DESIRABLE CORPORATE GOVERNANCE A CODE

DEFINITION OF CORPORATE GOVERNANCE:Corporate governance deals with laws,procedures,practices and implicit rules that determine a companys ability to take informed managerial decisions vis--vis its claimants-in particular,its shareholders,creditors,customers,the state and the employees.

There is a global consensus about the objective of good corporate governance maximising long-term shareholders value.
For a corporate governance code to have real meaning,it must first focus on listed companies which are financed largely by public money and hence need to follow codes and policies that make them accountable and value-oriented to their investing public.

CONFEDERATION OF INDIAN INDUSTRY

In 1996,CII took a special initiative on corporate governance-the first institutional initiative in Indian industry and their objective was to develop and promote a code for corporate governance to be adopted and followed by Indian companies,be these in the private sector,the public sector,banks or financial institutions,all of which are corporate entities.

A National Task Force set up with Mr.Rahul Bajaj,past president,CII AND Chairman & Managing Director,Bajaj Auto Limited.
This Task Force presented the draft

guidelines and code for Corporate Governance in April 1997at the National Conference and Annual Session of CII.This draft was then publicly debated and a number of suggestions were received for the consideration of the task force.

 This Code of Corporate Governance

Since 1974,CII has tried to chart a new path in terms of the role of an Industry Association such as itself
continues this process and takes it one step further.Fortunately,there is very little difference between the draft code released in April 1997 and the final Code,which is now published.

Recommendation 1
No need of Two-Tier Board

Single board performs well it can maximise long term shareholder value. Should meet a minimum of six times a year, at an interval of two months. Agenda that requires at least half a days discussion.

Recommendation 2
Any listed companies with a turnover of Rs.100crores and above should have professionally competent, independent, nonexecutive directors
At least 30 percent of the board if the chairman of the

company is a non-executive director, At least 50 percent of the board if the chairman and Managing Director is the same person.

Recommendation 3
No single person should hold directorships in more than 10 listed companies.

Recommendation 4
For Non-Executive directors to play a material role in corporate decision making and maximising long term shareholders value they need..
Active participants in boards, not passive advisors.

Clearly defined responsibilites within the board such as

the Audit Committee. Know how to read a balance sheet, Profit and Loss account, Cash floe statements and Financial ratios. Some knowledge of Company Laws.

Recommendation 5
To secure better efforts from Non-Executive Directors companies should. Pay a commission over and above the sitting fees the use of the professional inputs. Present commission of 1% of net profits (if managing director ) Or 3% (no managing director)

Recommendation 6
Re-appointing members of the Board.
Give the attendance record of the concered director in the

resolution that is put to vote. One should not reappoint any director who has not been

present for 50 percent or more meetings

Recommendation 7
Key information that must be reported to and placed before the Board.

Annual operating plans and budgets with updated long term

plans. Capital Budgets, manpower and overhead budgets. Quarterly results for the company as a whole and its operating divisions or business segments. Internal audit reports.

 Show cause, demand and prosecution notices received from revenue

authorities. Fatal or serious accidents, dangerous occurrences, pollution problems. Default in payment of interest or non-payment Default in nonpayment of inter-corporate deposits. Product liability claim. Details of any joint venture or collaboration agreements. Substantial payment towards goodwill, brand equity, or intellectual property. Recruitment and renumeration of senior officers. Labour problem. Quarterly details of foreign exchange.

Recommendation 8
Listed companies-turnover over 100crores or paid up capital of Rs20crores should set up audit committees within 2 years.

Recommendation

Additional Shareholders Information

Monthly averages on share prices Greater detail on Business segments Consolidation-optional Recommendation 10

Consolidation of Group Accounts

Voluntary Consolidation -Definition of group - Compliance Certificate

Recommendation

11

Stock Exchanges and compliance certificate Management- Fair presentation of financial statements

Accounting policies - Standard practices

Recommendation 12 For all companies with paid-up capital of Rs. 20crores or more, the quality and quantity of disclosure that accompanies a GDR issue should be the norm for any domestic issue.

Capital Market Issues

Take-overs-The Take-over code Mergers Strategic acquisitions

Recommendation 13 Greater funding to corporate sector. Creditors Rights

Recommendation 14

FIs as pure creditors to re-write their covenants to eliminate having nominee directors:- Except in the event of serious & systematic debt default - Debtor company not providing six-monthly operational data. Recommendation 15 More than one credit rating agency Tabular format to company standings Quantity & quality of disclosures.

Holders of company deposits.

Recommendation 16

Companies that default on fixed deposits. FIs and Nominee Directors

Recommendation 17

Reduction in the number of companies where there are nominee directors.

Concluding Remarks

Code of corporate governance cannot be static. Large number of foreign portfolio investors

Entry of foreign pension funds

Private equity of leveraged buy-out funds. No support by Indian FIs irrespective of performance. More reliance on GDRs Financial press getting stronger Capital Account Convertibility.