project corporate governance 6sem

7/29/2019 Project Corporate Governance 6sem

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APROJECTREPORTON

Corporate Governance


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Executive Summary

Banks earlier performed two main activities of accepting deposits and lending. But

this scenario of accepting deposits and lending has completely changed. Today

banks carry on n number of activities. As the banking business is widening, the

responsibility of banks and investors expectations from banks has also

considerably increased.

This project talks of Corporate governance not only being a pre-requisite for facing

intense competition for substantial growth but it also includes the parameters of

fairness, accountability, disclosures and transparency and to maximize value for

the stakeholders. Corporate governance extends far beyond the boundary of

corporate laws. Today the focus on governance is on the quality of governance.

Even capital and investments from the international investors are available to

corporate by demonstrating good governance practices. The project not only gives

us insight about corporate governance but it also covers the issues to be taken care

of banks.

The focus of corporate governance is more in the financial sector in general and

banking particularly. Governance issues are of paramount importance, as banks are

the critical elements of an economy playing a major role channelizing the public

savings into productive activities. Banking is considered as a subset of corporate

governance as activities of banks are stringently regulated by the regulatory

authority.

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SR.NO TABLE OF CONTENT PAGE.NO

1 INTRODUCTORY FRAMEWORK TO CORPORATEGOVERNANCE

6

2 CORPORATE GOVERNANCE IN INDIA A BACKGROUND 8

3 GUIDELINES AND CODES OF CORPORATE GOVERNANCE 12

4 CONCEPT OF CORPORATE GOVERNANCE 16

5 DEFINITION OF CORPORATE GOVERNANCE 19

6 ORIGINOF CORPORATE GOVERNANCE 20

7 ORIGIN IN INDIA OF CORPORATE GOVERNANCE 22

8 CORPORATE GOVERNANCE IN LISTED COMPANIESCLAUSE 49 OF THE LISTING AGREEMENT

24

9 CORPORATE GOVERNANCE IN BANKS 50

10 OBJECTIVES OF CORPORATE GOVERNANCE IN BANKS 52

11 CORPORATE GOVERNANCE IN PRIVATE SECTOR BANKS 53

12 CORPORATE GOVERNANCE OF HDFC BANK 59

13 CONCLUSIONS 68

14 BIBLIOGRAPHY 69

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Introductory Framework to Corporate

Governance

Corporate governance basically denotes rule of law, transparency, accountability and protection

of public interest in the management of a companys affairs in the prevailing global, competitive

and digital environment. It calls for an enlightened investing community and strict regulatory

regimes to protect the rights of the investors and companies to improve productivity and

profitability without recourse to any means which will offend the moral, ethical and regulatory

framework. The framework for corporate governance is not only an important component

affecting the long-term prosperity of companies, but it is a leading species of large genus namely,

National Governance, Human Governance, Societal Governance, Economic Governance and

Political Governance. Government provides necessary conditions, framework and environment

to corporate to operate. There is, however, no universal recipe for good corporate governance

since business environment varies from country to country. Efforts to articulate standards for

corporate governance took roots in countries like the United States and the United Kingdom and

have subsequently spread to other countries. The Organization for Economic Cooperation and

Development (OECD) took early initiatives to address governance issues and adopted the OECD

Principles on Corporate Governance in May 1999. Equity markets in these countries were not too

strong but the investment in equities was on the ascendance. After 1990 the transition from

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central planning to market driven economies, particularly the privatization of state-owned

companies, and the need to provide governance rules for the emerging private sector, brought the

issue of corporate governance to the centre stage. As a fall out of 1997 economic and financial

crisis, Asian countries too became keenly interested in the issue of corporate governance.

Globalization of the marketplace has ushered in an era wherein the quality of corporate

governance has become a crucial determinant of survival of corporate. The compatibility of

corporate governance practices with global standards has also become an important constituent

of corporate success. The practice of good corporate governance has, therefore, become a

necessary pre-requisite for any corporation to manage effectively in the globalised market.

Today the Indian economy has shifted from a controlled one to a market driven one. In this

process there have been several enfoldments in order to survive and flourish in the global

competitive market by the Indian corporate who need to assimilate these developments. They can

aspire to reach their goals with success if they pursue the right means. Good Governance is the

means to that end. The objectives before a business are to create wealth for the society, maintain

and preserve that wealth efficiently and to share the wealth with the stakeholders. Corporate

Governance is the method by which the aforesaid objectives are achieved. Liberalization and

Globalization has opened up vast opportunities for domestic players but is also fraught with

various challenges. Foreign Institutional Investors too demand greater professionalism in the

corporate activities. All these and many other related developments have brought in the issue of

Corporate Governance to center stage. Thus Corporate Governance has become imperative for

good corporate functioning and success.

Corporate Governance which until recently meant little to all but now it has become a

mainstream concern and a subject of discussion in corporate boardrooms, academic circles and

government and regulators around the globe.

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Corporate Governance in India A

Background

The history of the development of Indian corporate laws has been marked by Interesting

contrasts. At independence, India inherited one of the worlds poorest economies but one which

had a factory sector accounting for a tenth of the national product; four functioning stock markets

(predating the Tokyo Stock Exchange) with clearly defined rules governing listing, trading and

settlements; a well-developed equity culture if only among the urban rich; and a banking system

replete with well-developed lending norms and recovery procedures.24 In terms of corporate

laws and financial system, therefore, India emerged far better endowed than most other colonies.

The 1956 Companies Act as well as other laws governing the functioning of joint-stock

companies and protecting the investors rights built on this foundation.

The beginning of corporate developments in India were marked by the managing agency system

that contributed to the birth of dispersed equity ownership but also gave rise to the practice of

management enjoying control rights disproportionately greater than their stock ownership. The

turn towards socialism in the decades after independence marked by the 1951 Industries

(Development and Regulation) Act as well as the 1956 Industrial Policy Resolution put in place a

regime and culture of licensing, protection and widespread red-tape that bred corruption and

stilted the growth of the corporate sector. The situation grew from bad to worse in the following

decades and corruption, nepotism and inefficiency became the hallmarks of the Indian corporate

sector.

In the absence of a developed stock market, the 3 all-India development

Finance institutions (DFIs) the Industrial Finance Corporation of India, the Industrial

Development Bank of India and the Industrial Credit and Investment Corporation of India

together with the state financial corporations became the main providers of long-term credit to

companies. Along with the government owned mutual fund, the Unit Trust of India, they also

held large blocks of shares in the companies they lent to and invariably had representations in

their boards. In this respect, the corporate governance system resembled the bank-based German

model where these institutions could have played a big role in keeping their clients on the right

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track. Unfortunately, they were themselves evaluated on the quantity rather than quality of their

lending and thus had little incentive for either proper credit appraisal or effective follow-up and

monitoring. Their nominee directors routinely served as rubber-stamps of the management of the

day. With their support, promoters of businesses in India could actually enjoy managerial control

with very little equity investment of their own. Borrowers therefore routinely recouped their

investment in a short period and then had little incentive to either repay the loans or run the

business. Frequently they bled the company with impunity, siphoning off funds with the DFI

nominee directors mute spectators in their boards.

This sordid but increasingly familiar process usually continued till the companys net worth was

completely eroded. This stage would come after the company has defaulted on its loan

obligations for a while, but this would be the stage where Indias bankruptcy reorganization

system driven by the 1985 Sick Industrial Companies Act(SICA) would consider it sick and

refer it to the Board for Industrial and Financial Reconstruction (BIFR). As soon as a company is

registered with the BIFR it wins immediate protection from the creditors claims for at least four

years. Between 1987 and 1992 BIFR took well over two years on an average to reach a decision,

after which period the delay has roughly doubled. Very few companies have emerged

successfully from the BIFR and even for those that needed to be liquidated, the legal process

takes over 10 years on average, by which time the assets of the company are practically

worthless. Protection of creditors rights has therefore existed only on paper in India. Given this

situation, it is hardly surprising that banks, flush with depositors funds routinely decide to lend

only to blue chip companies and park their funds in government securities.

