Global Forum for Disaster Reduction (GFDR) A Seminar on Business Continuity Management November 28, 2007, Mumbai MANAGING RISKS --- A Step towards better Corporate Governance Paper presented by: Khushroo B. Panthaky --- Partner, Walker Chandiok & Co (A Member firm of Grant Thornton International)

Agenda Section IConceptualizing Corporate Governance Section II The Need for Corporate Governance Section III Evolution of Corporate Governance Section IV Clause 49 of the Listing Agreement Section V Issues and Challenges in India Section VI Advantages of a well developed Corporate Governance framework Section VII Proposed Amendments

Walker, Chandiok & Co November 28, 2007 Slide 3 Corporate Governance Conceptualizing Corporate Governance Section I Narrow definition A set of relationships between the company and shareholders, directors and management. Beneficiary of good governance - The Shareholders Broad definition Looking to the implicit and explicit relationships of the company with employees, creditors, consumers, distributors, Govt. Authorities and local communities Beneficiary of good governance - Every Stakeholder

Walker, Chandiok & Co November 28, 2007 Slide 4 Corporate Governance Conceptualizing Corporate Governance (contd.) Section I What constitutes shareholders’ interest? (sustainable profitability) Need for external regulation FOR: Conflict of interest between Management/Promoters and other constituencies To protect small investors To ensure Corporate Excellence AGAINST: Risk of excessive policing and increased costs

Walker, Chandiok & Co November 28, 2007 Slide 5 Corporate Governance The Need for Corporate Governance Section II Responsibility towards Internal and external Stakeholders Easier access to capital (FII, VCF, Foreign & Local Markets) Efficiency in operations and other business processes Global Competitiveness

Walker, Chandiok & Co November 28, 2007 Slide 6 Corporate Governance The Evolution of Corporate Governance - Abroad Section III Spate of high profile corporate frauds and collapses in the U.S sparked off the debate by investors and financial institutions on the need to protect their investments through regulations on Corporate Governance. The UK published the ‘Code of Best Practices’ in Corporate Governance in 1992 and it culminated in the Turnbull Guidelines in September,1999. The Sarbanes Oxley legislation was introduced in the U.S in July,2002. Other legislations on Corporate Governance were introduced in many countries.

Walker, Chandiok & Co November 28, 2007 Slide 7 Corporate Governance The Evolution of Corporate Governance - India Section III In India ‘Corporate Governance’ is still a catching up terrain. December 1995: CII sets up task force to design voluntary code of corporate governance April 1998: CII releases “Desirable Corporate Governance: A Code” May 1999: SEBI sets up the Kumar Mangalam Birla Committee February 2000: Clause 49 introduced pursuant to KM Birla Report Key aspects of financial disclosures,independence of boards etc were picked up from the Sarbanes Oxley Act. 2002: DCA sets up Naresh Chandra Committee- Report recommends financial and non-financial disclosures and independent auditing and board oversight of management

Walker, Chandiok & Co November 28, 2007 Slide 8 Corporate Governance Section III 2002: Narayana Murthy Committee set up by SEBI to review clause : Clause 49 modified to reflect some of Narayana Murthy’s recommendations December, 2005: Deadline for compliance with modified Clause 49 The reporting is quarterly and starts from 15th April, 2006 for the period January to March, Amendments made to Clause 49 requirements from time to time The Evolution of Corporate Governance – India (contd.)

Walker, Chandiok & Co November 28, 2007 Slide 9 Corporate Governance Clause 49 of the Listing Agreement – Scope Section IV The structuring of Boards e.g the ratio of Independent Directors and mandating its responsibilities. Board procedures and constitution of different committees like the audit committee, shareholders' grievances committee etc. Enhancing shareholder participation and protection of shareholders' interest through mandatory committees. Disclosure of financial information and institutionalizing Risk Management and Internal Control Frameworks - CEO and CFO made responsible for financials. Escalating legal compliance responsibilities to the Board An optional whistle blowers policy.

Walker, Chandiok & Co November 28, 2007 Slide 10 Corporate Governance Clause 49 of the Listing Agreement Section IV Concerned with Independent Directors, Audit Committees, Disclosures, CEO/CFO Certification Independent Directors Half of Board with executive Chairman to be independent; third of board with non executive Chairman to be independent. Definition of independent director:  Non executive  No Material pecuniary relationships or transactions with company, promoters, directors, senior management, holding company, subsidiaries or associates

Walker, Chandiok & Co November 28, 2007 Slide 11 Corporate Governance Clause 49 of the Listing Agreement Section IV Definition of independent Director ( … contd.) Not related to promoters, to board members or to persons holding managerial positions one level below board Has not been an executive in company in preceding three years Has not been a partner or executive in statutory audit firm or internal audit firm in the past 3 yeaars Has not been a partner or executive in law firm or consulting firm with material association to company in the past 3 years Is not a material supplier, service provider, customer, lessor or lessee of company Does not hold more than 2% shares in the company

