Corporate Governance:

The Kumar Mangalam Birla Committee

Report.

Compiled By:
Keval Kothari (PG-10-85)
Ankit Lodhia (PG-10-86)
Yogesh Punjabi (PG-10-100)
Pooja Shah (PG-10-108)
Introduction
 On May 7th, 1999, The Securities and Exchange Board of
India (SEBI) had set up a committee under Kumar
Mangalam Birla, member SEBI Board, to promote and
raise the standards of good corporate governance.

 The report submitted by the committee was the first formal

and comprehensive attempt to evolve a ‘Code of Corporate
Governance‘.

 The primary objective of the committee was to view

corporate governance from the perspective of the investors
and shareholders and to prepare a ‘Code' to suit the Indian
corporate environment.
 Introduction
• The Committee's terms of the reference were to:
 Suggest suitable amendments to the listing agreement
executed by the stock exchanges with the companies and
any other measures to improve the standards of corporate
governance in the listed companies in areas:
• Continuous disclosure of material information, both
financial and non- financial, manner and frequency of such
disclosures,
• Responsibilities of independent and outside directors.

 Draft a code of corporate best practices

 Suggest safeguards to be instituted within the companies to

deal with insider information and insider trading.
Introduction

The committee had identified the Shareholders,

the Board of Directors and the Management as the
three key constituents of corporate governance and
attempted to identify in respect of each of these
constituents, their roles and responsibilities as also
their rights in the context of good corporate
governance.
Introduction

 Corporate governance has several claimants –

shareholders and other stakeholders - which include
suppliers, customers, creditors, and the bankers, the
employees of the company, the government and the
society at large.

 The Report had been prepared by the committee,

keeping in view primarily the interests of a particular
class of stakeholders, namely, the shareholders, who
together with the investors form the principal
constituency of SEBI while not ignoring the needs of
other stakeholders.
Introduction
 The concept of Corporate Governance came into vogue
first in the U.S.A. in 70s, followed by the U.K. in 90s.

 The corporate world in India could not for long remain

indifferent to the developments that were taking place in
the U.K.

 In India, in the initial years emphasis was limited to:

 role and composition of the Audit Committees
 Importance of making all the necessary disclosures with
annual statements of accounts.

 CCI was first to come out with audit committee

recommendations.

 In 1999, SEBI proposed the first step to formal Corporate

Governance Code in form of this committee.
Mandatory - 19
Non- Mandatory - 6

RECOMMENDATIONS
 Mandatory Recommendations
1. Implementation in phases as per schedule:
 By all companies getting listed for the first time.
 Within financial year 2000-2001, not later than 31st March 2001, for
entities in group A of BSE.
 Within financial year 2001-2002 , not later than 31st March, 2002, for
all companies listed, with paid up capital of Rs. 10 Crores.
 Within financial year 2002-2003 , not later than 31st March, 2003, for
all companies listed, with paid up capital of Rs. 3 Crores.

2. Non- Executive directors should form 50% of the BoD, with some
independent directors.
 The number of independent directors would depend on the nature of the
chairman of the board.
 In case a company has a non-executive chairman, at least one-third of
board should comprise of independent directors and in case a company
has an executive chairman, at least half of board should be
independent
 Mandatory Recommendations
3. Nominee directors- on selective basis:
 Institutions should appoint nominees on the boards of
companies only on a selective basis where such
appointment is pursuant to a right under loan agreements
or where such appointment is considered necessary to
protect the interest of the institution.

 A nominee director will have the same responsibility and

accountability towards the stakeholders as any other
directors.

4. Qualified and independent audit committee:

 The committee had recommended an qualified and an
independent audit committee which would go long way in
enhancing the credibility.
 Mandatory Recommendations
5. Audit Committee meetings three times a year:
 The committee should meet at least thrice a year, one
meeting should be held before finalization of annual
accounts and one necessarily every 6 months.
 The quorum should be either 2 members or 1/3rd members
of audit committee and minimum 2 independent directors.
 The committee should have minimum 3 members, all being
non-executive directors, majority of independent.
 Chairman should be independent director and should be
present at the AGM.
 Company secretary will act as the secretary of the
committee.
Mandatory Recommendations

6.Powers of the Audit Committee:

 To investigate any activity within its terms of reference.

 · To seek information from any employee.

 · To obtain outside legal or other professional advice.

 · To secure attendance of outsiders with relevant

expertise, if it considers necessary.
Mandatory Recommendations

7. Audit Committee functions as the bridge between the

Board and statutory and internal auditors and the role
should include the following :
 Oversight of the company’s financial reporting process
and disclosure of its financial information.
 Recommending the appointment and removal of
external auditor, fixation of audit fee and also approval
for payment for any other services.
 Reviewing with management the annual financial
statements before submission to the board.
 Reviewing with the management, external and internal
auditors, the adequacy of internal control systems
 Reviewing the company’s financial and risk
management policies.
Mandatory Recommendations

8. Remuneration Committee of the Board should decide the

remuneration of non-executive director.
9.Disclosure of remuneration package of directors to shareholders which
should be made in the section on corporate governance of the annual
report:
 All elements of remuneration package of all the directors i.e.
salary,benefits, bonuses, stock options, pension etc.
 Details of fixed component and performance linked incentives,
along with the performance criteria.
 Service contracts, notice period, severance fees.
 Stock option details, if any – and whether issued at a discount as
well as the period over which accrued and over which exercisable.
Mandatory Recommendations

10.Board Meetings should be held at least 4 times in a year

with a maximum time gap of four months between any
two meetings.

