Narayana Murthy Committee

The Narayana Murthy Committee was constituted by the Securities and Exchange Board of India (SEBI) in 2002–03 under the chairmanship of N. R. Narayana Murthy, the founder of Infosys Technologies. The purpose of this committee was to strengthen the framework of corporate governance in Indian listed companies and to address shortcomings observed in the implementation of earlier recommendations. Its work culminated in the 2003 Narayana Murthy Committee Report, which became an influential document shaping corporate governance reforms in India.

Background and Formation

In the late 1990s and early 2000s, India’s capital markets underwent rapid modernisation and global integration. While SEBI had already introduced Clause 49 in the Listing Agreement (based on the earlier Kumarmangalam Birla Committee Report of 1999), concerns persisted regarding uneven compliance and governance failures in some listed companies.
To address these issues, SEBI set up the Narayana Murthy Committee in December 2002 with a clear mandate to review the existing framework and suggest measures to improve corporate transparency, accountability, and investor confidence.
The committee held its meetings on 7 December 2002, 7 January 2003, and 8 February 2003, and examined the adequacy of current practices against global standards.
Its terms of reference included:

• Reviewing the progress of corporate governance in listed companies.
• Assessing whether the existing regulatory framework met international expectations.
• Defining the role of companies in responding to market rumours and price-sensitive information.
• Recommending improvements to strengthen board oversight, audit processes, and disclosures.

Key Recommendations

The Narayana Murthy Committee proposed a comprehensive set of mandatory and non-mandatory recommendations to enhance governance standards. Many of these were later incorporated into a revised Clause 49 by SEBI.

Mandatory Recommendations

1. Audit Committee Reforms
   • The audit committee was to consist entirely of independent directors, with a majority possessing financial or accounting expertise.
   • It would oversee financial statements, internal audit reports, risk management systems, and compliance with legal and regulatory requirements.
   • The committee would also review related party transactions (RPTs) and ensure transparent disclosure.
2. Related Party Transactions
   • All RPTs required prior approval of the audit committee.
   • Comprehensive details of such transactions were to be disclosed in the annual report to prevent conflicts of interest.
3. Utilisation of IPO Proceeds
   • Companies raising funds through initial public offerings were required to disclose the intended use of proceeds in the prospectus.
   • Independent auditors were to verify and certify the actual utilisation of funds, which had to be published in annual financial statements.
4. Risk Management and Business Risks Disclosure
   • Boards were instructed to identify and disclose key business risks, along with mitigation strategies.
   • This aimed to foster a culture of proactive risk management and informed investor decision-making.
5. Code of Conduct and Certification
   • A written code of conduct was to be framed for all directors and senior management.
   • The CEO and CFO were required to certify the accuracy and completeness of financial statements, adding personal accountability to disclosures.
6. Whistleblower Policy
   • Companies were advised to implement a formal whistleblower mechanism to encourage employees to report unethical behaviour without fear of retaliation.
   • Protection for whistleblowers was seen as essential to maintaining internal ethical standards.

Non-Mandatory Recommendations

The committee also suggested several best-practice measures, encouraging companies to go beyond compliance:

• Striving for unqualified financial statements, free from auditor qualifications.
• Conducting regular training and orientation programmes for board members, especially independent directors.
• Undertaking annual performance evaluations of the board and its committees, either internally or by external assessors.
• Enhancing disclosure standards, particularly regarding segment reporting, managerial remuneration, and governance practices.

Significance and Impact

The Narayana Murthy Committee played a pivotal role in reshaping India’s corporate governance landscape. Its recommendations directly led to the revised Clause 49, implemented by SEBI in 2004, which made many of its suggestions mandatory for all listed entities.
Key outcomes included:

• Establishment of stronger independent board structures and enhanced audit oversight.
• Greater emphasis on ethical governance, with CEOs and CFOs made personally accountable for financial accuracy.
• Introduction of risk management frameworks and enhanced disclosure requirements in annual reports.
• Protection for employees under whistleblower mechanisms, helping create a culture of transparency.

The committee’s influence extended beyond SEBI’s reforms. It helped align Indian corporate governance with global best practices and served as a foundation for subsequent initiatives, including the Uday Kotak Committee (2017), which further refined governance norms for modern markets.

Criticism and Limitations

While the report was widely appreciated, several limitations were observed in its implementation:

• Enforcement weaknesses persisted, as compliance often remained at a formal rather than substantive level.
• Many non-mandatory recommendations were adopted unevenly, especially among smaller companies.
• Practical challenges arose in implementing whistleblower policies and detailed risk disclosures.
• Smaller firms cited resource constraints in meeting extensive documentation and reporting requirements.