Walker, Chandiok & Co November 28, 2007 Slide 12 Corporate Governance Clause 49 of the Listing Agreement Section IV The Audit Committee Company to constitute an audit committee with terms of reference At least three members- two thirds independent Chairman to be independent- must attend every AGM All members financially literate & at least 1 member to be expert & CS to be thesecretary May meet with or without executives – generally CFO & CEO are invited Must meet at least 4 times a year - quorum = greater of 2 members or 2/3rd and at least 2 independent

Walker, Chandiok & Co November 28, 2007 Slide 13 Corporate Governance Clause 49 of the Listing Agreement Section IV The Powers of the Audit Committee Investigate all matters within the terms of reference Seek information from any employee Obtain outside legal/ professional advice To invite outside experts

Walker, Chandiok & Co November 28, 2007 Slide 14 Corporate Governance Clause 49 of the Listing Agreement Section IV The Role of the Audit Committee Oversee financial reporting process Recommend to the Board the hiring and firing of statutory auditors and confirming their remuneration To review working of whistle blower mechanisms Discussing significant findings and follow ups with internal auditors Approval of payment to statutory auditors for any other services rendered Reviewing with the management annual/ quarterly financial statements before they are vetted by board especially Reviewing the adequacy of structures, staffing and examining the scope of internal audit department Other functions specified in terms of reference

Walker, Chandiok & Co November 28, 2007 Slide 15 Corporate Governance Clause 49 of the Listing Agreement Section IV Audit Committee to review following information Statement of significant related party transactions submitted by management Management letters and letters of internal control weakness issued by the statutory auditors Internal audit reports relating to internal control weakness Review of appointment, removal and terms of remuneration of chief internal auditor Review of Management Discussion and Analysis (MDA) Report of financial condition and result of operations

Walker, Chandiok & Co November 28, 2007 Slide 16 Corporate Governance Clause 49 of the Listing Agreement Section IV Subsidiary Companies At least one independent director on the Board of the Listed Company shall be a director on the Board of the non-Listed Indian Subsidiary Company The Audit Committee of the Listed holding company will review the financial statement of the unlisted subsidiary company The minutes of the Board Meetings of the unlisted subsidiary shall be placed at the Board Meeting of the listed holding company

Walker, Chandiok & Co November 28, 2007 Slide 17 Corporate Governance Clause 49 of the Listing Agreement Section IV Responsibility of the Audit Committee and the Board for disclosures Related party transactions ~ Place before the audit committee:  summary of transactions in the ordinary course of business  details of transactions not in the ordinary course of business  details of transactions, with related parties or others, not on arms length basis If financial statements are prepared in a manner other than that prescribed in an accounting standard, the same has to be disclosed i. Disclose in the Annual Report all pecuniary relationship or transactions of the non-executive directors with the company; criteria for making payments to such directors and number of shares and convertible instruments held by them.

Walker, Chandiok & Co November 28, 2007 Slide 18 Corporate Governance Clause 49 of the Listing Agreement Section IV Disclosures Disclose in the Annual Report all elements of remuneration package of independent directors; service contracts, notice period, severance fee and stock options details Senior Management shall make disclosures to the Board relating to all material financial and commercial transactions, where they have a personal interest that may have a potential to conflict with the interests of the Company On appointment of a new director or re-appointment of a director, provide information to the shareholders with respect to his expertise, about his membership/directorship in other companies and his shareholding in case he is a non-executive director. Quarterly results and presentations made by the Company to analysts shall be put on company ’ s website.

Walker, Chandiok & Co November 28, 2007 Slide 19 Corporate Governance Clause 49 of the Listing Agreement Section IV CFO / CEO certification CEO = MD or Manager Appointed Under Companies Act CFO = Whole Time Finance Director or Other Person Heading the Finance Function CEO and CFO to certify to the board: that they have reviewed financial statements and to the best of their knowledge and belief:  No materially untrue statement/ omission of material fact/ misleading statement  Statements together present true and fair view of company ’ s state of affairs and its results of operations and are in compliance with existing accounting standards and relevant laws and regulations.

