VI SEM CORPORATE GOVERNANCE

Module 2

Corporate Governance Framework in India: Corporate Boards and Powers,

Responsibilities Disqualifications; Regulatory Framework of Corporate governance
in India; Compensation Governance; Corporate governance in PSUs and Banks.

Whistle –Blowing and Corporate Governance: The concept of Whistle-Blowing;

Types of Whistle-Blowers; Whistle –Blower Policy; Developments in India.

Course Objectives for the Module

● Outline the business strategies of a company and ways of protecting the interests
of the stakeholders.
● Discuss the legal and regulatory requirements for a business organization
through good governance.

Course Outcomes for the Module

 Demonstrate the capacity to exercise judgement under minimal supervision to
solve emerging corporate governance problems in complex contexts using social,
ethical, economic, regulatory and global perspectives
 Inference the theory of corporate governance and apply this theory in analysing
corporate structures, board composition and how boards of directors conduct
their affairs.
 Appraise ethical aspects in corporate governance
 Interpret the knowledge of corporate governance theories, regulation and the
policy imperatives that underlie corporate governance regulation to assess and
propose solutions for corporate governance problems

CORPORATE GOVERNANCE IN INDIA: HISTORY AND EVOLUTION

There have been several major corporate governance initiatives launched in India since
the mid-1990s. The first was by the Confederation of Indian Industry (CII), India’s
largest industry and business association, which came up with the first voluntary code
of corporate governance in 1998. The second was by the SEBI, now enshrined as Clause
49 of the listing agreement. The third was the Naresh Chandra Committee, which
submitted its report in 2002. The fourth was again by SEBI — the Narayana Murthy
Committee, which also submitted its report in 2002. Based on some of the
recommendation of this committee, SEBI revised Clause 49 of the listing agreement in

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 VI SEM CORPORATE GOVERNANCE

August 2003. Subsequently, SEBI withdrew the revised Clause 49 in December 2003,
and currently, the original Clause 49 is in force.
The CII Code
More than a year before the onset of the Asian crisis, CII set up a committee to examine
corporate governance issues, and recommend a voluntary code of best practices. The
committee was driven by the conviction that good corporate governance was essential
for Indian companies to access domestic as well as global capital at competitive rates.
The first draft of the code was prepared by April 1997, and the final document, was
publicly released in April 1998. The code was voluntary, contained detailed provisions,
and focused on listed companies.
Kumar Mangalam Birla Committee Report and Clause 49

The second major corporate governance initiative in the country was undertaken by
SEBI. In early 1999, it set up a committee under Kumar Mangalam Birla to promote and
raise the standards of good corporate governance. In early 2000, the SEBI board had
accepted and ratified key recommendations of this committee, and these were
incorporated into Clause 49 of the Listing Agreement of the Stock Exchanges. This
report pointed out that the issue of corporate governance involves besides shareholders,
all other stakeholders. The committee recognized that India had in place a basic system
of corporate governance and that SEBI has already taken a number of initiatives
towards raising the existing standards.

Naresh Chandra Committee Report

The Naresh Chandra committee was appointed in August 2002 by the Department of
Company Affairs (DCA) under the Ministry of Finance and Company Affairs to
examine various corporate governance issues. The Committee submitted its report in
December 2002. It made recommendations in two key aspects of corporate governance:
financial and non-financial disclosures: and independent auditing and board oversight
of management. The committee submitted its report on various aspects concerning
corporate governance such as role, remuneration, and training etc. of independent
directors, audit committee, the auditors and then relationship with the company and
how their roles can be regulated as improved.

Narayana Murthy Committee Report On Corporate Governance

The fourth initiative on corporate governance in India is in the form of the

recommendations of the Narayana Murthy committee. The committee was set up by
SEBI, under the chairmanship of Mr. N. R. Narayana Murthy, to review Clause 49, and
suggest measures to improve corporate governance standards. Some of the major
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recommendations of the committee primarily related to audit committees, audit reports,

independent directors, related party transactions, risk management, directorships and
director compensation, codes of conduct and financial disclosures.

Corporate Governance voluntary guidelines 2009(MCA)

In December 2009, the Ministry of Corporate Affairs (MCA) published a new set of
Corporate Governance Voluntary Guidelines 2009, designed to encourage companies to
adopt better practices in the running of boards and board committees, the appointment
and rotation of external auditors, and creating a whistle blowing mechanism.

The guidelines are divided into the following six parts: i) Board of Directors, ii)
Responsibility of Board, iii) Audit Committee, iv) Auditors, v) Secretarial Audit vi)
Whistle Blowing mechanism

Uday Kotak Committee on Corporate Governance

21-member Committee on corporate governance headed by banker Uday Kotak has
submitted its report to the Securities and Exchange Board of India (SEBI).

Point-by-point analysis of SEBI's new corporate governance framework

Out of the 81 recommendations by Kotak panel, market regulator has accepted 40

proposals without any modifications; 15 with modifications; 18 were rejected and 8
have been referred to other agencies
Capital market regulator Securities and Exchange Board of India (SEBI) has approved
sweeping changes to the corporate governance framework for listed companies. The
new measures are based on recommendations made by a 25-member committee headed
by Uday Kotak, executive vice chairman and managing director of Kotak Mahindra
Bank. The panel had suggested 81 key changes and new measures to improve the
governance standards at India Inc.

Some of the proposals faced oppositions from industry and other regulators after the
committee made its report public in October 2017. SEBI had to take all stakeholders on
board to ensure implementation of the measures suggested the Kotak panel. As a result,
the market regulator couldn't implement all the 80 recommendations in toto.

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Out of the 80 odd recommendations, the market regulator has accepted 40 proposals
without any modifications; 15 with modifications; 18 were rejected and eight have been
referred to other agencies.

Following is a point-by-point analysis:

A. Proposals accepted without modifications

So far, SEBI has made public only 10 out of 40 proposals accepted without
modifications. The 10 proposals are as follows:

Reduction in the maximum number of listed entity directorships from 10 to 7 from

April 1, 2020

Impact: Previously, only one individual holds 10 director positions; one holds nine and
one holds eight. These three individuals will have to give up their directorships in some
companies.

Expanding the eligibility criteria for independent directors

Impact: Companies will not be able to appoint individuals related to the promoter
group as independent directors. Also, such individuals who would not be able to
discharge their duties independently due to certain prevailing circumstances or
situations.

Enhanced role of the audit committee, nomination and remuneration committee and
risk management committee

Impact: The requirement of a risk management committee to be extended to the top 500
listed entities by market capitalization as against current applicability to top 100 listed
entities. Also, nomination and remuneration committee will need to have at least two-
thirds of its members' independent directors.

Disclosure of utilization of funds from QIP/preferential issue

Impact: Companies will have to ensure better transparency, appropriate disclosures

pertaining to utilisation of proceeds of preferential issues and QIPs till the time such
proceeds are utilised.

Disclosures of auditor credentials, audit fee, reasons for the resignation of auditors

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Impact: Going ahead, companies will have to give disclosures in relation to the
credentials and terms of appointment of the auditors. Disclosures on fees paid will
prevent companies from paying disproportionately high audit fees in relation to their
assets. The move will ensure more transparency and help investors make informed
decisions.

Disclosure of expertise/skills of directors

Impact: The board of directors of every listed entity should be required to list the
competencies and expertise that it believes its directors should possess. Companies will
have to name the directors who have such skills, expertise, and competence from
financial year ended March 31, 2020.

Enhanced disclosure of related party transactions (RPTs)

Impact: Companies will have to make half-yearly disclosure of RPTs on a consolidated

basis. Strict penalties on those failing to do so. Any entity belonging to the promoter
group of the listed entity and holding 20 per cent or more of shareholding in the listed
entity shall also be a related party.

Mandatory disclosure of consolidated quarterly results with effect from FY20

Impact: Currently, the Companies Act and SEBI Regulations mandate the submission of
consolidated financial statements by a listed entity every financial year. Soon companies
will require to state the same on a quarterly basis.

