Handout on: 1. Good Corporate Governance and Clause 49 2.

Investor Protection Constituents of Good Corporate Governance are:

Board: The Primary requirement of good corporate governance is the clear identification of powers, roles, responsibilities and accountability of the Board, CEO and the Chairman of the board. Unambiguous Legislative Framework: A clear and unambiguous legislative and regulatory framework is fundamental to effective corporate governance. Communication of Code of Conduct: It is essential that an organization's explicitly prescribed code of conduct are communicated to all stakeholders and are clearly understood by them; there should be some system in place to periodically measure and evaluate the adherence to such code of conduct by each member of the organization. Board Effectiveness through Independence: An independent board is essential for sound corporate governance. It means that the board is capable of assessing the performance of managers with an objective perspective. Hence, the majority of board members should be independent of both the management team and any commercial dealings with the company. Such independence ensures the effectiveness of the board in supervising the activities of management as well as make sure that there are no actual or perceived conflicts of interests. Board Skills: To increase its functional effectiveness, the board must possess the necessary mix of qualities, competencies and experience so as to make quality contribution; it includes legal competencies, operational or technical expertise, financial skills, as well as knowledge of government and regulatory requirements. Ethical Framework: Good governance includes setting up of clear goals and right ethical framework, establishing due systems and processes, providing for transparency and clear enunciation of responsibility and accountability, implementing sound business planning, encouraging business risk assessment, having right people and right skill for jobs, establishing clear boundaries for acceptable behaviour, establishing performance evaluation measures and evaluating performance and sufficiently recognizing individual and group contribution. Appointment of New Directors and Board Training: Corporation to ensure that the most competent people are appointed in the board, the board positions must be filled through the process of extensive search. A well chalked out and open procedure must be in place for reappointments as well as for appointment of new directors; it is also essential to ensure that directors remain abreast of all development, which are or may impact corporate governance and other related issues. Effectiveness of Board Meetings: Board meetings and interactions are the platforms for board decision making. These meetings enable directors to discharge their responsibilities. The effectiveness of board meetings is dependent on carefully planned agendas and providing relevant papers and materials to directors sufficiently prior to board meetings. Strategy of the Company: The objective of the company mission should be clearly laid down in a long term corporate strategy including an annual business plan together with measurable performance goals and targets.

Community Responsibility: Though the basic concern of a business entity is inherently commercial yet it must also take care of community's considerations; the stakeholders must be informed about the approval of the proposed and on going initiatives taken to meet the community concerns and obligations. Relevant and Timely Reporting: The board requires comprehensive, regular, reliable, timely, correct and relevant information of financial and operational matters in a form and of a quality that is appropriate to discharge its function of monitoring corporate performance. Evaluating the Board Performance: Board must monitor and evaluate its combined performance and also that of individual directors at periodic intervals, using key performance dimensions besides peer review. Audit Committee to Liaison with Management: Audit Committee is responsible for liaisoning with management, internal and statutory auditors, examine and review the adequacy of internal control and compliance with significant policies and procedures, reporting to the board on the vital issues of the company. Identifying and Analysing Risk: Risk is an important dimension of corporate functioning and governance. There should be a clearly established system of identifying, analysing and treating risks, which could create obstacles for the company in effectively achieving its objectives. The board has the ultimate task and responsibility for identifying major risks to the organization, setting acceptable levels of risks and ensuring that senior management takes steps to detect, monitor and control these risks.

Implementation of recommendations of Birla Committee Report Clause 49 SEBI issued clause 49 in February 2000; Clause 49 of the Listing Agreement, which deals with Corporate Governance norms that a listed entity should follow, was first introduced in the financial year 2000-01 based on recommendations of Kumar Mangalam Birla Committee. The report of the Committee was considered and adopted by SEBI Board in its meeting held on January25, 2000. The recommendations were to be implemented through the amendment to the listing agreement of the stock exchanges. Internationally, listing agreement has been used in most markets to implement corporate governance in the listed companies. The recommendations of Kumar Mangalam Birla Committee, constituted by SEBI, led to the addition of Clause 49 in the Listing Agreement in February 2000. After these recommendations were in place for about two years, SEBI, in order to evaluate the adequacy of the existing practices and to further improve the existing practices set up a committee under the Chairmanship of Mr. Narayana Murthy during 2002-03. The Murthy committee, after holding three meetings, had submitted the draft recommendations on corporate governance norms. After deliberations, SEBI accepted the recommendations in August 2003 and asked the Stock Exchanges to revise Clause 49 of the Listing Agreement based on Murthy committee recommendations. This led to widespread protests and representations from the

