S. I. E. S. COLLEGE OF COMMERCE & ECONOMICS T.V CHIDAMBARAM MARG, Mumbai 400022.

BACHELOR OF COMMERCE (BANKING AND INSURANCE)

2007 - 2008

Corporate Governance for Private Sector Banks in India

Project guide: Name of the Student: Reshamvala Nema Saleem Seat No: Name of the coordinator: Date:

DECLARATION
I, Reshamvala Nema Saleem of S. I. E. S. college of T.Y.B.B.I. (Semester V) hereby declare that I have completed this project on
CORPORATE GOVERNANCE FOR PRIVATE SECTOR BANKS IN

I NDIA in the Academic year 2007-2008 . The information submitted is true and original to the best of my knowledge.

(Signature of the student)

CERTIFICATE
I, Professor AARTHI hereby certify that Reshamvala Nema Saleem of S. I. E. S. College of T.Y. B.B.I. (Semester V) has completed the project on corporate governance for private sector banks in India in the Academic Year 2007 -2008.The information submitted Is true and original to the best of my knowledge.

_______________ Signature of the Project Co-coordinator Signature of the Principal

Stamp

ACKNOWLEDGEMENT
I, Reshamvala Nema Saleem, the student of S. I.E.S. pursuing my third year of Bachelors of Banking & Insurance, would like to extend my sincere gratitude to all those people who have helped me in the successful completion of my Project on corporate governance for private sector banks in India. I would like to thank all Professors and course coordinator Professor to whom we shall forever remain indebt for setting the foundation for this course and for assisting in the project whenever help was required. I also thank all my colleagues who, through one way or the other may have helped me in my project. Lastly special thank to parents for their constant support & assistance, to make these project worth presenting before you.

SYNOPSIS
Corporate governance provides a systematic guidance to the business world of India, to help them to carry good corporate practices. These practices deal with transparency, accountability and the fairness with which business need to be governed. The concept of corporate governance has been gaining increasing importance on the backdrop of Global competition and at the same time it is under close scrutiny of the regulatory bodies in India. The project begins with underlining the objectives of the study. The first chapter of the project is the private sector banks in India, which talks about the meaning of private sector banks. The exclusive list of private sector banks functioning in India is also given. Thereafter, it explains the concept of corporate governance, its emergence, historical perspective, the meaning of term corporate governance and the need for corporate governance. Next section deals with the recommendations of some of the prominent committees formed to look into the corporate governance aspects. Such committees include Cadbury Committee from England and CII from India. This project deals with the recommendations of these committees in detail. The regulatory framework and the legal stipulations that is, the SEBI Guidelines on corporate governance are explained in the fourth chapter. The next chapter deals with the enhancing corporate governance practices for banking organizations recommended by the Basel Committee on Banking Supervision The project also explains the recent RBI guidelines on corporate governance in private sector banks. The project ends with a case study on CITIGROUP stating its corporate governance principles and the closure of Citigroup's Private Banking business in Japan.

INDEX
SR.NO 1 2 TITLE PRIVATE SECTOR BANKS IN INDIA CONCEPT OF CORPORATE GOVERNANCE DEFINATION PRINCIPLES HISTORY EMERGENCE PARTIES INVLOVED IN CORPORATE GOVERNANCE 3 NEED FOR CORPORATE GOVERNANCE RECOMMENDATIONS OF THE VARIOUS COMMITTES CADBURY COMMITTEE ON CORPORATE GOVERNANCE CII CONFEDERATION OF INDIAN INDUSTRIES 4 LEGAL COMPLAINCE - REGUALTORY FRAMEWORK SEBI GUIDELINES 5 ENHANCING CORPORATE GOVERNANCE FOR BANKING RECENT RBI GUIDELINES FOR PRIVATE SECTOR BANKS

PRIVATE SECTOR BANKS IN INDIA

PRIVATE SECTOR BANKS IN INDIA

Private sector banks are those that are owned and controlled by private individuals and corporations. Private banks have been in action in India for a very long time. In July 1969 GOI nationalized 14 banks having deposits of Rs.50crores and above. Again, in 1980, the government acquired 6 more banks with deposits of more than Rs.200crores. These two rounds of nationalization were a set back to the development of banks in the private sector. Not many private sector banks started operations in India during the period 1969 to 1993. The amendment to Banking Regulation Act in 1993 paved the way for entry of new private sector banks and a number of new banks launched by both industrial and other business houses have started business in India. However, these banks are also subject to rules and regulations of RBI and are functioning under its supervision.

Nearly 25 banks belong to the private sector after nationalization and these banks are over 50 years old known as Old Private Sector Banks (OPSB). Some of these are Karur Vysya Bank, Lakshmi Vilas Bank, Nedungadi bank etc. A committee was constituted under the chairmanship of M Narsimham, in the year 1991 and 1998 to examine the structure and functioning of the existing Indian financial system. Based on the recommendations of the committee the Government

permitted individuals, corporations, foreign and non-resident Indians to open private banks with a paid up capital of at least Rs.100crores. These banks came into existence after 1995 and are popularly known as New Private Sector Banks. (NPSBs). IndusIand was the first private sector bank to start operations in the post liberalization era. Presently there are nine NPSBs working in India like Global Trust Bank, IndusInd Bank, ICICI Bank etc

Private Sector Banks In India

Old private sector banks

Bharat Overseas Bank City Union Bank Development Credit Bank Dhanalakshmi Bank Lord Krishna Bank SBI Commercial & International Bank Tamilnadu Mercantile Bank The Bank of Rajasthan The Baneras State Bank The Catholic Syrian Bank The Federal Bank The Ganesh Bank of Kurduwad The Jammu & Kashmir Bank The Karnataka Bank The Karur Vyasya Bank etc.

New private sector banks

Bank of Punjab HDFC Bank ICICI Bank IDBI Bank Indus Ind Bank UTI Bank

CONCEPT OF GOVERNANCE

DEFINATION The term corporate governance has come to mean by two things.

the processes by which companies are directed and controlled. a field in economics, which studies the many issues arising from the separation of ownership and control.

Relevant rules include applicable laws of the land as well as internal rules of a corporation. Relationships include those between all related parties, the most important of which are the owners, managers, directors of the board, regulatory authorities and to a lesser extent employees and the community at large. Systems and processes deal with matters such as delegation of authority. The corporate governance structure spells out the rules and procedures for making decisions on corporate affairs. It also provides the structure through which the company objectives are set, as well as the means of attaining and monitoring the performance of those objectives. Corporate governance is used to monitor whether outcomes are in accordance with plans and to motivate the organisation to be more fully informed in order to maintain or alter organisational activity. Corporate governance is the mechanism by which individuals are motivated to align their actual behaviours with the overall participants. GOVERNANCE V/S CORPORATE GOVERNANCE

What is Governance: -The term governance is common parlance is used to mean the way people are governed and the way the affairs of the state are administered and regulated. This concept, drawn from the public

administration, has received increasingly greater attention in business world in the sense of direction and control of companies by their top management. Corporate governance means the idea of ensuring proper management of companies through the institutions and mechanisms available to the shareholders. The Cadbury Committee Report (1991) defines corporate governance as A system, by which corporates are directed and controlled. Corporate governance is a system by which a corporate entity is directed and controlled in a given economic, political and social environment. It also entails the interplay between different stakeholders of a corporation, viz., board of directors, equity holders, debt holders, employees, customers and government. It deals with how a company fulfills its obligations to investors and other stakeholders. It is about creating shareholder wealth while ensuring a fair play to all other stakeholders and society at large. Stakeholders mean people other than shareholders who have significant interest in the company. They can be creditors, employees of the company, government, society etc. In a company, shareholders are the owners of the company and their responsibilities lie in selecting the Board of Directors. Board of Directors is a formal body responsible for the governance of corporate functions. They review the affairs of the company and direct them. CORPORATE GOVERNANCE IN INDIAN CONTEXT In India the concept of corporate governance is gaining importance because of two reasons. A) After liberalization, there has been institutionalization of financial markets, FIs and mutual funds become dominant players in the stock

markets. The market began to discriminate between wealth destroyers. Corporate governance is a critical byproduct of market discipline. B) Another factor is the increased role being played by the private sector. Companies are realizing that shareholders love to stay with those corporate that create values for their shareholders. This is only possible by adopting fair, honest and transparent corporate practices. PRINCIPLES Key elements of good corporate governance principles include honesty, trust and integrity, openness, performance orientation, responsibility and accountability, mutual respect, and commitment to the organisation. Of importance is how directors and management develop a model of governance that aligns the values of the corporate participants and then evaluate this model periodically for its effectiveness. In particular, senior executives should conduct themselves honestly and ethically, especially concerning actual or apparent conflicts of interest, and disclosure in financial reports. Commonly accepted principles of corporate governance include:

Rights and equitable treatment of shareholders: Organisations should respect the rights of shareholders and help shareholders to exercise those rights. They can help shareholders exercise their rights by effectively communicating information that is understandable and accessible and encouraging shareholders to participate in general meetings. Interests of other stakeholders:

Organisations should recognise that they have legal and other obligations to all legitimate stakeholders.