Enhanced obligations on the listed entities with respect to subsidiaries

Impact: More oversight over unlisted ‘material’ subsidiaries both in India and overseas.
The definition of the term ‚material subsidiary‛ could be tightened to include those
subsidiaries whose income or net worth exceeds 10 per cent (from the current 20%) of
consolidated income or net worth.

Secretarial Audit to be mandatory for listed entities and their material unlisted
subsidiaries

Impact: Secretarial audit checks for compliance with all the regulations under various
acts including Companies Act, Foreign Exchange Management Act (Fema) and SEBI
Act.

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B. Proposals accepted with modifications

SEBI has made public seven out of 15 proposals it has accepted with modifications.
These include:

Minimum six directors in the top 1,000 listed entities by market capitalization
by April1, 2019 and in the top 2000 listed entities, by April 1, 2020

Impact: Currently, there are 65 companies among the top 1,000 NSE listed-companies
that have less than six board members. These companies will have to appoint more
board members.

At least one woman independent director in the top 500 listed entities by market
capitalization by April 1, 2019 and in the top 1000 listed entities, by April 1, 2020

Impact: 155 out of top 500 and 336 out of 1,000 companies don’t have any women
independent director
Separation of CEO/MD and Chairperson (to be initially made applicable to the top
500 listed entities by market capitalization w.e.f. April 1, 2020)

Impact: Companies have same individual as CEO and chairperson have reduced
Drastically

The quorum for Board meetings (1/3rdof the size of the Board or 3 members,
whichever is higher) in the top 1,000 listed entities by market capitalization by April
1, 2019 and in the top 2000 listed entities, by April 1, 2020

Impact: companies will need at least 1/3rd of its board or minimum three members
(whichever is higher) to be present for board meetings.

Top 100 entities to hold AGMs within 5 months after the end of FY 2018-19 i.e. by
August 31, 2019

Impact: Previously , listed companies are given six months from the end of a financial
year to hold their AGMs. Top 100 companies will have to conclude their AGMs within
five months.

Webcast of AGMs will be compulsory for top 100 entities by market capitalization a
w.e.f. FY19

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Impact: Previously , webcast of AGMs is not mandatory. Starting this fiscal, top 100
companies will have to provide this facility.

Shareholder approval for Royalty/brand payments to related party exceeding 2% of

consolidated turnover (instead of the proposed 5%)

Impact: While the Kotak panel had proposed a five per cent threshold, the SEBI board
has decided to take more stringent action. For the financial year 2016-17, there were
about 32 companies where royalty and brand payments exceeded two per cent of their
consolidated turnover. Interestingly, there were only 10 companies where royalty
payments were in excess of five per cent. Typically, MNCs are known to pay high
royalties to their overseas parents. Such payments will now require the blessings of at
least half (50% plus one vote) of the minority shareholders. Some of the companies that
will be impacted include Maruti Suzuki, Page Industries and Colgate-Palmolive.

C. Proposals rejected to referred to other agencies

The proposals that were rejected or referred to other agencies were mostly those which
infringed on other regulatory territories. For instance, the proposal strengthening the
role of Institute of Chartered Accountants of India (ICAI), a body that regulators
auditors, was referred to the government. The Kotak panel had suggested greater
powers be given to ICAI to enhance the governance of listed entities. Power to penalize
members by up to Rs 10 million and audit firms by up to Rs 50 million were among the
measures suggested. Also, setting up of a separate team for enforcement action was
recommended by the panel.

SEBI also rejected the proposal of removing voting rights on treasury stock. The market
regulator also refrained from taking any decision on the various proposals pertaining to
governance aspects of public sector undertaking (PSUs). Among the key proposals in
this regard were ensuring the independence of PSUs from administrative ministries,
consolidation of government stake in all listed PSUs under a separate holding structure.
Experts said SEBI couldn't implement some of these proposals as it was beyond its
regulatory ambit.

Regulatory Framework on Corporate Governance

The Indian statutory framework has, by and large, been in consonance with the
international best practices of corporate governance. Broadly speaking, the corporate

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governance mechanism for companies in India is enumerated in the following

enactments/ regulations/ guidelines/ listing agreement:

1. The Companies Act, 2013 inter alia contains provisions relating to board constitution,
board meetings, board processes, independent directors, general meetings, audit
committees, related party transactions, disclosure requirements in financial statements,
etc.

2. Securities and Exchange Board of India (SEBI) Guidelines: SEBI is a regulatory

authority having jurisdiction over listed companies and which issues regulations, rules
and guidelines to companies to ensure protection of investors.

3. Standard Listing Agreement of Stock Exchanges: For companies whose shares are
listed on the stock exchanges.

4. Accounting Standards issued by the Institute of Chartered Accountants of India

(ICAI): ICAI is an autonomous body, which issues accounting standards providing
guidelines for disclosures of financial information. Section 129 of the New Companies
Act inter alia provides that the financial statements shall give a true and fair view of the
state of affairs of the company or companies, comply with the accounting standards
notified under s 133 of the New Companies Act. It is further provided that items
contained in such financial statements shall be in accordance with the accounting
standards.

5. Secretarial Standards issued by the Institute of Company Secretaries of India

(ICSI): ICSI is an autonomous body, which issues secretarial standards in terms of the
provisions of the New Companies Act. So far, the ICSI has issued Secretarial Standard
on "Meetings of the Board of Directors" (SS-1) and Secretarial Standards on "General
Meetings" (SS-2). These Secretarial Standards have come into force w.e.f. July 1, 2015.
Section 118(10) of the New Companies Act provide that every company (other than one
person company) shall observe Secretarial Standards specified as such by the ICSI with
respect to general and board meetings.

Key Legal Framework for Corporate Governance in India

The Companies Act, 2013

The Companies Act, 2013 ("New Companies Act"), which replaced the erstwhile
Companies Act, 1956. The New Act has greater emphasis on corporate governance

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through the board and board processes. The New Act covers corporate governance
through its following provisions:

 New Companies Act introduces significant changes to the composition of the

boards of directors.
 Every company is required to appoint 1 (one) resident director on its board.
 Nominee directors shall no longer be treated as independent directors.
 Listed companies and specified classes of public companies are required to
appoint independent directors and women directors on their boards.
 New Companies Act for the first time codifies the duties of directors.
 Listed companies and certain other public companies shall be required to
appoint at least 1 (one) woman director on its board.
 New Companies Act mandates following committees to be constituted by the
board for prescribed class of companies:

o Audit committee
o Nomination and remuneration committee
o Stakeholders relationship committee
o Corporate social responsibility committee

Listing agreement – Applicable to the listed companies

SEBI has amended the Listing Agreement with effect from October 1, 2014 to align it
with New Companies Act.

Clause 49 of the Listing Agreement can be said to be a bold initiative towards

strengthening corporate governance amongst the listed companies. This Clause intends
to put a check over the activities of companies in order to save the interest of the
shareholders. Broadly, cl 49 provides for the following:

1. Board of Directors
The Board of Directors shall comprise of such number of minimum independent
directors, as prescribed. In case where the Chairman of the Board is a non-executive
director, at least one-third of the Board shall comprise of independent directors and
where the Chairman of the Board is an executive director, at least half of the Board shall
comprise of independent directors. A relative of a promoter or an executive director
shall not be regarded as an independent director.
2. Audit Committee
The Audit Committee to be set up shall comprise of minimum three directors as
members, two-thirds of which shall be independent.

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3. Disclosure Requirements
Periodical disclosures relating to the financial and commercial transactions,
remuneration of directors, etc, to ensure transparency.
4. CEO/ CFO Certification
To certify to the Board that they have reviewed the financial statements and the same
are fair and in compliance with the laws/ regulations and accept responsibility for
internal control systems.
5. Report and Compliance
A separate section in the annual report on compliance with Corporate Governance,
quarterly compliance report to stock exchange signed by the compliance officer or CEO,
company to disclose compliance with non-mandatory requirements in annual reports.

