International Journal of Law and Legal Jurisprudence Studies :ISSN:2348-8212: Volume 2 Issue 4

CORPORATE GOVERNANCE IN INDIA: AN OVERVIEW

Md. Baharul Islam*

Abstract

While recent high-profile corporate governance failures in developed countries have brought the
subject to media attention, the issue has always been central to finance and economics. The issue
is particularly important for developing countries since it is central to financial and economic
development. Recent research has established that financial development is largely dependent on
investor protection in a country – de jure and de facto. With the legacy of the English legal
system, India has one of the best corporate governance laws but poor implementation together
with socialistic policies of the pre-reform era has affected corporate governance. Concentrated
ownership of shares, pyramiding and tunneling of funds among group companies mark the
Indian corporate landscape. Boards of directors have frequently been silent spectators with the
DFI nominee directors unable or unwilling to carry out their monitoring functions. Since
liberalization, however, serious efforts have been directed at overhauling the system with the
SEBI instituting the Clause 49 of the Listing Agreements dealing with corporate governance.
Corporate governance of Indian banks is also undergoing a process of change with a move
towards more market-based governance.

Key words: corporate governance, development, enforcement, SEBI

_________________________________________________________
* Asst. Professor, Faculty of Law, The ICFAI University, Tripura. E-mail: [email protected]

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INTRODUCTION:
“Corporate Governance in essentially about leadership; leadership for efficiency in order for
companies to compete effectively in the global economy, and thereby create jobs; leadership for
probity because investors require confidence and assurance that the management of a company
will behave honestly and with integrity in regard to their shareholders and others; leadership
with responsibility as companies are increasingly called upon to address legitimate social
concerns relating to their activities; and , leadership that is both transparent and accountable
because otherwise business leaders cannot be trusted and this will lead to the decline of
companies and the ultimate demise of a country’s economy.”1

“Corporate governance is concerned with ways of bringing the interests of investors and
manager into line and ensuring that firms are run for the benefit of investors”. 2 “Corporate
governance includes ‘the structures, processes, cultures and systems that engender the
successful operation of organizations”.3

The corporate governance ensures the accountability of certain individuals in an organisation

through mechanisms that try to reduce or eliminate the principle-agent problem. It focuses on the
economic efficiency, with a strong emphasis on shareholders’ welfare. The history of the
development of India Corporate Laws has been marked by interesting contrast (Goswami, 2002).
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’ right built on this foundation.

1
- Mervyn King, King Report on Corporate Governance for South Africa [King II Report] [Parktown, South Africa:
Institute of Directors in Southern Africa, 2002] p.18
2
F. Mayer (1997), ‘Corporate governance, competition, and performance’, In Enterprise and Community: New
Directions in Corporate Governance, S. Deakin and A. Hughes (Eds), Blackwell Publishers: Oxford.
3
K. Keasey, S. Thompson and M. Wright (1997), ‘Introduction: The corporate governance problem - competing
diagnoses and solutions,’ In K. Keasey, S. Thompson and M. Wright, Corporate Governance: Economic,
Management, and Financial Issues. Oxford University Press: Oxford.

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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.4

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 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.

OBJECTIVES OF CORPORATE GOVERNANCE:

4
Chakrabarti, Rajesh. Corporate Governance in India – Evolution and Challenges available at http://

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The development of corporate governance concept is naturally and essentially related to the
“objectives of corporate governance”.5 Good governance is integral to the very existence of a
company. It inspires and strengthens investor’s confidence by ensuring company’s commitment
to higher growth and profits. It seeks to achieve following objectives:

i. That a properly structured Board capable of taking independent and objective decisions is
in place at the helm of affairs;
ii. That the Board is balanced as regards the representation of adequate number of non-
executive and independent directors who will take care of the interests and wellbeing of
all the stakeholders;
iii. That the Board adopts transparent procedures and practices and arrives at decisions on
the strength of adequate information;
iv. That the Board has an effective machinery to sub-serve the concerns of stakeholders;
v. That the Board keeps the shareholders informed of relevant developments impacting the
company;
vi. That the Board effectively and regularly monitors the functioning of the management
team; and
vii. That the Board remains in effective control of the affairs of the company at all times.

