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1 © Confederation of Indian Industry
Doing Things Right:
Corporate Governance in India
Omkar Goswami
Chief Economist
Confederation of Indian Industry
11-13 November, Mumbai, India

Contents
Brief history of corporate governance in India
What are the mandated CG guidelines and disclosures
How does India measure up with Sarbanes-Oxley
New corporate governance moves that are expected

• Unlike South-East and East Asia, the corporate governance
initiative in India was not triggered by any serious nationwide
financial, banking and economic collapse
• Also, unlike most OECD countries, the initiative in India was
initially driven by an industry association, the Confederation of
Indian Industry
• In December 1995, CII set up a task force to design a voluntary
code of corporate governance
• The final draft of this code was widely circulated in 1997
• In April 1998, the code was released. It was called Desirable
Corporate Governance: A Code
• Between 1998 and 2000, over 25 leading companies voluntarily
followed the code: Bajaj Auto, Hindalco, Infosys, Dr. Reddy’s
Laboratories, Nicholas Piramal, Bharat Forge, BSES, HDFC,
ICICI and many others

• Following CII’s initiative, the Securities and Exchange
Board of India (SEBI) set up a committee under Kumar
Mangalam Birla to design a mandatory-cum-
recommendatory code for listed companies
• The Birla Committee Report was approved by SEBI in
December 2000
• Became mandatory for listed companies through the listing
agreement, and implemented according to a rollout plan:
• 2000-01: All Group A companies of the BSE or those in
the S&P CNX Nifty index… 80% of market cap
• 2001-02: All companies with paid-up capital of Rs.100
million or more or net worth of Rs.250 million or more
• 2002-03: All companies with paid-up capital of Rs.30
million or more

• Following CII and SEBI, the Department of Company Affairs
(DCA) modified the Companies Act, 1956 to incorporate
specific corporate governance provisions regarding
independent directors and audit committees
• In 2001-02, certain accounting standards were modified to
further improve financial disclosures. These were:
• Disclosure of related party transactions
• Disclosure of segment income: revenues, profits and
capital employed
• Deferred tax liabilities or assets
• Consolidation of accounts
• Initiatives are being taken to (i) account for ESOPs, (ii)
further increase disclosures, and (iii) put in place systems
that can further strengthen auditors’ independence

Board of Directors: frequency of meetings and composition
• Board must meet at least at least four times a year, with a
maximum time gap of four months between two successive
meetings
• If the chairman of the Company is a non-executive then one-
third of the board should consist of independent directors,
and 50% otherwise
• ‘Independent’ defined as those directors who, apart from
receiving director’s remuneration do not have any other
material pecuniary relationship or transactions with the
company, its promoters, management or subsidiaries,
which in the view of the board may affect independence of
judgement
• This definition may be soon strengthened

Board of Directors: frequency of meetings and composition
• The frequency of board meetings and board committee
meetings, with their dates, must be fully disclosed to
shareholders in the annual report of the company
• The attendance record of all directors in board meetings
and board committee meetings must be fully disclosed to
• Full and detailed remuneration of each director (salary,
sitting fees, commissions, stock options and perquisites)
must be fully disclosed to shareholders in the annual report
of the company
• Loans given to executive directors are capped (no loans
permitted to non-executives), and must be fully disclosed to

Board of Directors: information that must be supplied
• Annual, quarter, half year operating plans, budgets and updates
• Quarterly results of company and its business segments
• Minutes of the audit committee and other board committees
• Recruitment and remuneration of senior officers
• Materially important legal notices and claims, as well as any
accidents, hazards, pollution issues and labor problems
• Any actual or expected default in financial obligations
• Details of joint ventures and collaborations
• Transactions involving payment towards goodwill, brand equity
and intellectual property
• Any materially significant sale of business and investments
• Foreign currency and other risks and risk management
• Any regulatory non-compliance

Board of Directors: Audit Committee
• Audit Committee is mandatory
• Must have minimum of three members, all non-executive
directors, the majority of whom are independent
• Chairman must be an independent director, and must be
present at the annual shareholders’ meeting to answer audit
or finance related questions
• At least one member must be an expert in finance/accounts
• Must have at least three meetings per year, including one
before finalisation of annual accounts
• Must meet with statutory auditors and internal auditors;
have the powers to seek any financial, legal or operational
information from the management; obtain outside legal or
professional advice

Board of Directors: Audit Committee functions
• Oversight of the company’s financial reporting process to ensure
that the financial statement is correct, sufficient and credible
• Appointment / removal of external auditor and fixing of audit fees
• Reviewing with management the annual financial statements
before submission to the board, focusing on:
• Changes in accounting policies and practices
• Major accounting entries
• Qualifications in draft audit report
• Significant adjustments arising out of audit
• The going concern assumption
• Compliance with accounting standards, with stock exchange
and legal requirements
• Any related party transactions

