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Committe Reports BECG

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The document summarizes recommendations from various committees in India on corporate governance practices for listed companies. Some of the key recommendations include: - Boards of listed companies should have a minimum of half independent directors if the Chairman is also the Managing Director. - Directors should not hold more than 10 directorships in listed companies. - Audit committees should comprise of non-executive members and review financial reporting and internal controls. - Disclosure of related party transactions and management discussion on company performance in annual reports. - Establishment of remuneration committees to set compensation of executive directors.

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27 CII Code recommendations (1997) Birla Committee (SEBI) recommendations (2000) Narayana Murthy committee (SEBI) recommendations (2003) Board of Directors a) No need for German style two-tiered board b) For a listed company with turnover exceeding Rs. 100 crores, if the Chairman is also the MD, at least half of the board should be Independent directors, else at least 30% . c) No single person should hold directorships in more than 10 listed companies. d) Non-executive directors should be competent and active and have clearly defined responsibilities like in the Audit Committee. e) Directors should be paid a commission not exceeding 1% (3%) of net profits for a company with(out) an MD over and above sitting fees. Stock options may be considered too. f) Attendance record of directors should be made explicit at the time of re-appointment. Those with less than 50% attendance should not be re- appointed. g) Key information that must be presented to the board is listed in the code. h) Audit Committee: Listed companies with turnover over Rs. 100 crores or paid-up capital of a) At least 50% non-executive members b) For a company with an executive Chairman, at least half of the board should be independent directors , else at least one-third. c) Non-executive Chairman should have an office and be paid for job related expenses . d) Maximum of 10 directorships and 5 chairmanships per person. e) Audit Committee: A board must have an qualified and indepenent audit committee, of minimum 3 members, all non-executive, majority and chair independent with at least one having financial and accounting knowledge. Its chairman should attend AGM to answer shareholder queries. The committee should confer with key executives as necessary and the company secretary should be he seceretary of the committee. The committee should meet at least thrice a year -- one before finalization of annual accounts and one necessarily every six months with the quorum being the higher of two members or one-third of members with at least two independent directors. It should have access to information from any employee and can investigate any a) Training of board members suggested. b) There shall be no nominee directors. All directors to be elected by shareholders with same responsibilities and accountabilities. c) Non-executive director compensation to be fixed by board and ratified by shareholders and reported. Stock options should be vested at least a year after their retirement. Independent directors should be treated the same way as non-executive directors. d) The board should be informed every quarter of business risk and risk management strategies. e) Audit Committee: Should comprise entirely of financially literate non-executive members with at least one member having accounting or related financial management expertise. It should review a mandatory list of documents including information relating to subsidiary companies. Whistle blowers should have direct access to it and all employees be informed of such policy (and this should be affirmed annually by management). All related party transactions must be approved by audit committee. The committee should be responsible for the appointment, Independent directors defined separately within each code. The Narayana Murthy committees definition is stricter. Table 1: Recommendations of various committees on Corporate Governance in India
28 Rs. 20 crores should have an audit committee of at least three members, all non-executive, competent and willing to work more than other non-executive directors, with clear terms of reference and access to all financial information in the company and should periodically interact with statutory auditors and internal auditors and assist the board in corporate accounting and reporting. i) Reduction in number of nominee directors. FIs should withdraw nominee directors from companies with individual FI shareholding below 5% or total FI holding below 10%. matter within its TOR, can seek outside legal/professional service as well as secure attendance of outside experts in meetings. It should act as the bridge between the board, statutory auditors and internal auditors with far- ranging powers and responsibilities. f) Remuneration Committee: The remuneration committee should decide remuneration packages for executive directors. It should have at least 3 directors, all non- executive and be chaired by an independent director. g) The board should decide on the remuneration of non-executive directors and all remuneration information should be disclosed in annual report h) At least 4 board meetings a year with a maximum gap of 4 months between any 2 meetings. Minimum information available to boards stipulated. removal and remuneration of chief internal auditor. f) Boards of subsidiaries should follow similar composition rules as that of parent and should have at least one independent director s of the parent company. g) The Board report of a parent company should have access to minutes of board meeting in subsidiaries and should affirm reviewing its affairs. h) Performance evaluation of non-executive directors by all his fellow Board members should inform a re -appointment decision. i) While independent and non-executive directors should enjoy some protection from civil and criminal litigation, they may be held responsible of the legal compliance in the companys affairs. j) Code of conduct for Board members and senior management and annual affirmation of compliance to it. Disclosure and Transparency a)Companies should inform their shareholders about the high and low monthly averages of their share prices and about share, performance and prospects of major business segments (exceeding 10% of turnover). b) Consolidation of group accounts should be a) Companies should provide consolidated accounts for subsidiaries where they have majority shareholding. b) Disclosure list pertaining to related party transactions provided by committee till ICAIs norm is established. a) Management should explain and justify any deviation from accounting standards in financial statements. b) Companies should move towards a regime of unqualified financial statements.
