Module 3 N.R Narayan Murthy Committee Report On Corporate

Module 3: N.
R Narayan Murthy Committee Report on Corporate

Governance
Sub: BE&CG (4519205)
Faculty: Dr. Meghna Shah
The Securities and Exchange Board of India (SEBI) had constituted a Committee on
Corporate Governance in 2002, in order to evaluate the adequacy of existing corporate
governance practices and further improve these practices. It was set up to review Clause
49, and suggest measures to improve corporate governance standards.
It may be recalled here that SEBI had constituted a Committee on May 7, 1999 under
the chairmanship of Shri Kumar Mangalam Birla, then Member of the SEBI Board “to
promote and raise the standards of corporate governance”. Based on the
recommendations of this Committee, a new clause 49 was incorporated in the Stock
Exchange Listing Agreements (“Equity Listing Agreements”) in known as Clause 49
of SEBI in 2000.
 The SEBI Committee on Corporate Governance (the “Committee”) was constituted

under the Chairmanship of Shri N. R. Narayana Murthy, Chairman and Chief
Mentor of Infosys Technologies Limited to review the previous Clause 49.
 Further revised Clause 49 of SEBI in 2002.
 Main focus was to improve transparency & integrity of the stock market
 Came to effect from Jan 2006
The SEBI Committee was constituted under the Chairmanship of Shri N. R. Narayana
Murthy, Chairman and Chief Mentor of Infosys Technologies Limited. The Committee
comprised members from various walks of public and professional life. This included
captains of industry, academicians, public accountants and people from financial
press and industry forums.
THE TERMS OF REFERENCE OF THE COMMITTEE WERE TO:
 review the performance of corporate governance; and

 determine the role of companies in responding to rumour and other price sensitive
information circulating in the market, in order to enhance the transparency and
integrity of the market.
THE ISSUES DISCUSSED BY THE COMMITTEE WERE PRIMARILY RELATED TO:
Audit committees, audit reports, independent directors, related parties, risk

management, directorships and director compensation, codes of conduct and
financial disclosures.
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The committee's recommendations in the final report were selected based on parameters
including their relative importance, fairness, accountability, transparency, ease of
implementation, verifiability and enforceability.
THE KEY MANDATORY RECOMMENDATIONS FOCUSED ON:
 strengthening the responsibilities of audit committees;

 improving the quality of financial disclosures, including those related to Related Party
Transactions (RPT) and proceeds from initial public offerings (IPOs);
 requiring corporate executive boards to assess and disclose business risks in the
annual reports of companies;
 introducing responsibilities on boards to adopt formal codes of conduct; the position
of nominee directors; and
 stock holder approval and improved disclosures relating to compensation paid to
non-executive directors.
NON-MANDATORY RECOMMENDATIONS INCLUDED:
 instituting a system of training of board members; and

 evaluation of performance of board members
KEY ISSUES DISCUSSED AND RECOMMENDATIONS
Audit committees
Mandatory recommendation: Audit committees of publicly listed companies should be
required to review the following information mandatorily:
 Financial statements and draft audit report, including quarterly / half-yearly financial
information;
 Management discussion and analysis of financial condition and results of operations;
 Reports relating to compliance with laws and risk management;
 Management letters / letters of internal control weaknesses issued by statutory /
internal auditors; and
 Records of related party transactions.
 All audit committee members should be “financially literate” and at least one member
should have accounting or related financial management expertise.
Audit Reports and Audit Qualifications

In case a company has followed a treatment different from that prescribed in an accounting
standard, management should justify why they believe such alternative treatment is more
representative of the underlying business transaction. Management should also clearly
explain the alternative accounting treatment in the footnotes to the financial statements.
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Related Party Transactions
A statement of all transactions with related parties including their bases should be placed
before the independent audit committee for formal approval / ratification. If any transaction is
not on an arm’s length basis, management should provide an explanation to the audit
committee justifying the same.
Risk Management
Procedures should be in place to inform Board members about the risk assessment and
minimization procedures. These procedures should be periodically reviewed to ensure that
executive management controls risk through means of a properly defined framework.
Management should place a report before the entire Board of Directors every quarter
documenting the business risks faced by the company, measures to address and minimize
such risks, and any limitations to the risk taking capacity of the corporation. This document
should be formally approved by the Board.
Proceeds from Initial Public Offerings (“IPO”)

