A PROJECT REPORT ON

“CORPORATE GOVERNANCE”
IN
ELECTRONICS CORPORATION OF INDIA LIMITED
 TABLE OF CONTENTS

1. INTRODUCTION TO THE PROJECT

1.1 Introduction to the project………………………………………..7

1.2 Objectives of the study…………………………………………...10
1.3 Need for the study…….…………………………………………..10
1.4 Research Methodology…………………………………………...11
1.5 Scope of the study………………………………………………...11
1.6 Limitations of the study…………………………………………..12

2. COMPANY PROFILE
2.1 About the company……………………………………………….14
2.2 History of the company…………………………………………...15
2.3 Products…………………………………………………………...18
2.4 Mission and Objectives of ECIL………………………………….24
2.5 Industry Profile……………………………………………………26

3. THEATERICAL BACKGROUND ON CORPORATE

GOVERNANCE
3.1 Introduction………………………………………………………29
3.2 What is Corporate Governance…………………………………..30
3.3 What went wrong is recent past………………………………….33
3.4 Concept of Corporate Governance……………………………….35
3.5 Aims of Corporate Governance…………………………………..36
3.6 Results of Good Corporate Governance………………………….36
3.7 Clause 49 of the Listing Agreement……………………………...42
3.8 Committees Related to Corporate Governance…………………..53
3.9 Case Study Related to Corporate Governance……………………60

4. CORPORATE GOVERNANCE PRACTICES AT ECIL

4.1 Director’s Reports……………………………………………….65
4.2 Accounting Policies……………………………………………..78
4.3 Auditor’s Reports………………………………………………..83

5. FINDINGS, CONCLUSIONS AND SUGGESTIONS

 5.1 Findings……………………………………………………..89
5.2 Conclusions…………………………………………………90
5.3 Suggestions………………………………………………….91

 Bibliography………………………………………………………..93
 CHAPTER-1

INTRODUCTION TO THE PROJECT

1.1 Introduction to the project-Corporate Governance at ECIL

1.2 Objectives of the study
1.3 Need for the study
1.4 Research Methodology
1.5 Scope of the study
1.6 Limitations of the study
 INTRODUCTION TO THE PROJECT-CORPORATE GOVERNANCE
AT E.C.I.L

1.1 INTRODUCTION TO THE PROJECT

1.1.1 Definition:

In A Board Culture of Corporate Governance, business author Gabrielle O'Donovan

defines corporate governance as 'an internal system encompassing policies, processes and
people, which serves the needs of shareholders and other stakeholders, by directing and
controlling management activities with good business savvy, objectivity, accountability and
integrity. Sound corporate governance is reliant on external marketplace commitment and
legislation, plus a healthy board culture which safeguards policies and processes.

The term "Corporate Governance" describes an incredibly broad, multifaceted concept. It

includes the systems, procedures and structure a corporation uses to convey authority,
responsibility and accountability among stakeholders. Good corporate governance balances
the interests of, and relationships between, a company's employees, owners and customers to
ensure the long-term sustainability and success of a corporate venture.

1.1.2 Laws and Regulations:

One of the primary aspects of corporate governance is company compliance with all
applicable federal and state legal regulations. Corporations must adhere to a set of strict,
comprehensive laws administered by national and local governments. These laws shape the
structure of a corporation's corporate governance before it even begins to operate. All
corporations, for example, are required to hold annual shareholder meetings, report income
and justify its use of assets.

1.1.3 Interests of Stakeholders:

 The stakeholders of a corporation are employees, customers, creditors and owners.
Each of these individuals or organizations have invested assets into the corporation.
Corporate governance describes how a corporation meets the interests of each of these
stakeholders without compromising the overall integrity of the company or neglecting
obligations to other stakeholders.

1.1.4 Ownership:

The owners of a corporation are called shareholders. They are primary stakeholders in
the company. The success of their investment in the corporation is directly dependent on the
success and sustainability of a corporation's actions and decisions. Shareholders meet
annually to elect members of a board of directors who act as their fiduciaries in the context of
their investment in the company. Shareholders to not play a role in the company's operations
or development. This “disconnects" between the owners of a corporation and the company
itself is one of the most critical aspects of corporate governance. Good corporate governance
includes a healthy, transparent relationship between the owners, the board and the company's
operations.

1.1.5 Board of Directors:

The board of directors in a corporation serve as the central body in the corporate
governance structure. Board members oversee the budget and operations of a company. They
are duty-bound to analyze and report this information to shareholders honestly and
accurately. The board appoints high level management officials for the corporation. These
officials have a great deal of authority and responsibility, and can ultimately determine the
success or failure of a company. The board is the primary conductor of corporate governance.
They are the bridge between the owners and employees of a company. They make the
strategic, long-term decisions that shape a corporation's structure and integrity.

1.1.6 Other Stakeholders:

Good corporate governance does more than convey the authority of the shareholders
throughout the corporation. Shareholders are a key stakeholder, but they are not the only
ones. Good corporate governance includes meeting the needs of employees and customers as
well. Shareholders may benefit financially from offering poor compensation to employees or
management, but the overall integrity of the corporation may not. The board and high-level
management develop strategies to benefit all stakeholders of the company. Creditors and
customers also have an interest, albeit indirect, in the health of a corporation. The concept of
corporate governance includes all of these relationships and interactions between
stakeholders within a corporation.

1.1.7 Other Aspects of Corporate Governance:

As corporate governance develops as an independent field of study and professional

practice, nearly all aspects of a corporation's operations fall under this umbrella term. Human
resources and public relations departments play an increasingly important role in the
governance structure of a corporation. As public and legal expectations of corporations
evolve, so must a corporation's governance structure.

Business ethics are integral to the integrity of a corporate governance structure.

Policies and procedures originating from ethical, responsible decisions maintain the
immediate and long-term health of a corporate enterprise.

1.1.8 Project study:

A project study on Corporate Governance in a leading public sector –

ELECTRONIC CORPORATION OF INDIA LIMITED. (Under government of India).
The above study is aimed at analyzing the governance practices prevalent in ECIL.

In this context it is proposed to take project study in reputed public sector undertaking
covering corporate governance’s aspect and giving suggestions for implementing any. ECIL
is chosen as it is a central public sector unit of long standing having diversified product
portfolio with large scope of supervision having control complications. The project study
aims to analyze, discuss, conclude and suggest measures for further controls.

The project is designed to provide an introduction to the study of CORPORATE

GOVERNANCE in ECIL. An attempt is made to explain about Corporate Governance &
various strategies. Corporate Governance in public sector undertaking assumes lot of
significance. This is more complex, when there are number of divisions & less common
controlling systems.
 It is observed that, some PSU’s are equipped with low intensive governance which
leads to drastic changes in the performances and also inferior standard or quality
management. While resulting in low growth rate of the organization. In case of ECIL, there is
large scope of supervision with high tech nature not similar to each other. Corporate
Governance hence is challenging task.

1.2 OBJECTIVES OF THE STUDY

To take a project study on corporate governance in a leading public sector –

ELECTRONIC CORPORATION OF INDIA LIMITED. The above study is aimed at
analyzing the corporate governance practices prevalent in ECIL.
1. To be followed by critical analysis & assessment of performance at ECIL.
2. To analyze the performance, the focus is on application of standard measurement tool
like performance ratios etc., to trend analysis and structural analysis of the company.
3. To analyze Corporate governance practices at ECIL.
4. To sum up providing conclusions and make suggestions for improvement on
Corporate governance practices at ECIL.

1.3 NEED FOR THE STUDY

The investment in Inventory is very high in most of the under talking engaged in
manufacturing wholesale and retail trade. The amount of investment is sometimes more in
inventory than in other assets.

In India a study of 29 major industries has revealed that the average cost of
materials is 64 paisa and the cost of labor and overheads is 36 paisa of a rupee. About 90% of
working capital is invested in inventories. The main reason attributed for loss making
financial indiscipline in managing the resources particularly in corporate governance for an
organization, the product profitability considering standards and budgets is of paramount
importance needless to say that in this context, corporate governance assumes lot of
significances.
 Corporate governance determines and portrays the following factors like what
to purchase, where to purchase, how to purchase, from where to purchase, where to store etc.
will be critical factor hence it becomes a crucial factors to undergo a detailed analysis to find
an efficient system of inventory. As an attempt has been made to study the corporate
governance with reference to ECIL.

1.4 RESEARCH METHODOLOGY

Any of the systematic and scientific research lies in its methodology giving a clear
idea of the forms of study and procedure adopted in conducting it and starting the purpose
become essential parts of every study. So, in this study the information furnished has been
collected in two ways one is primary source and one is secondary source.

Primary source:
Primary data has been collected by interacting with the guide and other supportive
through direct personnel, oral investigation, seminars, classroom lectures delivered about
Corporate governance in ECIL.

Secondary Data:
Secondary data is collected from Annual reports of the units, other reports of the
unit, House magazines of the units, Internet.

1.5 SCOPE OF THE STUDY

 Project covers 2002-2003 to 2008-2009 financial years. Data/ information is collects

for the above financial years.
 The project report on corporate governance covers collections of data, analysis of data
interpretations and suggestions. Inventory statements are prepared on the basis of the
financial statements of ECIL.
1.6 LIMITATIONS OF THE STUDY

 As stated elsewhere, ECIL is under a strategic ministry of government of India

dealing with nuclear power, defense etc.
 The very nature of the organization places certain limitations on the collection of the
data & analysis thereof.
 It’s not possible to collect total information.
 This has bearing to some extent on the project work.

CHAPTER-2

COMPANY PROFILE
2.1 About the Company
2.2 History of the Company
2.3 Products
2.4 Mission and Objectives of ECIL
2.5 Industry Profile

COMPANY PROFILE
2.1 ABOUT THE COMPANY

“Let us work up the embers of national pride latest in all of us and

build up our morale so that we can confidently aim high and
achieve greater goals”-

Dr. AS Rao – Founder C & MD of

ECIL.

Many industries require electronics in their production process. Electronics is

assuming increasing importance in the monitoring & control of production process of many
industries like engineering, chemical & metallurgical industries. In India, the electronics
industry has been taken many strides both in public & private sectors.

In the field of industrial electronics, the government of India has taken initiations in
1960’s to set up an industrial unit in public sector in order to produce industrial electronic
systems with indigenous technology to meet the nation’s requirement in strategic areas.

It has vital role to play in the fields of atomic energy, communication, defense,
education, space technology & entertainment. Because of its dynamic character, its pervasive
nature & its significant impact on science, industry & society, electronics is the vanguard of
the technological process. Technological process & obsolescence are both very rapid in this
field.

An intense promotional effort relating to both production & research development is

an important requisite. Therefore, it is essential to ensure a rapid growth in this field. In this
direction, government of India & its agencies with the aim of developing & promoting
industrial electronics system with indigenous know-how, to attain self-sufficiency in atomic
energy programmers, started ELECTRONICS CORPORATION OF INDIA LIMITED on
11th April, 1967.
2.2 HISTORY OF THE COMPANY

ECIL was setup under the Department of Atomic Energy in the year 1967 with a
view to generating a strong indigenous capability in the field of professional grade
electronics. The initial accent was on total self-reliance and ECIL was engaged in the Design
Development, Manufacture and Marketing of several products emphasis on three technology
lines viz. Computers, Control Systems and Communications. Over the years, ECIL pioneered
the development of various complex electronics products without any external technological
help and scored several 'firsts' in these fields prominent among them being country's

 First Digital Computer

 First Solid State TV
 First Control & Instrumentation for Nuclear Power Plants
 First Earth Station Antenna

The company played a very significant role in the training and growth of high caliber
technical and managerial manpower especially in the fields of Computers and Information
Technology. Though the initial thrust  was on meeting the Control & Instrumentation
requirements of the Nuclear Power Program, the expanded scope of self-reliance pursued by
ECIL enabled the company to develop various products to cater to the needs of  Defense,
Civil Aviation, Information & Broadcasting, Telecommunications, Insurance, Banking,
Police, and Para-Military Forces, Oil & Gas, Power, Space Education, Health, Agriculture,
Steel and Coal sectors and various user departments in the Government domain. ECIL thus
evolved as a multi-product company serving multiple sectors of Indian economy with
emphasis on import of country substitution and development of products & services that are
of economic and strategic significance to the country.

Electronics Corporation of India Limited (ECIL); a spin of BABA ATOMIC

RESEARCH CENTER (B.A.RC), was incorporated in 1987. The company is under the
administrative control of the Department of Atomic Energy (DAE).

The main objective of ECIL was to support the DAE by manufacturing electronic
instruments & systems, components, control panels & equipment for country’s nuclear
programme. The emphasis has all along been in self-reliance & indigenization in the chosen
technical fonts, supported by collaboration with global players on selective based over the
past three decades. The company has diversified its operations into other fields, such as,
computers, communication for other sectors such as oil & gas energy, telecom, civil aviation
& defense

Comparing last few years the position of the company, has been increasing. As
per the current information, the company has taken up lots of changes as well as
improvements in their profits.

