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Project Report

CORPORATE

GOVERNANCE

DECLARATION

We hereby declare that this Project Report titled “ CORPORATE

GOVERNANCE” submitted to the The Institute of Company Secretaries of India

(Jaipur Chapter) for the 27

th

Management Skill Orientation Programme is a record

of original work done by us under group efforts.

The information and data given in the report is authentic to the best of our

knowledge. This project report is not submitted to any other university or

institution for the award of any degree, diploma o fellowship or published any time

before.

Report Submitted by:

Group No. – 7

Shital ( Reg. no. 221059557/02/2011)

Vivek ( Reg. no. 220997190/09/2010)

Shweta ( Reg. no. 221439253/05/2012)

Monika ( Reg. no. 221238992/08/2011)

. 12 . Benefits of Corporate Governance 28 13 . Initiatives taken by SEBI 29 14 . Conclusion 30

INTRODUCTION Corporate Governance is the set of processes, customs, policies, laws and institutions affecting the way a corporation (or company) is directed, administered or controlled. Corporate governance also includes the relationships among the many stakeholders involved and the goals for which the corporation is governed. In simpler terms it means the extent to which companies are run in an open & honest manner. Corporate Governance has three key constituents namely: the shareholders, the board of directors & the management. Other stakeholders includes employees, customers, creditors, suppliers, regulators and the community at large. The concept of corporate governance identifies their role & responsibilities as well as their rights in the context of the company. It emphasizes accountability, transparency & fairness in the management of a company by its board, so as to achieve sustained prosperity for all the stakeholders. Corporate governance is a synonym for sound management, transparency & disclosure. Transparency refers to creation of an environment whereby decisions & actions of corporate are made visible, accessible & understandable. Disclosure refers to the process of providing information as well as its timely dissemination. In a Board culture of Corporate Governance, business author Gabrielle O’Donovan defines corporate governance as “An internal system encompassing policies, processes and people, which serves the need of shareholders and other stakeholders, by directing and controlling management activities with good business savvy, objectivity, accountability and integrity”. Sound corporate governance is reliant on external marketplace commitment and legislation, plus a healthy board culture which safeguards policies and processes.

Since the late 1970's, corporate governance has been the subject of significant debate inthe U.S. and around the globe. Bold, broad efforts to reform corporate governance have been driven, in part, by the needs and desires of shareowners to exercise their rights of corporateownership and to increase the value of their shares and, therefore, wealth. Over the past three decades, corporate directors' duties have expanded greatly beyond their traditional legal responsibility of duty of loyalty to the corporation and its shareowners. In the first half of the 1990s, the issue of corporate governance in the U.S. received considerable press attention due to the wave of CEO dismissals (e.g.: IBM, Kodak, Honeywell) by their boards. The California Public Employees' Retirement System (CalPERS) led a wave of institutional shareholder activism (something only very rarely seen before), as a way of ensuring that corporate value would not be destroyed by the now traditionally cozy relationships between the CEO and the board of directors (e.g., by the unrestrained issuance of stock options, not infrequently back dated). In 1997, the East Asian Financial Crisis saw the economies of Thailand, Indonesia, SouthKorea, Malaysia and The Philippines severely affected by the exit of foreign capital after property assets collapsed. The lack of corporate governance mechanisms in these countries highlighted the weaknesses of the institutions in their economies. In the early 2000s, the massive bankruptcies (and criminal malfeasance) of Enron andWorldcom, as well as lesser corporate debacles, such as Adelphia Communications,AOL,Qwest, Arthur Andersen, Global Crossing, Tyco, etc. led to increased shareholder and governmental interest in corporate governance. Because these triggered some of the largest insolvencies, the public confidence in the corporate sector was sapped. The popular perceptionwas that corporate leadership was fraught with greed & excess. Inadequacies& failure of theexisting systems, brought to the fore, the need for norms & codes to remedy them. This resulted in the passage of the Sarbanes-Oxley Act of 2002, (popularly known as Sox) by the United States. EVOLUTION OF CORPORATE GOVERNANCE IN INDIA The initiatives taken by government in 1991, aimed at economic liberalization and globalization of the domestic economy, led India to initiate reform process in order to suitably respond to the developments taking place world over. On account of the interest generated by Cadbury committee report, the confederation of Indian industry (CII), the associated chambers of commerce and industry (ASSOCHAM) and the securities and exchange board of India (SEBI) constituted committees to recommend initiatives in corporate governance. National Task Force Chaired by Rahul Bajaj In 1996, CII took a special initiative on Corporate Governance – the first institutional initiative in Indian industry. The objective was to develop and promote a code for Corporate Governance to be adopted and followed by Indian companies, be these in the Private Sector, the Public Sector, Banks or Financial Institutions, all of which are corporate entities.

