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School of Law University of California, Davis

400 Mrak Hall Drive Davis, CA 95616 530.752.0243 http://www.law.ucdavis.edu

UC Davis Legal Studies Research Paper Series


Research Paper No. 258 April 2011

A Brief Overview of Corporate Governance Reforms in India

Afra Afsharipour

This paper can be downloaded without charge from The Social Science Research Network Electronic Paper Collection: http://ssrn.com/abstract=1729422

Director Notes

A Brief Overview of Corporate Governance Reforms in India


by Afra Afsharipour

Since the late 1990s, Indian regulators as well as industry representatives and companies have undertaken significant efforts to overhaul the countrys corporate governance. These reform initiatives have been revived or accelerated following the Satyam scandal of 2009. The current corporate governance regime in India straddles both voluntary and mandatory requirements: for listed companies, the vast majority of Clause 49 requirements are mandatory; it remains to be seen whether some of the more recent voluntary corporate governance measures will become mandatory for all companies through a comprehensive revision of the Companies Act.
Over the past 15 years there has been a sea change in Indian corporate governance. The needs of Indias expanding economy, including access to foreign direct investment, the increased presence of institutional investors (both domestic and foreign), and the growing desire of Indian companies to access global capital markets by being listed on stock exchanges outside of India, have spurred corporate governance laws.1 Indias corporate governance reforms were initially spearheaded by corporate India and quickly became an important component of the work of the countrys primary capital markets regulatory authority, the Securities Exchange Board of India (SEBI), and the Ministry of Corporate Affairs (MCA). Beginning in the late 1990s, the Indian government began to undertake a significant overhaul of the countrys corporate governance system.2 After lobbying by large firms and leading industry groups, SEBI in 2000 introduced unprecedented corporate governance reforms via Clause 49 of the Listing Agreement of Stock Exchanges.3 Clause 49, a seminal event in Indian corporate governance, established a number of governance requirements for listed companies with a focus on the role and structure of corporate boards, internal controls and disclosure to shareholders. (See Clause 49: Details, p. 7.) These reforms were phased in over several years, and now apply to thousands of listed Indian companies. (See Corporate Governance Developments in India: A Timeline, p. 2.)

No. DN-020

december 2010

Corporate Governance Development in India: A Timeline


Enactment of Clause 49 Chandra Committee (MCA Appointed) CII CG Taskforce Murthy Committee (SEBI Appointed) Clause 49 Amendments Implemented Irani Committee (MCA Appointed) Companies Bill (2009) Considered MCA Voluntary CG Guidelines NASSCOM CG Recommendations

1996

1998

2000

2002

2004

2006

2008

2010 Listing Agreement Amended CII CG Recommendations

Birla Committee (SEBI Appointed) CII Code

Clause 49 Amended

Companies Bill (2003) Considered

Satyam Scandal Companies Bill (2008) Considered

Indias corporate governance reform efforts did not cease after adoption of Clause 49. In January 2009, the Indian corporate community was rocked by a massive accounting scandal involving Satyam Computer Services (Satyam), one of Indias largest information technology companies.4 (See The Satyam Scandal, p. 4). The Satyam scandal prompted quick action by the Indian government, including the arrest of several Satyam insiders and auditors, investigations by the MCA and SEBI, and substitution of the companys directors with government nominees.5 As a result of the scandal, Indian regulators and industry groups have advocated for a number of corporate governance reforms to address some of the concerns raised by the Satyam scandal. Some of these responses have moved forward, primarily through introduction of voluntary guidelines by both public and private institutions. However, corporate governance measures through comprehensive revision of the Companies Act (1956)6 have yet to be enacted. This report briefly outlines the process undertaken to reform Indias corporate governance laws. It also provides an overview of Clause 49, the pending corporate governance-related provisions in the Companies Bill (2009),7 and the MCAs Corporate Governance Voluntary Guidelines (2009).8

Overall, Indias corporate governance reform efforts reflect the following:

Significant industry involvement in assisting the government with crafting corporate governance measures; Substantial focus on improving the function and structure of company boards, including (i) emphasis on the independence of the board of directors, and (ii) an increased role for audit committees; and Noteworthy increase in disclosure to public shareholders.

The First Phase of Indias Corporate Governance Reforms: 1996-2008


Indias corporate governance reform efforts were initiated by corporate industry groups, many of which were instrumental in advocating for and drafting corporate governance guidelines. Following vigorous advocacy by industry groups, SEBI proceeded to adopt considerable corporate governance reforms. The first phase of Indias corporate governance reforms were aimed at making boards and audit committees more independent, powerful and focused monitors of management as well as aiding shareholders, including institutional and foreign investors, in monitoring management.9 These reform efforts were channeled through a number of different paths with both SEBI and the MCA playing important roles.

Director Notes A Brief Overview of Corporate Governance Reforms in India

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The role of industry Indias first major corporate governance reform proposal was launched by the Confederation of Indian Industry (CII), Indias largest industry and business association. In 1996, the CII formed a task force to develop a corporate governance code for Indian companies. Desirable Corporate Governance: A Code (CII Code) for listed companies was proposed by the CII in April 1998.10 The CII Code contained detailed governance provisions related to listed companies, although it was voluntarily adopted by only a few companies and did not result in a broad overhaul of governance norms and practices by Indian companies.11

transmit certain information, such as quarterly reports and analyst presentations, to shareholders.15

Indian companies, banks and nancial institutions (FIs) can no longer afford to ignore better corporate practices. As India gets integrated in the world market, Indian as well as international investors will demand greater disclosure, more transparent explanation for major decisions and better shareholder value.
Desirable Corporate Governance, Confederation of Indian Industry (CII), 1998.

Strong corporate governance is thus indispensable to resilient and vibrant capital markets and is an important instrument of investor protection. It is the blood that lls the veins of transparent corporate disclosure and high-quality accounting practices. It is the muscle that moves a viable and accessible nancial reporting structure. Without nancial reporting premised on sound, honest numbers, capital markets will collapse upon themselves.
Birla Committee Report, 1999.

SEBI-appointed committees and the adoption of Clause 49 Shortly after introduction of the CII Code, SEBI appointed the Committee on Corporate Governance (the Birla Committee). In 1999, the Birla Committee submitted a report to SEBI to promote and raise the standard of Corporate Governance for listed companies.12 The Birla Committees recommendations were primarily focused on two fundamental goalsimproving the function and structure of company boards and increasing disclosure to shareholders. With respect to company boards, the committee made specific recommendations regarding board representation and independence that have persisted to date in Clause 49.13 The committee also recognized the importance of audit committees and made many specific recommendations regarding the function and constitution of board audit committees.14 The Birla Committee also made several recommendations regarding disclosure and transparency issues, in particular with respect to information provided to shareholders. Among other recommendations, the Birla Committee stated that a companys annual report to shareholders should contain a Management Discussion and Analysis (MD&A) section, and that companies should