29 optional and subject to FIs and IT departments assessment norms. If a company consolidates, no need to annex subsidiary accounts but the definition of group should include parent and subsidiaries. c) Stock exchanges should require compliance certificate from CEOs and CFOs on company accounts d) For companies with paid-up capital exceeding Rs. 20 crore, disclosure norms for domestic issues should be same as those for GDR issues. c) A mandatory Management Discussion & Analysis segment of annual report that includes discussion of industry structure and development, opportunities, threats, outlook, risks etc. as well as financial and operational performance and managerial developments in HR/IR front. d) Management should inform board of all potential conflict of interest situations. e) On (re)appointment of directors, shareholders must be informed of their resume, expertise, and names of companies where they are directors. c) Management should provide a clear description, followed by auditors comments, of each materialcontingent liability and its risks. d) CEO/CFO certification of knowledge, veracity and comprehensiveness of financial statements and directors reports and affirmation of maintaining proper internal control as well as appropriate disclosure to auditors and audit committee. e) Security analysts must disclose the relationship of their employers with the client company as well as their actual or intended shareholding in the client company. Other issues Creditors Rights a) FIs should rewrite loan covenants eliminating nominee directors except in case of serious and systematic debt default or provision of insufficient information. b) In case of multiple credit ratings, they should all be reported in a format showing relative position of the company c) Same disclosure norms for foreign and domestic creditors. d) Companies defaulting on fixed deposits should not be permitted to accept further deposits and make inter-corporate loans or investments or declare dividends until the default is made good. Shareholders Rights a) Quarterly results, presentation to analysts etc. should be communicated to investors, possibly over the Internet. b) Half-yearly financial results and significant events reports be mailed to shareholders c) A board committee headed by a non- executive director look into shareholder complaints/grievances d) Company should delegate share transfer power to an officer/committee/registrar/share transfer agents. The delegated authority should attend to share transfer formalities at least once in a fortnight. Special Disclosure for IPOs a) Companies making Initial Public Offering (IPO) should informthe Audit Committee of category-wise uses of funds every quarter. It should get non-pre-specified uses approved by auditors on an annual basis. The audit committee should advise the Board for action in this matter.

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Committe Reports BECG

  • 1. 27 CII Code recommendations (1997) Birla Committee (SEBI) recommendations (2000) Narayana Murthy committee (SEBI) recommendations (2003) Board of Directors a) No need for German style two-tiered board b) For a listed company with turnover exceeding Rs. 100 crores, if the Chairman is also the MD, at least half of the board should be Independent directors, else at least 30% . c) No single person should hold directorships in more than 10 listed companies. d) Non-executive directors should be competent and active and have clearly defined responsibilities like in the Audit Committee. e) Directors should be paid a commission not exceeding 1% (3%) of net profits for a company with(out) an MD over and above sitting fees. Stock options may be considered too. f) Attendance record of directors should be made explicit at the time of re-appointment. Those with less than 50% attendance should not be re- appointed. g) Key information that must be presented to the board is listed in the code. h) Audit Committee: Listed companies with turnover over Rs. 100 crores or paid-up capital of a) At least 50% non-executive members b) For a company with an executive Chairman, at least half of the board should be independent directors , else at least one-third. c) Non-executive Chairman should have an office and be paid for job related expenses . d) Maximum of 10 directorships and 5 chairmanships per person. e) Audit Committee: A board must have an qualified and indepenent audit committee, of minimum 3 members, all non-executive, majority and chair independent with at least one having financial and accounting knowledge. Its chairman should attend AGM to answer shareholder queries. The committee should confer with key executives as necessary and the company secretary should be he seceretary of the committee. The committee should meet at least thrice a year -- one before finalization of annual accounts and one necessarily every six months with the quorum being the higher of two members or one-third of members with at least two independent directors. It should have access to information from any employee and can investigate any a) Training of board members suggested. b) There shall be no nominee directors. All directors to be elected by shareholders with same responsibilities and accountabilities. c) Non-executive director compensation to be fixed by board and ratified by shareholders and reported. Stock options should be vested at least a year after their retirement. Independent directors should be treated the same way as non-executive directors. d) The board should be informed every quarter of business risk and risk management strategies. e) Audit Committee: Should comprise entirely of financially literate non-executive members with at least one member having accounting or related financial management expertise. It should review a mandatory list of documents including information relating to subsidiary companies. Whistle blowers should have direct access to it and all employees be informed of such policy (and this should be affirmed annually by management). All related party transactions must be approved by audit committee. The committee should be responsible for the appointment, Independent directors defined separately within each code. The Narayana Murthy committees definition is stricter. Table 1: Recommendations of various committees on Corporate Governance in India
