All Stock Exchanges are hereby directed to amend the Listing Agreement by

replacing the existing Clause 49 of the listing agreement (issued vide circulars
dated 21st February, 2000, 9th March 2000, 12th September 2000, 22nd January,
2001, 16th March 2001 and 31st December 2001) with the revised Clause 49 given in
Annexure I through I D to this circular. SEBI Circular no. SEBI/MRD/SE/31/2003/
26/08 dated August 26, 2003 (which has been since deferred) is hereby withdrawn. The
revised Clause 49 also specifies the reporting requirements for a company.
2. Please note that this is a master circular which supersedes all other earlier circulars
issued by SEBI on Clause 49 of the Listing Agreement.
3. The provisions of the revised Clause 49 shall be implemented as per the schedule of
implementation given below:
a) For entities seeking listing for the first time, at the time of seeking in-principle approval
for such listing.
b) For existing listed entities which were required to comply with Clause 49 which is being
revised i.e. those having a paid up share capital of Rs. 3 crores and above or net worth
of Rs. 25 crores or more at any time in the history of the company, by April 1, 2005.
Companies complying with the provisions of the existing Clause 49 at present (issued
vide circulars dated 21st February, 2000, 9th March 2000, 12th September 2000, 22nd
January, 2001 16th March 2001 and 31st December 2001) shall continue to do so till the
revised Clause 49 of the Listing Agreement is complied with or till March 31, 2005,
whichever is earlier.
4. The companies which are required to comply with the requirements of the revised Clause
49 shall submit a quarterly compliance report to the stock exchanges as per sub Clause VI
(ii), of the revised Clause 49, within 15 days from the end of every quarter. The first such
report would be submitted for the quarter ending June 30, 2005. The report shall be signed
either by the Compliance Officer or the Chief Executive Officer of the company.
Page 2 of 18
5. The revised Clause 49 shall apply to all the listed companies, in accordance with the
schedule of implementation given above. However, for other listed entities which are not
companies, but body corporate (e.g. private and public sector banks, financial institutions,
insurance companies etc.) incorporated under other statutes, the revised Clause 49 will
apply to the extent that it does not violate their respective statutes and guidelines or
directives issued by the relevant regulatory authorities. The revised Clause 49 is not
applicable to Mutual Funds.
6. The Stock Exchanges shall ensure that all provisions of the revised Clause 49 have been
complied with by a company seeking listing for the first time, before granting the in-principle
approval for such listing. For this purpose, it will be considered satisfactory compliance if
such a company has set up its Board and constituted committees such as Audit
Committee, Shareholders/ Investors Grievances Committee etc. in accordance with the
revised clause before seeking in-principle approval for listing.
7. The Stock Exchanges shall set up a separate monitoring cell with identified personnel to
monitor the compliance with the provisions of the revised Clause 49 on corporate
governance. The cell, after receiving the quarterly compliance reports from the companies
which are required to comply with the requirements of the revised Clause 49, shall submit
a consolidated compliance report to SEBI within 60 days from the end of each quarter.
Yours faithfully,
Parag Basu
Encl: Annexure I, I A, I B, I C & I D

Report of Committee on Corporate Governance under the Chairmanship of

Shri N. R. Narayana Murthy
SEBI had constituted a Committee on Corporate Governance under the Chairmanship
of Shri N. R. Narayana Murthy. Based on the recommendations of the Committee
and public comments received, certain amendments were made in Clause 49 of the
Listing Agreement, vide circular dated August 26, 2003.
Subsequent to the issue of the said circular, SEBI continued to receive
feedback/representations. It was therefore considered appropriate that another
meeting of the Narayana Murthy committee on Corporate Governance be convened
on November 17, 2003 for the purpose of deliberating on the said suggestions and
representations received on the revised Clause 49 of the Listing Agreement.
The main issues and proposals to be deliberated in the meeting, are given below
along with rationale :
Issues under clause 49 and the proposals
Issue 1 – Definition o f independent director
Existing – Explanation (i)(e) to clause I.A
Explanation (i): For the purpose of this clause, the expression ‘independent director´
shall mean non-executive director of the company who:
a. apart from receiving director´s 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;
b. is not related to promoters or management at the board leve l or at one level
below the board;
c. has not been an executive of the company in the immediately preceding three
financial years;
d. is not a partner or an executive of the statutory audit firm or the internal audit
firm that is associated with the comp any, 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.
e. is not a supplier, service provider or customer of the company. This should include
lessor-lessee type relationships also; and
f. is not a substantial shareholder of the company, i.e. owning two percent or more
of the block of voting shares.
Rationale

narayana Murthy panel report on corporate governance — Is whistle blower policy practical?