Financial disclosure norms in India have traditionally been superior to most Asian countries

though fell short of those in the USA and other advanced countries. Noncompliance with

disclosure norms and even the failure of auditors reports to conform to the law attract nominal

fines with hardly any punitive action. The Institute of Chartered Accountants in India has not

been known to take action against erring auditors. While the Companies Act provides clear

instructions for maintaining and updating share registers, in reality minority shareholders have

often suffered from irregularities in share transfers and registrations deliberate or unintentional.

Sometimes non-voting preferential shares have been used by promoters to channel funds and

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deprive minority shareholders of their dues. Minority shareholders have sometimes been

defrauded by the management undertaking clandestine side deals with the acquirers in the

relatively scarce event of corporate takeovers and mergers. Boards of directors have been largely

ineffective in India in monitoring the actions of management. They are routinely packed with

friends and allies of the promoters and managers, in flagrant violation of the spirit of corporate

law. The nominee directors from the DFIs, who could and should have played a particularly

important role, have usually been incompetent or unwilling to step up to the act. Consequently,

the boards of directors have largely functioned as rubber stamps of the management. For most of

the post-Independence era the Indian equity markets were not liquid or sophisticated enough to

exert effective control over the companies. Listing requirements of exchanges enforced some

transparency, but non-compliance was neither rare nor acted upon. All in all therefore, minority

shareholders and creditors in India remained effectively unprotected in spite of a plethora of laws

in the books. The years since liberalization have witnessed wide-ranging changes in both laws

and regulations driving corporate governance as well as general consciousness about it. Perhaps

the single most important development in the field of corporate governance and investor

protection in India has been the establishment of the Securities and Exchange Board of India

(SEBI) in 1992 and its gradual empowerment since then. Established primarily to regulate and

monitor stock trading, it has played a crucial role in establishing

The basic minimum ground rules of corporate conduct in the country. Concerns about corporate

governance in India were, however, largely triggered by a spate of crises in the early 90s the

Harshad Mehta stock market scam of 1992 followed by incidents of companies allotting

preferential shares to their promoters at deeply discounted prices as well as those of companies

simply disappearing with investors money.

These concerns about corporate governance stemming from the corporate scandals as well as

opening up to the forces of competition and globalization gave rise to several investigations into

the ways to fix the corporate governance situation in India. One of the first among such

endeavors was the CII Code for Desirable Corporate Governance developed by a committee

chaired by Rahul Bajaj. The committee was formed in 1996 and submitted its code in April

1998. Later SEBI constituted two committees to look into the issue of corporate governance

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the first chaired by Kumar Mangalam Birla that submitted its report in early 2000 and the second

by Narayana Murthy three years later.

These important efforts at improving corporate governance in India. The SEBI committees

Recommendations have had the maximum impact on changing the corporate governance

Situation in India. The Advisory Group on Corporate Governance of RBIs standing Committee

on International Financial Standards and Codes also submitted its own Recommendations in

2001. A comparison of the three sets of recommendations in reveal the progress in the thinking

on the subject of corporate governance in India over the years. An outline provided by the CII

was given concrete shape in the Birla Committee report of SEBI. SEBI implemented the

recommendations of the Birla Committee through the enactment of Clause 49 of the Listing

Agreements. They were applied to companies in the BSE 200 and S&P C&X Nifty indices, and

all newly listed companies, on March 31, 2001; to companies with a paid up capital of Rs. 10

crore or with a net worth of Rs. 25 crore at any time in the past five years, as of March 31, 2002;

to other listed companies with a paid up capital of over Rs. 3 crore on March 31, 2003. The

Narayana Murthy committee worked on further refining the rules.

The recommendations also show that much of the thrust in Indian corporate Governance reform

has been on the role and composition of the board of directors and the disclosure laws. The Birla

Committee, however, paid much-needed attention to the subject of share transfers which is the

Achilles heel of shareholders right in India. The frequency of compliance of companies to the

different aspects of the corporate governance regulation. Clearly much more needs to be

accomplished in the area of compliance. Besides in the area of corporate governance, the spirit of

the laws and principles is much more important than the letter. Consequently, developing a

positive culture and atmosphere of corporate governance is essential is obtaining the desired

goals. Corporate governance norms should not become just another legal item to be checked off

by managers at the time of filing regulatory papers

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Guidelines and Codes of Corporate

Governance

In 1995, the Confederation of Indian Industry (CII) took a special initiative on corporate

governance the first institutional initiative by Indian industry. It was soon followed by the

professional bodies like the Institute of Companies Secretaries of India (ICSI) during the year

1996-97 to focus the attention of the Indian corporate sector on the imperative need to evolve

new norms of governance to sustain and develop Indian industry on healthy lines. A working

group, set up by the Department of Company Affairs, also looked into the matter of Corporate

Governance, which needs to be introduced. The pressure for change was because of lack of

confidence of individual investors as well as of institutional investors. In 2002, the Security and

Exchange Board of India, as well as the Department of Company Affairs established Narayana

Murthy Committee and Naresh Chandra Committee, which in their reports have provided

guidelines for corporate governance, keeping in view developments in corporate sector

especially in the USA.

CII Code of Corporate Governance

In December 1995, the CII set-up a Committee under the chairmanship of industrialist Rahul

Bajaj to prepare a comprehensive voluntary code of corporate governance for listed companies.

The final draft report was released in April 1998. The CII Code on corporate governance

recommended that the: key information to be reported, listed companies to have audit

committees, corporate to give a statement on value addition, consolidation of accounts to be

optional. Main emphasis was on transparency, as stated by ShekarDatta, the then President of

CII, in the foreword to the Report:

Corporate Governance is a phrase which implies transparency of management systems in

business and industry, be it private or public sector all of which are corporate entities. Just as

industry seeks transparency in Government policies and procedures, so, corporate governance

seeks transparency in corporate sector

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UTI Code of Corporate Governance

In the year 1999, the Unit Trust of India (UTI) also formulated a code of corporate governance.

This was followed by the professional bodies like the Institute of Company Secretaries of India

(ICSI) to focus the attention of the Indian corporate sector, on the norms of governance and it set

up a National award of Excellence in Corporate Governance.

Birla Committee Report on Corporate Governance

SEBI constituted a Committee on corporate governance with as many as 18 members under the

chairmanship of Shri Kumar Mangalam Birla, to promote and raise the standards of corporate

governance in respect of listed companies on 7thMay 1999. This Committee, after a good deal of

deliberations with industrial associations and professional bodies, submitted its report on

25thJanuary 2000, and recommended various new norms of corporate governance. SEBI accepted

the recommendations, which culminated in the introduction of clause 49 in the standard Listing

Agreement for implementation by all stock exchanges for all listed companies, within a time

frame of three years commencing from the financial year 2000-2001. The main

recommendations of this Committee related to the composition of the board including

independent directors, constitution of audit committee in certain sized companies to look into the

financial aspects of a company, remuneration of directors, directors report to include

management discussion and analysis report, better disclosure norms to the shareholders through

annual report, etc.

