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Reg. No. 120552032/08/2011


Companies pool capital from a large investor base both in the domestic and
in the international capital markets. In this context, investment is ultimately
an act of faith in the ability of a companys management. In order to
manage the affairs of a company and to act in the best interests of all at all
times, there must be a system whereby the directors are entrusted with
responsibilities and duties in relation to the direction of the company

Corporate governance is a system of making Management accountable

towards the stakeholders for effective management of the companies.

Corporate governance is also concerned with the morals, ethics, values,

parameters, conduct and behavior of the company and its management.

The underlying principles of corporate governance revolve around three

basic inter- related segments. These are:

Integrity and Fairness

Transparency and Disclosures
Accountability and Responsibility

According to the Confederation of Indian Industry (CII), corporate

governance deals with laws, procedures, practices and implicit rules that
determine the ability of the company to make managerial decisions vis- -
vis its claimants in particular, its shareholders, creditors, customers, the
State and employees.

Corporate governance mainly consists of two elements i.e., A long-term

relationship, which has to deal with checks and balances, incentives of
managers and communications between Management and investors. The
second element is a transactional relationship involving matters relating to
disclosure and authority. In other words, 'good corporate governance' is
simply 'good business'.

Reg. No. 120552032/08/2011

Meaning & Definition of Corporate Governance

Meaning: Corporate governance refers to the structures and processes for

the direction and control of companies. Corporate governance concerns the
relationships among the management, Board of Directors, controlling
shareholders, minority shareholders and other stakeholders. Good
corporate governance contributes to sustainable economic development by
enhancing the performance of companies and increasing their access to
outside capital.

A means whereby society can be sure that large corporations are well-run
institutions to which investors and lenders can confidently commit their

It is a term that refers broadly to the rules, processes, or laws by which

businesses are operated, regulated, and controlled. The term can refer to
internal factors defined by the officers, stockholders or constitution of a
corporation, as well as to external forces such as customer groups, clients
and government regulations.

Creates safeguards against corruption and mismanagement, while

promoting fundamental values of a market economy in democratic society.

Considering the ethical failures in the last several years and the resulting
crisis in confidence...A sincere commitment to creating and sustaining an
ethical business culture in public and private sectors (has never been so

Definition: Definition of Corporate Governance has been given from time

to time by the various authorities.

As per ICSI:
Corporate Governance is the best Management practices compliance of law
in true letter and adherence to ethical standards for effective management
and distribution of wealth and discharge of social responsibility for
sustainable development of all stakeholders.

Basic and summarized definition.

Reg. No. 120552032/08/2011

The above definition also reflects that a proper definition of corporate

governance should not just describe directors obligations towards
shareholders. Different countries have different ideas as to what
constitutes good corporate governance. Therefore any satisfactory
definition, to be applicable to a modern, global company, must synthesize
best practice from the biggest economic powers into something which can
be applied across all major countries. In essence we believe that good
corporate governance consists of a system of structuring, operating and
controlling a company such as to achieve the following:

a culture based on a foundation of sound business ethics

fulfilling the long-term strategic goal of the owners while taking into
account the expectations of all the key stakeholders, and in
o consider and care for the interests of employees, past, present
and future
o work to maintain excellent relations with both customers and
o take account of the needs of the environment and the local
Maintaining proper compliance with all the applicable legal and
regulatory requirements under which the company is carrying out its

We believe that a well-run organization must be structured in such a way

that all the above requirements are catered for and can be seen to be
operating effectively by all the interest groups concerned. We develop this
further in our section on best corporate governance practice. Here we have
set out our assessment of how corporate governance is usually discussed
and introduced our own, which we hope you have found useful. This page
serves as a hub to link to a range of issues related to the definition of
corporate governance. For example we define business ethics and
Corporate Social Responsibility, different country models and Codes of

Reg. No. 120552032/08/2011


The principles of governance have been in existence for centuries. History

reveals that Kautilya also called Chanakya or Vishnu Gupta who was
Mahaamatya (equivalent to Prime Minister) in Maurya Empire in 300 BC
propounded principles of good governance. In his celebrated treatise on
statecraft Arthashastra, he provided principles of governance. He states
the fourfold duty of a king as:

Duties of a King

 Raksha (Protection) Protecting shareholders wealth

 Vriddhi (Enhancement) Enhancing wealth
 Palana (Maintenance) Maintenance of that wealth
 Yogakshema (Safeguard) Safeguarding interests of

Corporate governance

And economic developments are intrinsically linked. Effective corporate

governance systems promote the development of strong financial systems-
irrespective of whether they are largely bank-based or market-based
which, in turn, have an unmistakably positive effect on economic growth
and poverty reduction.

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Corporate governance are the policies, procedures and rules governing the
relationships between the shareholders, (stakeholders), directors and
managers in a company, as defined by the applicable laws, the corporate
charter, the companys bylaws, and formal policies.

Primarily it is about managing top management, building in checks and

balances to ensure that the senop;;
ior executives pursue strategies that are in accordance with the corporate
mission. It consists of a set of processes, customs, policies, laws and
institutions affecting the way of a corporation is directed, administered or
controlled. Corporate governance governs the relationship among the
many players involved (the stakeholders) and the goals for which the
corporation is governed.

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The three constituents of Corporate Governance are:

 Board of Directors or Board ;

 Shareholders ; and

These can further be detailed as:

Roles and powers of the Board

Composition of Board
Code of Conduct
Board Independence
Board Skills
Roles and powers of Shareholders
Board Appointments
Board Meetings
Board Induction and training
Monitoring the Board Performance
Management skills and environment
Business and Community Obligations
Audit Committee
Financial and Operational Reporting

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 Improving access to capital

Much attention to corporate governance issues in emerging markets

among policymakers and academics has focused on the role governance
can play in improving access for emerging market companies to global
portfolio equity. An increasing volume of empirical evidence indicates
that well-governed companies receive higher market valuations.*
However, improving corporate governance will also increase all other
capital flows to companies in developing countries: from domestic and
global capital; equity and debt; and from public securities markets and
private capital sources.

 Improving performance

Equally important and, irrespective of the need to access capital, good

corporate governance brings better performance for IFC clients.
Improved governance structures and processes help ensure quality
decision-making, encourage effective succession planning for senior
management and enhance the long-term prosperity of companies,
independent of the type of company and its sources of finance.

Reg. No. 120552032/08/2011


Year Name of Committee/Body Areas/Aspects Covered

1998 Confederation of Indian Industry Desirable Corporate Governance

(CII) A Code

1999 Kumar Mangalam Birla Committee Corporate Governance

2002 Naresh Chandra Committee Corporate Audit & Governance

2003 N. R. Narayana Murthy Committee Corporate Governance

2004 J.J. Irani Adoption of Internationally

accepted best practices

Reg. No. 120552032/08/2011


Year Name of Committee/Body Areas/Aspects Covered

1992 Sir Adrian Cadbury Committee, UK Financial Aspects of Corporate


1995 Greenbury Committee , UK Directors Remuneration

1998 Hampel Committee, UK Combine Code of Best Practices

1999 Blue Ribbon Committee, US Improving the Effectiveness of

Corporate Audit Committees

1999 OECD & CACG Principles of Corporate Governance in

Common wealth

2003 Derek Higgs Committee, UK Review of role of effectiveness of

Non-executive Directors

2003 ASX Corporate Governance Council, Principles of Good Corporate

Australia Governance and Best Practice

Reg. No. 120552032/08/2011

Reg. No. 120552032/08/2011

An effective regulatory and legal framework is indispensable for the proper

and sustained growth of the company. In rapidly changing national and
global business environment, it has become necessary that regulation of
corporate entities is in tune with the emerging economic trends, encourage
good corporate governance and enable protection of the interests of the
investors and other stakeholders. Further, due to continuous increase in
the complexities of business operation, the forms of corporate
organizations are constantly changing. As a result, there is a need for the
law to take into account the requirements of different kinds of companies
that may exist and seek to provide common principles to which all kinds of
companies may refer while devising their corporate governance structure.

The important legislations for regulating the entire corporate structure and
for dealing with various aspects of governance in companies are Companies
Act, 1956 and Companies Bill, 2004. These laws have been introduced and
amended, from time to time, to bring more transparency and
accountability in the provisions of corporate governance. That is, corporate
laws have been simplified so that they are amenable to clear interpretation
and provide a framework that would facilitate faster economic growth.

Secondly, the Securities Contracts (Regulation) Act, 1956, Securities and

Exchange Board of India Act, 1992 and Depositories Act, 1996 have been
introduced by Securities and Exchange Board of India (SEBI), with a view to
protect the interests of investors in the securities markets as well as to
maintain the standards of corporate governance in the country.