The overall endeavour of the Board should be to take the organisation forward, to maximise
long-term value and shareholders’ wealth.”

DEVELOPMENTS IN INDIA:

On account of the interest generated by Cadbury Committee Report and also in the wake of
Government initiatives to respond to corporate developments world over, the following major
developments have taken place:

5
Corporate Governance Reporting (Model formats) by ICSI 2003.

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i. The Confederation of Indian Industries (CII), the Associated Chambers of

Commerce and Industry and the Securities and Exchange Board of India
constituted committees to recommend initiatives in corporate governance. The
CII, in 1996, took a special initiative on corporate governance. It was the first
institutional initiative in Indian industry. The objective being to develop a code
for corporate governance to be adopted by the Indian companies (private sector,
the public sector, banks and financial institutions which are corporate entities), a
code by CII carrying the title “Desirable Corporate Governance” was released.
ii. The SEBI appointed committee, known as the Kumar Mangalam Birla
Committee’s recommendations led to the addition of Clause 49 in the Listing
Agreement. Compliance of provisions of Clause 49 was largely made mandatory
by listed companies. The committee recommended that there should be a separate
section on corporate governance in the Annual Report of companies. This section
was required to detail the steps taken to comply with the recommendations of the
committee and thus inform the shareholders of specific initiatives taken to ensure
corporate governance. The committee accorded recognition to the three vital
aspects of corporate governance, namely accountability, transparency and
equality of treatment for all stakeholders.
iii. The Department of Company Affairs (DCA) appointed a study group on
15.5.2000 under the Chairmanship of the then Secretary DCA to suggest ways
and means of achieving corporate governance. The study group appointed a task
force. The study group recommended the setting up of an independent,
autonomous centre for corporate excellence with a view to accord accredition and
promote policy research and studies, training and education and awards etc., in
the field of corporate excellence through improved corporate governance. It
favoured greater shareholders’ participation, formal recognition of corporate
social responsibility, non-executive directors being charged with strategic and

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oversight responsibilities, minimisation of interest–conflict potential, and also

suggested application of corporate governance principles to public sector.
iv. The Department of Company Affairs also constituted on August 21, 2002 a high
level committee, popularly known as Naresh Chandra Committee, to examine
various corporate governance issues and to recommend changes in the diverse
areas such as the statutory auditor-company relationship, rotation of statutory
auditors, procedure for appointment and determination of audit fees, restrictions
if necessary on non-audit fees, independence of auditing functions, ensuring
presentation of ‘true and fair’ statement of the financial affairs of companies,
certification of financial statements and accounts, regulation of oversight
functionaries, setting up an independent regulator and the role of independent
directors. The committee has made very significant recommendations for
changes inter alia, in the Companies Act.
v. Yet another major development includes the constitution of a committee by SEBI
under the Chairmanship of Shri N.R. Narayana Murthy, for reviewing the
implementation of corporate governance code by listed companies. The
mandatory recommendations of the committee on various matters are detailed in
the Annexure.
vi. The Department of Company Affairs also has set up a proactive standing
company law advisory committee to advise on issues like inspection of
corporates for wrong doings, role of independent directors and auditors and their
liability, suggesting steps to enhance imposition of penalties. A High powered
Central Coordination and Monitoring Committee (CCMC) co-chaired by
Secretary DCA and Chairman SEBI was also set up to monitor action against
vanishing companies and unscrupulous promoters, who misused funds raised
from public.

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SEBI has also undertaken a project for development of a comprehensive instrument by a

reputed rating agency for rating the good corporate governance practices of listed
companies.

ENFORCEMENT OF CORPORATE GOVERNANCE IN INDIA:

1) The Companies Act

Companies in our country are regulated by the Companies Act, 2013, as amended up to date. The
companies Act is one of the biggest legislation in India. The arms of the Act are quite long and
touch every aspect of a company's insistence. But to ensure corporate governance, the Act
confers legal rights to shareholders to
i. Vote on every resolution placed before an annual general meeting;
ii. To elect directors who are responsible for specifying objectives and laying down
policies;
iii. Determine remuneration of directors and the CEO;
iv. Removal of directors and
v. Take active part in the annual general meetings.