Role and responsibilities of the board:

The board needs a range of skills and understanding to be able to deal with various business issues and have the ability to review and challenge management performance. It needs to be of sufficient size and have an appropriate level of commitment to fulfill its responsibilities and duties. There are issues about the appropriate mix of executive and non-

executive directors. The key roles of chairperson and CEO should not be held by the same person.

Integrity and ethical behaviour:

Organisations should develop a code of conduct for their directors and executives that promotes ethical and responsible decision making.

Disclosure and transparency:

Organisations should clarify and make publicly known the roles and responsibilities of board and management to provide shareholders with a level of accountability. They should also implement procedures to independently verify and safeguard the integrity of the company's financial reporting. Disclosure of material matters concerning the organisation should be timely and balanced to ensure that all investors have access to clear, factual information.

HISTORICAL PERSPECTIVE OF CORPORATE GOVERNANCE The seeds of modern Corporate Governance were probably sown by the Watergate scandal in the United States. As a result of subsequent investigations, US regulatory and legislative bodies were able to highlight control failures that had allowed several major corporations to make illegal political contributions and to bribe government officials. This led to the development of the Foreign and Corrupt Practices Act of 1977 in USA that contained specific provisions regarding the establishment, maintenance and review of systems of internal control. This was followed in 1979 by the Securities and Exchange Commission of USA's proposals for mandatory reporting on internal financial controls. In 1985, following a series of high profile business failures in the USA, the most notable one of which being the Savings and Loan collapse, the Treadway Commission was formed. Its primary role was to identify the main causes of misrepresentation in financial reports and to recommend ways of reducing incidence thereof. The Treadway report published in 1987 highlighted the need for a proper control environment, independent audit committees and an objective Internal Audit function. It called for published reports on the effectiveness of internal control. It also requested the sponsoring organizations to develop an integrated set of internal control criteria to enable companies to improve their controls.

Accordingly COSO (Committee of Sponsoring Organizations) was born. The report produced by it in 1992 stipulated a control framework which has been endorsed and refined in the four subsequent UK reports: Cadbury, Rutteman, Hampel and Turnbull. While developments in the United States stimulated debate in the UK, a spate of scandals and collapses in that country in the late 1980s and early 1990's led shareholders and banks to worry about their investments. These also led the Government in UK to recognize that the then existing legislation and self-regulation were not working.

EMERGENCE OF CORPORATE GOVERNANCE The term Corporate Governance has found importance only since the decade of the 1980s. It is mainly due to the financial scandals which rocked the UK in the 1990s, where billions of pounds were lost. Notable cases of the collapse of corporations were BCCI, Polly Peck and the pension funds of the Maxwell Communications Group. The focus on the issues of corporate governance culminated in the Cadbury Report on the financial aspects of corporate governance in 1992, the Greenbury Report on directors' remuneration in 1995, the Preliminary and Final Hampel Reports on corporate governance in 1997 and 1998. Also countries like South Africa, France, Belgium, Japan and India have been discussing issues on corporate governance for some time now. In India

the debate on corporate governance has stimulated mainly because of the work done in this area by the Government of India, the SEBI and the Confederation of Indian Industry (CIl). Today the role of the Board of Directors and that of the management team in running a company, in promoting and safeguarding the interests of shareholders and other stakeholders, its manner of functioning, the pattern of remuneration and incentives, the voting procedure and protocol etc. are receiving a great deal of learned attention as are the issues of accountability, enterprise and initiative. There has been an unprecedented growth in international trade and investment. MNCs today command enormous financial and non-financial resources have a distinct global presence, enjoy a great deal of economic and political clout. With the growing focus on liberalization and globalization, Capital markets, local and global, can be tapped far more easily by companies that perform satisfactorily. Studies of firms in India and abroad have shown that markets and investors take notice of well-managed companies, respond positively to them, and reward such companies. A common feature of such companies is that the have systems in place which allow sufficient freedom to boards to take decisions towards the progress of their companies, while remaining within the framework of accountability. In other words they have a system of good corporate governance.

WHO IS INVOLVED IN CORPORATE GOVERNANCE? THE TRIPOD

Corporate Governance Tripod

Management

Board of Directors

Shareholders

Three entities - Management, the board of directors and shareholders play an important role to ensure good corporate governance. They need to understand their roles properly and act in harmony with each other. The Management: The CEO is responsible for actually running the business. He/she has to ensure the integrity if the fiscal and managerial controls to maintain a high level of trust of both employees and public. The Board of Directors: The directors should be accountable to shareholders and responsible for managing successful and productive relationships with the corporation's stakeholders. The directors of the board are required to act in what they believe to be in the best interests of the company, regardless of specific view expressed by individual (even controlling) shareholders.

The Shareholders: They own the company and they require timely information about performance and results. The shareholders should also be informed about the rights, rules and procedures governing them and enabling them to participate effectively.

NEED FOR CORPORATE GOVERNANCE

GLOBALIZATION An efficient tapping of global markets is a critical source of generating value for owners in most businesses today. The sweeping changes brought about by globalization include factors like global competition for capital, global research, international portfolio diversification and convergence of accounting standards. Indian companies today realize that there are fewer boundaries in accessing overseas capital markets. Many companies in India today are seeking a listing in the other countries. Overseas, investors are accustomed to high levels of transparency and disclosures in offer documents and shareholder correspondence such as annual reports. Corporates, therefore, must have international standards of accounting practices, disclosure and governance. In doing so, they will reduce risk from the investors perspective, reduce their cost of capital and enhance their valuation. Companies and countries are interested in the development of standards and practices that will be accepted in all the world's major securities markets. Need of investors and the capital markets are paramount in this. CONSOLIDATION Global consolidation in investment management is a trend that has been gathering momentum in the nineties. This means that institutions will impose

greater leverage on company management. As information requirements become larger, they become more complex and the role of investor relations becomes even more important. The professional institutions in India are setting up guidelines or codes in line with international standards. They aim at transparency, accountability and protection of minority shareholders by issuing proper guidance to the directors, management and auditors. With this investors will get the same answer from the balance sheet of an Indian company or that of UK or US. COMPETITION Competitive activity is increasing in most industries. This leads investors to use more sophisticated valuation methodologies before parting with their capital. This forces changes in the ways companys function. They tend to increase investor-company contact. They also realize the need to do in-house research to constantly benchmark themselves against competition. A correct portrayal of this then helps company's image with investors

Further, non-financial factors will become far more significant factors in understanding the leading indictors of value. They mainly include environmental friendliness,' Quality of products, service to customers and employee participation, each crucial for good corporate governance. The most common financial aspect is employee Stock Option Plans (ESOPs). Some corporates, mainly in the technology and knowledge based industries, are introducing ESOPs and revising remuneration packages to retain their employees in this competitive environment

 TECHNOLOGY Electronic reporting is taking off with the spread of Internet and improved communication technologies. By changing information distribution and content, the electronic provision of information or content, the electronic provision of information or reporting will become the standard of the future. This will improve market efficiency and reduce the cost of equity because it eliminates or reduces uncertainty. The small investor will have a more equal footing with large investors in terms of access to information. The enfranchisement of the ultimate owners of capital by allowing them direct access to the companies in which their capital has been invested will lead to greater accountability in the governance chain. The web and media shall make for better information access to the retail investors. The information, being in the pubic domain will be shared with investors and be available to anyone anywhere in the world.