Rabindra Nath Sinha

KOLKATA, April 7

THE whistle blower policy recommended in the recent report of SEBI's committee on corporate
governance and Clause 49 of the Listing Agreement, which was headed by Mr N.R. Narayana Murthy,
Chairman and chief mentor of Infosys Technologies, seems to have evoked the sharpest response from
veteran company secretaries, who have studied the key suggestions in detail.

In fact, judging by what they have to say, it is apparent that this particular recommendation, which is
intended to curb unethical and improper practices in corporates, is being singled out by company law
experts as simply impractical.

What is `whistle blower' policy? It is an internal policy on access to audit committees. What is the
committee's recommendation? Personnel who come to know about unethical or improper practices,
which may not necessarily be a violation of law, should be able to approach the company's audit
committee "without necessarily informing their supervisors".

The committee wants corporates to take steps to see that this right of access is communicated to all
employees through internal circulars. Further, a company's employment and personnel policy should
provide a mechanism to protect whistle blowers from "unfair termination and other unfair, prejudicial
employment practices."

Senior company secretaries Business Line spoke to said that this recommendation, if implemented,
would be instrumental in breeding indiscipline as most likely the audit committee would be flooded with
frivolous complaints and minor issues. Many complainants might go by their personal likes and dislikes
and thus the possibility of the right of access to the audit committee being misused would always be
there.

They noted that the committee had not said anything on providing evidence in support of a complaint,
disclosure of the identity of the complainant and the maximum number of complaints that an employee
could make in a year.
Elimination of unethical or improper practices is the responsibility of respective corporate promoters
and management, for which they have to put in place systems for efficient administration and
transparent transactions. Much also depends on the environment in which corporates operate and the
policies that govern their operations. A whistle blower policy can't be a foolproof safeguard against
unethical and improper practices, they contend.

The recommendation regarding composition of an audit committee has given rise to confusion. While
this panel has suggested that audit committee members should be non-executive directors, the Naresh
Chandra committee that preceded it suggested that only independent directors should be on audit
committee. The reality is that while all independent directors are non-executive directors it is not so
vice versa.

Regarding contingent liabilities, it has been suggested that management's views thereon and auditor's
comments on management's views should be given in the annual report.

According to senior company secretaries, there are instances where contingent liability cannot be
ascertained, such as, labour disputes, court cases etc. As the description suggests, it's all contingent
upon future developments and, therefore, it can't be proper for a management to pass a judgement
about the risk involved. Ideally, a management should only give the background of a contingent
liability.

The Narayana Murthy panel is for restricting the tenure of non-executive directors to three terms of
three years each, running continuously. The Naresh Chandra panel said that after a nine year-term the
director would not be considered independent, but surely the concerned person would be able to
continue as a non-executive director.

Company secretaries make two points: If the intention is to follow the Naresh Chandra committee's
suggestion, the Narayana Murthy panel's recommendation should be redrafted. Representatives of a
promoter remain on the board of a company as non-independent directors. The recommendation now
made rules out continuation of promoter-directors on the board beyond nine years at a stretch.

It needs to be clarified whether a partner of an audit firm or a solicitor's firm can be treated as an
independent director of a company if his firm is the auditor or legal advisor of another company in the
same group.

On analysts and media role

THE Narayana Murthy committee on corporate governance also discussed reports brought out from
time to time by security analysts and the media, specially the financial press.