This initiative by CII flowed from public concerns regarding the protection of investor interest, especially the small investor; the promotion of transparency within business and industry; the need to move towards international standards in terms of disclosure of information by the corporate sector and, through all of this, to develop a high level of public confidence in business and industry. A National Task Force set up with Mr. Rahul Bajaj , Past President ,CII and Chairman & Managing Director, Bajaj Auto Limited, as the Chairman included membership from industry, the legal profession, media and academia. This Task Force presented the draft guidelines and the code of Corporate Governance in April 1997 at the NationalConference and Annual Session of CII. This draft was then publicly debated in workshops and Seminars and a number of suggestions were received for the consideration of the task force. CII took a special initiative on corporate governance, the first institution initiative in indian industry. The objective was to develop and promote a code for corporate governance to be adopted and followed by indian companies, whether in the private sector, the public sector, banks or financial institutions, all of which are corporate entities. The final draft of the said code was widely circulated in

1997. In april 1998, the code was released. It was called desirable corporate governance: The meaning of the term corporate governance is a subject of considerable debate. The concept has been defined in many ways. Organization for Economic Co-operation and Development (OECD) has defined corporate governance as, “procedures and processes according to which an organisation is directed and controlled. The corporate governance structure specifies the distribution of rights and responsibilities among the different participants in the organisation – such as the board, managers, shareholders and other stakeholders – and lays down the rules and procedures for decision-making." As per the Cadbury Committee (1992), “Corporate governance is the system by which companies are directed and controlled. Boards of directors are responsible for the governance of their companies. The shareholders‟ role in governance is to appoint the directors and the auditors to satisfy themselves that an appropriate governance structure is in place. The responsibilities of the board include setting the company‟s strategic aims, providing the leadership to put them into effect, supervising the management of the business and reporting to shareholders on their stewardship. The boards’ actions are subject to laws, regulations and the shareholders in general meeting”. In a nutshell, the corporate governance is all about governing corporations in such a transparent manner that all stakeholders‟ interests are protected, and with due compliance with the laid down laws. CORPORATE GOVERNANCE AND REGULATORY FRAMEWORK IN INDIA : Corporate governance concept has gained public attention in early „90s in India. First special initiative on corporate governance was taken by confederation of Indian Industry (CII) in 1996 by introducing voluntary corporate governance code. The objective was to develop and promote a code of corporate governance to be adopted and followed by Indian companies. CII came up with the recommendations to be followed by Indian industry. In 1999 Kumar Mangalam Birla committee was appointed to promote the standards of corporate governance. It came with some mandatory and non mandatory recommendations. The committeemade recommendations for several issues including board of directors, audit committee, remuneration committee, management, shareholders etc.

“Corporate governance structure specifies the distribution of rights and responsibilities among different participants in the company such as board, management, shareholders and other stakeholders; and spells out the rules and procedures for corporate decision-making. By doing this, it provides the structure through which the company’s objectives are set along with the means of attaining theses objectives as well as for monitoring performance.” OECD CORPORATE GOVERNANCE COMMITTEES IN INDIA CADBURY COMMITTEE, U.K Corporate governance is a system of structuring, operating and controlling a company with the following specific aims:-  Fulfilling long-term strategic goals of owners;  Taking care of the interests of employees;  A consideration for the environment and local community;  Maintaining excellent relations with customers and suppliers;  Proper compliance with all the applicable legal and regulatory requirements. DESIRABLE CORPORATE GOVERNANCE CODE (1998) - CONFEDERATION OF INDIAN INDUSTRY- CII Corporate governance deals with laws, procedures,practices,and implicit rules that determine a company’s ability to take informed managerial decisions vis-à-vis its claimants – in particular, its shareholders, creditors, customers, the state and employees. There is a global consensus about the objective of ‘good’ corporate governance: maximizing long term shareholder value. REPORT OF N.R. NARAYANA MURTHY COMMITTEE ON CORPORATE GOVERNANCE CONSTITUTED BY SEBI (2003) Strong corporate governance is indispensable to resilient and vibrant capital markets and is an important instrument of investor protection. It is the blood that fills the veins of transparent corporate disclosure and high quality accounting practices. It is the muscle that moves a viable and accessible financial reporting structure. INSTITUTE OF COMPANY SECRETARIES OF INDIA Corporate Governance is the application of best management practices, compliance of law in true letter and spirit and adherence to ethical standards for effective management and distribution of wealth and discharge of social responsibility for sustainable development of all stakeholders. ICSI PRINCIPLES OF CORPORATE GOVERNANCE  Sustainable development of all stakeholders  Effective management and distribution of wealth