The year 1996-97 has been another difficult year for the company. Production of Rs.
292.12 Crores & income (gross) of Rs. 356.03 Crores could be achieved during the year as
compared to the production & income of Rs. 320.65 Crores & Rs. 360.55 Crores respectively
for the previous year.

While the company could record profitable results throughout the 8th plan period
(92-97), the same could not be sustained in the year 1997-98, which turned out to be difficult
year both in terms of growth & profitability.

The year 1998-99 has been an exceptionally difficult on for the company due to
various extraneous reasons beyond control. The company was confronted with constraints in
procurement of certain custom-built components from foreign sources which affected
execution of order around Rs. 60 Crores, which were included in the year’s production
schedule.

Consequently, the company could achieve a production of Rs. 237.86 Crores only
as against a target of Rs. 380 Crores & Rs. 310.53 Crores achieved in the previous year.
Similarly, the income for the year worked out to be Rs. 256.94 Crores as compared to Rs.
347.85 Crores achieved in the previous year. This huge shortfall in unprecedented figures for
production & income in the previous year were Rs. 226.64 Crores respectively.
 The continued commitment to achieve a profitable growth & the associated
step initiated by the company resulted in consolidation of the turnover process, during the
year 2000-01. The performance shows 25% growth over the previous year in both production
& income fronts. The company recorded an impressive growth & crossed of Rs. 500 Crores
mark by achieving a production of Rs. 505.41 Crores, an achievement of 104% against the
target of Rs. 485 Crores.

The financial results for the year indicate a Net Profit of Rs. 1209 Crores, which is
the highest ever posted by the company in its history. The turnaround achievement in 2000-
01 was further strengthened by a 20% growth achieved a turnover for the second year in
succession. Against a target of Rs. 580 Crores, the company achieved a turnover of Rs. 681
Crores. The company made pre-tax profit of Rs. 79.34 Crores compared to 12.09 Crores
achieved in 2000-2001. All the accumulated losses of the company are wiped.

Out of a reserve of Rs. 20.53 Crores is created. The company redeemed all its
loans and is a debt free company, as on 31-03-2002.

During the year, the company registered an impressive growth by reaching a

turnover Rs. 1010 Crores against a target of Rs. 655 Crores, implying growth rate of 48%
over the previous year. The financial results indicate a pre-tax profit of Rs. 80.58 Crores after
making a provision of 01-01-1997 to 31-12-2000, as compared to Rs. 79.34 Crores, during
the year 2001-2002.

2.3 PRODUCTS

The company is organized into the following business divisions & their principal
Products are as follows:
1. Instrument & System Division (ISD):

Nuclear Industrial & Analytical Instruments, Security System Comprising CCTV,

Fire Alarm & x ray baggage inspection system, electronic energy meters, special
systems for defense, fiber optic based system & card access systems.

2. Servo Systems Division (SSD):

Precision servo systems for applications in defense & railways.

3. Communication System Division (CND):

Radio communication systems comprising of HF/VHF/UHF trans-receiver, catering

to the needs of Army, Navy, Air Force & Air Traffic Control, Satellite TV Receiver
only systems for B Sector, Special MW computers & electronic warfare systems.

4. Strategic Electronic Division (SED):

Special Defense Products

5. Telecom Division (TCD):

Telecommunication Equipment like switching products, transmission products, access

products & telecom administration products.

6. Antenna Products Division (APD):

Design, Manufacture & commissioning of various types of antenna system & turkey
SATCOM network projects.

7. Supervision Control & Data Acquisition Division (SCDAD):

The supervisory systems, supervisory control & automatic projects & industrial
control.

8. Business System Division (BSD):

 Computer Hardware products & large networking system.

9. Software Consultancy Division (SCD):

Software Consultancy Services

10. Components Division (CD):

Hybrid Micro-Circuits, Semi-Conductor Components, Ceramic Components,

Potentiometers, Tantalum Capacitors, Thermal Batteries, Printed Circuit Boards.

11. Special Products Division (SPD):

Various Time Fuses & other types for Army & Navy.

12. Control & Automation Divisions (CAD):

Simulators for thermal & nuclear power plant, data acquisition systems, control &
instrumentation equipment for nuclear & thermal power plant, operator information
systems.

13. Customer Support Division (CSD):

Spares & maintenance services for computers.

14. Industrial Control & Consumer Electronics Group (ICG)

15. Computer Education Division (CED)

16. IT Education Services:

 The business groups are supported by corporate facilities like standards & quality
assurance, corporate R&D, personnel & finance and accounts. Over the year,
company has acquired & maintained the following infrastructure facilities:

Standard Collaboration Laboratory:

 Antenna Test Range

 ASIC/VLSI Design Facility

 Wide variety of computing environment

 Country wide network for service support

 Antenna Spinning Facility

All the businesses of ECIL have obtained ISO 9001 certification for
design & manufacture of thick film resistors & hybrid micro circuits in June 1995.
Control Systems group has achieved ISO 9001 certification for design,
manufacture, supply, installation instrumentation systems in August 1995. Other
business groups have taken steps to apply for ISO 9000 quality system
certification.

Broadly, the present range of ECIL is as follows:

1. Computer & IT

 Software Products

 Parallel Processing Systems

 LAN Solutions

 EDP Packages
  Computer Hardware

2. Radio Communication

 Micro Wave Components

 VHF Radio Equipments

 Multi-Access Rural Radio

3. Instruments

 Analytical Systems

 Integrated Security

 Nuclear & Nuclear Industrial Systems

4. Antenna Products

 Earth Station Antenna

 V-SAT Products

 Satellite Earth Station

 Line of Sight(LOS) Antenna

5. Fuse Products for Antennas

 Fuse Products for defense

 Tantalum Capacitors & Potential Meters

 Hybrids
6. Telecom

 Telephone Billing Systems

 Max Electronic Exchange

 Special Tele-Equipment

 Message Switching Systems

7. Strategic Electronics

 Tank Communication Products

 Air-Traffic Control Display Systems

 Dependent Surveillance System

8. Electronic Welfare (EW) Products

9. Others

 Control & Automation

 Process Control DSC Systems

 DAS & SCADA

 Energy Management Systems

 Fiber Optic Communication System for Railway Signaling

ECIL BRANCHES
2.4 MISSION AND OBJECTIVES OF ECIL

MISSION

ECIL’s mission is to consolidate its status as a valued national asset in the area of
strategic electronics with specific focus on atomic energy, defense, security & such critical
sectors of national importance.

In the context of corporate governance, the firm is faced with the problem of meeting
two conflicting needs. To maintain a large size of inventory for efficient & smooth
production & sales operations. To maintain a minimum investment in inventories to
maximize profitability.

Both excessive & inadequate inventories are not desirable. These are two danger
points with in which the firm should operate. The objective of corporate governance should
be to determine & maintain optimum level of investment. The optimum level of inventory
will lie between the two danger points of excessive & inadequate inventories.

The firm should always avoid a situation of over investment or under investment in
inventories. The major dangers of over investment are:

 Unnecessary tie-up of the firm’s funds & loss of profit

 Excessive carrying costs

 Risk of Liquidity

The excessive level of inventories consumes funds of the firm, which cannot be used
for any other purpose & thus, it involves an opportunity cost. The carrying costs, such
as the cost of storage, handling, insurance, recording & inspection also increase in
proportion to the volume of inventory.

OBJECTIVES:
  To continue services to the country’s needs for the peaceful uses, Atomic Energy,
Special & Strategic requirements of defense & space, electronics security systems &
supports for civil aviation sector.

 To establish newer technology products such as container scanning systems &

explosive detectors.

 To explore new avenues of business & work for growth in strategic sectors, in
addition to working for realizing technological solutions for the benefit of society in
areas like Agriculture, Education, Health, Power, Transportation, Food, Disaster
Management etc.,

 To progressively improve share holder’s value in the company.

 To strengthen the technology base, enhance skill base & ensure succession planning
in the company.

 To re-engineer the company to become nationally & internationally competitive, by

paying particular attention to deliver, cost & quality in all its activities.

 To consciously work for finding export markets for the company’s products.

ACHIEVEMENTS, AWARDS AND FELICITATIONS:

As a recognition of the incredible turn around achieved and for its pioneering contribution
in the field of R&D, the company received a number of awards, most prominent of them are:

 “PADMA BHUSHAN” award (1972) to Ayyagari Sambhashiva Rao, a recognition

given to personalities of great national stature, when he was then chairman and
managing director of ECIL and director of atomic energy commission.
 Dr. A. S. Rao has been felicitated as “Electronics man of venture” in the year 2001.
 ECIL received national award for “excellence in the electronics” in 2003.
 SCOPE (Standard Conference of Public Enterprises) award for excellence and
outstanding contribution to public sector management.
  Certificate of merit for “excellence in MOU” performance, from the ministry of heavy
industries.

2.5 INDUSTRY PROFILE

The ELECTRONIC INDUSTRY is supported by the supply of raw materials from the
petrochemical industry, without which it may grind to a halt. The petrochemical industry is
an aid to many of the end-use product industries. It is one of the major supplier of number of
basic materials which is used by different other industries to manufacture their products. It
has become one of the major sources of growth for the economy.

The fastest growing sector is the it and electronic industry sector. The hardware
components serve as an important support to this stupendous growth. The growth of this
sector heavily depends on the supply of various intermediary products. The electronic
industry will not be able to perform without the components from the petrochemical industry.
The intermediary products assure better electrical insulation and safety, feasibility in
assembling, better design, and a superb capacity of data-storage, and reduction of mass of
components.

It is due to petrochemicals that the electronic industry has grown by leaps and
bounds in the previous decade. the progress in the communication technology is the result of
the improvements in the hardware devices such as radios, television sets, telephones,
computers, CD players, DVD players, digital cameras, mobile phones, laptops, palmtops, etc.
the circuitry of every electronic device is its most vital element. the circuitry mainly consists
of micro processors, integrated circuits, printed circuits, and connectors - all derived from
base materials of petrochemical products. Even the assembly and the housings are made out
of styrene plastics. Many of the cleansers used for cleaning the contact pins and lenses of the
optical drives are based on petrochemical products.

The electronics industry in India took off around 1965 with an orientation towards
space and defense technologies. This was rigidly controlled and initiated by the government.
This was followed by developments in consumer electronics mainly with transistor radios,
black & white TV, calculators and other audio products. Color televisions soon followed. In
1982-a significant year in the history of television in India - the government allowed
thousands of color TV sets to be imported into the country to coincide with the broadcast of
Asian games in New Delhi. 1985 saw the advent of computers and telephone exchanges,
which were succeeded by digital exchanges in 1988. The period between 1984 and 1990 was
the golden period for electronics during which the industry witnessed continuous and rapid
growth.

Current scenario

In recent years the electronic industry is growing at a brisk pace. It is currently worth
$10 billion but according to estimates, has the potential to reach $ 40 billion by 2010. The
largest segment is the consumer electronics segment. While is largest export segment is of
components.
 CHAPTER-3

THEORETICAL BACKGROUND ON CORPORATE

GOVERNANCE
3.1 Introduction
3.2 What is Corporate Governance
3.3 What went wrong in Recent Past
3.4 Concept of Corporate Governance
3.5 Aims of Corporate Governance
3.6 Results of Good Corporate Governance
3.7 Clause 49 of the Listing Agreement
3.8 Committees Related to Corporate Governance
3.9 Case Study Related to Corporate Governance
 THEORITICAL BACKGROUD

Introduction:

Good Corporate Governance practices are important to encourage investment in a country.

Companies in global economy, where access to capital markets is in the interest of economy,

assume greater significance. While the report of Kumar Mangalam Birla committee on

Corporate Governance opined that a strong Corporate Governance was a prerequisite for the

growth of capital market and was an important instrument of investor protection, studies of

various companies the world over revealed that markets and investors did take notice of well

governed companies, responded positively to them and rewarded such companies with higher

valuations as reflected in stock prices. Good Corporate Governance leads to the efficiency of

a business enterprise, to the creation of wealth of stakeholders and to the countries economy.

The need is for the entire corporate world to follow the principles of Corporate Governance.

There is to need to monitor the functioning of Corporates for guarding the

interest of investors and creditors. With increasing awareness and access to information,

investors do not solely depend upon regulators to protect them. They are conscious of their

rights and strive to maximize their wealth, so does a company. The key differences, with

everything else being common, will be the ability to create self driven, self-accessed, self-

regulated organization with a conscience. This is ultimately all about Corporate Governance

in India and elsewhere.

Also the Satyam scandal has allowed us to look at the fundamental aspects of

Corporate Governance—on whose behalf the company is governed, and how we can

distribute power to ensure the longevity and effectiveness of the institution

What is Corporate Governance?

 “Corporate Governance is the system by which companies are directed and

controlled…”

– Cadbury Report (UK), 1992

 “…to do with Power and Accountability: who exercises power, on behalf of whom,

how the exercise of power is controlled.”

 Sir Adrian Cadbury, in Reflections on Corporate Governance, Ernest Sykes Memorial

Lecture, 1993

A Canadian Definition :

 “…the process and structure to direct and manage the business and affairs of the

corporation with the objective of enhancing shareholder value, which includes

ensuring the financial viability of the business….”