Industry thereby forcing the Murthy committee to meet again to consider the objections. The committee, thereafter, considerably revised the earlier recommendations and the same was put up on SEBI website on 15th December 2003 for public comments. It was only on 29th October 2004 that SEBI finally announced revised Clause 49, which had to be implemented by the end of financial year 2004-05. These revised recommendations have also considerably diluted the original Murthy Committee recommendations. Provisions of Clause 49 Composition of Board: Board of directors of a company shall have an optimum combination of executive and non-executive directors with not less than fifty percent of the board of directors comprising of non-executive directors. The number of independent directors would depend whether the Chairman is executive or non-executive. In case of a non-executive chairman, at least one-third of board should comprise of independent directors and in case of an executive chairman, at least half of board should comprise of independent directors. All pecuniary relationship or transactions of the non-executive directors viz-a-viz. the company should be disclosed in the Annual Report. Constt. Of Audit Committee: audit committee should have three independent directors with chairman having sound financial background; financial director and head of internal audit should be special invitees and a minimum of three meetings should be convened every year; Following are the changes with regard to Audit Committee: (i) Two-third of the members of Audit committee shall be independent directors as against the requirement of majority being independent; (ii) Earlier, only non-executive directors could be members of Audit committee. The revised clause has omitted this requirement. (iii) All members of the Audit committee shall be financially literate (as defined in the revised clause) as against the existing requirement of at least one member having financial and accounting knowledge. Audit committee: responsible for review of financial performance on half-yearly/annual basis;appointment/removal/remuneration of auditors; review of internal control systems and its adequacy; Remuneration of directors: remuneration of non-executive directors is to be decided by board; details of remuneration package,stock options,performance incentives of directors should be disclosed to shareholders; Board procedures:board should have at least four meetings a year; a director should should not be member of more than 10 committees and chairman of more than 5 committees across all companies;

Management decision and analysis report: this should include(i)industry structure and developments;(ii)opportunities and threats;(iii)segment-wise or product wise performance(iv)outlook on business;(v)risks and concerns(vi)internal control systems and their adequacy(vii)discussions on financial performance(viii)discosures by directors,on material, financial and commercial transactions with the company; Shareholders information: company should provide brief resume of new/re-appointed directors,and submit quarterly results to stock exchanges to be placed on website and presented to analysts;shareholders/grievance committee under chairmanship of independent director should have minimum two meetings a year; company to report on CG and get certificate from auditors on compliance on provisions to CG as per clause 49 in listing agreement; Nominee directors to be independent directors: nominees of institutions that have invested in or lent to company are deemed independent directors; New provisions incorporated in New Clause 49: board will lay down code of conduct for all board members and senior management of the company to follow compulsorily; National Foundation for Corporate Governance (NFCG) Indian govt took a step forward towards good CG and Ministry of Corporate Affairs set up a National Foundation for Corporate Governance (NFCG) in association with CII, ICAI and ICSI, as a not-for-profit trust. It provides a platform to deliberate on issues relating to good corporate governance, to sensitise corporate leaders on importance of good corporate governance practices as well as facilitate exchange of experiences and ideas amongst corporate leaders, policy makers, regulators, law enforcing agencies and non- government organizations. The NFCG has a three-tier structure for its management, viz, the Governing Council under the Chairmanship of Minister of Corporate Affairs, the Board of Trustees and the Executive Directorate. NFCG had framed an action plan, which includes development of good corporate governance principles on identified themes i.e. (i) corporate governance norms for institutional investors, (ii) corporate governance norms for independent directors, and (iii) corporate governance norms for audit. The foundation has been set up with the mission to:

foster a culture for promoting good governance, voluntary compliance and facilitate effective participation of different stakeholders; create a framework of best practices, structure, processes and ethics;

make significant difference to Indian corporate sector by raising the standard of corporate governance in India towards achieving stability and growth.