SEBI implemented the Birla Committees proposals less than five months later, in February 2000. At that time, SEBI revised its Listing Agreement to incorporate the recommendations of the countrys new code on corporate governance. These rulescontained in Clause 49, a new section of the Listing Agreementtook effect in phases between 2000 and 2003. The reforms applied first to newlylisted and large companies, then to smaller companies, and eventually to the vast majority of listed companies.16 In the wake of the Enron scandal and the adoption of the Sarbanes-Oxley Act in the United States, SEBI formed the Narayana Murthy Committee in order to evaluate the adequacy of the then-existing Clause 49, to further enhance the transparency and integrity of Indias stock markets and to ensure compliance with corporate governance codes, in substance and not merely in form.17 The Murthy Committee stated that recent corporate governance failures, particularly in the United States, combined with the observations of Indias stock exchanges that compliance with Clause 49 up to that point had been uneven, compelled the Committee to recommend further reform.18 Like the Birla Committee, the Murthy Committee examined a range of corporate governance issues relating to boards and audit committees, as well as disclosure to shareholders. The committee focused heavily on the role and structure of corporate boards and strengthened the director independence definition in the then-existing Clause 49,

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Director Notes A Brief Overview of Corporate Governance Reforms in India

The Satyam Scandal


Satyam Computer Services was a publicly traded company listed on the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) in India, and cross-listed on the New York Stock Exchange (NYSE) in the United States. While Satyams promoters, represented by Mr. Ramalinga Raju and his family, held 8 percent of the shares in the company at the end of 2008, the company had a majority independent Board of Directors comprised of several Indian luminaries. Described as a gold-plated group, Satyams independent directors included a Harvard Business School professor, the then-dean of the Indian School of Business and a former Indian cabinet secretary in India.a In early 2009, Satyam experienced two related scandals, the first an aborted related-party transaction involving the companys promoters, the second the uncovering of colossal fraud in the companys financial statements. The Maytas transaction On December 16, 2008, Satyams Board convened a meeting to consider the proposed acquisition of Maytas Infra Limited and Maytas Properties Limited, companies focused on real estate and infrastructure development.b Two major issues in the proposed transaction surfaced. First, the Maytas companies were focused on real estate and infrastructure development two industries unrelated to Satyams core information technology business.c Second, the Raju family owned approximately 30 percent of the Maytas companies.d If effected, this related-party transaction would have resulted in a significant amount of cash flowing from Satyam . . . to its individual promoters, the Raju family.e While several of Satyams independent directors questioned the proposed transaction, the board eventually adopted a resolution to proceed with the proposed acquisition. Satyam notified the stock exchanges of the board approval as required under the listing agreement.f The market reacted badly to the news, and the company quickly withdrew the Maytas proposal.g Financial fraud On January 7, 2009, shortly after the failed Maytas transaction, Raju confessed to falsifying the financial statements of the company, including balance sheet errors showing fictitious cash assets of over US $ 1 billion.h The confession furthered revealed that the proposed Maytas acquisitions were just illusory transactions intended to manipulate the balance sheet of Satyam and to wipe out inconsistencies therein. i As a result of this information, Satyams stock price dropped another 70 percent, essentially obliterating the wealth of the Satyam shareholders. j The aftermath As a result of the scandal, the MCA, Government of India, and the SEBI initiated investigations.k The police arrested Raju, Satyams managing director, and the companys CFO within a few days of the confession.l Two partners from Lovelock & Lewis, an Indian affiliate of PriceWaterhouseCoopers and Satyams auditor, were also arrested.m Further, the government nominated and replaced remaining Satyam board members with candidates of its choice.n Under the new leadership, Satyam was able to make a remarkable turnaround.o In April 2009, Tech Mahindra purchased the company through a global bidding process. p The concerns raised by the Satyam scandal reverberated in corporate India more broadly. For example, in a recent study, the authors found evidence of mass resignations of independent directors of Indian firms following Satyam with at least 620 independent directors resigning in 2009 alone a figure that is . . . by far without precedent globally.q
a See Vikramaditya Khanna & Shaun J. Mathew, The Role of Independent Directors in Controlled Firms in India: Preliminary Interview Evidence, 22 NAT. L. SCH. IND. REV. 35, 41 (2010). See Omkar Goswami, Satyam: The Tasks Ahead, Business Standard, Jan. 21, 2009. Umakanth Varottil, Evolution and Effectiveness of Independent Directors in Indian Corporate Governance, Hastings Business Law Journal, p. 334.

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d e f

Id., p. 334. Id., p. 334. Id., p. 335; see also N Balasubramanian, Is corporate governance mere lip service?, The Economic Times, Dec. 23, 2008; Satyam independent directors watching situation, Hindu, Dec. 27, 2008. See Varottil, Evolution and Effectiveness of Independent Directors in Indian Corporate Governance, p. 335; Somasekhar Sundaresan, Year of Al-Pervasive Poor Governance, Business Standard, Dec. 29, 2008; see also S. Nagesh Kumar, Independent Directors Put Tough Questions, But Gave Blank Cheque, The Hindu, Jan. 14, 2009. See It was like riding a tiger, not knowing how to get off without being eaten, Financial Express, Jan. 8, 2009; Mandar Nimkar, How much is Satyams stock actually worth?, The Economic Times, Jan. 8, 2009; Heather Timmon & Jeremy Kahn, Indian Company in a Fight to SurviveN.Y. Times, Jan. 9, 2009. Varottil, Evolution and Effectiveness of Independent Directors in Indian Corporate Governance, p. 337. Id. See Oomen A. Ninan, Satyam Episode: SEBI Enquiries Will Focus on Three Areas, The Hindu Business Line, Jan. 16, 2009; Souvik Sanyal, Government Refers Satyam Case to Serious Frauds Investigation Office, The Economic Times, Jan. 13, 2009. See Satyam Fraud: Raju Sent to Central Prison; CFO Vadlamani Arrested, The Economic Times, Jan. 10, 2009; Satyams Raju Brothers Arrested by AP Police, The Economic Times, Jan. 9, 2009.

particularly to address the role of insiders.19 For example, while the new definition actually encompassed the old, it also indicated, among other things, that the director cannot be related to promoters or management at the board level, or one below the board; an executive of the company in the preceding three years; a supplier, service provider, or customer of the company; or a shareholder owning 2 percent or more of the company.20 The Murthy Committee also recommended that nominee directors (i.e., directors nominated by institutions, particularly financial institutions, with relationships with the company) be excluded from the definition of independent director, and be subject to the same responsibilities and liabilities applicable to any other director.21 In order to improve the function of boards, the Murthy Committee recommended that board members should also receive training in the companys business model22 and quarterly reports on business risk and risk management strategies.23 The Murthy Committee paid particular attention to the role and responsibilities of audit committees. It recommended that audit committees be composed of financially literate members,24 provided a greater role for the audit committee,25 and stated that whistleblowers should have access to the audit committee without first having to inform their supervisors. Further, the committee required that companies should annually affirm that they have not denied access to the audit committee or unfairly treated whistleblowers generally.26 In 2004, SEBI further amended Clause 49 in response to the Murthy Committees recommendations.27 However, implementation of these changes was delayed until January 1, 2006 due primarily to industry resistance and lack of preparedness to accept such wide-ranging reforms.28 While there were many changes to Clause 49 as a result of the Murthy Report, governance requirements with respect to corporate boards, audit committees, shareholder disclosure, and CEO/CFO certification of internal controls constituted the largest transformation of the governance and disclosure standards of Indian companies.