As for reports of security analysts, the committee has desired SEBI to make rules for:

* Disclosure whether the company that is being written about is a client of the analyst's employer or an
associate of the analyst's employer, and the nature of services rendered to such company, if any

* Disclosure whether the analyst or the analyst's employer or an associate of the analyst's employer
hold or held (in the 12 months immediately preceding the date of the report) or intend to hold any debt
or equity instrument in the issuer company that is the subject matter of the report of the analyst.

Regarding scrutiny of the media, particularly the financial press, it has observed the committee
considered views expressed by members.

The Press Council of India has prescribed a code of conduct for the financial media. However, verifying
adherence to the code is difficult. A detailed review by SEBI on the subject is desirable, keeping in mind
issues such as transparency and disclosures, conflicts of interest, etc. before making any rule. SEBI
should consider having a discussion with the representatives of the media, specially the financial press.

The need for corporate governance

1.1.1 A corporation is a congregation of various stakeholders, namely, customers,

employees, investors, vendor partners, government and society. A corporation
should be fair and transparent to its stakeholders in all its transactions. This has
become imperative in today’s globalized business world where corporations need to
access global pools of capital, need to attract and retain the best human capital from
various parts of the world, need to partner with vendors on mega collaborations and
need to live in harmony with the community. Unless a corporation embraces and
demonstrates ethical conduct, it will not be able to succeed.

1.1.2 Corporate governance is about ethical conduct in business. Ethics is concerned with the code of
values and principles that enables a person to choose between right and wrong, and therefore, select
from alternative courses of action. Further, ethical
dilemmas arise from conflicting interests of the parties involved. In this regard,
managers make decisions based on a set of principles influenced by the values,
context and culture of the organization. Ethical leadership is good for business as the
organization is seen to conduct its business in line with the expectations of all
stakeholders.

1.1.3 Corporate governance is beyond the realm of law. It stems from the culture and
mindset of management, and cannot be regulated by legislation alone. Corporate
governance deals with conducting the affairs of a company such that there is fairness
to all stakeholders and that its actions benefit the greatest number of stakeholders. It
is about openness, integrity and accountability. What legislation can and should do,
is to lay down a common framework – the “form” to ensure standards. The
“substance” will ultimately determine the credibility and integrity of the process.
Substance is inexorably linked to the mindset and ethical standards of management.

1.1.4 Corporations need to recognize that their growth requires the cooperation of all the stakeholders;
and such cooperation is enhanced by the corporation adhering to the
best corporate governance practices. In this regard, the management needs to act as
trustees of the shareholders at large and prevent asymmetry of benefits between
various sections of shareholders, especially between the owner-managers and the
rest of the shareholders.

1.1.5 Corporate governance is a key element in improving the economic efficiency of a

firm. Good corporate governance also helps ensure that corporations take into
account the interests of a wide range of constituencies, as well as of the communities
within which they operate. Further, it ensures that their Boards are accountable to
the shareholders. This, in turn, helps assure that corporations operate for the benefit
of society as a whole. While large profits can be made taking advantage of the
asymmetry between stakeholders in the short run, balancing the interests of all
stakeholders alone will ensure survival and growth in the long run. This includes,
for instance, taking into account societal concerns about labor and the environment.

Report of the Committee on Corporate Governance

Page 2 of 40
February 8, 2003

Report of the Committee on Corporate Governance

Page 3 of 40
February 8, 2003

1.1.11 The majority of the definitions articulated in the codes relate corporate governance to “control”
– of the company, of corporate management, or of company conduct or managerial conduct. Perhaps
the simplest and most common definition of this sort is that provided by the Cadbury Report (U.K.),
which is frequently quoted or
paraphrased: “Corporate governance is the system by which businesses are directed
and controlled.”