Board of Directors: Audit Committee functions
• Adequacy of internal audit and internal control systems,
through discussion with internal and statutory auditors as
well as management
• Significant findings, follow-up and action taken reports
• Discussion with internal and statutory auditors about scope
and design of audits
• Reviewing financial and legal risks and company’s risk
management policies
• Examining reasons behind any materially significant default
to creditors, bond-holders, suppliers and shareholders

Disclosures to shareholders in addition to balance sheet, P&L and
cash flow statement
• Board composition (executive, non-exec, independent)
• Qualifications and experience of directors
• Number of outside directorships held by each director (capped at
director not being a member of more than 10 board-level
committees, and Chairman of not more than 5)
• Attendance record of directors
• Remuneration of directors
• Relationship (familial or pecuniary) with other directors
• Warning against insider trading, with procedures to prevent such
acts
• Details of grievances of shareholders, and how quickly these
were addressed
• Date, time and venue of annual general meeting of shareholders

Disclosures to shareholders in addition to balance sheet, P&L
and cash flow statement
• Dates of book closure and dividend payment
• Details of shareholding pattern
• Name, address and contact details of registrars and/or
share transfer agents
• Details about the share transfer system
• Stock price data over the reporting year, and how the
company’s stock measured up to the index
• Financial effects of stock options
• Financial effects of any share buyback
• Financial effects of any warrants that are to be exercised
• Chapter reporting corporate governance practices

Disclosures to shareholders in addition to balance sheet, P&L
and cash flow statement
• Detailed chapter on Management Discussion and Analysis
focusing on markets, operations, finances, accounts, risks,
opportunities and threats, internal control systems
• Consolidated financial statement, incorporating accounts of
all subsidiaries (over 50% shares held by reporting
company)
• Details of all significant related party transactions
• Detailed segment reporting (revenues, costs, operating
profits and capital employed)
• Deferred tax liabilities and assets and debit/credit in the
P&L for the reporting year

Sarbanes-Oxley Indian situation What might be needed
Certification of annual
accounts by CEO, CFO
At least two directors must
sign, of whom one must be the
Managing Director
Need to change to have
MD/CEO plus Finance
Director/CFO to sign
Fully independent audit
committees
Fully non-executive, majority
independent audit committees
Need to consider (i) fully
independent (ii) tighter
definition of independence
Disgorgement of
CEO/CFO compensation
in event of restatement
Accounts and profits once
published cannot be re-stated
Need to see if ESOP payments
need to be disgorged if there
is a restatement
Prohibition of insider
trading
Prohibits insider trading Nothing is needed
Prohibition of insider
loans to directors
Strict cap on insider loans to
directors; requires prior
government approval
Caps are stringent enough to
prevent insider abuse

Sarbanes-Oxley Indian situation What might be needed
Real time disclosure
concerning changes in
financials and operations
Listing agreement mandates
companies to report quarterly
results and material changes
Nothing is needed
Mandatory periodic review
of company’s filings once
every three years
No such provision Need to consider how this can
be done without creating
administrative hassles
Auditors prohibited from
nine types of non-audit
services to audit clients
These services are already
prohibited in India
Nothing is needed
Auditors to report to Audit
Committee on critical
accounting policies
Mandated by the listing
agreement and the Companies
Act amendments
Nothing is needed
Rotation of audit partners
every five years
No such provision exists A committee is considering
such a change
Up to 20 years in prison
for fraud and destruction
of records
No such provision Need to consider tougher
penalties, including longer
imprisonment

Contents

• There are five reasons why one doesn’t expect the corporate
sector in India to exhibit the excesses that occurred in the US
1. The amount of stock options to be granted to employees is
strictly limited. Expensing options (if adopted) will create a
further natural limit
2. In general, companies are controlled by a sizeable
shareholder, typically owning over 35% of stocks. This tends
to limit agency costs of dispersed ownership
3. The variable compensation package is much more linked to
profits and/or EVA, than stock prices or P/E
4. Much greater importance is given to accumulating cash.
“Profit is an opinion; cash is fact”
5. For better or for worse, most Indian companies still don’t
have to give forward looking earnings estimates

• After the US crises, there have been some initiatives:
1. A committee has been set up to examine stock options,
including expensing them
2. Another committee has been set up to recommend
tighter enforcement by DCA and stiffer penalties,
including longer prison terms
3. A third committee has been set up to examine auditor-
company relationships and the role of independent
audit committees
4. A fourth committee is examining what additional
disclosures and accounting standards are needed to
have even better corporate governance

Concluding remarks
• By and large, Indian listed companies have been legally
mandated to follow fairly strict standards of corporate
governance and disclosure
• Comparisons will show that the standards are far stronger
than all Asian countries, and in general stronger than most
OECD countries
• Indian corporate sector regulators and companies have
been quick to incorporate some of the best international
corporate governance and disclosure practices
• The need of the day is more training… of directors, audit
committee members and senior executives of companies
• The challenge is to design and sustain a system that
imbibes the spirit of corporate governance… and not merely
the letter of the law

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