Reg. No. 120552032/08/2011

Companies Laws
The Ministry of Corporate Affairs (MCA) is the main authority for
regulating and promoting efficient, transparent and accountable form of
corporate governance in the Indian corporate sector. It is constantly
working towards improvement in the legislative framework and
administrative set up, so as to enable easy incorporation and exit of the
companies, as well as convenient compliance of regulations with
transparency and accountability in corporate governance. It is primarily
concerned with administration of the Companies Act, 1956 and related

1. The Companies Act, 1956 is the central legislation in India that

empowers the Central Government to regulate the formation, financing,
functioning and winding up of companies. It applies to whole of India and
to all types of companies, whether registered under this Act or an earlier
Act. It provides for the powers and responsibilities of the directors and
managers, raising of capital, holding of company meetings, maintenance
and audit of company accounts, powers of inspection, etc.

The main objectives with which this Act has been introduced are to:- (i)
help in the development of companies on healthy lines; (ii) maintain a
minimum standard of good behaviour and business honesty in company
promotion and management; (iii) protect the interests of the shareholders
as well as the creditors; (iv) ensure fair and true disclosure of the affairs of
companies in their annual published balance sheet and profit and loss
accounts; (v) ensure proper standard of accounting and auditing; (vi)
provide fair remuneration to management and Board of Directors as well as
to company's employees; etc.

The Companies Act, 1956 has elaborate provisions relating to the

Governance of Companies, which deals with management and
administration of companies. It contains special provisions with respect to
the accounts and audit, directors remuneration, other financial and non-
financial disclosures, corporate democracy, prevention of mismanagement,

Reg. No. 120552032/08/2011

Every company shall in each year, hold in addition to any other meetings, a
general meeting as its annual general meeting and shall specify the meeting
as such in the notices calling it; and not more than fifteen months shall
elapse between the date of one annual general meeting of a company and
that of the next. At each annual general meeting, every company shall
appoint an auditor or auditors to hold office from the conclusion of that
meeting until the conclusion of the next annual general meeting and shall,
within seven days of the appointment, give intimation thereof to every
auditor so appointed.

Every auditor of a company shall have a right of access at all times to the
books and accounts and vouchers of the company, whether kept at the
head office of the company or elsewhere, and shall be entitled to require
from the officers of the company such information and explanations as the
auditor may think necessary for the performance of his duties as auditor.

The auditor shall inquire: - (i) whether loans and advances made by the
company on the basis of security have been properly secured and whether
the terms on which they have been made are not prejudicial to the
interests of the company or its members; (ii) whether transactions of the
company which are represented merely by book entries are not prejudicial
to the interests of the company; etc.

In the case of every company, a meeting of its Board of directors shall be

held at least once in every three months and at least four such meetings
shall be held in every year. Every director of a company, who is in any way,
whether directly or indirectly, concerned or interested in a contract or
arrangement, or proposed contract or arrangement, entered into or to be
entered into, by or on behalf of the company, shall disclose the nature of
his concern or interest at a meeting of the Board of directors.

No director of a company shall, as a director, take any part in the discussion

of, or vote on, any contract or arrangement entered into, or to be entered
into, by or on behalf of the company, if he is in any way, whether directly or
indirectly, concerned or interested in the contract or arrangement; nor
shall his presence count for the purpose of forming a quorum at the time of
any such discussion or vote; and if he does vote, his vote shall be void.

Reg. No. 120552032/08/2011

Every company shall keep one or more registers in which shall be entered
separately particulars of all contracts or arrangements, including the
following particulars to the extent they are applicable in each case,
namely:- (i) the date of the contract or arrangement; (ii) the names of the
parties thereto; (iii) the principal terms and conditions thereof; (iv) in the
case of a contract or arrangement to which this Act applies, the date on
which it was placed before the Board; (v) the names of the directors voting
for and against the contract or arrangement and the names of those
remaining neutral. Further, every company shall keep at its registered office
a register of its directors, managing director, managing agent, secretaries
and treasurers, manager and secretary.

The remuneration payable to the directors of a company, including any

managing or whole-time director, shall be determined, either by the
articles of the company, or by a resolution or, if the articles so require, by a
special resolution, passed by the company in general meeting; and the
remuneration payable to any such director determined as aforesaid shall be
inclusive of the remuneration payable to such director for services
rendered by him in any other capacity. However, any remuneration for
services rendered by any such director in any other capacity shall not be so
included if:- (i) the services rendered are of a professional nature; and (ii) in
the opinion of the Central Government, the director possesses the requisite
qualifications for the practice of the profession.

A director may receive remuneration by way of a fee for each meeting of

the Board, or a committee thereof, attended by him. A director who is
neither in the whole-time employment of the company nor a managing
director may be paid remuneration, either by way of a monthly, quarterly
or annual payment with the approval of the Central Government; or by way
of commission if the company by special resolution authorises such
payment. However, the remuneration paid to such director, or where there
is more than one such director, to all of them together, shall not exceed:- (i)
one per cent of the net profits of the company, if the company has a
managing or whole-time director, a managing agent or secretaries and
treasurers or a manager; (ii) three per cent of the net profits of the
company, in any other case.

Every public company having paid-up capital of not less than five crores of

Reg. No. 120552032/08/2011

rupees shall constitute a committee of the Board knows as 'Audit

Committee' which shall consist of not less than three directors and such
number of other directors as the Board may determine of which two thirds
of the total number of members shall be directors, other than managing or
whole-time directors. The annual report of the company shall disclose the
composition of the Audit Committee. The auditors, the internal auditor, if
any, and the director-in-charge of finance shall attend and participate at
meetings of the Audit Committee but shall not have the right to vote.

The Audit Committee should have discussions with the auditors periodically
about internal control systems, the scope of audit including the
observations of the auditors and review the half-yearly and annual financial
statements before submission to the Board and also ensure compliance of
internal control systems. It shall have authority to investigate into any
matter in relation to the items specified by the Board and for this purpose,
shall have full access to information contained in the records of the
company and external professional advice, if necessary. The
recommendations of the Audit Committee on any matter relating to
financial management, including the audit report, shall be binding on the
Board. If the Board does not accept the recommendations of the Audit
Committee, it shall record the reasons thereof and communicate such
reasons to the shareholders.

Besides, a listed public company may, and in the case of resolutions relating
to such business as the Central Government may, by notification, declare to
be conducted only by postal ballot, shall, get any resolution passed by
means of a postal ballot, instead of transacting the business in general
meeting of the company. Where a company decides to pass any resolution
by resorting to postal ballot, it shall send a notice to all the shareholders,
along with a draft resolution explaining the reasons thereof, and requesting
them to send their assent or dissent in writing on a postal ballot within a
period of thirty days from the date of posting of the letter. If a resolution is
assented to by a requisite majority of the shareholders by means of postal
ballot, it shall be deemed to have been duly passed at a general meeting
convened in that behalf. However, if a shareholder sends his assent or
dissent in writing on a postal ballot and thereafter any person fraudulently
defaces or destroys the ballot paper or declaration of identify of the
shareholder, such person shall be punishable with imprisonment for a term

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which may extend to six months or with fine or with both.

2. In the competitive and technology driven business environment, while

corporates require greater autonomy of operation and opportunity for self-
regulation with optimum compliance costs, there is a need to bring about
transparency through better disclosures and greater responsibility on the
part of corporate owners and management for improved compliance. In
response to such changing corporate climate, the Companies Act, 1956 has
been amended from time to time so as to provide more transparency in
corporate governance and protect the interests of small investors,
depositors and debenture holders, etc.