 Where were the Directors? Guidelines for Improved Corporate Governance in

Canada, TSE, 1994

An OECD Definition:

 “Corporate governance involves a set of relationships between a company’s

management, its board, its shareholders and other stakeholders also the structure

through which objectives of the company are set, and the means of attaining those

objectives and monitoring performance are determined.”

 Preamble to the OECD Principles of Corporate Governance, 2004

 An Indian Definition:

 “…fundamental objective of corporate governance is the ‘enhancement of the long-

term shareholder value while at the same time protecting the interests of other

stakeholders.”

– SEBI (Kumar Mangalam Birla) Report on Corporate Governance, January,

2000

A Gandhian Definition:

 Trusteeship obligations inherent in company operations, where assets and resources

are pooled and entrusted to the managers for optimal utilization in the stakeholders’

interests.

Some Further Definitions:

Corporate governance is essentially about leadership:

 Leadership for efficiency;

 Leadership for probity;

 Leadership with responsibility; and

 Leadership which is transparent and which is accountable.

And according to me:

Corporate Governance is:

 System of laws, regulations and a practice, which promotes enterprise, accelerates

performance and ensures accountability.

OR

It may also be defined as a system of structuring, operating and controlling a

company.

Genesis of Governance

One may govern life in accordance with the revealed truth as one sees it or natural law or a

simple percept of not treating others as just ends, or in the pursuit of the good life of

contemplation prized by Aristotle. One may believe that morality lies in doing the best one

can do for oneself and one’s children and giving something back to the society, when one can

buy money or time. One may also think that morality is simply being responsible for one’s

actions, not harming others, and when one can compensate people for their pain and when

one cannot. One may think that morality is simply doing whatever produces the greatest good

for the greatest number; others may believe that morality is nothing more than maximizing

one’s wealth. One may believe any of these things has a moral compass to direct one’s daily

life. One should come to the realization that sometimes the ends do not justify the means and

sometimes the ends themselves are not pursuing. But a company/corporation has one end in

mind. Corporations have nothing called systems or beliefs. The result is that corporations are

able to act without morality or accountability, for they are formed for that one purpose: To

maximize pecuniary shareholder’s value. Therefore, to maintain the sanctity of a corporate

self, the corporations self, the corporations are required to follow a moral and ethical suit that
has become more pronounced in the present scenario, and has indeed exceeded the axiom of

wealth maximization.

Corporate Governance and Capital Markets

Source: A McKinsey Survey of Global Investors

2

What went wrong in the recent past?

 Environment

 Loss of moral fibre of corporations

 Business environment characterized by need to compete with the new economy

 Boards

 Fundamental weaknesses in business models sought to be compensated by adoption

of aggressive accounting practices

  Ignored ethics and value systems when a much hyped business strategy failed to

deliver as expected and articulated to Wall Street

 Incompetence of board members and overriding of audit committees

 Managements

 Stock option heavy compensation structures

 Bonus linked to short-term revenue growth, EPS and stock price

 An inability to accept failure

 Excessive focus on beating the street

 Auditors

 Aggressive interpretation of accounting standards

 Independence compromised to obtain lucrative consulting assignments

 Employees

 Compensation linked to stock-price movement

 Large disparity between the highest and lowest paid employee

 Culture of greed promoted within the organization by management

 Manipulative accounting practices

 Analysts

 Ever-greening of reports with an eye on investment banking assignments

 Pressurized managements to beat quarterly estimates

 Investors

 Short term focus of investors

Concept of Corporate Governance:

The concept of corporate governance cannot be completed without acknowledging the

contribution of the most celebrated scholar of ancient India, Kautilya. One of the worlds most

compete manuscript on the science of governance was penned by Kautilya in the third

century BC. Kautilya’s discussions on administrations and management are strikingly

modern and scientific covering almost all facets of governance. According to him, an ideal

king is one for whom Praja sukhe, sukhamragyam, Prajanan ca hite hitam, Naatman priyam

hitam ragyan Prajanan tu piyam hitam, i.e., in the happiness and well-being of the subjects

lies the well-being of the king, in the welfare of the subjects is the welfare of the king, what is

desirable and beneficial to the subjects and not his personal desires and ambitions is desirable

and beneficial for the king. He further elaborates that a king has fourfold duty as Raksha or

protection, vridhi or enhancement, palana or maintenance, yogakshema or safeguard. It is the

duty of the king to protect the wealth of the state and its subjects. If we for a moment assume

today’s business CEO or corporate board as king and the shareholders as the subject, it brings

out the quintessence of corporate governance as public good should be ahead of private good

and company’s resources should not be used for personal gains .The four duties in corporate

parlance would imply protection of shareholders wealth enhancement of wealth by proper

utilization of assets, maintaining the wealth (without appropriating it otherwise)and

safeguarding the interests of all stakeholders.

Aims of Corporate Governance

 Fulfilling long-term strategic goals of owners

  Taking care of the interests oh employees

 A consideration of the environment and local community

 Maintaining excellent relations with customers and suppliers

 Proper compliance with all the applicable legal and regulatory requirements.

Following extracts fro Kumar Mangalam Birla’s report on corporate governance brings

out the cardinal principle of corporate governance-“Strong corporate governance is

indispensable to resilient and vibrant capital markets and is an important instrument of

investor protection .It is the blood that flow within the veins of transparent corporate

disclosure and high quality accounting practices. It is the muscle that moves a viable and

accessible financial reporting structure.”

Results of Good Corporate Governance

 Enhancing the value for stakeholders.

 A well-understood corporate vision/mission statement.

 A broad-based board, comprising of directors with professional and expert acumen

with independent dispositions.

 Establishment of relevant committees of the board, with their roles clearly defined, to

oversee functions of the company in critical areas.

 Setting standards for good corporate practices to-

1. Ensure a transparent and fair relationship between the stakeholders and the company,

2. Institute a comprehensive management evaluation system;

3. Proactively eliminate investor complaints and evolve for redressal of the grievances (of

the customers, investors and borrowers),and,

 4. Institute systems and processes to ensure compliance with the statuses and laws

concerning the company.

 A clearly enunciated code of conduct for dealing with the stakeholders.

 Effective systems of internal control, monitoring and reporting mechanisms.

 Communication to the shareholder to ensure a high degree of transparency.

 The board to establish appropriate policies and monitor the performance at all levels

organization including self-evaluation.

Components of Corporate Governance

Board of
Directors

Shareholders

Management

The main constituents of Corporate Governance are the shareholders, the board of directors
and the management. The Board of Directors is responsible for the governance of the
company. The board members set the strategic objectives, frame financial as well as other
policies and oversee the implementation thereof, control the financial aspects and present the
director’s report on the activities and the progress of the company to the shareholders to
whom they are accountable. The board’s actions are subject to applicable laws, rules and
regulations. The shareholder’s role in enabling good governance is to identify and elect the
directors as well as auditors of the company and satisfy themselves as well as the auditors of
the company and satisfy themselves that an appropriate governance structure is in place. The
responsibilities of the senior management include ensuring that control systems are in place
to achieve the objectives laid down by the Board and help the board to discharge its
responsibilities to the shareholders effectively.
Is Corporate Governance a Business Ethic?

Yes, Corporate governance is about ethical conduct in business. Business ethics are
concerned with the core values and principles that enable a person to choose between right
and wrong and, therefore, select from alternative courses of action. However, ethical
dilemmas may arise from conflicting interests of the parties involved. Managers have to, thus,
make decisions based on a set principles influenced by the values, context and culture of the
organization. Ethical leadership is desirable for business as the organization is seen to
conduct its business in line with the expectations of all concerned stakeholders.
Independent directors of the company, i.e., board, are pivotal to the implementation of
corporate governance code and achievement of its desired results.
Independent directors are expected to take active interest in taking part in the company’s
board functions including policy formulation and strategic business decisions.
The board should function through committees, comprising of most of the directors, who
are independent.
These committees could be:
 Audit committee
 Remuneration committee
 Nomination committee
 Shareholders committee
 Other committees specific to company’s needs.

Audit committees exercise responsibility in three important areas:

1. Financial reporting
2. Corporate Governance
3. Corporate control
In financial reporting ,the responsibility of audit committee should be to provide assurance to
the board about financial disclosures made by the management to reasonably portray the
company’s financial health, results of operations, true and fair view of state of affairs and
profitability, and the company’s future plans and long-term commitments. The role of audit
committees in corporate relevant laws and regulations, is conducting its affairs ethically, and
is maintaining effective control against any conflict of interest and malafide practices .In
corporate control, the audit committee’s responsibility should include an understanding of the
company’s key financial reporting, areas and the system of internal control and fiscal
management.

Regulatory Framework

Legal and regulatory framework of corporate governance mainly covers the legal regime as
stipulated in the Securities and Exchange Board of India (SEBI)guidelines and Companies
Act (1956) covering various Indian Codes and Recommendations of committees.
Corporate Governance extends its jurisdiction beyond corporate laws. Its fundamental
objective is not only to merely fulfill the requirements of law but also to ensure commitment
of the board in managing the company in a transparent manner for maximizing long-term
shareholder value.
 It should be noted that effectiveness of any corporate governance system cannot be
legislated by law alone. While several laws exist to take care of most of the investor
grievances, the implementation and inadequacy of penal provisions have left a lot to be
desired and this is an area which requires significant improvement.
The real onus of achieving the desired level of corporate governance, therefore, lies in
the proactive initiatives taken by the companies and their board internally and not by way of
external measures.
In the Indian context, there is no single apex a regulatory body which can be said to
be the regulation of corporate, but there exists a coordination mechanism among various
functional regulators.
For example, in India, we have different regulators for the following:
 Corporates (MCA)
 Capital Market and Stock Exchanges (SEBI)
 Money Market and Banking (RBI)
 Insurance—Life and Non-Life (IRDA)
 Communication (TRAI)
 Foreign business (FIBP)
 Imports and Exports (FEMA, DGFT)
 Professions (Professional Institutes such as ICAI, ICSI, ICWAI, etc.).

Corporate Governance & Capital Market

Drivers: A Conceptual Framework
CCG & C REGULATION & LEGISLATION
Regulators Government Stock Exchanges
(SEBI/RBI) Legislation Listing Agreements

Lenders
Shareholders/
(Banks/ Listed Corporations Stakeholders
Depositors) (The Board & the Executive)

Market Operators Institutional Investors Press/Media

(Rewards) (Pension Funds/Insce Cos) (Opinion Makers)
Market Operations, Critique & Monitoring
21
Global Trends

Behind any corporate success or corporate failure lies the reason to it in the form of corporate
governance. Good governance in any corporate the world over is the interplay of legal
requirements, the ethics, effectiveness, board relationships and group dynamics. Corporate
Governance is common to one and all, be it India, China, Africa, or the other advanced
countries such as the US or the UK. In the corporate sector, governance has been extrapolated
to cover issues such as corporate sustainability, social and financial inclusion, social
responsibilities or even social inclusion, etc .In fact, every such issue hinges on good
governance, be it any part of the world. Since India and its economy are no longer isolated
constitute an important part of the global economy, it is high time that Indian Companies also
marched towards global best practices. While operations, capital and risk management,
technological innovations and customer satisfaction shall be the drivers of growth, it is going
to be corporate governance which shall lead Indian Corporate to match best business
practices on the globe.

Comparison of Board structure – Indian top 50 Vs U.S. top 50 – Key Findings

Parameter India (Nifty Fifty companies) US (top 50 out of NYSE 100

index)

Ownership pattern 48% of Indian companies have Largest shareholder holds less
largest shareholder holding than 10% in all cases
over 50%

Board size  Largest board size 18.

 Largest board size – smallest – 10
17. smallest – 5  66% of the top 50
 44% of the top 50 companies have more
companies have more than 12 directors
than 12 directors

Board independence All companies have a board

 58% of companies majority of independent
have a board majority directors
of independent
directors
 12% have less than
1/3rd of their directors
independent
Executive directors in Boards of 49 companies out of
In 35 companies 50% of the
board directors – or more – are 50 have less than 25%
executive directors executive directors

Chairman and CEO

60% have separate Chairman Only 20% have separate
and CEO Chairman and CEO
Lead independent director
3 companies have lead 20 companies have lead
independent directors independent directors
Board committees All companies have fully
independent audit
 All companies have remuneration and nomination
audit committees – committees
54% have fully
independent Audit
Committees

 33 companies have
remuneration
committees – of these
14 fully independent
and 16 have majority
independent
committees

 9 companies have
nomination
committees – 6 are
fully independent and
3 have majority
independent
committees

Source: Crisil Report on Corporate Governance

Management vs. Governance

Many people often mistakes the two terms to be synonymous. Even well-managed
corporations could be badly governed and lead to corporate failure. While governance has to
come fro the topmost layer-the-board-the management functions one layer beneath the board,
the executive or top management. The well-governed model will come from more new ideas,
more adaptable decision making and better accountability. Companies in India will have to
shift from best managed companies to best governed companies where the board’s role will
be to foster effective decisions and reverse failed policies.