ROLES AND RESPONSIBILITIES OF DIRECTORS UNDER COMPANIES ACT,

2013
WHO IS A DIRECTOR?
 An appointed or elected member of the board of directors of a company.
 He has the responsibility for determining and implementing the company’s policy.
 A company director need not
-to be a shareholder or
-an employee, and
-may hold only the office of director under the provisions of the Act.

TYPES OF DIRECTORS UNDER COMPANIES ACT 2013

 Executive Director
 Non Executive Director
 Shadow Director
 Woman Director
 Independent Director
 Resident Director
 Nominee Director
 Shareholder Director
Executive Director
The term executive director is usually used to describe a person who is both a member
of the board and who also has day to day responsibilities in respect of the affairs of the
company. Executive directors perform operational and strategic business functions such
as
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 Managing people
 Looking after assets
 Hiring and firing
 Entering into contracts
Executive directors are employed by the company and paid a salary, so are protected by
employment law.

Non Executive Director

Non executive directors are not in the employment of the company. They are the
members of the Board, who normally do not take part in the day-to-day
implementation of the company policy. They are generally appointed to provide the
company with the benefits of professional expertise and outside perspective to the
board. They play an effective role in governance of listed companies, but they may or
may not be independent directors.
Shadow Director
Shadow Director is a person who is not formally appointed as a director, but in
accordance with whose directions or instructions the directors of a company are
accustomed to act.
The Companies Act, 2013 has taken care of such individuals, who are not a member of
Board of Directors, yet maintain complete control over the affairs of the company. Such
directors are circumstantially categorized under the Companies Act, 2013, as ‚Person in
accordance with whose instructions the board is accustomed to act‛ and can also be
deemed to be Director of a Company. However, in commercial phraseology, such
persons are defined as a ‚Shadow Director‛.

A Shadow Director is an ‚officer‛ within the definition of the terms in Section 2 (59) of
the Companies Act, 2013, as it includes, ‚any person in accordance with whose
directions or instructions the Board of Directors or any one or more of the Directors is or
are accustomed to act‛.

Woman Director
The Companies Act, 2013 in India recognized the importance of gender diversity and
provides for mandatory appointment of atleast one women director in the listed and
other specified class of companies. Rule 3 of Companies (Appointment and
Qualification of Directors) Rules, 2014, prescribes the following class of companies shall
appoint at least one woman director-

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 Every listed company;

 Every other public company having :-
 Paid-up share capital of one hundred crore rupees or more; or
 Turnover of three hundred crore rupees or more.
Resident Director
Section 149 (3) of the Act has provided for residence of a director in India as a
compulsory i.e. every company shall have at least one director who has stayed in India
for a total period of not less than 182 days in the previous calendar year.
Independent Director
Independent Directors play a pivotal role in maintaining a transparent working
environment in the corporate regime. Independent Directors constitute such category of
Directors who are expected to have impartial and objective judgment for the proper
functioning of the company.
Section 2(47) of the Companies Act 2013 provides that ‚independent director‛ means an
independent director referred to in sub-section (6) of section 149.
Nominee Director
A nominee director belongs to the category of non-executive director and is appointed
on behalf of an interested party. Naresh Chandra Committee in its report stated that
‘nominee director’ will be excluded from the pool of directors in the determination of
the number of independent directors. Both SEBI (LODR) Regulations, 2015 and section
149(6) of the Companies Act, 2013 specifically exclude nominee director from being
considered as Independent.
Small Shareholders Director
According to Section 151 of the Companies Act, 2013 every listed company may have
one director elected by ‚small shareholders‛. For the purpose of this section, ‚small
shareholder‛ means a shareholder holding shares of nominal value of not more than
twenty thousand rupees or such other sum as may be prescribed.
Rule 7 of companies act 2013 laid down the terms and conditions for appointment of
Small Shareholder’s Director. A listed company, may upon notice of not less than 1000
or one-tenth of the total number of small shareholders, whichever is lower, have a Small
Shareholders’ Director elected by the small shareholders. A listed company may suo
moto (on its own accord) opt to have a director representing small shareholders. Thus
the Small Shareholder’s Director’s appointment is optional and made available to listed
companies only
ROLE OF DIRECTORS IN A COMPANY
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A Director is part of a collective body of Directors called the Board, responsible for the
superintendence, control and direction of the affairs of the Company.

LEGAL POSITION OF DIRECTOR

a) Directors as b) Directors as c) Directors as d) Director as

Agents :A company employees When officers trustees:
as an artificial the director is  Director treated as Director is treated as
person, acts appointed as whole officers of an trustees of the
through directors time employee of company. company, money
who are elected the company then  They are liable to and property: and of
representatives of that particular certain penalties if the the powers
the shareholders directors shall be provisions of the entrusted to and
and who execute considered as companies act are not vested in them only
decision making for employee director strictly complied as trustee.
the benefit of or whole time with.
shareholders director 

DUTIES OF DIRECTORS
 Director to act in accordance with AOA.
 A director of a company shall act in good faith in order to promote the objects of the
company for the benefit of its members as a whole, and in the best interests of the
company, its employees, the shareholders, the community and for the protection of
environment.
 A director of a company shall exercise his duties with due and reasonable care, skill and
diligence and shall exercise independent judgment.
 A director of a company shall not involve in a situation in which he may have a direct
or indirect interest that conflicts, or possibly may conflict, with the interest of the
company.
 A director of a company shall not achieve or attempt to achieve any undue gain or
advantage either to himself or to his relatives, partners, or associates
 A director of a company shall not assign his office and any assignment so made shall be
void.

LIABILITIES OF DIRECTORS
The Liability of the Directors can be both joint and collective for any and every act
prejudicial to the interests of the company. Though the Director and the Company are

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separate entities, under the following cases the Director may be held liable on behalf of
the Company

 Tax Liability: Unless a Director or any Past Director can prove that the non-
recovery or non-payment of Taxes are attributable as gross neglect or breach of
duty, then any present or past Director (pertaining to the time period of
defaulter) will be liable to pay the shortfall in tax amount and any penalty
associated.
 Refunding of share application or excess in share application money
 To pay for qualification shares
 Civil Liability in case of misstatement in Prospectus
 Fraudulent Business Conduct and all associated debts and contracts executed
 Failure in making disclosures as stipulated SEBI (Acquisition of Shares &
Takeovers) Regulations, 1997 and SEBI (Prohibition of Insider Trading)
Regulations, 1992 by the directors may attract legal proceedings by SEBI

SOME CRIMINAL LIABILITIES ASSOCIATED WITH A DIRECTORS CONDUCT

ARE AS FOLLOWS:

 Cheques Bounced or dishonored: Under Negotiable Instruments Act 1881,

signing of dishonored by a Director may lead to prosecution along with the
company
 Offences under Income Tax Act, 1961
 Offences under Labour Laws, specifically in case of Employees Provident Funds
and Miscellaneous Provisions Act, 1952 and Factories Act, 1948

DISQUALIFICATION OF DIRECTOR – COMPANIES ACT 2013

The Ministry of Corporate Affairs has started to strike-off companies that are dormant
and disqualify Directors of Companies that have not filed their MCA annual return
continuously for over three years. In this article, we look at the provisions under
Companies Act 2013 relating to disqualification of Director and its consequences.

 The Director is of unsound mind and stands so declared by a competent court.