The important step in this direction has been the Companies Bill, 2004,
which has been introduced to provide the comprehensive review of the
company law. It contained important provisions relating to corporate
governance, like, independence of auditors, relationship of auditors with
the management of company, independent directors with a view to
improve the corporate governance practices in the corporate sector. It is
subjected to greater flexibility and self-regulation by companies, better
financial and non-financial disclosures, more efficient enforcement of law,

This amendment to the Companies Act 1956 mainly focused on reforming

the audit process and the board of directors. It mainly aimed at:- (i) laying
down the process of appointment and qualification of auditors, (ii)
prohibiting non-audit services by the auditors; (iii) prescribing compulsory
rotation, at least of the Audit Partner; (iv) requiring certification of annual
audited accounts by both CEO and CFO; etc. For reforming the boards, the
bill included that remuneration of non-executive directors can be fixed only
by shareholders and must be disclosed. A limit on the amount which can be
paid would also be laid down. It is also envisaged that the directors should
be imparted suitable training. However, among others, an independent
director should not have substantial pecuniary interest in the companys

Reg. No. 120552032/08/2011


An improved corporate governance is the key objective of the regulatory

framework in the securities market. Accordingly, Securities and Exchange
Board of India (SEBI) has made several efforts with a view to evaluate the
adequacy of existing corporate governance practices in the country and
further improve these practices. It is implementing and maintaining the
standards of corporate governance through the use of its legal and
regulatory framework, namely:-

1. Securities Contracts (Regulation) Act, 1956

This Act was enacted to prevent undesirable transactions and to check

speculation in the securities by regulating the business of dealing therein.
Any stock exchange, which is desirous of being recognised, may make an
application in the prescribed manner to the Central Government. Every
application shall contain such particulars as may be prescribed, and shall be
accompanied by a copy of the bye-laws of the stock exchange for the
regulation and control of contracts as well as a copy of the rules relating in
general to the constitution of the stock exchange, and in particular to:- (i)
the governing body of such stock exchange, its constitution and powers of
management and the manner in which its business is to be transacted; (ii)
the powers and duties of the office bearers of the stock exchange; (iii) the
admission into the stock exchange of various classes of members, the
qualifications for membership, and the exclusion, suspension, expulsion
and re-admission of members there from or there into; (iv) the procedure
for the registration of partnerships as members of the stock exchange, in
cases where the rules provide for such membership; and the nomination
and appointment of authorised representatives and clerks.

Every recognised stock exchange shall furnish the Central Government with
a copy of the annual report, and such annual report shall contain such
particulars as may be prescribed. It may make rules or amend any rules
made by it to provide for all or any of the following matters, namely:- (i) the
restriction of voting rights to members only in respect of any matter placed
before the stock exchange at any meeting; (ii) the regulation of voting
rights in respect of any matter placed before the stock exchange at any
meeting so that each member may be entitled to have one vote only,

Reg. No. 120552032/08/2011

irrespective of his share of the paid-up equity capital of the stock exchange;
(iii) the restriction on the right of a member to appoint another person as
his proxy to attend and vote at a meeting of the stock exchange; etc.

If, in the opinion of the Central Government, an emergency has arisen and
for the purpose of meeting the emergency, the Central Government
considers it expedient so to do, it may, by notification in the Official
Gazette, for reasons to be set out therein, direct a recognised stock
exchange to suspend such of its business for such period not exceeding
seven days and subject to such conditions as may be specified in the
notification, and, if, in the opinion of the Central Government, the interest
of the trade or the public interest requires that the period should be
extended, it may, by like notification extend the said period from time to

Securities Contracts (Regulation) Amendment Act, 2007 has been enacted

in order to further amend the Securities Contracts (Regulation) Act, 1956,
with a view to include securitisation instruments under the definition of
'securities' and provide for disclosure based regulation for issue of the
securitised instruments and the procedure thereof. This has been done
keeping in view that there is considerable potential in the securities market
for the certificates or instruments under securitisation transactions.
Further, replication of the securities markets framework for these
instruments would facilitate trading on stock exchanges and, in turn, help
development of the market in terms of depth and liquidity.

2. Securities and Exchange Board of India Act, 1992

This Act was enacted to protect the interests of investors in securities and
to promote the development of, and to regulate, the securities market and
for matters connected therewith or incidental thereto. For this purpose,
the SEBI (the Board), by regulation, specify:- (i) the matters relating to issue
of capital, transfer of securities and other matters incidental thereto; and
(b) the manner in which such matters shall be disclosed by the companies.

No stock-broker, sub-broker, share transfer agent, banker to an issue,

trustee of trust deed, registrar to an issue, merchant banker, underwriter,
portfolio manager, investment adviser and such other intermediary who

Reg. No. 120552032/08/2011

may be associated with securities market shall buy, sell or deal in securities
except under, and in accordance with, the conditions of a certificate of
registration obtained from the Board in accordance with the regulations
made under this Act.

No depository, participant, custodian of securities, foreign institutional

investor, credit rating agency, or any other intermediary associated with
the securities market as the Board may by notification in this behalf specify,
shall buy or sell or deal in securities except under and in accordance with
the conditions of a certificate of registration obtained from the Board in
accordance with the regulations made under this Act.

Further, no person shall sponsor or cause to be sponsored or carry on or

caused to be carried on any venture capital funds or collective investment
scheme including mutual funds, unless he obtains a certificate of
registration from the Board in accordance with the regulations.

Every application for registration shall be in such manner and on payment

of such fees as may be determined by regulations. The Board may, by
order, suspend or cancel a certificate of registration in a prescribed
manner, as may be determined by regulations under this Act. However, no
order shall be made unless the person concerned has been given a
reasonable opportunity of being heard.

3. Depositories Act, 1996

This Act was enacted to provide for regulation of depositories in securities

and for matters connected therewith or incidental thereto. It provides for
the introduction of scripless trading system and settlement, which is
considered necessary for the effective functioning of the securities markets.
As per the Act, the term 'depository' means "a company formed and
registered under the Companies Act, 1956 and which has been granted a
certificate of registration under sub-section (1A) of section 12 of the
Securities and Exchange Board of India Act, 1992".

No depository shall act as a depository unless it obtains a certificate of

commencement of business from the Board (the SEBI). The Board shall
grant a certificate only if it is satisfied that the depository has adequate
systems and safeguards to prevent manipulation of records and

Reg. No. 120552032/08/2011

transactions. However, a certificate shall not be refused unless the

depository concerned has been given a reasonable opportunity of being

A depository shall enter into an agreement with one or more participants

as its agent, in such form as may be specified by the bye-laws. Any person,
through a participant, may enter into an agreement, in such form as may be
specified by the bye-laws, with any depository for availing its services. Any
such person shall surrender the certificate of security, for which he seeks to
avail the services of a depository, to the issuer in such manner as may be
specified by the regulations. The issuer, on receipt of certificate of security,
shall cancel the certificate of security and substitute in its records the name
of the depository as a registered owner in respect of that security and
inform the depository accordingly. A depository shall, on receipt of
information, enter the name of the person referred in its records, as the
beneficial owner.

On receipt of intimation from a participant, every depository shall register

the transfer of security in the name of the transferee. If a beneficial owner
or a transferee of any security seeks to have custody of such security, the
depository shall inform the issuer accordingly.

Every person subscribing to securities offered by an issuer shall have the

option either to receive the security certificates or hold securities with a
depository. Where a person opts to hold a security with a depository, the
issuer shall intimate such depository the details of allotment of the security,
and on receipt of such information the depository shall enter in its records
the name of the allottee as the beneficial owner of that security.

A depository shall be deemed to be the registered owner for the purposes

of effecting transfer of ownership of security on behalf of a beneficial
owner. However, it shall not have any voting rights or any other rights in
respect of securities held by it. The beneficial owner shall be entitled to all
the rights and benefits and be subjected to all the liabilities in respect of his
securities held by a depository.

The Board, on being satisfied that it is necessary in the public interest or in

the interest of investors so to do, may, by order in writing,:- (i) call upon

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any issuer, depository, participant or beneficial owner to furnish in writing

such information relating to the securities held in a depository as it may
require; or (ii) authorise any person to make an enquiry or inspection in
relation to the affairs of the issuer, beneficial owner, depository or
participant, who shall submit a report of such enquiry or inspection to it
within such period as may be specified in the order.

Reg. No. 120552032/08/2011


I. Board of Directors

(A) Composition of Board

i. The Board of directors of the company shall have an optimum
combination of executive and non-executive directors with not less
than fifty percent of the board of directors comprising of non-
executive directors.

ii. Where the Chairman of the Board is a non-executive director, at

least one-third of the Board should comprise of independent
directors and in case he is an executive director, at least half of the
Board should comprise of independent directors.

Provided that where the non-executive Chairman is a promoter of

the company or is related to any promoter or person occupying
management positions at the Board level or at one level below the
Board, at least one-half of the Board of the company shall consist of
independent directors.

