Committee # 1.

 CII Code of Desirable Corporate Governance (1998):

For the first time in the history of corporate governance in India, the Confederation
of Indian Industry (CII) framed a voluntary code of corporate governance for the
listed companies, which is known as CII Code of desirable corporate governance.

The main recommendations of the Code are summarised below:

(a) Any listed company with a turnover of Rs. 1000 million and above should
have professionally competent and acclaimed non-executive directors,

who should constitute:

(i) at least 30% of the board, if the chairman of the company is a non-executive
director, or

(ii) at least 50% of the board if the chairman and managing director is the same
person.

(b) For the non-executive directors to play an important role in corporate decision-
making and maximising long-term shareholder value,

They need to:

(i) become active participants in boards, not passive advisors,

(ii) have clearly defined responsibilities within the board, and

(iii) know how to read a balance sheet, profit and loss account, cash flow
statements and financial ratios, and have some knowledge of various company
laws.

(c) No single person should hold directorships in more than 10 listed companies.
This ceiling excludes directorship in subsidiaries (where the group has over 50%
equity stake) or associate companies (where the group has over 25% but no more
than 50% equity stake).

(d) The full board should meet a minimum of six times a year, preferably at an
interval of two months, and each meeting should have agenda items that require at
least half-a-days discussion.

(e) As a general rule, one should not re-appoint any non-executive director who
has not had the time to attend even one-half of the meetings.

(f) Various key information must be reported to, and placed before the board, viz.,
annual budgets, quarterly results, internal audit reports, show cause, demand and
prosecution notices received, fatal accidents and pollution problem, default in
payment of principal and interest to the creditors, inter corporate deposits, joint
venture foreign exchange exposures.

(g) Listed companies with either a turnover of over Rs. 1000 million or a paid up
capital of Rs. 200 million, whichever is less, should set up audit committees within
2 years. The committee should consist of a least three members, who should have
adequate knowledge of finance, accounts, and basic elements of company law. The
committees should provide effective supervision of the financial reporting process.
The audit committees should periodically interact with statutory auditors and
internal auditors to ascertain the quality and veracity of the company’s accounts as
well as the capability of the auditors themselves.

(h) Consolidation of group accounts should be optional.

(i) Major Indian stock exchanges should generally insist on a compliance

certificate, signed by the CEO and the CFO.
Committee # 2. Kumar Mangalam Birla Committee (2000):
Another Committee named as K.M. Birla Committee was set up by SEBI in the
year 2000. In fact, this Committee’s recommendation culminated in the
introduction of Clause 49 of the Listing Agreement to be complied with by all
listed companies. Practically most of the recommendations were accepted and
included by SEBI in its new Clause 49 of the Listing Agreement in 2000.

The main recommendations of the Committee are:

(a) The board of a company should have an optimum combination of executive and
nonexecutive directors with not less than 50% of the board comprising the non-
executive directors. In case, a company has a non-executive chairman, at least one-
third of board should be comprised of independent directors and in case, a
company has an executive chairman, at least half of the board should be
independent.

(b) Independent directors are directors who apart from receiving director’s
remuneration do not have any other material pecuniary relationship or transaction
with the company, its promoters, management or subsidiaries, which in the
judgement of the board may affect their independence of judgement.

(c) A director should not be a member in more than ten committees or act as
chairman of more than five committees across all companies in which he is a
director. 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.

(d) The disclosures should be made in the section on corporate governance of

the annual report:
(i) All elements of remuneration package of all the directors, i.e., salary, benefits,
bonus, stock options, pension etc.

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

(iii) Service contracts, notice and period, severance fees,

(iv) Stock option details, if any, and whether issued at a discount as well as the
period over which accrued and exercisable.

(e) In case of appointment of a new director or re-appointment of a director, the

shareholders must be provided with the information:

(i) a brief resume of the director,

(ii) nature of his experience in specific functional areas, and

(iii) names of companies in which the person also holds the directorship and the
membership of committees of the board.

(f) Board meetings should be held at least four times in a year, with a maximum
times gap of 4 months between any two meetings. The minimum information
(specified by the committee) should be available to the board.

(g) A qualified and independent audit committee should be set up by the board of
the company in order to enhance the credibility of the financial disclosures of a
company and promote transparency. The committee should have minimum three
members, all being non-executive directors, with majority being independent, and
with at least one director having financial and accounting knowledge. The
chairman of the committee should be an independent director and he should be
present at AGM to answer shareholder queries.

Finance director and head of internal audit and when required, a representative of
the external auditor should be present as invitees for the meetings of the audit
committee. The committee should meet at least thrice a year. One meeting should
be held before finalization of annual accounts and one necessarily every six
months. The quorum of the meeting should be either two members or one-third of
the members of the committee, whichever is higher and there should be a
minimum of two independent directors.

(h) The board should set up a remuneration committee to determine on their behalf
and on behalf of the shareholders with agreed terms of reference, the company’s
policy on specific remuneration package for executive directors including pension
rights and any compensation payment. The committee should comprise of at least
three directors, all of who should be non-executive directors, the chairman of the
committee being an independent director.

(i) A board committee under the chairmanship of a non-executive director should

be formed to specifically look into the redressal of shareholder complaints like
transfer of shares, non-receipt of balance sheet, declared dividends etc., The
committee should focus the attention of the company on shareholders’ grievances
and sensitize the management of redressal of their grievances,

(j) The companies should be required to give consolidated accounts in respect of

all their subsidiaries in which they hold 51% or more of the share capital,

(k) Disclosures must be made by the management 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. All
pecuniary relationships or transactions of the non-executive directors should be
disclosed in the annual report.