Regarding the composition of the board of directors of a company, the Committee was of the

view that the composition of the board of directors is critical to the independent functioning of

the board as it determines the ability of the board to collectively provide the leadership and

ensures that no one individual or group is able to dominate the board. The committee

recommended that the board of a company should have an optimum combination of executive

and non-executive directors, with not less than fifty percent of the board comprising the non-

executive directors. As the executive directors are involved in the day-to-day management of

companies, the non-executive directors bring external and wider perspective and independence to

the decision-making.

It has been the practice of most of the companies in India to fill the board with representatives of

the promoters of the company as independent directors. This has undergone a change and now

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the boards comprise of following groups of directors: Promoters directors, Executive directors,

non-executive directors, and a part of who are independent.

Based on these recommendations, the Companies (Amendment) Act 2000 introduced many

provisions relating to corporate governance including (a) additional ground of disqualification of

directors in certain cases, (b) setting up of audit committees, (c) directors responsibility

statement in the directors report, (d) introduction of postal ballot for transacting certain items of

business in the general meeting, and (e) enforcement of accounting standards.

Corporate governance was also introspected by the Advisory Group constituted by the Standing

Committee on International Finance Standards and Codes of the Reserve Bank of India under the

Chairmanship of Dr. Y.V.Reddy the then Deputy Governor and later on the Governor of RBI.26

All these efforts focused the attention of the corporate boards that they should manage the affairs

of companies with better accountability to shareholders and achieve transparency of operations

with disclosure of both financial and non-financial data through annual report and other

periodical reports. As a result, annual report of listed Indian companies, now reflect in adequate

measure the new norms of governance.

Naresh Chandra Committee Report on Corporate Audit and Governance (2002)

The Enron debacle in July 2002, involving the hand-in-glove relationship between the auditor

and the corporate client and various other scams in the United States, and the consequent

enactment of the stringent Sarbanes Oxley Act in the United States were some important

factors, which led the Indian government to wake up. The Department of Company Affairs in the

Ministry of Finance on 21 August 2002, appointed a high level committee, popularly known as

the Naresh Chandra Committee, to examine various corporate governance issues and to

recommend changes in the diverse areas involving the auditor-client relationships and the role of

independent directors. The Committee submitted its Report on 23 December 2002.

In its report, the Committee commented on: (a) the poor structure and composition of the board

of directors of Indian companies, (b) scant fiduciary responsibility, (c) poor disclosures and

transparency, (d) inadequate accounting and auditing standards, (e) the need for experts to go

through the minutest details of transactions among companies, banks and financial institutions,

capital markets etc. On the auditor company relationship, the Committee recommended that the

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proprietary of auditors rendering non-audit services is a complex area, which needs to be

carefully dealt with. The recommendations of this Committee are more or less in line with the

Rules framed by the Securities & Exchange Commission (SEC) in accordance with the

provisions of the Sarbanes-Oxley Act 2002. The recommendations of the Naresh Chandra

Committee are expected to play a vital role in strengthening the composition and effectiveness of

the regulatory framework for good corporate governance.

Narayana Murthy Committee Report on corporate governance

In the year 2002 SEBI analyzed the statistics of compliance with clause 49 by listed companies

and felt that there was a need to look beyond the mere systems and procedures, if corporate

governance was to be made effective in protecting the interests of the investors. SEBI, therefore,

constituted a committee under the Chairmanship of N.R. Narayana Murthy, Chairman of Infosys

Technologies Ltd to review the performance of corporate governance in India and make

appropriate recommendations. The Committee included representatives from the stock

exchanges, chambers of commerce and industry, investor associations and professional bodies.

The Narayana Murthy Committee submitted its report on 8 February 2003.

In the meantime many of the recommendations of the Naresh Chandra Committee found their

acceptance in the form of the Companies (Amendment) Bill of 2003, which was introduced in the

Parliament in May 2003, but now had been withdrawn. The mandatory recommendations of the

Committee relate to; (a) the role and functions of the Audit committee, (b) the risk management

and minimization procedures, (c) the uses and the application of funds received from the initial

public offers, (d) code of conduct for the board, (e) nominee directors and independent directors.

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Concept of Corporate Governance

Corporate governance is the set of processes, customs, policies, laws, and institutions affecting

the way a corporation 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. The principal stakeholders are the shareholders, management, and the board of

directors. Other stakeholders include employees, customers, creditors, suppliers, regulators, and

the community at large

Corporate Governance is not just the rules, regulations and law prescribed but it the culture of

relationships. The working of corporate governance depends on how the participants behave andinteract with each other. An important part of corporate governance deals with accountability,

fiduciary duty, disclosure to shareholders and others, and mechanisms of auditing and control. In

this sense, corporate governance players should comply with codes to the overall good of all

constituents.

Corporate Governance is the mechanism by which the values, principles, policies and procedures

of a corporation are inculcated and manifested. The essence of corporate governance lies in

promoting and maintaining integrity, transparency and accountability in the working of

management.

Good corporate governance plays a vital role in underpinning the integrity and efficiency of

financial markets. Poor corporate governance weakens a companys potential and at worst can

pave the way for financial difficulties and even fraud. If companies are well governed, they will

usually outperform other companies and will be able to attract investors whose support can help

to finance further growth though the concept and form of Corporate Governance is evolving over

the years, it inherently requires continuous nurturing and adapting to the dynamic business

environment.

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Principles

Key elements of good corporate governance principles include honesty, trust and integrity,

openness, performance orientation, responsibility and accountability, mutual respect, and

commitment to theorganization

Commonly accepted principles of corporate governance include

i. Rights and equitable treatment of shareholders: Organizations should respect

the rights of shareholders and help shareholders to exercise those rights. They can help

shareholders exercise their rights by effectively communicating information that is

understandable and accessible and encouraging shareholders to participate in general

meetings.

ii. Interests of other stakeholders: Organizations should recognize that they have

legal and other obligations to all legitimate stakeholders

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iii. Role and responsibilities of the board: The board needs a range of skills and

understanding to be able to deal with various business issues and have the ability to

review and challenge management performance. It needs to be of sufficient size and have

an appropriate level of commitment to fulfill its responsibilities and duties. There are

issues about the appropriate mix of executive and non-executive directors. The key roles

of chairperson and CEO should not be held by the same person.

iv. Integrity and ethical behaviors: Ethical and responsible decision making is not

only important for public relations, but it is also a necessary element in risk management

and avoiding lawsuits. Organizations should develop a code of conduct for their directors

and executives that promotes ethical and responsible decision making. It is important to

understand, though, that reliance by a company on the integrity and ethics of individuals

is bound to eventual failure. Because of this, many organizations establish Compliance

and Ethics Programs to minimize the risk that the firm steps outside of ethical and legal

boundaries.

v. Disclosure and transparency: Organizations should clarify and make publicly

known the roles and responsibilities of board and management to provide shareholders

with a level of accountability. They should also implement procedures to independently

verify and safeguard the integrity of the company's financial reporting. Disclosure of

material matters concerning the organization should be timely and balanced to ensure that

all investorshaveaccesstoclear,factualinformation.

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Definition of corporate governance

Corporate governance is the system by which companies are directed and controlled.

- Cadbury Report (UK) 1992

Corporate governance deals with the ways in which suppliers of finance to corporations

assure themselves of getting a return on their investment.

-Shleifer and Vishny

The term corporate governance has come to mean two things

The processes by which companies are directed and controlled.

A field in economics, which studies the many issues arising from the

separation of ownership and control.

Relevant rules include applicable laws of the land as well as internal rules of a corporation.

Relationships include those between all related parties, the most important of which are the

owners, managers, directors of the board, regulatory authorities and to a lesser extent employees

and the community at large. Systems and processes deal with matters such as delegation of

authority. The corporate governance structure specifies the rules and procedures for making

decisions on corporate affairs. It also provides the structure through which the company

objectives are set, as well as the means of attaining and monitoring the performance of those

objectives.