j k

m See Jackie Range, Pricewaterhouse Partners Arrested in Satyam Probe, Wall Street Journal Asia, Jan. 25, 2009. n Mukesh Jagota & Romit Guha, India Names New Satyam Board, Wall Street Journal, Jan. 12, 2009. Varottil, Evolution and Effectiveness of Independent Directors in Indian Corporate Governance, p. 338. Id. at 59. Khanna and Mathew, p. 36; see also Rajesh Chakrabarti, Krishnamurthy Subramanian, and Frederick Tung, Independent Directors and Firm Value: Evidence from an Emerging Market 2 (June 28, 2010), available at http://ssrn. com/abstract=1631710 (detailing exodus of independent directors following the Satyam scandal).

p q

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Director Notes A Brief Overview of Corporate Governance Reforms in India

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.
Murthy Committee Report, 2003.

have led to proposed amendments to the Companies Act, although such amendments have not yet resulted in legislation. In August 2002, the MCA formed the Chandra Committee. Chaired by Shri Naresh Chandra, a former Cabinet secretary, the committee was charged with undertaking a wideranging examination of corporate auditing and independent directors, although its report focused primarily on auditing and disclosure matters.29 The Chandra Committee made a series of recommendations regarding, among other matters, the grounds for disqualifying auditors from assignments, the type of non-audit services that auditors should be prohibited from performing, and the need for compulsory rotation of audit partners.30 While the recommendations of the Chandra Committee did not result in legislative changes, certain of its recommendations were incorporated in the report put forth by the Murthy Committee.31 In December 2004, the MCA convened the Irani Committee, led by J.J. Irani, a director of Tata Sons, Ltd.32 The Irani Committee was charged with evaluating the Companies Act, with a focus on combining internationally accepted best practices in corporate governance with attention to the particular needs of the growing Indian economy. Many of the committees recommendations were incorporated into proposed amendments to the Companies Act. These changes would apply to all Indian firms and not just those listed on the stock exchanges, and thus would introduce an entirely new corporate governance framework for many Indian firms. For example, the concept of independent director is proposed under the bill to be introduced in the Indian Companies Act for the first time.33 Companies that have a prescribed minimum share capital are required to have a board with at least one-third independent directors.

Clause 49, as currently in effect, includes the following key requirements:

Board Independence Boards of directors of listed companies must have a minimum number of independent directors. Where the Chairman is an executive or a promoter or related to a promoter or a senior official, then at least one-half the board should comprise independent directors; in other cases, independent directors should constitute at least one-third of the board size. Audit Committees Listed companies must have audit committees of the board with a minimum of three directors, two-thirds of whom must be independent; in addition, the roles and responsibilities of the audit committee are specified in detail. Disclosure Listed companies must periodically make various disclosures regarding financial and other matters to ensure transparency. CEO/CFO certification of internal controls The CEO and CFO of listed companies must (a) certify that the financial statements are fair and (b) accept responsibility for internal controls. Annual Reports Annual reports of listed companies must carry status reports about compliance with corporate governance norms.

See Clause 49: Details, p. 7. MCA-appointed committees and proposed amendments to the Indian Companies Act In addition to SEBIs corporate governance reforms that are only applicable to listed companies, the MCA undertook efforts in the early 2000s to reform the Companies Act to reflect more rigorous corporate governance provisions for all Indian companies. To date, the MCA has commissioned two separate committees to examine the Companies Act with respect to corporate governance provisions. The reports of these committees

Corporate Governance goes far beyond access to capital. Taking a narrow view of Corporate Governance as limited to public issue of capital and the processes that follow would be to the detriment of corporate entities themselves. Equally, the capital market regulator has to play a central role in public access to capital by the companies and must have the necessary space to develop suitable frameworks in tune with the uidity of the capital markets.
Irani Committee Report, 2005.

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Clause 49: Details


The main components of Clause 49 are summarized below: Board of Directors: Independence Requirement 50 percent independent directors if Chairman is an executive director or 33 percent if Chairman is a non-executive.

Broad role review statutory and


internal auditors as well as internal audit function, oversee a companys financial reporting process and quality of disclosure of financial information, and review whistleblower program if one exists, among other things.

mandatory recommendation with their reasons should be specifically highlighted.

For appointment or re-appointment


of a director, shareholders must be provided with the following information: (i) a brief resume of the director; (ii) nature of his expertise in specific functional areas; and (iii) companies in which he holds directorships.

Definition no material pecuniary


relationship or transactions with the company, its promoters, its management or its subsidiaries, not related to Board or one level below Board and no prior relationship with the Company for the last three years.

Powers to (i) investigate any activity within its terms of reference; (ii) seek information from any employee; (iii) obtain outside legal or other professional advice; and (iv) secure attendance of outsiders with relevant expertise, if necessary. Disclosures:

Information like quarterly results,


presentation made by companies to analysts, etc., should be put on the companys web-site and sent in such a form so as to enable the stock exchange on which the company is listed to put on its own web-site. Certifications:

Nominee Directors of Financial Institutions considered independent. Board Requirements & Limitations Meet four times a year (maximum three months between meetings).

Related party transactions. Accounting treatments and


departures.

Director may be on at most 10 committees and chair of at most five.

Code of Conduct (Ethics) required.


Audit Committee: Composition At least three directors (two-thirds must be independent).

Risk management. Annual report includes a detailed


chapter on MD&A, including a discussion on industry structure and developments, opportunities and threats, segment-wise or productwise performance, outlook, risks and concerns, internal control systems and their adequacy, relating financial performance with operational performance, and issues relating to human resource development.

CEO & CFO: financial statements;


effectiveness of internal controls; legal transactions; and inform audit committee of any significant changes in the above.

Auditor or Company Secretary


certifies compliance with corporate governance. Other Recommendations:

All members must be financially


literate and at least one of them must have accounting or related financial management expertise.

Chairman of the committee should


be an independent director, who should be present at Annual General Meeting to answer shareholder queries. Audit Committee Role & Powers Minimum of four meetings per year (gap between meetings not exceed four months).

Proceeds from offerings. Compensation for directors


(including non-executives) and obtain shareholders approval.

Whistleblower policy is optional. Independent directors lose status as


independent if they served nine years at company.

Details of compliance history for


last three years.

Training board members. Evaluate non-executive board


performance.

Corporate governance reports (and


disclose adoption, if any, of mandatory and non-mandatory requirements). Noncompliance with any

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Director Notes A Brief Overview of Corporate Governance Reforms in India

The Irani Committee recognized that requirements of special or small companies be accounted for through a series of exemptions, so that smaller businesses would not burdened with the same level of compliance costs as larger, established corporations. In keeping with this theme, the Irani Committee recommended a wider set of classifications for companies than just the public or private labels, as the committee believed that the binary system of classification was too narrow to account for the varying needs of companies with different sizes and resources.34 The Committees goal was to expand the system of classifications and exemptions to tailor compliance costs to needs, while maintaining sufficient regulatory stringency for large listed companies that access public capital.35 While there are many similarities between the corporate governance provisions of Clause 49 and the recommendations of the Irani Committee, there were some significant differences with respect to the board of directors, in particular as related to independent directors. As discussed below, these differences are reflected in the proposed amendments to the Companies Act. On August 5, 2009, the Companies Bill, 2009 was introduced in the Lok Sabha, the directly elected lower house of the Indian Parliament, in the same form in which it was presented in 2008.36 (See Corporate Governance Provisions of the Companies Bill (2009), at right). However, passage of the bill has been deferred, and it is expected that the Companies Bill will be further amended as a result of an August 2010 report by the Standing Committee on Finance of Parliament, which examined the 2009 bill in great detail.37 According to the Standing Committees report, the MCA has accepted that some of the matters included in the 2009 Voluntary Guidelines, discussed below, should be included in a revised bill. These include the separation of the roles of chairman and chief executive; the attributes and tenure of independent directors; board evaluation; the appointment of auditors; and the rotation of audit partners and firms. The table in the Appendix sets forth some of the existing differences with respect to public company independent directors among Clause 49, the Companies Bill (2009) and the MCAs proposed amendments to the Companies Bill as a result of the 2010 report by the Standing Committee on Finance.

