As a result of the interest generated in the Corporate sector by the Cadbury Committee's report, the issue of Corporate Governance was studied in depth and dealt with by the Confederation of Indian Industries (CII), the Associated Chamber of Commerce and the Securities and Exchange Board of India (SEBI). In India, the emphasis during the past few years has been limited to only some of the recommendations of the Cadbury Committee -- such as the role and composition of the Audit Committees and the importance of making all the necessary disclosures with annual statements of accounts, which are considered important for investors' protection.

The CII was the first to come out with its version of an Audit Committee. The SEBI, as the custodian of investor interests, did not lag behind. On May 7, 1999, it constituted an 18-member committee, chaired by the young and forward-looking industrialist, Mr. Kumar Mangalam Birla (a chartered accountant himself), on Corporate Governance, mainly with a view to protecting the investors' interests. The Committee made 25 recommendations, 19 of them `mandatory' in the sense that these were enforceable. The listed companies as you may be aware, were obliged to comply with these on account of the contractual obligation arising out of the listing agreement with Stock Exchanges.

The mandatory recommendations of the Kumar Mangalam committee include the constitution of Audit Committee and Remuneration Committee in all listed companies, appointment of one or more independent Directors in them, recognition of the leadership role of the Chairman of a company, enforcement of Accounting Standards, the obligation to make more disclosures in annual financial reports, effective use of the power and influence of institutional shareholders, and so on. The Committee also recommended a few provisions, which are non-mandatory. The various recommendations of Mohan Kumar Mangalam Committee are discussed in detail in 10 articles commencing from the page titled Report of the Kumar Mangalam Committee on Corporate Governance

It will be interesting to note that Kumar Mangalam Committee while drafting its recommendations was faced with the dilemma of statutory v/s voluntary compliance. You may also be aware that the desirable code of Corporate Governance, which was drafted by CII and was voluntary in nature, did not produce the expected improvement in Corporate Governance. It is in this context that the Kumar Mangalam Committee felt that under the Indian conditions a statutory rather than a voluntary code would be far more purposive and meaningful. This led the Committee to decide between mandatory and non-mandatory provisions. The Committee felt that some of the recommendations are absolutely essential for the framework of Corporate Governance and virtually form its code, while others could be considered as desirable. Besides, some of the recommendations needed change of statute, such as the Companies Act for their enforcement. Faced with this difficulty the Committee settled for two classes of recommendations.

SEBI has given effect to the Kumar Mangalam Committee's recommendations by a direction to all the Stock Exchanges to amend their listing agreement with various companies in accordance with the `mandatory' part of the recommendations.

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

Basel Committee published a paper on Corporate Governance for banking organisations in Sep 99. The Committee feels it is the responsibility of the banking supervisors to ensure that there is effective corporate governance in the banking industry. Supervisory experience underscores the need of having appropriate accountability and checks and balances within each bank to ensure sound corporate governance, which in turn would lead to effective and more meaningful supervision. Sound corporate governance could also contribute to a collaborative working relationship between bank managements and bank supervisors.

Basel Committee underscores the need for banks to set strategies for their operations. The committee also insists banks to establish accountability for executing these strategies. Unless there is transparency of information related to decisions and actions it would be difficult for stakeholders to make management accountable..

From the perspective of banking industry, corporate governance also includes in its ambit the manner in which their boards of directors govern the business and affairs of individual institutions and their functional relationship with senior management. This is determined by how banks. For more information on these recommendations/principles defined by Basel Committee please refer Enhancing Corporate Governance for Banking Organisations - Risk Management Group of the Basel Committee on Banking Supervision. You can also view the executive summary of the recommendations.

Basel Committee norms relate only to commercial banks and financial institutions. Banking and financial institutions stand to benefit only if Corporate Governance is accepted universally by industry and business, with whom banks and financial institutions have to interact and deal. SEBI report only partially attends to this need. SEBI is a functional statutory body and it can prescribe regulations only within its functions.

Kumar Mangalam Committee confined itself to submitting recommendations for good Corporate Governance and left it to SEBI to decide on the penalty provisions for non-compliance. In the absence of suitable penalty provisions, it would be difficult to establish good Corporate Governance. Some of the penalty provisions are not sufficient enough to discipline the Corporates. For example, the penalty for non-compliance of the stipulated minimum of 50% in respect of the number of directors in the Board that should be non-executive directors is delisting of shares of the company. This would hardly serve the purpose. In fact, this would be detrimental to the interest of the investors and to the effective functioning of the capital market.

Similarly, an Audit Committee, which is subservient to the Board, may serve no purpose at all; and one which is in perpetual conflict with the Board, may result in stalemates to the detriment of the company. If a company is to function smoothly, it should be made clear that the findings and recommendations of the Audit Committee need not necessarily have to be accepted by the Board which is accountable to the shareholders for its performance and which, under Section 291 of the Companies Act, is entitled to "exercise all such powers, and do all such things as the company is authorised to exercise and do''.

However, some functional specialists are of the considered view that whenever there is a difference of opinion and the Audit Committee's advice is ignored or over-ruled, the Board should be required to place the facts before the General Body of shareholders at their next meeting.

Apart from these issues, there is another area, which needs to be attended to for bringing about further improvements in Corporate Governance in India. One such area is the Accounting Standards. There are some gaps in Accounting Standards, which need to be closed or narrowed down for better transparency.