(l) As part of the Directors’ Report or as an additional thereto, a management

discussion and analysis report should form part of the annual report to the
shareholders,

(m) The half-yearly declaration of financial performance including summary of the

significant

events in last six months should be sent to each household of shareholders,

(n) The company should arrange to obtain a certificate from the auditors of a
company regarding compliance of mandatory recommendations and annex the
certificate with the Directors’ Report, which is sent annually to all the shareholders
of the company,

(o) There should be a separate section on corporate governance in the annual

reports of companies, with a detailed compliance report on corporate governance.

Committee # 3. Naresh Chandra Committee (2002):

Consequent to the several corporate debacles in the USA in 2001, followed by the
stringent enactments of Sarbanes Oxley Act, Government of India appointed
Naresh Chandra Committee in 2002 to examine and recommended drastic
amendments to the law pertaining to auditor-client relationships and the role of
independent directors.

The main recommendations of the Committee are given below:

(a) The minimum board size of all listed companies as well as unlisted public
limited companies with paid-up share capital and free reserves of Rs. 100 million
and above, or turnover of Rs. 500 million and above, should be seven, of which at
least four should be independent directors.

(b) No less than 50% of the board of directors of any listed company as well as
unlisted public limited companies with a paid-up share capital and free reserves of
Rs. 100 million and above or turnover of Rs. 500 million and above, should consist
of independent directors.

(c) In line with the international best practices, the committee recommended a
list of disqualification for audit assignment which included prohibition of:
(i) Any direct financial interest in the audit client,

(ii) Receiving any loans and/or guarantees,

(iii) Any business relationship,

(iv) Personal relationship by the audit firm, its partners, as well as their direct
relatives, prohibition of

(v) Service or cooling off period for a period of at least two years, and

(vi) Undue dependence on an audit client.

(d) Certain services should not be provided by an audit firm to any audit

client, viz.:
(i) Accounting and book keeping,

(ii) Internal audit,

(iii) Financial information design,

(iv) Actuarial,

(v) Broker, dealer, investment advisor, investment banking,

(vi) Outsourcing,

(vii) Valuation,

(viii) Staff recruitment for the client etc.

(e) The audit partners and at least 50% of the engagement team responsible for the
audit of either a listed company, or companies whose paid-up capital and free
reserves exceeds Rs. 100 million or companies whose turnover exceeds Rs. 500
million, should be rotated every 5 years.

(f) Before agreeing to be appointed (Section 224 (i)(b)), the audit firm must submit
a certificate of independence to the audit committee or to the board of directors of
the client company.

(g) There should be a certification on compliance of various aspects regarding

corporate governance by the CEO and CFO of a listed company.

It is interesting to note that majority of the recommendations of this committee are

the culmination of the provisions of Sarbanes Oxley Act of the USA.

Committee # 4. N.R. Narayana Murthy Committee (2003):

SEBI constituted this Committee under the chairmanship of N.R. Narayana
Murthy, chairman and mentor of Infosys, and mandated the Committee to review
the performance of corporate governance in India and make appropriate
recommendations. The Committee submitted its report in February 2003.

The main items of Committee recommendations are as follows:

(a) Persons should be eligible for the office of non-executive director so long as the
term of office did not exceed nine years (in three terms of three years each, running
continuously).

(b) The age limit for directors to retire should be decided by companies
themselves.

(c) All audit committee members shall be non-executive directors. They should be
financially literate and at least one member should have accounting or related
financial management expertise.

(d) Audit committee of listed companies shall review mandatorily the

information, viz.:
(i) Financial statements and draft audit reports,

(ii) Management discussion and analysis of financial condition and operating

results,

(iii) Risk management reports,

(iv) Statutory auditors’ letter to management regarding internal control

weaknesses, and

(v) Related party transactions.

(e) The audit committee of the parent company shall also review the financial
statements, in particular, the investments made by the subsidiary company.

(f) A statement of all transactions with related parties including their bases should
be placed before the independent audit committee for formal approval/ratification.
Of any transaction is not on an arm’s length basis, management should provide an
explanation to the audit committee, justifying the same.

(g) Procedures should be in place to inform board members about the risk
assessment and minimisation procedures.

(h) Companies raising money through an Initial Public Offering (IPO) shall
disclose to the audit committee, the uses/application of funds by major category
(capital expenditure, sales and marketing, working capital etc.) on a quarterly
basis. On an annual basis, the company shall prepare a statement of funds utilized
for purposes other than those stated in the offer document/prospectus. This
statement shall be certified by the independent auditors of the company. The audit
committee should make appropriate recommendations to the board to take up steps
in this matter.

(i) It should be obligatory for the board of a company to lay down the code of
conduct for all board members and senior management of a company. They shall
affirm compliance with the code on an annual basis. The annual report of the
company shall contain a declaration to this effect signed off by the CEO and COO.

(j) A director to become independent shall satisfy the various conditions laid down
by the Committee.
(k) Personnel two observe an unethical or improper practice (not necessarily a
violation of law) should be able to approach the audit committee without
necessarily informing their supervisors. Companies shall take measures to ensure
that this right of access is communicated to all employees through means of
internal circulars etc. Companies shall annually affirm that they have not denied
any personal access to the audit committee of the company (in respect of matters
involving alleged misconduct) and that they have provided protection to whistle
blowers from unfair termination and other unfair or prejudicial employment
practices. Such affirmation shall form a part of the board report on corporate
governance that is required to be prepared and submitted together with the annual
report.

(l) For all listed companies there should be a certification by the CEO and CFO
confirming, the financial statements as true and fair in compliance with the existing
accounting standards, effectiveness of internal control system, disclosure of
significant fraud and significant changes in internal control and/or of accounting
policies to the auditors and the audit committee. It is worth noting here that
majority of the recommendations of this committee have been accepted by SEBI
and thereby incorporated in the revised Clause 49 of the Listing Agreement in
2003 and 2004.