Explanation-For the purpose of the expression related to any

promoter referred to in sub-clause (ii):

a. If the promoter is a listed entity, its directors other than the

independent directors, its employees or its nominees shall be
deemed to be related to it;
b. If the promoter is an unlisted entity, its directors, its employees
or its nominees shall be deemed to be related to it.

iii. For the purpose of the sub-clause (ii), the expression independent
director shall mean a non-executive director of the company who:

a. apart from receiving directors remuneration, does not

have any material pecuniary relationships or transactions
with the company, its promoters, its directors, its senior

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management or its holding company, its subsidiaries and

associates which may affect independence of the director;\
b. is not related to promoters or persons occupying
management positions at the board level or at one level
below the board;
c. has not been an executive of the company in the
immediately preceding three financial years;
d. is not a partner or an executive or was not partner or an
executive during the preceding three years, of any of the
i. the statutory audit firm or the internal audit firm that is
associated with the company, and

ii. the legal firm(s) and consulting firm(s) that have a material
association with the company.

e. is not a material supplier, service provider or customer or a

lessor or lessee of the company, which may affect
independence of the director;

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

two percent or more of the block of voting shares.

g. is not less than 21 years of age


For the purposes of the sub-clause (iii):

a. Associate shall mean a company which is an associate as

defined in Accounting Standard (AS) 23, Accounting for
Investments in Associates in Consolidated Financial Statements,
issued by the Institute of Chartered Accountants of India.

b. Senior management shall mean personnel of the company who

are members of its core management team excluding Board of
Directors. Normally, this would comprise all members of

Reg. No. 120552032/08/2011

management one level below the executive directors, including all

functional heads.

c. Relative shall mean relative as defined in section 2(41) and

section 6 read with Schedule IA of the Companies Act, 1956.

d. Nominee directors appointed by an institution which has invested

in or lent to the company shall be deemed to be independent

Institution for this purpose means a public financial institution as

defined in Section 4A of the Companies Act, 1956 or a
corresponding new bank as defined in section 2(d) of the Banking
Companies (Acquisition and Transfer of Undertakings) Act, 1970 or
the Banking Companies (Acquisition and Transfer of Undertakings)
Act, 1980 [both Acts].

(B) Non executive directors compensation and disclosures

All fees/compensation, if any paid to non-executive directors, including

independent directors, shall be fixed by the Board of Directors and shall
require previous approval of shareholders in general meeting. The
shareholders resolution shall specify the limits for the maximum number of
stock options that can be granted to non-executive directors, including
independent directors, in any financial year and in aggregate.

Provided that the requirement of obtaining prior approval of shareholders

in general meeting shall not apply to payment of sitting fees to non-
executive directors, if made within the limits prescribed under the
Companies Act, 1956 for payment of sitting fees without approval of the
Central Government.

(C) Other provisions as to Board and Committees

i. The board shall meet at least four times a year, with a maximum
time gap of four months between any two meetings. The minimum

Reg. No. 120552032/08/2011

information to be made available to the board is given in

Annexure I A.
ii. A director shall not be a member in more than 10 committees or
act as Chairman of more than five committees across all companies
in which he is a director. Furthermore it should be a mandatory
annual requirement for every director to inform the company
about the committee positions he occupies in other companies and
notify changes as and when they take place.

1. For the purpose of considering the limit of the committees on
which a director can serve, all public limited companies, whether
listed or not, shall be included and all other companies including
private limited companies, foreign companies and companies
under Section 25 of the Companies Act shall be excluded.

2. For the purpose of reckoning the limit under this sub-clause,

Chairmanship/membership of the Audit Committee and the
Shareholders Grievance Committee alone shall be considered.

iii. The Board shall periodically review compliance reports of all laws
applicable to the company, prepared by the company as well as
steps taken by the company to rectify instances of non-

iv. An independent director who resigns or is removed from the Board

of the Company shall be replaced by a new independent director
within a period of not more than 180 days from the day of such
resignation or removal, as the case may be:

Provided that where the company fulfils the requirement of

independent directors in its Board even without filling the vacancy
created by such resignation or removal, as the case may be, the
requirement of replacement by a new independent director within
the period of 180 days shall not apply

Reg. No. 120552032/08/2011

(D) Code of Conduct

i. The Board shall lay down a code of conduct for all Board members and
senior management of the company. The code of conduct shall be posted
on the website of the company.

ii. All Board members and senior management personnel shall affirm
compliance with the code on an annual basis. The Annual Report of the
company shall contain a declaration to this effect signed by the CEO.

For this purpose, the term senior management shall mean personnel of
the company who are members of its core management team excluding
Board of Directors. Normally, this would comprise all members of
management one level below the executive directors, including all
functional heads.

II. Audit Committee

(A) Qualified and Independent Audit Committee

A qualified and independent audit committee shall be set up, giving the
terms of reference subject to the following:

i. The audit committee shall have minimum three directors as members.

Two-thirds of the members of audit committee shall be independent

ii. All members of audit committee shall be financially literate and at

least one member shall have accounting or related financial
management expertise.

Explanation 1: The term financially literate means the ability to read and
understand basic financial statements i.e. balance sheet, profit and loss
account, and statement of cash flows.

Reg. No. 120552032/08/2011

Explanation 2: A member will be considered to have accounting or related

financial management expertise if he or she possesses experience in
finance or accounting, or requisite professional certification in accounting,
or any other comparable experience or background which results in the
individuals financial sophistication, including being or having been a chief
executive officer, chief financial officer or other senior officer with financial
oversight responsibilities.

iii. The Chairman of the Audit Committee shall be an independent

iv. The Chairman of the Audit Committee shall be present at Annual
General Meeting to answer shareholder queries;

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

appropriate (and particularly the head of the finance function) to be
present at the meetings of the committee, but on occasions it may also
meet without the presence of any executives of the company. The
finance director, head of internal audit and a representative of the
statutory auditor may be present as invitees for the meetings of the
audit committee;
vi. The Company Secretary shall act as the secretary to the committee.

(B) Meeting of Audit Committee

The audit committee should meet at least four times in a year and not
more than four months shall elapse between two meetings. The quorum
shall be either two members or one third of the members of the audit
committee whichever is greater, but there should be a minimum of two
independent members present.

(C) Powers of Audit Committee

The audit committee shall have powers, which should include the following:

1. To investigate any activity within its terms of reference.

2. To seek information from any employee.
3. To obtain outside legal or other professional advice.

Reg. No. 120552032/08/2011

4. To secure attendance of outsiders with relevant expertise, if it

considers necessary.

(D) Role of Audit Committee

The role of the audit committee shall include the following:

1. Oversight of the companys financial reporting process and the

disclosure of its financial information to ensure that the financial
statement is correct, sufficient and credible.
2. Recommending to the Board, the appointment, re-appointment and, if
required, the replacement or removal of the statutory auditor and the
fixation of audit fees.
3. Approval of payment to statutory auditors for any other services
rendered by the statutory auditors.
4. Reviewing, with the management, the annual financial statements
before submission to the board for approval, with particular reference

a. Matters required to be included in the Directors Responsibility

Statement to be included in the Boards report in terms of clause
(2AA) of section 217 of the Companies Act, 1956
b. Changes, if any, in accounting policies and practices and reasons
for the same
c. Major accounting entries involving estimates based on the
exercise of judgment by management
d. Significant adjustments made in the financial statements arising
out of audit findings
e. Compliance with listing and other legal requirements relating to
financial statements
f. Disclosure of any related party transactions
g. Qualifications in the draft audit report.

5. Reviewing, with the management, the quarterly financial statements

before submission to the board for approval

Reg. No. 120552032/08/2011

5A. Reviewing, with the management, the statement of uses / application

of funds raised through an issue (public issue, rights issue, preferential
issue, etc.), the statement of funds utilized for purposes other than those
stated in the offer document/prospectus/notice and the report submitted
by the monitoring agency monitoring the utilisation of proceeds of a
public or rights issue, and making appropriate recommendations to the
Board to take up steps in this matter.

6. Reviewing, with the management, performance of statutory and

internal auditors, adequacy of the internal control systems.

7. Reviewing the adequacy of internal audit function, if any, including the

structure of the internal audit department, staffing and seniority of the
official heading the department, reporting structure coverage and
frequency of internal audit.

8. Discussion with internal auditors any significant findings and follow up

there on.

9. Reviewing the findings of any internal investigations by the internal

auditors into matters where there is suspected fraud or irregularity or
a failure of internal control systems of a material nature and reporting
the matter to the board.

10. Discussion with statutory auditors before the audit commences, about
the nature and scope of audit as well as post-audit discussion to
ascertain any area of concern.

11. To look into the reasons for substantial defaults in the payment to the
depositors, debenture holders, shareholders (in case of non payment
of declared dividends) and creditors.

12. To review the functioning of the Whistle Blower mechanism, in case

the same is existing.

12A. Approval of appointment of CFO (i.e., the whole-time Finance

Director or any other person heading the finance function or

Reg. No. 120552032/08/2011

discharging that function) after assessing the qualifications, experience

& background, etc. of the candidate.