One of the first and foremost demands of good corporate governance is to let investors know how their money has been used to further the interests of the company they have invested in.

The question that assumes importance here is how effectively the resources of the company are utilized for strengthening the organization. The only available source of information regarding the affairs of a company appears to be its Balance Sheet. Yet, for obvious reasons, the Balance Sheet remains the most abused statement of several companies.

The common methods by which companies hide their wrongful practices, which are all too well known, are to use legal and accounting jargon, non-disclosure and selective adoption of only those policies that are mandatory in nature. It is only a handful of qualified persons, primarily the accountants and the other knowledgeable people, who can get to the picture behind the scenes and unmask the actual from the portrayed picture. It is in this context that the adoption of US-GAAP, which provides for rigorous Accounting Standards and disclosures, assumes relevance.

There are many areas such as consolidation of accounts, treatment of fixed assets, depreciation, R&D costs etc where Indian Accounting Standards (IAS) are at variance with US-GAAP. However, it is heartening to note that things appear to be changing for the better on the Indian turf; thanks to the impetus towards a more transparent accounting system shown by market leaders. Recently, the Institute of Chartered Accountants of India (ICAI) issued the Accounting Standard 21 (AS-21) for consolidation of accounts whereby accounts of companies will be presented along with those of their subsidiaries. This would meet the long pending demand of investors on greater transparency and disclosure.

The need for transparency, so far, appears to have been felt in the context of Public Sector alone. Consequently, we have on the anvil the Right to Information Act and a modification of the Official Secrets Act. While, there is no doubt the government has to be completely transparent in its dealings, since it is dealing with public money, privately managed companies also have a wide shareholder base. They are also dealing with large volumes of public money. The need for transparency in private sector is, therefore, in no way less important than in the Public Sector.

However, private companies use "competitive advantage/company interests" as a pretext to hide essential information. Awarding of contracts, recruitments, transfer pricing (for instance through under/over invoicing of goods in intra company transfers) are the areas, which require greater transparency. Environmental conservation, redressal of customer complaints and use of company resources for personal purposes are some of the other crucial areas, which call for greater disclosure. Relevant details about these must be available for public scrutiny. Fear of public scrutiny, as you will agree, will ensure corporate governance on sound principles both in the Public as well as Private Sectors.

No discussion on public affairs will be complete without a reference to Ethics and Values. The quality of corporate governance is also determined by the manner in which top management, particularly the Board of Directors, allocates the financial resources of the company as between themselves and other interest groups such as employees, customers, government etc. The basic qualities invariably expected in this regard are trust, honesty, integrity, transparency and compliance with the laws of the land. There is an increasing body of public opinion that would expect a business enterprise not only to be a mere economic unit but also to be a good corporate citizen. For this, its corporate governance must be based on a genuine respect for Business Ethics and Values.

The Department of Company Affairs, in May 2000, invited a group of leading industrialists, professionals and academics to study and recommend measures to enhance corporate excellence in India. The Study Group in turn set up a Task Force, which examined the subject of Corporate Excellence through sound corporate governance and submitted its report in Nov 2000. The task force in its recommendations identified two classifications namely essential and desirable with former to be introduced immediately by legislation and latter to be left to the discretion of companies and their shareholders. Some of the recommendations of the task force include:

• Greater role and influence for non-executive independent directors

• Stringent punishment for executive directors for failing to comply with listing and other requirements

• Limitation on the nature and number of directorship of Managing and Whole-Time directors

• Proper disclosure to the shareholders and investing community

• Interested shareholders to abstain from voting on specified matters.

• More meaningful and transparent accounting and reporting

• Tougher listing and compliance regimen through a Centralized National Listing Authority

• Highest and toughest standards of Corporate Governance for Listed Companies.

• A code of public behaviour for Public Sector Units

• Setting Up of a Centre for Corporate Excellence.

Recently, the Government has announced the proposal for setting up the Centre for Corporate Excellence under the aegis of the Department of Company Affairs as an independent and autonomous body as recommended by the Study Group. The Centre would undertake research on Corporate Governance; provide a scheme by which companies could rate themselves in terms of their corporate governance performance; promote corporate governance through certifying companies who practice acceptable standards of corporate governance and by instituting annual awards for outstanding performance in this area. Government's initiative in promoting corporate excellence in the country by setting up such a center is indeed a very important step in the right direction. It is likely to spread greater awareness among the corporate sector regarding matters relating to good corporate governance motivating them to seek accreditation from this body. Cumulative effect of the companies achieving levels of corporate excellence would undoubtedly be visible in the form of much enhanced competitive strength of our country in the global market for goods and services.

Impelled on these objectives on 21 August 2002, the Department of Company Affairs (DCA) under the Ministry of Finance and Company Affairs appointed a High Level Committee, under the Chairmanship of Naresh Chandra, former Cabinet Secretary "to examine the Auditor-Company relationship, role of independent directors, disciplinary mechanism over auditors in the light of irregularities committed by companies in India and abroad". The Committee has already submitted its report and currently under consideration of the Finance Ministry, of which DCA is a part. The Department of Company Affairs is also proposing, as stated earlier, to set up a National Foundation for Corporate Governance in collaboration with industry associations -- CII, FICCI and ASSOCHAM -- and with professional Institutes ICAI and ICSI - to spread the culture of good corporate governance in the country. These are discussed in greater detail in subsequent pages commencing from page titled Initiatives by Department of Company Affaris to frame guidelines for Corporate Governance.