Notifications

DBOD No.BC.112 /08.138.001/2001-02

4.06.2002

The Chairman/Chief Executives of Indian Commercial Banks

Dear Sir,

As you are aware, the Securities and Exchange Board of India (SEBI) had constituted a Committee on Corporate Governance and circulated the recommendations to all stock exchanges for implementation by listed entities as part of the listing agreement vide SEBI’s circular SMDRP/Policy/CIR-10/2000 dated February 21, 2000. However it had at that time exempted body corporates such as public and private sector banks, financial institutions, insurance companies and those incorporated under separate statute. SEBI has now suggested to RBI to consider issuing appropriate guidelines to banks and financial institutions so as to ensure that all listed companies would have uniform standards of corporate governance. As requested by SEBI, it has now been proposed that the SEBI Committee’s guidelines may be taken up for adoption by those commercial banks listed in stock exchanges so that they can harmonize their existing corporate governance requirements with the requirements of SEBI, wherever considered appropriate.

2. On a review by RBI of the existing corporate governance requirements in banks, it is observed that many of the recommendations in regard to the following stand implemented in banks and may not require further action towards implementation in respect of these guidelines for the present.

1. Optimum combination of executive and non-executive directors in the Board
2. Pecuniary relationship or transactions of the non-executive directors vis-à-vis the bank
3. Independent Audit Committees, their constitution, chairmanship, power, roles, responsibilities, conduct of business, etc
4. Remuneration of Directors (in case of private sector banks)
5. Periodicity /number of board meetings
6. Disclosure by management to the board about the conflict of interest
7. Information to shareholders regarding appointment/re-appointment of directors, display of quarterly results/presentation to analysts on the web- site
8. Maintenance of office by non-executive Chairman.
9. Reviewing with the management by the Audit Committee of the board the annual financial statements before submission to the Board, focusing primarily on:

• Any changes in accounting policies and practices,
• Major accounting entries based on exercise of judgement by management,
• Qualifications in draft audit report,
• Significant adjustments arising out of audit, compliance with accounting standards,
• Compliance with stock exchange and legal requirements concerning financial statements, and
• The going concern assumption.

3. The Audit Committee of the board may look into the reasons for default in payment to depositors, debenture holders, shareholders (non-payment of dividends) and creditors, wherever there are any cases of defaults in payment. SEBI Committee’s recommendations on other additional functions to be entrusted to the Audit Committee may be complied with by the listed banks as per listing agreement.

4. As regards the appointment and removal of external auditors, the practice followed in banks is more stringent than that recommended by the Committee and hence will continue. Further, fixation of audit fee and also approval of payment for any other services are already subject to the instructions of RBI. As regards recommendation for obtaining a certificate from auditors regarding compliance of conditions of Corporate Governance, it may be stated that the compliance of banks with RBI instructions is already being verified by the statutory auditors. Therefore, a separate certificate from the auditors is not considered necessary.

5. With a view to further improving the Corporate Governance standards in banks, the following measures are now recommended for implementation.

1. In the interest of the shareholders, the private sector banks and public sector banks which have issued shares to the public may form committees on the same lines as listed companies under the Chairmanship of a non-executive director to look into redressal of shareholders' complaints.
2. All listed banks may provide un-audited financial results on half yearly basis to their shareholders with summary of significant developments.

6. A brief summary of the SEBI Committee’s recommendations on Corporate Governance as applicable to banks is enclosed for ready reference. Full text of recommendations of the Committee which form part of a detailed circular issued by SEBI to the stock exchanges on February 21, 2000 can be had by access to SEBI’s website, www.sebi.gov.in/circulars/2000 .