2) The Securities and Exchange Board of India (SEBI)

The primary securities law in our country is the SEBI Act. Since its setting up in 1992, the board
has taken a number of initiatives towards investor protection. One such initiative is to mandate
information disclosure both in prospectus and in annual accounts. While the companies Act itself
mandates certain standards of information disclosure, SEBI Act has added substantially to these
requirements in an attempt to make these documents more meaningful. The main objective of
SEBI regulation is shareholder value maximization by putting corporate governance structures in
place and through the reduction of information asymmetry between the managers and the
investors of the company. Jensen (2000) also argues in favour of shareholder wealth
maximization as the main objective function of any company.

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3) The Reserve Bank of India (RBI)

The RBI, established in 1935, is the central bank of India and is entrusted with monetary
stability, currency management and supervision of the financial and payments systems. Its
functions and focus have evolved in response to India’s changing economic environment. It acts
as the banker to the state and national governments, the lender of last resort and the controller of
the country’s money supply and foreign exchange. The RBI supervises the operations of all
banks and NBFCs in the country. It is responsible for monetary policy, setting benchmark
interest rates, managing the treasury operations (both borrowings and redemption) for the
government and as custodian and controller of the foreign exchange reserves.

4) Criminal Actions Under The Indian Penal Code

The Indian Penal Code (IPC) provides a number of provisions under which governance related
matters can be addressed. These include criminal breach of trust (section 406) and cheating
(section 420). 6 Although these provisions do not target core governance concerns, they are
sometimes used to address these concerns (Khanna & Mathew, 2010). However conviction rates
are not terribly high (a concern found in many areas of the IPC and related criminal provisions)
and hence the deterrent effect of these provisions is likely to be attenuated (Debroy & Singh,
2009; Khanna 2010a). Nonetheless the power to arrest is ubiquitous even if convictions are not.
This particular equilibrium (easy arrest and difficult convictions) is troubling on multiple levels
and is a matter that needs to be addressed before criminal laws can be used effectively in this
area (Khanna 2010a; Khanna & Mathew 2010).

CLAUSE 497:

Clause 49 of the Equity Listing Agreement consists of mandatory as well as non-mandatory

provisions. Those which are absolutely essential for corporate governance can be defined with

6
For details, see Tristar Consultants v. Vcustomer Services, AIR 2007 Delhi 157; Nanalal Zaver v. Bombay Life
Assurance, AIR 1950 SC 172.
7
Securities and Exchange Board of India Clause 49 of listing agreement.

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precision and which can be enforced without any legislative amendments are classified as
mandatory. Others, which are either desirable or which may require change of laws are classified
as non-mandatory. The non-mandatory requirements may be implemented at 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.

Gist of Cause 49 is as follows:

Mandatory provisions comprises of the following:

i. Composition of Board and its procedure - frequency of meeting, number of independent

directors, code of conduct for Board of directors and senior management;
ii. Audit Committee, its composition, and role
iii. Provision relating to Subsidiary Companies
iv. Disclosure to Audit committee, Board and the Shareholders
v. CEO/CFO certification
vi. Quarterly report on corporate governance
vii. Annual compliance certificate

Non-mandatory provisions consist of the following:

i. Constitution of Remuneration Committee,

ii. Despatch of Half-yearly results,
iii. Training of Board members,
iv. Peer evaluation of Board members,
v. Whistle Blower policy

As per Clause 49 of the Listing Agreement, there should be a separate section on Corporate
Governance in the Annual Reports of listed companies, with detailed compliance report on
Corporate Governance. The companies should also submit a quarterly compliance report to the

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stock exchanges within 15 days from the close of quarter as per the prescribed format. The report
shall be signed either by the Compliance Officer or the Chief Executive Officer of the company.

Apart from Clause 49 of the Equity Listing Agreement, there are certain other clauses in the
listing agreement, which are protecting the minority shareholders and ensuring proper
disclosures

i. Disclosure of Shareholding Pattern,

ii. Maintenance of minimum public shareholding (25%),
iii. Disclosure and publication of periodical results,
iv. Disclosure of Price Sensitive Information,
v. Disclosure and open offer requirements under SAST

OECD PRINCIPLES ON CORPORATE GOVERNANCE8:

OECD, in its endeavour to improve the governance practices, had published its revised principles
on Corporate Governance in 2002. The OECD Principles of Corporate Governance have since
become an international benchmark for policy makers, investors, corporations and other
stakeholders worldwide. They have advanced the corporate governance agenda and provided
specific guidance for legislative and regulatory initiatives in both member and non-member
countries. The Financial Stability Forum has designated the Principles as one of the 12 key
standards for sound financial systems.

