In the last ten years or so, corporate governance has grown leaps and bounds in the country. To the extent that the New York Stock Exchange cites Infosys Technologies, an Indian company, as a role model regarding disclosure of information to shareholders. It all began in 1992 when the Cadbury report on corporate governance defined the role of independent directors on the board of a company. This was followed by the Kumarmangalam Birla Committee report on corporate governance, set up by the Securities and Exchange Board of India (Sebi), in 1999. Now, the Naresh Chandra Committee report of last week of December 2002 has taken forward the work done by the Kumarmangalam Birla panel.

Says the Report -"The global movement for better corporate governance progressed in fits and starts from the mid-1980s up to 1997. There were the odd country-level initiatives such as the Cadbury Committee Report in the United Kingdom (1992) or the recommendations of the National Association of Corporate Directors of the US (1995). It would be fair to say, however, that such initiatives were few and far between. And while there were the occasional international conferences on the desirability of good corporate governance, most companies - global and Indian alike - knew little of what the phrase meant, and cared even less for its implications.

More recently, the first major stimulus for corporate governance reforms came after the South-East and East Asian crisis of 1997-98. This was no classical Latin American debt crisis. Here were fiscally responsible, healthy, rapidly growing, export-driven economies going into crippling financial crises. Gradually, governments, multilateral institutions, banks as well as companies began to understand that the devil lay in the institutional, microeconomic details - the nitty-gritty of transactions between companies, banks, financial institutions and capital markets; the design of corporate laws, bankruptcy procedures and practices; the structure of ownership and crony capitalism; sharp stock market practices; poor boards of directors showing scant regard to fiduciary responsibility; poor disclosures and transparency; and inadequate accounting and auditing standards. Suddenly, 'corporate governance' came out of dusty academic closets and moved centre stage.

India's experience was somewhat different from this Asian scheme of things.

1. First, unlike South-East and East Asia, the corporate governance movement did not occur due to a national or region-wide macroeconomic and financial collapse. Indeed, the Asian crisis barely touched India.

2. Secondly, unlike other Asian countries, the initial drive for better corporate governance and disclosure, perhaps as a result of the 1992 stock market "'scam", ', and the onset of international competition consequent on the liberalisation of economy that began in 1990, came from all-India industry and business associations, and in the Department of Company Affairs.

3. Thirdly, it is fair to say that, since April 2001, listed companies in India are required to follow some of the most stringent guidelines for corporate governance throughout Asia and which rank among some of the best in the world. Even so, there is scope for improvement. For one, while India may have excellent rules and regulations, regulatory authorities are inadequately staffed and lack sufficient number of skilled people. This has led to less than credible enforcement. Delays in courts compound this problem. For another, India has had its fair share of corporate scams and stock market scandals that has shaken investor confidence. Much can be done to improve the situation.

Just as the global corporate governance movement was going into a bit of hibernation, there came the Enron debacle of 2001, followed by other scandals involving large US companies such as WorldCom, Qwest, Global Crossing, and the exposure of auditing lacunae that eventually led to the collapse of Andersen. Having shaken the foundations of the business world, that too in the citadel of capitalism, these scandals have triggered another more vigorous phase of reforms in corporate governance, accounting practices and disclosures - this time more comprehensively than ever before. As a US- based expert recently put it, "Enron and WorldCom have done more to further the cause of corporate transparency and governance in less than one year, than what activists could do in the last twenty."

Although India has been fortunate in not having to go through the pains of massive corporate failures such as Enron and WorldCom, it has not been found wanting in its desire to further improve corporate governance standards. On 21 August 2002, the Department of Company Affairs (DCA) under the Ministry of Finance and Company Affairs appointed this Committee to examine various corporate governance issues. Among others, this Committee has been entrusted to analyse and recommend changes, if necessary, in diverse areas such as:

• the statutory auditor-company relationship, so as to further strengthen the professional nature of this interface;

• the need, if any, for rotation of statutory audit firms or partners;

• the procedure for appointment of auditors and determination of audit fees;

• restrictions, if necessary, on non-audit fees;

• independence of auditing functions;

• measures required to ensure that the management and companies actually present 'true and fair' statement of the financial affairs of companies;

• the need to consider measures such as certification of accounts and financial statements by the management and directors;

• the necessity of having a transparent system of random scrutiny of audited accounts;

• adequacy of regulation of chartered accountants, company secretaries, and cost accountants, and other similar statutory oversight functionaries;

• advantages, if any, of setting up an independent regulator similar to the Public Company Accounting Oversight Board in the SOX Act, and if so, its constitution; and

• the role of independent directors, and how their independence and effectiveness can be ensured.