13. Carrying out any other function as is mentioned in the terms of

reference of the Audit Committee.
Explanation (i): The term "related party transactions" shall have the
same meaning as contained in the Accounting Standard 18, Related
Party Transactions, issued by The Institute of Chartered Accountants of
Explanation (ii): If the company has set up an audit committee
pursuant to provision of the Companies Act, the said audit committee
shall have such additional functions / features as is contained in this

(E) Review of information by Audit Committee

The Audit Committee shall mandatorily review the following information:

1. Management discussion and analysis of financial condition and results
of operations;
2. Statement of significant related party transactions (as defined by the
audit committee), submitted by management;
3. Management letters / letters of internal control weaknesses issued by
the statutory auditors;
4. Internal audit reports relating to internal control weaknesses; and
5. The appointment, removal and terms of remuneration of the Chief
internal auditor shall be subject to review by the Audit Committee

III. Subsidiary Companies

i. At least one independent director on the Board of Directors of the holding

company shall be a director on the Board of Directors of a material non
listed Indian subsidiary company.
ii. The Audit Committee of the listed holding company shall also review the
financial statements, in particular, the investments made by the unlisted
subsidiary company.
iii. The minutes of the Board meetings of the unlisted subsidiary company
shall be placed at the Board meeting of the listed holding company. The

Reg. No. 120552032/08/2011

management should periodically bring to the attention of the Board of

Directors of the listed holding company, a statement of all significant
transactions and arrangements entered into by the unlisted subsidiary

Explanation 1: The term material non-listed Indian subsidiary shall mean

an unlisted subsidiary, incorporated in India, whose turnover or net worth
(i.e. paid up capital and free reserves) exceeds 20% of the consolidated
turnover or net worth respectively, of the listed holding company and its
subsidiaries in the immediately preceding accounting year.

Explanation 2: The term significant transaction or arrangement shall

mean any individual transaction or arrangement that exceeds or is likely to
exceed 10% of the total revenues or total expenses or total assets or total
liabilities, as the case may be, of the material unlisted subsidiary for the
immediately preceding accounting year.

Explanation 3: Where a listed holding company has a listed subsidiary which

is itself a holding company, the above provisions shall apply to the listed
subsidiary insofar as its subsidiaries are concerned.

IV. Disclosures

(A) Basis of related party transactions

i. A statement in summary form of transactions with related parties

in the ordinary course of business shall be placed periodically
before the audit committee.

ii. Details of material individual transactions with related parties

which are not in the normal course of business shall be placed
before the audit committee.

iii. Details of material individual transactions with related parties or

others, which are not on an arms length basis should be placed
before the audit committee, together with Managements
justification for the same..

Reg. No. 120552032/08/2011

(B) Disclosure of Accounting Treatment

Where in the preparation of financial statements, a treatment different

from that prescribed in an Accounting Standard has been followed, the
fact shall be disclosed in the financial statements, together with the
managements explanation as to why it believes such alternative
treatment is more representative of the true and fair view of the
underlying business transaction in the Corporate Governance Report.

(C) Board Disclosures Risk management

The company shall lay down procedures to inform Board members

about the risk assessment and minimization procedures. These
procedures shall be periodically reviewed to ensure that executive
management controls risk through means of a properly defined

(D) Proceeds from public issues, rights issues, preferential issues etc.

When money is raised through an issue (public issues, rights issues,

preferential issues etc.), it shall disclose to the Audit Committee, the
uses / applications of funds by major category (capital expenditure, sales
and marketing, working capital, etc), on a quarterly basis as a part of
their quarterly declaration of financial results. Further, on an annual
basis, the company shall prepare a statement of funds utilized for
purposes other than those stated in the offer
document/prospectus/notice and place it before the audit committee.
Such disclosure shall be made only till such time that the full money
raised through the issue has been fully spent. This statement shall be
certified by the statutory auditors of the company. Furthermore, where
the company has appointed a monitoring agency to monitor the
utilisation of proceeds of a public or rights issue, it shall place before the
Audit Committee the monitoring report of such agency, upon receipt,
without any delay. The audit committee shall make appropriate
recommendations to the Board to take up steps in this matter.

Reg. No. 120552032/08/2011

(E) Remuneration of Directors

i. All pecuniary relationship or transactions of the non-executive

directors vis--vis the company shall be disclosed in the Annual
ii. Further the following disclosures on the remuneration of directors
shall be made in the section on the corporate governance of the
Annual Report:
a. All elements of remuneration package of individual directors
summarized under major groups, such as salary, benefits,
bonuses, stock options, pension etc.
b. Details of fixed component and performance linked incentives,
along with the performance criteria.
c. Service contracts, notice period, severance fees.
d. Stock option details, if any and whether issued at a discount as
well as the period over which accrued and over which
iii. The company shall publish its criteria of making payments to non-
executive directors in its annual report. Alternatively, this may be
put up on the companys website and reference drawn thereto in
the annual report.
iv. The company shall disclose the number of shares and convertible
instruments held by non-executive directors in the annual report.
v. Non-executive directors shall be required to disclose their
shareholding (both own or held by / for other persons on a
beneficial basis) in the listed company in which they are proposed
to be appointed as directors, prior to their appointment. These
details should be disclosed in the notice to the general meeting
called for appointment of such director

(F) Management

i. As part of the directors report or as an addition thereto, a

Management Discussion and Analysis report should form part of
the Annual Report to the shareholders. This Management
Discussion & Analysis should include discussion on the following

Reg. No. 120552032/08/2011

matters within the limits set by the companys competitive

1. Industry structure and developments.
2. Opportunities and Threats.
3. Segmentwise or product-wise performance.
4. Outlook
5. Risks and concerns.
6. Internal control systems and their adequacy.
7. Discussion on financial performance with respect to operational
8. Material developments in Human Resources / Industrial
Relations front, including number of people employed.

ii. Senior management shall make disclosures to the board relating to

all material financial and commercial transactions, where they have
personal interest, that may have a potential conflict with the
interest of the company at large (for e.g. dealing in company
shares, commercial dealings with bodies, which have shareholding
of management and their relatives etc.)
Explanation: For this purpose, the term "senior management" shall mean
personnel of the company who are members of its. core management team
excluding the Board of Directors). This would also include all members of
management one level below the executive directors including all
functional heads.

(G) Shareholders
i. In case of the appointment of a new director or re-appointment of
a director the shareholders must be provided with the following
a. A brief resume of the director;
b. Nature of his expertise in specific functional areas;
c. Names of companies in which the person also holds the
directorship and the membership of Committees of the Board;
d. Shareholding of non-executive directors as stated in Clause 49
(IV) (E) (v) above

Reg. No. 120552032/08/2011

ia. Disclosure of relationships between directors inter-se shall be made

in the Annual Report, notice of appointment of a director,
prospectus and letter of offer for issuances and any related filings
made to the stock exchanges where the company is listed.
ii. Quarterly results and presentations made by the company to
analysts shall be put on companys web-site, or shall be sent in such
a form so as to enable the stock exchange on which the company is
listed to put it on its own web-site.
iii. A board committee under the chairmanship of a non-executive
director shall be formed to specifically look into the redressal of
shareholder and investors complaints like transfer of shares, non-
receipt of balance sheet, non-receipt of declared dividends etc. This
Committee shall be designated as Shareholders/Investors
Grievance Committee.
iv. To expedite the process of share transfers, the Board of the
company shall delegate the power of share transfer to an officer or
a committee or to the registrar and share transfer agents. The
delegated authority shall attend to share transfer formalities at
least once in a fortnight.

V. CEO/CFO certification

The CEO, i.e. the Managing Director or Manager appointed in terms of the
Companies Act, 1956 and the CFO i.e. the whole-time Finance Director or
any other person heading the finance function discharging that function
shall certify to the Board that:

a. They have reviewed financial statements and the cash flow statement
for the year and that to the best of their knowledge and belief :

i. these statements do not contain any materially untrue statement

or omit any material fact or contain statements that might be

ii. these statements together present a true and fair view of the
companys affairs and are in compliance with existing accounting
standards, applicable laws and regulations.

Reg. No. 120552032/08/2011

b. There are, to the best of their knowledge and belief, no transactions

entered into by the company during the year which are fraudulent,
illegal or violation of the companys code of conduct.

c. They accept responsibility for establishing and maintaining internal

controls for financial reporting and that they have evaluated the
effectiveness of internal control systems of the company pertaining to
financial reporting and they have disclosed to the auditors and the Audit
Committee, deficiencies in the design or operation of such internal
controls, if any, of which they are aware and the steps they have taken
or propose to take to rectify these deficiencies.

d. They have indicated to the auditors and the Audit committee

i. significant changes in internal control over financial reporting during

the year;

ii. significant changes in accounting policies during the year and that
the same have been disclosed in the notes to the financial
statements; and

iii. instances of significant fraud of which they have become aware and
the involvement therein, if any, of the management or an employee
having a significant role in the companys internal control system
over financial reporting.

VI. Report on Corporate Governance

i. There shall be a separate section on Corporate Governance in the

Annual Reports of company, with a detailed compliance report on
Corporate Governance. Non-compliance of any mandatory
requirement of this clause with reasons thereof and the extent to
which the non-mandatory requirements have been adopted should
be specifically highlighted. The suggested list of items to be
included in this report is given in Annexure- I C and list of non-
mandatory requirements is given in Annexure I D.

