Corporate Governance Report

Introduction

Vedanta's shares have been listed on the London Stock Exchange since December 2003.  Most of the Group's assets and management are located in India.  Three of the Group's subsidiary companies are currently listed on stock exchanges in India and maintain their own corporate governance arrangements in line with Indian regulations.  In addition, BALCO and HZL, along with the Group's recently privatised Zambian business, KCM, have government appointees on their company boards who represent wider stakeholder interests.

The Group's Executive Chairman, Mr Anil Agarwal, is the Group's original promoter and founder having built the Group from its inception in 1976.  Volcan Investments Limited, a company controlled by Mr Agarwal and his family, remains the Group's controlling shareholder with a 54% interest.  The relationship between Volcan, Mr Agarwal and the Group is governed by a Relationship Agreement which was entered into by the Company and Volcan at the time of Listing in December 2003; it is designed to ensure the Company can operate independently of the controlling shareholder (described below in further detail).

Since Listing, the Board has moved towards compliance with the requirements of "The Combined Code on Corporate Governance" issued by the Financial Reporting Council (the "Code") in July 2003.  The Board believes that in the interest of all shareholders, the application of corporate governance must reflect the nature and location of the Group's businesses, the ownership of the Company and its subsidiaries, the Group's development needs and ensure that talents within the Group are utilised to their fullest potential.

Statement of Compliance

Throughout the year ended 31 March 2005, Vedanta has complied with Section 1 of the Code, save as set out below.

Pursuant to the Relationship Agreement and as disclosed at the time of Listing, Volcan will be consulted on all appointments to the Board. The Nominations Committee therefore works collaboratively with Volcan over making appointments to the Board, and to this extent, does not follow the process set out in the Code (Provision A.4.1).

Mr Agarwal did not meet the independence criteria set out in the Code at the time of his appointment as Executive Chairman on 23 March 2005. He had previously been Chief Executive of the Company and is the controlling shareholder of the Company (Provisions A.2.2 and A.3.1).  The Board believes that India is changing rapidly and presents the Group with significant opportunities.  The appointment of Mr Agarwal has allowed him to step back from operational management and to focus on turning these opportunities into value creating projects.  Together with the appointment of Mr KK Kaura as Chief Executive, the Board considers that this allows best use of the talents within the management team. 

Due to changes in Board membership during the year, no evaluation of the Board, its committees or individual Directors has been performed during the year (Principle A.6) and membership of the Board committees has not been maintained fully in compliance with the requirements of the Code (Provisions A.4.1, B.2.1 and C.3.1).  However, at the end of the year, membership of all Board committees complied with the Code.

The Company fully complies in all other respects with the Code, with the Listing Rules of the UK Listing Authority and with the UK Companies Act, and the Board remains fully committed to conducting the Group's affairs in a transparent manner.

The Board

The Board is responsible for setting leadership standards for the Group, sponsoring and monitoring its principal businesses, securing financial and other resources to enable those businesses to pursue their strategic objectives, ensuring that the Group maintains appropriate internal control systems and ensuring effective relationships with shareholders are maintained.

Board Composition

The Board consists of an Executive Chairman, three Executive Directors and four independent Non-executive Directors. 

Independence

The Board considers that all of the Non-executive Directors are independent of the Company as defined by Code Provision A.3.1.

Relationship Agreement

At the time of Listing, Volcan and the Company entered into the Relationship Agreement to regulate the ongoing relationship between them.  The principal purpose of the Relationship Agreement is to ensure that the Group is capable of carrying on its business independently of Volcan, the Agarwal family and their associates.  Under the terms of the Relationship Agreement, the Board and Nominations Committee will at all times comprise a majority of Directors who are independent of Volcan and the Agarwal Family, and the Remuneration and Audit Committees shall at all times consist only of Non-executive Directors.  Volcan is entitled to nominate for appointment as Director such number of persons as is one less than the number of Directors who are independent of Volcan, the Agarwal Family and their associates.

Executive Chairman, Chief Executive and Senior Independent Director

On 23 March 2005, the Board appointed Mr Anil Agarwal as Executive Chairman and Mr Kaura, previously Chief Operating Officer, was appointed to the Board as Chief Executive.  The Executive Chairman, as agreed by the Board, will be primarily responsible for providing strategic leadership to the Board and further enhancing Vedanta's exceptional growth pipeline.  Meanwhile, the Chief Executive, as agreed by the Board, will be primarily responsible for leadership of the executive team, implementation of the Group's strategy, the management of resources, the maintenance of a sound control environment, setting budgets and managing performance within those budgets.