As is evident, the terms of reference to this Committee lie at the heart of corporate governance. Before outlining the scheme of this report and moving on to other chapters, it is necessary to give a thumbnail sketch of the basic theory of corporate governance - if only to indicate how the chapters that follow derive from its core tenets.

A look at the abbreviated terms of reference to this Committee outlined in paragraphs above shows that it is entrusted to look into the two key aspects of corporate governance:

1. financial and non-financial disclosures, and

2. independent auditing and board oversight of management.

There are related aspects - the need for independent oversight of auditors, and efficacious disciplinary procedure for professionals. Having outlined the basic theory of corporate governance that will inform the recommendations of the Committee, we now turn to the structure of the report.

Chapter 2 deals with the entire range of the statutory auditor-company relationship. The objective is to suggest ways of ensuring, and enhancing, the independent, professional nature of this key corporate governance link. Among other things, the chapter examines issues such as the rotation of audit firms versus that of auditing partners, restrictions on non-audit work and fees from such work, the procedure for appointment of auditors, determination of audit fees, and allied subjects. It also looks into measures that may be required to ensure that management and auditors actually present the 'true and fair' statement of financial affairs of the company and, in light of section 302 of the SOX Act, whether it is necessary to introduce measures such as CEO and CFO certification.

Chapter 3 focuses on the issue of who audits the performance of auditors - and examines whether the present system of regulation of chartered accountants, company secretaries and cost and works accountants is sufficient and has adequately served the interests of corporate shareholders and stakeholders. In this context, the chapter analyses the need for setting up an independent regulatory body to oversee the quality of audit of public limited companies as has been done in the case of the Public Company Accounting Oversight Board prescribed by the SOX Act.

Chapter 4 relates to the independence of the board of directors. It examines the definition of 'independence' currently used in India, and reviews whether there is a need to tighten such a definition. The chapter then goes on to discuss the composition and size of corporate boards, and steps that can be taken to ensure and enhance independence of judgement. Thereafter, it examines in detail the role and functions of the Audit Committee of the board, and suggests things that can be done to strengthen this key committee. The chapter then looks at the remuneration and liabilities of non-executive and independent directors, and finally suggests the need for a concerted nation-wide training programme for directors.

The report concludes with Chapter 5, which discusses some related or allied matters, and recommendations of a consequential nature. It covers some of the concerns that emanated during discussions on the terms of reference, such as improving the conditions and functioning of ROC offices, strengthening the inspection wing of the DCA, harmonisation of action between SEBI and DCA, the need to set up a Corporate Serious Frauds Office, random scrutiny of accounts, and the like.

A brief narration on the theory of Corporate Governance and exposition of the concept as elaborated in the Report of the Committee can be viewed for a better understanding of the perspectivea of the report. Executive Summary of the Committee's Report giving summary of the recommendations of the Committee is contained separately in the next four consecutive pages.

The Government has accepted in general the recommendations of the Naresh Chandra Committee is working towards implementation of the Committee report on corporate governance issues and some amendments in the Companies Act and the Chartered Accountants Act may have to be made, as per sources in the Department of Company Affairs.

The recommendations of Committee will be in addition to the SEBI guidelines for listed companies and will not override them. It is proposed to hold discussions between the Company Affairs Secretary and the Securities and Exchange Board of India Chairman, on how to harmonise their respective regulatory functions and minimise overlap. "As many of the Naresh Chandra Committee's suggestions involve both DCA and SEBI, I am personally going to discuss with the SEBI Chairman, Mr. Bajpai, how to harmonise our operations over the next few days,'' Mr. Dhall said, addressing a panel discussion on the Naresh Chandra Committee report organised by the Confederation of Indian Industry Delhi during February 2003. The sources further said that the Department of Company Affairs was of the view that general overlap between SEBI and DCA should go. While the DCA regulates companies as per the Companies Act, listed companies are also bound by SEBI guidelines including Clause 49 of the listing agreement and some instances of overlap between the functioning of the two regulators have been noticed. Late last year, the two regulators appeared to be at loggerheads over search and seizure powers, which till then rested solely with the DCA until an ordinance was issued to provide limited search and seizure powers to SEBI for listed companies. Speaking on the occasion, Naresh Chandra echoed industry sentiment saying "Clause 49 of the listing agreement of SEBI must be harmonised with DCA's regulatory functions so that this feeling of being over-regulated is dispelled."