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INVESTOR PROTECTION UNDER CORPORATE GOVERNANCE

INVESTOR PROTECTION UNDER CORPORATE GOVERNANCE

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Published by Soumitra Chawathe
A Presentation which highlights the Concept of Corporate Governance, Investor Protection under the Corporate Governance (Clause 49 of Listing Agreement) and Shareholders' Activism
A Presentation which highlights the Concept of Corporate Governance, Investor Protection under the Corporate Governance (Clause 49 of Listing Agreement) and Shareholders' Activism

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Published by: Soumitra Chawathe on Aug 14, 2010
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06/20/2013

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INVESTORS PROTECTION UNDER CORPORATE GOVERNANCE

SOUMITRA CHAWATHE
Company Secretary, Pune
1

INTRODUCTION
y Investors invest their hard earned money y Assurance about safety y Are investors innocent? y Past events have shook investor confidence y Increased need for corporate governance

2

THE NEED FOR INVESTOR PROTECTION
y Corporate Scams and Accounting Scandals y Insider Trading y Non-disclosure of material facts y Vanishing Companies Taking investors money and

disappearing y Terrorist funding y Money laundering

3

EVOLUTION OF CORPORATE GOVERNANCE
‡ Corporate Governance principles by sages and hermits in ancient

India Have we forgotten these values?
‡ Kautilya has elaborated on four fold duties of a king ‡ Duties- Raksha (protection), Vrudhi (enhancement), Palana

(maintenance), Yogakshema (safeguard)

4

CORPORATE GOVERNANCE WHAT DOES IT MEAN
y The social, legal & economic process in which Companies

function and are accountable
y Conducting the affairs of the company in a manner that

ensures fairness to the stake holders, i.e. y Customers y Employees y Investors y Lenders and institutions y Vendors y The Government, and y The Society as a whole

5

ELEMENTS OF GOOD CORPORATE GOVERNANCE
‡ ‡ ‡ ‡ ‡ ‡ ‡

Transparency Disclosures Accountability Equity Compliance Ethics Share holder s value

THE SEVEN COMMANDMENTS
6

MODERN DAY PRINCIPLES OF CORPORATE GOVERNANCE
y Solid Foundations for management and oversight y Structure the Board to add value y Promote ethical and responsible decision making y Safeguard integrity in financial reporting y Timely & Balanced Disclosure
7

MODERN DAY PRINCIPLES OF CORPORATE GOVERNANCE
y Protection of stakeholders rights y Encourage and enhance performance y Recognize and manage risk y Remunerate fairly y Recognize legitimate interests of shareholders

8

INVESTOR PROTECTION VIS-À-VIS CORPORATE GOVERNANCE
y Investor Protection Most important, yet neglected y Professional Ethics & Responsibility y Role of Market Regulators y Shareholders Activism

Healthy trend for Corporate
9

Governance

INVESTOR PROTECTION MEASURES IN INDIA
y SEBI ESTABLISHED IN 1992

y FUNCTIONS OF SEBI

10

MEASURES INITIATED BY SEBI
y Vetting Offer Documents and Prospectus y Advertising Code for issues y IPO Grading y Improve functioning of Stock Exchanges y Securities Appellate Tribunal y Disclosure of NAV of Mutual Funds daily y Publications / Awareness Programmes y Stringent requisites for an intermediary
11

EXPERT COMMITTEE (DR. J.J. IRANI COMMITTEE)
y As per the new company law by the Expert Committee

training of directors should be aimed at better discharge of fiduciary duties and value enhancing board activities

12

KUMAR MANGALAM BIRLA COMMITTEE
y Clause 49 was introduced in the Listing Agreement pursuant

to the recommendations of the report of Committee
y Constituted by SEBI in May 1999 y Large number of complaints from the investors prompted the

constitution
y Recommended

appointment of independent directors in board

minimum

number

of
13

CLAUSE 49 OF THE LISTING AGREEMENT AND ITS PROVISIONS

14

I. Board of Directors
a) Composition of Board of Directors b) Non Executive Director s Compensation & Disclosures c) Other Provisions as to Board of Directors d) Code of Conduct

