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
The key mandatory recommendations focused on:
Non-mandatory recommendations included:
- strengthening the responsibilities of audit committees;
- improving the quality of financial disclosures, including
those related to related party transactions and proceeds from initial
- 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.
- 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.