1.1.12 The definition in the preamble of the OECD Principles is also all encompassing 
“[C]orporate governance . . . involves a set of relationships between a company’s
management, its board, its shareholders and other stakeholders. Corporate
governance also provides the structure through which the objectives of the company
are set, and the means of attaining those objectives and monitoring performance are
determined.”
1.1.13 The most common school of thought would have us believe that if management is about running
businesses, governance is about ensuring that it is run properly. All
companies need governing as well as managing. The aim of “Good Corporate
Governance” is to enhance the long-term value of the company for its shareholders
and all other partners. The enormous significance of corporate governance is clearly
evident in this definition, which encompasses all stakeholders. Corporate
governance integrates all the participants involved in a process, which is economic,
and at the same time social. This definition is deliberately broader than the
frequently heard narrower interpretation that only takes account of the corporate
governance postulates aimed at shareholder interests.

1.1.14 Studies of corporate governance practices across several countries conducted by the Asian
Development Bank (2000), International Monetary Fund (1999), Organization
for Economic Cooperation and Development (“OECD”) (1999) and the World Bank
(1999) reveal that there is no single model of good corporate governance. This is
recognized by the OECD Code. The OECD Code also recognizes that different legal
systems, institutional frameworks and traditions across countries have led to the
development of a range of different approaches to corporate governance. Common
to all good corporate governance regimes, however, is a high degree of priority
placed on the interests of shareholders, who place their trust in corporations to use
their investment funds wisely and effectively. In addition, best-managed
corporations also recognize that business ethics and corporate awareness of the
environmental and societal interest of the communities within which they operate,
can have an impact on the reputation and long-term performance of corporations.

1.2 The Kumarmangalam Birla Committee on Corporate Governance

1.2.1 SEBI had constituted a Committee on May 7, 1999 under the chairmanship of Shri
Kumarmangalam 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 (“Listing Agreements”).
1.2.2 The recommendations of the Kumarmangalam Birla Committee on Corporate
Governance (the “Recommendations”) are set out in Enclosure I to this report.

Report of the Committee on Corporate Governance

Page 4 of 40
February 8, 2003

1.3 Financial reporting and disclosures

1.3.1 Financial disclosure is a critical component of effective corporate governance. SEBI set up an
Accounting Standards Committee, as a Standing Committee, under the
chairmanship of Shri Y. H. Malegam with the following objectives:

To review the continuous disclosure requirements under the listing

agreement for listed companies;

To provide input to the Institute of Chartered Accountants of India (“ICAI”)

for introducing new accounting standards in India; and

To review existing Indian accounting standards, where required and to

harmonise these accounting standards and financial disclosures on par with
international practices.
1.3.2 SEBI has interacted with the ICAI on a continuous basis in the issuance of recent
Indian accounting standards on areas including segment reporting, related party
disclosures, consolidated financial statements, earnings per share, accounting for
taxes on income, accounting for investments in associates in consolidated financial
statements, discontinuing operations, interim financial reporting, intangible assets,
financial reporting of interests in joint ventures and impairment of assets.

1.3.3 With the introduction of these recent Indian accounting standards, financial
reporting practices in India are almost on par with International Accounting
Standards.

1.4 Implementation of corporate governance requirements

1.4.1 The Recommendations were implemented through Clause 49 of the Listing
Agreements, in a phased manner by SEBI.

1.4.2 They were made applicable to all companies in the BSE 200 and S&P C&X Nifty
indices, and all newly listed companies, as of March 31, 2001.

1.4.3 The applicability of the Recommendations was extended to companies with a paid
up capital of Rs. 100 million or with a net worth of Rs. 250 million at any time in the
past five years, as of March 31, 2002.

1.4.4 In respect of other listed companies with a paid up capital of over Rs. 30 million, the
requirements were made applicable as of March 31, 2003.
1.4.5 The accounting standards issued by the ICAI, which are applicable to all companies

under sub-section 3A of Section 211 of the Companies Act, 1956, were specifically
made applicable to all listed companies for the financial year ended March 31, 2002,
under the Listing Agreements.

The Cadbury Report, titled Financial Aspects of Corporate Governance, is a report of a committee
chaired by Adrian Cadbury that sets out recommendations on the arrangement of company boards and
accounting systems to mitigate corporate governance risks and failures. The report was published in
1992. The report's recommendations have been adopted in varying degree by the European Union, the
United States, the World Bank, and others.