Board Empowerment
Effective board empowerment is missing on Indian corporate boards. This emanates from the
composition itself which in most public sector units is government controlled. In contrast,
private sector company boards are more effective, efficient contributing, responsive and
empowered. This gets reflected in quality qualification of director’, selection process,
contributions made and even the sitting fees paid to them. While private sector boards could
be said to be assets in many public sector cases in India, one finds many boards devoid of
good people. Each board is a mix of all variants which dilutes the quality.

The mis-governance in the recent example of Punjab and Sindh Bank is a glaring case before
us. towards global best practices, Indian companies are expected to move in the direction of
board empowerment so that boards can be effective. One should not have any reservation
about empowering outside directors, but this is the only way to take out the best from them
;of course with a defined code of conduct in place-which we behave. There have been several
instances where independent directors participate more effectively in the board meetings and
CEOs in such entities do not find their powers diminished. The practice of empowering the
boards is followed in companies such as Dayton Hudson Corporation, Monsanto, and General
Motors, etc. One need to be reminded that corporate governance, at its core, is not about
power, but about ensuring that decisions are made effectively.

What is the Current Status on Corporate Governance Practices?

Greater emphasis on
leadership by example

Boards are returning to basic

value systems
• Each culture should look back to
its roots for value systems
• India’s centuries old principles of Strengthening
“Dharma”
the moral fiber
of the
Value systems are corporation
helping build corporate
governance framework
for companies

Boards are redefining value

creation
• Not merely increase in
stock prices
9

CLAUSE 49 OF THE LISTING AGREEMENT

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

The major provisions included in the new Clause 49 are:

 The board will lay down a code of conduct for all board members and senior
management of the company to compulsorily follow.
 The CEO an CFO will certify the financial statements and cash flow statements of the
company.
 If while preparing financial statements, the company follows a treatment that is
different from that prescribed in the accounting standards, it must disclose this in the
 financial statements, and the management should also provide an explanation for
doing so in the corporate governance report of the annual report.
 The company will have to lay down procedures for informing the board members
about the risk management and minimization procedures.
 Where money is raised through public issues etc., the company will have to disclose
the uses/ applications of funds according to major categories ( capital expenditure,
working capital, marketing costs etc) as part of quarterly disclosure of financial
statements.

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

Mandatory requirements refer primarily to:

1. Board of Directors with respect to their composition, independence, procedures, code
of conduct and disclosures;
2. Audit Committee and its composition, powers, role and responsibilities;
3. Subsidiary Companies to ensure their better control and supervision;
4. Disclosures in the context of related party transctions, risk management and
minimization procedures, utilization of proceeds from Initial Public Offerings,
inverstor education and protection;
5. CEO/CFO certification regarding the correction of the financial statement and
compliance with prescribed Accounting Standards
6. Separate report on corporate Governance in the annual reports with respects to
compliance of mandatory and non mandatory requirements; and
7. Compliance certificate obtained either from the auditors or practicing company
Secretaries

Non mandatory requirements refer to those requirements which are not compulsory and can
be adopted at the discretion of the company.
These include requirements:
1. Regarding the maximum tenure of the independent directors,
2. Formation of a remuneration committee for determining the remuneration packages
for executives directors,
3. Moving towards a regime of unqualified financial statements,
4. Training of board members,
5. Evaluation of non – executive board members, and
6. Establishing a mechanism for employees to report unethical behavior to the
management under a Whistle Blower Policy.
CLAUSE 49 – MANDATORY REQUIREMENTS

I. BOARD OF DIRECTORS
A. Composition of Board:
1. The Board of directors of the company shall have an optimum combination of
executive and non-executive directors with not less than fifty percent of the
board of directors comprising of non- executive directors .
2. Where the Chairman of the Board is non- executive directors, at least one third
of the Board should comprise of independent directors and in case he is an
executive directors, at least half of the Board should comprise of independent
directors.
3. For the purpose of sub – clause (ii) the expression ‘independent director’ shall
mean a non executive director of the company who:
a. Apart from receiving director’s remuneration , does not have any material
pecuniary relationships or transactions with the company, its promoters, its
directors its senior management or its holding company, its subsidiaries
and associated which many affects independence of the director.
b. Is not related to promoters or persons occupying managements positions at
the board level or at one level below the board;
c. It not been executive or was not partner or an executive during the
preceding three years, of any of the following:
d. Is not a partner or an executive or was not partner or an executive during
the preceding three years, of any of the following:
i. The statutory audit firm or the internal audit firm that is associated
with the company, and ;
ii. The legal firm(s) and consulting firm(s) that have a 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 directors; and
f. is not a substantial shareholder of the company i.e owning two percent or
more of the block of voting shares.
4. Nominee directors appointed by an institution which has invested in or lent to
the company shall be deemed to be independent directors. However if the Dr.
J.J. irani Committee recommendations on the proposed new company law are
accepted, then directors, nominated by financial institutions and the
government will not be considered independent.
B. Non executive directors compensation and disclosures: all fees/ compensation
and disclosures: all fees/ compensation , if any paid to non executive directors,
including independent directors, shall be fixed by the Board of Directors and shall
require previous approval of shareholders in general meeting. The shareholders’
resolution shall specify the limits for the maximum number of stock options that
can be granted to non- executive directors, including independent directors, in any
 financial year and aggregate. However as per SEBI amendment made vide
circular SEBI/ CFD/DIL/CG dated 12/1/06 sitting fees paid to non-executive
directors as authorized by the Companies Act 1956, would not require the
previous approval of shareholders.
C. Other provisions as to Board and Committees:
1. The board shall meet at least four times a year, with a maximum time gap of
three months between any two meetings. However SEBI has amended the
clause 40 of the listing agreement vide circular SEBI/CFD/DIL/CG dated 12-
1-06 as per which the maximum gap between two board meetings has been
increased again to 4 months.
2. A director shall not be a member in more than 10 Audit and / or Shareholders
grievance Committee or act as chairman of more than five Audit Shareholders
Grievance committee across all companies in which he is a director.
Furthermore it should e mandatory annual requirement for every director to
inform the company about the committee positions he occupies in other
companies and notify changes as and when they take place.
D. Code of conduct:
1. The Board shall lay down a code of conduct for all Board members and senior
management of the company. The code of conduct shall be posted the website
of the company,
2. All Board members and senior management personnel shall affirm compliance
with the code on an annual basis. The Annual report of the company shall
contain declaration to this effect signed by CEO.
II. AUDIT COMMITTEE.
A. Qualified and Independent Audit Committee: A qualified and independent audit
committee shall be set up, giving the terms of reference subject to the following:

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

Two thirds of the members fo audit committee shall be independent
directors.
2. All members of audit committee shall be financially literate an at least one
member shall have accounting or related financial management expertise.
3. The chairman of the Audit Committee shall be an independent director.
4. The chairman of the Audit Committee shall be present at annual General
Meeting to answer shareholder queries;
5. The audit committee may invite such of the executives, as it considers
appropriate (and particularly the head of the finance function) to the
present at the meetings of the committee. The finance director, head of
internal audit and representative of the statutory auditor may be present as
invitees for the meeting of the audit committee;
6. The Company Secretary shall act as the secretary to the committee.
B. Meeting of Audit Committee: the audit committee should meet at least four times
in a year and not more than four months shall elapse between two meetings. The
quorum shall be either tow members or one third of the members of the audit
committee whichever is greater, but there should be minimum of two independent
members present.

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

1. To investigate any activity within the terms of reference;
2. To seek information from any employee;
3. To obtain outside legal or other professional advice;
4. To secure attendance of outsiders with relevant experts, if any.

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

1. Oversight of the company’s financial reporting process and the disclosure of

its financial information to ensure that the financial statement is correct,
sufficient and credible.
2. Recommending to the Board, the appointment re- appointment and if required
the replacement or removal of the statutory auditor and the fixation of audit
fees.
3. Approval of payment too statutory auditors for any other services rendered by
the statutory auditors.
4. Reviewing, with the management the quarterly and annual financial statements
before submission to the board for approval with reference to Director’s
Responsibility statement under section 217 (2AA)k, significant adjustments
made in financial statements, compliance with listing requirements, disclosure
of any related pending transaction etc.
5. Reviewing with the management performance of statutory and internal auditor
and adequacy of the internal control systems.
6. Discussion with internal auditors regarding any significant findings including
suspected frauds or irregularities and follow up thereon.
7. Reviewing the findings of any internal investigation by the internal auditors
into matters where there is suspected fraud or irregularity or a failure of
internal control system of a material nature and reporting the matter to the
board.
8. Discussion with statutory auditors before the audit commence, about the
nature and scope of audit as well as post- audit discussion to ascertain any area
of concern.
9. To look into the reason fo substantial defaults in the payments to the
depositors, debenture holders, shareholders (in case of nonpayment of
declared dividends) and creditors.
 10. To review the functioning of the Whistle Blower mechanism, in case the same
is existing.
11. Carrying out any other function as it mentioned in the terms of reference of the
Audit Committee.

III. SUBSIDARY COMPANIES

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

company shal be a director on the Board of Directors of a material non listed
Indian subsidiary company.
2. The audit committee of the listed holding company shall also review the financial
statements, in particular, the investment made by the unlisted subsidiary company.
3. The minutes of the Board meeting of the unlisted subsidiary company shall be
placed at the Board meeting of the listed holding company, the management
should periodically bring to the attention of the Board of Directors of the listed
holding company, a statement of all significant transaction and arrangements
entered into by the unlisted subsidiary company.

IV. DISCLOSURES

A. Basis of related party transactions:

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

placed periodically before the audit committee.
2. Details of material individual transactions with related parties which are not in
the normal course of business shall be placed before the audit committee.

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 management’s explanation as to why it believes such alternative
treatment is more representative of the true and fair view of the underlying
business transaction in the Corporate Governance Report.

C. Board Disclosure- Risk Management: the company shall lay down procedures to
inform Board members about the risk assessment and minimization procedures.

D. Proceeds from public issues, rights issues , preferential issues etc. : When money
is raised through an issue (public issues rights issues, preferential issues etc.), it
shall disclose to the Audit committee, the uses/ applications of funds by major
 category (capital expenditure,, sales and marketing, working capital, etc.), on a
quarterly and annual basis.

E. Remuneration of Directors :

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

vis the company shall be disclosed in the Annual Report.
2. Further, certain prescribed disclosures on the remuneration of directors shall
be made in the section on the corporation governance of the Annual Report;
3. The company shall disclose the number of shares and convertible instruments
held by non-executive directors in the annual report.
4. Non executive directors shall be required to disclose their shareholding (both
own or held by/ for other persons on a (beneficial basis) in the listed company
in which they proposed to be appointed as directors, prior to their
appointment. These details should be disclosed in the notice to the general
meeting called for appointment of such directors.
F. Management: As part of the directors’ report or as an addition there to a
Management Discussion and Analysis report, the following should form part of
the Annual Report to the shareholders. This includes discussion on:

1. Industry structure and developments.

2. Opportunities and threats.
3. Segment wise or product wise performance
4. Outlook
5. Risks and concerns.
6. Internal control systems and their adequacy
7. Discussion on financial performance with respect to operational performance.
8. Material developments in Human resources/ industrial Relations front
including number of people employed.
G. Shareholders:

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

the shareholders must be provided with the following information:
a. A brief resume of the director
b. Nature of his expertise in specific functional areas;
c. Names of companies in which the persons also holds directorship and the
membership Committees of the Board; and
d. Shareholding of non – executive directors.

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

be formed to specifically look into the redressal of shareholder and investor
 complaints like transfer of shares, non receipt of declared dividends etc. this
committee shall be designated as ‘Shareholders/Investors Grievance
Committee’.
3. To expedite the process of share transfer, Board of the company shall delegate
the power of share transfer to an officer or a committee or to the registrar and
share transfer agents. There delegated authority shall attend to share transfer
formalities and least once in a fortnight.

V. CEO/CFO CERTIFICATION

Through the amendment made by SEBI vide circular SEBI /CFD/DIL CG DATED
12-1-06, in Clause 49 of the Listing Agreement, certification of intedrnal controls and
internalcontrol system
CFO/CEO would be for the purpose of financial reporting. Thus the CEO, i.e. the
Managing Direcctor or Manager appointed in terms of the Companies Act, 1956 and
the CFO i.e. the whole – time Finance Director or any other Person heading the
finance function discharging that function shall certify to the Board that:

1. They have reviewed financial statements and the cash flow statement for the year
and that to the best of their knowledge and belief:
i. These statements do not contain any materially untrue statement or omit
any material fact or contain statements that might be misleading;
ii. These statements together present a true and fair view of the company’s
affairs and are in compliance within existing accounting standards,
applicable laws and regulations.

2. There are, to the best of their knowledge and belief, no transactions entered into
by the company during the year which fraudulent, illegal or violative of the
company’s code of conduct.

3. They accept responsibility for establishing and maintaining internal controls and
they have evaluated the effectiveness of the internal control system of the
company pertaining to financial reporting and they have disclosed to the auditors
and the Audit Committee, deficiencies in the design or operation of internal
controls, if an, of which they are aware and the steps they have taken or propose to
take to rectify these deficiencies
 4. They have indicated to the auditors and the Audit Committee significant changes
in internal control over financial reporting during the year, significant fraud of
which they have become aware and the involvement there in if any, of the
management or an employee having a significant role in the company’s internal
control system over financial reporting.