 The Director is an undischarged insolvent.
 The Director has applied to be adjudicated as an insolvent and his application is
pending.
 The Director has been convicted by a court of any offence, whether involving
moral turpitude or otherwise and sentenced in respect thereof to imprisonment
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for not less than six months and a period of five years has not elapsed from the
date of expiry of the sentence. Also any person, who has been convicted of any
offence and sentenced to imprisonment for a period of seven years or more, will
not be eligible to be appointed as a director in any company.
 An order disqualifying the Director for appointment as a director has been
passed by a court or Tribunal and the order is in force.
 The Director has not paid any calls in respect of any shares of the company held
by him, whether alone or jointly with others, and six months have elapsed from
the last day fixed for the payment of the call.
 The Director has been convicted of the offence dealing with related party
transactions under section 188 at any time during the last preceding five years.
 A company in which the Director is a part of the Board has not filed financial
statements or annual returns for any continuous period of three financial
years.
 The company has failed to repay the deposits accepted by it or pay interest
thereon or to redeem any debentures on the due date or pay interest due thereon
or pay any dividend declared and such failure to pay or redeem continues for
one year or more

Canvass of Corporate Governance Guidelines for Banks

Effective corporate governance practices are essential to achieving and maintaining

public trust and confidence in the banking system, which are critical to the proper
functioning of the banking sector and economy as a whole. Poor corporate governance
may contribute to bank failures, which can pose significant public costs and
consequences due to their potential impact on any applicable deposit insurance systems
and the possibility of broader macroeconomic implications, such as contagion risk and
impact on payment systems. In addition, poor corporate governance can lead markets
to lose confidence in the ability of a bank to properly manage its assets and liabilities,
including deposits, which could in turn trigger a bank run or liquidity crisis. Indeed, in
addition to their responsibilities to shareholders, banks also have a responsibility to
their depositors.

From a banking industry perspective, corporate governance involves the manner in

which the business and affairs of banks are governed by their boards of directors and
senior management, which affects how they function:

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The following are the essential elements of good corporate governance in Banks
1. Transparency in Board’s processes and independence in the functioning of Boards.
The Board should provide effective leadership to the company and management for
achieving sustained prosperity for all stakeholders. It should provide independent
judgment for achieving company's objectives.
2. Accountability to stakeholders with a view to serve the stakeholders and account to
them at regular intervals for actions taken, through strong and sustained
communication processes.
3. Fairness to all stakeholders.
4. Social, Regulatory and Environmental concerns.
5. Clear and unambiguous legislation and regulations are fundamentals to effective
corporate governance.
6. A healthy management environment that includes setting up of clear objectives and
appropriate ethical framework, establishing due processes, clear enunciation of
responsibility and accountability, sound business planning, establishing clear
boundaries for acceptable behavior, establishing performance evaluation measures.
7. Explicitly prescribed norms of ethical practices and code of conduct are
communicated to all the stakeholders, which should be clearly understood and
followed by each member of the organization.
8. The objectives of the company must be clearly documented in a long-term corporate
strategy including an annual business plan together with achievable and measurable
performance targets and milestones.
9. A well composed Audit Committee to work as liaison with the management,
internal and statutory auditors, reviewing the adequacy of internal control and
compliance with significant policies and procedures, reporting to the Board on the key
issues.
10. Risk is an important element of corporate functioning and governance, which
should be clearly identified, analyzed for taking appropriate remedial measures. For
this purpose the Board should formulate a mechanism for periodic reviews of internal
and external risks.
11. A clear Whistle Blower Policy whereby the employees may without fear report to
the management about unethical behaviour, actual or suspected frauds or violation of
company’s code of conduct. There should be some mechanism for adequate safeguard
to employees against victimization that serves as whistleblowers.

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Debut of Corporate Governance in Indian banks

As a prelude to institutionalize Corporate Governance in banks, an Advisory Group on
Corporate Governance was formed under the chairmanship of Dr. R.H. Patil. Following
its recommendations in March 2001 another Consultative Group was constituted in
November 2001 under the Chairmanship of Dr. A.S. Ganguly: basically, with a view to
strengthen the internal supervisory role of the Boards in banks in India. This move was
further reinforced by certain observations of the Advisory Group on Banking
Supervision under the chairmanship, Shri M.S. Verma which submitted its report in
January 2003. Keeping all these recommendations in view and the cross-country
experience, the Reserve Bank initiated several measures to strengthen the corporate
governance in the Indian banking sector.

Indian banking system consists of Public/Private sector banks having a basic difference
between them as far as the Reserve Bank’s role in governance matters relevant to
banking is concerned. The current regulatory framework ensures, by and large, uniform
treatment of private and PSBs in so far as prudential aspects are concerned. However,
some of the governance aspects of PSBs, though they have a bearing on prudential
aspects, are exempt from applicability of the relevant provisions of the Banking
Regulation Act, as they are governed by the respective legislations under which various
PSBs were set up. In brief, therefore, the approach of RBI has been to ensure, to the
extent possible, uniform treatment of the PSBs and the private sector banks in regard to
prudential regulations.

Disclosures of the Bank for Good Corporate Governance

Corporate Governance disclosures are
1. Board Structure Strength & Size
The board of the company has an optimum combination of executive and non executive
directors with not less than fifty percent of the board comprising the non executive
directors. The number of independent directors would depend on the nature of the
chairman of the board. In case a company has a non executive chairman at least one
third of board should comprise of independent directors and in case a company has an
executive chairman of least half of board should be independent
2. Director’s Attendance in Board Meetings

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Board meeting should be held at least four times in a year with a maximum time gap of
four months between any two meetings maximum attendance at board meetings
ensures good accountability and commitment of the board members
3. Audit Committee
It is required as per clause 49(II) of the listing agreement that a qualified and
independent audit committee should be set up by the board of a company which, will
enhance transparent practices.
4. Shareholder’s/Investor’s Grievances
Board committee under the chairmanship of a non-executive director should be formed
to specifically look into the redressing of shareholder complaints of this committee is
that such a committee will help focus the attention of the company on shareholder’s
grievances and sensitize the management to redressal of their grievances.
5. Remuneration Committee
A company must have a credible and transparent policy in determining and accounting
for the remuneration of the directors. The policy should avoid potential conflicts of
interest between the shareholders, the directors the management. The over-riding
principle in respect of director’s remuneration is that of openness and shareholders are
entitled to a full and clear statement of benefits available to the directors.

6. Mandatory Statutory Disclosures

S Items of Statutory Public Sector Banks Private Sector Banks
N Disclosures
1 Significant related No Bank has entered into any No Bank has entered into
party transactions materially significant related party
any materially significant
having potential transactions with its Promoters, related party transactions
conflict with the Directors or Management, their with its Promoters,
interest of the subsidiaries or relatives, etc., that
Directors or Management,
company may have potential conflict with the
their subsidiaries or
interest of the Bank at large. relatives, etc., that may
have potential conflict with
the interest of the Bank at
large.
2 Board Disclosure Risk Laid down procedure to inform Laid down procedure to
Management board member about risk inform board member
assessment and minimization for about risk assessment and
boards review reports minimization for boards
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 VI SEM CORPORATE GOVERNANCE

review reports.
3 Shareholder Disclosed Compliance Disclosed Compliance
information on
 Appointment
of new
directors/Reap
pointment of
retiring
directors
 Quarterly
result &
presentation
 Share-transfers
 Director’s
responsibility
Statement

7. Non-Mandatory Statutory Disclosures.

S Items of Statutory Public Sector Banks Private Sector Banks
N Disclosures
1 Shareholder right The quarterly / Annual Financial The quarterly / Annual
(e.g. information & half Results of all Banks are sent to Financial Results of all Banks
yearly declaration of NSE/BSE, published in are sent to NSE/BSE,
financial performance newspapers and placed on Bank’s published in newspapers and
sent to shareholders) website including highlights. placed on Bank’s website
Annual reports are also sent to the including highlights. Annual
shareholders before AGM reports are also sent to the
shareholders before AGM.
2 Evaluation of Non- Information provided in corporate Information provided in
Executive directors governance report. corporate governance report.
3 Whistle Blower Policy Information provided in corporate Information provided in
governance report. corporate governance report.

The guidelines provide for a stringent framework related to the composition and
functioning of the Board Committees.