Walker, Chandiok & Co November 28, 2007 Slide 20 Corporate Governance Clause 49 of the Listing Agreement Section IV CEO/ CFO to certify the following and report:  No transactions entered into by company during the year which are fraudulent, illegal or violative of the company ’ s code of conduct  Accept responsibility for internal control systems, have evaluated the effectiveness of the systems.  Significant changes in internal control during the year  Significant changes in accounting policies  Instances of significant fraud of which they have become aware

Walker, Chandiok & Co November 28, 2007 Slide 21 Corporate Governance Clause 49 of the Listing Agreement Section IV Report and Compliance Separate section in annual report on compliance with corporate governance Quarterly compliance report to stock exchange signed by Compliance Officer or CEO Company to disclose compliance with non-mandatory requirements in annual reports

Walker, Chandiok & Co November 28, 2007 Slide 22 Corporate Governance Amendements in Clause 49 Section IV SEBI vide Circular SEBI/CFD/DIL/CG/1/2006/13 dated January 13, 2006, has made certain changes in the revised Clause 49. The changes are covered hereunder – 1. Payment of sitting fee to Non-Executive Directors within the limits prescribed under the Companies Act, 1956 will not require prior approval of shareholders. 2. The maximum gap between two Board meetings has been increased to 4 months from 3 months. 3. Certification regarding degree of prevalence of internal controls underlying the systems will form part of overall certification by CEO & CFO and would be mandatory for the purpose of financial reporting.

Walker, Chandiok & Co November 28, 2007 Slide 23 Corporate Governance Zero tolerance compliance system 2 Identify locations and personnel 3 List out statutory compliance requirements at each location 4 Fix compliance reporting methodologies 1 Understand the business process 5 Implementation of Compliance Reporting Structure 6 Periodical Review of compliances 7 Find out the Gaps/ Instances of Non Compliance 8 Periodical reporting to the Board on instances of Non Compliance along with the steps taken to rectify Suggested Statutory Compliance Reporting Structure ILLUSTRATIVE

Walker, Chandiok & Co November 28, 2007 Slide 24 Corporate Governance Board Approve policy/strategy Executive Team Sponsorship/operation Board Audit & Risk Committee Delegated authority Risk Manager Subject matter Departments Apply policy Risk policy & guidelines Risk information Quarterly risk reporting Suggested Risk Management Structure ILLUSTRATIVE

Walker, Chandiok & Co November 28, 2007 Slide 25 Corporate Governance Recommended solution to comply with Clause 49 Establish Risk Management Framework At entity level At Process level Risk Register Document Risk & Control Heat Maps (Function/ Process) Initial Risk Assessment Establishing Internal Control Framework CEO / CFO Certification Establishing legal compliance framework Reporting structure & format Board Reporting ILLUSTRATIVE

Walker, Chandiok & Co November 28, 2007 Slide 26 Corporate Governance Section V Building responsive boards - with a mechanism to create trust and responsibility. Finding appropriate Independent Directors in adequate numbers. Creating a climate where Corporate Governance norms are followed in spirit rather than just as a ‘tick the box’ activity. Fostering a corporate culture of transparency. Strengthening the weaker compliance mechanisms for adherence to statutory and regulatory requirements. Shareholders passivity. Tight insider/owner controls or government ownership. Lack of awareness of global best practices. Issues and Challenges in India

Walker, Chandiok & Co November 28, 2007 Slide 27 Corporate Governance Issues and Challenges in India Section V Shareholders not sole beneficiary of corporate governance norms- other stakeholders need protection too Clause 49 disqualifies holder of more than 2% stake from being an independent director

Walker, Chandiok & Co November 28, 2007 Slide 28 Corporate Governance Section V Audit Committees Awareness to review compliance with various legal requirements with the management. Not comfortable to ensure and certify adequacy of internal control systems Degree of financial literacy can never be measured or adjudged Is remuneration of members an issue? Issues and Challenges in India

Walker, Chandiok & Co November 28, 2007 Slide 29 Corporate Governance Section VI Advantages of a well developed Corporate Governance framework Increased confidence of investors especially foreign investors as we now have one of the best developed mandatory Corporate Governance Codes. Streamlining of Corporate’s financial,risk management and legal compliance reporting frameworks resulting in efficiencies of operation. Greater transparency of corporate proceedings and an internal check through a whistle blowers policy-though optional, has been adopted by the larger corporations. Increased shareholder value.

Walker, Chandiok & Co November 28, 2007 Slide 30 Corporate Governance Advantages of a well developed Corporate Governance framework (contd.) Increased emphasis on corporate governance being perceived as an effective investment criteria among large investors Improved Equity Price Performance Higher Valuations Respectable access to global markets Increased investor goodwill & confidence Section VI

Walker, Chandiok & Co November 28, 2007 Slide 31 Corporate Governance Proposed amendments In case non-executive Chairman is a promoter/relative of promoter/person occupying management position at Board level or one level below Board, he would not be treated as independent director and 50% criteria would apply. Disclosure of relation between independent directors interse as well as with other directors not holding management position in public documents (key individuals) Resigned/Removed independent director to be replaced within 90 days of such resignation/removal Minimum age of independent directors should be 21 years Nominee directors would not be considered as independent directors Section VII

Walker, Chandiok & Co November 28, 2007 Slide 32 Corporate Governance Thank you