IIPM Report Corporate Governance

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INDIAN INSTITUTE OFPLANNING & MANAGEMENT

(MUMBAI)

A PROJECT ON

CORPORATE GOVERNANCE

PRINCIPLES

PREPARED BY:

RICHA S.K DUBEURMI PANDYA

SUNITA NAIR

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INTRODUCTION

Corporate governance is the set of processes, customs, policies, laws, and

institutions affecting the way a corporation (or company) is directed, administered or

controlled. Corporate governance also includes the relationships among the many

stakeholders involved and the goals for which the corporation is governed. In simpler

terms it means the extent to which companies are run in an open & honest manner.

Corporate governance has three key constituents namely: the Shareholders, the

Board of Directors & the Management. Other stakeholders include employees,

customers, creditors, suppliers, regulators, and the community at large. The concept of

corporate governance identifies their roles & responsibilities as well as their rights in the

context of the company. It emphasises accountability, transparency & fairness in the

management of a company by its Board, so as to achieve sustained prosperity for all the

stakeholders.

Corporate governance is a synonym for sound management, transparency &

disclosure. Transparency refers to creation of an environment whereby decisions &

actions of the corporate are made visible, accessible & understandable. Disclosure refers

to the process of providing information as well as its timely dissemination.

In A Board Culture of Corporate Governance, business author Gabrielle

O'Donovan defines corporate governance as An internal system encompassing policies,

processes and people, which serves the needs of shareholders and other stakeholders, by

directing and controlling management activities with good business savvy, objectivity,accountability and integrity. Sound corporate governance is reliant on external

marketplace commitment and legislation, plus a healthy board culture which safeguards

policies and processes.

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However, the concept of corporate governance is not just restricted to the notion

of transparency & accountability alone but also concerns itself about independence of all

those charged with the governance. Corporate governance stipulates rules for the

composition of the governance team & defines the relationship primarily between those

governing & those on whose behalf governance is being carried out. Hence although it is

important that prosperity must be created for stakeholders, but at the same time it is also

necessary to do the same while conforming to the laws, rules & regulations established

by the society.

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BACKGROUND

As mentioned earlier, the term corporate governance is related to the extent to

which the companies are transparent & accountable about their business. Corporate

governance today has become a major issue of interest in most of the corporate

boardrooms, academic circles & even governments around the globe.

In the 19th century, state corporation laws enhanced the rights of corporate boards

to govern without unanimous consent of shareholders in exchange for statutory benefits

like appraisal rights, to make corporate governance more efficient. Since that time and

because most large publicly traded corporations in the US are incorporated under

corporate administration-friendly Delaware law and because the US's wealth has been

increasingly securitized into various corporate entities and institutions, the rights of

individual owners and shareholders have become increasingly derivative and dissipated.

The concerns of shareholders over administration pay and stock losses periodically has

led to more frequent calls for corporate governance reforms.

In the 20th century, in the immediate aftermath of the Wall Street Crash of 1929,

legal scholars such as Adolf Augustus Berle, Edwin Dodd, and Gardiner C. Means

pondered on the changing role of the modern corporation in society. From the Chicago

school of economics, Ronald Coase's "The Nature of the Firm" (1937) introduced the

notion of transaction costs into the understanding of why firms are founded and how they

continue to behave. Fifty y`ears later, Eugene Fama and Michael Jensen's "The

Separation of Ownership and Control" (1983, Journal of Law and Economics) firmly

established agency theory as a way of understanding corporate governance: the firm is

seen as a series of contracts. Agency theory's dominance was highlighted in a 1989 article

by Kathleen Eisenhardt ("Agency theory: an assessement and review", Academy of

Management Review).

The expansion of US afterWorld War II through the emergence of multinational

corporations saw the establishment of the managerial class. Accordingly, the following

Harvard Business School management professors published influential monographs

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studying their prominence: Myles Mace (entrepreneurship), Alfred D. Chandler, Jr.

(business history), Jay Lorsch (organizational behavior) and Elizabeth MacIver

(organizational behaviour). According to Lorsch and MacIver "Many large corporations

have dominant control over business affairs without sufficient accountability or

monitoring by their board of directors."

Since the late 1970s, corporate governance has been the subject of significant

debate in the U.S. and around the globe. Bold, broad efforts to reform corporate

governance have been driven, in part, by the needs and desires of shareowners to exercise

their rights of corporate ownership and to increase the value of their shares and, therefore,

wealth. Over the past three decades, corporate directors duties have expanded greatly

beyond their traditional legal responsibility of duty of loyalty to the corporation and itsshareowners.

In the first half of the 1990s, the issue of corporate governance in the U.S.

received considerable press attention due to the wave of CEO dismissals (e.g.: IBM,

Kodak, Honeywell) by their boards. The California Public Employees' Retirement

System (CalPERS) led a wave of institutional shareholder activism (something only very

rarely seen before), as a way of ensuring that corporate value would not be destroyed by

the now traditionally cozy relationships between the CEO and the board of directors (e.g.,

by the unrestrained issuance of stock options, not infrequentlyback dated).

In 1997, the East Asian Financial Crisis saw the economies of Thailand,

Indonesia, South Korea, Malaysia and The Philippines severely affected by the exit of

foreign capital after property assets collapsed. The lack of corporate governance

mechanisms in these countries highlighted the weaknesses of the institutions in their

economies.

In the early 2000s, the massive bankruptcies (and criminal malfeasance) ofEnron

and Worldcom, as well as lesser corporate debacles, such as Adelphia Communications,

AOL, Qwest, Arthur Andersen, Global Crossing, Tyco, etc. led to increased shareholder

and governmental interest in corporate governance. Because these triggered some of the

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largest insolvencies, the public confidence in the corporate sector was sapped. The

popular perception was that corporate leadership was fraught with greed & excess.

Inadequancies & failure of the existing systems, brought to the fore, the need for norms

& codes to remedy them. This resulted in the passage of the Sarbanes-Oxley Act of

2002, (popularly known as Sox) by the United States.

In India however, only when the Securities Exchange Board of India (SEBI),

introduced Clause 49 in the Listing Agreement, for the first time in the financial year

2000-2001, that the listed companies started embracing the concept of corporate

governance. This clause was based on the Kumara Mangalam Birla Committee

constituted by SEBI. After these recommendations were in place for about four years,

SEBI, in order to evaluate & improve the existing practices, set up a committee under theChairmanship of Mr. N.R. Narayana Murthy during 2002-2003.At the same time, the

Ministry of Corporate Affairs set up a committee under the Chairmanship of Shri. Naresh

Chandra to examine the various corporate governance issues. The recommendations of

the committee however, faced widespread protests & representations from the industry,

forcing SEBI to revise them.

Finally, on the 29th October, 2004, SEBI announced the revised Clause 49, which

was implemented by the end of the financial year 2004-2005. Apart from Clause 49 of

the Listing Agreement, corporate governance is also regulated through the provisions of

the Companies Act, 1956. The respective provisions have been introduced in the

Companies Act by Companies Amendment Act, 2000.

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SOME DEFINITIONS OF CORPORATE

GOVERNANCE

"Corporate governance is a field in economics that investigates how to secure/motivate

efficient management of corporations by the use of incentive mechanisms, such as

contracts, organizational designs and legislation. This is often limited to the question

of improving financial performance, for example, how the corporate owners can

secure/motivate that the corporate managers will deliver a competitive rate of

return" - www.encycogov.com, Mathiesen [2002]. This definition can beillustrated as a transaction cost based theory of the managerial agency problem.