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Audit committee (‘AC’) Risk Management Nomination and

Committee (‘RMC’) Remuneration Committee
(‘NRC’)
Composition Only NEDs Majority NEDs Only NEDs

Minimum 2/3rd of the Minimum 1/2 of the Minimum 1/2 of the

directors shall be IDs directors shall be IDs directors shall be IDs

Chairperson Independent Director Independent Director Independent Director

Restrictions on Cannot chair any other Cannot chair the Board Cannot chair the Board
Chairperson committee of the Board and/or any Committee
of the Board

Qualification of All members should At least 1 member shall No specific provision

Members have the ability to have professional
understand all financial expertise/ qualification
statements as well as in risk management
the notes/ reports
attached thereto and

At least 1 member shall

have requisite
professional expertise/
qualification in financial
accounting or financial
management

Meetings One meeting in every One meeting in every As and when required
quarter quarter

Quorum 3 members of which at 3 members of which at 3 members of which at

least 2/3rd will be IDs least 1/2 are IDs least 1/2 are IDs of which
one shall be a member of
the RMC.

* IDs- Independent directors

*NED – Non Executive Directors

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Age and tenure of NEDs

The upper age limit for all NEDs, including the Chairperson, will be 75 years post
which no person can continue as an NED. The total tenure of an NED, continuously or
otherwise, on the board of a bank, shall not exceed 8 years and such NED will be
eligible for re-appointment after a cooling period of 3 years. This means that even if an
NED’s appointment is staggered and results into a total of 8 years irrespective of any
gaps in the tenure, a cooling period of 3 years will be required before his/her
reappointment once he/she completes 8 years as an NED.

However, such cooling period will not preclude him/her from being appointed as a
director in another bank subject to meeting the requirements.

Tenure of MD & CEO and WTDs

A person can act as an MD and CEO or a WTD only for a period of 15 years, subject to
statutory approvals required from time to time. The person will be eligible for re-
appointment as MD&CEO or WTD in the same bank, if considered necessary and
desirable by the Board, after a cooling off period of 3 years, subject to meeting other
conditions. During this three-year cooling period, the person will not be allowed to be
appointed or associated with the bank or its group entities in any capacity, either
directly or indirectly.

Further, an MD&CEO or WTD who is also a promoter/ major shareholder, cannot hold
such posts for more than 12 years. However, in extraordinary circumstances, at the sole
discretion of RBI such directors may be allowed to continue up to 15 years.

It is to be noted that RBI has permitted banks with MD&CEOs or WTDs who have
already completed 12/15 years, on the date these instructions come to effect, to complete
their current term as already approved by RBI.

Corporate Governance and Public Sector Undertakings/Enterprises

Historical Roots of Public Sector Undertakings/Enterprises

The public sector in India emerged out of a mandate where the state was supposed to
lay a strong industrial base in the economy. At the time of Independence, India was a
poor country with high income inequalities, low growth in income and savings, very
poor infrastructure facilities and inadequate technological resources. The economy was
largely dominated by subsistence farming, hunger and unemployment. India needed
vast industrialization to be able to produce goods of mass consumption and several

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 VI SEM CORPORATE GOVERNANCE

other basic and key goods that were needed as inputs for manufacturing. India also
needed to develop infrastructure like power, telecommunications, railways and steel.
There was also a strong need to produce defense equipments and other heavy goods
like automobiles, railway coaches that were imported. Thus, a strategy of laying an
industrial base, rapid industrialization even in the backward regions of the country and
a need for import substitution led to the setting up of a vast empire of public sector
enterprises.

The reason why government had to be in business rather than encourage the private
sector enterprises to grow was because such large scale industrialization often needed
huge investment outlays with low returns. The private sector neither had the resources
at its disposal nor could be asked to make such sacrifices of its commercial interest.
Hence, the central public sector came into being. The public sector mainly dominates in
mining and mineral extraction, manufacturing of metals and other basic goods such as
fertilizers, seeds, chemicals and heavy machinery. In the services, public sector
dominates in agricultural trading, railways, airlines, telecommunication, financial
services, tourism and consultancies.

In addition to the above, the public sector has played an important role in the
achievement of constitutional goals like reducing concentration of economic power in
private hands, increasing public control over the national economy, creating a socialistic
pattern of society, etc. With all its linkages the public sector has made solid
contributions to national self-reliance

(Note: Corporate Governance Regulatory Framework/ Legal Framework for PSUs /

PSEs are same any other company in India. Department of Public Enterprises (DPES)
Guidelines are also merged to have uniformity in Governance Laws)

Additional Corporate Governance Framework for PSUs / PSEs

Presently, Besides Parliament and Ministry of Company Affairs (Companies Act), PSEs
are accountable to other authorities, such as the Comptroller and Auditor General of
India, Central Vigilance Commission, Competition Commission of India and the Right
to Information Act, etc. Besides, listed companies are governed by SEBI norms. These
checks and balances have assured high levels of transparency in PSE functioning, and
contributed to the greater investor confidence enjoyed by PSEs

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Corporate Governance: Issues and Challenges of Indian PSUs / PSEs

Complex ownership and governance structure of PSEs

PSEs, although the state is a controlling shareholder, its role does not fit within the
above paradigm. At one level, the state may be considered as a single controller, but
that notion would be rather superficial. Unlike a single private controller, the state is
not a unitary actor. Different governmental bodies and agencies may carry differing
interests that may be difficult to reconcile. In that sense, the state’s position could be
akin to that of a group of controllers with no coherence in approach.

Managerial and Commercial Autonomy

Various committees and commissions set up to make in-depth studies on the public
sector have recommended autonomy. Though various governments have accepted
autonomy, it continues to elude PSUs. The question of accountability imposed by the
ministries is oppressive; there being little evidence of the often stressed need to dilute
and rationalize accountability of PSUs. While formal control by the government, as per
provisions of law or the Memoranda and Articles of Association, is very extensive
covering almost all areas of activities of enterprises, the informal control which
consumes productive time of PSU managements, inhibits their decision making, a
mockery of their autonomy and impairing their performance. If public sector reforms
have to become a reality, accountability not only of PSU managements but also for
bureaucracy and ministers should be defined including its content, limits, mechanics
and benchmarks.

Public enterprises function directly under the control of the government, even when
they do not form departments in the government, there is far too much of interference
in the working of the public sector enterprises. There is thus a question of autonomy of
the public sector enterprise that is crucial for good performance and decision making.
PSUs should be kept immune from political and bureaucratic interference. It is now
well established that political and bureaucratic interference affects the performance of
an enterprise adversely. Therefore, the government should control and monitor PSUs
without interfering in their day-today management. The government should act as an
informed and responsible promoter and majority shareholder of PSUS. The government

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 VI SEM CORPORATE GOVERNANCE

policy to provide managerial and commercial autonomy to PSUs, operating in a

competitive environment is much needed.

Board of Directors and Independent Directors

Performance of any enterprise depends to a very large extent on the capability and
value system of the top management. To perform, however, he/she must have the
freedom to put his/her intellect, experience, knowledge, values and ethics to optimum
use. Nominating unqualified and unsuitable persons as top management of PSUs by
vested interests affects their performance. In most cases, the Board o the public sector
enterprises have bureaucrats as members; and this does not qualify as independent
directors. The lack of ‚independence‛ for the independent directors constrains the
independence of the Board and the autonomy of the public sector. The government
should appoint professionals having competence and understanding of business as
board members. It may be a good idea to invite other large shareholders to nominate
their representatives to the Board. An independent director in a PSU board should not
only be independent of the executive management, he/she should also be independent
of the government and the political parties in power. Therefore, the government should
avoid appointing individuals political affiliation to the Board of directors of a PSU as an
independent director.

The government, as the promoter of a PSU and as a majority shareholder, should

closely monitor the performance of the enterprise and the performance of its Board of
directors. The government should enforce control and monitoring through government
officials, who are members of the Board of directors. They should clearly communicate
the government strategy and government views on various issues in the Board meeting
without impeding the independence and authority of other directors.

Role of Investigating Agencies

Effective and quick decision-making involves an element of risk which may mean
occasional losses. The ultimate career decision of PSU executives seems to lie with
officials of investigating agencies and not with Board of management. It would be
desirable to create a cadre of ombudsmen for PSUs making it imperative to refer any
charges against executives to them before any disciplinary action is contemplated.