OECD Principles on Corporate Governance are as follows:

i. Principle I: Ensuring the Basis for an Effective Corporate Governance Framework

The corporate governance framework

a) should promote transparent and efficient markets,

b) be consistent with the rule of law and

8
Principles of Corporate Governance : A report by OECD Task Force on Corporate Governance. (1999)

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c) clearly articulate the division of responsibilities among different supervisory, regulatory

and enforcement authorities

ii. Principle II: The Rights of Shareholders and Key Ownership Functions protected and
facilitated

a) protect and facilitate the exercise of shareholders’ rights

iii. Principle III: The Equitable Treatment of Shareholders

a) Should ensure the equitable treatment of all shareholders,

b) opportunity to obtain effective redress for violation of their rights

iv. Principle IV: The Role of Stakeholders in Corporate Governance- recognized

a) should recognise the rights of stakeholders,

b) encourage co-operation between corporations and stakeholders in creating wealth, jobs,
and the sustainability of enterprises

v. Principle V: Disclosure and Transparency

a) Timely and accurate disclosure is made on all material matters including the financial
situation, performance, ownership, and governance of the company.

vi. Principle VI: The Responsibilities of the Board-Monitoring Management and

Accountability to Shareholders

a) should ensure the strategic guidance of the company,

b) the effective monitoring of management by the board, and
c) the board’s accountability to the company and the shareholders

Indian Corporate Governance Framework is in compliance with the Corporate Governance

principles of OECD. OECD steering committee on corporate governance reviews the principles

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and its compliance by member and non-member countries by conducting regular thematic peer
review of member and non-member countries.

RECOMMENDATIONS OF VARIOUS COMMITTEES ON CORPORATE

GOVERNANCE IN INDIA:

1. CII Code Recommendations (1997)9

“Indian companies, banks and financial institutions (FIs) can no longer afford to ignore better
corporate practices. As India gets integrated in the world market, Indian as well as international
investors will demand greater disclosure, more transparent explanation for major decisions and
better shareholder value.”
-Desirable Corporate Governance,
Confederation of Indian Industry (CII), 1998.

2. Birla Committee (SEBI) Recommendations (2000)10

“Strong corporate governance is thus indispensable to resilient and vibrant capital markets and
is an important instrument of investor protection. It is the blood that fills the veins of transparent
corporate disclosure and high-quality accounting practices. It is the muscle that moves a viable
and accessible financial reporting structure. Without financial reporting premised on sound,
honest numbers, capital markets will collapse upon themselves.”
-Birla Committee Report, 1999.

3. Naresh Chandra Committee Report11

9
Report of the CII Taskforce on Corporate Governance Chaired by Mr. Naresh Chandra ( November 2009)
10 Department of Company Affairs (2000) Report of the taskforce on Corporate Excellence through Governance on
the basis of report submitted by acommittee chaired by Dr P L Sanjeeva Reddy & by Kumar Mangalam Birla
Committee on corporate Governance , Chartered Secretary ( March 2000)

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“Corporate governance is the acceptance by management of the inalienable rights of

shareholders as the true owners of the corporation and of their own role as trustees on behalf of
the shareholders. It is about commitment to values, about ethical business conduct and about
making a distinction between personal and corporate funds in the management of a company.”
-Murthy Committee Report, 2003.

4. Narayana Murthy Committee (SEBI) Recommendations (2003)12

Narayana Murthy committee to review the performance of Corporate Governance and to
determine the role of companies in responding to rumour and other price sensitive information
circulating in the market in order to enhance the transparency and integrity of the market. The
Committee in its Report observed that “the effectiveness of a system of Corporate Governance
cannot be legislated by law, nor can any system of Corporate Governance be static. In a
dynamic environment, system of Corporate Governance needs to be continually evolved.”

Based on the recommendations of the Committee, the SEBI had specified principles of Corporate
Governance and introduced a new clause 49 in the Listing agreement of the Stock Exchanges in
the year 2000. These principles of Corporate Governance were made applicable in a phased
manner and all the listed companies with the paid up 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, were covered as of
March 31, 2003.