Reg. No. 120552032/08/2011

ii. The companies shall submit a quarterly compliance report to the

stock exchanges within 15 days from the close of quarter as per the
format given in Annexure I B. The report shall be signed either by
the Compliance Officer or the Chief Executive Officer of the

VII. Compliance

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

practicing company secretaries regarding compliance of conditions of
corporate governance as stipulated in this clause and annex the
certificate with the directors report, which is sent annually to all the
shareholders of the company. The same certificate shall also be sent to
the Stock Exchanges along with the annual report filed by the company.
2. The non-mandatory requirements given in Annexure I D may be
implemented as per the discretion of the company. However, the
disclosures of the compliance with mandatory requirements and
adoption (and compliance) / non-adoption of the non-mandatory
requirements shall be made in the section on corporate governance of
the Annual Report.

Reg. No. 120552032/08/2011

Reg. No. 120552032/08/2011

Scandal at Satyam: Truth, Lies and Corporate


When terrorists attacked Mumbai last November,

the media called it "India's 9/11." That tragedy has
been succeeded by another that has been dubbed
"India's Enron." In one of the the biggest frauds in
India's corporate history, B. Ramalinga Raju,
founder and CEO of Satyam Computers, India's
fourth-largest IT services firm, announced on
January 7 that his company had been falsifying its
accounts for years, overstating revenues and
inflating profits by $1 billion. Ironically, Satyam
means "truth" in Sanskrit, but Raju's admission --
accompanied by his resignation -- shows the
company had been feeding investors, shareholders, clients and employees
a steady diet of asatyam (or untruth), at least regarding its financial
performance. (Editor's note: Satyam is a corporate sponsor of India

Raju's departure was followed by the resignation of Srinivas Vadlamani,

Satyam's chief financial officer, and the appointment of Ram Mynampati as
the interim CEO. In a press conference held in Hyderabad on January 8,
Mynampati told reporters that the company's cash position was "not
encouraging" and that "our only aim at this time is to ensure that the
business continues." A day later, media reports noted that Raju and his
brother Rama (also a Satyam co-founder) had been arrested -- and the
government of India disbanded Satyam's board. Though control of the
company will pass into the hands of a new board, the government stopped
short of a bailout -- it has not offered Satyam any funds. Meanwhile, a team
of auditors from the Securities and Exchange Board of India (SEBI), which
regulates Indian public companies, has begun an investigation into the
fraud. Since Satyam's stocks or American Depository Receipts (ADRs) are
listed on the Bombay Stock Exchange as well as the New York Stock
Exchange, international regulators could swing into action if they believe
U.S. laws have been broken. At least two U.S. law firms have filed class-

Reg. No. 120552032/08/2011

action lawsuits against Satyam, but given the company's precarious

finances, it is unclear how much money investors will be able to recover.

According to experts from Wharton and elsewhere, the Satyam debacle will
have an enormous impact on India's business scene over the coming
months. The possible disappearance of a top IT services and outsourcing
giant will reshape India's IT landscape. Satyam could possibly be sold -- in
fact, it had engaged Merrill Lynch to explore "strategic options," but the
investment bank has withdrawn following the disclosure about the fraud. It
is widely believed that rivals such as HCL, Wipro and TCS could cherry pick
the best clients and employees, effectively hollowing out Satyam. Another
possible impact could be on the trend of outsourcing to India, since India's
IT firms handle sensitive financial information for some of the world's
largest enterprises. The most significant questions, however, will be asked
about corporate governance in India, and whether other companies could
follow Satyam's Raju in revealing skeletons in their own closets.

'Riding a Tiger'

Raju was compelled to admit to the fraud following an aborted attempt to

have Satyam invest $1.6 billion in Maytas Properties and Maytas
Infrastructure ("Maytas" is Satyam spelled backwards) -- two firms
promoted and controlled by his family members. On December 16,
Satyam's board cleared the investment, sparking a negative reaction by
investors, who pummeled its stock on the New York Stock Exchange and
Nasdaq. The board hurriedly reconvened the same day and called off the
proposed investment.

The matter didn't die there, as Raju may have hoped. In the next 48 hours,
resignations streamed in from Satyam's non-executive director and Harvard
professor of business administration Krishna Palepu and three independent
directors -- Mangalam Srinivasan, a management consultant and advisor to
Harvard's Kennedy School of Government; Vinod Dham, called the "father
of the Pentium chip" and now executive managing director of NEA Indo-US
Ventures in Santa Clara, Calif.; and M. Rammohan Rao, the dean of the
Indian School of Business in Hyderabad (ISB). Rao had chaired both
December 16 board meetings. On January 8, he resigned his position as the
ISB dean. In a letter to the ISB community, he explained: "Unfortunately,

Reg. No. 120552032/08/2011

yesterday's shocking revelations, of which I had absolutely no prior

knowledge, mean that we are far from seeing the end of the controversy
surrounding Satyam Computers. My continued concern and preoccupation
with the evolving situation are impacting my role as dean of ISB at a critical
time for the school. Given that my term with ISB anyway ends in a few
months, I think that this is an appropriate time for me to step down."

Resigning as Satyam's chairman and CEO, Raju said in a letter addressed to

his board, the stock exchanges and the market regulator Securities &
Exchange Board of India (SEBI) that Satyam's profits were inflated over
several years to "unmanageable proportions" and that it was forced to
carry more assets and resources than its real operations justified. He took
sole responsibility for those acts. "It was like riding a tiger, not knowing
how to get off without being eaten," he said. "The aborted Maytas
acquisition was the last attempt to fill the fictitious assets with real ones."

Specifically, Raju acknowledged that Satyam's balance sheet included Rs.

7,136 crore (nearly $1.5 billion) in non-existent cash and bank balances,
accrued interest and misstatements. It had also inflated its 2008 second
quarter revenues by Rs. 588 crore ($122 million) to Rs. 2,700 crore ($563
million), and actual operating margins were less than a tenth of the stated
Rs. 649 crore ($135 million).

Satyam's auditor PricewaterhouseCoopers issued a terse statement: "Over

the last two days, there have been media reports with regard to alleged
irregularities in the accounts of Satyam.... Price Waterhouse are the
statutory auditors of Satyam. The audits were conducted by Price
Waterhouse in accordance with applicable auditing standards and were
supported by appropriate audit evidence. Given our obligations for client
confidentiality, it is not possible for us to comment upon the alleged
irregularities. Price Waterhouse will fully meet its obligations to cooperate
with the regulators and others."

Impact on 'Brand India'

The outrage over Raju's admission of systematic accounting fraud has

broadened to wider concern about the potential damage to India's appeal
for foreign investors and the IT services industry in particular. Immediately

Reg. No. 120552032/08/2011

following Raju's confession, Satyam's shareholders took a direct hit as the

company's share price crashed 77% to Rs. 30 (approximately 60 cents), a far
cry from its 52-week high of Rs. 544 ($11.35) last May.

"If there were one or two more such accounting scandals in the next six
months, it would make international investors more wary," says Wharton
management professor Michael Useem. "One example would put people
on guard; several examples would be enough to tell big investment money
managers that they have to be especially careful working in that

Jitendra Singh, a Wharton management professor who is currently dean of

the Nanyang Business School in Singapore, believes Satyam is an "outlier"
and that there is no reason to think that "problems of this kind may be
much more extensive than one company or a handful of companies."
However, he adds, "foreign investors will look a little more askance at
accounting data from India. And that may not be a bad thing."

Useem also warns against overreacting. "Don't assume other firms are
guilty," he says. But he considers the situation to be an "alerting call" for
investors to check where their money is, and for auditors and independent
directors in all major firms to take a look at the books.

Corporate India has tried to contain the damage so far. Rajeev

Chandrasekhar, president of the Federation of Indian Chambers of
Commerce and Industry, called upon regulators "to move quickly to
demonstrate that this is an exceptional case among corporations, and that
investors need not worry about Indian corporate governance and
accounting standards." Suresh Surana, founder of RSM Astute Consulting
Group, said in a statement that the Satyam development is "a major eye
opener and will bring into renewed and critical focus the role of
independent directors, auditors, company management, [the] CFO and
other key persons involved."

"When you have companies that are ostensibly growing their top lines at
30%, 40% or 50%, it is possible to paper over things," Singh says. "Satyam
was doing it by boosting sales and profits; Bernie Madoff was doing it by
boosting rates of return. When growth rates slow down, you are unable to

Reg. No. 120552032/08/2011

hide the financial reality of how much cash you actually have. It is possible
that during this slowdown period, more scandals will come to light." (U.S.
financier Madoff last month admitted to running a $50 billion Ponzi scheme
to keep his hedge fund afloat.)