Corporate governance deals with the ways in which suppliers of finance to

corporations assure themselves of getting a return on their investment.

-The Journal of Finance, Shleifer and Vishny [1997, page 737].

"Corporate governance is the system by which business corporations are directed and

controlled. The corporate governance structure specifies the distribution of rights

and responsibilities among different participants in the corporation, such as, the

board, managers, shareholders and other stakeholders, and spells out the rules and

procedures for making decisions on corporate affairs. By doing this, it also provides

the structure through which the company objectives are set, and the means of

attaining those objectives and monitoring performance". -OECD April 1999.

OECD's definition is consistent with the one presented by Cadbury [1992, page 15].

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"Corporate governance - which can be defined narrowly as the relationship of a

company to its shareholders or, more broadly, as its relationship to society".

- From an article in Financial Times [1997].

"Corporate governance is about promoting corporate fairness, transparency and

accountability". - J. Wolfensohn, (President of the Word bank, as quoted by an

article in Financial Times, June 21, 1999).

Some commentators take too narrow a view, and say it (corporate governance) is the

fancy term for the way in which directors and auditors handle their responsibilities

towards shareholders. Others use the expression as if it were synonymous with

shareholder democracy. Corporate governance is a topic recently conceived, as yet

ill-defined, and consequently blurred at the edgescorporate governance as a

subject, as an objective, or as a regime to be followed for the good of shareholders,

employees, customers, bankers and indeed for the reputation and standing of our

nation and its economyMaw et al. [1994, page 1].

Sir Adrian Cadbury in his preface to the World Bank publication

Corporate Governance: A framework for implementation, said, Corporate

governance is holding the balance between economic & social goals and between

individual & community goals. The aim is to align as nearly as possible, the

interests of individuals, corporations & society.

The Cadbury Committee U.K, defined corporate governance as follows:

It is a system by which companies are directed & controlled. It may also be

defined as a system of structuring, operating & controlling a company with the

following specific aims:

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1. Fulfilling long-term strategic goals of owners.

2. Taking care of the interests of the employees.

3. A consideration for the environment & local community.

4. Maintaining excellent relations with the customers & suppliers and

5. Proper compliance with all the applicable legal & regulatory requirements.

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SCOPE & IMPORTANCE OF

CORPORATE GOVERNANCE

Corporate governance is all about ethics in business. It is about transparency,

openness & fair play in all aspects of business operations. The key aspects to corporate

governance include:

1. Accountability of Board of Directors & their constituent responsibilities to the

ultimate owners- the shareholders.

2. Transparency, i.e. right to information, timeliness & integrity of the information

produced.

3. Clarity in responsibilities to enhance accountability.

4. Quality & competence of Directors and their track record.

5. Checks & balances in the process of governance.

6. Adherence to the rules, laws & spirit of codes.

An active & involved board consisting of professional & truly independent directorsplays an important role in creating trust between a company & its investors and is the

best guarantor of good corporate governance.

Good corporate governance is integral to the very existence of a company. It is

important for the following reasons:

1. Corporate governance ensures that a properly structured Board, capable of takingindependent & objective decisions is at the helm of affairs of the company. This

lays down the framework for creating long-term trust between the company &

external providers of capital.

2. It improves strategic thinking at the top by inducting independent directors who

bring a wealth of experience & a host of new ideas.

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3. It rationalizes the management & monitoring of risk that a corporation faces

globally.

4. Corporate governance emphasises the adoption of transparent procedures &

practices by the Board, thereby ensuring integrity in financial reports.

5. It limits the liability of top management & directors, by carefully articulating the

decision making process.

6. It inspires & strengthens investors confidence by ensuring that there are adequate

number of non-executive & independent directors on the Board, to look after the

interests & well-being of all the stakeholders.

7. Corporate governance helps provide a degree of confidence that is necessary for

the proper functioning of a market economy, as it contemplates adherence to

ethical business standards.

8. Finally, globalisation of the market place has ushered in an era wherein the

quality of corporate governance has become a crucial determinant of survival of

corporates. Compatibility of corporate governance practices with global standards

has also become an important constituent of corporate success. Thus, good

corporate governance is a necessary pre-requisite for the success of Indian

corporates.

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THE SARBANES-OXLEY ACT

The Sarbanes-Oxley Act (often referred to as Sox) is a legislation enacted in

response to the high-profile financial scandals like Enron, WorldCom, Tyco, AOL, etc.

so as to protect the shareholders & general public from accounting errors & fraudulent

practices in the enterprise. The Act is administered by the Securities & Exchange

Commission (SEC), which sets deadlines for compliance & publishes rules on

requirements. The Act is not a set of business practices & does not specify how a

business should store records; rather it defines which records are to be stored & for how

long. The legislation not only affects the financial side of corporations but also the IT

Departments of these, whose job is to store their electronic records. The Sarbanes-Oxley

Act states that all business records, including electronic records & electronic messages

must be saved for not less than five years. The consequences of non-compliance are fines,

imprisonment or both.

The following sections of the Act contain three rules that affect the management of

electronic records.

1) The first rule deals with destruction, alteration & falsification of records.

Sec 802 (a) states that, Whoever knowingly alters, destroys, mutilates, conceals, covers

up, falsifies or makes a false entry in any record, document or tangible object with the

intent to impede, obstruct or influence the investigation or proper administration of any

matter within the jurisdiction of any department or agency of the United States or any

case filed under Title 11, or in relation to or contemplation of any such matter or case,

shall be fined under this title, imprisoned not more than 20 years, or both.

2) The second rule defines the retention period for storage of records. Best practices

indicate that corporations securely store all business records using the same guidelines as

set for public accountants.

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Sec 802 (a) (1) states that, Any accountant who conducts an audit of an issuer of

securities to which section 10 A (a) of Securities Exchange Act of 1934 [15 U.S.C

78j- 1 (a)] applies, shall maintain all audit or review work papers for a period of 5

years from the end of the fiscal period in which the audit or review was

concluded.

3) The third rule refers to the type of business records that need to be stored, including all

business records & communication, which includes electronic communication also.

Sec 802 (a) (2) states that, The Securities & Exchange Commission shall

promulgate within 180 days , such as rules & regulations, as are reasonably

necessary relating to the retention of relevant records such as work papers,

documents that form the basis of an audit or review, memoranda, correspondence,

other documents & records (including electronic records), which are created, sent

or received in connection with an audit or review & contain conclusions,

opinions, analyses or financial data relating to such an audit or review.

SarbanesOxley Act contains 11 titles that describe specific mandates and requirements

for financial reporting. Each title consists of several sections, summarized below.

1. Public Company Accounting Oversight Board (PCAOB)

Title I consists of nine sections and establishes the Public Company Accounting

Oversight Board, to provide independent oversight of public accounting firms

providing audit services ("auditors"). It also creates a central oversight board

tasked with registering auditors, defining the specific processes and procedures

for compliance audits, inspecting and policing conduct and quality control, and

enforcing compliance with the specific mandates of SOX.

