Washington, D.C., February 2, 2006 — India is now implementing important corporate governance reforms that position the country's corporate governance framework as above average compared to other emerging market economies. However, as is the case with many other countries weaknesses remain in enforcement of rules and regulations, concludes a new report published today by the Institute of International Finance (IIF).

Mr. Edward Baker, Chief Investment Officer of Global Emerging Markets, Alliance Capital Management, and Chairman of the Equity Advisory Group (EAG) of the IIF, said: "Our report is being published as new Indian regulations are coming into effect with the aim of significantly strengthening the system of corporate governance. The Securities and Exchange Board of India (SEBI), the independent capital markets regulator, has made significant efforts to keep up with changing corporate governance practices in leading equity markets around the world, namely the United Kingdom and the United States. We welcome the actions that the Indian authorities are pursuing."

IIF Managing Director Charles Dallara said, "It is important that Indian corporate governance standards continue to improve as the country becomes an increasingly important participant in global trade and finance. It is encouraging that, as our new report points out, companies such as Infosys Technologies, the Tata Group, ICICI Bank and the Housing Development Finance Corporation Ltd. (HDFC), are developing sound corporate governance approaches. These can serve as models for the thousands of listed Indian companies that have yet to put in place governance systems that meet the requirements set by the Indian authorities and that can enhance international investor confidence."

The IIF is the global association of financial institutions comprising more than 340 member institutions headquartered in over 60 countries operating across the world. In preparing the report the Task Force held meetings in Mumbai and New Delhi with senior officials from the government, the Reserve Bank of India, the Securities and Exchange Board of India (SEBI), the Bombay Stock Exchange (BSE), the National Stock Exchange of India (NSE), private companies, rating agencies, law firms and consultancies involved in corporate governance.

India has 22 stock exchanges and approximately 6,000 publicly listed companies with a total market capitalization of India's stock markets of around US $546 billion, as of December 30, 2005. Over 40 million people invest in shares and mutual funds in the country. The ten largest companies account for more than one-third of total market capitalization. Indian companies have been increasingly attracting foreign capital either through listing on international stock exchanges or through private equity placements and foreign institutional investments. Companies that wish to access markets for capital or that wish to become leading global suppliers to corporations in developed markets are becoming increasingly transparent and are more willing to adopt higher corporate governance standards.

Highlights of the Report

The EAG India Task Force found that in such key areas as minority shareholder protection and accounting/auditing, India's corporate governance framework is consistent with most of the IIF's guidelines. In October 2004, SEBI revised existing corporate governance requirements to incorporate selected features of the Sarbanes-Oxley Act. Indian companies are required to be in compliance with these new provisions, introduced in Clause 49 of SEBI's listing agreement, by December 31, 2005. Clause 49 requires companies to file a quarterly compliance report with the stock exchange. The stock exchange in turn is required to file an annual compliance report with SEBI for each listed company. Quarterly reports due on March 31, 2006 will begin carrying compliance information with the new governance listing requirements.

Today's report pointed out that, neither the stock exchanges nor SEBI have increased staff as needed to effectively scrutinize compliance with Clause 49 and other rules and regulations. The EAG Task Force said, "SEBI personnel need adequate training to develop skills required to build strong cases against errant companies." Moreover, the report stated that the cost of non-compliance to companies in the form of fines, legal action and de-listing is low and has proved to be an ineffective mechanism to deal with errant companies.

The report noted that an overhaul of the Indian Companies Act of 1956 (amended in 2002) is likely in the near future, which is designed to simplify procedures and introduce a system based on rules to be prescribed by authorities. However, it is uncertain at this time which authority will prescribe the rules. Nevertheless, if the bill passes, the voluminous provisions in the current act would be reduced by two-thirds from the present roughly 780 provisions.
The report noted a lack of shareholder activism. It added that pension reforms are required to create a class of Indian institutional investors who will further the cause of minority shareholders and help strengthen corporate governance in Indian companies. To some degree, the Indian press is seen as substituting for shareholder activism.

On balance, India's corporate governance policy framework is above average and moving in the right direction, though weak surveillance and enforcement practices slow down the pace of improvements. The Task Force believes that further improvements in Indian corporate governance practices require the following actions:

• Encourage better compliance with listing requirements by increasing the cost of non-compliance.
• Strengthen surveillance mechanisms.
• Introduce sector-specific corporate governance best practices.
• Increase shareholder activism in the country by undertaking pension reforms.
• Pursue legal reforms to provide investors with a mechanism by which they can redress grievances in a timely and cost-effective manner.