VI. REPORT ON CORPORATE GOVERNANACE

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

Company with a detailed compliance report on Corporate Governance. Non
compliance of any mandatory requirement of this clause with reason there of and
the extent to which the non- mandatory requirements have been adopted should be
specifically highlighted.
2. The companies shall submit a quarterly compliance report to the stock exchange
within 15 days from the close of quarter as per the format given in
3. Annexure IB. the report shall be signed either by the Compliance Officer or the
Chief Executive Officer of the company.

VII. COMPLIANCE

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

NON MANDATORY REQUIREMENTS

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

chairman’s office at the company’s expense and also allowed reimbursement of
expenses incurred in performance of his duties Independent
directors may have a tenure not exceeding,, in the aggregate, a period of nine
years, on the Board of a company.
2. Remuneration Committee:
 i. The board may set up a remuneration committee comprising of at least
three directors all of whom shall be non-executive director, with the
chairman being an independent director, t determine on their behalf and on
behalf of the shareholders with agreed terms to reference, the company’s
policy remuneration packages for executive directors including pension
rights and may compensation payment
ii. The chairman of the remuneration committee could be present at the
Annual General Meeting to answer the shareholders queries

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

summary of the significant events in last six months, may be sent to each
household of shareholders,
4. Audit qualifications: Company many move towards a regime of unqualified
financial statements,
5. Training of Board Members : A company may train its Board members in the
business model of the company as well as the risk profile of the business
parameters of the company, their responsibilities as directors, and the best ways to
discharge them. It should be noted that originally training and updating of
knowledge of directors was a mandatory requirements of the Murthy Committee.
But in the face of strong opposition from the industry it was made non mandatory
6. Mechanism for evaluation non – executive Board Members: the performance
evaluation of non – executive directors could be done by a per group comprising
the entire Board of Directors, excluding the director being evaluated and Peer
Group evaluation cold be the mechanism to determine whether the extend/
continue the terms of appointment of non-executive directors.
7. Whistle Blower Policy: the concept behind introducing a Whistle Blower Policy
is that there are many employees at various levels in an organization who feel that
something is going wrong- eg. Corruption, violation of law, wastages, unethical
practices etc. they feel helpless and frustrated as they are unable to do anything
since they have no access to top management. They either remain silent or leave
the job. Sometimes they may write anonymous letters to various inside and
outside authorities, leak news to newspapers or may even act as informants to
Government/ statutory agencies. It is felt that such employees should be allowed
to talk about their concerns internally, so that management can take timely action
before it is too late. This termed as ‘blowing the whistle’.

Therefore Clause 49 provides that the company may establish a mechanism for
employees to report to the management concern about unethical behavior, actual or
suspected fraud or violation of the company’s code of conduct or ethics policy. The
mechanism could also provide for adequate safeguards against victimisation of
employees who avail of the mechanism and also provide for direct access to the
Chairman of the Audit committee in exceptional cases. Once established, the
existence of the mechanism may be appropriately communicated within the
organization.
STEPS IMPLEMENTED BY COMPANIES ACT WITH REGARD TO
CORPORATE GOVERNANCE

The Ministry of Company Affairs appointed various committees on the subject of

corporate governance which lead to the amendment of the companies Act in 2000.
These amendments aimed at increasing transparency and accountabilities of the Board
of Directors in the management of the company, thereby ensuring good corporate
governance. The dealt with the following:

1. COMPLIANCE WITH ACCOUNTING STANDARDS – SECTION 210A

As per this subsection inserted by the Companies Act, 1999 every profit and loss
account and balance sheet of the company shall comply with the accounting
standards. The compliance of Indian Accounting standards was made mandatory
and the provisions for setting up of National Committee on accounting standards
were incorporated in the Act.

2. INVESTORS EDUCATION AND PROTECTION FUND – SECTION 205C

This section was inserted by the Companies Act 1999which provides that the
central government shall establish a fund called the Investor Education and
protection Fund and amount credited to the fund relate to unpaid dividend, unpaid
matured deposits, unpaid matured Debenture, unpaid application money received
by the companies for allotment of securities and due for refund and interest
accrued on above amounts.

3. DIRECTOR’S RESPONSIBILITY STATEMENT- SECTION 217(2AA)

Subsection (2AA)added by the Companies Act, 2000 provides that the Boards
report shall also include a Director’s Responsibility statement with respect to the
following matters:

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

accounts and reasons for material departures, if any;
b. Whether appropriate accounting policies have been applied and on consistent
basis;
c. Whether directors had made judgments and estimate that are reasonable
prudent so as to give a true and fair view of the state of affair and profit and
loss of the company;
d. Whether the directors had prepared the annual accounts on a going concern
basis.
e. Whether directors had taken proper and sufficient care for the maintenance of
adequate accounting records for safeguarding the assets of the company.
4. NUMBER OF DIRECTORSHIPA- SECTION 275

As per this section of Companies Act, 2000 a person cannot hold office at same
time as director in more than fifteen companies.

5. AUDIT COMMITTEES – SECTION 292A

This section of the companies Act, 2000 provides for the constitution of audit
committees by every public company having a paid- up capital of Rs. 5 crores or
more. Audit Committee is to consist of at least 3 directors. Two of the members
of the Audit Committee shall be directors other than managing or whole time
director. Recommendation of the Audit Committee on any matter related to
financial management including audit report shall be binding on the Board.

6. PROHIBITION ON INVITIN OR ACCEPTING PUBLIC DPOSIT

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

7. SMALL DEPOSITOR- SECTIONS 58AA AND 58AAA

The Companies Act, 2000 had added two new sections, viz, section a 58AA and
58AAA, for the protection of small depositors. These provisions are designed to
protect depositors who have invested upto Rs. 20, 000 in a financial year in a
company.

8. CORPORATE IDENTITY NUMBER

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

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

9. POWERS TO SEBI – SECTION 22A

This section added Companies Act, 2000 empowers SEBI to administer the
provisions contained in section 44 to 48, 59 to 84, 10, 109, 110, 112, 113, 116,
117, 118, 119, 120, 121, 122, 206, 206A and 207 so far as they relate to issue and
transfer ofsecurities and non payment of dividend. However, SEBI’S power in
this regard is limited to listed companies.

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

Clause (g) of Section 2i7i4, added by the companies Act, 200 disqualifies a person
who is already director of a public company which (a) has not filed the annual
accounts and annual returns for any continuous three financial years commencing
on and after the first day of
April 1999; or (b) has failed or repay its deposit or interest thereon on due date or
redeem its debentures on due date or pay dividend and such failure to continues
for one year or more, however, the aforesaid disqualification will last for five
years only.
 11. SECRETARIAL AUDIT – SECTION383A
12. Secretarial Audit Section 383A was amended to provide for secretarial audit with
respect to companies having a paid up share capital of Rs. 10 lakhs or more but
less than, present Rs. 2 crores. As per the Companies Act, 2000 a whole time
company secretary has to file with ROC a certificate as to whether the company
has complied with all the provisions of the Act. A copy of this certificate shall
also be attached with the report of Board of Directors.

Thus, the importance of codification of good Corporate governance practices having

mandatory force cannot be mitigates. But in order to ensure implementation and compliance
in true spirit, Corporate Governance practices need to be legislated by one regular or body so
as to avert duplicity, confusion and uncertainty.

COMMITTEES RELATED TO CORPORATE GOVERNANCE IN INDIA

I) Kumar Mangalam Birla Committee Report [2000]:

Following CII’s initiative, SEBI set up a committee under Kumar Mangalam Birla to design

a mandatory-cum-recommendatory code for listed companies. The Birla Committee Report

was approved by SEBI in December 2000.

Mandatory and non mandatory recommendations

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

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

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

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

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

enforced some form of compliance through their listing agreements.

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

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

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

statute, such as the Companies Act, for their enforcement. In the case of others, enforcement
would be possible by amending the Securities Contracts (Regulation) Rules, 1957 and by

amending the listing agreement of the stock exchanges under the direction of SEBI. The

latter, would be less time consuming and would ensure speedier implementation of corporate

governance. The Committee therefore felt that the recommendations should be divided into

mandatory and non- mandatory categories and those recommendations which are absolutely

essential for corporate governance, can be defined with precision and which can be enforced

through the amendment of the listing agreement could be classified as mandatory. Others,

which are either desirable or which may require change of laws, may, for the time being, be

classified as non-mandatory

II) Naresh Chandra Committee Report [2002:]

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

governance issues. The Committee was entrusted to analyse and recommend changes, to the

issues related to the statutory auditor-company relationship, certification

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

independent

directors.

Corporate governance is the acceptance by management of the inalienable rights of

shareholders as the true owners of the corporation and of their own role as trustees

on behalf of the shareholders. It is about commitment to values, about ethical

business conduct and about making a distinction between personal and corporate

funds in the management of a company.

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

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

these standards themselves were evolving in keeping with market dynamics.

Accordingly, the Committee on Corporate Governance (the “Committee”) was

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

practices and further improve these practices. The Committee comprised members

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

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

forums.

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

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

director compensation, codes of conduct and financial disclosures. The Committee’s

This report contains 30 pages and two enclosures

Enclosures consist of 10 pages

recommendations in the final report were selected based on parameters including

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

implementation, verifiability and enforceability.

The key mandatory recommendations focus on strengthening the responsibilities of

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

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

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

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

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

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

Non-mandatory recommendations include moving to a regime where corporate

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

members; and the evaluation of performance of board members.

The Committee believes that these recommendations codify certain standards of

“good’ governance into specific requirements, since certain corporate responsibilities

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

implemented through SEBI’s regulatory framework, they will strengthen existing

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

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

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

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

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

premium when competing for scarce capital in today’s public markets.

III) Narayana Murthy Committee Report [2003]:

SEBI Committee on Corporate Governance was constituted under the Chairmanship of N. R.

Narayana Murthy, to look into:

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

governance standards.

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

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

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

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

governance practices and further improve these practices. It was set up to review Clause 49,

and suggest measures to improve corporate governance standards.

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

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

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

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

industry forums.

The terms of reference of the committee were to:

 review the performance of corporate governance; and

 determine the role of companies in responding to rumour and other price sensitive

information circulating in the market, in order to enhance the transparency and integrity of

the market.

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

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

compensation, codes of conduct and financial disclosures.

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

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

implementation, verifiability and enforceability.

The key mandatory recommendations focused on:

 Strengthening the responsibilities of audit committees;

 Improving the quality of financial disclosures, including those related to related party

transactions and proceeds from initial public offerings;

 Requiring corporate executive boards to assess and disclose business risks in the

annual reports of companies;

  Introducing responsibilities on boards to adopt formal codes of conduct; the position

of nominee directors; and

 Stock holder approval and improved disclosures relating to compensation paid to non-

executive directors.

 Non-mandatory recommendations included:

 Moving to a regime where corporate financial statements are not qualified;

 Instituting a system of training of board members; and

 Evaluation of performance of board members.

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

into specific requirements, since certain corporate responsibilities are too important to be left

to loose concepts of fiduciary responsibility. Their implementation through SEBI's regulatory

framework will strengthen existing governance practices and also provide a strong incentive

to avoid corporate failures.

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

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

clause 49.

Revised Clause 49 [2004]

In October 2004, SEBI amended Clause 49 of the listing

agreement in alignment with the Narayana Murthy Committee

recommendations. These changes primarily strengthened the

requirements in the following areas:

 Board composition and procedure

 Audit committee responsibilities

 Subsidiary companies
  Risk management

 CEO/CFO certification of financials and internal controls

 Legal compliance

 Other disclosures

The revised Clause 49 was effective 1 January 2006.

CASE STUDIES RELATED TO CORPORATE

GOVERNANCE

Satyam scam:
A Satyam Computers service limited was a consulting and an Information Technology
(IT) services company founded by Mr. Ramalingam Raju in 1988. It was India’s fourth
largest company in India’s IT industry, offering a variety of IT services to many types of
businesses. Its’ networks spanned from 46 countries, across 6 continents and employing over
20,000 IT professionals. On 7th January 2009, Satyam scandal was publicly announced & Mr.
Ramalingam confessed and notified SEBI of having falsified the account.
Raju confessed that Satyam's balance sheet of 30 September 2008 contained:

 Inflated figures for cash and bank balances of Rs 5,040 Crores (US$ 1.04 billion) [as
against Rs 5,361 Crores (US$ 1.1 billion) reflected in the books].
 An accrued interest of Rs. 376 Crores (US$ 77.46 million) which was non-existent.
 An understated liability of Rs. 1,230 Crores (US$ 253.38 million) on account of funds
which were arranged by himself.
 An overstated debtors' position of Rs. 490 Crores (US$ 100.94 million) [as against
Rs. 2,651 Crores (US$ 546.11 million) in the books].