7. Please acknowledge receipt.

Yours faithfully,

(M.R. Srinivasan)
Chief General Manager

Summary of the important Recommendations of the
SEBI’s Committee on Corporate Governance

The Securities and Exchange Board of India (SEBI) had constituted a Committee on Corporate Governance and circulated the recommendations to all stock exchanges for implementation by listed entities as part of the listing agreement vide SEBI’s circular SMDRP/Policy/CIR-10/2000 dated February 21, 2000. . Full text of recommendations of the Committee which form part of the above circular can be had by access to SEBI’s website, www.sebi.gov.in/circulars/2000 . A summary of the important recommendations of the SEBI Committee as applicable to banks is furnished here under:

1.1 All pecuniary relationship or transactions of the non-executive directors should be disclosed in the annual report.

1.2 The Committee is of the view that non-executive directors help bring an independent judgement to bear on board's deliberations, especially on issues of strategy, performance, management of conflicts and standards of conduct. The Committee therefore lays emphasis on the calibre of the non-executive directors, especially of the independent directors.

1.3 The Committee is of the view that it is important that an adequate compensation package be given to the non-executive independent directors so that these positions become sufficiently financially attractive to attract talent and that the non-executive directors are sufficiently compensated for undertaking this work.

1.4 The Committee recommends that the board of a company have an optimum combination of executive and non-executive directors with not less than fifty per cent of the board comprising the non-executive directors. The number of independent directors depends on the nature of the chairman of the board. In case a company has a non-executive chairman, at least half of board should be independent (Mandatory recommendation).

2.1 The Committee recommends that when a nominee of the institutions is appointed as a director of the company, he should have the same responsibility, be subject to the same discipline and be accountable to the shareholders in the same manner as any other director of the company. In particular, if he reports to any department of the institutions on the affairs of the company, the institution should ensure that there exist Chinese walls between such department and other department which may be dealing in the shares of the company in the stock market.

3.1 The Committee recommends that a non-executive Chairman should be entitled to maintain a Chairman's office at the company's expense and also allowed reimbursement of expenses incurred in performance of his duties. This will enable him to discharge the responsibilities effectively.

4.1 The Committee recommends that a qualified and independent audit committee should be set up by the board of a company (Mandatory recommendation)

4.2 The Committee recommends that -

• the audit committee should have a minimum of three members, all being non-executive directors, with the majority being independent and with at least one director having financial and accounting knowledge;

• the chairman of the committee should be an independent director;
• the chairman should be present at the Annual General Meeting to answer shareholder queries;

• the audit committee should invite such of the executives, as it considers appropriate (and particularly the head of the finance function) to be present at the meetings of the Committee but on occasions it may also meet without the presence of any executives of the company. The finance director and head of internal audit and when required, a representative of the external auditor should be present as invitees for the meetings of the audit committee;

• the Company Secretary should act as the secretary to the committee.

4.3 The Committee recommends that the audit committee should meet at least thrice a year. One meeting must be held before finalisation of annual accounts and one necessarily every six months (Mandatory recommendation).

4.4 The quorum should be either two members or one-third of the members of the audit committee, whichever is higher and there should be a minimum of two independent directors (Mandatory recommendation).

4.5 Being a committee of the board, the audit committee derives its powers from the authorization of the board. The Committee recommends that such powers should include powers :

1. To investigate any activity within its terms of reference.
2. To seek information from any employee.
3. To obtain outside legal or other professional advice.
4. To secure attendance of outsiders with relevant expertise, if it considers necessary.

4.6 As the audit committee acts as the bridge between the board, the statutory auditors and internal auditors, the Committee recommends that its role should include the following :

• Oversight of the company's financial reporting process and the disclosure of its financial information to ensure that the financial statement is correct, sufficient and credible.

• Recommending the appointment and removal of the external auditor, fixation of audit fee and also approval for payment for any other service.

• Reviewing with management the annual financial statements before submission to the board, focusing primarily on :

• Any changes in accounting policies and practices.
• Major accounting entries based on exercise of judgement by management.

• Qualifications in draft audit report.
• Significant adjustment arising out of audit.
• The going concern assumption.
• Compliance with accounting standards.
• Compliance with stock exchange and legal requirements concerning financial institutions.

• Any related party transactions i.e. transactions of the company of material nature, with promoters or the management, their subsidiaries or relatives, etc., that may have potential conflict with the interests of company at large.