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2. Auditor Independence

Title II consists of nine sections and establishes standards for external auditor

independence, to limit conflicts of interest. It also addresses new auditor approval

requirements, audit partner rotation, and auditor reporting requirements. It

restricts auditing companies from providing non-audit services (e.g., consulting)

for the same clients.

3. Corporate Responsibility

Title III consists of eight sections and mandates that senior executives take

individual responsibility for the accuracy and completeness of corporate

financial reports. It defines the interaction of external auditors and corporate audit

committees, and specifies the responsibility of corporate officers for the accuracy

and validity of corporate financial reports. It enumerates specific limits on the

behaviors of corporate officers and describes specific forfeitures of benefits and

civil penalties for non-compliance. For example, Section 302 requires that the

company's "principal officers" (typically the Chief Executive Officerand Chief

Financial Officer) certify and approve the integrity of their company financial

reports quarterly

[3]

4. Enhanced Financial Disclosures

Title IV consists of nine sections. It describes enhanced reporting requirements

for financial transactions, including off-balance-sheet transactions, pro-forma

figures and stock transactions of corporate officers. It requires internal controls

for assuring the accuracy of financial reports and disclosures, and mandates both

audits and reports on those controls. It also requires timely reporting of material

changes in financial condition and specific enhanced reviews by the SEC or its

agents of corporate reports.

5. Analyst Conflicts of Interest

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Title V consists of only one section, which includes measures designed to help

restore investor confidence in the reporting of securities analysts. It defines the

codes of conduct for securities analysts and requires disclosure of knowable

conflicts of interest.

6. Commission Resources and Authority

Title VI consists of four sections and defines practices to restore investor

confidence in securities analysts. It also defines the SECs authority to censure or

bar securities professionals from practice and defines conditions under which a

person can be barred from practicing as a broker, advisor, or dealer.

7. Studies and Reports

Title VII consists of five sections and requires the Comptroller General and the

SEC to perform various studies and report their findings. Studies and reports

include the effects of consolidation of public accounting firms, the role of credit

rating agencies in the operation of securities markets, securities violations and

enforcement actions, and whether investment banks assisted Enron,Global

Crossing and others to manipulate earnings and obfuscate true financial

conditions.

8. Corporate and Criminal Fraud Accountability

Title VIII consists of seven sections and is also referred to as the Corporate and

Criminal Fraud Act of 2002. It describes specific criminal penalties for

manipulation, destruction or alteration of financial records or other interference

with investigations, while providing certain protections for whistle-blowers.

9. White Collar Crime Penalty Enhancement

Title IX consists of six sections. This section is also called the White Collar

Crime Penalty Enhancement Act of 2002. This section increases the criminal

penalties associated with white-collar crimes and conspiracies. It recommends

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stronger sentencing guidelines and specifically adds failure to certify corporate

financial reports as a criminal offense.

10. Corporate Tax Returns

Title X consists of one section. Section 1001 states that the Chief Executive

Officershould sign the company tax return.

11. Corporate Fraud Accountability

Title XI consists of seven sections. Section 1101 recommends a name for this titleas Corporate Fraud Accountability Act of 2002. It identifies corporate fraud

and records tampering as criminal offenses and joins those offenses to specific

penalties. It also revises sentencing guidelines and strengthens their penalties.

This enables the SEC the resort to temporarily freeze transactions or payments

that have been deemed "large" or "unusual".

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CLAUSE 49 OF THE LISTING AGREEMENT

Clause 49 of the listing agreement

SEBI revise Clause 49 of the Listing Agreement pertaining to corporate governance videcircular date October 29th, 2004, which superseded all other earlier circulars issued bySEBI on this subject. All existing listed companies were required to comply with theprovisions of the new clause by 31st December 2005.

The major provisions included in the new Clause 49 are:

The board will lay down a code of conduct for all board members and senior

management of the company to compulsorily follow.

The CEO an CFO will certify the financial statements and cash flow statements of the

company.

If while preparing financial statements, the company follows a treatment that is differentfrom that prescribed in the accounting standards, it must disclose this in the financial

statements, and the management should also provide an explanation for doing so in the

corporate governance report of the annual report.

The company will have to lay down procedures for informing the board members about

the risk management and minimization procedures.

Where money is raised through public issues etc., the company will have to disclose the

uses/ applications of funds according to major categories ( capital expenditure, working

capital, marketing costs etc) as part of quarterly disclosure of financial statements.

Further, on an annual basis, the company will prepare a statement of funds utilized forpurposes other than those specified in the offer document/ prospectus and place it beforethe audit committee.The company will have to publish its criteria for making its payments to non-executivedirectors in its annual report. Clause 49 contains both mandatory and non mandatoryrequirements.

Mandatory requirements refer primarily to:1. Board of Directors with respect to their composition, independence, procedures, code of

conduct and disclosures;

2. Audit Committee and its composition, powers, role and responsibilities;

3. Subsidiary Companies to ensure their better control and supervision;

4. Disclosures in the context of related party transctions, risk management and minimization

procedures, utilization of proceeds from Initial Public Offerings, inverstor education and

protection;

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5. CEO/CFO certification regarding the correction of the financial statement and

compliance with prescribed Accounting Standards

6. Separate report on corporate Governance in the annual reports with respects to

compliance of mandatory and non mandatory requirements; and

7. Compliance certificate obtained either from the auditors or practicing company

Secretaries

Non mandatory requirements refer to those requirements which are not compulsory andcan be adopted at the discretion of the company.

These include requirements:1. Regarding the maximum tenure of the independent directors,

2. Formation of a remuneration committee for determining the remuneration packages for

executives directors,

3. Moving towards a regime of unqualified financial statements,

4. Training of board members,

5. Evaluation of non executive board members, and

6. Establishing a mechanism for employees to report unethical behavior to the management

under a Whistle Blower Policy.

CLAUSE 49 MANDATORY REQUIREMENTS

I. BOARD OF DIRECTORS

A. Composition of Board:

1. The Board of directors of the company shall have an optimum combination of

executive and non-executive directors with not less than fifty percent of the board

of directors comprising of non- executive directors .

2. Where the Chairman of the Board is non- executive directors, at least one third of

the Board should comprise of independent directors and in case he is an

executive directors, at least half of the Board should comprise of independent

directors.

3. For the purpose of sub clause (ii) the expression independent director shall

mean a non executive director of the company who:

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a. Apart from receiving directors remuneration , does not have any material

pecuniary relationships or transactions with the company, its promoters, its

directors its senior management or its holding company, its subsidiaries and

associated which many affects independence of the director.

b. Is not related to promoters or persons occupying managements positions at

the board level or at one level below the board;

c. It not been executive or was not partner or an executive during the

preceding three years, of any of the following:

d. Is not a partner or an executive or was not partner or an executive during the

preceding three years, of any of the following:

i. The statutory audit firm or the internal audit firm that is associated

with the company, and ;

ii. The legal firm(s) and consulting firm(s) that have a materialassociation with the company

e. Is not a material supplier, service provider or customer or a lessor or lessee of

the company, which may affect independence of the directors; and

f. is not a substantial shareholder of the company i.e owning two percent or

more of the block of voting shares.

4. Nominee directors appointed by an institution which has invested in or lent to the

company shall be deemed to be independent directors. However if the Dr. J.J.

irani Committee recommendations on the proposed new company law are

accepted, then directors, nominated by financial institutions and the government

will not be considered independent.

