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Recent acq’s:

• During March 2007, the Indian steel company Hidalco bought American
rival Novelis for a mere $6 Billion. This made it the world’s largest
aluminum -rolling company.

• Vodafone's 67% acquisition of Hutchison Essar for $13.66 billion

• Idea Cellular-AT&T deal

• British brewer SABMIller’s buy of Foster’s Australia’s Indian arm Foster’s


• Global acquisition of S&N by the Heineken-Carlsberg consortium, involving

a 37.5% stake held by S&N in UB group.
• Ford Motor Co’s sale of its British luxury brands Jaguar and LandRover to
Tata Motors for over $2 billion.
• Following are some major overseas acquisitions by Tata Group companies
in recent years: -

o Feb 2000 - Tata Tea Ltd acquires UK's Tetley for $432 million,
becoming the world's No. 2 packaged tea company - Feb 2004.
o Tata Motors signs a deal to buy the commercial vehicle unit of
South Korea's Daewoo Group for $102 million in Aug 2004.
o Tata Steel Ltd buys Singapore's lone steel miller, NatSteel Ltd, for
$286 million
o June 2005 - Tata Coffee buys US-based Eight O'Clock Coffee Co
for $220 million from Gryphon Investors in July 2005.
o Telecom firm Videsh Sanchar Nigam Ltd buys US-based Teleglobe
International Holdings Ltd for $239 million and completes the
$130 million purchase of Tyco International's global undersea
fibre optic cable network unit in Aug 2006.
o Tata Tea buys 30 per cent of US enhanced water firm Energy
Brands Inc for $677 million. It sells the stake less than a year
later to Coca-Cola for $1.2 billion in Jan 2007.
o Tata Steel acquires Anglo-Dutch steelmaker Corus Group for $13
billion, India's biggest overseas takeover yet - March 2007.
o Tata Power buys stakes in Indonesian PT Bumi Resources Tbk's
two coal mines for $1.3 billion in Jan 2008.
o Tata Chemicals buys US soda-ash producer General Chemical
Industrial Products Inc for $1.01 billion.
o Tata Steel, India’s largest private producer of steel purchased the
Dutch firm Corus for $13.2 billion. This price tag was 9 times
larger than any foreign acquisition by an Indian organization
before this.
• In one of the largest ever deal in the Indian pharma industry; the third
largest Japanese drug firm Daiichi Sankyo announced the acquisition of
over 50% stake in India’s largest pharmaceutical major Ranbaxy for a
consideration of US$4.6 billion.
• AAA Project Ventures acquired warrants convertible into a 15.38%
stake in Reliance Energy, an electric utility company, for a total value
of US$1.9 billion in a privately negotiated transaction.
• Dublin based CRH Plc, the world’s second-biggest maker and
distributor of building materials , acquired a 50% stake in a Indian
cement manufacturer, My Home Industries, for a consideration of
US$456 million. This is one of the most expensive acquisitions of a
cement unit in India by a foreign major.
• Thomas Cook UK acquired 75% stake in Thomas Cook India for US$380
million. This is two years after Thomas Cook AG sold Thomas Cook
India to the Dubai Financial Group.
• Acquisition of Escotel and RPG.
• The world’s largest drug maker Pfizer will be among the top eight firms
in the domestic market once its integration with Wyeth’s India arm
gets over. Pfizer agreed to buy Wyeth for $68 billion in January this
• Punj Lloyd’s international acquisitions like Singapore-based SembCorp
and Technodyne
• Sun Pharma has been one of the fastest growing companies in the
Indian pharma space. Acquisition of loss making US-based Caraco
marked Sun’s first overseas acquisition in 1996.
• Acq. Of Belgium-based Hansen Transmission and Germany-based
Repower by Suzlon Energy, it has grown to be the fifth largest wind
power equipment manufacturer in the world

Here are the top 10 acquisitions made by Indian companies

Target Country
Acquirer value Industry
Company targeted
($ ml)
Tata Corus Group
UK 12,000 Steel
Steel plc
Hindalco Novelis Canada 5,982 Steel
Electronics Korea 729 Electronics
Reddy’s Betapharm Germany 597
Hansen Group Belgium 565 Energy
HPCL Petroleum Kenya 500 Oil and Gas
Refinery Ltd.
Ranbaxy Pharmaceutic
Terapia SA Romania 324
Labs al
Natsteel Singapore 293 Steel
Thomson SA France 290 Electronics
VSNL Teleglobe Canada 239 Telecom