Background

Sridhar Arcot and Valentina Bruno in their article called 'In Letter but not in Spirit: An Analysis of
Corporate Governance in the UK'[1] explain the background to the Cadbury Committee.

“ Robert Maxwell's death while cruising on the Canary Islands in 1990 shone a spotlight on his
company's affairs. A series of risky acquisitions in the mid-eighties had led Maxwell
Communications into high debts, which was being financed by diverting resources from the
pension funds of his companies. After his disappearance, it emerged that the Mirror Group's
 debts (one of Maxwell's companies) vastly outweighed its assets, while £440 millions (GBP )
were missing from the company's pension funds. Despite the suspicion of manipulation of the
pension schemes, there was a widespread feeling in the City of London that no action was taken
by UK or US regulators against the Maxwell Communications Corp. Eventually, in 1992 Maxwell's
companies filed for bankruptcy protection in the UK and US. At around the same time the Bank
of Credit and Commerce International (BCCI) went bust and lost billions of dollars for its
depositors, shareholders and employees. Another company, Polly Peck, reported healthy profits
one year while declaring bankruptcy the next.

Following the raft of governance failures, Sir Adrian Cadbury chaired a committee whose aims
were to investigate the British corporate governance system and to suggest improvements
restore investor confidence in the system. The Committee was set up in May 1991 by the
Financial Reporting Council, the London Stock Exchange, and the accountancy profession. The
report embodied recommendations based on practical experiences and with an eye on the US
experience, further elaborated after a process of consultation and widely accepted. The final
report was released in December 1992 and then applied to listed companies reporting their
accounts after 30th June 1993.

The Cadbury Committee, Corporate Performance and Top Management Turnover. The Cadbury
Committee was appointed by the Conservative Government of the United Kingdom (UK) in May 1991
with a broad mandate to “…address the financial aspects of corporate governance.”1 In December
1992, the Committee issued its report which recommended, among
other things, that boards of directors of publicly traded companies include at least three nonexecutive
(i.e., outside) directors as members and that the positions of Chairman of the Board (Chairman) and
Chief Executive Officer (CEO) of these companies be held by two different individuals. The apparent
reasoning underlying the Committee’s recommendations is that greater
independence of a corporate board will improve the quality of board oversight.

To appreciate the potential significance of the Cadbury Committee and its recommendations, it is
important to appreciate the environment surrounding the establishment of the Committee. First, the
Committee was appointed in the aftermath of the “scandalous” collapse of several prominent UK
companies during the later 1980s and early 1990s, including Ferranti International PLC, Colorol Group,
Pollypeck International PLC, Bank of Credit and Commerce International (BCCI) and Maxwell
Communication Corporation. The broadsheet press popularly attributed these failures and
others to weak governance systems, lax board oversight, and the vesting of control in the hands of a
single top executive.