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1. Originof corporate governance

Roots of Corporate Governance

Kautilyas (Chanakya) Arthashastra (around 300 B.C)- In the happiness of the

subjects lies the benefit of the king and in what is beneficial to the subjects is his own

benefit (1.19.34)

The East India Company introduced a Court of Directors, separating ownership

and control (U.K., the Netherlands) in 1600s

In 1991 Sir Adrian Cadbury was asked in May1991 to chair the committee in

the financial aspects of Corporate Governance by the financial reporting council the

London Stock Exchange and the accounting profession.

In Dec 1992 Sir Adrian Cadbury Committee, UK report on Financial Aspects of

Corporate Governance and it took the view that governance was not a matter of

legislation and the report produced a code of Best Practice, comprising 19 provisions and

14 notes dealing with Board and committee structures, remuneration and financialreporting and describing the appropriate relationship with auditors.

This led to London Stock exchange asking the listed companies whether they

complied with Cadbury rules or were asked to explain in case of non-compliance.

Alongside, Fat cat corporate scandals, on fixing remuneration, were on the rise.

This led to constitution of Greenburg committee on director remuneration in Jan 1995

reporting in July1995.

The Greenburg committee produced its own code in relation to directors

remuneration and this code was adopted with the listing rules on a Comply or explain

basis.

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Following the recommendations of Cadbury and Greenburg committees, a

committee on CG was established of Sir. Ronald Ham bell the then Chairman of ICI.

The final report of Ronald Hampbell came in Jan1998 which is popularly known

as Hampbell committee report

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Origin of corporate governance in India

Roots of Corporate Governance in India

In 1998, the Confederation of Indian Industry ("CII"), "India's premier business

association," unveiled India's first code of corporate governance.

In 1999, in a defining moment in India's corporate-governance history, the Indian

Parliament created the Securities and Exchange Board of India ("SEBI") to "protect the

interests of investors in securities and to promote the development of, and to regulate the

securities market."

Corporate Governance code for the listed companies in India was framed by SEBI

in 2000 and has been amended few times since its inception.

SEBI appointed the Birla Committee to fashion a code of corporate governance.

In 2000, SEBI accepted the recommendations of the Birla Committee and introducedClause 49 into the Listing Agreement of Stock Exchanges.

The First code for CG was enacted based on the Kumar Mangalam Birla

Committee 1999; guidelines were issued in 2000 report. Companies are also required to

furnish statements and reports for the Electronic Data Information Filing and Retrieval

(EDIFAR) system maintained by SEBI.

The report has also set out recommendations of Naresh Chandra Committee

(2002) on Corporate Audit and governance set up by Department of Company Affairs.

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To further improve the guidelines SEBI constituted a Committee on Corporate

Governance (Chairman, N.R. Narayana Murthy) whose report was presented on

(08.02.2003.)

SEBI has since incorporated the recommendations of the Murthy Committee, and

the latest revisions to Clause 49 became law on January 1, 2006.

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Corporate Governance in Listed Companies

Clause 49 of the Listing Agreement

SEBI is the regulating body which regulates all the companies. The rules and regulations are

prescribed by SEBI for all the companies. SEBI has prescribed Clause 49 of the Listing

Agreement for all Stock Exchanges. All Stock Exchanges are hereby directed to amend the

Listing Agreement by replacing the existing Clause 49 of the Listing Agreement.

The provisions of the revised Clause 49 shall be implemented as per the schedule of

implementation given below:

a. The entities seeking listing for the first time, at the time of seeking in- principle

approval for such listing is required.

b. The existing listed companies which are required to comply with revised clause

49 of the Listing Agreement should have a paid up capital of Rs. 3 cores and above or net

worth of Rs. 25 corers or more at any time in the history of the company, by April 1,

2005.

c. The companies complying with revised Clause 49 of the Listing Agreement have

to submit a quarterly compliance report to the stock exchange as per the sub clause VI (ii)

in the revised Clause 49 of the Listing Agreement, within 15 days from the end of every

quarter. The report shall be signed either by the Compliance Officer or the Chief

Executive Officer of the company.

d. The Stock Exchanges shall ensure that the provisions of the revised clause are

complied with, by companies seeking listing for the first time. For this the company had

to set up its Board and constituted committees such as Audit Committee,Shareholders/investors Grievances Committee etc. before seeking approval for listing.

e. The Stock exchange should set up a separate monitoring cell to monitor the

compliance with the provisions of the revised Clause 49 on Corporate Governance. The

cell, after receiving the quarterly compliance reports from the companies complying with

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the requirements of the revised Clause 49, shall submit a consolidated compliance report

to SEBI within 60 days from the end of each quarter.

Clause 49 of the Listing Agreement

SEBI/CFD/DIL/CG/1/2004/12/10

The October 29, 2004

Managing Director/Executive Director/Administrator

of all the Stock Exchanges

Dear Sir/Madam,

Sub: Corporate Governance in listed Companies Clause 49 of the Listing Agreement

All Stock Exchanges are hereby directed to amend the Listing Agreement by replacing the

existing Clause 49 of the listing agreement (issued vide circulars dated 21st February, 2000,

9th March 2000, 12th September 2000, 22nd January, 2001, 16th March 2001 and 31st

December 2001) with the revised Clause 49 given I Annexure I through ID to this circular.

SEBI Circular no. SEBI/MRD/SE/31/2003/26/08 dated August 26, 2003 (which has been since

deferred) is hereby withdrawn. TheRevised Clause 49 also specifies the reporting requirements

for a company.

1) Please note that this is a master circular which supersedes all other earlier circulars Issued

by SEBI on Clause 49 of the Listing Agreement.

2) The provisions of the revised Clause 49 shall be implemented as per the schedule of

Implementation given below: For entities seeking listing for the first time, at the time of seeking in-principle approval

for such listing.

For existing listed entities which were required to comply with Clause 49 which is being

revised i.e. those having a paid up share capital of Rs. 3 crores and above or net worth of Rs. 25

crores or more at any time in the history of the company, by April 1, 2005 Companies

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complying with the provisions of the existing Clause 49 at present (issued vide circulars dated

21st February, 2000, 9th March 2000, 12th September 2000, 22nd January, 2001 16th March

2001 and 31st December 2001) shall continue to do so till the revised Clause 49 of the Listing

Agreement is complied with or till March 31, 2005,whichever is earlier.

The companies which are required to comply with the requirements of the revised Clause

49 shall submit a quarterly compliance report to the stock exchanges as per sub Clause VI (ii), of

the revised Clause 49, within 15 days from the end of every quarter. The first such report would

be submitted for the quarter ending June 30, 2005. The report shall be signed either by the

Compliance Officer or the Chief Executive Officer of the company.

3) The revised Clause 49 shall apply to all the listed companies, in accordance with the

schedule of implementation given above. However, for other listed entities which are not

companies, but body corporate (e.g. private and public sector banks, financial institutions,

insurance companies etc.) incorporated under other statutes, the revised Clause 49 will apply to

the extent that it does not violate their respective statutes and guidelines or directives issued by

the relevant regulatory authorities. The revised Clause 49 is not applicable to Mutual Funds.

4) The Stock Exchanges shall ensure that all provisions of the revised Clause 49 have been

complied with by a company seeking listing for the first time, before granting the in-principle

approval for such listing. For this purpose, it will be considered satisfactory compliance if such acompany has set up its Board and constituted committees such as Audit Committee,

Shareholders/ Investors Grievances Committee etc. in accordance with the revised clause before

seeking in-principle approval for listing.