Mr Navin Agarwal was appointed Deputy Executive Chairman on 1 June 2005, to provide support to the Executive Chairman.

Mr Chandra is the Company's Senior Independent Director, having been appointed to that role on 24 November 2004.  The principal duties of the Senior Independent Director are: to be available to shareholders to discuss any concerns they may have about the running of the Company, especially where the normal channels of communication would not seem appropriate; and to lead discussions at meetings of the independent Non-executive Directors.

Board Appointments

The Board has sought to improve the balance of the Board by appointing Non-executive Directors with a breadth of skills and experience to support the Executive Directors in implementing the Group's strategy.  The composition of the Board combines specialist knowledge of the economic, political and market environments within which the Group operates with expertise of international mining.

Board Development

The Board has established procedures for providing formal induction for the new Non-executive Directors, taking into account their existing qualifications and experience.  These procedures include meetings with senior management and the Company's lawyers, brokers and external auditors.

Board Administration

The Board has an agreed schedule of matters reserved to it, which has been updated since Listing, and newly adopted terms of reference for Board committees.  Most operational decisions are delegated to the Executive Committee and the boards of subsidiary companies.

The Executive Committee provides a conduit for keeping the Board informed of Group performance and developments.  It consists of the Executive Directors and senior management who head up the Group's principal operations and functions.  The Executive Committee meets monthly to consider corporate matters and has regular reviews with the executive teams from each of the principal subsidiaries.

Relations with Shareholders

The Board is responsible for ensuring an effective dialogue between the Company and its shareholders.  Formal communication with shareholders is mainly through meetings with the Executive Directors, including the Chairman, Chief Executive and Finance Director.  The Board is regularly briefed by the Head of Investor Relations, Mr John Smelt, on the Company's relationships with its shareholders.

The Company announces its results on a quarterly basis (in full for the preliminary and interim announcements and in abbreviated form in the intervening quarters).  Analysts' presentations involving the Executive Directors are made following the release of the interim and year end results.

The Chairmen and the Senior Independent Director have been available to discuss issues and concerns of major shareholders during the year and opportunities for such meetings are offered to major shareholders, through the Company's brokers.  Contact with the Chairman and/or the Senior Independent Director may be made directly through the Head of Investor Relations.  The Non-executive Directors are also available to meet as and when such meetings are requested.

The Board is happy to encourage the constructive use of the Company's annual general meeting for shareholder communication.

Nominations Committee

The terms of reference of the Nominations Committee have been revised to bring them in line with the recommendations of the Code.  The terms of reference are available upon request from the Company Secretary.

In conjunction with the consultation of Volcan pursuant to the Relationship Agreement, the Nominations Committee has a role in reviewing the size and composition of the Board, particularly the balance between Executive and Non-Executive Directors, and advising the Board on proposed appointments of new Non-executive Directors.

The Executive Directors' service agreements and terms of appointment for the Non-executive Directors are available for inspection at the Company's registered and head office.

Remuneration Committee

The terms of reference of the Remuneration Committee have also been revised and are available upon request from the Company Secretary.

Audit Committee

The role of the Audit Committee has been reviewed during the year in the light of the Code and the Smith Guidance incorporated into the Code.  The terms of reference of the Audit Committee have also been revised in the light of the Smith Guidance.  The terms of reference are available upon request from the Company Secretary.

The primary role of the Audit Committee has been confirmed in the new terms of reference as principally being to oversee:

• the integrity of the financial reporting system of the Group;
• the Group's approach to risk and internal controls;
• the effectiveness of the Group's internal audit activity;
• the Group's relationship with its external auditors; and
• compliance with relevant statutory and required financial reporting standards, including corporate governance disclosures.

In addition to the requirements of the Code, the Group subsidiary companies, by virtue of their listings on Indian stock exchanges, have their own audit committees, which are established in accordance with Indian corporate governance requirements.  This provides a second level of financial oversight below the Audit Committee, which also monitors the discussions and findings of the Group's subsidiary audit committees.