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Indian Banking Today and Tomorrow - Report of
the Kumar Mangalam Committee on Corporate
Governance - Introduction

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Corporate Governance SEBI -
Kumara Mangalam Report

Report of the Kumar Mangalam Committee on Corporate Governance

The concept of Corporate Governance came into vogue first in the U.S.A. in the late Seventies, followed by the U.K. in the Nineties. The principles & practice of Corporate Governance were perfected in U.K. based on the reports four committees appointed for the purpose viz. Cadbury, Rutteman, Hampel and Turnbull Committees.

The corporate world in India could not for long remain indifferent to the developments that were taking place in the U.K. In fact the developments in U.K had tremendous influence on our country too. They triggered the thinking process in our country, which finally led us to laying down our own ground rules on Corporate Governance.

Earlier Initiatives to Define/Popularise Corporate Governance
for Adherence by Indian Companies

In India, the emphasis during the past few years has been limited to only some of the recommendations of the Cadbury Committee -- such as the role and composition of the Audit Committees and the importance of making all the necessary disclosures with annual statements of accounts, which are considered important for investors' protection.

Some of the important initiatives taken in our country to frame the ground rules on Corporate Governance deserve a brief mention.

SEBI's Initiative for raising Standards of
Corporate Governance

The CII was the first to come out with its version of an Audit Committee. The SEBI, as the custodian of investor interests, did not lag behind. On May 7, 1999, it constituted an 18-member committee, chaired by the young and forward-looking industrialist, Mr. Kumar Mangalam Birla (a chartered accountant himself), on Corporate Governance, mainly with a view to protecting the investors' interests. The Committee made 25 recommendations, 19 of them `mandatory' in the sense that these were enforceable. The listed companies were obliged to comply with these on account of the contractual obligation arising out of the listing agreement with Stock Exchanges.

It will be interesting to note that Kumar Mangalam Committee while drafting its recommendations was faced with the dilemma of statutory v/s voluntary compliance. You may also be aware that the desirable code of Corporate Governance, which was drafted by CII and was voluntary in nature, did not produce the expected improvement in Corporate Governance. It is in this context that the Kumar Mangalam Committee felt that under the Indian conditions a statutory rather than a voluntary code would be far more purposive and meaningful. This led the Committee to decide between mandatory and non-mandatory provisions. The Committee felt that some of the recommendations are absolutely essential for the framework of Corporate Governance and virtually form its code, while others could be considered as desirable. Besides, some of the recommendations needed change of statute, such as the Companies Act for their enforcement. Faced with this difficulty the Committee settled for two classes of recommendations.

The SEBI had already implemented through the amendment of the listing agreement of the stock exchanges (listing agreement's clause 49). The recommendations applicable first to all the listed companies which are included either in group A of the BSE and in S&P CNX Nifty index as on January 1, 2000 to be completed by March 31, 2001 and in the subsequent years to other companies in a phased manner. This substantially enhanced the standard of corporate governance in India. some of the norms related to corporate governance such as disclosure norms for IPOs, presentation of information on utilisation and end-use of funds, statement on cash flow in balance sheet, declaration of unaudited quarterly results etc.

By march 31, 2001 all entities, which were included in Group 'A' of the BSE or in CNP Nifty index as on January 1, 2000 have been compulsorily required to fulfill the directions that have been issued. This effectively covered 80% of the market capitalisation. So, we can now see in the annual reports of listed Companies more details regarding directors, their remunerations, details of the audit committee, shareholder's grievance committee, and general shareholder information.

SEBI has formed a Committee on corporate governance to review implementation by listed companies. Earlier Mr. JR Verma headed this committee. Recently SEBI has appointed Mr N.R. Narayana Murthy, Chairman, Infosys Technologies, to head the committee and to review implementation of the code by listed companies. He will take over from the former SEBI member, Mr. J.R.verma.

According to SEBI, a few new members would also be inducted on the panel. The committee would study the implementation of CG code and recommend changes to improve practices. The rating agencies Crisil and ICRA were also working out a model and methodology of CG rating and would put it up to the Panel. It may suggest parameters for assessing the wealth sharing behaviour of corporates in the model.

To propagate better compliance of the standards of corporate governance SEBI will be organising a conferences periodically at key metropolitan centers.

Financial Disclosures to be Made
  • The cash flow statement as per the listing agreement required to be mandatorily prepared in accordance with the relevant accounting standard.>
  • Additional disclosures to be made in the unaudited financial quarterly results of the companies to make these more transparent and meaningful.
  • Limited review by auditors for half -yearly results.
  • Prior intimation about Board Meeting at which declaration of dividend is considered to be made at least seven days in advance.
  • Announcement by the companies on dividend, rights etc. to be made only after the close of the market hours to avoid excessive volatility in stock prices.