RECOMMENDATIONS OF THE VARIOUS COMMITTIES

CADBURY COMMITTEE ON CORPORATE GOVERNANCE

The stated objective of Cadbury committee was to help to raise the standards of corporate governance and the level of confidence in financial reporting and auditing by setting out clearly what it sees as the respective responsibilities those involved in corporate governance. The Cadbury committee report published in December 1992 was well received. While the recommendations themselves were not compulsory, the companies listed on the London Stock Exchange were required to clearly state in their accounts whether or not code had been followed. The companies who did not comply were required to explain the reasons for that. Recommendations of the Cadbury committee The Cadbury Code of Best Practices had 19 recommendations. The recommendations are in the nature of guidelines relating to the Board of Directors, Non-executive Directors, Executive Directors and those on Reporting & Control. Relating to the Board of Directors these are: The Board should meet regularly, retain full and effective control over the company and monitor the executive management. There should be a clearly accepted division of responsibilities at the head of a company, which will ensure balance of power and authority,

such that no individual has unfettered powers of decision. In companies where the Chairman is also the Chief Executive, it is essential that there should be a strong and independent element on the Board, with a recognized senior member. The Board should include non-executive Directors of sufficient caliber and number for their views to carry significant weight in the Board's decisions. The Board should have a formal schedule of matters specifically reserved to it for decisions to ensure that the direction and control of the company is firmly in its hands. There should be an agreed procedure for Directors in the furtherance of their duties to take independent professional advice if necessary, at the company's expense. Directors should have access to the advice and services of the Company Secretary, who is responsible to the Board for ensuring that Board procedures are followed and that applicable rules and regulations are complied with. Any question of the removal of Company Secretary should be a matter for the Board as a whole. Relating to the Non-executive Directors recommendations are Non-executive Directors should bring an independent judgment to bear on issues of strategy, performance, resources, including key appointments, and standards of conduct

 The majority should be independent of the management and free from any business or other relationship, which could materially interfere with the exercise of their independent judgment, apart from their fees and shareholding. Their fees should reflect the time, which they commit to the company. Non-executive Directors should be appointed for specified terms and reappointment should not be automatic. Non-executive Directors should be selected through a formal process and both, this process and their appointment, should be a matter for the Board as a whole. For the Executive Directors the recommendations are: Directors' service contracts should not exceed three years without shareholders' approval. There should be full and clear disclosure of their total emoluments and those of the Chairman and the highest-paid Directors, including pension contributions and stock options. Separate figures should be given for salary and performance-related elements and the basis on which performance is measured should be explained. Executive Directors' pay should be subject to the recommendations of a Remuneration Committee made up wholly or mainly of NonExecutive Directors.

For Reporting and Controls, the Cadbury Code of Best Practices stipulate that: It is the Board's duty to present a balanced and understandable assessment of the company's position. The Board should ensure that an objective and professional relationship is maintained with the Auditors. The Board should establish an Audit Committee of at least 3 NonExecutive Directors with written terms of reference, which deal clearly with its authority and duties. The Directors should explain their responsibility for preparing the accounts next to a statement by the Auditors about their reporting responsibilities. The Directors should report on the effectiveness of the company's system of internal control. The Directors should report that the business is a going concern, with supporting assumptions or qualifications as necessary.

CII- Confederation of Indian Industries

In 1996, CII took a special initiative on Corporate Governance the first institutional initiative in Indian industry. The objective was to develop and promote a code for Corporate Governance to be adopted and followed by Indian companies, be these in the Private Sector, the Public Sector, Banks or Financial Institutions, all of which are corporate entities. The Important Recommendations made by committee formed by CII are as follows: Board of Directors The key to good corporate governance is a well functioning, informed board of directors. The board should have a core group of excellent, professionally acclaimed non-executive directors who understand their dual role of appreciating the issues put forward by management, and of honestly discharging their fiduciary responsibilities towards the companys shareholders as well as creditors.

Recommendation 1: Single Tier System There is no need to adopt the German system of two-tier boards to ensure desirable corporate governance. A single board, if it performs well, can maximize long-term shareholder value just as well as a two- or multi-tiered

board. Equally, there is nothing to suggest that a two-tier board, per se, is the panacea to all corporate problems. Recommendation 2: Appointment Of Non-Executive Directors Any listed companies with a turnover of Rs.100crores and above should have professionally competent, independent, non-executive directors, who should constitute At least 30 percent of the board if the Chairman of the company is a nonexecutive director, or At least 50 percent of the board if the Chairman and Managing Director is the same person. Recommendation 3 : Cap On Directorship No single person should hold directorships in more than 10 listed companies. This ceiling excludes directorships in subsidiaries (where group has over 50% equity stake) or associate companies (where group has over 25% but not more than 50% equity stake )

Recommendation 4: Role Of Non-Executive Directors For non-executive directors to play a material role in corporate decisionmaking and maximizing long-term shareholder value, they need to Become active participants in boards, not passive advisors; Have clearly defined responsibilities within the board such as the Audit Committee; and Know how to read a balance sheet, profit and loss account, cash flow statements and financial ratios and have some knowledge of various company laws. This, of course, excludes those who are invited to join boards as experts in other fields such as science and technology.

Recommendation 5: Key information that must be reported to and placed before the board must contain: Annual operating plans and budgets, together with up-dated long term plans. Capital budgets, manpower and overhead budgets. Quarterly results for the company as a whole and its operating or business segments. Internal audit reports, including cases of theft and dishonesty of a material nature. Show cause, demand and prosecution notices received from revenue authorities, which are considered to be materially important. (Material nature is any exposure that exceeds 1 percent of the companys net worth). Fatal or serious accidents, dangerous occurrences, and any effluent or pollution problems. Quarterly details of foreign exchange exposure and the steps taken by management to limit the risks of adverse exchange rate movement, if material. Recommendation 6 : Setting Up Of Audit Committee Listed companies with either a turnover of over Rs.100crores or a paid-up capital of Rs.20crores should set up Audit Committees within two years. Audit Committees should consist of at least three members, all drawn from a companys non-executive directors, who should have adequate knowledge of finance, accounts and basic elements of company law. divisions

REGULATORY FRAMEWORK:

LEGAL COMPLAINCE

SEBI Guidelines On Corporate Governance Board Of Directors :

i. ii. iii. The Non-executive Directors on board should not be less than fifty percent of the Board of Directors, Or In case of a non-executive chairman, at least one-third of board should comprise of independent directors. A director shall not be a member in more than 10 committees or act as Chairman of more than 5 committees.

Audit Committee:
A. Set Up Of Audit Committee

Minimum of three members -all being Non-executive Directors. Majority of the members to be independent. One member must have financial and accounting knowledge Chairman of the committee shall be an independent Director.

B.

Functioning Of Audit Committee

Audit committee shall meet at least thrice a year. One meeting to be held before finalization of Annual Accounts. Other two meeting should be held at interval of 6 months. C. Power Of Audit Committee

To investigate any activity within its terms of reference. To seek information from any employee. Remuneration Of Directors Remuneration of non-executive directors to be decided by the Board of Directors.

Board procedure i. ii. The Board meeting to be held at least four times a year. The difference of two Board meeting should not be more than four months.

Management The Directors report and the Management Discussions and Analysis report should contain information on following matters i. ii. iii. iv. Industry structure and developments. Opportunities and Threats. Outlook. Risk and concerns.

Shareholders The shareholders are to be provided following information before appointment of a new director or re-appointment of a director. i. ii. iii. Brief resume of the director. Nature of his expertise in specific functional areas; and Names of companies in which the person also holds the directorship and the membership of Committees of the board.