With a view to promote and raise the standards of Corporate Governance, SEBI on the basis of
recommendations of the Committee and public comments received on the report and in exercise
of powers conferred by Section 11(1) of the Securities and Exchange Board of India Act, 1992

11
Report on Corporate Governance by committee headed by Shri Naresh Chandra on regulation of private
companies and partnership
12
Securities and Exchange Board of India (2002) Report on SEBI Committee on Corporate Governance (under the
chairmanship of Shri N R Narayanamurthy)

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read with section 10 of the Securities Contracts (Regulation) Act 1956, revised the existing
clause 49 of the Listing agreement vide its circular SEBI/MRD/SE/31/2003/26/08 dated August
26, 2003. It clarified that some of the sub-clauses of the revised clause 49 shall be suitably
modified or new clauses shall be added following the amendments to the Companies Act 1956
by the Companies (Amendment) Bill/Act 2003, so that the relevant provisions of the clauses on
Corporate Governance in the Listing Agreement and the Companies Act remain harmonious with
one another.

VOLUNTARY GUIDELINES ISSUED BY MINISTRY OF CORPORAATE AFFAIRS13

Voluntary Guidelines on Corporate Governance were issued by the Ministry of Corporate Affairs
in December 2009. Few guidelines are worth mentioning.

1. Board of Directors

A. Appointment of Directors
i. Companies should issue formal letters of appointment to Non-Executive Directors
(NEDs) and Independent Directors as is done by them while appointing employees and
Executive Directors. Such a formal letter should form a part of the disclosure to
shareholders at the time of the ratification of his/her appointment or re-appointment to the
Board.
ii. The offices of chairman of the board and chief executive officer should be separate.
iii. The companies may have a Nomination Committee comprised of a majority of
Independent Directors, including its Chairman. A separate section in the Annual Report
should outline the guidelines being followed by the Nomination Committee and the role
and work done by it during the year under consideration.

13
Ministry of Corporate Affairs, Government of India, Corporate Governance Voluntary Guidelines 2009
(December 2009), available at
http://www.mca.gov.in/Ministry/latestnews/CG_Voluntary_Guidelines_2009_24dec2009.pdf National Foundation
for Corporate Governance, (accessed on 09/02/2015)

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iv. Independent Directors and NEDs should hold no more than seven directorships.

B. Independent Directors
i. The Board should put in place a policy for specifying positive attributes of Independent
Directors such as integrity, experience and expertise, foresight, managerial qualities and
ability to read and understand financial statements. Disclosure about such policy should
be made by the Board in its report to the shareholders. Such a policy may be subject to
approval by shareholders.
ii. All Independent Directors should provide a detailed Certificate of Independence at the
time of their appointment, and thereafter annually. Independent Directors should be
restricted to six-year terms. They must leave for three years before serving another term,
and they may not serve more than three tenures for a company.
iii. Independent Directors should have the ability to meet with managers and should have
access to information.

C. Remuneration of Directors
i. NEDs should be paid either a fixed fee or a percentage of profits. Whichever payment
method is elected should apply to all NEDs. NEDs paid with stock-options should hold
onto those options for three years after leaving the board.
ii. Independent Directors should not be paid with stock options or profit-based commission.
iii. The Remuneration Committee should have at least three members with the majority of
NEDs, and at least one Independent Director. Their decisions should be made available in
the Annual Report.

2. Duties of the Board

i. The Board should provide training for the directors.

ii. The Board should enable quality decision-making by giving the members timely access
to information.
iii. The Board should put in systems of risk management and review them every six months.

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iv. The Board should review its own performance annually and state its methods in its
Annual Report.
v. The Board should put in a system to ensure compliance with the law, which should be
reviewed annually. All agenda items should be assessed for its impact on minority
shareholders.

3. Audit Committee of Board

i. The Audit Committee should be composed of at least three members, with Independent
Directors in the majority and an Independent Director as the chairperson.
ii. The Audit Committee is responsible for reviewing the integrity of financial statements,
the company’s internal financial controls, internal audit function and risk management
systems. The Audit Committee should also monitor and approve all Transactions.