The letter by B Ramalinga Raju where he confessed of inflating his company’s revenues
contained the following statements:

"What started as a marginal gap between actual operating profit and the one reflected in the
books of accounts continued to grow over the years. It has attained unmanageable proportions
as the size of company operations grew significantly [annualized revenue run rate of
Rs 11,276 Crores (US$ 2.32 billion) in the September quarter of 2008 and official reserves of
Rs 8,392 Crores (US$ 1.73 billion)]. As the promoters held a small percentage of equity, the
concern was that poor performance would result in a takeover, thereby exposing the gap. The
aborted Maytas acquisition deal was the last attempt to fill the fictitious assets with real ones.
It was like riding a tiger, not knowing how to get off without being eaten.”

The Scandal:

The scandal all came to light with a successful effort on the part of investor’s to
prevent an attempt by the minority shareholding promoters to use the firm’s cash reserves to
buy two companies owned by them i.e. Maytas Properties and Maytas Infra. As a result, this
aborted an attempt of expansion on Satyam’s part, which in turn led to a collapse in price of
company’s stock following with a shocking confession by Raju, The truth was its’ promoters
had decided to inflate the revenue and profit figures of Satyam thereby manipulating their
balance sheet consisting non-existent assets, cash reserves and liabilities.

The probable reasons:

 Deriving high stock values would allow the promoters to enjoy benefits allowing
them to buy real wealth outside the company and thereby giving them opportunity to derive
money to acquire large stakes in other firms on another hand. There could be the reason as to
why Raju’s family build its shareholding and shed it when required.

After the scandal, on 10 January 2009, the Company Law Board decided to bar the
current board of Satyam from functioning and appoint 10 nominal directors. On 5th February
2009, the six-member board appointed by the Government of India named A. S. Murthy as
the new CEO of the firm with immediate effect. The board consisted of:
1) Banker Deepak Parekh.
2) IT expert Kiran Karnik.
3) Former SEBI member C Achuthan S Balakrishnan of Life Insurance Corporation.
4) Tarun Das, chief mentor of the Confederation of Indian Industry and
5) T N Manoharan, former President of the Institute of Chartered Accountants of India.

A CASE STUDY ON INFOSYS

The case, ‘Corporate governance at Infosys’ talks about the corporate governance
practices at Infosys, one of India’s largest software companies. Till late 1990s, corporate
governance did not have much significance in India, in 1999; two committees
(Confederation of Indian Industries, CII and the Kumar Mangalam Birla Committee)
were setup to recommend good governance norms. These committees came out with
several recommendations, which were made mandatory for the companies to adhere to by
2001. Infosys was one of the first companaies in India which had complied with the
recommendations made by the committees. The case discusses in detail, the corporate
governance practices at Infosys, which complied with most of the recommendations made
by the committees.
By the late 1990s, Infosys Technologies Limited (Infosys) had clearly emerged one of
the best managed companies in India. Its corporate governance practices seemed to be
better than those of many other companies in India.
Because of its good governance practices, Infosys was the recipient of many awards. In
2001, Infosys was rated India’s most respected company by business World. Infosys was
also ranked second in corporate governance among 495 emerging companies in a survey
conducted by Credit Lyonnais Securities Asia (CLSA) Emerging Markets. It was voted
India’s best managed company five year sin arrow (1996-2000) by the Asia money poll.
In 2000, Infosys had been awarded the “National Award for Excellence in Corporate
Governance” by the Government of India. In 1999, Infosys had been selected as on e of
Asia’s leading companies in the Far Eastern Economic Review’s REVIEW 2000 Survey
and voted India’s most admired company by The Economic Times.

Corporate Governance – Infosys way:

Infosys had accepted the recommendation of both the CII and the Kumar Mangalam Birla
Committee. This section provides an overview of corporate governance practices
followed by Infosys.
Infosys had an executive chairman and chief executive officer (CEO) and a managing
director, president and chief operating officer (COO). The CEO was responsible for
corporate strategy, brand equity, planning, external contacts, acquisitions, and board
matters. The COO was responsible for all day-to-day operational issues and achievement
of the annual targets in client satisfaction, sales, profits, quality, productivity, employee
empowerment and employee retention.
The CEO, COO, executive directors and the senior management made periodic
presentations to the board on their targets, responsibilities and performance.

Infosys – A Benchmark for Corporate Governance

Some analysts felt that Infosys corporate governance practices offered many lessons to
corporate India. Infosys had shown that increasing shareholder wealth and safeguarding
the interests of other stakeholders was not incompatible, Infosys had given its non-
executive director not only played an active role in decision making, but also led or
served on at least on of the three (Nomination, Compensation and Audit) committees.
 In the late 1990s, the Confederation of Indian Industries (CII) published a code of
corporate governance ( Fefer Exhibit II for the highlights of the report). In 1999, the
Securities and Exchange Board of India (SEBI) appointed a committee under the
Chairmanship of Kumar Mangalam Birla to recommend a code of corporate governance.
Infosys had also provided all the information required by the Cadbury committee Infosys
had benchmarked its corporate governance practices against those of the best managed
companies in the world (Refer Exhibit I for board structures and processes for good
governance).
It was one of the first companies in India to publish a compliance report on corporate
governance, base on the recommendations of a committee constituted by the
Confederation of Indian Industries (CII). Infosys maintained a high degree of
transparency while disclosing information to stakeholders.

CHAPTER-4
CORPORATE GOVERNANCE PRACTICES AT ECIL

4.1 Director’s Reports

4.2 Accounting Policies
4.3 Auditor’s Reports

CORPORATE GOVERNANCE PRACTICES AT E.C.I.L

4.1 DIRECTOR’S REPORTS

(A) Director’s reports for the year 2005-2006

Director’s Report to the Shareholders

The company continued to take several measures to enhance the openness and
transparency of its operations.

Board of Directors
 In terms of section 617 of the companies act, 1956, ECIL is a Government company.
Presently, the entire paid up capital of the company is held by the president of India,
including 3 shares held by his nominees.

The Board, as on date, comprises of eight Directors- Chairman & Managing Director,
three wholesome Directors and four Non-Executive Directors. The Board meets at regular
intervals and is responsible for the proper direction and the management of the Company.

During the financial year ended 31st March 2006, four Board meetings were held on
27.5.2005, 11.7.2005, 7.11.2005 and 9.3.2006. The composition of the Directors, their
attendance at the Board meetings during the financial year and at the last Annual General
Meeting etc. is as follows:

Name & Position Board Board Attendance No. of other

As on 31.3.2006 Meetings Meetings At the last AGM Directorship
Held during Attended Held on 11.7.2005
the
Tenure
Whole-Time Directors
Sri G.P.Srivastava
4 4 Yes 1
Chairman & Managing
Director
Sri. A. Murugesan
4 4 Yes 1
Director( Finance)
Sri. R.R. Pandalai
4 3 NA Nil
Director(Personnel)
Sri.G.N.V.Satyanarayana
4 4 NA Nil
Director(Technical)
Non-ExecutiveDirectors
4 4 Yes 2
Sri.V.P.Raja
Sri.Rahul Asthana 4 3 yes 4
Sri.A.R.Gore
(upto 30.6.2005) 1 1 NA Nil

Lt.Gen.Davinder Kumar 4 2 NA 2
PVSM,VSM & Bar,ADC
Sri.G.Kumaraswamy Rao
2 2 NA Nil
(upto 31.10.2005)
Sri.Umesh Chandra
2 1 NA Nil
(appointed w.e.f 8.8.2005)

The remuneration

The remuneration of whole-time Directors is fixed by the Government of India as the

company is a Government company in terms of section 617of the Companies Act, 1956. At
present, all the part time Directors are Government officials from other PSUs and therefore,
are eligible for sitting fee for the meetings attended by them.

Audit Committee

A three-member Audit Committee was constituted by the board in March 2001

comprising of two Non-Executive Directors and a whole time Director. With regard to terms
of reference, powers and functions of the committee, the Board suggested that the provisions
in Clause 49 of Listing Agreement prescribed by SEBI as applicable to listed Companies are
to be followed as guidelines. The Audit Committee presently comprises of two Non-
Executive Directors, Sri Rahul Asthana, Sri A.R.Gore(upto 30.6.2005) and Sri Umesh
Chandra(from the meeting held on 30.9.2005) and one whole time Director(Technical) of the
company, Sri G.N.V. Satyanarayana. Sri Rahul Asthana is tha chairman of the committee.
During the year, four meetings of the committees were held on 27.5.2005, 30.9.2005,
19.12.2005 and 10.3.2006. The Audit committee reviewed the implementation of Accounting
Standards and Audit Programmes. The committee reviewed the Internal Audit Reports and
also the report on Fixed Assets Physical Verification. The committee pursued the Annual
Financial Statements and interacted with the Statutory Auditors for improvement in the
system for maintaining Financial records as well as the data under Cost Accounts Record
Rules.

Board’s Sub-Committee on Capital Projects

The Board reconstituted the sub-committee on Capital Projects on 29.3.2003

consisting of Sri V.P.Raja , Non-Executive Director, Sri A.Murugesan, Director(Finance) and
Sri.G.N.V.Satyanarayana, Director(Technical) to scrutinize the capital proposals and
recommend to the Board for its approval.

Investments Committee

The Board constituted an Investment Committee on 17.12.2003 consisting of

Chairman & Managing Director, Director(Finance), General Manager(Accounts) and a
representative from Corporate Planning and Projects Monitoring Division. This committee
will consider the proposals for investment of surplus funds in nationalized banks or sound
rated scheduled banks at the highest and competitive rates as per DPE guidelines.

Corporate Management Committee

The Corporate Management Committee is a high level policy making body at the
Corporate level which is headed by the Chairman & Managing Director. The Committee
consists of all Functional Directors, Executive Directors, General Manager and Heads of
Divisions. The Committee meets deliberates on the major policy issues including
performance of the company. The President and General Secretary of ECEU and President
and Secretary of ECOA are the special invitees.

Divisional Production Committees

The Divisional Production Committees are also constituted under the scheme of
Workers’ Participation in Management. The Head of Division concerned is the Chairman for
the Committee and the members are drawn from production shops, quality control, material
planning, personnel and finance areas. The meetings are convened periodically for discussion
on the issues pertaining to working plan to realize the production targets, sales targets and
sundry debts, order booking status etc.

Apex Committee

The Apex Committee is constituted under the scheme of Workers’ Participation in

Management. The Committee is headed by Chairman & Managing Director and other
members include Functional Directors on the Board, Executive Directors, General Manager
(HR), President and General Secretary of ECEU and President and Secretary of ECOA. The
committee meets periodically and deliberates and makes suitable recommendations on the
issues concerning improvement of production and performance and major policy issues for
smooth functioning and maintaining harmonious industrial relations in the company and
make suitable recommendations.

General Body Meetings

The details of the last three Annual General Meeting of the company are given below

Year Date Time Venue

Registered office:
2002-2003 27.06.2003 1400 hrs ECIL post office,
Hyderabad-500062
2003-2004 07.07.2004 1400 hrs -do-
2004-2005 11.07.2005 1400 hrs -do-

(B) Director’s reports for the year 2006-2007

Director’s Report to the Shareholders

The company continued to take several measures to enhance the openness and
transparency of its operations.

Board of Directors

In terms of section 617 of the companies act, 1956, ECIL is a Government company.
Presently, the entire paid up capital of the company is held by the president of India,
including 3 shares held by his nominees.

The Board, as on date, comprises of ten Directors- Chairman & Managing Director,
three wholesome Directors and six Non-Executive Directors. The Board meets at regular
intervals and is responsible for the proper direction and the management of the Company.
 During the financial year ended 31st March 2007, four Board meetings were held on
09.06.2006, 27.07.2006, 08.11.2006 and 06.02.2007. The composition of the Directors, their
attendance at the Board meetings during the financial year and at the last Annual General
Meeting etc. is as follows:

Board
Meetings Board Attendance
Name & Position No. of other
Held Meetings At the last AGM
As on 31.3.2007 Directorship
during the Attended Held on 27.07.2006
Tenure
Whole-Time Directors
Sri G.P.Srivastava
4 2 Yes 1
Chairman & Managing
Director(upto 29.09.2006)
Sri K.S Rajasekhara Rao
Chairman & Managing 4 2 - 1
Director(from 29.09.2006)
Sri A. Murugesan
Director(Finance) 4 2 Yes Nil
(upto 11.10.2006)
Sri. R.R. Pandalai
4 4 Yes Nil
Director(Personnel)
Sri.G.N.V.Satyanarayana
4 4 Yes Nil
Director(Technical)
Non-ExecutiveDirectors
4 3 Yes 2
Sri.V.P.Raja
Sri.Rahul Asthana
4 3 yes 4
(upto 26.03.2007)
Lt.Gen.Davinder Kumar
PVSM,VSM & Bar,ADC 4 2 - 2
(upto 30.09.2006)
Sri.Umesh Chandra 4 4 Yes Nil
Dr B N Suresh
3 1 - 1
(appointed w.e.f 11.07.2006)
Dr M J Zarabi
2 2 - Nil
(appointed w.e.f 19.10.2006)
Lt.Gen.SP Sree Kumar,PVSM
1 1 - 1
(appointed w.e.f 06.12.2006)

The remuneration

The remuneration of whole-time Directors is fixed by the Government of India as the

company is a Government company in terms of section 617of the Companies Act, 1956. At
present, all the part time Directors except Dr. M J Zarabi, are Government officials from
other PSUs and therefore, are eligible for sitting fee for the meetings attended by them.Dr. M
J Zarabi,who is an Independent Director,is being paid Rs. 2500 as sitting fee per attendance.