Future happening(s) in the bag:

• Cisco, the $33.5 billion technology giant, is bullish on making

acquisitions in India as it goes about expanding its array of solutions
and products in the area of emerging technologies. Some of its recent
acquisitions include companies like Scientific Atlanta and WebEx. Cisco
has committed over $100 million as venture capital investment for
India. It has so far invested in four Indian companies including
Indiagames and Bharti Telesoft.
• Bharti Airtel's proposed $23 to $29 billion merger with South African
operator MTN goes through, India's telecom M&A market will come of

• However, the downturn in the global and domestic economies seems

to have impacted India’s M&A scenario.
• While the total number of transactions fell from 663 in the first half
(Q1) of 2007 to 467 in Q1 2008, the total deal value saw a sharp
slump, dipping by over 40% from US$38.4 billion in Q1 2007 to
US$21.4 billion in H12008. The sectors which have been driving the
strategic M&A activity include pharmaceuticals, IT & ITeS , Banking &
Financial Services (BFSI) and Real Estate. The outbound investments
accounted for US$ 8.2 billion of M&A activity spread over 96 deals.
• However, corporate India’s overseas acquisitions are continuing to
make global footprints
• Outbound investments by Indian companies continued to grow,
touching US$8.2 billion spread across 96 deals. The valuations have
fallen globally and have made it easier for Indian firms to acquire
businesses overseas. Though, with interest rates hardening, leverage

financing will take a hit, making it difficult to finance large buyouts



• Corporate governance is the set of processes, customs, policies,

laws, and institutions affecting the way a corporation (or company) is
directed, administered or controlled. Corporate governance also
includes the relationships among the many stakeholders involved and
the goals for which the corporation is governed. The principal
stakeholders are the shareholders/members, management, and the
board of directors. Other stakeholders include labor (employees),
customers, creditors (e.g., banks, bond holders), suppliers, regulators,
and the community at large.
• Corporate governance is only part of the larger economic context in
which firms operate that includes, for example, macroeconomic
policies and the degree of competition in product and factor markets.
The corporate governance framework also depends on the legal,
regulatory, and institutional environment. In addition, factors such as
business ethics and corporate awareness of the environmental and
societal interests of the communities in which a company operates can
also have an impact on its reputation and its long-term success. While
a multiplicity of factors affect the governance and decision-making
processes of firms, and are important to their long-term success, the
Principles focus on governance problems that result from the
separation of ownership and control. However, this is not simply an
issue of the relationship between shareholders and management,
although that is indeed the central element.
• While corporate governance may not state the economic prospects of
developing countries, it certainly takes part in shaping them. Good
corporate governance is vital because of its role in attracting investors
to invest both in the domestic and in the international capital markets
• Investors primarily consider two variables before making investment
decisions in the companies – the rate of return on invested capital
and the risk associated with the investment. Good corporate
governance practices reduce this risk by ensuring transparency,
accountability, and enforceability in the capital marketplace. As a
result, the investors expect the Board and the Management in the
companies to act in their best interests at all times so as to earn a risk
adjusted rate of return that is higher than the cost of capital.
• Practices that the Board of Directors of a listed entity follows to fulfill
the expectations of all stakeholders (i. e. Shareholders, employees,
creditors, customers, government, regulatory authorities and society at
large) is called corporate governance practices. While sound corporate
governance practices ensure a company’s long-term success, weak
practices often lead to serious problems.


(1) Companies pool capital from a large investor base both in the domestic
and in the international capital markets.
(2) In this context, investment is ultimately an act of faith in the ability of a
company’s management. In order to manage the affairs of a company and to
act in the best interests of all at all times, there must be a system whereby
the directors are entrusted with responsibilities and duties in relation to the
direction of the company affairs.
(3) Corporate governance is a system of making Management accountable
towards the stakeholders for effective management of the companies.
(4) Corporate governance is also concerned with the morals, ethics, values,
parameters, conduct and behavior of the company and its management.
(5) The underlying principles of corporate governance revolve around three
basic interrelated
Segments. These are:
 Integrity and Fairness
 Transparency and Disclosures
 Accountability and Responsibility
(6) According to the Confederation of Indian Industry (CII), corporate
governance deals with laws, procedures, practices and implicit rules that
determine the ability of the company to make managerial decisions visà-vis
its claimants – in particular, its shareholders, creditors, customers, the State
and employees.
(7) Corporate governance mainly consists of two elements i.e., A long-term
relationship, which has to deal with checks and balances, incentives of
managers and communications between Management and investors. The
second element is a transactional relationship involving matters relating to
disclosure and authority. In other words, 'good corporate governance' is
simply 'good business'.
(8) Practices that the Board of Directors of a listed entity follows to fulfill the
expectations of all stakeholders (i.e. Shareholders, employees, creditors,
customers, government, regulatory
Authorities and society at large) is called corporate governance practices.