CG in IndiaA Performance Appraisal Indian industry has come a long way since 1991; companies like Infosys have shown high cg standards; if American capital market regulator,SEC,commend Infosys balance sheet as a role model to be emulated by US companies,it speaks volumes about our better governed corporations; Performance Appraisal of Indian Corporations OECD Policy recommendations: Need for sanction and enforcement: existing provisions on sanctions in Companies Act for violation of law are said to be inadequate, especially measly fines imposed; need for clear demarcation of controls: presently Indian regulatory framework distributes the responsibility of oversight of listed companies to three different quasi-legal agencies, namely, DCA, stock exchanges and SEBI; lack of clear demarcations of regulatory bodies and their functions lead to overlapping of controls and makes it possible for violators to play one against the other; lack of professionalism of Directors: directors need to improve their knowledge and skills. Boards must have a clear understanding of what is expected of them; role of institutional investors: they should be made to form a cg policy, including voting and board representation; Indian boards exhibit poor professionalism: CG reforms mostly on paper. Analysis by CLGupta and his team of researchers shows a vast majority of Indian listed companies have destroyed shareholder value. study shows that great majority of Indian listed companies have,in fact,destroyed shareholder value. instead of severely punishing guilty corporate managements,Indian authorities let them go free;

Independent directors are not so independent: most of the independent directors are hand-inglove with promoters; Weaknesses in Functioning of Indian Corporate Sector: Lack of whistle blower policy: SEBI proposed whistle blower policy to be made mandatory; after stiff resistance from industry, it asked Narayana Murthy panel to rework the policy; later, whistle blower policy was made optional for companies; Unlisted investment companies: companies and promoters have promoted thousands of unlisted subsidiaries; many of them divert funds through these companies; listed companies will give a loan to these unlisted companies which in turn will default repayment Poor shareholder participation: Indian investors are scattered, unorganized,mute and uninterested in affairs of the company(except for dividends and annual gifts doled out to

them; they give their consent most obligingly enabling unscrupulous managements to perpetrate their dynastic rule; Obliging auditors: help company in window dressing, manipulation of P&L accounts, hedging and fudging of unexplainable expenditures and resorting to continuous upward elevation of assets to conceal poor performance; Other problems: slow-moving judicial system, indifferent value system, inefficient market regulator and poor enforcement of rules and regulations have all combined together to ensure that though ideal of CG is kept on high pedestal, it is hardly put into practice;

Rights of shareholders Important rights of shareholders: Right to obtain copies of MoA,AoA,and others on request of payment of fees(S.39,Companies Act,1956) Right to have certificate of shares held by him or her within three months of allotment Right to transfer his shares or other interests in company; Right to appeal to company law board; Preferential right to purchase shares on a pro-rata basis; Right to apply to company law board for rectification of register of members; Right to apply to court to have any variation or abrogation to his rights set aside by the court; Right to inspect the register and index of numbers, annual returns, register of charges, register of investments not held by company in its own name without any charge; Entitled to receive notices of general meetings; Entitled to receive a copy of statutory report; Entitled to receive copies of annual report of directors, annual accounts and auditors report Right to participate in appointment of auditors and election of directors at annual general meeting; Right to make an application to Company law Board for calling annual general meeting(if co. fails to call such meeting within prescribed time limits); Require directors to convene an extraordinary general meeting; Right to apply to Company law board for investigation of affairs of the company; Right to remove a director before expiry of term of office; Right to make an application to Company law Board for relief in case of oppression and mismanagement; Can make petition to HC for winding up of company under certain circumstances;

Right to participate in passing special resolution that company be wound up,by court or voluntarily and in participating in surplus assets of the company;

Investor Protection In India Due to lack of proper investor protection, capital market in country has experienced a stream of market irregularities in 1990s; SEBI formed with objective of Investor Protection took notice of issue seriously only after Ketan Parikh scam(2001) and UTI crisis(1998 and 2001) and developed sophisticated institutional mechanism to serve the purpose; SEBI-NCAER study estimated investor population in India was 8%of Indian households;