B. Non executive directors compensation and disclosures: all fees/ compensation and

disclosures: all fees/ compensation , if any paid to non executive directors, including

independent directors, shall be fixed by the Board of Directors and shall require

previous approval of shareholders in general meeting. The shareholders resolution

shall specify the limits for the maximum number of stock options that can be granted

to non- executive directors, including independent directors, in any financial year and

aggregate. However as per SEBI amendment made vide circular SEBI/

CFD/DIL/CG dated 12/1/06 sitting fees paid to non-executive directors as authorized

by the Companies Act 1956, would not require the previous approval of shareholders.

C. Other provisions as to Board and Committees:

1. The board shall meet at least four times a year, with a maximum time gap of

three months between any two meetings. However SEBI has amended the clause

40 of the listing agreement vide circular SEBI/CFD/DIL/CG dated 12-1-06 as per

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which the maximum gap between two board meetings has been increased again

to 4 months.

2. A director shall not be a member in more than 10 Audit and / or Shareholders

grievance Committee or act as chairman of more than five Audit Shareholders

Grievance committee across all companies in which he is a director.

Furthermore it should e 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. Code of conduct:

1. The Board shall lay down a code of conduct for all Board members and senior

management of the company. The code of conduct shall be posted the website of

the company,

2. All Board members and senior management personnel shall affirm compliance

with the code on an annual basis. The Annual report of the company shallcontain declaration to this effect signed by CEO.

II. AUDIT COMMITTEE.

A. Qualified and Independent Audit Committee: A qualified and independent audit

committee shall be set up, giving the terms of reference subject to the following:

1. The audit committee shall have minimum three directors as members. Two

thirds of the members fo audit committee shall be independent directors.

2. All members of audit committee shall be financially literate an at least one

member shall have accounting or related financial management expertise.

3. The chairman of the Audit Committee shall be an independent director.

4. The chairman of the Audit Committee shall be present at annual General

Meeting to answer shareholder queries;

5. The audit committee may invite such of the executives, as it considers

appropriate (and particularly the head of the finance function) to the present

at the meetings of the committee. The finance director, head of internal audit

and representative of the statutory auditor may be present as invitees for the

meeting of the audit committee;

6. The Company Secretary shall act as the secretary to the committee.

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B. Meeting of Audit Committee: the audit committee should meet at least four times in

a year and not more than four months shall elapse between two meetings. The

quorum shall be either tow members or one third of the members of the audit

committee whichever is greater, but there should be minimum of two independent

members present.

C. Powers of Audit Committee: the audit committee shall have powers:

1. To investigate any activity within the terms of reference;

2. To seek information from any employee;

3. To obtain outside legal or other professional advice;

4. To secure attendance of outsiders with relevant experts, if any.

D. Role of audit committee: the role for the audit committee shall include the following:

1. Oversight of the companys financial reporting process and the disclosure of its

financial information to ensure that the financial statement is correct, sufficient

and credible.

2. Recommending to the Board, the appointment re- appointment and if required the

replacement or removal of the statutory auditor and the fixation of audit fees.

3. Approval of payment too statutory auditors for any other services rendered by the

statutory auditors.

4. Reviewing, with the management the quarterly and annual financial statements

before submission to the board for approval with reference to Directors

Responsibility statement under section 217 (2AA)k, significant adjustments

made in financial statements, compliance with listing requirements, disclosure of

any related pending transaction etc.

5. Reviewing with the management performance of statutory and internal auditor

and adequacy of the internal control systems.

6. Discussion with internal auditors regarding any significant findings including

suspected frauds or irregularities and follow up thereon.

7. Reviewing the findings of any internal investigation by the internal auditors into

matters where there is suspected fraud or irregularity or a failure of internal

control system of a material nature and reporting the matter to the board.

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8. Discussion with statutory auditors before the audit commence, about the nature

and scope of audit as well as post- audit discussion to ascertain any area of

concern.

9. To look into the reason fo substantial defaults in the payments to the depositors,

debenture holders, shareholders (in case of nonpayment of declared dividends)

and creditors.

10. To review the functioning of the Whistle Blower mechanism, in case the same is

existing.

11. Carrying out any other function as it mentioned in the terms of reference of the

Audit Committee.

III. SUBSIDARY COMPANIES

1. At least one independent director on the Board of Director of the holding company

shal be a director on the Board of Directors of a material non listed Indian subsidiary

company.

2. The audit committee of the listed holding company shall also review the financial

statements, in particular, the investment made by the unlisted subsidiary company.

3. The minutes of the Board meeting of the unlisted subsidiary company shall be placed

at the Board meeting of the listed holding company, the management should

periodically bring to the attention of the Board of Directors of the listed holdingcompany, a statement of all significant transaction and arrangements entered into by

the unlisted subsidiary company.

IV. DISCLOSURES

A. Basis of related party transactions:

1. A statement in summary form of transactions with related parties shall be placed

periodically before the audit committee.

2. Details of material individual transactions with related parties which are not in

the normal course of business shall be placed before the audit committee.

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B. Disclosure of Accounting Treatment: where in the preparation of financial

statements, a treatment different from that prescribed in an Accounting Standard has

been followed, the fact shall be disclosed in the financial statements, together with

the managements explanation as to why it believes such alternative treatment is

more representative of the true and fair view of the underlying business transaction in

the Corporate Governance Report.

C. Board Disclosure- Risk Management: the company shall lay down procedures to

inform Board members about the risk assessment and minimization procedures.

D. Proceeds from public issues, rights issues , preferential issues etc. : When money is

raised through an issue (public issues rights issues, preferential issues etc.), it shall

disclose to the Audit committee, the uses/ applications of funds by major category

(capital expenditure,, sales and marketing, working capital, etc.), on a quarterly andannual basis.

E. Remuneration of Directors :

1. All pecuniary relationship or transactions of the non- executive directors vis--vis

the company shall be disclosed in the Annual Report.

2. Further, certain prescribed disclosures on the remuneration of directors shall bemade in the section on the corporation governance of the Annual Report;

3. The company shall disclose the number of shares and convertible instruments

held by non-executive directors in the annual report.

4. Non executive directors shall be required to disclose their shareholding (both

own or held by/ for other persons on a (beneficial basis) in the listed company in

which they proposed to be appointed as directors, prior to their appointment.

These details should be disclosed in the notice to the general meeting called for

appointment of such directors.

F. Management: As part of the directors report or as an addition there to a

Management Discussion and Analysis report, the following should form part of the

Annual Report to the shareholders. This includes discussion on:

1. ;industry structure and developments.

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2. Opportunities and threats.

3. Segment wise or product wise performance

4. Outlook

5. Risks and concerns.

6. Internal control systems and their adequacy

7. Discussion on financial performance with respect to operational performance.

8. Material developments in Human resources/ industrial Relations front including

number of people employed.

G. Shareholders:

1. In case of the appointment of a new directors or reappointment of a director the

shareholders must be provided with the following information:

a. A brief resume of the director

b. Nature of his expertise in specific functional areas;

c. Names of companies in which the persons also holds directorship and the

membership Committees of the Board; and

d. Shareholding of non executive directors.

2. A board committee under the chairmanship of a non- executive director shall be

formed to specifically look into the redressal of shareholder and investor

complaints like transfer of shares, non receipt of declared dividends etc. this

committee shall be designated as Shareholders/Investors Grievance Committee.