 Discharge of social responsibility  Application of best management practices  Compliance of law in letter and spirit  Adherence to ethical standards FOUR PILLARS OF CORPORATE GOVERNANCE  Accountability i. Ensure that management is accountable to the Board ii. Ensure that the Board is accountable to shareholders  Fairness i. Protect Shareholders rights ii. Treat all shareholders including minorities, equitably iii. Provide effective redress for violations  Transparency i. Ensure timely, accurate disclosure on all material matters, including the financial situation, performance, ownership and corporate governance  Independence i. Procedures and structures are in place so as to minimise, or avoid completely conflicts of interest ii. Independent Directors and Advisers i.e. free from the influence of others ELEMENTS OF GOOD CORPORATE GOVERNANCE

1. Role and powers of Board Good governance is decisively the manifestation of personal beliefs and values which configure the organizational values, beliefs and actions of its board. The board as a main functionary is primary responsible to ensure value creation for its stakeholders. The absence of clearly designated role and powers of board weakens accountability mechanism and threatens the achievement of organizational goals. Therefore, the foremost requirement of good governance is the clear identification of powers, roles, responsibilities and accountability of the board, CEO, and the chairman of the board. The role of the board should be clearly documented in a board charter.
2. Legislation

7. Board independence Independent board is essential for sound corporate governance. This goal may be achieved by associating sufficient number of independent directors with the board. Independence of directors would ensure that there are no actual or perceived conflicts of interest. It also ensures that the board is effective in supervising and, where necessary, challenging the activities of management. The board needs to be capable of assessing the performance of managers with an objective perspective. Accordingly, the majority of board members should be independent of both the management team and any commercial dealings with company.
8. Board meetings Directors must devote sufficient time and give due attention to meet their obligations. Attending board meeting regularly and preparing thoroughly before entering the boardroom increases the quality of interaction at board meetings. Board meetings are the forums for board decision- making. These meetings enable directors to discharge their responsibilities. The effectiveness of board meetings is dependent on carefully planned agendas and providing relevant papers and materials to directors sufficiently prior to board meetings.
9. Code of conduct It is essential that the organization’s explicitly prescribed norms of ethical practices and code of conduct are communicated to all stakeholders and are clearly understood and followed by each member of the organization. Systems should be in place to periodically measure, evaluate and if possible recognize the adherence to code of conduct.
10. Strategy setting The objectives of the company must be clearly documented in a long-term corporate strategy including an annual business plan together with achievable and measurable performance tragets and milestones.
11. Business and community obligations Though basic activity of a business entity is inherently commercial yet it must also take care of community’s obligations. Commercial objectives and community service obligations should be clearly documented after approval by the board. The stakeholders must be informed about the proposed and on going initiatives taken to meet the community obligations.
12. Financial and operational reporting The board requires comprehensive, regular, reliable, timely, correct and relevant information in a form and of a quality that is appropriate to discharge its function of monitoring corporate performance. For this purpose, clearly defined performance measures – financial and non- financial should be prescribed which would add to the efficiency and effectiveness of the organization.

The reports and information provided by the management must be comprehensive but not so extensive and detailed as to hamper comprehension of the key issues. The reports should be available to board members well in advance to allow informed decision-making. Reporting should include status report about the state of implementation to facilitate the monitoring of the progress of all significant board approved initiatives.