Quarterly results, presentation etc. made by companies to analysts shall be put on company's web site. A committee under the name "Shareholders/ Investors Grievances Committee" to be set up to specifically look into the redressing of shareholder and investors complaints. Report On Corporate Governance There shall be a separate section on corporate governance in annual report of the company. The suggested list of items to be included in this report is given as follows: A brief statement of companys philosophy on code of governance

Board Of Directors Composition and category of directors, for example, promoter, executive, non-executive, nominee Attendance of each director at board meetings and at the AGM Number of board meetings held and dates on which held Audit Committee Composition, name of members, and chairperson Meeting and attendance during meeting Remuneration Committee Composition, name of members, and chairperson Attendance during meeting Remuneration policy Shareholders Committee Number of Shareholders complaints received so far Number of pending share transfers

ENHANCING CORPORATE GOVERNANCE

FOR
BANKING ORGANISATIONS

INTRODUCTION

Banking supervision cannot function if sound corporate governance is not in place and, consequently, banking supervisors have a strong interest in ensuring that there is effective corporate governance at every banking organization. Supervisory experience underscores the necessity of having the appropriate levels of accountability and checks and balances within each bank. Put plainly, sound corporate governance makes the work of supervisors infinitely easier. Sound corporate governance can contribute to a collaborative working relationship between bank management and bank supervisors. Recent sound practice papers issued by the Basel Committee underscore the need for banks to set strategies for their operations and establish accountability for executing these strategies. In addition, transparency of information related to existing conditions, decisions and actions is integrally related to accountability in that it gives market participants sufficient information with which to judge the management of a bank. This guidance refers to a management structure composed of a board of directors and senior management. The Committee recognizes that there are significant differences in the legislative and regulatory frameworks across countries as regards the functions of the board of directors and senior management. In some cases, it is known as a supervisory board. This means that the board has no executive functions. In other countries, by contrast, the board has a broader competence in that it lays down the general framework

for the management of the bank. Owing to these differences, the notions of board of directors and senior management are used in this paper not to identify legal constructs but rather to label two decision-making functions within a bank. These approaches to boards of directors and senior management are sometimes referred to as corporate governance "structures" in this paper. The Basel Committee is issuing this paper to supervisory authorities worldwide in the belief that it will assist supervisors in promoting the adoption of sound corporate governance practices by banking organizations in their countries. Recognizing that different structural approaches to corporate governance exist across countries, this paper encourages practices which can strengthen corporate governance under diverse structures.

Corporate Governance in Relation to Commercial Banks Banks are a critical component of any economy. They provide financing for commercial enterprises, basic financial services to a broad segment of the population and access to payments systems. In addition, some banks are expected to make credit and liquidity available in difficult market conditions. The importance of banks to national economies is underscored by the fact that banking is virtually universally a regulated industry and that banks have access to government safety nets. It is of crucial importance therefore that banks have strong corporate governance. From a banking industry perspective, corporate governance involves the manner in which the business and affairs of individual institutions are

governed by their boards of directors and senior management, affecting how banks: Set corporate objectives (including generating economic returns to owners); Run the day-to-day operations of the business; Consider the interests of recognized stakeholders; Protect the interests of depositors The Basel Committee has issued several papers on specific topics, where the importance of corporate governance is emphasized. These include Principles for the management of interest rate risk (September 1997), Framework for internal control systems in banking organizations (September 1998), Enhancing bank transparency (September 1998), and Principles for the management of credit risk (issued as a consultative document in July 1999). These papers have highlighted the fact that strategies and techniques that are basic to sound corporate governance include: ["Stakeholders" include employees, customers, suppliers and the

community. Due to the unique role of banks in national and local economies and financial systems, supervisors and governments are also stakeholders.] The corporate values, codes of conduct and other standards of appropriate behavior and the system used to ensure compliance with them; The clear assignment of responsibilities and decision-making authorities, incorporating a hierarchy of required approvals from individuals to the board of directors Establishment of a mechanism for the interaction and cooperation among the board of directors, senior management and the auditors; Strong internal control systems, including internal and external audit

functions, risk management functions independent of business lines, and other checks and balances; Special monitoring of risk exposures where conflicts of interest are likely to be particularly great, including business relationships with borrowers affiliated with the bank, large shareholders, senior management, or key decision-makers within the firm (e.g. traders); The financial and managerial incentives to act in an appropriate manner offered to senior management, business line management and employees in the form of compensation, promotion and other recognition; and Appropriate information flows internally and to the public. Ensuring an environment supportive of Sound Corporate Governance The Basel Committee recognizes that primary responsibility for good corporate governance rests with boards of directors and senior management of banks; however, there are many other ways that corporate governance can be promoted, including by: Government - through laws; Securities regulators, stock exchanges - through disclosure and listing requirements; Auditors - through audit standards on communications to boards of directors, senior management and supervisors; and Banking industry associations - through initiatives related to voluntary industry principles and agreement on and publication of sound practices. For example, corporate governance can be improved by addressing a number of legal issues, such as the protection of shareholder rights; the enforceability

of contracts, including those with service providers; clarifying governance roles; ensuring that corporations function in an environment that is free from corruption and bribery; and laws/regulations (and other measures) aligning the interests of managers, employees and shareholders. All of these can help promote healthy business and legal environments that support sound corporate governance and related supervisory initiatives. The Role of Supervisors Supervisors should be aware of the importance of corporate governance and its impact on corporate performance. They should expect banks to implement organizational structures that include the appropriate checks and balances. Regulatory safeguards must emphasize accountability and transparency. Supervisors should determine that the boards and senior management of individual institutions have in place processes that ensure they are fulfilling all of their duties and responsibilities. A bank's board of directors and senior management are ultimately responsible for the performance of the bank. As such, supervisors typically check to ensure that a bank is being properly governed and bring to management's attention any problems that they detect through their supervisory efforts. When the bank takes risks that it cannot measure or control, supervisors must hold the board of directors accountable and require that corrective measures be taken in a timely manner. Supervisors should be attentive to any warning signs of deterioration in the management of the bank's activities. Sound corporate governance considers the interests of all stakeholders, including depositors, whose interests may not always be recognized. Therefore, it is necessary for supervisors to determine that individual banks are conducting their business in such a way as not to harm

depositors.

RBI GUIDELINES ON CORPORATE GOVERNANCE FOR PRIVATE SECTOR BANKS

RBI Guidelines Governance in Private Sector Banks

INTRODUCTION Banks are special as they not only accept and deploy large amount of uncollateralized public funds in fiduciary capacity, but they also leverage such funds through credit creation. The banks are also important for smooth functioning of the payment system. In view of the above, legal prescriptions for ownership and governance of banks laid down in Banking Regulation Act, 1949 have been supplemented by regulatory prescriptions issued by RBI from time to time. On July 2, 2004, RBI issued draft guidelines on ownership and governance in private sector banks in India. These guidelines were placed in the public domain for wider debate and feedback. The RBI issued final policy guidelines on 28th February 2005 after taking into account the feedback received. It is considered necessary to lay down a comprehensive framework of policy in a transparent manner relating to corporate governance in the Indian private sector banks as described below. The broad principles underlying the framework of policy relating to corporate governance of private sector banks would have to ensure that (i) The ultimate ownership and control of private sector banks is well diversified. Well-diversified ownership minimizes the risk of misuse or imprudent use of leveraged funds , it is no substitute for effective regulation. (ii) The directors and the CEO who manage the affairs of the bank are fit and proper as indicated in circular dated June 25, 2004 and observe sound corporate governance principles. (iii) Private sector banks have minimum capital/net worth for optimal