5) The Stock Exchanges shall set up a separate monitoring cell with identified personnel t

monitor the compliance with the provisions of the revised Clause 49 on corporate governance.

The cell, after receiving the quarterly compliance reports from the companies which are required

to comply with the requirements of the revised Clause 49, shall submit a consolidated

compliance report to SEBI within 60 days from the end of each quarter.

Encl: Annexure I, I A, I B, I C & I

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Annexure I

Clause 49 - Corporate Governance

The company agrees to comply with the following provisions:

I. Board of Directors

(A) Composition of Board

i. The Board of directors of the company shall have an optimum combination of executive

and non-executive directors with not less than fifty percent of the board of directors comprising

of non-executive directors.

ii. Where the Chairman of the Board is a non-executive director, at least one-third of the

Board should comprise of independent directors and in case he is an executive director, at least

half of the Board should comprise of independent directors.

iii. For the purpose of the sub-clause (ii), the expression independent director shall mean a

non-executive director of the company who:

apart from receiving directors remuneration, does not have any material

pecuniary relationships or transactions with the company, its promoters, its

directors, its senior management or its holding company, its subsidiaries and

associates which may affect independence of the director; is not related to promoters or persons occupying management positions at

the board level or at one level below the board;

Has not been an executive of the company in the immediately preceding

three financial years;

is not a partner or an executive or was not partner or an executive during

the preceding three years, of any of the following:

the statutory audit firm or the internal audit firm that is associated with the

company, and

the legal firm(s) and consulting firm(s) that have a material association

with the company.

is not a material supplier, service provider or customer or a lessor or lessee

of the company, which may affect independence of the director; and

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is not a substantial shareholder of the company i.e. owning two percent or

more of the block of voting shares.

Explanation

For the purposes of the sub-clause (iii):

a) Associate shall mean a company which is an associate as defined in Accounting

Standard (AS) 23, Accounting for Investments in Associates in Consolidated Financial

Statements, issued by the Institute of Chartered Accountants of India.

b) Senior management shall mean personnel of the company who are members of its core

management team excluding Board of Directors. Normally, this would comprise all members of

management one level below the executive directors, including all functional heads.

c) Relative shall mean relative as defined in section 2(41) and section 6 read with

Schedule IA of the Companies Act, 1956..

d) Nominee directors appointed by an institution which has invested in or lent to the

company shall be deemed to be independent directors.

Explanation:

Institution for this purpose means a public financial institution as defined in Section 4A of the

Companies Act, 1956 or a corresponding new bank as defined in section 2(d) of the Banking

Companies (Acquisition and Transfer of Undertakings) Act, 1970 or the Banking Companies

(Acquisition and Transfer of Undertakings) Act, 1980 [both Acts].

(B) Non executive directors compensation and disclosures

All fees/compensation, if any paid to non-executive directors, including independent directors,

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-executive directors, including independent directors,

in any financial year and in aggregate.

(C) Other provisions as to Board and Committees

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i. The board shall meet at least four times a year, with a maximum time gap of three months

between any two meetings. The minimum information to be made available to the board is given

in Annexure I A.

ii. A director shall not be a member in more than 10 committees or act as Chairman of more

than five committees across all companies in which he is a director. Furthermore it should be a

mandatory annual requirement for every director to inform the company about the committee

positions he occupies in other companies and notify changes as and when they take place.

Explanation:

i. For the purpose of considering the limit of the committees on which a director canserve,

all public limited companies, whether listed or not, shall be included and all other companies

including private limited companies, foreign companies and companies underSection 25 of the

Companies Act shall be excluded.

ii. For the purpose of reckoning the limit under this sub-clause, Chairmanship/membership

of the Audit Committee and the Shareholders Grievance Committee aloneshall be considered.

iii. The 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 rectifyinstances of

non-compliances.

(D) Code of Conduct

i. The 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.

ii. All Board members and senior management personnel shall affirm compliance with th

code on an annual basis. The Annual Report of the company shall contain a declaration to this

effect signed by the CEO.

Explanation: For this purpose, the term senior management shall mean personnel of the

company who are members of its core management team excluding Board of Directors..

Normally, this would comprise all members of management one level below the executive

directors, including all functional heads.

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II Audit Committee

(A) Qualified and Independent Audit Committee

A qualified and independent audit committee shall be set up, giving the terms of reference

subject to the following:

i. The audit committee shall have minimum three directors as members. Two-thirds of the

members of audit committee shall be independent directors.

ii. All members of audit committee shall be financially literate and at least one member

shall have accounting or related financial management expertiseExplanation 1: The term

financially literate means the ability to read and understand basic financial statements i.e.

balance sheet, profit and loss account, and statement of cash flows.Explanation 2: A member will

be considered to have accounting or related financial management expertise if he or she

possesses experience in finance or accounting, or requisite professional certification in

accounting, or any other comparable experience or background which results in the individuals

financial sophistication, including being or having been a chief executive officer, chief financial

officer or other senior officer with financial oversight responsibilities.

iii. The Chairman of the Audit Committee shall be an independent director;

iv. The Chairman of the Audit Committee shall be present at Annual General Meeting to

answer shareholder queries;

v. The audit committee may invite such of the executives, as it considers appropriate and

particularly the head of the finance function) to be present at the meetings of the committee, but

on occasions it may also meet without the presence of any executives of the company. The

finance director, head of internal audit and a representative of the statutory auditor may be

present as invitees for the meetings of the audit committee;

vi. The Company Secretary shall act as the secretary to the committee.

(B) Meeting of Audit Committee

The audit committee should meet at least four times in a year and not more than four months

shall elapse between two meetings. The quorum shall be either two members or one third of the

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members of the audit committee whichever is greater, but there should be a minimum of two

independent members present.

(C) Powers of Audit Committee

The audit committee shall have powers, which should include the following:

1. To investigate any activity within its terms of reference.

2. To seek information from any employee.

3. To obtain outside legal or other professional advice.

4. To secure attendance of outsiders with relevant expertise, if it considers necessary.

(D) Role of Audit Committee

The role of the audit committee shall include the following:

i. Oversight of the companys financial reporting process and the disclosure of its financial

information to ensure that the financial statement is correct, sufficient and credible.

ii. Recommending to the Board, the appointment, re-appointment and, if required, the

replacement or removal of the statutory auditor and the fixation of audit fees.

iii. Approval of payment to statutory auditors for any other services rendered by the statutory

auditors.

iv. Reviewing, with the management, the annual financial statements before submission to

the board for approval, with particular reference to: Matters required to be included in the

Directors Responsibility Statement to be included in the Boards report in terms of clause

(2AA) of section 217 of the Companies Act, 1956

Changes, if any, in accounting policies and practices and reasons for the same

Major accounting entries involving estimates based on the exercise of judgment

by management

Significant adjustments made in the financial statements arising out of audit

findings

Compliance with listing and other legal requirements relating to financial

statements

Disclosure of any related party transactions

Qualifications in the draft audit report.

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v. Reviewing, with the management, the quarterly financial statements before submission to

the board for approval

vi. Reviewing, with the management, performance of statutory and internal auditors

adequacy of the internal control systems.

vii. Reviewing the adequacy of internal audit function, if any, including the structure of the

internal audit department, staffing and seniority of the official heading the department, reporting

structure coverage and frequency of internal audit.

viii. Discussion with internal auditors any significant findings and follow up there on.

ix. Reviewing the findings of any internal investigations by the internal auditors into matters

where there is suspected fraud or irregularity or a failure of internal control systems of a material

nature and reporting the matter to the board.

x. Discussion with statutory auditors before the audit commences, about the nature and

scope of audit as well as post-audit discussion to ascertain any area of concern.

xi. To look into the reasons for substantial defaults in the payment to the depositors

debenture holders, shareholders (in case of nonpayment of declared dividends) and creditors.

xii. To review the functioning of the Whistle Blower mechanism, in case the same is

existing.

xiii. Carrying out any other function as is mentioned in the terms of reference of the Audit

Committee.