11.A director should not be a member in more than 10

committees or acts as chairman of more than 5 committees:
 It is to ensure that the members of the board give due importance
and commitment to the meetings of the board and its committees.
 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.
Mandatory Recommendations

12.Accounting Standard and Financial Reporting:-

 Consolidation of accounts of subsidiaries: The companies should be
required to give consolidated accounts in respect of all its subsidiaries in
which they hold 51 % or more of the share capital.
 Segment reporting when a co. has multiple line of business: Equally in
cases of companies with several businesses, it is important that financial
reporting in respect of each product segment should be available to
shareholders and the market to obtain a complete financial picture of the
company.
 Disclosure & Treatment of Related Party Transactions: The Committee
recommends that the Institute of Chartered Accountants of India should be
requested to finalise this at the earliest.
 Treatment of deferred taxation: The treatment of deferred taxation and
its appropriate disclosure has an important bearing on the true and fair
view of the financial status of the company.
Mandatory Recommendations

13.Board should clearly define the role of CEO and key managers:
 In the view of the Committee, the over-riding aim of management
is to maximize shareholder value without being detrimental to the
interests of other stakeholders.
 The management however, is subservient to the board of directors
and must operate within the boundaries and the policy framework
laid down by the board.
 The board is responsible for ensuring that the principles of
corporate governance are adhered to and enforced, the real onus
of implementation lies with the management.
 It is responsible for translating into action, the policies and
strategies of the board and implementing its directives to achieve
corporate objectives of the company framed by the board.
Mandatory Recommendations
14.Board and Management must be accountable to the
shareholders:
As a part of the disclosure related to Management, the Committee
recommends that as part of the directors’ report or as an addition there to, 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
company’s competitive position:
 Industry structure and developments.
 · Opportunities and Threats
 · Segment-wise or product-wise performance.
 · Outlook.
 · Risks and concerns
 · Internal control systems and their adequacy.
 · Discussion on financial performance with respect to operational performance.
 · Material developments in Human Resources /Industrial Relations front, including
 number of people employed.
Mandatory Recommendations
15. Shareholders
right to participate and informed on
fundamental corporate changes. Quarterly results to be put
up on company’s website. Postal ballot to be introduced.
 And also in respect of other decisions relating to material changes such as
takeovers, sale of assets or divisions of the company and changes in
capital structure which will lead to change in control or may result in
certain shareholders obtaining control disproportionate to the equity
ownership.

 The Committee recommends that information like quarterly results,

presentation made by companies to analysts may be put on company’s
web-site or may 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.

 In this context, for shareholders who are unable to attend the meetings,
there should be a requirement which will enable them to vote by postal
ballot for key decisions.
RECOMMENDATIONS

16- Redressal of shareholders complaints- committee of the Board to

be set up under the chairmanship of non-executive directors

17- Board should delegate the powers of share transfer:

 The Committee further recommends that to expedite the process
of share transfers the board of the company should delegate the
power of share transfer to an officer, or a committee or to the
registrar and share transfer agents.
 The delegated authority should attend to share transfer
formalities at least once in a fortnight.
 RECOMMENDATIONS
18- A separate section on C.G. in the annual reports of the companies with
a detailed compliance report on C.G.:
 Non-compliance of any mandatory recommendation with reasons
thereof and the extent to which the non-mandatory recommendations
have been adopted should be specifically highlighted.
 This will enable the shareholders and the securities market to assess
for themselves the standards of corporate governance followed by a
company.
19- Auditors of the company to give a certificate regarding compliance of
the mandatory recommendations and annex the certificate with the
director’s report:
 It is sent annually to all the shareholders of the company. The same
certificate should also be sent to the stock exchanges along with the
annual returns filed by the company.
 RECOMMENDATIONS
NON MANDATORY
1- Chairman’s role is different from that of the CEO

2- A non-executive chairman entitled to maintain a chairman’s office at

company’s expense:
 Given the importance of Chairman’s role, the Committee
recommends that nonexecutive Chairman should be entitled to
maintain a Chairman’s office at the company’s expense and also
allowed reimbursement of expenses incurred in performance of his
duties.
 This will enable him to discharge the responsibilities effectively.
3- Remuneration committee of the Board should consist of three
directors :
 The Committee recommends that to avoid conflicts of interest,
the remuneration committee, which would determine the
remuneration packages of the executive directors should
comprise of at least three directors, all of whom should be non-
executive directors, the chairman of committee being an
independent director.
 RECOMMENDATIONS
4- Half-yearly declaration of financial performance to be sent to
shareholders: The Committee recommends that 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.
5- Institutional shareholders take active interest in the composition of the
Board and be vigilant:
 The Committee deliberated on the quorum for the meeting and was of
the view that remuneration is mostly fixed annually or after specified
periods.
 It would not be necessary for the committee to meet very often.
 The Committee was of the view that it should not be difficult to arrange
for a date to suit the convenience of all the members of the committee.
The Committee therefore recommends that all the members of the
remuneration committee should be present at the meeting.
THANK YOU !!!