PSUs Pay Structure

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The corporate pay structure is designed more towards attaining social equality and
sometimes may not reward good performance. In other words, there is little connection
between performance and pay in the public sector. This might reduce employee
initiatives in the organization. Since pay and performance are not always related, there
is no adequate structure in corporate governance for the monitoring of organizational
performance.

Non-executive directors on PSU boards are also undercompensated in comparison to

non-executives on private sector boards and this poses challenges in getting the right
composition on PSU boards. It is therefore important to raise the compensation levels of
non-executives on PSU boards.

Risk-Taking Techniques

Though there are also instances of fraud in the public enterprises, yet the disclosures of
the non-financial aspects in these units are not transparent.

Most public sector units do not have systematic risk-taking techniques. In fact there is a
positive risk aversion in the public sector. The general risk aversion of the public sector
Boards also make them less effective and they cannot make as much profit as they could
have. An important factor in the performance of PSUs is ethics, morality and
qualifications of political decision makers. The corrupt nexus between politicians and
bureaucrats in financial deals of PSUs, under public scrutiny has damaged the image of
many PSUs.

Ensuring compliance with the SEBI Listing Agreement

Many listed Navratna and Miniratna PSUs are lagging behind in complying with
minimum requirements stated in Clause 49 of SEBI listing agreement. This directly
hampers the future prospects of India Incorporated when the Ministry of Corporate
Affairs is emphasizing strongly on the implementation of corporate governance
guidelines. The corrective action can be to make proper disclosures within director’s
and corporate governance reports and ensuring accountability. Also implementation of
corporate governance norms for PSEs, both listed and unlisted, should be supervised
consistently.

Selection processes

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Selection processes should take cognizance of composition, domain/industry

knowledge, roles, responsibilities, training and compensation.

While the Public Enterprises Selection Board (PESB) can continue to play a critical role
in short-listing candidates and maintaining a database of eligible candidates, the PSU
boards and CMDs should play a larger role in board succession planning.

There are big gaps between the governance standards prevalent in the larger and more
profitable disinvested PSUs versus the smaller and not so profitable ones. Functional
directors on the larger, profitable and better performing PSUs should be allowed to
assume non-executive director roles in the smaller and not so profitable PSUs so as to
promote better sharing of good practices. This is also essential if the wide gaps between
the prevailing standards in state and central PSUs have to be bridged.

Deficiencies in Financial Reporting

Over the years, CAG (Comptroller and Auditor General ) reports have indicated PSUs
for deficiencies in financial reporting including within audit reports and disclosures.
Some of these deficiencies have raised questions with respect to the quality of audits
within PSUs. The audit committee of PSUs should have explicit powers in monitoring
audit quality and ensuring that audit fees are commensurate with the level of audit risk
and effort levels involved in undertaking the PSU audits.

Non-compliance with legal requirements and SEBI and DPE Guidelines – It is

disconcerting to note that many of the top PSUs are falling behind in complying with
minimum requirements envisaged in Clause 49 and DPE Guidelines. Even the
compliance audit conducted by the Comptroller and Auditor General of India has
highlighted this issue.

Excessive regulation – Besides Parliament, PSUs are also accountable to other

authorities like Comptroller & Auditor General of India, (CAG); Central Vigilance
Commission, (CVC); Competition Commission of India, (CCI); and Right to Information
Act, (RTI) etc. Over regulation has not only created accountability problems but has also
killed corporate governance.

Whistle Blowing
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Introduction

The term whistleblower was first discussed by Doggett, J., in the case of Winters v.
Houston Chronicle Pub. Co., The word is derived from the practice of English Police
Officers, who would blow their whistles when they noticed the commission of a crime.
The whistle would alert both law enforcement officers and the general public of danger.

What is Whistle Blowing?

Technically whistle blowing is the act, for an employee or a former employee, of

disclosing what he believes to be unethical or illegal behaviour to higher management
(internal whistle blowing) or to an external authority or the public (external whistle
blowing).
Whistle blowing is essentially a process and is not to be viewed as an individual event.
Prima facie four important subjects of this process involve the whistleblower, the
complaint or revelation, the party to whom the complaint or revelation is made and the
organisation against which it is made. The ultimate aim of the whistle blowing process
is to protect public interest.

FEATURES OF WHISTLE BLOWING

 It relates to an action that takes place with an organisation.

 Whistle blowing can be done by a member of an organisation.

 The information is generally evidence of some significant kind of misconduct on

the part of an organisation or some of its members.

 Release of information must be something that is done voluntarily, as opposed to

being legally required although the distinction is not always very clear.

 Whistle blowing must be undertaken as a moral protest.

Types of Whistleblowers

 Internal: When the whistleblower reports the wrong doings to the officials at
higher position in the organization. The usual subjects of internal whistle
blowing are disloyalty, improper conduct, indiscipline, insubordination,
disobedience etc.

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 External: Where the wrongdoings are reported to the people outside the
organization like media, public interest groups or enforcement agencies it is
called external whistle blowing.
 Alumini: When the whistle blowing is done by the former employee of the
organization it is called alumini whistle blowing.
 Open: When the identity of the whistleblower is revealed, it is called Open
Whistle Blowing.
 Personal: Where the organizational wrongdoings are to harm one person only,
disclosing such wrong doings it is called personal whistle blowing.
 Impersonal: When the wrong doing is to harm others, it is called impersonal
whistle blowing.
 Government: When a disclosure is made about wrong doings or unethical
practices adopted by the officials of the Government.
 Corporate: When a disclosure is made about the wrongdoings in a business
corporation, it is called corporate whistle blowing.

Reasons for Whistle-Blowing

 Unlawful Behavior: There are many forms of behaviors and illegal actions so in
this case must to blow the whistle because it will lead to very bad result .for
example, someone will lose his /her life or lose his/her job.
 Un-Procedural Behavior: Behavior may be un-technical since it interrupts clearly
communicated actions in the form of rules and policies that leading the
operations of the organization.
 Immoral Behavior: Its mean the behavior will be illegal because he/she not going
or following the world behavior guidelines for example: Safety, respecting,
honest, responsibility .Illegal behavior may hurt the others feelings .In this kind
of situation you must not blow your whistle.
 Wasteful Behavior: This behavior if the person trying to waste the resource of
company. Example, There was an employee in a municipality. He is a manger of
equipment‘s store and he steals some equipment. His colleague couldn‘t keep
silent he take an action and tell the boss about that.
Essentials of Whistle Blowing in an Organisation
 Addressing concerns and providing feedback

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Whistle blowing policies should set out procedures for handling concerns. This
should reassure employees that their concerns will be taken seriously and will
ensure that instances of malpractice are identified and dealt with appropriately.
 Commitment, clarity and tone from the top
Guidance should make clear that any concerns are welcomed and will be
treated seriously. Guidance should reassure the employee who may be
thinking of raising a concern that the organization’s leadership will take the
concern seriously and will not punish the employee if the concern turns out
to be untrue, as long as they had reasonable suspicion of wrongdoing.
 Openness, confidentiality and anonymity
Guidance should make sensible and realistic statements about respecting
whistleblowers’ confidentiality. Guidance should also outline the potential issues
that could arise from employees reporting concerns who wish to remain
anonymous.
 Whistle blowing to external bodies (prescribed persons)
Guidance should make employees aware of how they can raise concerns outside
the department, e.g. to an external auditor or regulator. This is an obligation for
officials in certain circumstances, for example where there is evidence of
criminal activity.