15

II. Audit Committee
a) Qualified & Independent Committee b) Meeting c) Powers d) Role e) Review of information
16

III. Subsidiary Companies
a) At least One Independent Director of holding Company

on the Board of materially non listed subsidiary company
b) Audit Committee of Listed Company should also review

the financial results of Materially non listed subsidiary company
c) Minutes of the non listed subsidiary company be placed

and before the board of the listed company
17

IV. Disclosures
a) Related Party Transactions b) Accounting Treatment c) Board Disclosures d) Proceeds from public/ right issue/ preferential

allotments etc. e) Remuneration of Directors f) Management g) Shareholders

18

V. CEO/ CFO Certification
a) Review and Declarations of Financial Results b) Declaration as to no transactions of fraudulent, illegal or

violative of code of conduct, are entered by the Company
c) Responsibility for establishing and maintaining internal

controls for financial reporting

19

VI. Report On Corporate Governance
a) Separate section in Annual Report of the Company with

detailed report on compliance of corporate governance
b) Quarterly Compliance Report to be submitted to the

Stock Exchange within 15 days of close of quarter.

20

VII. Compliance
y Companies to obtain certificate from Auditors or PCS

regarding compliance of conditions of Corporate Governance as stipulated in this Clause.

21

Shareholder Activism Healthy trend for Corporate Governance
Shareholder Activism means the active involvement of stockholders in their Organization Involvement can be done in various ways : Establishing dialogue with the management on issues that concern you. Influencing the corporate culture. Using the corporate democracy provided by law. Increasing general awareness on social and human rights issues concerning the organization. Internet and mass media are effective tools in building up pressure on the management.
22

y y y y

Shareholder Activism Healthy trend for Corporate Governance

‡ Participation in the meetings ‡ Concern over the financial matters ‡ Proxy Battles ‡ Publicity Campaigns ‡ Shareholder Resolution ‡ Litigation and Negotiation with the management

23

IMPORTANCE OF CORPORATE GOVERNANCE
‡ ‡

Enhances the ethical value system Protects the rights of the shareholders by ensuring equitable treatment. Cope with the challenges of liberalization, privatization and globalization. Timely and accurate disclosure on all materials matters
24

‡

‡

IMPORTANCE OF CORPORATE GOVERNANCE
‡ Corporate Excellence Through Transparency,

Accountability and Responsibility.
‡ Compliance of All the Relevant Law and

Regulations.
‡ Best Business Ethical Practices and Value Based

System.
25

ROLE OF COMPANY SECRETARIES
‡ ‡ ‡ ‡ ‡ ‡

Governance architecture Board/Committee meeting Compliance officer: Ensure compliance of clause 49 and report to the Stock Exchanges. Annual Reports : Compile various reports and make necessary disclosure in Annual reports. Proactive initiative in good governance and monitoring governance practices Role of a Practicing Company Secretary
26

Consequences of Investors Protection
Two broad areas in which investor protection has an impact : y Financial Markets The most basic prediction of the legal approach is that investor protection encourages the development of financial markets. When investors are protected from expropriation, they pay more for securities, making it more attractive for entrepreneurs to issue these securities.

27

Consequences of Investors Protection
y Real Consequences

Through its effect on financial markets, investor protection influences the real economy. Financial development can accelerate economic growth in three ways :
y Enhance savings. y It can channel these savings into real investment and thereby

foster capital accumulation. y To the extent that the financiers exercise some control over the investment decisions of the entrepreneurs, financial development improves the efficiency of resource allocation, as capital flows toward the more productive uses. All three channels can in principle have large effects on economic growth.
28

CONCLUSION
‡

Corporate governance should not be followed just as set of rules and procedures. Can not be the same all the time. Well defined and well accepted accounting practices are pre-requisites in corporate governance. Corporate Governance is the key to Corporate Excellence
29

‡

‡

‡

NEVER MAKE A NEGLIGENCE IN GOOD CORPORATE GOVERNANCE IT REALLY MAKES TRUE SENSE TO ACHIEVE CORPORATE EXCELLENCE

30

31

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