Corporate Governance Assessment / Ratings A presentation by ICRA Limited 14th December, 2007

ICRA Limited The Rating / Assessment Framework 2

ICRA Limited uObjectively and independently evaluate the Corporate Governance practices of a company. uOverriding emphasis is on Substance over Form uUnderlying theme qthe extent to which a company adopts and follows such practices and conventions that would provide qits stakeholders an assurance on the quality of Corporate Governance practices What are we trying to do ? 3

ICRA Limited uIn case of CG Assessment, it is a detailed report meant for use by the top management of the company highlighting qStrengths and weaknesses qDeviations from generally accepted best practices qPotential red-flags from CG perspective uIn case of CGR, a Rating on a scale of CGR1 to CGR6 uThe assessment is a one-time exercise not subject to the annual surveillance process What is the deliverable ? 4

ICRA Limited Assessment Approach uPrimary focus on the business processes qStrength and integrity of structures, processes, risk management and disclosure standards from a stakeholders perspective uThe measurable outcome is also evaluated qNo established input-output relation, however consistently poor performance needs to be factored in uEmphasis on substance over form, not a Checkbox exercise uInvolves perusal of documents like Board Notes and Agenda Papers not available in the public domain 5

ICRA Limited Key Variables in the Rating Process uOwnership structure uGovernance Structure and Management Processes uBoard Structure and Processes qAudit Committee and Risk Management uStakeholder Relations uTransparency & Disclosures uFinancial discipline 6 Feedback from Independent Directors a key part of the exercise

ICRA Limited Typical issues evaluated…… I uOwnership structure qIs is transparent ? qWhat is the extent of cross-holdings ? uQuality of decision making process in the company qAre Governance Arrangements clearly defined and followed ? qWhat is the nature of the planning process ? uWhat is the nature and quality of Board supervision? qComposition of Board qBoards role in overseeing strategy, projects, acquisition ? qBoards role in executive compensation / succession panning? 7

ICRA Limited uQuality of control systems and risk management qInternal Audit function qEffectiveness of Audit Committee qProgress in developing holistic risk management systems qNon-audit services provided by the auditors uTransparency and disclosure standards qNature and quality if analyst presentation qQuality and level of detail in Annual Accounts qDisclosures on transaction with related-party uDemonstrated evidence of commitment to, and focus on, ethical practices ? 8 Typical issues evaluated…… II

ICRA Limited uExecutive Compensation qprocess of setting compensation qis it disproportionate compared to peers and profit growth? qDoes it provide large short term incentives? uFinancial Discipline qAccounting policies compared with GAAP qROCE earned compared to peers in various business lines qDividend policy qNature of transaction with subsidiaries / associates uAre there any instance of discrimination against minority shareholders ? 9 Typical issues evaluated…… III

ICRA Limited Some specific areas for ICRA analysis uBoards role in guiding the management on key issues facing the company uAcquisitions / Investments / Diversification qWhat is the rationale ? qWhat role did the board play? qDoes the board review performance compared to projections? uRationale for subsidiaries / associates qAre transactions on arms-length basis ? uShare movement analysis pre major announcements 10

ICRA Limited Benefits uAn objective and independent assessment of a companys governance practices uAn opportunity to benchmark a companys practices with the best practices in the field. uAn opportunity to utilize the insights that ICRA has gained during assessing companies for CG practices 11

ICRA Limited What have clients gained ? Some examples 12

ICRA Limited uICRAs observations: qUnstructured, informal discussions would precede major corporate decisions uClients response qAn Executive Committee, with representation from all SBUs and Business Heads formed qThe EC meets every month to review operations as well as strategic issues. Formal minutes maintained qAn Acquisition Framework has been drawn up, which delineates steps to be taken for any M&A activity. Illustrating benefits ……(I) 13

ICRA Limited uICRAs observations: qAudit Committee composition and practices had scope for improvement uClients response qAudit Committee reconstituted with only Independent Directors qAudit Committee has started the practice of meeting External and Internal Auditors without management presence qFrom time to time external speakers invited to brief Committee on changes in Accounting Policy, Approach to Risk Management and the like Illustrating benefits….. (II) 14

