k birlas report

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� Report of the Committee Appointed by the

SEBI on Corporate Governance under the

Chairmanship of Shri Kumar Mangalam Birla

� Report of the Kumar Mangalam Birla

Committee on Corporate Governance



� Preface 1.1 It is almost a truism that theadequacy and the quality of corporategovernance shape the growth and the future of

any capital market and economy. The concept of corporate governance has been attracting publicattention for quite some time in India. The topicis no longer confined to the halls of academia and

is increasingly finding acceptance for its relevanceand underlying importance in the industry andcapital markets.



� Progressive firms in India have voluntarily put inplace systems of good corporate governance.Internationally also, while this topic has been

accepted for a long time, the financial crisis inemerging markets has led to renewed discussionsand inevitably focussed them on the lack of corporate as well as governmental oversight. The

same applies to recent high-profile financialreporting failures even among firms in thedeveloped economies.



� Studies of firms in India and abroad have shownthat markets and investors take notice of well-managed companies, respond positively to them,and reward such companies, with highervaluations. A common feature of such companiesis that they have systems in place, which allowsufficient freedom to the boards andmanagement to take decisions towards the

progress of their companies and to innovate,while remaining within a framework of effectiveaccountability. In other words they have a systemof good corporate governance.



� Strong corporate governance is thusindispensable to resilient and vibrant capitalmarkets and is an important instrument of

investor protection. It is the blood that fills theveins of transparent corporate disclosure andhigh-quality accounting practices. It is the musclethat moves a viable and accessible financial

reporting structure. Without financial reportingpremised on sound, honest numbers, capitalmarkets will collapse upon themselves.



insider trading

� Another important aspect of corporate governance relates toissues of insider trading. It is important that insiders do not usetheir position of knowledge and access to inside informationabout the company, and take unfair advantage of the resultinginformation asymmetry. To prevent this from happening,corporates are expected to disseminate the material pricesensitive information in a timely and proper manner and alsoensure that till such information is made public, insiders abstainfrom transacting in the securities of the company. The principleshould be disclose or desist. This therefore calls for companies

to devise an internal procedure for adequate and timelydisclosures, reporting requirements, confidentiality norms,code of conduct and specific rules for the conduct of itsdirectors and employees and other insiders



� At the heart of the Committee's report is the setof recommendations which distinguishes theresponsibilities and obligations of the boards andthe management in instituting the systems forgood corporate governance and emphasises therights of shareholders in demanding corporategovernance. Many of the recommendations aremandatory. For reasons stated in the report,

these recommendations are expected to beenforced on the listed companies for initial andcontinuing disclosures in a phased manner withinspecified dates, through the listing agreement.



� The Committee therefore agreed that thefundament al objective of corpor ategover nance is the " enhancement of

sharehold er v al ue, keepi ng i n view thei nterests of other st akehold er". This definitionharmonises the need for a company to strike abalance at all times between the need to

enhance shareholders wealth whilst not inany way being detrimental to the interests of the other stakeholders in the company.



Independent directors and the

definition of independence

� The Committee therefore agreed on the foll owi ng d efi nition of "i nd epend ence".Ind epend ent d irectors are d irectors who apart from receivi ng d irectors remuner ation d o not have any other materi al pecuni ar y relationship or tr ansactionswith the company, its promoters, its management or its subsi d i aries, which i n the judgement of theboar d may affect their i nd epend ence of

judgement.Further , all pecuni ar y relationships or tr ansactions of the non-executive d irectors should be d iscl osed i n the annual report.



� The Committee recommend s that the boar d of a company have an optimum combi nation of executiveand non-executive d irectors with not l ess than fift y percent of the boar d comprisi ng the non-executive

d irectors. The number of i nd epend ent d irectors(i nd epend ence bei ng as d efi ned i n the foregoi ng par agr aph) would d epend on the nature of thechairman of the boar d . In case a company has a non-executive chairman, at l east one-thir d of boar d should

comprise of i nd epend ent d irectors and i n case a company has an executive chairman, at l east hal f of boar d should be i nd epend ent.



� The Committee therefore recommend s that a

qual ified and i nd epend ent aud it committee

should be set up by the boar d of a company .

This would go a l ong w ay i n enhanci ng the

cred ibi l it y of the fi nanci al d iscl osures of a

company and promoti ng tr ansparency .

� This is a mandator y recommendation.