The Second Phase of Reform: Corporate Governance After Satyam


Indias corporate community experienced a significant shock in January 2009 with damaging revelations about board failure and colossal fraud in the financials of Satyam. The Satyam scandal also served as a catalyst for the Indian government to rethink the corporate governance, disclosure, accountability and enforcement mechanisms in place.38 As described below, Indian regulators and

Corporate Governance Provisions of the Companies Bill (2009)


The current provisions of the Companies Bill as related to the function and independence of the Board of Directors and its audit committee include: Auditors and Audit Committee

The Audit Committee shall consist of a minimum of


three directors with independent directors forming a majority and at least one director having knowledge of financial management, audit or accounts.

The chair of the Audit Committee must be an independent director. Eligibility

A person shall be eligible for appointment as an auditor of a company only if he is a Chartered Accountant in practice.

Where a firm is appointed as an auditor of a company,


only the partners who are Chartered Accountants in practice shall be authorized by the firm to act and sign on behalf of the firm.

None of the following persons shall be eligible for


appointment as an auditor of a company, namely: a body corporate;a an officer or employee of the company; a person who is a partner, or who is in the employment, of an officer or employee of the company; a person who, or his relative or partner is holding any security of the company or its subsidiary of value in terms of such percentage as may be prescribed;

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industry groups have advocated for a number of corporate governance reforms to address some of the concerns raised by the Satyam scandal. Industry response Shortly after news of the scandal broke, the CII began examining the corporate governance issues arising out of the Satyam scandal.39 Other industry groups also formed corporate governance and ethics committees to study the impact and lessons of the scandal.40

In late 2009, a CII task force put forth corporate governance reform recommendations.41 In its report the CII emphasized the unique nature of the Satyam scandal, noting that Satyam is a one-off incident . . . The overwhelming majority of corporate India is well run, well regulated and does business in a sound and legal manner.42

is indebted to the company; or has given a guarantee or provided any security in connection with the indebtedness of any third person to the company for such amount as may be prescribed. Powers and Duties of Auditors and Auditing Standards

No person shall hold office as a director in more than 15


companies. Independent Directors

Nonexecutive director (NED) of the company, other than


a nominee director, who is a person of integrity and possesses relevant expertise and experience.

Every auditor of a company shall have a right of access


at all times to the books of account and vouchers of the company, and may request any necessary information from the officers of the company.

Who, neither himself nor any of his relatives has or had


any pecuniary relationship or transaction with the company, amounting to 10 percent or more of its gross turnover or total income during the two immediately preceding financial years or during the current financial year; holds or has held any senior management position, position of a key managerial personnel or is or had been employee of the company in any of the three financial years immediately preceding the financial year in which he is proposed to be appointed; holds together with his relatives 2 percent or more of the total voting power of the company. Meeting of the Board and Its Powers

The auditors report shall also state whether he has


obtained all the information and explanations which were necessary for the purpose of his audit; whether proper books of account as required by law have been kept by the company; whether the companys balance sheet and profit and loss account dealt with in the report are in agreement with the books of account and returns; whether the financial statements comply with the accounting standards and the auditing standards; the observations or comments of the auditors which have any adverse effect on the functioning of the company; whether any director is disqualified from being appointed as a director under; any qualification, reservation or adverse remark relating to the maintenance of accounts and other matters connected therewith. Appointment and Qualification of Directors

The Board must meet a minimum of four times a year with


not more than 120 days between consecutive meetings.

The participation of directors in a meeting of the Board


may be either in person or through video conferencing or such other electronic means, as may be prescribed.

The Board must establish the Audit Committee and the


Remunerations Committee.
a A body corporate is a defined terms under the India Companies Act, and includes companies incorporated in or outside of India.

Every listed public company having such amount of paidup share capital as may be prescribed shall have at the least one-third of the total number of directors as independent directors.

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Director Notes A Brief Overview of Corporate Governance Reforms in India

Large, highly visible and publicized corporate scandals often provoke legislative and regulatory actions. CII advocates caution against overregulating. It needs to be recognized that while the super-structure of corporate governance is built on laws and regulations, these cannot be anything more than a basic framework. Much of best-inclass corporate governance is voluntaryof companies taking conscious decisions of going beyond the mere letter of law.
Report of the CII Task Force on Corporate Governance, Confederation of Indian Industries, 2009.

streamlining of timelines for submission of various financial statements by listed entities as required under the Listing Agreement.46

In early 2010, SEBI amended the Listing Agreement to add provisions related to the appointment of the CFO by the audit committee and other matters related to financial disclosures.47 However, other proposals such as rotation of audit partners were not included in the amendment of the Listing Agreement.48

MCA actions
Inspired by industry recommendations, including the influential CII recommendations, in late 2009 the MCA released a set of voluntary guidelines for corporate governance.49 The Voluntary Guidelines address a myriad of corporate governance matters including:

In addition to the CII, the National Association of Software and Services Companies (NASSCOM, selfdescribed as the premier trade body and the chamber of commerce of the IT-BPO industries in India)43 also formed a Corporate Governance and Ethics Committee, chaired by N. R. Narayana Murthy, one of the founders of Infosys and a leading figure in Indian corporate governance reforms.44 The Committee issued its recommendations in mid-2010, focusing on stakeholders in the company. The report emphasizes recommendations related to the audit committee and a whistleblower policy. The report also addresses improving shareholder rights. The Institute of Company Secretaries of India (ICSI) has also put forth a series of corporate governance recommendations.45 Government response Satyam prompted quick action by both SEBI and the MCA.

independence of the boards of directors; responsibilities of the board, the audit committee, auditors, secretarial audits; and mechanisms to encourage and protect whistleblowing.50

Important provisions include:51 i. ii. iii. iv. v. vi. vii. viii.


Issuance of a formal appointment letter to directors. Separation of the office of chairman and the CEO. Institution of a nomination committee for selection of directors. Limiting the number of companies in which an individual can become a director. Tenure and remuneration of directors. Training of directors. Performance evaluation of directors. Additional provisions for statutory auditors.