3. To expedite the process of share transfer, Board of the company shall delegate

the power of share transfer to an officer or a committee or to the registrar and

share transfer agents. There delegated authority shall attend to share transfer

formalities and least once in a fortnight.

V. CEO/CFO CERTIFICATION

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Through the amendment made by SEBI vide circular SEBI /CFD/DIL CG DATED 12-1-

06, in Clause 49 of the Listing Agreement, certification of intedrnal controls and

internalcontrol system

CFO/CEO would be for the purpose of financial reporting. Thus the CEO, i.e. the

Managing Direcctor or Manager appointed in terms of the Companies Act, 1956 and the

CFO i.e. the whole time Finance Director or any other Person heading the finance

function discharging that function shall certify to the Board that:

1. They have reviewed financial statements and the cash flow statement for the year and

that to the best of their knowledge and belief:

i. These statements do not contain any materially untrue statement or omit any

material fact or contain statements that might be misleading;

ii. These statements together present a true and fair view of the companys

affairs and are in compliance within existing accounting standards,

applicable laws and regulations.

2. There are, to the best of their knowledge and belief, no transactions entered into by

the company during the year which fraudulent, illegal or violative of the companys

code of conduct.

3. They accept responsibility for establishing and maintaining internal controls and they

have evaluated the effectiveness of the internal control system of the company

pertaining to financial reporting and they have disclosed to the auditors and the Audit

Committee, deficiencies in the design or operation of internal controls, if an, of

which they are aware and the steps they have taken or propose to take to rectify these

deficiencies

4. They have indicated to the auditors and the Audit Committee significant changes in

internal control over financial reporting during the year, significant fraud of which

they have become aware and the involvement there in if any, of the management or

an employee having a significant role in the companys internal control system over

financial reporting.

VI. REPORT ON CORPORATE GOVERNANACE

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1. There shall be separate section on Corporate Governance in Annual Reports of

Company with a detailed compliance report on Corporate Governance. Non

compliance of any mandatory requirement of this clause with reason there of and the

extent to which the non- mandatory requirements have been adopted should be

specifically highlighted.

2. The companies shall submit a quarterly compliance report to the stock exchange

within 15 days from the close of quarter as per the format given in

3. Annexure IB. the report shall be signed either by the Compliance Officer or the

Chief Executive Officer of the company.

VII. COMPLIANCE

1. The company shall obtain a certificate from either the auditor or practicing company

secretaries regarding compliance of conditions of corporate governance as stipulated

in this clause and annex the certificate with the directors report, which is sent

annually to all the shareholders of the company. The same certificate shall also be

sent to the Stock Exchanges along with the annual report filed by the company.

2. The non- mandatory requirements may be implemented as per the discretion of the

company. However, the disclosures of the compliance with mandatory requirements

and adoption / non- adoption of the non mandatory requirements shall be made in the

section on corporate governance of the Annual Report.

NON MANDATORY REQUIREMENTS

1. The Board : A non executive Chairman man be entitled to maintain a chairmans

office at the companys expense and also allowed reimbursement of expenses

incurred in performance of his duties Independent

directors may have a tenure not exceeding,, in the aggregate, a period of nine years,

on the Board of a company.

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2. Remuneration Committee:

i. The board may set up a remuneration committee comprising of at least three

directors all of whom shall be non-executive director, with the chairman

being an independent director, t determine on their behalf and on behalf of

the shareholders with agreed terms to reference, the companys policy

remuneration packages for executive directors including pension rights and

may compensation payment

ii. The chairman of the remuneration committee could be present at the Annual

General Meeting to answer the shareholders queries

3. Shareholder Rights: A half yearly declaration of financial performance including

summary of the significant events in last six months, may be sent to each household

of shareholders,

4. Audit qualifications: Company many move towards a regime of unqualified financialstatements,

5. Training of Board Members : A company may train its Board members in the

business model of the company as well as the risk profile of the business parameters

of the company, their responsibilities as directors, and the best ways to discharge

them. It should be noted that originally training and updating of knowledge of

directors was a mandatory requirements of the Murthy Committee. But in the face of

strong opposition from the industry it was made non mandatory

6. Mechanism for evaluation non executive Board Members: the performance

evaluation of non executive directors could be done by a per group comprising theentire Board of Directors, excluding the director being evaluated and Peer Group

evaluation cold be the mechanism to determine whether the extend/ continue the

terms of appointment of non-executive directors.

7. Whistle Blower Policy: the concept behind introducing a Whistle Blower Policy is

that there are many employees at various levels in an organization who feel that

something is going wrong- eg. Corruption, violation of law, wastages, unethical

practices etc. they feel helpless and frustrated as they are unable to do anything since

they have no access to top management. They either remain silent or leave the job.

Sometimes they may write anonymous letters to various inside and outside

authorities, leak news to newspapers or may even act as informants to Government/statutory agencies. It is felt that such employees should be allowed to talk about their

concerns internally, so that management can take timely action before it is too late.

This termed as blowing the whistle.

Therefore Clause 49 provides that the company may establish a mechanism foremployees to report to the management concern about unethical behavior, actual

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or suspected fraud or violation of the companys code of conduct or ethics policy.The mechanism could also provide for adequate safeguards against victimisationof employees who avail of the mechanism and also provide for direct access to theChairman of the Audit committee in exceptional cases. Once established, theexistence of the mechanism may be appropriately communicated within the

organization.

STEPS IMPLEMENTED BY COMPANIES ACT WITH REGARD TO

CORPORATE GOVERNANCE

The Ministry of Company Affairs appointed various committees on the subject ofcorporate governance which lead to the amendment of the companies Act in 2000.These amendments aimed at increasing transparency and accountabilities of theBoard of Directors in the management of the company, thereby ensuring goodcorporate governance. The dealt with the following:

1. COMPLIANCE WITH ACCOUNTING STANDARDS SECTION 210A

As per this subsection inserted by the Companies Act, 1999 every profit and loss

account and balance sheet of the company shall comply with the accounting

standards. The compliance of Indian Accounting standards was made mandatory and

the provisions for setting up of National Committee on accounting standards were

incorporated in the Act.

2. INVESTORS EDUCATION AND PROTECTION FUND SECTION 205C

This section was inserted by the Companies Act 1999which provides that the centralgovernment shall establish a fund called the Investor Education and protection Fund

and amount credited to the fund relate to unpaid dividend, unpaid matured deposits,

unpaid matured Debenture, unpaid application money received by the companies for

allotment of securities and due for refund and interest accrued on above amounts.

3. DIRECTORS RESPONSIBILITY STATEMENT- SECTION 217(2AA)

Subsection (2AA)added by the Companies Act, 2000 provides that the Boards report

shall also include a Directors Responsibility statement with respect to the following

matters:

a. Whether accounting standards had been followed in the preparation of annual

accounts and reasons for material departures, if any;

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b. Whether appropriate accounting policies have been applied and on consistent

basis;

c. Whether directors had made judgments and estimate that are reasonable prudent

so as to give a true and fair view of the state of affair and profit and loss of the

company;

d. Whether the directors had prepared the annual accounts on a going concern basis.

e. Whether directors had taken proper and sufficient care for the maintenance of

adequate accounting records for safeguarding the assets of the company.