Remuneration Committee of the

Board

� For this purpose the Committee recommend sthat the boar d should set up a remuner ation committee to d etermi ne on their behal f and

on behal f of the sharehold ers with agreed terms of reference, the company s pol icy on specific remuner ation pack ages for executived irectors i ncl ud i ng pension ri ghts and any

compensation pay ment.

� This is a non-mandator y recommendation.



Accounting Standards and Financial

Reporting

�

12.1 Over time the financial reporting andaccounting standards in India have beenupgraded. This however is an ongoing processand we have to move speedily towards theadoption of international standards. This isparticularly important from the angle of corporate governance. The Committee took note

of the d iscussions of the SEBI Committee on Accounti ng St andar d s referred to ear l ier and makes the foll owi ng recommendations



� Consolidation of Accounts of subsidiariesThe companies should be required to giveconsol i dated accounts i n respect of all itssubsi d i aries i n which they hold 51 % or more of the share capit al . The Committee w as i nformed that SEBI w as al ready i n d i al ogue with theInstitute of Chartered Account ants of Ind i a tobri ng about the changes i n the Accounti ng

St andar d on consol i dated fi nanci al st atements.The Institute of Chartered Account ants of Ind i a should be requested to issue the Accounti ng St andar d s for consol i dation exped itiously .



� Segment reporting where a company has

multiple lines of business.

Equally in cases of companies with several

businesses, it is important that financial

reporting in respect of each product segment

should be available to shareholders and the

market to obtain a complete financial pictureof the company.



� Disclosure and treatment of related partytransactions.This again is an important disclosure. TheCommittee was informed that the Institute of Chartered Accountants of India had alreadyissued an Exposure Draft on the subject. TheCommittee recommend s that the Institute of Chartered Account ants of Ind i a should be

requested to fi nal ise this at the ear l iest. In thei nterim, the Committee recommend s thed iscl osures set out i n C lause 7 of



� Annexure-4 Treatment of deferred taxation

The treatment of deferred taxation and its

appropriate disclosure has an important

bearing on the true and fair view of the

financial status of the company. The

Committee recommend s that the Institute of

Chartered Account ants of Ind i a be requested to issue a st andar d on d eferred t ax l i abi l it y at

an ear ly date.



� As a part of the d iscl osure related toManagement , the Committee recommend s that as part of the d irectors report or as an add ition

there to, a Management Discussion and Analy sisreport should form part of the annual report tothe sharehold ers. This Management Discussion &Analy sis should i ncl ud e d iscussion on the

foll owi ng matters withi n the l imits set by thecompany s competitive position:

� This is a mandator y recommendation



� The Committee recommend s that i n case of theappoi ntment of a new d irector or re-appoi ntment of a d irector the sharehold ers must be provi d ed

with the foll owi ng i nformation:

1. A brief resume of the d irector;

2. Nature of his expertise i n specific functional areas; and

3. Names of companies i n which the person al sohold s the d irectorship and the membership of Committees of the boar d .



1. Ind ustr y structure and d evel opments.

2. Opportunities and Threats

3. Segment -wise or prod uct -wise performance.

4. Out l ook.5. Risks and concer ns

6. Inter nal control sy stems and their ad equacy .

7. Discussion on fi nanci al performance with respect tooper ational performance.

8. Materi al d evel opments i n Human Resources/Ind ustri al Relations front , i ncl ud i ng number of peopl eempl oy ed .



� Good corporate governance casts an obligation on themanagement in respect of disclosures. The Committeetherefore recommend s that d iscl osures must be mad eby the management to the boar d relati ng to all materi al fi nanci al and commerci al tr ansactions, wherethey have personal i nterest , that may have a potenti al conf l ict with the i nterest of the company at lar ge (for e.g. d eal i ng i n company shares, commerci al d eal i ngs

with bod ies, which have sharehold i ng of management and their relatives etc.)

� This is a mandator y recommendation



KUMAR MANGALAM BIRLA

COMMITTEE - REPORT

�OBJECTIVES

�Corporate Governance has several claimants-share holders and other stakeholders- including

suppliers, customers, creditors, bankers,

employees, government and society . As thereport is for SEBI, investors and shareholders

are to form the principal constituents



RECOMMENDATIONS

� Are divided into:-

� a) Mandatory

� b) Non-mandatory

� MANDATORY

� 1- Implementation in phases as per schedule

� 2- Non-executive directors- 50%, some independent

�

3- Nominee directors- on a selective basis� 4- Qualified and independent Audit Committee

� 5- Audit Committee meetings 3 times in a year



RECOMMENDATIONS

� 6- Powers of the Audit Committee

� a) To investigate only activity within its

terms of reference� b) To seek information from any employee

� c) To obtain outside legal or professional

advice� d) To secure attendance of outsiders, if

necessary

� 7- Audit Committee functions as the bridge



RECOMMENDATIONS

� 10- Board meetings should be held at least 4

times in a year

�

11- A director should not be a member inmore than 10 committees or acts as chairman

of more than 5 committees

� 12- Accounting standard and financial

reporting :-

� a) Consolidation of accounts of

subsidiaries,

� b) Se ment re ortin where a co.has



RECOMMENDATIONS

� 15- Shareholders right to participate and

informed on fundamental corporate changes.