SEBI actions
In September 2009 the SEBI Committee on Disclosure and Accounting Standards issued a discussion paper that considered proposals for:

See MCA Voluntary Guidelines: A Closer Look, p. 12. In discussing the voluntary nature of the guidelines, Corporate Affairs Secretary, R. Bandyopadhyay, stated that the MCA did not want to enact a rigid, mandatory law.52 However, the MCA also indicated that the guidelines are a first step and that the option remains open to perhaps move to something more mandatory.53 In fact, certain voluntary aspects of the guidelines, such as the separation of the office of chairman and CEO, have now been recommended for enactment in amendments to the Companies Bill pending in Parliament.54
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appointment of the chief financial officer (CFO) by the audit committee after assessing the qualifications, experience and background of the candidate; rotation of audit partners every five years; voluntary adoption of International Financial Reporting Standards (IFRS); interim disclosure of balance sheets (audited figures of major heads) on a half-yearly basis; and

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Director Notes A Brief Overview of Corporate Governance Reforms in India

The guidelines are not intended to be a substitute for or addition to the existing laws but are recommendatory in nature. While it is expected that more and more corporations should make sincere efforts to consider adoption of the guidelines, there may be genuine reasons for some companies in not being able to do so completely. In such a case it is expected that such companies should inform their shareholders about the reasons for not adopting these guidelines either fully or partially.
MCA Voluntary Guidelines, 2009.

The top private sector firms have largely complied with Clause 49 and appear to have benefited from the more robust corporate governance rules imposed by Clause 49. For example, a recent event study of the impact of Clause 49 reforms on the market value of Indian firms found a significant rise in the share price of large firms following SEBIs initial announcement to adopt corporate governance reforms similar to those proposed by the CII.61 Furthermore, the study found that fast-growing and cross-listed firms both reacted more positively than other firms, consistent with the theory that faster-growing firms are more likely to raise equity capital, and may benefit more from the bonding to good governance and cross-listed firms may have greater investment by governance-sensitive foreign investors.62 While large corporate entities have been relatively successful at implementing Clause 49s reforms, PSUs and small- and medium-sized enterprises have struggled with the implementation process. For example, in January 2006, when revisions to Clause 49 went into effect, the top 10 private sector companies were all in compliance.63 In marked contrast to top private sector companies, PSUs were mostly noncompliant with Clause 49 by large margins at the time it went into effect.64 Moreover, as of December 2009, 21 of 43 listed PSUs do not have the required number of independent directors under Clause 49.65 Enforcement Clause 49 contained certain penalty provisions for noncompliance. While the initial penalty for failure to comply with Clause 49 was delisting, severe financial penalties for directors of non-compliant firms were introduced in 2004.66 Despite statutory penalties for non-compliance, there appears to be little enforcement of Clause 49. To date, SEBI has not provided much public disclosure regarding its enforcement efforts. What is known, at least with respect to large entities, is that there has been little use by SEBI of the delisting enforcement measure provided under Clause 49, even for companies that have failed to comply with Clause 49s board independence rules.67 SEBIs first enforcement actions were not brought until 2007, almost seven years after Clause 49 was put into place. SEBIs 2007 adjudication proceedings were brought against only 20 out of the hundreds of noncompliant companies. Though it did not disclose all of the names of the companies, SEBI indicated 15 were private companies and five were PSUs.68 However, SEBI later abandoned the enforcement actions against the PSUs after significant political pressure.69

Compliance and Enforcement


Clause 49 sets forth a strong corporate governance framework, however, compliance with and enforcement of this framework leave much to be desired. While many of the largest independent public companies appear to have little difficulty complying with Clause 49, public sector undertakings (PSUs)55 and smaller companies have struggled to meet Clause 49s requirements. But, there has been little effort to bring enforcement actions against non-compliant companies. Compliance Despite the fact that Clause 49s requirements have been in place for listed companies since 2006, compliance remains incomplete across corporate India.56 Clause 49 compliance is reported by listed companies who must submit a quarterly report, signed by the CEO or the Compliance officer, to stock exchanges within fifteen days from the close of quarter.57 Moreover, the companys annual report must contain a separate section on corporate governance. To date, companies listed on the NSE, which has grown rapidly in the past several years, have more fully complied with Clause 49 regulations than have BSE-listed companies.58 As of December 31, 2009, 88 of the companies listed on the NSE, or approximately 6 percent, have failed to submit Clause 49 compliance reports, while 1103 of the companies listed on the BSE have failed to submit such reports.59 The compliance ratio of BSE companies is quite low, at approximately 50 percent, when one considers that a large proportion of BSE companies are either suspended or placed under the Z group of BSE.60

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Director Notes A Brief Overview of Corporate Governance Reforms in India

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MCA Voluntary Guidelines: A Closer Look


I. Board of Directors Appointment of Directors

Independent Directors should be restricted to six-year


terms. They must leave for three years before serving another term, and they may not serve more than three tenures for a company.

Companies should issue formal letters of appointment to


Non-Executive Directors (NEDs) and Independent Directors - as is done by them while appointing employees and Executive Directors. Such a formal letter should form a part of the disclosure to shareholders at the time of the ratification of his/her appointment or re-appointment to the Board.

Independent Directors should have the ability to meet


with managers and should have access to information. Remuneration of Directors

NEDs should be paid either a fixed fee or a percentage of


profits; whichever payment method is elected should apply to all NEDs. NEDs paid with stock-options should hold onto those options for three years after leaving the board.

The offices of chairman of the board and chief executive


officer should be separate.

The companies may have a Nomination Committee comprised of a majority of Independent Directors, including its Chairman. A separate section in the Annual Report should outline the guidelines being followed by the Nomination Committee and the role and work done by it during the year under consideration.

Independent Directors should not be paid with stock options or profit-based commission.

The Remuneration Committee should have at least three


members, the majority NEDs, with at least one Independent Director. Their decisions should be made available in the Annual Report. II. Duties of the Board

Independent Directors and NEDs should hold no more


than seven directorships. Independent Directors

The Board should provide training for the directors. The Board should enable quality decision-making by giving the members timely access to information.

The Board should put in place a policy for specifying positive attributes of Independent Directors such as integrity, experience and expertise, foresight, managerial qualities and ability to read and understand financial statements. Disclosure about such policy should be made by the Board in its report to the shareholders. Such a policy may be subject to approval by shareholders.

The Board should put in systems of risk management and


review them every six months.

The Board should review its own performance annually


and state its methods in its Annual Report.

All Independent Directors should provide a detailed Certificate of Independence at the time of their appointment, and thereafter annually. (The actual director is to certify her independence based on the board policy as set forth above. According to the MCAs Voluntary Guidelines, the certificate of independence is to be provided by the independent director and placed on the companys website and on the website of the stock exchange where the companys shares are listed.)

The Board should put in a system to ensure compliance


with the law, which should be reviewed annually. All agenda items should be assessed for its impact on minority shareholders.

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Conclusion
III. Audit Committee of Board Since the late 1990s, significant efforts have been taken by Indian regulators, as well as by Indian industry representatives and companies, to overhaul Indian corporate governance. Not only have reform measures been put into place prior to discovery of major corporate governance scandals, but both industry groups and government actors have sprung into action following the Satyam scandal. The current corporate governance regime in Indian straddles both voluntary and mandatory requirements. For listed companies, the vast majority of Clause 49 requirements are mandatory. It remains to be seen whether some of the more recent voluntary corporate governance measures will become mandatory for all companies through a comprehensive revision of the Companies Act.

The Audit Committee should be composed of at least


three members, with Independent Directors in the majority and an Independent Director as the chairperson.

The Audit Committee is responsible for reviewing the


integrity of financial statements, the companys internal financial controls, internal audit function and risk management systems. The Audit Committee should also monitor and approve all Related Party Transactions. IV. Auditors

The Committee should be consulted on the selection


of auditors. The committee must be supplied with relevant information about the auditing firm.