13. Monitoring the board performance The board must monitor and evaluate its combined performance and also that of individual directors at periodic intervals, using key performance indicators besides peer review. The board should establish and appropriate mechanism for reporting the results of Board’s performance evaluation results.
14. Audit committees The audit committee is inter alia responsible for liaison with the management; internal and statutory auditors, reviewing the adequacy of internal control and compliance with significant policies and procedures, reporting to the board on the key issues. The quality of audit committee significantly contributes to the governance of the company.
15. Risk management Risk is an important element of corporate functioning and governance. There should be a clearly established process of identifying, analyzing and treating risk, which could prevent the company from effectively achieving its objectives. It also involves establishing a link between risk-return and resourcing priorities. Appropriate control procedures in the form of a risk management plan must be pdut in place to manage risk throughout the organization. The plan should cover activities as diverse as review of operating performance, effective us of information technology, contracting out and outsourcing. The board has the ultimate responsibility for identifying major risks to the organization, setting acceptable levels of risk and ensuring the senior management takes steps to detect, monitor and control these risks. The board must satisfy itself that appropriate risk management systems and procedure are in place to identify and manage risks. For this purpose the company should subject itself to periodic external and internal risk reviews. SCOPE & IMPORTANCE OF CORPORATE GOVERNANCE

MAJOR CHANGES IN CORPORATE GOVERNANCE NORMS  Appointment of Women Director  Tenure of Independent Directors and performance evaluation  Formal letter of appointment to independent directors  Separate meeting of independent directors and training of IDs  Succession plan for board/ senior management  Disclosure in Annual Report about Remuneration Policy and evaluation criteria  Compulsory Whistle Blower Mechanism  Constitution of Nomination and Remuneration Committee  Related Party Transactions  Compulsory Electronic Voting for all shareholders resolution

1. Composition of the Board – The Board shall have optimum combination of EDs and Non- EDs with at least one woman director on the Board of the company AND not less than 50% of the Board comprising Non-EDs. Requirement of Woman Director is to align with Section 149(1) of the Cos. Act, 2013. As per new Cos. Act, Non-Listed cos. having:

• paid-up share capital of Rs.100 Cr. or more OR
• Turnover of Rs.300 Cr. or more need to have Woman Director before 31st March 2015. 2. Independent Directors –
• Where Chairman is Non-ED - at least 1/3rd of the Board
• Where Chairman is Executive - at least 1/2 of the Board
• Also Where Chairman is Non-ED but is a promoter or is related to any promoter or person occupying management position at the Board level or at one level below the Board - at least 1/ of the Board Related to any promoter: i. If the promoter is a listed entity, its directors other than the IDs, its employees or its nominees shall be deemed to be related to it; ii. If the promoter is an unlisted entity, its directors, its employees or its nominees shall be deemed to be related to it. 3. Exclusion of Nominee Director from the definition of Independent Director. (This is to align the definition of Independent Director under Listing Agreement with Section 149(6) of the Cos. Act, 2013.) 4. Independent Directors - Definition of Independent Director

The definition of Independent Director has been widened in scope. Listed companies must determine the independence of existing directors in the light of new definition.This is to align with the definition of Independent Director under Listing Agreement with Section 149(6) of the Cos. Act, 2013.

5. Who is Independent Director? (Sec. 2(47), 149(6) of the Companies Act, 2013 and Rules thereto and Cl. 49 of the Listing Agreement ID shall mean a non-executive director (i.e., not MD, WTD) other than nominee director of the Company:- a. who, in the opinion of the Board, is a person of integrity and possesses relevant expertise and experience; b. (i) who is or was not a promoter of the company or its holding, subsidiary or associate company; (ii) who is not related to promoters or directors in the company, its holding, subsidiary or associate company; c. apart from receiving director's remuneration, has or had no pecuniary relationship with the company, its holding, subsidiary or associate company, or their promoters, or directors, during the two immediately preceding financial years or during the current financial year; d. none of whose relatives has or had pecuniary relationship or transaction with the company, its holding, subsidiary or associate company, or their promoters, or directors, amounting to two per cent. or more of its gross turnover or total income or fifty lakh rupees or such higher amount as may be prescribed, whichever is lower, during the two immediately preceding financial years or during the current financial year; e. who, neither himself nor any of his relatives :— (i) holds or has held the position of a key managerial personnel or is or has been employee of the company or its holding, subsidiary or associate company in any of the three financial years immediately preceding the financial year in which he is proposed to be appointed; (ii) is or has been an employee or proprietor or a partner, in any of the three financial years immediately preceding the financial year in which he is proposed to be appointed, of — (A) a firm of auditors or company secretaries in practice or cost auditors of the company or its holding, subsidiary or associate company; or 6 (B) any legal or a consulting firm that has or had any transaction with the company, its holding, subsidiary or associate company amounting to ten per cent or more of the gross turnover of such firm;

disclosed on the websites of the company and the Stock Exchanges not later than one working day from the date of such appointment.This is to align with the Schedule IV of the Cos. Act, 2013 which provides the contents of the appointment letter of ID also.Cos. Act - posting of the terms and conditions of appointment of ID on the website, which shall also be open for inspection at the Regd. Office by any member.