4. NUMBER OF DIRECTORSHIPA- SECTION 275

As per this section of Companies Act, 2000 a person cannot hold office at same time

as director in more than fifteen companies.

5. AUDIT COMMITTEES SECTION 292A

This section of the companies Act, 2000 provides for the constitution of audit

committees by every public company having a paid- up capital of Rs. 5 crores or

more. Audit Committee is to consist of at least 3 directors. Two of the members of

the Audit Committee shall be directors other than managing or whole time director.

Recommendation of the Audit Committee on any matter related to financialmanagement including audit report shall be binding on the Board.

6. PROHIBITION ON INVITIN OR ACCEPTING PUBLIC DPOSIT

The Companies Act, 2000 has prohibited companies to invite/accept deposit from

public.

7. SMALL DEPOSITOR- SECTIONS 58AA AND 58AAA

The Companies Act, 2000 had added two new sections, viz, section a 58AA and

58AAA, for the protection of small depositors. These provisions are designed to

protect depositors who have invested upto Rs. 20, 000 in a financial year in a

company.

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8. CORPORATE IDENTITY NUMBER

Registrar of Companies is to allot a Corporate Identity Number to each company

registered on or after November 1, 2000 (Valid circular No.)12/2000 dated 25-10-

2000)

9. POWERS TO SEBI SECTION 22A

This section added Companies Act, 2000 empowers SEBI to administer the

provisions contained in section 44 to 48, 59 to 84, 10, 109, 110, 112, 113, 116, 117,

118, 119, 120, 121, 122, 206, 206A and 207 so far as they relate to issue and transfer

ofsecurities and non payment of dividend. However, SEBIS power in this regard is

limited to listed companies.

10. DISQUALIFICATION OF A DIRECTOR- SETION 274 CLAUSE (G)

Clause (g) of Section 2i7i4, added by the companies Act, 200 disqualifies a person

who is already director of a public company which (a) has not filed the annual

accounts and annual returns for any continuous three financial years commencing on

and after the first day of

April 1999; or (b) has failed or repay its deposit or interest thereon on due date or

redeem its debentures on due date or pay dividend and such failure to continues for

one year or more, however, the aforesaid disqualification will last for five years

only.

11. SECRETARIAL AUDIT SECTION383A

12. Secretarial Audit Section 383A was amended to provide for secretarial audit with

respect to companies having a paid up share capital of Rs. 10 lakhs or more but less

than, present Rs. 2 crores. As per the Companies Act, 2000 a whole time company

secretary has to file with ROC a certificate as to whether the company has complied

with all the provisions of the Act. A copy of this certificate shall also be attached

with the report of Board of Directors.

Thus, the importance of codification of good Corporate governance practices havingmandatory force cannot be mitigates. But in order to ensure implementation andcompliance in true spirit, Corporate Governance practices need to be legislated by oneregular or body so as to avert duplicity, confusion and uncertainty.

CONCLUSIONIn conclusion, we can say that corporate governance is a way of life and not a set of rules,a way of life that necessitates talking into account the stakeholders interest in every

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business decision.

COMMITTEES RELATED TO CORPORATEGOVERNANCE IN INDIA

I) Kumar Mangalam Birla Committee Report [2000]:

Following CIIs initiative, 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.

Mandatory and non mandatory recommendations

The Committee debated the question of voluntary versus mandatory compliance of its

recommendations. The Committee was of the firm view that mandatory compliance of

the recommendations at least in respect of the essential recommendations would be most

appropriate in the Indian context for the present. The Committee also noted that in most

of the countries where standards of corporate governance are high, the stock exchanges

have enforced some form of compliance through their listing agreements.

The Committee felt that some of the recommendations are absolutely essential for the

framework of corporate governance and virtually form its core, while others could be

considered as desirable. Besides, some of the recommendations may also need change of

statute, such as the Companies Act, for their enforcement. In the case of others,

enforcement would be possible by amending the Securities Contracts (Regulation) Rules,

1957 and by amending the listing agreement of the stock exchanges under the direction ofSEBI. The latter, would be less time consuming and would ensure speedier

implementation of corporate governance. The Committee therefore felt that the

recommendations should be divided into mandatory and non- mandatory categories and

those recommendations which are absolutely essential for corporate governance, can be

defined with precision and which can be enforced through the amendment of the listing

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agreement could be classified as mandatory. Others, which are either desirable or which

may require change of laws, may, for the time being, be classified as non-mandatory

II) Naresh Chandra Committee Report [2002:]

In August 2002, DCA appointed Naresh Chandra Committee to examine various

corporate governance issues. The Committee was entrusted to analyse and recommend

changes, to the issues related to the statutory auditor-company relationship, certification

of accounts and financial statements by the management and directors; and role of

independent

directors.

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.

It was the belief of the Securities and Exchange Board of India (SEBI) that efforts to

improve corporate governance standards in India must continue. This is because

these standards themselves were evolving in keeping with market dynamics.Accordingly, the Committee on Corporate Governance (the Committee) was

constituted by SEBI, to evaluate the adequacy of existing corporate governance

practices and further improve these practices. The Committee comprised members

from various walks of public and professional life. This includes captains of industry,

academicians, public accountants and people from financial press and from industry

forums.

The issues discussed by the Committee primarily related to audit committees, audit

reports, independent directors, related parties, risk management, directorships and

director compensation, codes of conduct and financial disclosures. The Committees

This report contains 30 pages and two enclosures

Enclosures consist of 10 pages

recommendations in the final report were selected based on parameters including

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their relative importance, fairness, accountability, transparency, ease of

implementation, verifiability and enforceability.

The key mandatory recommendations focus on strengthening the responsibilities of

audit committees; improving the quality of financial disclosures, including those

related to related party transactions and proceeds from initial public offerings;

requiring corporate executive boards to assess and disclose business risks in the

annual reports of companies; introducing responsibilities on boards to adopt formal

codes of conduct; the position of nominee directors; and stock holder approval and

improved disclosures relating to compensation paid to non-executive directors.

Non-mandatory recommendations include moving to a regime where corporate

financial statements are not qualified; instituting a system of training of board

members; and the evaluation of performance of board members.

The Committee believes that these recommendations codify certain standards of

good governance into specific requirements, since certain corporate responsibilities

are too important to be left to loose concepts of fiduciary responsibility. When

implemented through SEBIs regulatory framework, they will strengthen existing

governance practices and also provide a strong incentive to avoid corporate failures.

Some people have legitimately asked whether the costs of governance reforms are

too high. In this context, it should be noted that the failure to implement good

governance procedures has a cost beyond mere regulatory problems. Companies that

do not employ meaningful governance procedures will have to pay a significant risk

premium when competing for scarce capital in todays public markets.

III) Narayana Murthy Committee Report [2003]:

SEBI Committee on Corporate Governance was constituted under the Chairmanship of

N. R. Narayana Murthy, to look into:

governance issues / review Clause 49,suggest measures to improve corporate

governance standards.

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With the belief that the efforts to improve corporate governance standards in India must

continue because these standards themselves were evolving in keeping with the market

dynamics, the Securities and Exchange Board of India (SEBI) had constituted a

Committee on Corporate Governance in 2002 , in order to evaluate the adequacy of

existing corporate governance practices and further improve these practices. It was set up

to review Clause 49, and suggest measures to improve corporate governance standards.