N.K.Mitra committee submitted report on investor protection in April 2001 with foll. recommendations: Need for specific Act to protect investor interest; Act to codify, amend and consolidate laws for protecting investor interest; establishment of a judicial forum and award of compensation for aggrieved investors; investor education and protection fund which is under Companies Act to be shifted to SEBI and administered by SEBI;SEBI should be THE ONLY capital market regulator, with power of investigation; SEBI Act,1992 should be amended to provide for statutory standing committees on investors protection, market operation and standard setting; Securities Contracts (Regulation)Act,1956 should be amended to provide for corporatization and good governance of stock exchanges; Problems of Investor Protection Investor protection a wide term that covers various measures to protect investors from malpractices of companies, brokers, merchant bankers, issue managers, registrar of new issues etc.; investor complaints divided into three categories: (i)against member-brokers of stock exchanges (ii)against companies listed for trading on stock exchanges (iii)complaints against financial intermediaries; Investor protection is a multi-dimensional function, requiring checks at various levels: Company level: disclosure and CG norms; Stock brokers level: self-regulating orgn of brokers; Stock exchanges: to have a grievance redressal mechanism in place as well as an investor protection fund; Regulatory agencies: include Investors Grievances and Guidance Division of SEBI, DCA, DEA, RBI

Investor information centres set up in every recognized stock exchange which in addition to complaints related to securities listed with them, will take up all other complaints regarding trades effected in exchange and relevant member of exchange; two other avenues always relevant to investor to seek redressal of his complaints are (i) complaints with Consumer Dispute Redressal Forums, and (ii) suits in court of law; Sahara Investor Refund Case: Taking stern action against Sahara in the high-profile investor refund case involving over Rs 24,000 crore, market regulator Sebi ordered freezing of bank accounts and attachment of all properties of two group firms and top executives, including Subrata Roy. Sebis action follows directions from the Supreme Court, which had said last week that the market regulator was free to freeze accounts and attach properties if Sahara group firms were not depositing the money with it for refund to investors. Passing two separate orders against Sahara Housing Investment Corporation Ltd (SHICL) and Sahara India Real Estate Corporation Ltd (SIRECL), Sebi said that the two companies had raised Rs 6,380 crore and Rs 19,400 crore respectively from bondholders and various illegalities were committed in raising of these funds. Sebi on 13th Feb2013 ordered freezing of bank accounts and attachment of all properties of two group firms and top executives, including Subrata Roy. The Supreme Court in August last year had asked Sahara group firms to refund the money with 15 per cent interest and had asked Sebi to facilitate the refund. However, the group in December, 2012 was allowed to pay the money in three instalments, including an immediate payment of Rs 5,120 crore, followed by an installment of Rs 10,000 crore in the first week of January and remainder by the first week of February 2012. In its orders, Sebi said that neither of the two instalments was paid and therefore it is constrained to take necessary action as per the Supreme Court orders. With regard to the payment of Rs 5,120 crore also, Saharas have claimed that only Rs 2620 crore remained to be refunded to investors and it has already paid Rs 19,400 crore to the bondholders. The properties being attached by Sebi include the land owned by Sahara group firm Aamby Valley Ltd, which has set up a resort village near Pune, development rights of land at prime locations in Delhi, Gurgaon, Mumbai and various other places across the country. Besides, Sebi has also ordered attachment of equity shares held in Aamby Valley Ltd, units of mutual funds, bank and demat accounts and investments in all the branches of all banks. Sebi has asked all the banks to transfer the amounts lying in those accounts to its Sebi-Sahara Refund Account.

With regard to Subrata Roy and three other directors, namely Vandana Bhargava, Ravi Shanker Dubey and Ashok Roy Choudhary, Sebi ordered freezing of all bank and demat accounts of these four persons, as also attachment of all moveable and immoveable properties in their name with immediate effect. Sebi directed them to furnish details of all moveable and immoveable properties in their name within 21 days, pending which they can not alienate, dispose or encumber any of their assets. The regulator said it is seeking attachment of all other movable and immoveable properties owned and/or held by the two companies SIRECL with immediate effect and asked them not to alienate, dispose or in any manner encumber the same. Sebi also directed the two firms to furnish details of any other investments within 21 days and restrained them with immediate effect from operating their bank and demat accounts and from withdrawing of any investments. The two companies have also been asked to deposit cash, bank balances and fixed deposits in their names to Sebi and have also been barred from transferring any shares held by them. Sebi said it has informed RBI and Enforcement Directorate as well regarding its actions against Sahara group firms. The assets being attached include investments of SIRECL and SHICL in group companies, special purpose vehicles and partnership firms and the necessary orders for sale of all attached properties would be passed in due course after getting their full particulars, Sebi said.