Explanation (i): The term "related party transactions" shall have the same meaning as contained

in the Accounting Standard 18, Related Party Transactions, issued by The Institute of Chartered

Accountants of India.

Explanation (ii): If the company has set up an audit committee pursuant to provision of the

Companies Act, the said audit committee shall have such additional functions / features as is

contained in this clause.

(E) Review of information by Audit Committee

The Audit Committee shall mandatorily review the following information:

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i. Management discussion and analysis of financial condition and results of operations;

ii. Statement of significant related party transactions (as defined by the audit committee),

submitted by management;

iii. Management letters / letters of internal control weaknesses issued by the statutory

auditors;

iv. Internal audit reports relating to internal control weaknesses; and

v. The appointment, removal and terms of remuneration of the Chief internal auditor shall

be subject to review by the Audit Committee

III. Subsidiary Companies

i. At least one independent director on the Board of Directors of the holding company shall

be a director on the Board of Directors of a material non listed Indian subsidiary company.

ii. The Audit Committee of the listed holding company shall also review the financial

statements, in particular, the investments made by the unlisted subsidiary company.

iii. The minutes of the Board meetings of the unlisted subsidiary company shall be placed at

the Board meeting of the listed holding company. The management should periodically bring to

the attention of the Board of Directors of the listed holding company, a statement of all

significant transactions and arrangements entered into by the unlisted subsidiary company.

Explanation 1: The term material non-listed Indian subsidiary shall mean an unlisted

subsidiary, incorporated in India, whose turnover or net worth (i.e. paid up capital and free

reserves) exceeds 20% of the consolidated turnover or net worth respectively, of the listed

holding company and its subsidiaries in the immediately preceding accounting year.

Explanation 2: The term significant transaction or arrangement shall mean any individual

transaction or arrangement that exceeds or is likely to exceed 10% of the total revenues or total

expenses or total assets or total liabilities, as the case may be, of the material unlisted subsidiary

for the immediately preceding accounting year.

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Explanation 3: Where a listed holding company has a listed subsidiary which is itself a holding

company, the above provisions shall apply to the listed subsidiary insofar as its subsidiaries are

concerned.

IV. Disclosures

(A) Basis of related party transactions

i. A statement in summary form of transactions with related parties in the ordinary course

of business shall be placed periodically before the audit committee.

ii. Details of material individual transactions with related parties which are not in the

normal course of business shall be placed before the audit committee.

iii. Details of material individual transactions with related parties or others, which are not on

an arms length basis should be placed before the audit committee, together with Managements

justification for the same..

(B) Disclosure of Accounting Treatment

Where in the preparation of financial statements, a treatment different from that prescribed in an

Accounting Standard has been followed, the fact shall be disclosed in the financial statements,

together with the managements explanation as to why it believes such alternative treatment is

more representative of the true and fair view of the underlying business transaction in the

Corporate Governance Report.

(C) Board Disclosures Risk management

The company shall lay down procedures to inform Board members about the risk assessment and

minimization procedures. These procedures shall be periodically reviewed to ensure that

executive management controls risk through means of a properly defined framework.

(D) Proceeds from public issues, rights issues, preferential issues etc.

When money is raised through an issue (public issues, rights issues, preferential issues etc.), it

shall disclose to the Audit Committee, the uses / applications of funds by major category (capital

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expenditure, sales and marketing, working capital, etc), on a quarterly basis as a part of their

quarterly declaration of financial results. Further, on an annual basis, the company shall prepare a

statement of funds utilized for purposes other than those stated in the offer

document/prospectus/notice and place it before the audit committee. Such disclosure shall be

made only till such time that the full money raised through the issue has been fully spent. This

statement shall be certified by the statutory auditors of the company. The audit committee shall

make appropriate recommendations to the Board to take up steps in this matter.

(E) Remuneration of Directors

i. All pecuniary relationship or transactions of the non-executive directors vis--vis the

company shall be disclosed in the Annual Report.

ii. Further the following disclosures on the remuneration of directors shall be made in the

section on the corporate governance of the Annual Report:

(a) All elements of remuneration package of individual directors summarized under major

groups, such as salary, benefits, bonuses, stock options, pension etc.

(b) Details of fixed component and performance linked incentives, along with the

performance criteria.

(c) Service contracts, notice period, severance fees. (d) Stock option details, if any and

whether issued at a discount as well as the period over which accrued and over which

exercisable.

iii. The company shall publish its criteria of making payments to non-executive directors in

its annual report. Alternatively, this may be put up on the companys website and reference

drawn thereto in the annual report.

iv. The company shall disclose the number of shares and convertible instruments held by

non-executive directors in the annual report.

v. Non-executive directors shall be required to disclose their shareholding (both own or held

by / for other persons on a beneficial basis) in the listed company in which they are proposed to

be appointed as directors, prior to their appointment. These details should be disclosed in the

notice to the general meeting called for appointment of such director

(F) Management

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i. As part of the directors report or as an addition thereto, a Management Discussion and

Analysis report should form part of the Annual Report to the shareholders. This Management

Discussion & Analysis should include discussion on the following matters within the limits set

by the companys competitive position:

i. Industry structure and developments.

ii. Opportunities and Threats.

iii. Segmentwise or product-wise performance.

iv. Out lookv. Risks and concerns.

v. Internal control systems and their adequacy.

vi. Discussion on financial performance with respect to operational performance.

vii. Material developments in Human Resources / Industrial Relations front, including

number of people employed.

ii. (Senior management shall make disclosures to the board relating to all material financial

and commercial transactions, where they have personal interest that may have a potential conflict

with the interest of the company at large (for e.g. dealing in company shares, commercial

dealings with bodies, which have shareholding of management and their relatives etc.)

Explanation: For this purpose, the term "senior management" shall mean personnel of the

company who are members of its. core management team excluding the Board of Directors).

This would also include all members of management one level below the executive directors

including all functional heads.

(G) Shareholders

I. In case of the appointment of a new director or re-appointment of a director the

shareholders must be provided with the following information:

(a) A brief resume of the director;

(b) Nature of his expertise in specific functional areas;

(c) Names of companies in which the person also holds the directorship and the membership

of Committees of the Board; and

(d) Shareholding of non-executive directors as stated in Clause 49 (IV) (E) (v) above

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II. Quarterly results and presentations made by the company to analysts shall be put on

companys web-site, or shall be sent in such a form so as to enable the stock exchange on which

the company is listed to put it on its own web-site.

III. A board committee under the chairmanship of a non-executive director shall be formed

to specifically look into the redressal of shareholder and investors complaints like transfer of

shares, non-receipt of balance sheet, non-receipt of declared dividends etc. This Committee shall

be designated as Shareholders/Investors Grievance Committee.

IV. To expedite the process of share transfers, the Board of the company shall delegate the

power of share transfer to an officer or a committee or to the registrar and share transfer agents.

The delegated authority shall attend to share transfer formalities at least once in a fortnight.

V. CEO/CFO certification

The CEO, i.e. the Managing Director or Manager appointed in terms of the Companies Act, 1956

and the CFO i.e. the whole-time Finance Director or any other person heading the finance

function discharging that function shall certify to the Board that:

I. They have reviewed financial statements and the cash flow statement for the year and

that to the best of their knowledge and belief :

(i) these statements do not contain any materially untrue statement or omit any material fact

or contain statements that might be misleadin;

(ii) these statements together present a true and fair view of the companys affairs and are in

compliance with existing accounting standards, applicable laws and regulations.

