1. CORPORATE GOVERNANCE IN BANKS

2. International Scenario Cadbury Committee Report, UK –May 1991 OECD Principles of Corporate Governance –April 1998 Basel Committee Report

3. Indian Scenario Kumara Mangalam Birla Committee, 1999 Naresh Chandra Committee, 2004 Narayana Murthy Committee 2003 Reserve Bank of India Norms Khan Working Group Report, 1998 Narasimham Committee Report I, 1992 Narasimham Committee Report II, 1998 Dr. Patil Advisory Group Varma Group Report of the Consultancy Group of Directors of Banks / Financial Institutions, 2002 Chaired by A.S.Ganguly

4. Corporate Governance Framework Companies Act, 1956 Companies Act, 1956 (Amendment in 2002) SEBI Regulations for Listed Companies (Clause 49)

5. Corporate Governance Requests Minority shareholder protection Voting Rights Firm’s capital structure Shareholder meetings Structure and responsibilities of the Board of Directors Board structure Board meetings Nomination and election of directors Board committees Disclosure Audit committee responsibilities

6. Voting Rights Shareholders can appoint a proxy. A proxy can demand a poll and cast vote but cannot speak at the meeting. The notice convening the meeting must state that shareholders can appoint a proxy. All shares are equal within one class. Shares with different voting rights or dividend can be issued as long as shareholders approve the issue and such shares do not exceed 25% of total share capital. Issue of share capital with different voting rights or dividends (Companies Rule 2001)

7. Capital Structure Mergers require a special resolution (more than 75% of shareholders present) at the shareholder meeting. In the event shareholders are not called upon to approve the merger, the acquirer has to make a public announcement of his/her intent to acquire the shares. (Regulation 12 SEBI- Takeover Code)

8. Capital Structure Acquisition of 15% or more shares or voting rights of any company requires the acquirer to make a mandatory public offering (Regulation 10 SEBI – Takeover Code). Exception: Compliance not mandatory when –Acquirer already owns 15% or more but less than 75% of shares or voting rights of the company and in one year acquires less than 5% of shares or voting rights, –Acquirer already owns 75% of shares or voting rights of the company

9. Capital Increase If a company is issuing further capital it is required to offer the shares to existing equity holders in proportion to the capital paid-up on those shares on that date. Notice for exercising the offer should be given at least 15 days prior to the issue. The offer can be transferred to another person unless the Articles of the company specifically disallow such transfer.

10. Capital Increase Exception (Section 81 of Companies Act): –Preferential allotment if a special resolution to that effect has been passed in the Annual General Meeting, –If a special resolution is not passed then the number of votes cast in favour of forfeiting preferential allotment should exceed votes against the forfeiture –Central Government should approve the application of the board of directors to waive requirement of preferential allotment.

11. Buyback of Shares A company can acquire its owns shares if –The buy-back is authorized by its Articles, –A special resolution has been passed in the shareholders’ meeting authorizing the buy-back, –The buy-back is less than 25% of the total paid up capital and free reserves, –The ratio of debt owed by the company is not more than twice the capital and its free reserves after the buy-back.

12. Buyback of Shares Exception (Section 77A of Companies Act): A special shareholders resolution is not needed if the buy-back is less than 10% of the total paid-up equity capital and free reserves of the company and the buy- back has been authorized by the Board of Directors of the company.

13. Shareholder Meeting Companies are required to hold an Annual General Meeting (AGM) every year (Section 166 of Companies Act). Notice for such meeting should be sent to shareholders 21 days in advance (Section 171 of Companies Act). Shareholder controlling 10% of voting rights or paid-up capital can call for a special or Extraordinary General Meeting (EGM) (Section 169 of Companies Act).

14. Shareholder Meeting Foreign Institutional Investors (FIIs) must register with SEBI to participate in the market. Investments and returns are freely repatriable, except in the case of certain specified items which attract the condition of dividend balancing and/or where the approval is subject to specific conditions such as lock in period on original investment, dividend cap, foreign exchanging neutrality, etc.

15. Shareholder Meeting Companies are required to create ‘Shareholders/Investors Grievance Committee’ Chairmanship of a non-executive director to look into the redressing of shareholder and investor complaints like transfer of shares, non-receipt of balance sheet, non- receipt of declared dividends etc (SEBI Code, Clause 49). Quorum is set at five persons for a public company and two for other companies (Section 174 of Companies Act).

16. Board Structure An independent director is a non-executive director (SEBI Code, Clause 49): –Aside from director’s remuneration, does not have any material pecuniary relationship or transactions with the company, its promoters, management or subsidiaries which may affect the independence of judgment, –Not related to the promoter or a person in management on the board or one level below the board,

17. Board Structure –Not been an executive for the past three years, –Not or has not been a partner in the past three years of a statutory or internal audit firm or a firm providing consulting services to the company. All pecuniary relationship/transactions of nonexecutive directors should be disclosed in the annual report (SEBI Code, Clause 49).

18. Independent Directors The number of independent directors is dependent on whether the Chairman is an executive or non-executive director. In the case of a non-executive chairman, at least one- third of the board should be comprised of independent directors and in the case of an executive chairman, at least half of the board should be comprised of independent directors (SEBI Code, Clause 49).

19. Board Responsibilities The Board shall meet at least four times a year, with a minimum time gap of three months between any two meetings (SEBI Code, Clause 49). Quorum for board meetings is 33% of total board strength or 2 members whichever is higher (Section 287 of Companies Act). No specific provision mandating the creation of a board- level nominating committee. The directors of the Board are appointed by the company in the Annual General Meeting (Section 255 of Companies Act).