The Cadbury Committee was set up in response to a number of corporate

scandals that cast doubt on the systems for controlling the ways companies are run. The downfall of
powerful figures such as Asil Nadir or the late Robert Maxwell, whose personal control over their
companies was complete, raised fears about the concentration of power. Self-regulation Seen as the
Way Forward, Financial Times, May 28, 1992.
Second, historically, executive (i.e., inside) directors have heavily dominated UK boards.
For example, during 1988, of the Financial Times 500, for only 21 companies did non-executive
directors comprise a majority of the board and, when boards are ranked according to the fraction of
non-executive board members, for the median board, non-executives comprised only 27 per cent of
their membership. In comparison, during 1988, for 387 of the Fortune 500 U. S. companies,
outsiders comprised a majority of the board. Furthermore, for the Fortune 500 companies, for the
median board, outsiders comprised 81 per cent of the membership. With respect to the joint
position of Chairman and CEO, the UK and US historically are not dissimilar. For example, during
1988, for 349 of the Fortune 500 companies and for 328 of the FTSE 500 companies, a single
individual jointly held the positions of Chairman and CEO.
At its issuance, the Cadbury Report was greeted with skepticism both by those who felt that
it went too far and by those who felt that it did not go far enough. The general unease of those who
felt it went too far can best be summarized as a concern that the delicate balance between
shareholders and managers is best left to the forces of competition. A less generous interpretation of
this perspective, which was most frequently espoused by corporate managers, was “leave us alone -
There is danger in an over emphasis on monitoring, on non-executive directors
independence from the business of the corporation; on controls over decision
making activities of companies. When coupled with the clearly reduced status
of executives on the governing boards, such requirements must blunt the
3
competitive edge and deflect the entrepreneurial drive which characterises
participants, let alone success in a free market.
Sir Owen Green, Pall Mall Lecture on UK Corporate Governance,
February 24, 1994
The general concern of those who thought that the report did not go far enough centered on the
“voluntary” nature of the Report’s recommendations.
The committees’ recommendations are steps in the right direction. But, if the
government is to address the problems which led to the Maxwell, Polly Peck,
BCCI and other recent scandals, then new rules in a legal framework are
required…Shareholders, investors and creditors will have been disappointed
that just when the corporate failures of recent years cried out for bold and
imaginative legal return, the body from which so much had been expected
came up with a little, tinkering and a voluntary code.
Cadbury Committee Draft Orders Mixed News for Shareholders,
Financial Times, June 2, 1992
The purpose of this study is to cast light on what heretofore has been largely a vitriolic
dispute by investigating empirically the impact of the key Cadbury Committee recommendations - -
that boards include at least three non-executive members and that the positions of Chairman and
CEO be held by two different individuals - - on the quality of board oversight in UK firms over the
period 1989 to 1995. We begin our investigation with the presumption that an important oversight
role of boards of directors is the hiring and firing of top corporate management. We further presume
that one indicator of effective board oversight is that the board will replace poorly performing top
management. With those presumptions in place, we empirically investigate the relationship between
top management turnover and corporate performance before and after the Cadbury Committee
issued its recommendations.
4
To conduct this investigation, we assemble a random sample of 460 UK companies from the
Official List of the London Stock Exchange (LSE) as of December 1988. For each company, we
collect information on top management turnover, board composition, and corporate performance for
up to seven years before and four years after the issuance of the Cadbury Report. With these data,
we determine that the relationship between top management turnover and corporate performance
was statistically significant both before and after adoption of the Cadbury Committee’s
recommendations - - poorer performance is associated with higher turnover. Importantly, for our
purposes, this relationship is significantly stronger following adoption of the Cadbury Committee’s
recommendations. Upon further exploration, the increased sensitivity of turnover to performance
appears to be attributable to the increase in outside board members following Cadbury.
We view this study as making contributions in both the small and the large of corporate
governance. From a narrow perspective, this study thoroughly examines the effect of the Cadbury
Committee’s recommendations on the relationship between top management turnover and corporate
performance in the UK. From a broader perspective, this study contains implications for corporate
governance and board composition generally, and augments studies by Agrawal and Knoeber
(1994), Bhagat and Black (1996; 1998), Byrd and Hickman (1992), Cotter, Shivdasani and Zenner
(1997), Denis and Sarin (1999), Hermalin and Weisbach (1998), Kaplan and Reishaus (1990),
Kini, Kracaw and Mian (1995), Klein (1997), Kole and Lehn (1996), Rosenstein and Wyatt
(1990), Shivdasani (1993), Weisbach (1988), Yermack (1996) and You, Caves, Smith and Henry
(1986) among others. Our investigation also complements prior investigations of the relationship
between top management turnover and corporate performance by Coughlan and Schmidt (1985),
Denis and Denis (1995), Franks and Mayer (1997), Huson Parrino and Starks (1998), Jensen and
5
Murphy (1990), Kang and Shivdasani (1995), Kaplan (1994a, b), Martin and McConnell (1991),
Mikkelson and Partch (1997), Warner, Watts and Wruck (1988) and Weisbach (1988) among
others.
The next section briefly describes the Cadbury Committee Report on the “Financial Aspects
of Corporate Governance”. Section II describes our sample selection procedure. Section III
presents descriptive statistics for the sample. We reserve our review of related studies until after we
present our empirical findings. In Section IV, we discuss our results in the context of prior empirical
investigations and present our conclusions.