Singh adds that companies with "the bluest of blue-chip reputations [such
as] Infosys and TCS" could actually gain in the current environment,
because of a potential "flight to quality" among client companies. "The
third-tier and weaker companies will probably undergo a lot more
scrutiny," he says.

According to Ravi Aron, senior fellow at the Mack Center for Technological
Innovation at Wharton, the Satyam fallout could affect India's IT offshoring
and outsourcing firms in several ways. An immediate impact could be
skepticism on the part of clients about whether Indian IT firms can be
entrusted with sensitive financial information. "Clients could begin to ask,
'How much do I know about this IT company and its governance?'" says
Aron. "Is the IT service provider doing anything that could jeopardize the
client's compliance with FASB, Sarbanes Oxley, Basel II or other financial

Aron recommends that before other IT companies get blackballed because

of Satyam's problems, "they should act swiftly to demonstrate that their
own operations are squeaky clean." Indian IT companies have always had
exceptionally high standards of accounting, and they should ensure that
they do not face any spillover effect, he adds. This has already begun to
happen. On the day that Raju came clean, N. R. Narayana Murthy, chief
mentor at Infosys, was on Indian television -- distancing Infosys and the rest
of the IT industry from Satyam's practices. Similarly, Vineet Nayar, CEO of
HCL, e-mailed a personal letter to the company's clients and associates.
Describing Satyam's disclosures as "unfortunate," the letter added that
Nayar would "reaffirm our commitment that we [will] focus on creating
value for our customers with the same passion that we have demonstrated
in the past while maintaining the highest ethical and governance

Mauro Guillen, a Wharton management professor who has studied

corporate governance in emerging economies, believes that Indian business

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has an advantage in arguing that the problem is limited to Satyam and is

not systemic. "India is not perceived like Russia -- it is neither everyone's
darling nor the plague," he says. "This works to the country's advantage
because it deflects the blame of such occurrences to the way governance
works in emerging economies rather than to India. What regulators in India
need to do in response to Satyam is to find out quickly if other companies
have been doing similar things. The proper response is to deal with and
defuse the problem as soon as possible."

Guillen notes that what makes Satyam's case unusual is that it had listed its
ADRs on the NYSE. "Companies in emerging economies have trouble raising
capital at low costs. The literature shows that is the reason they want to list
in the U.S., where they accept a higher level of governance in order to raise
capital at a lower cost. The fact that Satyam listed its ADRs in the U.S. but
still had such serious governance problems makes this case particularly

Guillen adds, though, that India has several well-regarded IT companies. "If
one or two of them don't make the grade, it should not shake investor
confidence. It shows that investing in emerging markets is risky. Investors
always balance risks and rewards. If the IT sector in India continues to
remain competitive, the Satyam episode will just be a footnote in India's
business story. If the sector becomes uncompetitive, then that would
create a serious problem."

Saikat Chaudhuri, a management professor at Wharton, believes the

Satyam episode reveals that the pressure on companies to maintain their
financial performance is immense. "Satyam always wanted to keep up with
the Big Three of Indian IT companies -- TCS, Infosys and Wipro," he notes.
"At a time when the IT industry was booming and companies were growing
rapidly, it was easy for Satyam to argue that the company was doing well
and that it had good governance." The involvement of the board,
Chaudhuri adds, was at the "strategic level; in companies like Satyam, it is
the owner/promoter/founder who runs the show. It has to do with the
ownership structure." In Chaudhuri's view, auditors such as
PricewaterhouseCoopers, who signed off on the bogus accounts at Satyam,
have a lot more to answer for than the board of directors. "This is a serious
lapse on their part. They should have probed."

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Chaudhuri's advice to other Indian IT firms is to distance themselves from

the Satyam fallout through prompt action. "Honesty and transparency will
alleviate investor concerns," he says. "I don't believe the sector will come
crashing down. Perhaps Indian IT companies will face more scrutiny in the
coming months; they may have to answer a few more questions, but India
Inc. will pull through." NASSCOM, the National Association of Software and
Services Companies, could play a role in helping communicate that "the
Satyam episode, though it shocked everyone, is an isolated instance," he

WorldCom and Tyco, Again

Useem says that if one were to take an inference from recent high-profile
scandals outside of India, "there would be a redoubled effort [in India] on
the part of investors and independent directors at other companies to
ensure that nothing like what happened at Satyam happens under their

Useem draws a parallel between what occurred at Satyam with the

scandals at WorldCom and Tyco, rather than at Enron. "At WorldCom, the
CFO and the CEO were knowingly misstating the accounting and financials
of the firm; at Tyco, the CEO and the CFO were knowingly taking money
from the company for personal purposes," he says. "Satyam's disaster has a
parallel to these acts of malfeasance."

Useem recalls the CEO and promoter of a Chinese solar panel company
who "wanted his company to be extremely well governed" and therefore
listed it on the New York Stock Exchange. "He wanted a great board of
directors and thus listed the company fully on the NYSE -- not as an ADR --
for the sole purpose ... of forcing himself to be disciplined in the
governance policies his company pursues."

If it survives, Satyam may be able to redeem itself with new management

and governance codes, Useem says. He recalls working as a consultant a
couple of years ago with Tyco, where the company's new CEO Ed Breen
systematically went about cleaning up after the departure of disgraced CEO
Dennis Kozlowski, instituting strong corporate governance practices. Tyco is

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one of the best examples of a corporate governance turnaround, Useem


Singh adds that the Satyam scandal doesn't necessarily warrant more
regulation. "There is no need to strengthen corporate governance
regulations [in India]," he says. "The issue is really more one of leadership
at the board level. The tone gets set by the chairman of the board; it's
much more a matter of culture within the board room, of the group
dynamics within the board."

Truth in Numbers

Notwithstanding Raju's confession, the Satyam episode has brought into

sharp relief the role and efficacy of independent directors. SEBI requires
Indian publicly held companies to ensure that independent directors make
up at least half their board strength.

The knowledge available to independent directors and even audit

committee members is inherently limited to prevent willful withholding of
crucial information, Singh notes. "The reality is, at the end of the day, even
as an audit committee member or as an independent director, I would have
to rely on what the management was presenting to me," he says, drawing
upon his experience as an independent director and audit committee
member at Fedders, a publicly held company in the U.S. that filed for
bankruptcy last year. "It is the auditors' job to see if the numbers presented
are accurate."

Singh says he drew "a level of confidence" from the accounting rigor and
governance mechanisms at Infosys, where he was an independent director
from 2000 to 2003. He recalls how T.V. Mohandas Pai, the company's then-
chief financial officer (now a director overseeing human resources) "would
take so much time going into accounting details."

Even if outside directors were unaware of the true state of Satyam's

finances, some red flags should have been obvious. According to Aron,
Satyam is one of the world's largest implementers of SAP systems. In an
effort to compete against Satyam, HCL recently acquired Axon, an SAP
consulting firm, at a cost of $800 million. (Editor's note: See interview with
HCL CEO Vineet Nayar) Aron notes that any Satyam director should have

Reg. No. 120552032/08/2011

been puzzled that the company was proposing to invest $1.6 billion in real
estate at a time when a competitor as formidable as HCL was gunning for
one of its most lucrative markets. "IT is a highly capital-intensive business,
especially in India," says Aron. "What on earth would compel Satyam to
invest $1.6 billion in real estate at a time when competition with HCL was
about to grow more intense? That is what the directors should have been
asking." Instead, he adds, like the dog that didn't bark in the Sherlock
Holmes story, the matter was allowed to slide.

How effective independent directors can be is mainly a factor of the

"dynamics inside the board room once the doors are closed," according to
Singh. "There is an attitude in some Indian companies that the board
members actually work for the people who have brought them onto the
board. This is a completely misguided attitude. It looks like this may have
been a problem at Satyam.... The real strength of a healthy board is when a
consensus gets overturned by a dissenting view."

Even if the proposed investment in the two Maytas firms appeared to be

ethical on first sight, Singh notes that he would have expected the
independent directors to be extra careful. "Given the fact that there is a
family connection involved, as an independent board member I would be
looking very hard at whether this is the right decision for the company," he
says. "Also, quite aside from issues of governance, everything we know
about unrelated diversification [deals] from management literature is that,
as a general matter, they are not a good idea; they don't seem to make
strategic sense."

Independent Defectors

Useem wonders if the Satyam directors who resigned actually did the right
thing. "The leadership dictum is that you need to stay the course, stay in
the game, face the problem and solve the problem," he says. "Did the four
directors who resigned have an option of banding together, staying on the
board and changing governance?" Useem adds that "it is often very hard to
stay the course. I am empathetic with people who have difficulty [making
that decision]."