The SEBI Committee was constituted under the Chairmanship of Shri N. R. Narayana

Murthy, Chairman and Chief Mentor of Infosys Technologies Limited. The Committee

comprised members from various walks of public and professional life. This included

captains of industry, academicians, public accountants and people from financial press

and industry forums.

The terms of reference of the committee were to:

review the performance of corporate governance; and

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 issues discussed by the committee primarily related to audit committees, audit

reports, independent directors, related parties, risk management, directorships and

director compensation, codes of conduct and financial disclosures.

The committee's recommendations in the final report were selected based on parameters

including their relative importance, fairness, accountability, transparency, ease of

implementation, verifiability and enforceability.

The key mandatory recommendations focused on:

strengthening the responsibilities of audit committees;

improving the quality of financial disclosures, including those related to related

party transactions and proceeds from initial public offerings;

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requiring corporate executive boards to assess and disclose business risks in the

annual reports of companies;

introducing responsibilities on boards to adopt formal codes of conduct; the

position of nominee directors; and

stock holder approval and improved disclosures relating to compensation paid to

non-executive directors.

Non-mandatory recommendations included:

moving to a regime where corporate financial statements are not qualified;

instituting a system of training of board members; and

evaluation of performance of board members.

As per the committee, these recommendations codify certain standards of 'good

governance' into specific requirements, since certain corporate responsibilities are too

important to be left to loose concepts of fiduciary responsibility. Their implementation

through SEBI's regulatory framework will strengthen existing governance practices and

also provide a strong incentive to avoid corporate failures.

The Committee noted that the recommendations contained in their report can be

implemented by means of an amendment to the Listing Agreement, with changes made to

the existing clause 49.

Revised Clause 49 [2004]

In October 2004, SEBI amended Clause 49 of the listing

agreement in alignment with the Narayana Murthy Committee

recommendations. These changes primarily strengthened the

requirements in the following areas:

Board composition and procedure

Audit committee responsibilities

Subsidiary companies

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Risk management

CEO/CFO certification of financials and internal controls

Legal compliance

Other disclosures

The revised Clause 49 was effective 1 January 2006.

CASE STUDIES RELATED TO CORPORATE

GOVERNANCE

I) Enron Scam :

Enron was Americas energy based company founded in the year 1985. It was the

result of merger between two well established brands Houston natural gas and

Ohama-based Internorth Inc. Basically it carried out business in producing natural gas

and pipeline operations for the same. It decided to expand its bases further in late

1980s and early 1990 at the places like U.K, Europe, South America and India. In

1999 it launched its broadband service unit and Enron online. Over time, eventually,

Enron claimed 90% of its trades through Enron online. In August 2000, Enron

claimed all time high with profits of more than $90 US. It was ranked 6 th largest

energy company in the world. However February 2001 reported to be start of

downfall of Enrons downfall. It had increased on its debt levels to $37.7 billion

which was almost 91% higher compared to previous 12 months period. Inspite of this,

Enron assets increased to 19.03%. In August, Enrons Chief Executive and Vice-

President Mr. Skilling resigned and Mr. Ken Lay was replaced as Chief Executive

Officer (CEO). Further in October, the company reported its first quarterly loss of$618 million US and reduction in shareholder equity of over $1 billion in four years.

Subsequently, it was reported that U.S. Securities and Exchange Commission is

looking into Enrons transactions with Mr. Fastow for partnership. It was then

reported that Fastow had been replaced as CEO by the head of Enrons industrial

market units, Mr. Jeff McMahon. However, the companys share prices continued to

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decline. In November 2001, J.P. Morgan and Solomon Barney agreed to provide $1

billion in secured credit.

Eventually Enrons market cap tumbled down to $8.9 billion that is 26% drop in

just 1 week. Its asset volatility remained to 20%. In November, Enron reported that it

overstated its earnings dating back to 1997 to almost $600 million. On 9th November

2001, the company reported to deal with its smaller rival Dynegy Inc. to buy Enrons

stock at $9 billion. Chevron Texaco agreed to inject $ 1.5 billion fresh capital

immediately. Enron then disclosed that a deterioration of its credit ratings could

accelerate repayment of the $690 million loan. However, major credit rating agencies

downgraded its bonds & as a result Dynegy terminated to buy Enron. Enron

temporarily suspended all its payments other than those necessary to maintain core

operations. In December 2001, Enron finally filed for Chapter 11 bankruptcy and hit

Dynegy with a $10 billion breach of contract lawsuit.

II) WordCom Scandal :

WorldCom was a US based telecommunications company. It had reported to

misrepresent the financial statements to the extent of $4 billion. The companyadmitted to resort to fraudulent accounting practices for five quarters, which includes

four quarters of 2001 and the first quarter of 2002. WorldCom was started by Bill

Fields in Hattiesburg, Mississippi, in 1983 under the name 'Long Distance Discount

Services' (LDDS), providing long distance telecommunication (telecom) services.

Later in the year 1992, LDDS acquired Advanced Telecommunications Corp. In

1995, LDDS changed its name to WorldCom as it thought it could achieve

consistency along with global presence thereby acquiring telecom-related companies

across the world. In 1998, WorldCom bought the network units of America Online

and CompuServe. However WorldComs biggest deal was acquiring Microwave

Communication Inc at an estimated price of $ 40 billion. On October 1999, Sprint

Corporation and MIC WorldCom announced the merger of $129 million between the

two.

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Details of the fraud:

CEO Bernard Ebbers became wealthy from the increasing price of his holdings in

WorldCom common stock. In the year 2000, WorldCom suffered a serious slowdown

when U.S. Justice Board asked them to abandon the merger with Sprint Corporation. By

that time, WorldComs stock started declining and Ebbers was in immense pressure from

the banks to cover margin calls on his WorldCom stock. Later in 2002, Ebbers was

replaced by Mr. John Sidgmore. After Ebbers resignation, it got revealed that under his

direction, Mr. Scott Sullivan (CFO), Mr. David Myers (Controller) and Mr. Buford Yates

(Director of General Accounting) & the company used fraudulent accounting practices

from 1999 to year 2000.

The fraud was accomplished primarily in two ways:

1) Under-reporting line costs (interconnection expenses with other telecommunication

companies) by capitalizing these costs on the balance sheet rather than properly

expensing them.

2) Inflating revenues with bogus accounting entries from "corporate unallocated revenue

accounts".

The U.S. Securities and Exchange Commission (SEC) launched an investigation into

this matter on June 26, 2002 and on the basis of which it was estimated that companys

total assets were inflated at the rate $11 billion. On July 21, 2002, WorldCom filed for

Chapter 11 bankruptcy protection.

III) Satyam Scam :

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Satyam Computers services limited was a consulting and an Information Technology

(IT) services company founded by Mr. Ramalingam Raju in 1988. It was Indias fourth

largest company in Indias IT industry, offering a variety of IT services to many types of

businesses. Its networks spanned from 46 countries, across 6 continents and employing

over 20,000 IT professionals. On 7th January 2009, Satyam scandal was publicly

announced & Mr. Ramalingam confessed and notified SEBI of having falsified the

account.

Raju confessed that Satyam's balance sheet of 30 September 2008 contained:

Inflated figures for cash and bank balances ofRs 5,040 crores (US$ 1.04 billion)

[as against Rs 5,361 crores (US$1.1 billion) reflected in the books].