Audit Committee

A three-member Audit Committee was constituted by the board in March 2001

comprising of two Non-Executive Directors and a whole time Director. With regard to terms
of reference, powers and functions of the committee, the Board suggested that the provisions
in Clause 49 of Listing Agreement prescribed by SEBI as applicable to listed Companies are
to be followed as guidelines.

The Audit Committee presently comprises of two Non-Executive Directors, Sri Rahul
Asthana,(upto 26.03.2007) and Sri Umesh Chandra and one whole time Director(Technical)
of the company, Sri G.N.V. Satyanarayana. Sri Rahul Asthana is tha chairman of the
committee.

During the year, four meetings of the committees were held on 09.02.2006,
27.07.2006, 08.11.2006 and 01.03.2007. The Audit committee reviewed the implementation
of Accounting Standards and Audit Programmes. The committee reviewed the Internal Audit
Reports and also the report on Fixed Assets Physical Verification. The committee pursued the
Annual Financial Statements and interacted with the Statutory Auditors for improvement in
the system for maintaining Financial records as well as the data under Cost Accounts Record
Rules.

Board’s Sub-Committee on Capital Projects

 The Board reconstituted the sub-committee on Capital Projects on 29.3.2003
consisting of Sri V.P.Raja , Non-Executive Director, Sri A.Murugesan, Director(Finance) and
Sri.G.N.V.Satyanarayana, Director(Technical) to scrutinize the capital proposals and
recommend to the Board for its approval.

Investments Committee

The Board constituted an Investment Committee on 17.12.2003 consisting of

Chairman & Managing Director, Director(Finance), General Manager(Accounts) and a
representative from Corporate Planning and Projects Monitoring Division. This committee
will consider the proposals for investment of surplus funds in nationalized banks or sound
rated scheduled banks at the highest and competitive rates as per DPE guidelines.

Corporate Management Committee

The Corporate Management Committee is a high level policy making body at the
Corporate level which is headed by the Chairman & Managing Director. The Committee
consists of all Functional Directors, Executive Directors, General Manager and Heads of
Divisions. The Committee meets deliberates on the major policy issues including
performance of the company. The President and General Secretary of ECEU and President
and Secretary of ECOA are the special invitees.

Divisional Production Committees

The Divisional Production Committees are also constituted under the scheme of
Workers’ Participation in Management. The Head of Division concerned is the Chairman for
the Committee and the members are drawn from production shops, quality control, material
planning, personnel and finance areas. The meetings are convened periodically for discussion
on the issues pertaining to working plan to realize the production targets, sales targets and
sundry debts, order booking status etc.

Apex Committee
 The Apex Committee is constituted under the scheme of Workers’ Participation in
Management. The Committee is headed by Chairman & Managing Director and other
members include Functional Directors on the Board, Executive Directors, General Manager
(HR), President and General Secretary of ECEU and President and Secretary of ECOA. The
committee meets periodically and deliberates and makes suitable recommendations on the
issues concerning improvement of production and performance and major policy issues for
smooth functioning and maintaining harmonious industrial relations in the company and
make suitable recommendations.

General Body Meetings

The details of the last three Annual General Meeting of the company are given below

Year Date Time Venue

Registered office:
2003-2004 07.07.2004 1400 hrs ECIL post office,
Hyderabad-500062
2004-2005 11.07.2005 1400 hrs -do-
2005-2006 27.07.2006 1400 hrs -do-

( C) Director’s reports for the year 2007-2008

Director’s Report to the Shareholders

The company continued to take several measures to enhance the openness and
transparency of its operations.

Board of Directors
 In terms of section 617 of the companies act, 1956, ECIL is a Government company.
Presently, the entire paid up capital of the company is held by the president of India,
including 3 shares held by his nominees.

The Board, as on date, comprises of eleven Directors- Chairman & Managing Director, three
wholesome Directors and seven Non-Executive Directors. The Board meets at regular
intervals and is responsible for the proper direction and the management of the Company.

During the financial year ended 31st March 2008, five Board meetings were held on
15.05.2007, 24.07.2007, 26.09.2007, 28.12.2007 and 26.03.2008. The composition of the
Directors, their attendance at the Board meetings during the financial year and at the last
Annual General Meeting etc. is as follows:

Board
Meetings Board Attendance
Name & Position No. of other
Held during Meetings At the last AGM
As on 31.3.2008 Directorship
the Attended Held on 26.09.2007
Tenure
Whole-Time Directors
Sri K.S Rajasekhara Rao
5 5 Yes Nil
Chairman & Managing
Director
Sri. S.Hanumantha Rao
Director( Personnel) 5 5 Yes Nil
(appointed from 01.04.07)
Sri. U Vishnumurthy
Director(Finance) 5 5 Yes Nil
(appointed from 09.05.07)
Sri.G.N.V.Satyanarayana
Director(Technical) 2 2 - Nil
(upto 31.08.07)
Sri Y.S Mayya
Director(Technical) 3 3 Yes Nil
(appointed from 01.09.07)
Non-ExecutiveDirectors 3 3 Yes 2
Sri.V.P.Raja
(upto 18.10.07)
Sri Umesh Chandra 5 5 Yes Nil
Dr. B N Suresh
5 3 - Nil

Dr. M J Zarabi 5 4 Yes 3

Lt. Gen SP Sree Kumar,
5 3 - 1
PVSM,AVSM,ADC
Dr. R Sreehari Rao
5 4 - Nil
(appointed from 12.04.07)
Sri V R Sadasivam
4 2 Yes 4
(appointed from 19.07.07)
Ms. Revathy Iyer
2 2 - 2
(appointed from 18.10.07)

The remuneration

The remuneration of whole-time Directors is fixed by the Government of India as the

company is a Government company in terms of section 617of the Companies Act, 1956. At
present, all the part time Directors except Dr.Zarabi are Government officials from other
PSUs and therefore, are eligible for sitting fee for the meetings attended by them. However,
Dr.Zarabi, who is an independent Director, is paid Rs.3000 as sitting fee per attendance.

Audit Committee

A three-member Audit Committee was constituted by the board in March 2001

comprising of two Non-Executive Directors and a whole time Director. With regard to terms
of reference, powers and functions of the committee, the Board suggested that the provisions
in Clause 49 of Listing Agreement prescribed by SEBI as applicable to listed Companies are
to be followed as guidelines.

The Audit Committee presently comprises of two Non-Executive Directors, Sri

Umesh Chandra and Sri V R Sadasivam and one whole time Director(Technical) of the
company, Sri Y.S.Mayya. Sri Umesh Chandra is the chairman of the committee.
 During the year, four meetings of the committees were held on 24.07.2007,
26.9.2007, 11.12.2007 and 26.3.2008. The Audit committee reviewed the implementation of
Accounting Standards and Audit Programmes. The committee reviewed the Internal Audit
Reports and also the report on Fixed Assets Physical Verification. The committee pursued the
Annual Financial Statements and interacted with the Statutory Auditors for improvement in
the system for maintaining Financial records as well as the data under Cost Accounts Record
Rules.

Investments Committee

The Board constituted an Investment Committee on 17.12.2003 consisting of

Chairman & Managing Director, Director(Finance), General Manager(Accounts) and a
representative from Corporate Planning and Projects Monitoring Division. This committee
will consider the proposals for investment of surplus funds in nationalized banks or sound
rated scheduled banks at the highest and competitive rates as per DPE guidelines.

Corporate Management Committee

The Corporate Management Committee is a high level policy making body at the
Corporate level which is headed by the Chairman & Managing Director. The Committee
consists of all Functional Directors, Executive Directors, General Manager and Heads of
Divisions. The Committee meets deliberates on the major policy issues including
performance of the company. The President and General Secretary of ECEU and President
and Secretary of ECOA are the special invitees.

Divisional Production Committees

The Divisional Production Committees are also constituted under the scheme of
Workers’ Participation in Management. The Head of Division concerned is the Chairman for
the Committee and the members are drawn from production shops, quality control, material
planning, personnel and finance areas. The meetings are convened periodically for discussion
on the issues pertaining to working plan to realize the production targets, sales targets and
sundry debts, order booking status etc.
Apex Committee

The Apex Committee is constituted under the scheme of Workers’ Participation in

Management. The Committee is headed by Chairman & Managing Director and other
members include Functional Directors on the Board, Executive Directors, General Manager
(HR), President and General Secretary of ECEU and President and Secretary of ECOA. The
committee meets periodically and deliberates and makes suitable recommendations on the
issues concerning improvement of production and performance and major policy issues for
smooth functioning and maintaining harmonious industrial relations in the company and
make suitable recommendations.

General Body Meetings

The details of the last three Annual General Meeting of the company are given below

Year Date Time Venue

Registered office:
2004-2005 11.07.2005 1400 hrs ECIL post office,
Hyderabad-500062
2005-2006 27.07.2006 1400 hrs -do-
2006-2007 26.09.2007 1400 hrs -do-

Vigilance:

During the year, The Corporate Vigilance conducted training programmes on

a) Procurement and related matters to executives from Material Management Wings of

the divisions
b) Vigilance related issues to executives working in Personnel Group and Finance &
Accounts Group
c) Vigilance modules were included in the Induction-cum-Orientation programmes
conducted for the newly recruited Graduate Engineer Trainees. Irregularities noticed
were brought to the notice of Management and division concerned. The divisions
 were persuaded to publish tenders on the website of ECIL and on www.tenders.gov.in
in addition to publication of vendor’s registration forms and notification for vendor
registration on the website.

4.2 Accounting policies

1. ASSETS:

1.1 Fixed assets are carried at cost of acquisition.

1.2 Outstanding foreign currency loans, utilized for purchase of machinery are
converted at exchange rates prevailing as at the year end and the exchange
fluctuations apportioned to the original cost of the assets acquired through such
foreign currency.
1.3 Fixed assets acquired with financial assistance/subsidy from outside agencies,
either wholly or partly, are taken in the books at net cost to the company.
However, numerical records are maintained in respect of tangible assets acquired
free of cost.
1.4 Depreciation on fixed assets is charged on straight line method at the rates
prescribed in Income Tax act in respect of assets capitalized up to 1.4.1987 and at
the rates prescribed in Companies Act , in respect of assets capitalized on or after
2.4.1987.

2. INVENTORIES:

2.1 Inventories related to stores, spares, loose tools and implements are valued at cost.
However, in respect of items not moving for more than 3 years and more than 5
years, a provision of 50% and 90% of the value respectively is made in the
accounts towards deterioration in value.
2.2 Inventories relating to finished goods are valued at cost or marked price
whichever is lower; work in process and raw materials are valued at cost.
2.3 Stock of waste products like iron ore fines, char, shale and dull coal etc., are
valued at the selling price and accounted for.
 2.4 Initial spares received with equipment are capitalized along with the cost of
equipment.
2.5 Stationery and medicines are charged off to expenditure on purchase. However,
separate stock registers are maintained.

3. LONG TERM CONTRACTS:

Income from works contracts, including Consultancy Contracts is recognized

and accounted for in the year of completion.

4. ADJUSTMENTS RELATING TO PREVIOUS YEARS:

Only income or expenditure relating to previous years exceeding Rs.10000/-

in each case is classified to “Prior Period”.

5. INCIDENTAL EXPENDITURE DURING CONSTRUCTION:

Adjustments/transactions relating to the period of construction and arising

thereafter involving Rs.1,00,000/- and above in each individual cases are capitalized.

6. GRATUITY:

Company has taken a Group-cum-Life Assurance Policy with Life Insurance

Corporation of India and the premium payable to keep the policy in force is paid by
the company.

7. GRANTS-IN-AID:

Amounts received as grants-in-aid from the Government and the amount

utilized out of the fund for the specified purpose, for which it was granted, will be
identified and exhibited separately in the accounts.
8. REVENUE RECOGNITION:

Income from services is accounted for on accrual basis and in conformity with
Accounting Standard-9 of ICAI. Accordingly,

a) Revenue for all services is recognized when earned and are realizable at the
time of billing. Unbilled revenues from the billing date to the end of the year
are recorded as accrued revenue during the period in which services are
provided. Provision is made in respect of bills considered to be disputed(by
the management), debts outstanding for more than two years and for debts due
for less than two years, to the extent considered necessary by the management.
b) Sale proceeds of scrap arising from maintenance and project works are taken
into miscellaneous income in the year of sale.
c) Income from SIMs, Recharge coupons from mobile, Prepaid calling cards and
prepaid internet connection cards are treated as the income of the year in
which the payment is received since the extent of use of these cards within the
financial year could not be ascertained.
d) Wherever there is uncertainty in realization of income, such as liquidated
damages, claims on Government Departments & local authorities etc., these
are recognized on collection basis.
e) Other income by way of interest on loans to employees, security deposit with
Government Departments and local authorities, being not material, are
accounted for on collection.