Companies raising money through an Initial Public Offering (“IPO”) should disclose to the
Audit Committee, the uses / applications of funds by major category (capital
expenditure, sales and marketing, working capital, etc), on a quarterly basis. On an
annual basis, the company shall prepare a statement of funds utilised for purposes other
than those stated in the offer document/ prospectus. This statement should be certified by
the independent auditors of the company. The audit committee should make appropriate
recommendations to the Board to take up steps in this matter.
Code of Conduct
It should be obligatory for the Board of a company to lay down the code of conduct for all
Board members and senior management of a company. This code of conduct shall be
posted on the website of the company. All Board members and senior management
personnel shall affirm compliance with the code on an annual basis. The annual report of the
company shall contain a declaration to this effect signed off by the CEO and COO. For this
purpose, the term “senior management” shall mean personnel of the company who are
members of its management / operating council (i.e. core management team excluding
Board of Directors). Normally, this would comprise all members of management one level
below the executive directors
Non-Executive Director Compensation

All compensation paid to non-executive directors may be fixed by the Board of Directors and
should be approved by shareholders in general meeting. Limits should be set for the
maximum number of stock options that can be granted to non-executive directors in
any financial year and in aggregate. Non-executive directors should be required to
disclose their stock holding (both own or held by / for other persons on a beneficial
basis) in the listed company in which they are proposed to be appointed as directors, prior
to their appointment. These details should accompany their notice of appointment.
Independent Directors
The term “independent director” is defined as a non-executive director of the company
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who: (Same as defined in the Naresh Chandra Committee)
 apart from receiving director remuneration, does not have any material
pecuniary relationships or transactions with the company, its promoters, its
senior management or its holding company, its subsidiaries and associated
companies;
 is not related to promoters or management at the board level or at one level below
the board;
 has not been an executive of the company in the immediately preceding three
financial years;
 is not a partner or an executive of the statutory audit firm or the internal audit
firm that is associated with the company, and has not been a partner or an
executive of any such firm for the last three years. This will also apply to legal
firm(s) and consulting firm(s) that have a material association with the entity.
 is not a supplier, service provider or customer of the company. This should
include lessor-lessee type relationships also; and is not a substantial shareholder of
the company, i.e. owning two percent or more of the block of voting shares.
Whistle Blower Policy

Personnel who observe an unethical or improper practice (not necessarily a violation of law)
should be able to approach the audit committee without necessarily informing their
supervisors. Companies shall take measures to ensure that this right of access is
communicated to all employees through means of internal circulars, etc. The employment
and other personnel policies of the company shall contain provisions protecting “whistle
blowers” from unfair termination and other unfair prejudicial employment practices.
Subsidiary Companies
The provisions relating to the composition of the Board of Directors of the holding
company should be made applicable to the composition of the Board of Directors of
subsidiary companies. At least one independent director on the Board of Directors of
the parent company shall be a director on the Board of Directors of the subsidiary
company. The Audit Committee of the parent company shall also review the financial
statements, in particular the investments made by the subsidiary company. The minutes of
the Board meetings of the subsidiary company shall be placed for review at the Board
meeting of the parent company. The Board report of the parent company should state that
they have reviewed theaffairs of the subsidiary company also.
Conclusion
The Committee has primarily focused its recommendations on investors and

shareholders, as they are the prime constituencies of SEBI. Effectiveness of a system of
corporate governance cannot be legislated by law nor can any system of corporate
governance be static. In a dynamic environment, systems of corporate governance need to
continually evolve. The Committee believes that its recommendations raise the standards of
corporate governance in Indian firms and make them attractive for domestic and global
capital. These recommendations will also form the base for further evolution of the
structure of corporate governance in consonance with the rapidly changing economic
and industrial environment of the country in the new millennium.
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Module 3: N.

R Narayan Murthy Committee Report on Corporate

Faculty: Dr. Meghna Shah

 The SEBI Committee on Corporate Governance (the “Committee”) was constituted

 Further revised Clause 49 of SEBI in 2002.

 Came to effect from Jan 2006

THE TERMS OF REFERENCE OF THE COMMITTEE WERE TO:

 review the performance of corporate governance; and

THE ISSUES DISCUSSED BY THE COMMITTEE WERE PRIMARILY RELATED TO:

Audit committees, audit reports, independent directors, related parties, risk

THE KEY MANDATORY RECOMMENDATIONS FOCUSED ON:

 strengthening the responsibilities of audit committees;

NON-MANDATORY RECOMMENDATIONS INCLUDED:

 instituting a system of training of board members; and

KEY ISSUES DISCUSSED AND RECOMMENDATIONS

Audit Reports and Audit Qualifications

Proceeds from Initial Public Offerings (“IPO”)

Non-Executive Director Compensation

Whistle Blower Policy

The Committee has primarily focused its recommendations on investors and

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