operations and systemic stability. (iv)The policy and the processes are transparent and fair. Minimum capital The capital requirement of existing private sector banks should be on par with the entry capital requirement for new private sector banks prescribed in RBI guidelines of January 3, 2001, which is initially Rs.200crore, with a commitment to increase to Rs.300crore within three years. In order to meet with this requirement, all banks in private sector should have a net worth of Rs.300crore at all times. The banks which are yet to achieve the required level of net worth will have to submit a time-bound programme for capital augmentation to RBI. Where the net worth declines to a level below Rs.300crore, it should be restored to Rs.300crore within a reasonable time. Shareholding (i) The RBI guidelines on acknowledgement for acquisition or transfer of shares issued on February 3, 2004 will be applicable for any acquisition of shares of 5 per cent and above of the paid up capital of the private sector bank. (ii) In the interest of diversified ownership of banks, the objective will be to ensure that no single entity or group of related entities has shareholding or control, directly or indirectly, in any bank in excess of 10 per cent of the paid up capital of the private sector bank. Any higher level of acquisition will be with the prior approval of RBI and in accordance with the guidelines of February 3, 2004 for grant of acknowledgement for acquisition of shares. (iii) Where ownership is that of a corporate entity, the objective will be to

ensure that no single individual/entity has ownership and control in excess of 10 per cent of that entity. Where the ownership is that of a financial entity the objective will be to ensure that it is a well established regulated entity, widely held, publicly listed and enjoys good standing in the financial community. (iv) Banks (including foreign banks having branch presence in India)/FIs should not acquire any fresh stake in a banks equity shares, if by such acquisition, the investing banks/FIs holding exceeds 5 per cent of the investee banks equity capital as indicated in RBI circular dated July 6, 2004. (v) As per existing policy, large industrial houses will be allowed to acquire, by way of strategic investment, shares not exceeding 10 per cent of the paid up capital of the bank subject to RBIs prior approval. Furthermore, such a limitation will also be considered if appropriate, in regard to important shareholders with other commercial affiliations. (vi)In case of restructuring of problem/weak banks or in the interest of consolidation in the banking sector, RBI may permit a higher level of shareholding, including by a bank. Directors and Corporate Governance (i) The recommendations of the Ganguly Committee on corporate governance in banks have highlighted the role envisaged for the Board of Directors. The Board of Directors should ensure that the responsibilities of directors are well defined and the banks should arrange need-based training for the directors in this regard. While the respective entities should perform the roles envisaged for them, private sector banks will be required to ensure that the directors on their Boards representing specific sectors as provided under the Banking Regulation Act, are indeed representatives of those sectors in a demonstrable fashion, they fulfill the criteria under corporate governance

norms provided by the Ganguly Committee and they also fulfill the criteria applicable for determining fit and proper status of Important Shareholders (i.e., shareholding of 5 per cent and above) as laid down in RBI Circular dated June 25, 2004. (ii) As a matter of desirable practice, not more than one member of a family or a close relative (as defined under Section 6 of the Companies Act, 1956) or an associate (partner, employee, director, etc.) should be on the Board of a bank. (iii) Guidelines have been provided in respect of 'Fit and Proper' criteria for directors of banks by RBI circular dated June 25, 2004 in accordance with the recommendations of the Ganguly Committee on Corporate Governance. For this purpose a declaration and undertaking is required to be obtained from the proposed / existing directors (iv)Being a Director, the CEO should satisfy the requirements of the fit and proper criteria applicable for directors. In addition, RBI may apply any additional requirements for the Chairman and CEO. The banks will be required to provide all information that may be required while making an application to RBI for approval of appointment of Chairman/CEO Due diligence process The process of due diligence in all cases of shareholders and directors will involve reference to the relevant regulator, revenue authorities, investigation agencies and independent credit reference agencies as considered appropriate. Transition arrangements (i) The current minimum capital requirements for entry of new banks is Rs.200crore to be increased to Rs.300crore within three years of

commencement of business. A few private sector banks that have been in existence before these capital requirements were prescribed have less than Rs.200crore net worth. In the interest of having sufficient minimum size for financial stability, all the existing private banks should also be able to fulfill the minimum net worth requirement of Rs.300crore required for a new entry. Hence any bank with net worth below this level will be required to submit a time bound programme for capital augmentation to RBI for approval. (ii) Where any existing shareholding of any individual entity/group of entities is 5 per cent and above, due diligence outlined in the February 3, 2004 guidelines will be undertaken to ensure fulfillment of fit and proper criteria. (iii) Where any existing shareholding by any individual entity/group of related entities is in excess of 10 per cent, the bank will be required to indicate a time table for reduction of holding to the permissible level. While considering such cases, RBI will also take into account the terms and conditions of the banking licenses. (iv) Any bank having shareholding in excess of 5 per cent in any other bank in India will be required to indicate a time bound plan for reduction in such investments to the permissible limit. The parent of any foreign bank having presence in India, having shareholding directly or indirectly through any other entity in the banking group in excess of 5 per cent in any other bank in India will be similarly required to indicate a time bound plan for reduction of such holding to 5 per cent. (v) Banks will be required to undertake due diligence before appointment of directors and Chairman/CEO on the basis of criteria that will be separately indicated and provide all the necessary certifications/information to RBI. (vi) Banks having more than one member of a family, or close relatives or associates on the Board will be required to ensure compliance with these requirements at the time of considering any induction or renewal of terms of

such directors. (vii) Action plans submitted by private sector banks outlining the milestones for compliance with the various requirements for ownership and governance will be examined by RBI for consideration and approval. Continuous monitoring arrangements (i) Where RBI acknowledgement has already been obtained for transfer of shares of 5 per cent and above, it will be the banks responsibility to ensure continuing compliance of the fit and proper criteria and provide an annual certificate to the RBI of having undertaken such continuing due diligence. (ii) Similar continuing due diligence on compliance with the fit and proper criteria for directors/CEO of the bank will have to be undertaken by the bank and certified to RBI annually. (iii) RBI may, when considered necessary, undertake independent verification of fit and proper test conducted by banks through a process of due diligence.

CASE STUDY

CITIGROUP INC. CORPORATE GOVERNANCE GUIDELINES

As of January20, 2007

Corporate Governance Mission

Citigroup Inc. (the Company) aspires to the highest standards of ethical Conduct: doing what we say; reporting results with accuracy and transparency; and maintaining full compliance with the laws, rules and regulations that govern the Companys businesses.

Board of Directors
The Board of Directors primary responsibility is to provide effective governance over the Companys affairs for the benefit of its stockholders, and to balance the interests of its diverse constituencies around the world, including its customers, employees, suppliers and local communities. In all actions taken by the Board, the Directors are expected to exercise their business judgment in what they reasonably believe to be the best interests of the Company. In discharging that obligation, Directors may rely on the honesty and integrity of the Companys senior executives and its outside advisors and auditors.

Number and Selection of Board Members

The Board has the authority under the by-laws to set the number of Directors, which should be in the range of 13 to 19, with the flexibility to increase the number of members in order to accommodate the availability of an outstanding candidate or the Boards changing needs and circumstances. The Board may also appoint honorary directors. Honorary directors are invited to Board meetings, but do not vote on issues presented to the Board. Candidates for the Board shall be selected by the Nomination and Governance Committee, and recommended to the Board of Directors for approval, in accordance with the qualifications approved by the Board and set forth below, taking into consideration the overall composition and diversity of the Board and areas of expertise that new Board members might be able to offer. Directors are elected by the stockholders at each Annual Meeting, to serve for a one-year term, which expires on the date of the next

Annual Meeting. Between Annual Meetings, the Board may elect additional Directors by majority vote to serve until the next Annual Meeting. The Nomination and Governance Committee shall nominate annually one of the members of the Board to serve as Chairman of the Board.

Confidential Voting Policy

It is the Companys policy that every stockholder shall have the right to require the Company to keep his or her vote confidential, whether submitted by proxy, ballot, internet voting, telephone voting or otherwise. If a stockholder elects, in connection with any decision to be voted on by stockholders at any Annual or Special Meeting, to keep his or her vote confidential, such vote shall be kept permanently confidential and shall not be disclosed to the Company, to its affiliates, directors, officers and employees or to any third parties except: (a) As necessary to meet applicable legal requirements and to assert or defend claims for or against the Company, (b) In case of a contested proxy solicitation, (c) If a stockholder makes a written comment on the proxy card or otherwise communicates his or her vote to management, or (d) To allow the independent inspectors of election to certify the results of the vote. Employee stockholders in the Citigroup Common Stock Fund under the plan or one of the Companys retirement, savings or employee stock ownership plans already enjoy confidential treatment as required by law and, without the need for any action on their parts, will continue to vote their shares confidentially.

