Naresh Chandra Committee (2002)-
Consequent to the several corporate debacles in the USA in 2001, followed by the stringent enactments of the Sarbanes Oxley Act, the Government of India appointed Naresh Chandra Committee in 2002 to examine and recommended drastic amendments to the law pertaining to auditor-client relationships and the role of independent directors.
The main recommendations of the Committee are given below:
(a) The minimum board size of all listed companies as well as unlisted public limited companies with paid-up share capital and free reserves of Rs. 100 million and above, or turnover of Rs. 500 million and above, should be seven, of which at least four should be independent directors.
(b) No less than 50% of the board of directors of any listed company as well as unlisted public limited companies with a paid-up share capital and free reserves of Rs. 100 million and above or turnover of Rs. 500 million and above, should consist of independent directors.
(c) In line with the international best practices, the committee recommended a list of disqualification for audit assignment which included the prohibition of:
(i) Any direct financial interest in the audit client,
(ii) Receiving any loans and/or guarantees,
(iii) Any business relationship,
(iv) Personal relationship by the audit firm, its partners, as well as their direct relatives, the prohibition of
(v) Service or cooling off period for a period of at least two years, and
(vi) Undue dependence on an audit client.
(d) Certain services should not be provided by an audit firm to any audit client, viz.:
(i) Accounting and bookkeeping,
(ii) Internal audit,
(iii) Financial information design,
(iv) Actuarial,
(v) Broker, dealer, investment advisor, investment banking,
(vi) Outsourcing,
(vii) Valuation,
(viii) Staff recruitment for the client etc.
(e) The audit partners and at least 50% of the engagement team responsible for the audit of either a listed company or companies whose paid-up capital and free reserves exceed Rs. 100 million or companies whose turnover exceeds Rs. 500 million, should be rotated every 5 years.
(f) Before agreeing to be appointed (Section 224 (i)(b)), the audit firm must submit a certificate of independence to the audit committee or to the board of directors of the client company.
(g) There should be a certification on compliance of various aspects regarding corporate governance by the CEO and CFO of a listed company.
It is interesting to note that majority of the recommendations of this committee are the culmination of the provisions of the Sarbanes Oxley Act of the USA.
CII Code of Desirable Corporate Governance (1998):
For the first time in the history of corporate governance in India, the Confederation of Indian Industry (CII) framed a voluntary code of corporate governance for the listed companies, which is known as CII Code of desirable corporate governance.
The main recommendations of the Code are summarised below:
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(a) Any listed company with a turnover of Rs. 1000 million and above should have professionally competent and acclaimed non-executive directors,
who should constitute:
(i) at least 30% of the board, if the chairman of the company is a non-executive director, or
(ii) at least 50% of the board if the chairman and managing director is the same person.
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(b) For the non-executive directors to play an important role in corporate decision-making and maximizing long-term shareholder value,
They need to:
(i) become active participants in boards, not passive advisors,
(ii) have clearly defined responsibilities within the board, and
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(iii) know how to read a balance sheet, profit and loss account, cash flow statements, and financial ratios, and have some knowledge of various company laws.
(c) No single person should hold directorships in more than 10 listed companies. This ceiling excludes directorship in subsidiaries (where the group has over 50% equity stake) or associate companies (where the group has over 25% but no more than 50% equity stake).
(d) The full board should meet a minimum of six times a year, preferably at an interval of two months, and each meeting should have agenda items that require at least half-a-days discussion.
(e) As a general rule, one should not re-appoint any non-executive director who has not had the time to attend even one-half of the meetings.
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(f) Various key information must be reported to and placed before the board, viz., annual budgets, quarterly results, internal audit reports, show cause, demand, and prosecution notices received, fatal accidents and pollution problem, a default in payment of principal and interest to the creditors, inter-corporate deposits, joint venture foreign exchange exposures.
(g) Listed companies with either a turnover of over Rs. 1000 million or a paid-up capital of Rs. 200 million, whichever is less, should set up audit committees within 2 years. The committee should consist of a least three members, who should have adequate knowledge of finance, accounts, and basic elements of company law. The committees should provide effective supervision of the financial reporting process. The audit committees should periodically interact with statutory auditors and internal auditors to ascertain the quality and veracity of the company’s accounts as well as the capability of the auditors themselves.
(h) The consolidation of group accounts should be optional.
(i) Major Indian stock exchanges should generally insist on a compliance certificate, signed by the CEO and the CFO.