8. Performance evaluation of Independent Directors(ID) a. The Nomination Committee shall lay down the evaluation criteria for performance evaluation of IDs. b. The company shall disclose the criteria for performance evaluation, as laid down by the Nomination Committee, in its Annual Report. c. The performance evaluation of ID shall be done by the entire Board of Directors (excluding the director being evaluated). d. On the basis of the report of performance evaluation, it shall be determined whether to extend or continue the term of appointment of the ID.This is to align with Schedule IV of the Cos. Act, 2013 which provides mechanism for evaluation of IDs. 9. Separate meeting of the Independent Directors (IDs) (a) The IDs of the company shall hold at least one meeting in a year, without the attendance of non-independent directors and members of management. All the IDs of the company shall strive to be present at such meeting. The IDs in the meeting shall, inter-alia: i. review the performance of non-independent directors and the Board as a whole; ii. review the performance of the Chairperson of the company, taking into account the views of executive directors and nonexecutive directors; iii. assess the quality, quantity and timeliness of flow of information between the company management and the Board that is necessary for the Board to effectively and reasonably perform their duties. (This is to align with Schedule IV of the Cos. Act, 2013.) 10. Training of Independent Directors a. The company shall provide suitable training to independent directors to familiarize them with the company, their roles, rights, responsibilities in the company, nature of the industry in which the company operates, business model of the company, etc. b. The details of such training imparted shall be disclosed in the Annual Report. 11. Non-EDs’ compensation and disclosures

All fees/compensation, if any paid to Non-EDs, including IDs shall be fixed by the Board of Directors and shall require previous approval of shareholders in general meeting. The shareholders’ resolution shall specify the limits for the maximum number of stock options that can be granted to Non-EDs, in any financial year and in aggregate. Prior approval of shareholders shall not apply to payment of sitting fees, if made within the limits prescribed under the Companies Act,2013.IDs shall not be entitled to any Stock Option.(This is to align with Section 149(9) of the Cos. Act, 2013.)

12. Board and Committees The Board shall meet at least 4 times in a year with a maximum gap between two meetings of the Board -120 days. This is to align with Section 173 (1) of the Cos. Act, 2013. Membership of Committees – a Director shall not be a member in any more than 10 Committees or act as Chairman of more than 5 Committees across all companies. Every director shall inform about the Committee positions he occupies in other companies and notify changes as and when take place. Explanation: i) For this purpose all public limited companies, whether listed or not, shall be included and all other companies including private limited companies, foreign companies and companies under Section 8 of the Companies Act, 2013 shall be excluded. ii) Also Chairmanship/membership of the Audit Committee and the Stakeholders’ Relationship Committee alone shall be considered. Board shall periodically review compliance reports of all laws applicable to the company, prepared by the company as well as steps taken by the company to rectify instances of non- compliances.

• Time for filling in vacancy in Board for ID Vacancy in the office of ID – to be filled not later than the immediate next Board Meeting or three months from the date of such vacancy, which ever is later. (earlier it was 180 days), unless the minimum No. of IDs arealready on the Board.The Companies Act, 2013 provides for a time line of 180 days, which is applicable to non- listed cos.
• Succession Plan The Board shall satisfy itself that plans are in place for orderly succession for appointments to the Board and to senior management. This is a new requirement. 13. Code of Conduct Board shall lay down a code of conduct for all Board members and senior management of the company. The code of conduct shall be posted on the website of the company.All Board members and senior management personnel shall affirm compliance with the code on an annual basis. The Annual Report of the company shall contain a declaration to this effect signed by the CEO.The Code of Conduct shall suitably incorporate the duties of IDs as laid down in the Companies Act,

2013. This is to align with Schedule IV of the Cos. Act, 2013.