Corporate scandals such as Enron and WorldCom that erupted in the early 2000s led to a renewal of emphasis on corporate governance. To review the adequacy of existing practices and improve them, the Securities and Exchange Board of India (SEBI) commissioned the SEBI Committee on Corporate Governance, to be chaired by N. R. Narayana Murthy, Chairman of Infosys. Members included Y. H. Malegam (Managing Partner, S. B. Billimoria & Co.); Ravi Narain (Managing Director, NSE); A. C. Muthiah (President, FICCI); R. K. Somany (President, ASSOCHAM); Ashok Soota (President, CII); M. K. Doogar (Representative, PHDCCI); Sumit Mazumder (President, BCCI); Kamlesh S. Vikamsey (Member – Central Council, ICAI); S. Gangopadhyay (President, ICSI); T. R. Ramaswami (CEO, AMBI); Manoj Vaish (Executive Director, BSE); A. K. Narayan (President, Tamil Nadu Investors Association); Nitin Shingala (Investors Grievances Forum); Manubhai Shah (Managing Trustee, CERC); Omkar Goswami (Chief Economist, CII); Sucheta Dalal (Consulting Editor, Financial Express); R. Gopalakrishnan (Executive Director, Tata Sons Ltd.); D. M. Satwalekar (MD & CEO, HDFC Standard Life Insurance); K. M. Chouhan (Chairman, Mahendra & Young Knowledge Foundation); D. N. Raval (Executive Director, SEBI); Pratip Kar (Executive Director, SEBI); and P. K. Bindlish (General Manager, SEBI, Member Secretary). It focused on audit committees, audit reports, independent directors, related parties, risk management, directorships, director compensation, codes of conduct, and financial disclosures. The committee’s work built upon previous efforts like the Kumar Mangalam Birla Committee, recognizing the evolving nature of governance standards in response to market dynamics and recent corporate scandals.

Key findings included the need for audit committees to mandatorily review financial statements, compliance reports, and related-party transactions, ensuring members are financially literate with at least one possessing accounting expertise. The report recommended management justify deviations from accounting standards, aiming for unqualified financial statements. It stressed the importance of transparent related-party transactions, requiring audit-committee review and justification for non-arm’s-length transactions. Risk-management procedures were to be periodically reviewed, with quarterly reports on business risks presented to the board for approval. Proceeds from IPOs should be disclosed quarterly, with annual auditor-certified statements reviewed by the audit committee. Companies were urged to establish a code of conduct for board members and senior management, with annual compliance affirmed in the annual report. Nominee directors were excluded from the definition of independent directors, emphasizing the need for their election through shareholder votes and equal responsibility. The report recommended requiring shareholder approval for non-executive-director compensation, with limits on stock options and mandatory annual disclosures of shares held. Independent directors were defined to ensure their impartiality and independence from company management and significant stakeholders. A whistleblower policy was recommended, granting employees access to the audit committee to report unethical practices, with protections against unfair treatment.

The committee’s conclusions were primarily encapsulated in mandatory recommendations to be implemented via amendments to the listing agreement, specifically Clause 49, ensuring broad applicability across listed companies, with phased compliance for smaller entities. It also incorporated recommendations from the Naresh Chandra Committee, such as detailed disclosure of contingent liabilities, CEO and CFO certification of financial statements, and mandatory nonexecutive audit-committee membership. The report highlighted the importance of harmonizing SEBI’s regulations with the Companies Act (1956) and encouraged corporate-governance ratings while acknowledging the developmental stage of such initiatives in India. The recommendations aimed to enhance investor confidence, attract long-term capital, and ensure the sustainable growth of corporations through robust governance practices.

The revised Clause 49 was issued in August 2003 and encapsulated the accepted recommendations and provided a comprehensive framework for corporate governance in listed companies. This clause mandated the establishment of audit committees, specified the roles and responsibilities of directors, and enhanced financial disclosures and transparency requirements.

The Narayana Murthy Committee outlined measures to strengthen corporate governance, including mandatory audit committees, stricter definitions of independent directors, enhanced financial disclosures, and whistleblower protections. Its recommendations, implemented through the revised Clause 49 of the listing agreement with stock exchanges, aimed to improve transparency, accountability, and investor confidence in India's corporate sector.