I. Cadbury Committee Report

The Cadbury Committee was chaired by a leading industrialist, Sir Adrian Cadbury, CEO of
the Cadbury confectionery empire, and included other senior industry executives, finance specialists,
and academics. The Committee was charged with examining the “financial aspects of corporate
governance” in UK firms. The committee issued a draft report of its recommendations for public
comment on May 27, 1992. Between then and December 1, 1992, the committee accepted
comments and issued its final report on December 1, 1992.
The cornerstone of the Cadbury Report is “The Code of Best Practice” which presents the
committee’s recommendations on the structure and responsibilities of corporate boards of directors.
The two key recommendations affecting the board structure were that boards of directors of
publicly-traded companies include at least three outside directors as members and that the positions
of Chairman and CEO be held by two different individuals.2
As part of its report, the Committee “urged” that the boards of all companies registered on
the Official List of the London Stock Exchange (LSE) comply with the Code and further
“encouraged” that all other UK companies also aim to meet its guidelines.3 As such, compliance
with “The Code of Best Practice” is entirely voluntary. That is, the Code has not been enshrined in
UK corporate law. This does not imply, however, that the Code is “without teeth”. First, the
Cadbury Committee, as part of its report, explicitly recognized that legislation would very likely
follow if companies did not comply with the guidelines of the Code.4 Second, the report has been
given further bite by the LSE which, since June 1993, has required a statement from each listed
company which spells out whether the firm is in compliance with the Code and, if not, further
requires that an explanation be given as to why the company is not in compliance. As it turns out,
this informal arm-twisting appears to have been effective: by 1998 all companies in the Financial
Times 100 and over 90% of all firms on the Official List of the LSE were in compliance with the key
provisions of the Code. The question that we investigate herein is whether adoption of the key
provisions of the Cadbury Committee’s recommendations has had a significant impact on the
relationship between corporate performance and top management turnover.
2 The report also recommended: (i) full disclosure of the pay of the chairman and the highest paid
director; (ii)

FOREWORD
In 1996,CII took a special initiative on Corporate Governance – the first institutional initiative in Indian
industry. The 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.
This initiative by CII flowed from public concerns regarding the protection of investor interest,
especially
the small investor; the promotion of transparency within business and industry; the need to move
towards
international standards in terms of disclosure of information by the corporate sector and, through all of
this,
to develop a high level of public confidence in business and industry.
A National Task Force set up with Mr. Rahul Bajaj , Past President ,CII and Chairman & Managing
Director,
Bajaj Auto Limited, as the Chairman included membership from industry, the legal profession, media
and
academia.
This Task Force presented the draft guidelines and the code of Corporate Governance in April 1997 at
the
National Conference and Annual Session of CII. This draft was then publicly debated in workshops and
Seminars and a number of suggestions were received for the consideration of the Task Force.
Reviewing, these suggestions, and the development, which have taken, place in India and abroad over
the
past year, the Task Force has finalised the Desirable Corporate Governance Code. CII has the pleasure
in
presenting this Code in this document for information, for understanding and for implementation of
Indian
business and industry.
CII would like to acknowledge, with deep gratitude, the role and leadership provided by the Task Force
Chairman, Mr. Rahul Bajaj, and the economist in the group, Dr. Omkar Goswami, who undertook a
great
deal of research and too special responsibility for drafting the Code.
Since 1974, CII has tried to chart new path in terms of the role of an Industry Association such as
itself.
It has gone beyond dealing with the traditional work of interacting with Government of policies &
procedures,
which impact on industry. CII has taken initiatives in Quality, Environment, Energy, Trade Fairs, Social
Development, International Partnership Building, etc. as part of its process of development and
expanding
contribution to issues of relevance and concern to industry.
This Code of Corporate Governance 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. It reflects the comprehensiveness of the Task Force’s work and the thought, which has gone
into
preparing this Code. Its is pioneering work , it is path-breaking initiative and we are delighted to
release the
Code in the hope that the corporate sector will implement it seriously and sincerely.
N Kumar
April 1998 President, CII