  • 2. 28 Rs. 20 crores should have an audit committee of at least three members, all non-executive, competent and willing to work more than other non-executive directors, with clear terms of reference and access to all financial information in the company and should periodically interact with statutory auditors and internal auditors and assist the board in corporate accounting and reporting. i) Reduction in number of nominee directors. FIs should withdraw nominee directors from companies with individual FI shareholding below 5% or total FI holding below 10%. matter within its TOR, can seek outside legal/professional service as well as secure attendance of outside experts in meetings. It should act as the bridge between the board, statutory auditors and internal auditors with far- ranging powers and responsibilities. f) Remuneration Committee: The remuneration committee should decide remuneration packages for executive directors. It should have at least 3 directors, all non- executive and be chaired by an independent director. g) The board should decide on the remuneration of non-executive directors and all remuneration information should be disclosed in annual report h) At least 4 board meetings a year with a maximum gap of 4 months between any 2 meetings. Minimum information available to boards stipulated. removal and remuneration of chief internal auditor. f) Boards of subsidiaries should follow similar composition rules as that of parent and should have at least one independent director s of the parent company. g) The Board report of a parent company should have access to minutes of board meeting in subsidiaries and should affirm reviewing its affairs. h) Performance evaluation of non-executive directors by all his fellow Board members should inform a re -appointment decision. i) While independent and non-executive directors should enjoy some protection from civil and criminal litigation, they may be held responsible of the legal compliance in the companys affairs. j) Code of conduct for Board members and senior management and annual affirmation of compliance to it. Disclosure and Transparency a)Companies should inform their shareholders about the high and low monthly averages of their share prices and about share, performance and prospects of major business segments (exceeding 10% of turnover). b) Consolidation of group accounts should be a) Companies should provide consolidated accounts for subsidiaries where they have majority shareholding. b) Disclosure list pertaining to related party transactions provided by committee till ICAIs norm is established. a) Management should explain and justify any deviation from accounting standards in financial statements. b) Companies should move towards a regime of unqualified financial statements.
  • 3. 29 optional and subject to FIs and IT departments assessment norms. If a company consolidates, no need to annex subsidiary accounts but the definition of group should include parent and subsidiaries. c) Stock exchanges should require compliance certificate from CEOs and CFOs on company accounts d) For companies with paid-up capital exceeding Rs. 20 crore, disclosure norms for domestic issues should be same as those for GDR issues. c) A mandatory Management Discussion & Analysis segment of annual report that includes discussion of industry structure and development, opportunities, threats, outlook, risks etc. as well as financial and operational performance and managerial developments in HR/IR front. d) Management should inform board of all potential conflict of interest situations. e) On (re)appointment of directors, shareholders must be informed of their resume, expertise, and names of companies where they are directors. c) Management should provide a clear description, followed by auditors comments, of each materialcontingent liability and its risks. d) CEO/CFO certification of knowledge, veracity and comprehensiveness of financial statements and directors reports and affirmation of maintaining proper internal control as well as appropriate disclosure to auditors and audit committee. e) Security analysts must disclose the relationship of their employers with the client company as well as their actual or intended shareholding in the client company. Other issues Creditors Rights a) FIs should rewrite loan covenants eliminating nominee directors except in case of serious and systematic debt default or provision of insufficient information. b) In case of multiple credit ratings, they should all be reported in a format showing relative position of the company c) Same disclosure norms for foreign and domestic creditors. d) Companies defaulting on fixed deposits should not be permitted to accept further deposits and make inter-corporate loans or investments or declare dividends until the default is made good. Shareholders Rights a) Quarterly results, presentation to analysts etc. should be communicated to investors, possibly over the Internet. b) Half-yearly financial results and significant events reports be mailed to shareholders c) A board committee headed by a non- executive director look into shareholder complaints/grievances d) Company should delegate share transfer power to an officer/committee/registrar/share transfer agents. The delegated authority should attend to share transfer formalities at least once in a fortnight. Special Disclosure for IPOs a) Companies making Initial Public Offering (IPO) should informthe Audit Committee of category-wise uses of funds every quarter. It should get non-pre-specified uses approved by auditors on an annual basis. The audit committee should advise the Board for action in this matter.