Director Independence
At least two-thirds of the members of the Board should be independent. The Board has adopted the Director Independence Standards to assist the Board in making the independence determination. The Director Independence Standards are intended to comply with the New York Stock Exchange (NYSE) corporate governance rules and all other applicable laws, rules and regulations regarding director independence in effect from time to time. A Director shall qualify as independent for purposes of service on the Board of the Company and its Committees if the Board has determined that the Director has no material relationship with the Company.

 Qualifications for Director Candidates

One of the of the Board's most important responsibilities is identifying, evaluating and selecting candidates for the Board of Directors. The Nomination and Governance Committee reviews the qualifications of potential director candidates and makes recommendations to the whole Board. The factors considered by the Committee and the Board in its review of potential candidates include: Whether the candidate has exhibited behavior that indicates he or she is committed to the highest ethical standards and Shared Responsibilities. Whether the candidate has had business, governmental, non-profit or professional experience at the Chairman, Chief Executive Officer, Chief Operating Officer or equivalent policy-making and operational level of a large organization with significant international activities that indicates that the candidate will be able to make a meaningful and immediate contribution to the Board's discussion of and decision-making on the array of complex issues facing a large financial services business that operates on a global scale. Whether the candidate has special skills, expertise and background that would complement the attributes of the existing Directors, taking into consideration the diverse communities and geographies in which the Company operates. Whether the candidate has the financial expertise required to provide effective oversight of a diversified financial services business that operates on a global scale. Whether the candidate has achieved prominence in his or her business, governmental or professional activities, and has built a reputation that demonstrates the ability to make the kind of important and sensitive judgments that the Board is called upon to make. Whether the candidate will effectively, consistently and appropriately take into account and balance the legitimate interests and concerns of all of the Companys stockholders and our other stakeholders in reaching decisions, rather than advancing the interests of a particular constituency. Whether the candidate possesses a willingness to challenge management while working constructively as part of a team in an environment of collegiality and trust.

 Whether the candidate will be able to devote sufficient time and energy to the performance of his or her duties as a Director. Application of these factors involves the exercise of judgment by the Board.

Lead Director
The Board may appoint a Lead Director. The Lead Director shall: (i) preside at all meetings of the Board at which the Chairman is not present, including executive sessions of the independent Directors; (ii) Serve as liaison between the Chairman and the independent Directors; (iii) Approve information sent to the Board; (iv)Approve meeting agendas for the Board; (v) Approve meeting schedules to assure that there is sufficient time for discussion of all agenda items; (vi)Have the authority to call meetings of the independent Directors; and (vii) If requested by major shareholders, ensure that he or she is available for consultation and direct communication.

Additional Board Service

The number of other public company boards on which a Director may serve shall be subject to a case-by-case review by the Nomination and Governance Committee, in order to ensure that each Director is able to devote sufficient time to perform his or her duties as a Director. Members of the Audit and Risk Management Committee may not serve on more than three public company audit committees, including the Audit and Risk Management Committee of the Company

Interlocking Directorates
No inside Director or executive officer of Citigroup shall serve as a director of a company where a Citigroup outside Director is an executive officer.

Stock Ownership Commitment

The Board and members of senior management are subject to the Stock Ownership Commitment, which provides that for so long as they remain members of the Board or senior management, they shall hold at least 75% of

the shares of Company common stock they own on the date they become subject to the commitment and 75% of the net shares delivered to them pursuant to awards granted under the Companys equity programs, once certain minimum guidelines have been met, subject to the provisions contained in the commitment. For purposes of these guidelines, the term members of senior management shall mean members of the Operating Committee, members of the Management Committee, members of the Business Planning Groups and senior members of corporate staff as disclosed in the Companys annual report. In 2005, the Company introduced an expanded version of the Stock Ownership Commitment, with a 25% holding requirement that applies prospectively and generally covers those employees who report directly to a member of the Management Committee and those employees one level below them. After the expansion of the Stock Ownership Commitment becomes effective in 2006, approximately 3,000 employees around the world will be subject to the Stock Ownership Commitment. Exceptions to the Stock Ownership Commitment include gifts to charity, estate-planning transactions, transactions with the Company in connection with exercising employee stock options or paying withholding taxes under equity compensation programs, and certain other circumstances.

Retirement from the Board/Term Limits

Directors may serve on the Board until the Annual Meeting of the Company next following their 72nd birthday, and may not be re- elected after reaching age 72, unless this requirement has been waived by the Board for a valid reason. The Company has not adopted term limits for Directors.

Director Elections
If a nominee who has been nominated by the Board of Directors receives, in an uncontested election, a number of votes withheld from his or her election that is greater than the number of votes cast for the election of the Director, such Director shall offer to resign from his or her position as a Director. Unless the Board decides to reject the offer or to postpone the effective date of the offer, the resignation shall become effective 60 days after the date of the election. In making a determination whether to reject the

offer or postpone the effective date, the Board of Directors shall consider all factors it considers relevant to the best interests of the Company. If the Board rejects the resignation or postpones its effective date, it shall issue a public statement that discloses the reason for its decision.

Board Committees
The standing committees of the Board are the Executive Committee, the Audit and Risk Management Committee, the Personnel and Compensation Committee, the Nomination and Governance Committee and the Public Affairs Committee. All members of these committees, other than the Executive Committee, shall meet the independence criteria, as determined by the Board, set forth in the NYSE corporate governance rules, and all other applicable laws, rules or regulations regarding director independence. Committee members shall be appointed by the Board upon recommendation of the Nomination and Governance Committee, after consultation with the individual Directors. Committee chairs and members shall be rotated at the recommendation of the Nomination and Governance Committee. Each committee shall have its own written charter which shall comply with the applicable NYSE corporate governance rules, and other applicable laws, rules and regulations. The charters shall set forth the mission and responsibilities of the committees as well as qualifications for committee membership, procedures for committee member appointment and removal, committee structure and operations and reporting to the Board. The Chair of each committee, in consultation with the committee members, shall determine the frequency and length of the committee meetings consistent with any requirements set forth in the committees charter. The Chair of each committee, in consultation with the appropriate members of the committee and senior management, shall develop the committees agenda. At the beginning of the year, each committee shall establish a schedule of major topics to be discussed during the year (to the degree these can be foreseen). The agenda for each committee meeting shall be furnished to all Directors in advance of the meeting, and each independent Director may attend any meeting of any committee, whether or not he or she is a member of that committee. The Board and each committee shall have the power to hire and fire independent legal, financial or other advisors, as they may deem necessary, without consulting or obtaining the approval of senior

management of the Company in advance. The Board may, from time to time, establish or maintain additional committees as necessary or appropriate.

Evaluation of Board Performance

The Nomination and Governance Committee shall conduct an annual review of Board performance, in accordance with guidelines recommended by the Committee and approved by the Board. This review shall include an overview of the talent base of the Board as a whole as well as an individual assessment of each outside Directors qualification as independent under the NYSE corporate governance rules and all other applicable laws, rules and regulations regarding director independence; consideration of any changes in a Directors responsibilities that may have occurred since the Director was first elected to the Board; and such other factors as may be determined by the Committee to be appropriate for review. Each of the standing committees (except the Executive Committee) shall conduct an annual evaluation of its own performance as provided in its charter. The results of the Board and committee evaluations shall be summarized and presented to the Board.

Attendance at Meetings
Directors are expected to attend the Companys Annual Meeting of Stockholders, Board meetings and meetings of committees and subcommittees on which they serve, and to spend the time needed and meet as frequently as necessary to properly discharge their responsibilities. Information and materials that are important to the Boards understanding of the business to be conducted at a Board or committee meeting should be distributed to the Directors prior to the meeting, in order to provide time for review. The Chairman should establish a calendar of standard agenda items to be discussed at each meeting scheduled to be held over the course of the ensuing year, and, together with the Lead Director, shall establish the agenda for each Board meeting. Each Board member is free to suggest items for inclusion on the agenda or to raise subjects that are not on the agenda for that meeting. The non-management Directors shall meet in executive session at each Board meeting. The Lead Director shall preside at the executive sessions.