II. There are, to the best of their knowledge and belief, no transactions entered into by the

company during the year which are fraudulent, illegal or volatile of the companys code of

conduct.

III. They accept responsibility for establishing and maintaining internal controls and that they

have evaluated the effectiveness of the internal control systems of the company and they have

disclosed to the auditors and the Audit Committee, deficiencies in the design or operation of

internal controls, if any, of which they are aware and the steps they have taken or propose to take

to rectify these deficiencies.

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IV. They have indicated to the auditors and the Audit committee

(i) significant changes in internal control during the year;

(ii) significant changes in accounting policies during the year and that the same have been

disclosed in the notes to the financial statements; and

(iii) instances of significant fraud of which they have become aware and the involvement therein,

if any, of the management or an employee having a significant role in the companys internal

control system

VI. Report on Corporate Governance

(i) There shall be a separate section on Corporate Governance in the Annual Reports of

company, with a detailed compliance report on Corporate Governance. Non-compliance of any

mandatory requirement of this clause with reasons thereof and the extent to which the non-

mandatory requirements have been adopted should be specifically highlighted. The suggested list

of items to be included in this report is given in

Annexure- I C and list of non-mandatory requirements is given in Annexure I D. (ii) The

companies shall submit a quarterly compliance report to the stock exchanges within 15 days

from the close of quarter as per the format given in Annexure I B. The reportshall be signed

either by the Compliance Officer or the Chief Executive Officer of thecompany

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VII. Compliance

(1) The company shall obtain a certificate from either the auditors or practicing company

secretaries regarding compliance of conditions of corporate governance as stipulated in this

clause and annex the certificate with the directors report, which is sent annually to all the

shareholders of the company. The same certificate shall also be sent to the Stock Exchanges

along with the annual report filed by the company.

(2) The non-mandatory requirements given in Annexure I D may be implemented as per the

discretion of the company. However, the disclosures of the compliance with mandatory

requirements and adoption (and compliance) / non-adoption of the non-mandatory requirements

shall be made in the section on corporate governance of the Annual Report.

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Annexure I A

Information to be placed before Board of Directors

1) Annual operating plans and budgets and any updates.

2) Capital budgets and any updates.

3) Quarterly results for the company and its operating divisions or business segments.

4) Minutes of meetings of audit committee and other committees of the board.

5) The information on recruitment and remuneration of senior officers just below the board

level, including appointment or removal of Chief Financial Officer and the Company Secretary.

6) Show cause, demand, prosecution notices and penalty notices which are materially

important

7) Fatal or serious accidents, dangerous occurrences, any material effluent or pollution

problems.

8) Any material default in financial obligations to and by the company, or substantial

nonpayment for goods sold by the company.

9) Any issue, which involves possible public or product liability claims of substantial

nature, including any judgement or order which, may have passed strictures on the conduct of the

company or taken an adverse view regarding another enterprise that can have negative

implications on the company.

10) Details of any joint venture or collaboration agreement.

11) Transactions that involve substantial payment towards goodwill, brand equity, or

intellectual property.

12) Significant labour problems and their proposed solutions. Any significant development in

Human Resources/ Industrial Relations front like signing of wage agreement, implementation of

Voluntary Retirement Scheme etc.

13) Sale of material nature, of investments, subsidiaries, assets, which is not in normal course

of business.

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14) Quarterly details of foreign exchange exposures and the steps taken by management limit

the risks of adverse exchange rate movement, if material

15) Non-compliance of any regulatory, statutory or listing requirements and shareholder

service such as non-payment of dividend, delay in share transfer etc.

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Anne

xure IB

Format of Quarterly Compliance Report on Corporate Governance

Name of the Company:

Quarter ending on:

Particulars Clause of

Listing

agreement

Compliance

Status

Yes/No

Remarks

I. Board of Directors 49 I

(A)Composition of Board 49(IA)

(B)Non-executive Directors compensation

& disclosures

49 (IB)

(C)Other provisions as to Board and

Committees

49 (IC)

(D)Code of Conduct 49(ID)

II. Audit Committee 49 (II)

(A)Qualified & Independent Audit Committee 49 (IIA)

(B)Meeting of Audit Committee 49 (IIB)

(C)Powers of Audit Committee 49 (IIC)(D)Role of Audit Committee 49 (IID)

(E)Review of Information by Audit

Committee

49 (IIE)

III. Subsidiary Companies 49 (III)

IV. Disclosures 49 (IV)

(A)Basis of related party transactions 49 (IVA)

(B)Board Disclosures 49 (IVB)

(C)Proceeds from public issues, rights

issues,preferential issues etc.

49 (IVC)

(D)Remuneration of Directors 49 (IVD)

(E)Management 49 (IVE)

(F)Shareholders 49 (IVF)

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V.CEO/CFO Certification 49 (V)

VI. Report on Corporate Governance 49 (VI)

VII. Compliance 49 (VII)

Note:-

1) The details under each head shall be provided to incorporate all the information required as

per the provisions of the Clause 49 of the Listing Agreement.

2) In the column No.3, compliance or non-compliance may be indicated by Yes/No/N.A.

For example, if the Board has been composed in accordance with the Clause 49 I of the Listing

Agreement, "Yes" may be indicated. Similarly, in case the company has no related party

transactions, the words N.A. may be indicated against 49 (IV A)

3) In the remarks column, reasons for non-compliance may be indicated, for example, in case of

requirement related to circulation of information to the shareholders, which would be done only

in the AGM/EGM, it might be indicated in the "Remarks" column as will be complied with at

the AGM. Similarly, in respect of matters which can be complied with only where the situation

arises, for example, "Report on Corporate Governance" is to be a part of Annual Report only, the

words "will be complied in the next Annual Report" may be indicated

Annexure I C

List of Items n the Report on Corporate Governance in the Annual Report of Companies

1. A brief statement on companys philosophy on code of governance.

2. Board of Directors:

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a. Composition and category of directors, for example, promoter, executive, nonexecutive,

independent non-executive, nominee director, which institution represented as lender or as equity

investor.

b. Attendance of each director at the Board meetings and the last AGM.

c. Number of other Boards or Board Committees in which he/she is a member or

Chairperson

Number of Board meetings held, dates on which held.

3. Audit Committee:

Brief description of terms of reference

Composition, name of members and Chairperson

Meetings and attendance during the year

4. Remuneration Committee:

Brief description of terms of reference

Composition, name of members and Chairperson

Attendance during the year

Remuneration policy

Details of remuneration to all the directors, as per format in main report.

5. Shareholders Committee:

Name of non-executive director heading the committee

Name and designation of compliance officer

Number of shareholders complaints received so far

Number not solved to the satisfaction of shareholders

Number of pending complaints

6. General Body meetings:

Location and time, where last three AGMs held.

Whether any special resolutions passed in the previous 3 AGMs

Whether any special resolution passed last year through postal ballot details of

voting pattern

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Person who conducted the postal ballot exercise

Whether any special resolution is proposed to be conducted through postal ballot

Procedure for postal ballot

7. Disclosures:

Disclosures on materially significant related party transactions that may have potential

conflict with the interests of company at large.

Details of non-compliance by the company, penalties, strictures imposed on the company

by Stock Exchange or SEBI or any statutory authority, on any matter related to capital markets,

during the last three years.

Whistle Blower policy and affirmation that no personnel has been denied access to the

audit committee.