Endnotes
1 See Bernard S. Black & Vikramaditya S. Khanna, Can Corporate Governance Reforms Increase Firms Market Value: Evidence from India, University of Michigan Law School, Olin Working Paper No. 07002, Oct. 2007, available at www.ssrn.com/abstract=914440. For a detailed history of developments in Indian corporate governance, see Afra Afsharipour, Corporate Governance Convergence: Lessons from the Indian Experience, Northwestern Journal of International Law & Business 335 (2009); Rajesh Chakrabarti, Corporate Governance in IndiaEvolution and Challenges 20 (Jan. 17, 2005) (unnumbered working paper), available at http:// ssrn.com/abstract=649857. Circular, Securities and Exchange Board of India, Amendments to Clause 49 of the Listing Agreement (Sept. 12, 2000), available at http://web.sebi.gov.in/circulars /2000/CIR422000.html; Circular, Corporate Governance in Listed CompaniesClause 49 of the Listing Agreement (Aug. 26, 2003), available at http://web.sebi.gov.in/ circulars/2003/cir2803.html. See James Fontanella-Khan, Timeline: The Satyam Scandal, Fin. Times, Jan. 7, 2009; Indias Enron, The Economist, Jan. 8, 2009. See Satyam Fraud: Raju Sent to Central Prison; CFO Vadlamani Arrested, The Economic Times, Jan. 10, 2009; Satyams Raju Brothers Arrested by AP Police, The Economic Times, Jan. 9, 2009; Jackie Range, Pricewaterhouse Partners Arrested in Satyam Probe, The Wall Street Journal Asia, Jan. 25, 2009; Mukesh Jagota & Romit Guha, India Names New Satyam Board, The Wall Street Journal, Jan. 12, 2009. The Companies Act, 1956, Acts of Parliament, 1956 (as amended) provides the general legal framework for companies in India, governing the incorporation, functioning, and winding up of Indian companies. All registered companies in India, whether public or private, are governed by the Companies Act. See Companies Bill (2009), available at http://www.mca.gov.in/ Ministry/acts_bills.html; see also Ministry of Corporate Affairs, Government of India, Companies Bill Introduced in Lok Sabha, Press Release, Aug. 3, 2009, available at http://www.pib.nic.in/release/ release.asp?relid=51386.

Every auditor should provide a certificate stating


his/her/its arms length relationship with the client company.
2

The audit partner should be rotated every three


years; the firm should be rotated every five years. Audit partners should have a cooling off period of three years before they work with the client company again; the firm should have a cooling off period of five years.
3

The Committee may appoint an internal auditor.


4

V. Institution of a Mechanism for Whistleblowing


5

The companies should ensure the institution of a


mechanism for employees to report concerns about unethical behavior, actual or suspected fraud, or violation of the companys code of conduct or ethics policy.

The companies should also provide for adequate safeguards against victimization of employees who avail of the mechanism, and also allow direct access to the Audit Committee Chairperson in exceptional cases.
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See Ministry of Corporate Affairs, Government of India, Corporate Governance Voluntary Guidelines 2009 (December 2009), available at http://www.mca.gov.in/Ministry/latestnews/CG_Voluntary_ Guidelines_2009_24dec2009.pdf. Dhammika Dharmapala & Vikramaditya S. Khanna, Corporate Governance, Enforcement, and Firm Value: Evidence from India (Univ. of Mich. Law Sch., Olin Working Paper No. 08-005, 2007), available at http://ssrn.com/abstract=1105732.

10 See Confederation of Indian Industry, Desirable Corporate Governance: A Code (1998). 11 See National Foundation for Corporate Governance, Corporate Governance in India: Theory and Practice (Sept. 2004). 12 Shri Kumar Mangalam Birla et al., the Securities and Exchange Board of India, Report of the Kumar Mangalam Birla Committee on Corporate Governance (1999), available at http://www.sebi.gov.in/ commreport/corpgov.html. 13 Id. 6.5, 6.9. The Committee recommended that at least half the members should be independent (or one-third if the chairman of the board is an independent director), and defined an independent director as one who has no material pecuniary relationship[, other than remuneration,] or transaction with the company [et al.]... which in the judgment of the board may affect [the directors] independence of judgment. Id. To ensure that directors give companies due attention, the Committee also recommended that directors be limited to holding a maximum of ten directorships and five chairmanships. Id. 11.2. 14 Id. 9.6. The Committee recommended that the audit committee be composed of at least three directors, all nonexecutive directors, a majority of independent directors, and at least one director with financial and accounting knowledge. Id. The chair of the audit committee should be independent. In addition, the Committee recommended that the audit committee should meet at least three times a year. Id. 9.7. 15 Id. 13.4, 14.7. 16 For a discussion of the phase-in process under the initial Clause 49 adoption, see Umakanth Varottil, Evolution and Effectiveness of Independent Directors in Indian Corporate Governance, Hastings Business Law Journal 281 (2010). 17 N.R. Narayana Murthy Et Al., the Securities and Exchange Board of India, Report of the SEBI Committee on Corporate Governance 1.6 (2003), available at http://www.sebi.gov.in/commreport/corpgov. pdf. 18 Id. 1.5.41.5.5. 19 Id. 3.10.14. 20 Id. 21 Id. 3.8.1.1, 3.8.1.2. 22 Id. 3.5.2.4. 23 Id. 3.5.1.7. 24 Id. 3.2.2.3. 25 Id. 3.4.1.5. 26 Id. 3.11.1.3, 3.11.2.4. 27 SEBI, Issues Under Clause 49 and Proposed Amendments 1 (2003), available at www.sebi.gov.in/commreport/clause49.html.