20. Board Resposibilities At the time of appointment of a new director or the re- appointment of a director, shareholders must be provided with a brief résumé of the director, expertise in specific functional areas and names of companies in which the person also holds other directorships (SEBI Code, Clause 49). Unless the Articles of a Company provide for the retirement of all directors at every AGM, not less than one-third directors have to be appointed by the company at the AGM (Section 255 of Companies Act).

21. Board Committee Every board is required to have an audit committee and a shareholder grievance committee. The board of directors is required to consider the CEO’s remuneration. Creation of a separate remuneration committee is a non- mandatory requirement (Clause 49 of SEBI’s listing requirements). In practice, however, most Boards of large companies have an audit, remuneration and nomination committee.

22. Disclosure Every company is required to appoint a compliance officer who is responsible for setting policies, procedures, monitoring adherence to the rules for the preservation of ‘price sensitive information’ to prevent insider trading (SEBI Insider Trading Regulation, 2002). There should be a separate section on Corporate Governance in the annual report to shareholders. Non-compliance with any mandatory requirements and the extent to which the non-mandatory requirements have been adopted should be specifically highlighted (SEBI Code, Clause 49).

23. Disclosure Information such as quarterly results and presentations made by companies to analysts shall be put on the company’s website, or shall be sent in such a form as to enable the stock exchange on which the company is listed to put it on its website (SEBI Code, Clause 49).

24. Remuneration of Directors All fees/compensation paid to non-executive directors are fixed by the Board of Directors and require previous approval of shareholders in the Annual General Meeting. The shareholder’s resolution should specify the limits for the maximum number of stock options that can be granted to non-executive directors in any financial year and in aggregate (SEBI Code, Clause 49).

25. Conflict of Interest A company is required to disclose all bases for related party transactions to the audit committee. It has to periodically provide a statement in summary form of transactions with related parties in the ordinary course of business, details of material individual transactions with related parties which are not in the normal course of business, and transactions with related parties or others that are not on an arms length basis with management’s justification for such transactions (SEBI Code, Clause 49).

26. Conflict of Interest Disclosure of materially significant related party transactions that may have potential conflicts with the interests of the company at large have to be made in the Report on Corporate Governance in the Annual Report to Shareholders (SEBI Code, Clause 49).

27. Internal Control and Risk Management System The company is required to lay down procedures to inform Board members about risk assessment and minimization procedures. These procedures shall be periodically reviewed to ensure that executive management controls risk through means of a properly defined framework (SEBI Code, Clause 49).

28. Internal Control and Risk Management System The audit committee also has to review the adequacy of the internal audit function, if any, including the structure of the internal audit department, staffing, seniority of the officials heading the department, reporting structure coverage, and frequency of internal audit (SEBI Code, Clause 49).

29. Standards India materially conforms to International Financial Reporting Standards (IFRS) International Standards on Auditing (ISA). Institute of Chartered Accountants of India (ICAI) guidelines Companies Act

30. Audit Report Quarterly reports are subject to limited audit review. As part of the non-mandatory requirements, a half-yearly declaration of financial performance, including a summary of the significant events in the last six months, may be sent to each household of shareholders (SEBI Code, Clause 49). Comprehensive audits are conducted annually.

31. Audit Quality Every company at each AGM shall appoint an auditor(s) to hold office till the conclusion of the next AGM (Section 224 of Companies Act). The Companies Act requires annual accounts to be audited by an independent certified chartered accountant who is a member of the Institute of Chartered Accountants of India (ICAI)

32. Audit Quality The quality of financial disclosures for listed companies is determined by the Department of Company Affairs, SEBI, and the ICAI. The ICAI lays down the parameters of accounting and auditing standards. The Companies Act requires management to explain any deviations from the prescribed accounting standards in financial statements.

33. Audit Committee The audit committee shall have minimum three directors as members, with two-thirds of the members being independent (SEBI Code, Clause 49). All members of the audit committee should be financially literate and at least one member shall have accounting or related financial management expertise (SEBI Code, Clause 49).

34. Internal and External Auditor The audit committee recommends to the Board the appointment, re-appointment, and if required the replacement or removal of the external auditor and the fixation of audit fees. The committee also has to approve payment to auditors for other services provided (SEBI Code, Clause 49).

35. Internal and External Auditor The audit committee has to review with management the performance of the external and internal audit firm and the adequacy of internal control systems (SEBI Code, Clause 49).

36. Ownership and Control Senior management is required to disclose potential conflicts of interest to the board. Directors are required to disclose share dealings beyond prescribed thresholds. SEBI has issued rules against insider trading. Monitoring and prosecuting insider trading activity is very difficult. An acquirer, who acquires shares or voting rights exceeding specified threshold levels has to disclose at every stage the aggregate holdings or voting rights to the company and to the stock exchanges where the companies are listed. Current threshold limits are 5%, 10% or 14% of shares or voting rights (Regulation 7 SEBI – Takeover Code).

37. Regulatory Environment The Ministry of Company Affairs (MoCA), regulators like RBI and SEBI and stock exchanges have surveillance functions. MoCA has surveillance responsibility over unlisted companies. For listed companies, stock exchanges are considered to be the first line of defence followed by SEBI. RBI oversees companies in the banking and financial sector.

38. Independence of Supervisory Body SEBI is an independent quasi-judicial body that plays an active regulatory and development role in India’s security market. The Central Government appoints the chairman and may nominate a maximum of nine other members. The body is funded by contributions from public financial institutions, banks and the Government of India.

39. Corporate Governance of Banks Openness Accountability Transparency Responsibility Risk Management