Details of compliance with mandatory requirements and adoption of the non mandatory

requirements of this clause

8. Means of communication.

Quarterly results

Newspapers wherein results normally published

Any website, where displayed

Whether it also displays official news releases; and

The presentations made to institutional investors or to the analysts.

9. General Shareholder information:

AGM : Date, time and venue

Financial year

Date of Book closure

Dividend Payment Date

Listing on Stock Exchanges

Stock Code

Market Price Data : High., Low during each month in last financial year

Performance in comparison to broad-based indices such as BSE Sensex,CRISIL index et

Registrar and Transfer Agents

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Share Transfer System

Distribution of shareholding

Dematerialization of shares and liquidity

Outstanding GDRs/ADRs/Warrants or any Convertible instruments, conversion date

and likely impact on equity

Plant Locations

Address for correspondence

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Annexure I D

Non-Mandatory Requirements

(1) The Board

A non-executive Chairman may be entitled to maintain a Chairmans office at the companys

expense and also allowed reimbursement of expenses incurred in performance of his duties.

Independent Directors may have a tenure not exceeding, in the aggregate, a period of nine years,

on the Board of a company.

(2) Remuneration Committee

The board may set up a remuneration committee to determine on their behalf and on

behalf of the shareholders with agreed terms of reference, the companys policy on specific

remuneration packages for executive directors including pension rights and any compensation

payment.

To avoid conflicts of interest, the remuneration committee, which would determine the

remuneration packages of the executive directors may comprise of at least three directors, all

of whom should be non-executive directors, the Chairman of committee being an independent

director.

All the members of the remuneration committee could be present at the meeting.

The Chairman of the remuneration committee could be present at the Annual

General Meeting, to answer the shareholder queries. However, it would be up to the Chairman to

decide who should answer the queries.

(3) Shareholder RightsA half-yearly declaration of financial performance including summary of the significant events

in last six-months, may be sent to each household of shareholders.

(4) Audit qualifications

Company may move towards a regime of unqualified financial statements.

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(5) Training of Board Members

A company may train its Board members in the business model of the company as well as the

risk profile of the business parameters of the company, their responsibilities as directors, and the

best ways to discharge them.

(6) Mechanism for evaluating non-executive Board Members

The performance evaluation of non-executive directors could be done by a peer group

comprising the entire Board of Directors, excluding the director being evaluated; and Peer Group

evaluation could be the mechanism to determine whether to extend continue the terms of

appointment of non-executive directors.

(7) Whistle Blower Policy

The company may establish a mechanism for employees to report to the management

Concerns about unethical behaviour, actual or suspected fraud or violation of the companys

code of conduct or ethics policy. This mechanism could also provide for adequate safeguards

against victimization of employees who avail of the mechanism and also provide for direct

access to the Chairman of the Audit committee in exceptional cases. Established, the existence of

the mechanism may be appropriately communicated within the organization.

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In accordance with Clause 49 of the Listing Agreement with the Stock Exchanges in India

(Clause 49) and some of the best practices followed internationally on Corporate

Governance, the report containing the details of governance systems and processes at

Reliance Industries Limited is as

Under:

1. Companys Philosophy on Code of Governance

Reliances philosophy on Corporate Governance envisages attainment of the highest levels of

transparency, accountability and equity in all facets of its operations, and in all its interactions

with its stakeholders, including shareholders, employees, lenders, Government and the society at

large. Reliance is committed to achieve and maintain the highest standards of Corporate

Governance. Reliance believes that all its actions must serve the underlying goal of enhancing

overall shareholder value on a sustained basis. Reliance is committed to the best governance

practices that create long term sustainable shareholder value. Keeping in view the Companys

size, complexity, global operations and corporate traditions, the Reliance Governance framework

is based on the following main principles:

Constitution of a Board of Directors of appropriate composition, size, varied expertise and

commitment to discharge its responsibilities and duties.

Ensuring timely flow of information to the Board and its Committees to enable them to

discharge their functions effectively.

Independent verification and safeguarding integrity of the Companys financial reporting

A sound system of risk management and internal control.

Timely and balanced disclosure of all material information concerning the Company to all

stakeholders

Transparency and accountability.

Compliance with all the applicable rules and regulations

Fair and equitable treatment of all its stakeholders including employees, customers,

shareholders and investors

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Corporate Governance in Banks

Banks play a very vital role in the economy of any country and the strengthening and stability of

the banking system is a matter general public interest and concern for providing a payment and

settlement system. However, today Banking has become complex and it has been recognized that

there is need to attach importance to qualitative standards such as internal controls and risk

management, composition and role of the board and disclosure standards. In India therefore

during the last few years, banks have initiated several steps towards Corporate Governance. Also

there is an increasing interest in Corporate Governance in banks due to certain developments

such as participation of the public shareholders in the public sector banks, also the entry of new

private banks and the need to access capital markets by all banks.

The generally accepted principles of Corporate Governance are similar and are applicable to

banks also. The key components of Corporate Governance are accountability, transparency,

predictability and participation. The governance approaches however differ from one banking

institution to another. But the fundamental element remains the same, which includes active

concern with understanding the responsibility and diligently discharging them in a prudent

manner.

The focus on Corporate Governance is particularly acute in financial services and most of all in

the banking sector. Governance in banks is considerably much more complex issue than in other

sectors. Banks exhibit strong linkages with the real sector of the economy and they are a major

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source of funding for all types of economic activities. Banks channelize the public saving to the

corporate world and other individuals for productive purposes. This important fact makes it clear

that banks and financial institution are the backbone of the economy and an important element

for the growth of the economy. With this kind of importance of banks and financial institutions,

they are under regulatory purview of the Central Bank of the country not only in India but all the

countries. The fact remains that banks are highly leveraged entities and also that their failure

would have a contagion effect on the entire financial system. Banking is however a very special

sub-set of corporate governance with much of its management obligations enshrined in law or

regulatory codes and so banks will attempt to comply with the same codes of board governance

as other companies. Governance is two-sided issue for banks because they fund their money and

also have ownership in other companies. This makes them a significant owner in their own right.

There is a lot of focus on raising the level of corporate governance in India mainly from the

angle of creating shareholder value and also bringing more transparency in the operations.. The

banks have to bring improvement in these standards so as to meet the competitive challenges and

the risk associated with the rapidly changing environment.

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Objectives of Corporate Governance in

Banks1. Corporate governance is very integral to the existence of a bank. It not only

inspires and strengthens the investors confidence but also helps the company to seek

higher growth and profits. Corporate Governance seeks to achieve following objectives:

2. A properly structured board with appropriate composition and size, capable of

taking independent and objective decisions and also which can adequately discharge its

duties and responsibilities.

3. The balanced board as regards to the adequate representation of the non-executive

and independent directors who will take care of the interests and well-being of all thestakeholders and also of investors.

4. The board shall seek to adopt transparent practices and procedures and should

arrive at true and fair decisions and should carry out independent functions.

5. There should be timely and accurate disclosure on all matters concerning

operations and performance of the bank.

6. The board should keep the shareholders informed of relevant developmentsimpacting the company.

7. The bank should take adequate risk management and internal control measures.

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Corporate Governance in Private Sector

Banks

Banks are special entities as they not only accept and deploy large amounts of uncollateralized

public funds in fiduciary capacity, but also they leverage such funds though credit creation. They

are important for smooth functioning of the payment system. In view of the above, legal

prescriptions for ownership and governance of banks laid down in the Banking Regulation Act,

1949 which have been supplemented by regulatory prescriptions issued by RBI from time totime.

The existing legal framework and significant current practices in particular cover the following

aspects:

1. The comp

project corporate governance 6sem

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