The Benefits of Whistle Blowing

 Raises Security of the Organization: when we feel that the person with ethical
principles is watching others in the organization, the chances of wrong doing
decreases and security of the organization increases. The activity will help in
detecting un-ethical or misconduct in the organization.
 Highlights Organization’s Code of Ethics: Every organization must have their
codes of ethics and behavior to have a better observing of employees acts.
 Advance the Management: Make sure any management that consider about
moral standard will be always successful.
 Enhance Employees' Ethical Behaviors: The employees will be aware that there
is someone watching him/her .So, he /she will be carful before doing something
wrong
Barriers to Whistle-Blowing

 Management apathy or resistance- Many organizations make their internal

reporting system available to staff who may wish to use it, but do not positively
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encourage its use. Only a very few seek to instill a sense of obligation by sending
the message that staff who become aware of wrongdoing yet fail to sound the
alarm are complicit by their apathy or indifference.
 Cultural and historical obstacles- On the one hand, there was a general
willingness to foster a culture grounded in strong ethical values, and recently,
this has been given added impetus by the trauma of highly-public corruption
scandals. On the other hand, the idea of positively promoting the use of an
internal reporting system was very often seen as a step too far — and this despite
acknowledging that internal reports had often played a vital role in averting
further scandal. Research shows that in many countries the business community
was not ready to embrace internal reporting mechanisms.
 Union relations- Cooperation with trade unions can be critical to the successful
take-up of an internal reporting mechanism, particularly in companies with a
tradition of active consultation, and where staff resistance is likely to be strong.
 Fear to retaliation- The whistle blowers hesitate in reporting about misdeeds in
the fear of retaliation as when the blow whistle against the people of high
positions they attack them and take revenge. The aim of whistle blowers is to
help the community but when they see that people at key positions are not
supporting them they are discouraged.

Negative Aspects of Whistle Blowing

 Increases cost- When information is shared either with subordinates or superiors

it always increases cost and it also creates mistrust which within the organization
which leads to affect output.
 Demoralize Employees- Whistle blowing creates an atmosphere of spying and
counters spying which demoralizes employees in the organization. Low income
group employees feel scared
 Misuse of Whistle blowing for harassing employees- Whistle blowing may be
used as the tool for harassing people and also for settling previous scores.

Law dealing with Whistle Blowing in India

Laws relating to whistle blowing and protection of whistleblowers are inadequate in

India. However, the Companies Act, 2013 lays down provisions for corporate
governance and elimination of fraud by establishing adequate vigil mechanism.
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Sections 206 to 229 of the Companies Act, 2013 lay down laws relating to Inspection,
Inquiry and Investigation incorporate.
Section 208 of the Act empowers an Inspector to inspect company records and furnish
any recommendations to conduct investigations. Section 210 states that the Central
Government may order an investigation into the affairs of the company in the following
cases

 On receipt of a report by Registrar or Inspector of the company.

 On intimation of a Special Resolution passed by a company that the affairs of the
company must be investigated.
 To uphold the public interest.

The Serious Fraud Investigation Office (SFIO), a statutory body is created under Section
211 of the Act which has the power to arrest any person for fraud in the company. The
auditors have the responsibility to report to the Central Government if they have reason
to believe a fraud committed or being committed to the company.

Draft Rule 12.5 of the Companies Act, 2013andSection 177(9) makes it compulsory for
listed companies, companies accepting deposits from public and companies borrowing
more than Rs. 50 crore from banks or public financial institutions to establish a vigil
mechanism for directors and employees to report their genuine concerns. A vigil
committee has to be set up to ensure vigil mechanism in the company.

Additionally, the Securities and Exchange Board of India (SEBI) amended the Principles
of Corporate Governance in 2003. Clause 49 of the Listing Agreement now includes the
formulation of a Whistleblower policy for companies. A company may establish a
mechanism for employees to report concerns regarding unethical behaviour, actual or
suspected fraud or violation of the company’s code of conduct or ethics policy.

The Whistle Blowers Protection (Amendment) Act, 2015

 This Act is a modified version of Whistle-blowers Protection Act, 2014. This Act
gives a component to accepting and inquisitive into open intrigue revelations
against demonstrations of debasement, willful abuse of energy or tact, or
criminal offenses by open hirelings.
 The act establishes a mechanism to receive complaints related to disclosure of
allegations of corruption or wilful misuse of power or discretion, against any
public servant, and to inquire or cause an inquiry into such disclosure.

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 The act also provides adequate safeguards against victimization of the person
making such complaints.
 It allows any person, including a public servant, to make a public interest
disclosure before a Competent Authority. The law has elaborately defined
various competent authorities. For instance, Competent authority to complaint
against any union minister is the Prime Minister.
 The law does not allow anonymous complaints to be made and clearly states
that no action will be taken by a competent authority if the complainant does
not establish his/her identity.
 The maximum time period for making a complaint is seven years.
 Exemptions: The act is not applicable to the Special Protection Group
(SPG) personnel and officers, constituted under the Special Protection Group
Act, 1988.
 Court of Appeal: Any person aggrieved by any order of the Competent
Authority can make an appeal to the concerned High Court within a period of
sixty days from the date of the order.
 Penalty: Any person who negligently or mala-fidely reveals the identity of a
complainant will be punishable with imprisonment for a term extending up to 3
years and a fine which may extend up to Rs 50,000.
 If the disclosure is done mala-fidely and knowingly that it was incorrect or
false or misleading, the person will be punishable with imprisonment for a
term extending up to 2 years and a fine extending up to Rs. 30,000.
 Annual Report: The Competent Authority prepares a consolidated annual
report of the performance of its activities and submits it to the Central or State
Government that will be further laid before each House of Parliament or State
Legislature, as the case may be.
 The Whistleblowers Act overrides the Official Secrets Act, 1923 and allows the
complainant to make public interest disclosure before competent authority even
if they are violative of the later act but not harming the sovereignty of the
nation.
 In 2015, an amendment bill was moved that proposes, whistleblowers must
not be allowed to reveal any documents classified under the Official Secrets
Act of 1923 even if the purpose is to disclose acts of corruption, misuse of
power or criminal activities. This dilutes the very existence of the 2014 Act.

A comparison can be drawn in the cases of Sherron Watkins and Satyendra Dubey to
highlight the miserable position of whistle blower in India.

Basis SHERRON WATKINS SATYENDRA DUBEY

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Country USA INDIA

Employer Enron Corporation National Highway Authority of

India, Government of India

Designation Former Vice-President Former Project Director

Reported Irregularities Accounting irregularities Financial irregularities in the

within the company Golden Quadrilateral Project

Consequence of Lauded in the press for her courageous Shot dead by unidentified
Showing Courage actions and received numerous honors assailants
 Persons of the Year for 2002 Court  Whistleblower of the year
Awards and TV Scales of Justice Award Award from the London
Honors  Everyday Hero‘s Award Women based Index on
Mean Business Award from the Censorship
Business and Professional  The Transparency
Women/USA Organization International‘s Annual
 The 2003 Woman of the Year integrity award
Award by Houston Baptist  The Service Excellence
University award from the All India
 Barbara Walters included her as Management Association
one of the 10 Most Fascinating
People of 2002
 Rolfe Award for Educating the
Public about Business and Finance
 Passage of the Sarbanes Oxley Act  CVC launched an
New Regulation on July 30, 2002 initiative to protect
and Legislation  New Governance proposal was whistle blowers
post disclosure approved by Securities and
Exchange Commission in
November 2003

INDIAN CORPORATES – FAILURE OF CORPORATE GOVERNANCE:

A couple of examples of corporate governance failures which forced businesses and
government authorities to rethink their stance on corporate governance:
1. JET AIRWAYS (INDIA) LIMITED (‘JET AIRWAYS’):
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Background:

Jet Airways was one of the largest airlines in India, Headquartered in Mumbai. Mr.
Naresh Goyal is the Founder of Jet Airways.

What Happened?

 Jet Airways became a debt-ridden Company. Due to continued increase in the debt
level, lenders denied releasing further funds to keep carrier flying.
 As a result, Jet Airways closed reservations to international services, effective April
2019 and subsequently suspended all operations citing financial issues.
 Further, it has stranded approximately 20,000 employees.