 Annual Strategic Review The Board shall review the Companys long-term strategic plans and the principal issues that it expects the Company may face in the future during at least one Board meeting each year.

Communications
The Board believes that senior management speaks for the Company. Individual Board members may, from time to time, meet or otherwise communicate with various constituencies that are involved with the Company, at the request of the Board or senior management.

Director Access to Senior Management

Directors shall have full and free access to senior management and other employees of the Company. Any meetings or contacts that a Director wishes to initiate may be arranged through the CEO or the Secretary or directly by the Director. The Board welcomes regular attendance at each Board meeting by senior management of the Company. If the CEO wishes to have additional Company personnel attendees on a regular basis, this suggestion should be brought to the Board for approval.

Charitable Contributions
If a Director or an immediate family member of a Director serves as a director, trustee or executive officer of a foundation, university or other nonprofit organization (Charitable Organization) and such Charitable Organization receives contributions from the Company and/or the Citigroup Foundation, such contributions will be reported to the Nomination and Governance Committee at least annually.

Director Orientation and Continuing Education

The Company shall provide an orientation program for new Directors which shall include presentations by senior management on the Companys strategic plans, its significant financial, accounting and risk management issues, its compliance programs, its Code of Conduct, its management

structure and executive officers and its internal and independent auditors. The orientation program may also include visits to certain of the Companys significant facilities, to the extent practical. The Company shall also make available continuing education programs for all members of the Board. All Directors are invited to participate in the orientation and continuing education programs.

Chairman and CEO Performance

The Personnel and Compensation Committee shall conduct an annual review of the Chairmans and the CEOs performance. The Board of Directors shall review the Personnel and Compensation Committees report in order to ensure that the Chairman and the CEO are providing the best leadership for the Company in the long and short term.

Succession Planning
The Personnel and Compensation Committee, or a subcommittee thereof, shall make an annual report to the Board on succession planning. The entire Board shall work with the Personnel and Compensation Committee, or a subcommittee thereof, to nominate and evaluate potential successors to the CEO. The CEO shall meet periodically with the Personnel and Compensation Committee in order to make available his or her recommendations and evaluations of potential successors, along with a review of any development plans recommended for such individuals.

Code of Conduct and Code of Ethics for Financial Professionals

The Company has adopted a Code of Conduct and other internal policies and guidelines designed to support the mission statement set forth above and to comply with the laws, rules and regulations that govern the Companys business operations. The Code of Conduct applies to all employees of the Company and its subsidiaries, as well as to Directors, temporary workers and other independent contractors and consultants when engaged by or otherwise representing the Company and its interests. In addition, the Company has adopted a Code of Ethics for Financial Professionals, which

applies to the principal executive officers of the Company and its reporting subsidiaries and all professionals worldwide serving in a finance, accounting, treasury, tax or investor relations role. The Nomination and Governance Committee shall monitor compliance with the Code of Conduct, the Code of Ethics for Financial Professionals and other internal policies and guidelines.

Recoupment of Unearned Compensation

If the Board learns of any misconduct by an executive officer that contributed to the Company having to restate all or a portion of its financial statements, it shall take such action as it deems necessary to remedy the misconduct, prevent its recurrence and, if appropriate, based on all relevant facts and circumstances, punish the wrongdoer in a manner it deems appropriate. In determining what remedies to pursue, the Board shall take into account all relevant factors, including whether the restatement was the result of negligent, intentional or gross misconduct. The Board will, to the full extent permitted by governing law, in all appropriate cases, require reimbursement of any bonus or incentive compensation awarded to an executive officer or effect the cancellation of unvested restricted or deferred stock awards previously granted to the executive officer if: The amount of the bonus or incentive compensation was calculated based upon the achievement of certain financial results that were subsequently the subject of a restatement, The executive engaged in intentional misconduct that caused or partially caused the need for the restatement, and The amount of the bonus or incentive compensation that would have been awarded to the executive had the financial results been properly reported would have been lower than the amount actually awarded.

Insider Transactions
The Company does not generally purchase Company common stock from employees (except in connection with the routine administration of employee stock option and other equity compensation programs). Directors and executive officers may not trade shares of Company common stock during an administrative blackout period affecting the Companys 401(k) plan or pension plan pursuant to which a majority of the Companys

employees are restricted from trading shares of Company common stock or transferring funds into or out of the Company common stock fund, subject to any legal or regulatory restrictions and the terms of the Companys Personal Trading Policy.

Stock Options
The Company prohibits the re-pricing of stock options. All new equity compensation plans and material revisions to such plans shall be submitted to stockholders for approval.

Financial Services
To the extent ordinary course services, including brokerage services, banking services, loans, insurance services and other financial services, provided by the Company to any Director or family member of a Director, are not otherwise specifically prohibited under these Corporate Governance Guidelines or other policies of the Company, or by law or regulation, such services shall be provided on substantially the same terms as those prevailing at the time for comparable services provided to non-affiliates.

Personal Loans
Personal loans may be made or maintained by the Company to a Director, an executive officer (designated as such pursuant to Section 16 of the Securities Exchange Act of 1934), or a member of the Operating Committee, or an immediate family member of any such person, only if the loan: (a) Is made in the ordinary course of business of the Company or one of its subsidiaries, is of a type that is generally made available to the public, and is on market terms, or terms that are no more favorable than those offered to the general public; (b) Complies with applicable law, including the Sarbanes Oxley Act of 2002 and Regulation of the Board of Governors of the Federal Reserve; (c) When made does not involve more than the normal risk of collectibility or present other unfavorable features; and (d) Is not classified by the Company as Substandard (II) or worse, as defined by the Office of the Comptroller of the Currency (OCC) in its Rating Credit Risk Comptrollers Handbook.

 Investments/Transactions
The Company, its executive officers and their immediate family members, individually or in combination, shall not make any investment in a partnership or other privately held entity in which a Director is a principal or in a publicly traded company in which a Director owns or controls more than a 10% interest. Except as otherwise provided by this section, a Director or family member of a Director may participate in ordinary course investment opportunities or partnerships offered or sponsored by the Company only on substantially similar terms as those for comparable transactions with similarly situated non-affiliated persons. Executive officers and their immediate family members may not invest in partnerships or other investment opportunities sponsored, or otherwise made available, by the Company unless their participation is approved in accordance with these Guidelines. Such approval shall not be required if the investment opportunity: (i) is offered to qualified employees and investment by executive officers is approved by the Personnel and Compensation Committee; (ii) Is made available to an executive officer actively involved in a business unit, the principal activity of which is to make such investments on behalf of the Company, and is 11 offered pursuant to a co-investment plan approved by the Personnel and Compensation Committee; or (iii) Is offered to executive officers on the same terms as those offered to qualified persons who are not employees of the Company. Transactions, other than ordinary course transactions on third-party terms and conditions, between Directors or executive officers and the Company or any of its subsidiaries valued at less than $50 million require the prior approval of the Transaction Review Committee; such transactions with a value of $50 million or more require the prior approval of the Nomination and Governance Committee. Except with the approval of the Nomination and Governance Committee, no Director or executive officer may invest in a third-party entity if the investment opportunity is made available to him or her as a result of such individuals status as, respectively, a Director or an executive officer of the Company. No Director or immediate family member of a Director shall

receive an IPO allocation from a broker/dealer, including broker/dealers not affiliated with the Company.

Indemnification
The Company provides reasonable directors and officers liability insurance for the Directors and shall indemnify the Directors to the fullest extent permitted by law and the Companys certificate of incorporation and bylaws.

Amendments
The Board may amend these Corporate Governance Guidelines, or grant waivers in exceptional circumstances, provided that any such modification or waiver may not be a violation of any applicable law, rule or regulation and further provided that any such modification or waiver is appropriately disclosed.