4. Auditors

i. The Audit Committee should be consulted on the selection of auditors. The committee
must be supplied with relevant information about the auditing firm.
ii. Every auditor should provide a certificate stating his/her/its arm’s length relationship
with the client company.
iii. The audit partner should be rotated every three years; the firm should be rotated every
five years. Audit partners should have a cooling off period of three years before they
work with the client company again; the firm should have a cooling off period of five
years. • The Committee may appoint an internal auditor.

5. Institution of a Mechanism for Whistle blowing

i. The companies should ensure the institution of a mechanism for employees to report
concerns about unethical behaviour, actual or suspected fraud, or violation of the
company’s code of conduct or ethical policy.

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ii. The companies should also provide for adequate safeguards against victimization of
employees who avail of the mechanism, and also allow direct access to the Audit
Committee Chairperson in exceptional cases.

RECENT POLICY TAKEN BY SEBI14

The introspection that followed the Satyam episode has resulted in some major changes in Indian
corporate governance regime. Some of the recent steps taken in this regard are as follows:

1. Disclosure of pledged shares: It is made mandatory on the part of promoters (including

promoter group) to disclose the details of pledge of shares held by them in listed entities
promoted by them. Further, it was decided to make such disclosures both event-based and
periodic.
2. Peer review: In the light of developments with respect to Satyam SEBI carried out a peer
review exercise of the working papers (relating to financial statements of listed entities)
of auditors in respect of the companies constituting the NSE – Nifty 50, the BSE Sensex
and some listed companies outside the Sensex and Nifty chosen on a random basis.
3. Disclosures regarding agreements with the media companies: In order to ensure public
dissemination of details of agreements entered into by corporates with media companies,
the listed entities are required to disclose details of such agreements on their websites and
also notify the stock exchange of the same for public dissemination.
4. Maintenance of website: In order to ensure/enhance public dissemination of all basic
information about the listed entity, listed entities are mandated to maintain a functional
website that contains certain basic information about them, duly updated for all statutory
filings, including agreements entered into with media companies, if any.
5. Compulsory dematerialization of Promoter holdings: In order to improve transparency
in the dealings of shares by promoters including pledge / usage as collateral, it is decided
that the securities of companies shall be traded in the normal segment of the exchange if

14
Consultative Paper on Review of Corporate Governance Norms in India, SEBI

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and only if, the company has achieved 100% of promoter’s and promoter group’s
shareholding in dematerialized form. In all cases, wherein the companies do not satisfy
the above criteria, the trading in securities of such companies shall take place in trade for
trade segment;
6. Peer reviewed Auditor: It has been decided that in respect of all listed entities, limited
review/statutory audit reports submitted to the concerned stock exchanges shall be given
only by those auditors who have subjected themselves to the peer review process of ICAI
and who hold a valid certificate issued by the ‘Peer Review Board’ of the said Institute;
7. Approval of appointment of ‘CFO’ by the Audit Committee: In order to ensure that the
CFO has adequate accounting and financial management expertise to review and certify
the financial statements, it is mandated that the appointment of the CFO shall be
approved by the Audit Committee before finalization of the same by the management.
The Audit Committee, while approving the appointment, shall assess the qualifications,
experience & background etc. of the candidate
8. Disclosure of voting results: In order to ensure wider dissemination of information
regarding voting patterns which gives a better picture of how the meetings are conducted
and how the different categories of investors have voted on a resolution, listed entities are
required to disclose the voting results/ patterns on their websites and to the exchanges
within 48 hours from the conclusion of the concerned shareholders’ meeting.
9. Enabling shareholders to electronically cast their vote: In order to enable wider
participation of shareholders in important proposals, listed companies are mandated to
enable e-voting facility also to their shareholders, in respect of those businesses which are
transacted through postal ballot by the listed companies.
10. Manner of dealing audit reports filed by listed entities: SEBI board has approved a
mechanism to process qualified annual audit reports filed by the listed entities with stock
exchanges and Annual Audit Reports where accounting irregularities have been pointed
out by Financial Reporting Review Board of the Institute of Chartered Accountants of

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International Journal of Law and Legal Jurisprudence Studies :ISSN:2348-8212: Volume 2 Issue 4