Quarterly results to be put up on companys

web sites. Postal ballot to be introduced

� 16- Redressal of shareholders complaints-

committee of the Board to be set up under

the chairmanship of non-executive directors

� 17- Board should delegate the powers of share

transfer

� 18- A separate section on C.G. in the annual



RECOMMENDATIONS

� NON MANDATORY

�1- Chairmans role is different from that of theCEO

� 2- A non-executive chairman entitled to

maintain a chairmans office at companysexpense

� 3- Remuneration committee of the Board

should consist of three directors

� - -



� Board of Directors: frequency of meetings and composition

� Board must meet at least four times a year, with a maximum timegap of four months between two successive meetings.

� If the chairman of the Company is a non-executive then one-thirdof the board should consist of independent directors, and 50%otherwise.

� µIndependent¶ defined as those directors who, apart from receivingdirector¶s remuneration do not have any other monetary

relationship or transactions with the company, its promoters,management or subsidiaries, which in the view of the board mayaffect independence of judgment.

Mandated CG guidelines anddisclosures



� Board of Directors: frequency of meetings and composition

� The frequency of board meetings and board committee meetings,with their dates, must be fully disclosed to shareholders in theannual report of the company.

� The attendance record of all directors in board meetings and boardcommittee meetings must be fully disclosed to shareholders in theannual report of the company.

� Full and detailed remuneration of each director (salary, sitting

fees, commissions, stock options and perquisites) must be fullydisclosed to shareholders in the annual report of the company.

� Loans given to executive directors are capped (no loans permittedto non-executives), and must be fully disclosed to shareholders inthe annual report of the company.




� Board of Directors: information that must be supplied

� Annual, quarter, half year operating plans, budgets and updates.

� Quarterly results of company and its business segments.

�

Minutes of the audit committee and other board committees.� Recruitment and remuneration of senior officers.

� Materially important legal notices and claims, as well as anyaccidents, hazards, pollution issues and labor problems.

� Any actual or expected default in financial obligations.

� Details of joint ventures and collaborations.

� Transactions involving payment towards goodwill, brand equity

and intellectual property.� Any materially significant sale of business and investments.

� Foreign currency and other risks and risk management.

� Any regulatory non-compliance.




� Disclosures to shareholders in addition to balance sheet, P&L� and cash flow statement

� Board composition (executive, non-exec, independent).

� Qualifications and experience of directors.

� Number of outside directorships held by each director (capped atdirector not being a member of more than 10 board-levelcommittees, and Chairman of not more than 5).

� Attendance record of directors.

� Remuneration of directors.

�

Relationship (familial or pecuniary) with other directors.

� Warning against insider trading, with procedures to prevent suchacts.

� Details of grievances of shareholders, and how quickly these wereaddressed.

� Date, time and venue of annual general meeting of shareholders.




� Disclosures to shareholders in addition to balance sheet,P&L and cash flow statement

� Dates of book closure and dividend payment.

�

Details of shareholding pattern.� Name, address and contact details of registrars and/or

share transfer agents.

� Details about the share transfer system.

� Stock price data over the reporting year, and how the

company¶s stock measured up to the index.

� Financial effects of stock options.

� Financial effects of any share buyback.

� Financial effects of any warrants that are to be exercised.

� Chapter reporting corporate governance practices




� Disclosures to shareholders in addition to balance sheet, P&L and

� cash flow statement

� Detailed chapter on Management Discussion and Analysis focusingon markets, operations, finances, accounts, risks, opportunities and

threats, internal control systems.

� Consolidated financial statement, incorporating accounts of allsubsidiaries (over 50% shares held by reporting company).

� Details of all significant related party transactions.

� Detailed segment reporting (revenues, costs, operating profits andcapital employed).

� Deferred tax liabilities and assets and debit/credit in the P&L for thereporting year


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k birlas report