Exhibit A To Corporate Governance Guidelines Director Independence Standards

A Director shall qualify as independent for purposes of service on the Board of the Company and its committees if the Board has determined that the Director has no material relationship with the Company, either directly or as an officer, partner or employee of an organization that has a relationship with the Company. A Director shall be deemed to have no material relationship with the Company and will qualify as independent provided that (a) The Director meets the Director Independence Standards and (b) if there exists any relationship or transaction of a type not specifically mentioned in the Director Independence Standards, the Board, taking into account all relevant facts and circumstances, determines that the existence of such other relationship or transaction is not material and would not impair the Directors exercise of independent judgment. These Director Independence Standards have been drafted to incorporate the independence requirements contained in the NYSE corporate governance rules and all other applicable laws, rules and regulations in effect from time

to time and are intended to supplement the provisions contained in the Corporate Governance Guidelines. A fundamental premise of the Director Independence Standards is that any permitted transactions between the Company (including its subsidiaries and affiliates) and a Director, any family member of a Director or their respective primary business affiliations shall be on arms-length, market terms.

Advisory, Consulting and Employment Arrangements

During any 12 month period within the last three years, neither a Director nor any family member of a Director shall have received from the Company, directly or indirectly, any compensation, fees or benefits in an amount greater than $100,000, other than amounts paid (a) pursuant to the Companys Amended and Restated Compensation Plan for Non-Employee Directors or (b) To a family member of a Director who is a non-executive employee of the Company. In addition, no member of the Audit and Risk Management Committee, nor any immediate family member of such individual, nor any entity in which an Audit and Risk Management Committee member is a partner, member or executive officer shall, within the last three years, have received any payment for accounting, consulting, legal, investment banking or financial advisory services provided to the Company.

Business Relationships
All business relationships, lending relationships, deposit and other banking relationships between the Company and a Directors primary business affiliation or the primary business affiliation of a family member of a Director must be made in the ordinary course of business and on substantially the same terms as those prevailing at the time for comparable transactions with non-affiliated persons. In addition, the aggregate amount of payments in any of the last three fiscal years by the Company to, and to the Company from, any company of which a Director is an executive officer or employee or where a family member of a Director is an executive officer, must not exceed the greater of $1 million or 2% of such other companys consolidated gross revenues in any single fiscal year. Loans may be made or maintained by the Company to a Directors primary business affiliation or the primary business affiliation of an immediate family member of a Director, only if the loan:

(a) Is made in the ordinary course of business of the Company or one of its subsidiaries, is of a type that is generally made available to other customers, and is on market terms, or terms that are no more favorable than those offered to other customers; (b) Complies with applicable law, including the Sarbanes-Oxley Act of 2002, Regulation O of the Board of Governors of the Federal Reserve, and the Federal Deposit Insurance Corporation (FDIC) Guidelines; (c) When made does not involve more than the normal risk of collectibility or present other unfavorable features; and (d) Is not classified by the Company as Substandard (II) or worse, as defined by the Office of the Comptroller of the Currency (OCC) in its Rating Credit Risk Comptrollers Handbook.

Charitable Contributions
Annual contributions in any of the last three calendar years from the Company and/or the Citigroup Foundation to a foundation, university, or other non-profit organization (Charitable Organization) of which a Director or an immediate family member of a Director serves as a director, trustee or executive officer (other than the Citigroup Foundation and other Charitable Organizations sponsored by the Company) may not exceed the greater of $250,000 or 10% of the Charitable Organizations annual consolidated gross revenue.

Employment/Affiliations
An outside Director shall not: (i) Be or have been an employee of the Company within the last three years; (ii) Be part of, or within the past three years have been part of, an interlocking directorate in which an executive officer of the Company serves or has served on the compensation committee of a company that concurrently employs or employed the Director as an executive officer; or (iii) Be or have been affiliated with or employed by a present or former outside auditor of the Company within the five-year period following the auditing relationship.

An outside Director may not have a family member who: (i) Is an executive officer of the Company or has been within the last three years; (ii) Is, or within the past three years has been, part of an interlocking directorate in which an executive officer of the Company serves or has served on the compensation committee of a company that concurrently employs or employed such family member as an executive officer; or (iii) (A) is a current partner of the Companys outside auditor, or a current employee of the Companys outside auditor who participates in the auditors audit, assurance or tax compliance practice, or (B) Was within the last three years (but is no longer) a partner of or employed by the Companys outside auditor and personally worked on the Companys audit within that time.

Definitions
For purposes of these independence standards The term family member means any of the Directors spouse, parents, children, brothers, sisters, mother and father-in law, sons- and daughters-inlaw, and brothers and sisters-in-law and anyone (other than domestic employees) who shares the Directors home; The term immediate family members includes the Directors spouse and other family members (including children) who share the Directors home or who are financially dependent on the Director; and The term primary business affiliation means an entity of which the Director is an officer, partner or employee or in which the Director owns directly or indirectly at least a 5% equity interest.

BACKGROUND NOTE
Citigroup was formed in 1998 by the merger of Citicorp and Travelers Group. The former's history could be traced to the City Bank of New York, formed in 1812 with an authorized capital of $2 mn. In 1865, the company joined the US national banking system and became The National City Bank of New York. By the 1890s, City Bank became the largest bank in the US and one of the major American banks to establish a foreign department. Branches were started in Asia, Europe and Latin America by the early 1900s. In 1955, City Bank's name was changed to the First National City Bank of New York, and later shortened to the First National Citibank (FNC). In 1968, First National City Corporation, a bank holding company, became the parent of FNC. In 1974, the holding company changed its name to Citicorp in tune with its global business. In 1976, the First National City Bank became Citibank NA (National Association).

Citigroup was the first financial services company in the US to bring together banking, insurance and investments under one umbrella. By the early 2000s, it had emerged as the largest financial services conglomerate in the world with nearly 275,000 employees and 200 million customer accounts in over 100 countries. Citibank NA was the largest bank in the world in terms of market capitalization In September 2004, Federal Services Agency (FSA), the financial regulatory body of Japan, announced the closure of Citigroup's Private Banking business in Japan starting from September 30, 2005 onwards. Independent investigations conducted by FSA revealed major violations of law by the

Private Banking unit. The case details the irregularities in Citigroup's Japanese operations and highlights the importance of good governance. On September 17, 2004, the Financial Services Agency (FSA) the banking and financial services regulatory body of Japan, announced that it had revoked the licenses of the four Citigroup offices in Japan. Citigroup was asked to withdraw from the Private Banking business in Japan after several instances of illegal conduct of business by Citibank Japan came to light. The four branches, one in Tokyo's Marunouchi business district and three satellite branches in Fukuoka, Nagoya and Osaka, employing around 400 people, represented Citigroup's Private Banking business in Japan The winding up of business commenced from September 29, 2004 onwards by suspending all new transactions with customers. Incorporated in 2001, FSA had been keeping a close eye on the working of foreign and domestic banks in Japan .It uncovered a number of acts injurious to public interest, serious violations of law and regulations and extremely inappropriate transactions in the Private Banking unit. FSA further said that Citigroup's management in Japan was solely driven by profit motive and had created a law-evading sales system, breaking Japan's banking laws and regulations. The irregularities at the Private Banking unit were preceded by continued failure to improve internal controls despite regulatory warnings over the past three years and a reprimand by the FSA in May 2004. After the unit was asked to wind up its operations, Charles O Prince (Prince), CEO, Citigroup, acknowledged the irregularities saying, "I sincerely apologize to customers and the public for the company's failure to comply with legal and regulatory requirements in Japan. Senior staff in the private bank had put short-term profits ahead of the bank's long-term reputation and broken the law. It was a unique breakdown in Japan due to the individuals involved."

BIBLIOGRAPHY
The whole project is with the courtesy of the following books, periodicals, newspaper articles and sites:

Books: Leadership & Corporate GovernanceA.V Vedpuriswar Business Ethics & Corporate GovernanceVivek Gupta A review of current banking, theory and practice S.K Basu Business ethics and managerial valuesS.K Bhatia

Newspapers: The Economic Times Periodicals: Economic and Political Weekly Professional Banker Web sites: www.wikipedia.com www.corgov.net www.citigroup.com