• Reviewing with the management, external and internal auditors, the adequacy of internal control systems.

• Reviewing the adequacy of the internal audit function, including the structure of the internal audit department, staffing and seniority of the official heading the department, reporting structure, coverage and frequency of internal audit.

• Discussion with the internal auditors of any significant findings and follow-up thereon.

• Reviewing the findings of any internal investigations by the internal auditors into matters where there is suspected fraud or irregularity or a failure of internal control systems of a material nature and reporting the matter to the board.

• Discussion with external auditors, before the audit commences, of the nature and scope of audit. Also post-audit discussion to ascertain any area of concern.

• Reviewing the company's financial and risk management policies.

• Looking into the reasons for substantial defaults in the payments to the depositors, debenture holders, shareholders (in case of non-payment of declare dividends) and creditors.

This is a mandatory recommendation.

5.1 The Committee recommends that the board should set up a remuneration committee to determine on their behalf and on behalf of the shareholders with agreed terms of reference, the company's policy on specific remuneration packages for executive directors including pension rights and any compensation payment.

6.1 The Committee therefore recommends that board meetings should be held at least four times in a year, with a maximum time gap of four months between any two meetings. The minimum information should be available to the board (Mandatory recommendation).

6.2 The committee recommends that a director should not be a member in more than 10 committees or act as Chairman of more than five committees across all companies in which he is a director. Furthermore, it is a mandatory annual requirement for every director to inform the company about the committee positions he occupies in other companies and notify changes as and when they take place (Mandatory recommendation).

7.1 The recommendations contained in this section pertain to accounting standards on consolidation, segment reporting, disclosure and treatment of related party transactions and deferred taxation. The Committee recommended that the Institute of Chartered Accountants of India issue accounting standards on these areas expeditiously.

8.1 As a part of the disclosure related to Management, the Committee recommends that as part of the directors' report or as an addition thereto, a Management Discussion and Analysis report should form part of the annual report to the shareholders (Mandatory recommendation).

8.2 The committee recommends that disclosures be made by management to the board relating to all material financial and commercial transactions, where they have personal interest, that may have a potential conflict with the interest of the company at large (for e.g. dealing in company shares, commercial dealings with bodies which have shareholding of management and their relatives etc. (Mandatory recommendation).

9.1 The Committee recommends that in case of the appointment of a new director or re-appointment of a director the shareholders must be provided with the following information :

• A brief resume of the director;
• Nature of his expertise in specific financial areas; and
• Names of the companies in which the person also holds the directorship and the membership of Committees of the board.

This is a mandatory recommendation.

9.2 The Committee recommends that information like quarterly results, presentation made by companies to analysts may be put on company's website or may be sent in such a form so as to enable the stock exchange on which the company is listed to put it on its own website (Mandatory recommendation).

9.3 The Committee recommends that the half-yearly declaration of financial performance including summary of the significant events in last six months, should be sent to each household of shareholders.

9.4 The Committee recommends that a board committee under the chairmanship of a non-executive director should be formed to specifically look into the redressing of shareholder complaints like transfer of shares, non-receipt of balance sheet, non-receipt of declared dividends etc. The Committee believes that the formation of such a committee will help focus the attention of the company on shareholders' grievances and sensitize the management to redressal of their grievances (Mandatory recommendation).

9.5 The Committee further recommends that to expedite the process of share transfers the board of the company should delegate the power of share transfer to an officer, or a committee or to the registrar and share transfer agents. The delegated authority should attend to share transfer formalities at least once in a fortnight (Mandatory recommendation).

10. The Committee recommends that there should be a separate section on Corporate Governance in the annual reports of companies, with a detailed compliance report on Corporate Governance. Non-compliance of any mandatory recommendation with reasons thereof and the extent to which the non-mandatory recommendation have been adopted should be specifically highlighted. This will enable the shareholders and the securities market to assess for themselves the standards of corporate governance followed by a company. (Mandatory recommendation).