Although “corporate governance” still remains

an ambiguous and misunderstood phrase, three
aspects are becoming evident.
• First, there is no unique structure of “corporate
governance” in the developed world; nor is one
particular type unambiguously better than others.
Thus, one cannot design a code of corporate
governance for Indian companies by mechanically
importing one form or another.
• Second, Indian companies, banks and financial
institutions (FIs) can no longer afford to ignore
better corporate practices. As India gets integrated
in the world market, Indian as well as international
investors will demand greater disclosure,
more transparent explanation for major decisions
and better shareholder value.
• Third, corporate governance goes far beyond
company law. The quantity, quality and frequency
of financial and managerial disclosure, the extent
to which the board of directors exercise their
fiduciary responsibilities towards shareholders, the
quality of information that management share
with their boards, and the commitment to run
transparent companies that maximise long term
shareholder value cannot be legislated at any level
of detail. Instead, these evolve due to the catalytic
role played by the more progressive elements
within the corporate sector and, thus, enhance
corporate transparency and responsibility.

A Minimal Definition
Corporate governance deals with laws, procedures,
practices and implicit rules that determine a
company’s ability to take managerial decisions vis-àvis
its claimants—in particular, its shareholders, creditors,
customers, the State and employees. There is a
global consensus about the objective of ‘good’ corporate
governance: maximising long term shareholder
value. Since shareholders are residual claimants,
this objective follows from a premise that, in
well performing capital and financial markets, whatever
maximises shareholder value must necessarily
maximise corporate prosperity, and best satisfy
the claims of creditors, employees, shareholders, and
the State.
For a corporate governance code to have real
meaning, it must first focus on listed companies.
These are financed largely by public money (be it
equity or debt) and, hence, need to follow codes and
policies that make them more accountable and valueoriented
to their investing public. There is a diversity
of opinion regarding beneficiaries of corporate
governance. The Anglo-American system tends to
focus on shareholders and various classes of creditors.
Continental Europe, Japan and South Korea
believe that companies should also discharge their
obligations towards employees, local communities,
suppliers, ancillary units, and so on. In the first instance,
it is useful to limit the claimants to shareholders
and various types of creditors. There are two
reasons for this preference.
1. The corpus of Indian labour laws are strong
enough to protect the interest of workers in the
organised sector, and employees as well as trade
unions are well aware of their legal rights. In
contrast, there is very little in terms of the implementation
of law and of corporate practices that
protects the rights of creditors and shareholders
2. There is much to recommend in law, procedures
and practices to make companies more attuned
to the needs of properly servicing debt and equity.
If most companies in India appreciate the
importance of creditors and shareholders, then
we will have come a long way.

Company’s Philosophy on Corporate Governance

The Company’s philosophy on Corporate Governance is to observe the highest level of ethics in all its
dealings, to ensure

the efficient conduct of the affairs of the Company to achieve its goal of maximising value for all its
stakeholders.

II. Board of Directors (Board)

l Composition

During the year under consideration, the Board comprises of 11 experts (excluding Alternate
Directors) drawn from

diverse fields / professions. The Board has an optimum combination of Executive and Non-executive
Directors,

which is in conformity with the requirement of Clause 49 of the Listing Agreement with the Stock
Exchanges

(Listing Agreement) in this regard. The Chairman of the Board is a Non-executive and Independent
Director. All

Directors, except the Managing Director and Special Director, are liable to retire by rotation.

Particulars Composition of the Board Minimum Requirement

No. of Directors % of Total Directors as per Clause 49

Non-executive Directors

(therein Independent Directors)

(6)

72.73

(54.55)

50%

(33.33%)
Whole-time Directors 3 27.27 -

Total 11 100.00

The necessary disclosures regarding Committee positions have been made by all the Directors. None
of the

Directors on the Board is a Member of more than 10 Committees and Chairman of more than 5
Committees across

During the Financial Year 2009-10, 6 Meetings were held on 20th November, 2009, 26

th November, 2009, 30th November, 2009, 29th January, 2010, 29th April, 2010 and 29th July, 2010.

The gap between any two Meetings did not exceed four months.