Reasons for failure:

 Poor Management: The poor decision making and management of Company lead
to heavy losses and increase in debt of the Company. Company’s decision lacked
transparency and therefore, the board of directors could not contribute to operating
and financing decisions.
 Costly Purchase: Aviation experts believe that the management of the Company
has repeatedly ignored the advice of professionals and purchased Jets at high cost.

 Budget Airlines: Due to stiff competition from hugely successful airlines, like
Indigo, SpiceJet and Go Air etc. Jet Airways always catered to corporates and failed
to recognize that low-cost carriers were attracting customers who were price
sensitive.
 Failure to attract investors: Reason for financial predicament is failure to find a
strategic investor to pump money in to Jet Airways.
2. DEWAN HOUSING FINANCE CORPORATION LIMITED (‘DHFL’):

Background:

Dewan Housing Finance Corporation Limited is a leading housing finance

company, headquartered in Mumbai. Mr. Rajesh Kumar Wadhawan is the Founder
of DHFL.

What Happened?

 DHFL has sanctioned and paid funds in unsecured and dubious loans.
 Loan amounting to thousands of crores of rupees were given to newly incorporated

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 VI SEM CORPORATE GOVERNANCE

shell companies.
 Shell Companies are operating from common email address.
 The said loans were provided without any security or collateral and the proceeds
were utilized by for private asset creation.
 DHFL has not adequately disclosed the terms of loan and repayment in the financial
statements.
 They also ensured that most of the shell companies have hidden the name of the
lender i.e. DHFL.
 The act of DHFL ensured that the recovery of such dubious loans would be
impossible since the companies or their directors themselves do not own any assets.
 The promoters and their associates used these dubious loans to acquire personal
assets which were completely ring-fenced from the recovery process since the
companies or their directors themselves do not own any of these assets.
 Due to poor Corporate Governance concerns, the Reserve Bank of India (RBI)
superseded the board of debt-laden DHFL.
 RBI has initiated the process of resolution of the Company under the Insolvency
and Bankruptcy (Insolvency and Liquidation Proceedings of Finance Service
providers and Application to Adjudicating Authority rules, 2019.

Reasons for failure:

 DHFL case is absolute failure of Corporate Governance.

 The act of promotors in diversion of loan amounts to shell company without
scrutiny or security shows a complete deviation from the corporate governance
policies.
3. YES BANK LIMITED (‘YES BANK’):

Background:

Yes Bank Limited is an Indian private sector bank, founded by Rana Kapoor and
Ashok Kapur in 2004. Yes Bank is India’s fourth largest private sector bank and is a
high quality, customer centric and service driven Bank.

What Happened?

 In 2015, RBI conducted an asset quality review (AQR) to clean up the rising toxic
loan problem in the country’s financial sector.
 Several banks were asked to report loan divergences i.e., the difference between the
RBI’s assessment of bad loans and the one reported by the bank, in their quarterly

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 VI SEM CORPORATE GOVERNANCE

results.
 At a time when most banks were struggling with rising bad loans, Yes Bank Ltd had
managed to keep a check on its non-performing assets (NPAs).
 During the AQR review in 2015, RBI found out some serious issues related to loan
divergence and NPAs at Yes Bank Ltd.

Reasons for failure:

 Yes Bank consistently showed NPAs below 2%. The gross NPAs reported by the
bank in Finanancial Year 2016 were at Rs. 748.98 Crores. It turned out that the NPAs
identified by RBI were at Rs. 4925.68 Crores. A whopping 557% higher NPA was
observed during the AQR review with respect to actual reported. The Gross NPA %
disclosed by Yes Bank as on March 2016 stood at 0.76%. This Gross NPA actually
should have been at 5.01% as per RBI observations.
 RBI also observed very astounding deviation of 1166% for Net NPAs. The Net NPA
% disclosed by Yes Bank was at 0.29% for Mar 2016, which according to RBI should
have been 3.67%.
 Loan divergence is mere account jugglery in Yes Bank Ltd. RBI has considered this
as the persistent governance and compliance failures and violations of statutory and
regulatory rules at Yes Bank Ltd.
4. INTERGLOBE AVIATION LIMITED (‘INDIGO’)

Background:

Interglobe Aviation Limited is one of the largest Indian Airline Company, founded
by Rakesh Gangwal and Rahu Bhatia.

What Happened?

 Rakesh Gangwal alleged serious governance lapses by its co-founder Rahul Bhatia.
However, Rahul Bhatia had denied about any such governance failures.
 As the issue was going-on for over a year, Gangwal reach out to Securities Exchange
Board of India for its intervention to address the problem and solution on the
matter.
 Gangwal further alleged that the Company is not adequately following core
principles and values of governance. He further said that even Betel Shop would
have managed matters in a better way.
 Gangwal also questioned certain related party transactions and said that the
Shareholder’s Agreement provides Rahul Bhatia controlling rights over Indigo.

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Reasons for failure:

 The Company did not follow due process for Related Party Transaction approvals
and other Corporate Governance measures.

Takeways from good Corporate Governance of Indian Corporates

1. Built a strong, qualified board of directors and evaluate performance
2. Define clear roles and responsibilities:among the Board, Chair, Chief Executive
Officer, Chief Financial Officer, Executive Officers and management.
3. Evaluate performance and make principled compensation decisions.
4. Identifying and assessing the risks faced by Companies, including operational,
financial, environmental, reputational and legal risks

Self Assessment Questions

SECTION A -2 MARKS

1. Mention any four committees on Corporate Governance in India

2. Mention any four components of Regulatory Framework on Corporate Governance.
3. Mention the internal committees required for good Corporate Governance in an company
4. Mention any four essential elements of good corporate governance in Banks.
5. Mention any four Disclosures of the Bank for Good Corporate Governance
6. Mention any four types of Director in an Indian Company according to Companies Act 2013.
7. Mention any four Challenges faced by Indian Public sector in Good Corporate Governance
8. Which organisation plays a crucial role in short-listing candidates for PSU boards?
9. In which year new Companies bill was implemented?
10. Name the current minster of corporate affairs.
11. What is Whistle Blowing?
12. Mention any four types of Whistle Blowing.
13. Mention the legislative support to Whistle Blowing in India.
14. Mention any two prominent whistle blowers in India.
15. Mention the negative effects of Whistle blowing.
16. Define Whistle Blowing
17. Which year was Whistle Blowing Act enacted in India and when was it amended?
18. Mention any 2 features of Whistle Blowing.
19. Which is the statutory body is created under Section 211 of the Act which has the power to
arrest any person for fraud in the company?
20. Who used the word whistleblower for the first time?
SECTION B-4 Marks

1. Briefly explain the features of Whistle Blowing.

2. Briefly explain the reasons for Whistle Blowing.
3. Briefly explain the essentials of Whistle Blowing in an Organisation.
4. Briefly explain the Barriers to Whistle-Blowing.

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5. Write a short on Whistle Blowers Protection Act.

6. Is whistle blowing essential in an organisation? Give Reasons.
7. Briefly explain the benefits of Whistle Blowing.
8. Draw a comparison between the cases of Sherron Watkins and Satyendra Dubey to highlight the
miserable position of whistle blower in India.
9. Briefly explain the features of Whistle Blowers Protection Act.
10. What is Whistle Blowing? Briefly explain the negative aspects of Whistle Blowing
SECTION C-10 MARKS

1. Explain the regulatory and legal framework of Corporate Governance in India

2. Explain the committees on Corporate Governance in India
3. Explain the Challenges faced by Indian Public sector in Good Corporate Governance
4. Explain the types of Director in an Indian Company according to Companies Act 2013.
5. Explain the role of a Director in a Company and Mention the reasons for the disqualifications of a
Director.
6. Explain the issues of good corporate governance in Indian Banks
7. Explain the issues of good corporate governance in Indian public sector enterprises
8. Explain the types of Whistle Blowing.
9. Explain any two corporate failures in India due to lack of corporate governance.
10. Explain the challenges for Indian public sector enterprises for good governance

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 VI SEM CORPORATE GOVERNANCE

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