An accrued interest of Rs. 376 crores (US$ 77.46 million) which was non-

existent.

An understated liability ofRs. 1,230 crores (US$253.38 million) on account of

funds which were arranged by himself.

An overstated debtors' position ofRs. 490 crores (US$ 100.94 million) [as against

Rs. 2,651 crores (US$546.11 million) in the books].

The letter by B Ramalinga Raju where he confessed of inflating his companys revenues

contained the following statements:

"What started as a marginal gap between actual operating profit and the one reflected in

the books of accounts continued to grow over the years. It has attained unmanageable

proportions as the size of company operations grew significantly [annualised revenue run

rate of Rs 11,276 crores (US$ 2.32 billion) in the September quarter of 2008 and official

reserves of Rs 8,392 crores (US$ 1.73 billion)]. As the promoters held a small percentage

of equity, the concern was that poor performance would result in a takeover, thereby

exposing the gap. The aborted Maytas acquisition deal was the last attempt to fill the

fictitious assets with real ones. It was like riding a tiger, not knowing how to get off

without being eaten.

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The Scandal:

The scandal all came to light with a successful effort on the part of investors to

prevent an attempt by the minority shareholding promoters to use the firms cash reserves

to buy two companies owned by them i.e. Maytas Properties and Maytas Infra. As a

result, this aborted an attempt of expansion on Satyams part, which in turn led to a

collapse in price of companys stock following with a shocking confession by Raju, The

truth was its promoters had decided to inflate the revenue and profit figures of Satyam

thereby manipulating their balance sheet consisting non-existent assets, cash reserves and

liabilities.

The probable reasons:

Deriving high stock values would allow the promoters to enjoy benefits allowing

them to buy real wealth outside the company and thereby giving them opportunity to

derive money to acquire large stakes in other firms on another hand. There could be the

reason as to why Rajus family build its shareholding and shed it when required.

After the scandal, on 10 January 2009, the Company Law Board decided to bar the

current board of Satyam from functioning and appoint 10 nominal directors. On 5th

February 2009, the six-member board appointed by the Government of India named A. S.

Murthy as the new CEO of the firm with immediate effect. The board consisted of:

1) Banker Deepak Parekh.

2) IT expert Kiran Karnik.

3) Former SEBI member C Achuthan S Balakrishnan of Life Insurance Corporation.

4) Tarun Das, chief mentor of the Confederation of Indian Industry and

5) T N Manoharan, former President of the Institute of Chartered Accountants of

India.

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WHISTLE BLOWER POLICY

Whistleblowing occurs when an employee or worker provides certain types of

information, usually to the employer or a regulator, which has come to their attention

through work. The whistleblower is usually not directly & personally affected by the

danger or illegality. Whistleblowing occurs when a worker raises a concern about danger

or illegality that affects others, for example members of the public. Both employers and

employees may have a lot at stake when whistleblowing occurs. Where malpractice is

shown to have occurred, this may reflect badly on management systems, or on individual

managers. Whistleblowers may fear that management will be tempted to 'shoot the

messenger'. A clear procedure for raising issues will help to reduce the risk that serious

concerns are mishandled, whether by the employee or by the organisation. But it is alsoimportant for workers to understand that there will be no adverse repercussions for

raising cases with their employer. In addition, in some sectors there are separate legal

requirements requiring a whistleblowing policy and employers who do have a policy are

less likely to be taken to an employment tribunal. Many organisations have reported a

positive benefit from their whistleblowing procedures. For example, Great Britian

Treasurys Annual Fraud Reports record a marked increase in the number of Whitehall

frauds discovered and stopped by staff raising concerns following the introduction of

whistle blowing policies since the PIDA (Public Interest Disclosure Act, 1998) came into

force. The cost-benefit analysis section of the Financial Services Authoritys policy paper

concludes that respondents all agreed that the costs in implementing or reassessing

whistleblowing procedures were minimal.

Employers should make clear to employees what to do if they come across

malpractices in the workplace. This should encourage employees to inform someone with

the ability to do something about the problem. Guidance will need to reflect thecircumstances of individual employers, but it should make clear:

The kinds of actions targeted by the legislation are unacceptable and the employer

attaches importance to identifying and remedying malpractice (specific examples

of unacceptable behaviour might usefully be included).

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Employees should inform their line manager immediately if they become aware

that any of the specified action is happening (or has happened, or is likely to

happen).

In more serious cases, (e.g. if the allegation is about the actions of their line

manager), the employee should feel able to raise the issue with a more senior

manager, bypassing lower levels of management.

Whistleblowers can ask for their concerns to be treated in confidence and such

wishes will be respected.

Employees will not be penalised for informing the management about any of the

specified actions.

Laws related to Whistleblowing concept :

A) In U.S, Whistleblower law is part of Employment Law, as well as Employment

Discrimination,

Whistleblower law- US

Sarbanes Oxley Act of 2002

A landmark whistleblower law also called the corporate and criminal Fraud

Accountability Act of 2002. It protects employees of publicly- traded

corporations from retaliation for reporting alleged violations of any rule or

regulation of the Securities and Exchange Commission, or any provision of

Federal law relating to fraud against shareholders.

Whistleblowe4r disclosures Us Office of Special Counsel

OSCs Disclosure Unit (DU) serves as a safe conduit for the receipt and

evaluation of whistleblower disclosures from federal employees, former

employees, and applicants for federal employment. 5 U. S. C. and 1213

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Whistleblower Protection Act of 1989

Act that amend title 5, United States Code, to strengthen the protections available to

Federal employees against prohibited personnel practices, and for other purposes.

Whistleblower Protection Enhancement Act of 2007

to amend title 5, United States Code, to clarify which disclosures of information

are protected from prohibited personnel practices; to require a statement in non

disclosure policies, forms, and agreement to the effects that such policies, forms,

and agreements to the effects that such policies, forms and agreements are

consistent with certain disclosure protections, and for other purposes.

Whistle blower Protection Program US Department of Labour

The occupational safety and health Act is designed to regulate employment

conditions relating to occupational safety and health and to achieve safer and

more healthful workplaces throughout the nation. The Act provides for a wide

range of substantive and procedural rights for employees and representatives of

employees.

Whistleblower Protections- US department of Labor

The Occupational Safety and Health Act (OSH Act ) and a number of other laws

protect worker against retaliation for complaining to their employers, union, the

Occupational Safety and Health Administration (OSHA), or other government

agencies about unsafe or unhealthful conditions in the workplace, environmental

problems, certain public safety hazards, and certain violations of federal

provisions concerning securities fraud, as well as for engaging in other relates

protected activities. Whistleblowers may not be transferred, denied a raise, have

their hours reduced, or be fired or punished in any other way because they have

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exercised any right afforded to them under one of the laws that protect

whistleblowers.

B) In India, laws related to whistleblowing concept are:

1) Clause 49 of the Listing Agreement

2) Limited Liability Partnership Act, 2008.

Case for whistleblowing law in India

The term `whistle-blowing' is a relatively recent entry into the vocabulary of public and

corporate affairs, although the phenomenon itself is not new. It refers to the process by

which insiders go public with their claims of malpractices by, or within, organisations -

usually after failing to remedy the matters from the inside, and often at great personal risk

to themselves. Sometimes the co