28 For an overview of implementation and enforcement issues with respect to Clause 49, see generally Afsharipour, Corporate Governance Convergence: Lessons from the Indian Experience; Umakanth Varottil, A Cautionary Tale of the Transplant Effect on Indian Corporate Governance, 21 Natl L. Sch. of India Rev. 1 (2009); Bala B. Balasubramanian, , Bernard S. Black, and Vikramaditya S. Khanna, Firm-Level Corporate Governance in Emerging Markets: A Case Study of India (July 2, 2008, ECGI - Law Working Paper 119/2009; 2nd Annual Conference on Empirical Legal Studies Paper; University of Michigan Law & Economics, Olin Working Paper 08-011; U of Texas Law, Law and Econ Research Paper No. 87; Northwestern Law & Economics Research Paper No. 09-14) available at http://ssrn.com/ abstract=992529. 29 See National Foundation, p. 8. 30 Id. 31 See Murthy Report, at 4. 32 Jamshed J. Irani et al., Expert Committee on Company Law, Report of the Expert Committee to Advise the Government on the New Company Law 3 (2005), available at www.primedirectors.com/pdf/ JJ%20Irani%20Report-MCA.pdf. 33 Id. at 23. 34 Id. at 1011. 35 Id. at 1112. 36 See Chakshu Roy & Avinash Celestine, Legislative Brief: The Companies Bill, 2009, PRS Legislative Research (Aug. 18, 2009), available at http://www.prsindia.org/uploads/media/Company/ Legislative%20Brief--companies%20bill%202009.pdf. 37 See Standing Committee on Finance (2009-2010), Fifteenth Lok Sabha, The Companies Bill, 2009, Twenty-First Report (August 2010). 38 See Omkar Goswami, Aftermath Of Satyam, Businessworld (India), Jan. 23, 2009; Prashant K Sahu, Sapna Dogra & Aditi Phadnis, Satyam Scam Prompts Clause 49 Review, Business Standard, Jan. 14, 2009. 39 See CII Sets Up Task Force on Corporate Governance, Business Standard, Jan. 12, 2009. 40 See NASSCOM Announces Formation of Corporate Governance and Ethics Committee, Business Standard, Feb. 11, 2009. 41 See Naresh Chandra, Report of the CII Task Force on Corporate Governance 2 (November 2009), available at www.mca.gov.in/ Ministry/latestnews/Draft_Report_NareshChandra_CII.pdf [hereinafter CII 2009 Report]. 42 Id. at 1. 43 NASSCOM, About Us, available at http://www.nasscom.in/Nasscom/ templates/NormalPage.aspx?id=5365. 44 NASSCOM, NASSCOM Governance And Ethics Committee Releases ITs Recommendations For The IT-BPO Industry, April 27, 2010 available at www.nasscom.in/Nasscom/templates/NormalPage.aspx?id=59083. 45 See Institute of Company Secretaries of India, ICSI Recommendations to Strengthen Corporate Governance Framework (Dec. 2009), available at www.mca.gov.in/Ministry/latestnews/ICSI_Recommendations_ Book_8dec2009.pdf. 46 SEBI Committee on Disclosures and Accounting Standards, Discussion Paper on Proposals Relating to Amendments to the Listing Agreement (Sep. 2009), available at www.sebi.gov.in/commreport/ amendproposal.pdf.

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47 These measures have been introduced through an amendment to the Listing Agreement. See Securities and Exchange Board of India, Circular No. CIR/CFD/DIL/1/2010 (Apr. 5, 2010), available at www. sebi.gov.in/circulars/2010/cfddilcir01.pdf. 48 See Securities and Exchange Board of India, Circular No. CIR/ CFD/DIL/1/2010 (Apr. 5, 2010), available at http://www.sebi.gov. in/circulars/2010/cfddilcir01.pdf.; see also Umakanth Varottil, Indias Corporate Governance Voluntary Guidelines 2009: Rhetoric or Reality? 13 (2010), available at http://papers.ssrn.com/sol3/papers. cfm?abstract_id=1634821. 49 For detailed evaluation of the substance of the voluntary guidelines and whether a voluntary approach is the correct approach, see Varottil, Rhetoric or Reality. 50 See Voluntary Guidelines. 51 Id. 52 Corporate Affairs Secretary R. Bandyopadhyay: CSR is not Charity -- its a Win-Win Situation, India Knowledge at Wharton, available at http://knowledge.wharton.upenn.edu/india/article. cfm?articleid=4488. 53 Id. 54 See Standing Committee on Finance, at Annexure I. 55 PSUs are state-owned enterprises and represent the Indian governments socialist policies prior to 1991. See Lawrence Sez & Joy Yang, The Deregulation of State-Owned Enterprises in India and China, 43 Comp. Econ. Stud. 69, 76 (2001). 56 See Varottil, Evolution and Effectiveness of Independent Directors in Indian Corporate Governance, at 343-374. 57 Clause 49 (2004), at VI(ii). 58 NSE, Listing of Securities 38 (2009), available at http://nseindia.com/ content/us/fact2009sec3.pdf. 59 Corporate Filing & Dissemination System, Companies Not Complying with Clauses 49 & 40A, http://www.corpfiling.co.in/notcomplying/ links.aspx (last visited April 6, 2010). As of December 2009, 4955 companies were listed on the BSE. BSE, Key Statistics, http:// bseindia.com/about/st_key/list_cap_raised.asp (last visited April 6, 2010). As of March 2009, 1432 companies were listed on the NSE. NSE, Listing of Securities 38 (2009), available at http://nseindia.com/ content/us/fact2009sec3.pdf.

60 See Directors Database, http://directorsdatabase.com/; V. Venkateswara Rao, Clause 49: Needed, better compliance, Business Line, May 27, 2009. 61 See Black & Khanna, p. 1. 62 Id. 63 PSUs Fail SEBIs Clause 49 Test, Financial Express, Jan. 10, 2006. 64 Id. 65 PSUs Fail to Meet SEBI Criterion on Directors, Business Standard, Dec. 26, 2009. 66 See The Securities Laws (Amendment) Act, 2004 11, No. 1, Acts of Parliament, 2005, available at http://indiacode.nic.in/fullact1. asp?tfnm=200501. 67 Inside Story: How they Saved Satyam, News Center, Jan. 26, 2010, available at www.moneycontrol.com/news/business/inside-storyhow-they-saved-satyam_432170.html. 68 Press Release, SEBI, SEBI Initiates Adjudication Proceedings Against 20 Companies for Non-Compliance of Clause 49 Norms (Sept. 11, 2007), available at www.sebi.gov.in/press/2007/2007257.html. 69 During October and November 2008, SEBI passed a series of orders involving several government companies, viz. NTPC Limited (8 October), GAIL (India) Limited (27 October), Indian Oil Corporation Limited (31 October) and Oil and Natural Gas Corporation Limited (3 November), all available at www.sebi.gov.in.

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APPENDIX Clause 49, the Companies Bill, 2009, and the Standing Committee on Finance Report: Differences With Respect to Public Company Independent Director Provisions
Clause 49 Companies Bill (2009) MCAs Current Proposal in Response to Standing Committee on Finance Report

Number of Directors on the Board

(I)(A)(i): The Board of directors of the company must have an optimum combination of executive and non-executive directors

Clause 132(1): For public companies, the Board of Directors must have a minimum of three directors and a maximum of twelve directors, excluding the directors nominated by the lending institutions.

Chapter XI Clause 132:

For public companies, the Board of Directors must have a minimum of three directors and a maximum of fifteen directors, excluding the directors nominated by the lending institutions; a company may appoint more than fifteen directors after passing a special resolution and after obtaining prior approval of [the] Central Government in this regard.

Minimum Number of Independent Directors

(I)(A)(i)-(ii):

Where the chairman holds an executive position in the company or when the nonexecutive chairman is a promoter or a person related to any promoter of the company, at least one half of the board should consist of independent directorsa Otherwise, one- third of the board should consist of independent directors.

Clause 132(3): Independent directors must comprise onethird of the board for listed companies

Chapter XI Clause 132(3): Independent directors must comprise one-third of the board for listed companies.

Definition of Independence

(I)(A)(iii)(a): An independent director is defined as a nonexecutive director who

apart from receiving directors 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 associates which may affect independence of the director;

Clause 132 (5): An independent director is defined as a non-executive director

Chapter XI Clause 132(5): The definition of independent director remains largely the same as in the Companies Bill, 2009, except as follows:

who in the opinion of the Board, is a person of integrity and possesses relevant expertise and experience; who neither the independent director nor his/her relatives:

Neither an independent director nor his/ her relatives may have a pecuniary relationship or transaction with the company, its holding, subsidiary or associate company, or its promoters, or directors, amounting to two per cent or more of the companys gross turnover or total income, during the two immediately preceding financial years or during the current financial year.

a Promoter and promoter group are defined to include: (i) the person or persons who are in overall control of the company, (ii) the person or persons who are instrumental in the formulation of a plan or program pursuant to which securities are offered to the public, and (iii) the person or persons named in the prospectus as promoters. See Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009, Gazette of India, section III(4), subsecs. 2(1)(za)-2(1)(zb) (Aug. 26, 2009), available at http://www.sebi.gov.in/Index.jsp?contentDisp=Section&sec_id=1.