Corporate like Infosys have changed the way annual reports used to be. Detailed charts and graphs, which are easy on the eyes, have become increasingly common. These steps are in the right direction and combined with quarterly results etc, there is a lot of information that a shareholder can get. Maybe companies need to look at small shareholders differently by issuing them separate reports, which are better prepared and speak in lay terms. They should have brief analysis, comparative charts, a brief industry report, performance highlights and some general information. Main points of audit reports could be presented in a readable manner. This will make the document less dense and more reader friendly. At their option, the shareholder could demand detailed report or access the company website. The company not only needs to treat its shareholders as the owners but also as their customers. A customer who can at least expect an annual report that is tailored with his profile in mind.

Salient Recommendations of the Committee

Detailed recommendations of the committee are to be found in the accompanying web-pages. The most significant recommendations are summarised hereunder for a quick reading & understanding.

The mandatory recommendations of the Kumar Mangalam committee include the constitution of Audit Committee and Remuneration Committee in all listed companies, appointment of one or more independent Directors in them, recognition of the leadership role of the Chairman of a company, enforcement of Accounting Standards, the obligation to make more disclosures in annual financial reports, effective use of the power and influence of institutional shareholders, and so on. The Committee also recommended a few provisions, which are non- mandatory. Let us see these recommendations in brief:

The Salient mandatory recommendations are under:
  • The Board of a company should have an optimum combination of executive and non-executive Directors with not less than 50% of the Board comprising the non-executive Directors.
  • The Board of a company should set up a qualified and an independent Audit Committee. The Audit Committee should have minimum three members, all being non-executive Directors, with the majority being independent, and with at least one Director having financial and accounting knowledge. The Chairman of the Audit Committee should be an independent Director.

The board of directors is a combination of executive directors and non-executive directors. The non-executive directors comprise of promoter directors and independent directors. Independent directors are those, who, apart from receiving director's remuneration, do not have any material pecuniary relationship or transactions with the company, its promoters, its management or its subsidiaries that in the judgement of the Board may affect their independence of judgement.

  • The Chairman of the Audit Committee should be present at Annual General Meeting to answer shareholder-queries.

  • The Company Secretary should act as the secretary to the Audit Committee.
  • The Audit Committee should meet at least thrice a year. The quorum should be either two members or one-third of the members of the Audit Committee.
  • The Audit Committee should have powers to investigate any activity within its terms of reference, to seek information from any employee; to obtain outside legal or professional advice, and to secure attendance of outsiders if necessary.
  • The Audit committee should discharge various roles such as, reviewing any change in accounting policies and practices; compliance with Accounting Standards; compliance with Stock Exchange and legal requirements concerning financial statements; the adequacy of internal control systems; the company's financial and risk management policies etc.
  • The Board of Directors should decide the remuneration of the non-executive Directors.
  • Full disclosure should be made to the shareholders regarding the remuneration package of all the Directors.
  • The Board meetings should be held at least four times a year.
  • A Director should not be a member in more than ten committees or act as the chairman of more than five committees across all companies in which he is a Director. This is done to ensure that the members of the Board give due importance and commitment of the meetings of the Board and its committees.
  • The management must make disclosures to the Board relating to all material, financial and commercial transactions, where they have personal interest.
  • In case of the appointment of a new Director or re-appointment of a Director, the shareholders must be provided with a brief resume of the Director, his expertise and the names of companies in which the person also holds Directorship and the membership of committees of the Board.
  • A Board committee should be formed to look into the redressal of shareholders' complaints like transfer of shares, non-receipt of balance sheet, dividend etc.
  • There should be a separate section on Corporate Governance in the annual reports of the companies with a detailed compliance report.

Apart from these, the Kumar Mangalam Committee also made some recommendations that are non-mandatory in nature as already mentioned by me above. Some of the non-mandatory recommendations are that:

  • The Board should set up a Remuneration Committee to determine the company's policy on specific remuneration packages for executive Directors.

  • Half-yearly declaration of financial performance including summary of the significant events in the last six months should be sent to each shareholder.
  • Non-executive chairman should be entitled to maintain a chairman's office at the company's expense. This will enable him to discharge the responsibilities effectively.

Report of Kumar Mangalam Committee on Corporate
Governance -the Complete Report

Comprehensive Recommendations both "mandatory" and "recommendatory" contained in the report subject-wise are furnished in the web-pages detailed in the Table of Contents. Use the Menu Bar ATat the top top access the same.

While there are several exercises defining corporate governance to be followed by public limited companies & other bodies whose capital is raised by way of subscription by the public, the report brought out by SEBI is more important, since it has a statutory sanction behind it, as explained earlier. The mandatory provisions are made binding on member companies under listing agreement with the respective Stock Exchanges, where their shares are listed and quoted.

This has brought in information valuable to the shareholders in the annual reports of the Companies, whose shares they have subscribed. For Bankers it is important as a source or tool for better assessment of the policies of the customer units being financed by them and to assesses their adherence to standards of ethics and good governance.

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