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Home > Business > Business Headline > Report

Murthy panel agrees to level of compliance

S Ravindran in Mumbai | March 20, 2003 12:23 IST

The Narayana Murthy committee on corporate governance has noted with approval that the level of compliance in respect of requirements relating to the board of directors, mandatory constitution of audit committees, shareholders' grievance committee is very high.

But, at the same time, the committee has noted that many companies are yet to comply with the requirements relating to the constitution and working of the respective remuneration committee, board procedures, and report on corporate governance.

In fact, only a few companies have reverted to the Bombay Stock Exchange and the National Stock Exchange that the provisions relating to management and board procedures are not applicable to them.

In its report to the committee, the Securities and Exchange Board of India had observed that the compliance with the requirements in Clause 49 of the listing agreement is "by and large, satisfactory" but the markets watchdog added that "an analysis of the financial statements of companies and the report on corporate governance discloses that their quality is not uniform."

Sebi said that this inconsistency is observed on parameters such as the nature of qualifications in audit reports, the quality of the corporate governance report itself (which is often perfunctory in nature) and the business transacted and the duration of audit committee meetings.

Variations in the quality of annual reports including disclosures raise the question whether compliance is in form or in substance; and how to ensure that the laws, rules and regulations do not reduce corporate governance to a mere ritual, the committee said in reaction to the Sebi's observations.

"This question has come under close scrutiny in recent times," the committee said. Sebi has analysed a few recently published annual reports of companies to assess the quality of corporate governance. The regulator found the full spectrum of levels of compliance in these reports.

To begin with, there were some reports where there is no mention of the compliance with corporate governance requirements while some others said the company is fully compliant with clause 49 of the listing agreement but where independent auditors have made qualifications in their audit reports.

Of those companies which mention areas of non-compliance with clause 49 of the Listing Agreement, only a few have provided a detailed explanation for the non-compliance; and then there are the reports, which have faithfully reported areas of non-compliance with clause 49 of the Listing Agreement but provide no explanation for the auditor's qualifications and for reasons for non-compliance.

Sebi also observed that there is a considerable variance in the extent and quality of disclosures made by companies in their annual reports.

Based on this analysis, Sebi reported to the Murthy committee that the code of corporate governance must be changed in order to ensure that companies comply with corporate governance codes, in substance and not merely in form.

To justify its point, Sebi said that efforts to improve corporate governance standards in India must continue because these standards are themselves evolving, in keeping with market dynamics.

Recent events worldwide, primarily in the US, have renewed the emphasis on corporate governance.

"These events have highlighted the need for ethical governance and management, and to look beyond mere systems and procedures," Sebi said.

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