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APPENDIX (continued)

Clause 49

Companies Bill (2009)

MCAs Current Proposal in Response to Standing Committee on Finance Report

Definition of Independence (continued)

is not related to promoters or persons occupying management positions at the board level or at one level below the board; has not been an executive of the company in the immediately preceding three financial years; is not a partner or an executive or was not partner or an executive during the preceding three years, of any of the following:
- the statutory audit firm or the internal audit firm that is associated with the company, and - the legal firm(s) and consulting firm(s) that have a material association with the company.

- has or had a pecuniary relationship with the board amounting to 10% or more of the companys gross turnover or total income during the two immediately preceding financial years or during the current financial year; - holds or has held any senior management position, position of a key managerial personnel or is or had been employee of the company in any of the three financial years immediately preceding the financial year in which he is proposed to be appointed; - is or has been an employee or a partner, in any of the three financial years immediately preceding the financial year in which he is proposed to be appointed, of - (A) a firm of auditors or company secretaries in practice or cost auditors of the company or its holding, subsidiary or associate company; or - (B) any legal or a consulting firm that has or had any transaction with the company, its holding, subsidiary or associate company amounting to ten per cent. or more of the gross turnover of such firm; - holds together with his relatives two per cent. or more of the total voting power of the company; or - is a Chief Executive or director, by whatever name called, of any nonprofit organisation that receives twenty-five per cent. or more of its income from the company, any of its promoters, directors or its holding, subsidiary or associate company or that holds two per cent. or more of the total voting power of the company; or

An independent director may not be related to promoters, directors or senior management.

is not a material supplier, service provider or customer or a lessor or lessee of the company, which may affect independence of the director; is not a substantial shareholder of the company i.e. owning two percent or more of the block of voting shares. is not less than 21 years of age.

who possesses such other qualifications as may be prescribed.

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APPENDIX (continued)

Clause 49

Companies Bill (2009)

MCAs Current Proposal in Response to Standing Committee on Finance Report

Maximum Number of Board Membership

(I)(C)(ii): An independent director can be a member of a maximum of ten boards, or a maximum of five chairmanships.

Clause 146: An independent director can be a member of a maximum of fifteen boards.

Chapter XI Clause 146: (1) No person shall hold office as a director in more than twenty companies at the same time:

Provided that the maximum number of public companies in which a person can be appointed as a director shall not exceed fifteen; Provided further that the maximum number of listed companies in which a person can be appointed as a director shall not exceed seven; Provided also that subject to the provisions of the first and second proviso, Central Government may, on an application made by any person in this behalf, permit him to be appointed as director in more than twenty private companies if the Central Government is satisfied that it is necessary to allow such permission, keeping in view the nature and working of such private companies.

(2) In case a person is a managing or wholetime director in a listed company, the number of public companies in which such a person can be appointed as non executive director, shall be restricted to ten and the number of listed companies in which such a person can be appointed as a non executive director, shall be restricted to two.

Limits on Tenure

Annexure (I)(D)(1): Nonmandatory requirement that after serving nine years, an independent director is no longer independent.

No limits on the tenure of an independent director.

Chapter XI -New sub-clause 132(7):

No independent director shall have a tenure exceeding, in the aggregate, a period of six consecutive years on the Board of a company. A period of three years must elapse before such an individual is inducted in the same company in any capacity. No individual shall have more than two tenures as independent director in any company.

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About the Author


Afra Afsharipour is Assistant Professor of Law at University of California, Davis School of Law. Professor Afsharipour conducts research on comparative corporate law, corporate governance, corporate social responsibility, mergers and acquisitions, and transactional law. Prior to joining the Davis faculty, Professor Afsharipour was an associate in the corporate department of Davis Polk & Wardwell, where she advised clients on domestic and cross border mergers and acquisitions, public and private securities offerings, and corporate governance and compliance matters. She also served as a law clerk to the Honorable Rosemary Barkett of the Eleventh Circuit Court of Appeals. She received a J.D. from Columbia Law School, and a B.A. from Cornell University. Professor Afsharipours scholarship has appeared in a number of law reviews, including the Columbia Law Review, the Vanderbilt Law Review, the UC Davis Law Review, and the Northwestern Journal of International Law and Business. In addition, Professor Afsharipour is a contributing editor at the M&A Law Prof Blog.

About the Series Director


Matteo Tonello is Director of Corporate Governance Research at The Conference Board in New York. For The Conference Board, Tonello has conducted governance and risk management analyses and research in collaboration with leading corporations, institutional investors, and professional firms. Also, he has participated as a speaker and moderator in educational programs on governance best practices. Recently, Tonello served as the co-chair of The Conference Boards Expert Committee on Shareholder Activism and as a member of the Technical Advisory Group to The Conference Board Task Force on Executive Compensation. Before joining The Conference Board, he practiced corporate law at Davis Polk & Wardwell. Tonello is a graduate of Harvard Law School and the University of Bologna.

About The Conference Board


The Conference Board is the worlds preeminent business membership and research organization. Best known for the Consumer Confidence Index and the Leading Economic Indicators, The Conference Board has, for over 90 years, equipped the worlds leading corporations with practical knowledge through issues-oriented research and senior executive peer-to-peer meetings.

About Director Notes


Director Notes is a series of online publications in which The Conference Board engages experts from several disciplines of business leadership, including corporate governance, risk oversight, and sustainability, in an open dialogue about topical issues of concern to member companies. The opinions expressed in this report are those of the author(s) only and do not necessarily reflect the views of The Conference Board. The Conference Board makes no representation as to the accuracy and completeness of the content. This report is not intended to provide legal advice with respect to any particular situation, and no legal or business decision should be based solely on its content.

For more information on this report, please contact: Matteo Tonello, LL.M., S.J.D., director, corporate governance, at 212 339 0335 or matteo.tonello@conferenceboard.org. The Conference Board www.conferenceboard.org The Americas 845 Third Avenue, New York, NY 10022-6600, United States / Tel +1 212 759 0900 / Fax +1 212 980 7014 Asia china Beijing Representative Office, 7-2-72 Qijiayuan, 9 Jianwai Street, Beijing 100600 P.R. China / Tel +86 10 8532 4688 / Fax +86 10 8532 5332 / www.conferenceboard.cn hong kong Suite No. 2-3, 18/F, Queens Place, 74 Queens Road Central, Hong Kong SAR / Tel +852 2804 1000 / Fax +852 2869 1403 india A-701 Mahalaxmi Heights, Keshavrao Khadye Marg, Mahalaxmi (East), Mumbai 400 011 India / Tel +91 22 23051402 singapore 8 Eu Tong Sen Street #22-81, The Central, Singapore 059818 / Tel +65 6325 3121 / Fax +65 6222 4637 Europe Chausse de La Hulpe 130, box 11, B-1000 Brussels, Belgium / Tel +32 2 675 54 05 / Fax +32 2 675 03 95
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