In early 1999, Securities and Exchange
Board of India (SEBI) had set up a committee under Shri Kumar Mangalam
Birla, member SEBI Board, to promote and raise the standards of good corporate
governance. The report submitted by the committee is the first formal
and comprehensive attempt to evolve a ‘Code of Corporate Governance',
in the context of prevailing conditions of governance in Indian companies,
as well as the state of capital markets.
The Committee's terms of the reference
were to:
- suggest suitable amendments to the
listing agreement executed by the stock exchanges with the companies
and any other measures to improve the standards of corporate governance
in the listed companies, in areas such as continuous disclosure of material
information, both financial and non-financial, manner and frequency
of such disclosures, responsibilities of independent and outside directors;
- draft a code of corporate best practices;
and
- suggest safeguards to be instituted
within the companies to deal with insider information and insider trading.
The primary objective of the committee
was to view corporate governance from the perspective of the investors
and shareholders and to prepare a ‘Code' to suit the Indian corporate
environment.
The committee had identified the
Shareholders, the Board of Directors and the Management
as the three key constituents of corporate governance and attempted to
identify in respect of each of these constituents, their roles and responsibilities
as also their rights in the context of good corporate governance.
Corporate governance has several claimants
–shareholders and other stakeholders - which include suppliers, customers,
creditors, and the bankers, the employees of the company, the government
and the society at large. The Report had been prepared by the committee,
keeping in view primarily the interests of a particular class of stakeholders,
namely, the shareholders, who together with the investors form the principal
constituency of SEBI while not ignoring the needs of other stakeholders.
Mandatory and non-mandatory recommendations
The committee divided the recommendations
into two categories, namely, mandatory and non- mandatory. The recommendations
which are absolutely essential for corporate governance can be defined
with precision and which can be enforced through the amendment of the
listing 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.
Mandatory Recommendations:
- Applies To Listed Companies With Paid
Up Capital Of Rs. 3 Crore And Above
- Composition Of Board Of Directors
– Optimum Combination Of Executive & Non-Executive Directors
- Audit Committee – With 3 Independent
Directors With One Having Financial And Accounting Knowledge.
- Remuneration Committee
- Board Procedures – Atleast 4 Meetings
Of The Board In A Year With Maximum Gap Of 4 Months Between 2 Meetings.
To Review Operational Plans, Capital Budgets, Quarterly Results, Minutes
Of Committee's Meeting.Director Shall Not Be A Member Of More Than 10
Committee And Shall Not Act As Chairman Of More Than 5 Committees Across
All Companies
- Management Discussion And Analysis
Report Covering Industry Structure, Opportunities, Threats, Risks, Outlook,
Internal Control System
- Information Sharing With Shareholders
Non-Mandatory Recommendations:
- Role Of Chairman
- Remuneration Committee Of Board
- Shareholders' Right For Receiving
Half Yearly Financial PerformancePostal Ballot Covering Critical Matters
Like Alteration In Memorandum Etc
- Sale Of Whole Or Substantial Part
Of The Undertaking
- Corporate Restructuring
- Further Issue Of Capital
- Venturing Into New Businesses
As per the committee, the recommendations
should be made applicable to the listed companies, their directors, management,
employees and professionals associated with such companies, in accordance
with the time table proposed in the schedule given later in this section.
Compliance with the code should be both in letter and spirit and should
always be in a manner that gives precedence to substance over form. The
ultimate responsibility for putting the recommendations into practice
lies directly with the board of directors and the management of the company.
The recommendations will apply to all
the listed private and public sector companies, in accordance with the
schedule of implementation. As for listed entities, which are not companies,
but body corporates (e.g. private and public sector banks, financial institutions,
insurance companies etc.) incorporated under other statutes, the recommendations
will apply to the extent that they do not violate their respective statutes,
and guidelines or directives issued by the relevant regulatory authorities
.
The Committee recognizes that compliance
with the recommendations would involve restructuring the existing boards
of companies. It also recognizes that some companies, especially the smaller
ones, may have difficulty in immediately complying with these conditions.
The recommendations were implemented
through Clause 49 of the Listing Agreements, in a phased manner by SEBI.
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