9. DEPRECIATION/AMORTIZATION:

a) Depreciation is provided based on the Written Down Value method at the rates
prescribed in Schedule XIV to the Companies Act, 1956 except for Subscriber
Installation. The Subscriber Installation is depreciated over the useful life of 5
years on Written Down Value method Assets costing up to Rs. 500 are
depreciated fully in the year of purchase. Similarly, partition works costing up
to Rs. 2000 are depreciated fully in the year of construction.
 b) The depreciation on machinery & tools used both for project and maintenance
work is charged to profit and loss account instead of capitalization.
c) All telephone exchange buildings, administrative offices and captive
consumption assembling premises/workshops are considered as normal
building and not as factory building.
d) Accordingly depreciation is charged uniformly.

10. FOREIGN CURRENCY TRANSACTIONS:

a) Transactions in foreign currency are recorded at the exchange rate prevailing

on the date of the transaction date i.e. on the date of payment or receipt as the
case may be.
b) All foreign currency liabilities and monetary assets are stated at the exchange
rate prevailing as at the date of balance sheet and the difference taken to Profit
and Loss Accounts as Exchange Fluctuation Loss or Gain.

11. EXTRAORDINARY ITEMS:

Extra-ordinary items of income and expenditure, as covered by AS-5, are

disclosed separately.

12. MANUFACTURING EXPENSES:

Expenses incurred at Factory units are allocated to the cost of the manufactured
products.

13. PRIOR PERIOD ITEMS:

Items of Income/Expenditure exceeding Rs. 5 lakh are only considered for being
treated as ‘prior period items’.

14. PROVISIONS:
 Provisions are recognized when the company has a present obligation as a result of
past events; it is more likely than not than an outflow of resources will be required to
settle the obligation; and the amount has been reliably estimated.

15. CONTINGENT LIABILITIES:

Liabilities, though contingent, are provided for if there are reasonable chances of
maturing such liabilities as per management. Other contingent liabilities, barring
frivolous claims, not acknowledged as debts, are disclosed by way of notes.

16. EARNING PER SHARE:

Earning Per Share (“EPS”) comprises the Net Profit after tax(excluding extraordinary
income net of tax). The number of shares used in computing Basic & Diluted EPS is
the weighted average number of shares outstanding during the year.

17. EXPENSES ON RESEARCH AND DEVELOPMENT:

Expenditure incurred on project related studies and development costs in regard to

modernization/revamping of the existing line/new activity are deferred till the project
is approved by the authority concerned. On approval, such expenditure is capitalized
and depreciated.

The treatment of other expenditure on R&D is as under:

1) Assigned to revenue in the year in which incurred.
2) Identified for deferral and charge off based on matching benefit concept on a
case to case basis.

18. PROVISIONS FOR BAD AND DOUBTFUL DEBTS:

 Provisions for bad and doubtful debts is made for the debts outstanding for more than
one year, excepting those which are conttactualy not due as per the terms of the
contract or those which are considered realizable based on a case review by the
management.

19. INVESTMENTS:

Long term investments are valued at cost less any diminution in value that is other
than temporary.

20. TECHNICAL KNOW HOW:

Expenditure on Technical know how fees, software, training of personnel etc., are
charged off to revenue on incurrence.

4.3 Auditors Reports

EXTERNAL AUDITOR:

It is a generally accepted belief that the process of corporate governance is the

relationship between a company’s shareholders, directors, and management as defined by the
corporate charter, bylaws, formal policy, and rule of law. If corporate governance is to work,
both internal and external auditors have critical roles to play. Each must provide assurance to
directors and management on the integrity of financial statements and the adequacy of
internal controls. To be effective, the auditors must maintain their independence. Although
the external auditor is protected in theory from undue management influence, in practice,
both the auditors experience such pressure.
 The external auditor’s report in corporate financial statements is seen as providing key
assurance to the shareholder’s interests. The U.S. Congress, U.S. Securities and Exchange
Commission, and other interested parties, such as institutional shareholders, have taken steps
to ensure that information is accurate and free from management influence. The U.S.
Sarbanes- Oaxley Act of 2002 made the Audit Committee the body that appoints and
compensates the external auditor. The audit committee must now approve every non-attest
fee. In addition, the external auditor’s lead partner must rotate after five years to avoid
becoming too close to management at a personal level and dependent on the company and the
audit fees for advancement within the firm.

INTERNAL AUDITOR:

The mistakes made at the energy giant and other companies with highly publicized
auditing failures were disasters for e-accounting profession, but they have given us a unique
window of opportunity. More than ever before, audit committees and boards are looking to
internal auditors for help with corporate governance issues. And more than ever before, we
have an opportunity to step out of our traditional comfort zone and strengthen the role of
internal auditing in that realm.

Internal auditor’s unique fulltime focus on risks and controls is vital to sound
governance process and to sound financial reporting. According to recent statistics from
international news information organization, Bloomberg News, in more than half of the 673
large bankruptcies of public corporations since 1996, external auditors provided no cautions
in annual financial statements in the months before bankruptcy. Five of the seven largest
bankruptcies in history including Enron, Global Crossing Ltd., and Kmart Corp., followed
annual reports with clean audit opinions from external auditors. These statistics demonstrate
that the larger and complex the company, the more difficult it is for external auditors,
management and boards to have an accurate picture of risks and controls. With our unique
viewpoint as independent but inside observers, internal auditors play a vital role within
governance processes by keeping the board, senior management, and external auditors aware
of risk and control issues and by assessing the effectiveness of risk management.
 AUDITORS REPORTS AND COMPANY REPLIES ON ECIL

AUDITORS REPORTS COMPANY’S REPLIES

1. The accounting policy of the company 1. The deviations expressed pursuant to

on revenue recognition(accounting section 211 (3) (B) of the Companies
policy(‘A’)) is not in accordance with Act, 1956, are self explanatory. The
the mandatory accounting company does not foresee any financial
standard(AS-9) on “Revenue impact. The accounting policy “A” of
recognition” issued by ICAI in so far the company is being followed
as the deviations expressed by the consistently. The company will review
company with regard to fulfillment of the policy and take necessary
material conditions such as corrective action.

Transfer of significant risks and

rewards of ownership

Transfer of property in the goods

Retention of effective control over the

goods.

2. Recognition of income on the basis of 2. In view of certain difficulties in

separate line entries in composite
contracts and long production cycle
items containing acceptance
conditional basis without discharging
the installation obligation
recognition of revenue in case of
lease/sub-lease agreement.
Further, the company has recognized
substantial revenue towards the year
end on the basis of consignment notes
accounting income on accrual method,
income is accounted on cash basis as
on per the accounting policy “J”. The
activities of the computer education
and division are being phased out. AS-7
allows revenues to be recognized based
on the progress of work and the
company has recognized revenue based
on demonstrable progress of work and
committed expenditure.
 transport operators, the value of which
is not ascertained by the company and
we are not in a position to quantify the
same.

The auditors are unable to quantify the

impact of such deviations on the
financial statements. Further, the
accounting of fees receipts and
expenditure of computer education
division even as per the declared
policy is not followed. The impact is
not ascertainable.
3. Reconciliation is being carried
periodically. Amount due to ECIL has
3. The internal control procedures been recovered from subsequent
relating to fixed assets are adequate transactions. The transactions are being
except in the areas of recording reconciled.
transfers and reconciliation of books
records with physical verification at Reconciliation is under progress,
branches. As per the information and suitable action as necessary will be
explanations provided by the taken after reconciliation.
management, there are not contracts or
arrangements taken place during the
year, which need to be entered into the
register maintained under section 301
of the Companies Act, 1956. 4. Technical committee has approved the
revenue recognition after carefully
reviewing the progress made on the
4. The company has identified and projects as per AS-7.
provided for surplus inventories basing
on its own technical estimates with
specific exclusion of items relating to
materials procured for orders on hand,
 items required for anticipated orders
and spares required for annual
maintenance contracts(AMC’s) which 5. The observations of the audit are noted
being technical in nature. for future guidance. Necessary
measures will be undertaken quickly.

5. The internal audit system is not

adequate and its scope and coverage
need to be widened so as to be 6. The internal control procedures for
commensurate with the size of the purchase of stores, raw materials
company and nature of its business. including components and for sale of
goods are maintained properly. The
observations of audit are noted for
6. The internal control procedures for future streamlining and improvement.
purchase of stores, raw materials
including components and for sale of
goods are adequate and the procedure
for recording of the receipts and issues
of material throughout the year in
general and transaction in particular
considering their volume needs to be
thoroughly revamped and streamlined.
 CHAPTER-5
FINDINGS, CONCLUSIONS AND SUGGESTIONS FOR
IMPROVING CORPORATE GOVERNANCE

5.1 Findings
5.2 Conclusions
5.3 Suggestions for improving Corporate Governance
5.1 FINDINGS:

 As ECIL is a multi product organization catering to different customers on divergent

technologies, the inventory procurement for various ranges of products is quite high.

 Corporate governance is an important function which effects the reliability of

stabilized production & profitability of the organization

 Inventory Procurement is also based on & does not conform to economic batch
quantities, leading to surplus inventories & non-moving inventories.

 It is also observed that there are frequent changes in specifications by the customer
rendering the already procured inventory, either obsolete or non-moving.

 There is a regular physical verification for ‘A’ & ‘B’ class items, by internal audit
department to highlight on non-moving inventories.

 As per the directions of the management, non-moving inventory of a particular

business group has to be listed & circulated to all the other divisions for any possible
usage before action is taken for disposal.

 The % of raw material on cost of production is found to high in year 2008-2009 i.e.,
69.72 which indicates organization has an effective utilization of material inventory.

 In spite of the above constraints, there is reasonably a good control noticed as

reflected in the period of holding of inventories & turnover ratio.
5.2 CONCLUSION

 Effective corporate governance is more than just putting in place structure, such as

committees and reporting mechanisms, to achieve desired results. Such structure is

only a means for developing a more creatable corporate governance framework and is

not ends in them. That is, there be more emphasis on the substance rather than the

form of good corporate governance and to the confidence and assurance of

stakeholders.

 A key aspect of corporate governance is to ensure that all participant are aware of and

accepts; their jobs, responsibilities and accountabilities and that they have a sound

understanding an appreciation of the latter’s practical importance in meeting th e

public interest. The framework is very people oriented involving better

communication; a more systematic approach to corporate management; a greater

emphasis on corporate and ethical conduct; risk management skills development;

relationship with citizens as clients ; and quality service delivery.

 Corporate Governance as practiced in Electronics Corporate of India Limited is a

voluntary basis as the same is not mandatory. The reason is ECIL is not listed

company and is wholly owned by Central Government.

 It is observed that “Electronics Corporation of India :limited” is people oriented and

operations are flavor intensive aim day-to-day operations any minor deviation can be
 interpreted in different ways ready to lessen unrest. In the above contest transparency

which is a corner stone of corporate governance is must. Hence a foundation is laid

for practicing good Corporate Governance principals.

 On the audit side, a perusal of Accounting policies & Auditor would revel various

Auditing practices of ECIL at the information of one and all.

 Apart from various audit committees, comiittees like Government Committee and

their activites are reported in Annual Report. This is another feature of good corporate

governance principle.

 The Audit Committee reviewed the implementation of Acconting Standards and Audit

programmes in ECIL from time to time. The Committee reviewed the Internal Audit

reports and also the report on the Fixed Assets physical verification. The committee

perused the Annual Financial Statements and interacted with the statutory Auditors

for improvement in the system for maintaing financial records as well as the data

under Cost Accounts Record Rules.

5.3 SUGGESTIONS

 Suggestions must be taken from all departments of the organization for proper
maintaining of stock.
 Once non-moving inventory is observed & declared, a quick disposal action has to be
installed. This exercise has to be carried on throughout the year.
 As a preventive measure there should be a regular monitoring mechanism at the stage
of procurement itself, whether there is a control exercised in purchasing materials in
line with estimated, standard Bill of Material.
 A regular reporting system on inventory should be in place to highlight on carrying
costs & liquidity covering all the business groups & at the corporate level.
 Corporate governance is to keep the stock in such way that neither there is over-
stocking or under stocking.
  Under-stocking will result in stoppage of work. So, the investment corporate
governance should be kept in reasonable limits.
 Organization need to be upgrade of the technology, which in turn increases effective
utilization of raw material.
 Organization has to attention on the amount of % of raw material on cost of
production, which is slightly high when compared to ideal percentages

BIBLIOGRAPH

BOOKS:

1. CHARY, S.N, 2003, Production and Operation Management, Tata McGraw-Hill, 2nd
Edition, Page no: 280.
2. R.K.SHARMA & SHAAHI.K.GUPTA, 2008, Management Accounting, Kalyani Publishers,
11th Revised Edition, Page no: 24.26.
3. I.M.PANDAY, 2005, Financial Management, Vikas Publications, 9th Edition, Page no: 624.
4. Web Site: www.ecil.co.in