Reg. No. 120552032/08/2011

Media reports quoted former independent director Srinivasan as saying she

accepted "moral responsibility" for failing to cast a dissenting vote on the
Maytas proposal. Some of the other directors who resigned have cited
difficulties in attending frequent board meetings. Useem says it can indeed
prove challenging for independent directors to go through reams of
documents and attend frequent board meetings that companies in distress
typically have.

In a written response to Knowledge@Wharton, Palepu, Satyam's former

non-executive director, stated that he was not present at the board
meetings where the Maytas investment proposals were discussed. "As a
result, under Indian law, I was not eligible to vote on the proposals," he
said. Palepu earned nearly Rs. 1 crore (about $200,000) from Satyam in
2007, according to regulatory filings, most of it for rendering "professional
services." He declined comment, but those services were essentially
leadership development and consulting for Satyam's top management,
according to Archana Muthappa, the company's head of media relations.

SEBI and India's registrar of companies have launched an investigation into

Satyam. Citing the Indian Securities Contract Regulation Act of 1956, a
report in The Economic Times says SEBI is empowered to award penalties of
up to Rs. 25 crore and imprisonment of up to 10 years to directors and
management executives "for violating the listing agreement by making false
and inaccurate disclosures in the company's quarterly and annual results."

Singh says it is important to remember who the ultimate victims are in

cases like Satyam. "This is a real tragedy; the people who will be left holding
the bag will be the shareholders."

Even as Raju is widely blamed for unleashing "India's Enron," Chaudhuri

points to a major difference between Enron and Satyam. "At Enron, the
CEO stonewalled, while whistle-blowers came out with the truth," he says.
"At Satyam, there were no whistle-blowers. The CEO blew the whistle on
himself." In that sense, Raju did -- ultimately -- tell the truth and perhaps
live up to the "Satyam" name. Unfortunately for him, the company, and
India's IT industry, by then it was much too late.

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The concept of corporate governance has been attracting public attention
for quite some time. It has been finding wide acceptance for its relevance
and importance to the industry and economy. It contributes not only to the
efficiency of a business enterprise, but also, to the growth and progress of a
country's economy. Progressively, firms have voluntarily put in place
systems of good corporate governance for the following reasons:

 Several studies in India and abroad have indicated that markets and
investors take notice of well managed companies and respond
positively to them. Such companies have a system of good corporate
governance in place, which allows sufficient freedom to the board
and management to take decisions towards the progress of their
companies and to innovate, while remaining within the framework of
effective accountability.
 In today's globalised world, corporations need to access global pools
of capital as well as attract and retain the best human capital from
various parts of the world. Under such a scenario, unless a
corporation embraces and demonstrates ethical conduct, it will not
be able to succeed.
 The credibility offered by good corporate governance procedures
also helps maintain the confidence of investors both foreign and
domestic to attract more long-term capital. This will ultimately
induce more stable sources of financing.
 A corporation is a congregation of various stakeholders, like
customers, employees, investors, vendor partners, government and
society. Its growth requires the cooperation of all the stakeholders.
Hence it imperative for a corporation to be fair and transparent to all
its stakeholders in all its transactions by adhering to the best
corporate governance practices.
 Good Corporate Governance standards add considerable value to the
operational performance of a company by:

1. improving strategic thinking at the top through induction of

independent directors who bring in experience and new ideas;
2. rationalizing the management and constant monitoring of risk
that a firm faces globally;

Reg. No. 120552032/08/2011

3. limiting the liability of top management and directors by

carefully articulating the decision making process;
4. assuring the integrity of financial reports, etc.

It also has a long term reputational effects among key stakeholders,

both internally and externally.

 Also, the instances of financial crisis have brought the subject of

corporate governance to the surface. They have shifted the emphasis
on compliance with substance, rather than form, and brought to
sharper focus the need for intellectual honesty and integrity. This is
because financial and non-financial disclosures made by any firm are
only as good and honest as the people behind them.
 Good governance system, demonstrated by adoption of good
corporate governance practices, builds confidence amongst
stakeholders as well as prospective stakeholders. Investors are
willing to pay higher prices to the corporates demonstrating strict
adherence to internally accepted norms of corporate governance.
 Effective governance reduces perceived risks, consequently reduces
cost of capital and enables board of directors to take quick and
better decisions which ultimately improves bottom line of the
 Adoption of good corporate governance practices provides long term
sustenance and strengthens stakeholders' relationship.
 A good corporate citizen becomes an icon and enjoy a position of
 Potential stakeholders aspire to enter into relationships with
enterprises whose governance credentials are exemplary.
 Adoption of good corporate governance practices provides stability
and growth to the enterprise.

Effectiveness of corporate governance system cannot merely be legislated

by law neither can any system of corporate governance be static. As
competition increases, the environment in which firms operate also
changes and in such a dynamic environment the systems of corporate
governance also need to evolve. Failure to implement good governance
procedures has a cost in terms of a significant risk premium when
competing for scarce capital in today's public markets.

Reg. No. 120552032/08/2011


Companies Bill, 2012, takes giant strides in privileging corporate

governance. Directors face severe restrictions, auditors will be rotated,
independent directors (IDs) have been strengthened, more powers are
vested in shareholders, private companies lose many exemptions and
transparency gets a boost. Extensive controls on loans and investments are
another limb of governance. Greater involvement by shareholders will
replace government approvals, a welcome move. Loans to all parties not
only corporates will be covered in the loan limits and investments by

Contracts with related parties will require prior approval by the board and,
in some cases, by shareholders. By a unique provision, shareholders
interested in the matter cannot vote on these general meeting resolutions.
Small shareholders are ensured board participation by one director
representing them. Related-party contracts must be justified and fully
disclosed in the Director's Report. These approvals will, however, not be
required if the transactions are on arm's-length basis. The directors,
promoters, key management personnel and top 10 shareholders in listed
companies must report any share purchase or sale within 15 days to the

All listed or notified classes of companies must have at least one-third

directors as IDs. Any director's associated party cannot do business with the
company except on an arm's length basis. Directors will be responsible only
for acts of omission or commission or negligence if they do not act on
information that should come to their knowledge as board members. They
must oversee the welfare of all stakeholders. No conflict of interest is
allowed between the company and another organization with which they
are connected; or hold office beyond two terms of three years each
followed by rest of one term. All board resolutions must be approved by at
least one ID. If a third of the directors so notify, resolutions moved by
circulation have to be considered by the board.

The Bill provides additional matters to be resolved upon only at board

meetings, viz, (a) issue of securities, (b) granting of loans or guarantees, etc,
(c) diversification of company's business, (d) approval of any merger or

Reg. No. 120552032/08/2011

reconstruction, (e) taking a substantial stake in another company, (f)

related-party transaction, or (g) other prescribed matters. For many
matters, shareholders' Special Resolution is now needed, not just ordinary
resolution, viz, selling or leasing out undertakings, borrowing money or to
remit or give time for debt repayment by a director. Even private
companies cannot give a loan to a director or associated parties except by
shareholders' prior Special Resolution approval.

Working directors and senior management staff have been prohibited from
entering into any call or put option on securities of the company, subsidiary
or associates. Insider trading in any company will fetch penalties. The
Remuneration Committee, headed by an ID, shall decide a remuneration
policy, having fixed and variable pay, and pay relationship between
directors and senior management, and to be disclosed to shareholders.

Audit committee responsibility has been expanded to include monitoring of

auditors' independence, their performance evaluation, approval of
modification of related-party transactions, scrutiny of loans and
investments, valuation of assets and evaluation of internal controls and risk
management. They have to establish a vigil mechanism and protection for
any whistle-blower. The members must be able to understand financial
statements and have a majority of IDs. Large companies must mandatorily
have professional internal auditors.

Firms of auditors of listed and specified classes of companies must have a

rest period after two consecutive terms of five years each. Their
continuation can be reviewed at every AGM. During their tenure, partner
and team are to be rotated. A sole proprietary firm has to retire at the end
of five years. The auditor will not be eligible for appointment, if he is
providing other services to the company, its subsidiary or associates. In this
scenario, we will surely see a concentration of large audits amongst the Big
Four audit firms as per the trend in the developed world.

The responsibility of auditors and penalty for negligence/wrongdoing has

gone up, including criminal liability on the entire firm for even one partner's
collusion in a fraud. This measure will be counterproductive by keeping
good talent away. Disciplinary process is to be transferred from ICAI to a

Reg. No. 120552032/08/2011

statutory board.

For private companies, many exemptions have been withdrawn. All loans to
working directors and other parties, related-party transactions, a business
diversification or capital raising, etc, will need board or general body
approval. Disclosure requirements to shareholders have been enhanced.