ICRA Limited uICRAs observations: qControl systems w.r.t vetting of contracts seemed to be an area of weakness uClients response qScope and coverage of Internal Audit was significantly enhanced qAdequacy of systems in this area became a focus area for the Audit Committee Illustrating benefits….. (III) 15

ICRA Limited uICRAs observations: qAn analysis of BoD meetings revealed the adjacent focus areas uClients response qPractice of dedicated strategy session has been initiated qThese sessions also provide an opportunity for external directors to watch senior management and identify potential Illustrating benefits….. (IV) 16

ICRA Limited uICRAs observations: qDetailed presentations in the Board on operational issues was cluttering Board proceedings qSuccession planning an area of concern, especially given the ownership structure uClients response qLess of Show and tell presentations, more emphasis on seeking guidance from Board Members on key aspects qMore active Nomination Committee qGreater focus on succession planning Illustrating benefits….. (V) 17

ICRA Limited uProcedural lapses in compliance with Clause 49 highlighted uImprovement in minuting process uGreater focus on Nomination Committee issues uLaying down a policy for Non-Audit fees by SA Other observations 18

ICRA Limited uThe basic essence of the exercise is Evaluating Substance over Form uUnlike credit ratings, there is no quantitative measures for peer comparison uA judgmental call, arrived at with sufficient rigour and due diligence, is therefore the hallmark of the process uThe rating / assessment offers valuable insights if used as a diagnostic tool To conclude …. 19

ICRA Limited uFinancial theory is yet to establish a linkage uResearch supports the proposition that good governance enhances value. qOpinion based surveys qResearch studies linking governance rankings / ratings with performance and value creation qCALPERs focus list 20 What are the benefits of Corporate Governance ?

ICRA Limited ICRA survey suggests high importance of Corporate Governance for investors 21

ICRA Limited Mckinsey Investor Opinion Survey- June 2002 …. board practices are at least as important as financial performance Source: McKinsey Investor Opinion Study 22

ICRA Limited Mckinsey Investor Opinion Survey- June investors would be willing to pay more for the shares of a well- governed company Source: McKinsey Investor Opinion Study 23

ICRA Limited Research linking governance ranking with stock performance uCLSA study qThe April 2003 study showed that over the past five years, high CG stocks (ranked in the 1st quartile) outperformed the Sensex by 169% qThe out-performance was at over 40% even if one excluded the Software stocks uCG and Equity Prices - A Study by Paul Gompers of Harvard Business School and others qA Governance Index was calculated for 1500 large firms during the 1990s qAn investment strategy that bought firms in the decile with strongest CG and sold firms in the decile with lowest CG would have outperformed the index by 8.5% during the period. 24

ICRA Limited Research linking governance ranking with stock performance uCG and Expected Stock Returns - A Study by Wolfganag Dorbetz, University of Basel qAn investment strategy that bought high-CGR firms and shorted low CGR firms would have earned excess returns of 12% compared to the DAX 100 during uLipper-GMI Mutual Fund Report qThe two firms compared the performance and portfolio of 725 large-cap funds against GMIs corporate governance ratings qConclusion : Mutual funds that invest in companies with higher CG ratings have been rewarded with superior returns 25

ICRA Limited Research linking governance ranking with stock performance uStudy by Japan Corporate Governance Research Institute. (Data from 2003 report) The Institute has developed the JCG Index, which measures corporate governance in Japanese firms Their study found that high JCG Index firms achieved superior performance, as measured by ROA, ROE, Stock Returns etc. 26

ICRA Limited Shareholders Wealth Effect of CALPERs focus list uCalifornia Public Employees Retirement Systems identifies and publishes a Focus list annually ---- companies with poor Governance and financial performance uCALPERS study showed that there is a significantly positive shareholder impact from the release of CALPERs focus list over the period qAt 95% confidence, the study found that inclusion in the focus list results in a 5.37% additional return over a 6 month period. 27

ICRA Limited Thank You 28