India (ICAI-FRRB). In order to enhance the quality of financial reporting done by listed
entities, it has been, inter-alia, decided that:
i. Deficiencies in the present process would be examined and rectified.
ii. SEBI would create Qualified Audit Report review Committee (QARC) represented
by ICAI, Stock Exchanges, etc. to guide SEBI in processing audit reports where
auditors have given qualified audit reports.
iii. Listed entities would be required to file annual audit reports to the stock exchanges
along with the applicable Forms (Form A: 'Unqualified' / 'Matter of Emphasis
Report'; Form B: 'Qualified' / 'Subject To' / 'Except For Audit Report').
iv. After preliminary scrutiny and based on materiality, exchanges would refer these
reports to SEBI/QARC.
v. Cases wherein the qualifications are significant and explanation given by Company is
unsatisfactory would be referred to the ICAI-FRRB. If ICAI-FRRB opines that the
qualification is justified, SEBI may mandate a restatement of the accounts of the
entity and require the entity to inform the same to the shareholders by making the
announcement to stock exchanges.

Recently, NSE held a conference jointly with SEBI and CFA Institute on “Independent Directors
- issues and Challenges” – to create awareness among independent Directors;

CONCLUSION:

With the recent spate of corporate scandals and the subsequent interest in corporate governance,
a plethora of corporate governance norms and standards have sprouted around the globe. The
Sarbanes-Oxley legislation in the USA, the Cadbury Committee recommendations for European
companies and the OECD principles of corporate governance are perhaps the best known among
these. But developing countries have not fallen behind either. Well over a hundred different
codes and norms have been identified in recent surveys and their number is steadily increasing.

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International Journal of Law and Legal Jurisprudence Studies :ISSN:2348-8212: Volume 2 Issue 4

India has been no exception to the rule. Several committees and groups have looked into this
issue that undoubtedly deserves all the attention it can get.

In the last few years the thinking on the topic in India has gradually crystallized into the
development of norms for listed companies. The problem for private companies, that form a vast
majority of Indian corporate entities, remains largely unaddressed. The agency problem is likely
to be less marked there as ownership and control are generally not separated. Minority
shareholder exploitation, however, can very well be an important issue in many cases.

Development of norms and guidelines are an important first step in a serious effort to improve
corporate governance. The bigger challenge in India, however, lies in the proper implementation
of those rules at the ground level. More and more it appears that outside agencies like analysts
and stock markets (particularly foreign markets for companies making GDR issues) have the
most influence on the actions of managers in the leading companies of the country. But their
influence is restricted to the few top (albeit largest) companies. More needs to be done to ensure
adequate corporate governance in the average Indian company.

Even the most prudent norms can be hoodwinked in a system plagued with widespread
corruption. Nevertheless, with industry organizations and chambers of commerce themselves
pushing for an improved corporate governance system, the future of corporate governance in
India promises to be distinctly better than the past.

References:

 A.C.Fernando (2006), Corporate Governance, Principles, Policies andPractices. Pp. 76-

77, Pearson.
 Bertrand, M., P. Mehta, and S. Mullainathan. 2002. “Ferreting out Tunneling: An
Application to Indian Business Groups.” Quarterly Journal of Economics 117(1): 121–
48.
 Cadbury, A., Chairman, (1992), Report on the Financial Aspects of Corporate
Governance.

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International Journal of Law and Legal Jurisprudence Studies :ISSN:2348-8212: Volume 2 Issue 4

 Clause 49, SEBI listing agreement.

 Das, A. and S. Ghosh, 2004. Corporate Governance in Banking System: An Empirical
Investigation, Economic and Political Weekly, March 20, 2004, pp. 1263-1266.
 Goswami, Omkar, 2002, “Corporate Governance in India,” Taking Action Against
Corruption in Asia and the Pacific (Manila: Asian Development Bank), Chapter 9.
 F. Mayer (1997), ‘Corporate governance, competition, and performance’, In Enterprise
and Community: New Directions in Corporate Governance, S. Deakin and A. Hughes
(Eds), Blackwell Publishers: Oxford.
 National Foundation for Corporate Governance, Discussion Paper : Corporate
Governance in India : Theory and Practice.
 Verma, Jayanth Rama (1997), “Corporate Governance in India: Disciplining the
Dominant Shareholders”, IIMB Management Review.

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