(9) In order to overcome the under noted serious concerns within the
business community,
there is a need to introduce a system of corporate governance that will
ensure the transparency, integrity and accountability of Management
including non-executive

• Concentration of greater financial power and authority in a lesser number

of individuals,
• Violations of foreign exchange rules and regulations,
• Large scale diversion of funds to associate companies and risky ventures,
• Unfocussed business decisions leading to losses,
• Preferential allotment of shares to promoters at low prices,
• Exploited the weaknesses in the Accounting Standards to inflate profits and
understate liabilities,
• Frequent changes in Board structures,
• Spinning off profitable business operations to subsidiary companies, and
• Charging of royalty for use of brand name by the parent company by
leading companies.

(10) In an open financial market, investors choose from a variety of

investment vehicles. The existence of a corporate governance system is
likely a part of this decision-making process. In such a scenario, companies
that are more open and transparent, and thus well governed, are
more likely to raise capital successfully because investors will have the
information and confidence necessary for them to lend funds directly to such
companies. Moreover, well-governed companies likely will obtain capital
more cheaply than companies that have poor corporate governance
practices because investors will require a smaller “risk premium” for
investing in well-governed companies. Thus, in an efficient capital market,
investors will invest in companies with better corporate governance
frameworks because of the lower risks and the likelihood of higher returns.
Good corporate governance practices also enable Management to allocate
resources more efficiently, which increases the likelihood that investors will
obtain a higher rate of return on their investment.
(11) Moreover, Good corporate governance practices ensure:
 Adequate disclosures and effective decision making to achieve
corporate objectives;
 Transparency in business transactions;
 Statutory and legal compliances;
 Protection of shareholder interests;
 Commitment to values and ethical conduct of business.
 Long-term survival of the companies.
(12) Corporate governance in a developing country setting takes on
additional importance. Good corporate governance is vital because of its role
in attracting foreign investment. The extent of foreign investment, in
turn, shapes the prospects for economic growth for many developing
countries. Generally developing countries that have good corporate
structures consistently outperform developing countries with poor corporate
governance structures. Moreover, corporate governance can play a role in
reducing corruption, and decreased corruption significantly enhances a
country’s development prospects. Ultimately, the
concept of corporate governance is not just one of those imported western
luxuries; it is
a vital consideration to be enforced successfully.
(13) The aim of "Good Corporate Governance" is to ensure commitment of
the board in managing the company in a transparent manner for maximizing
long-term value of the company for its shareholders and all other partners. It
integrates all the participants involved in a process, which is economic, and
at the same time social.
(14) The fundamental objective of corporate governance is to enhance
shareholders' value
and protect the interests of other stakeholders by improving the corporate
performance and accountability. Hence it harmonizes the need for a
company to strike a balance at all times between the need to enhance
shareholders' wealth whilst not in any way being detrimental to the interests
of the other stakeholders in the company. Further, its objective is to generate
environment of trust and confidence amongst those having competing and
conflicting interests.
(15) There is a global consensus about the objective of ‘good’ corporate
maximizing long term shareholder value.
Since shareholders are residual claimants, this objective follows from a
premise that, in well performing capital market, whatever maximizes
shareholder value must necessarily maximize corporate prosperity and best
satisfy the claims of creditors, employees, customers, shareholders and the


(16) Broadly, the test of corporate governance should cover the following
• Whether the funds of the company have been deployed for pursuing
the main objects of the company as enshrined in the Memorandum?
• Whether the funds acquired from financial institutions and the capital
market have been utilized for the purpose for which they were intended?
• Whether the company has the core competence to effectively
manage its diversifications?
• Whether there has been proper diversion of funds by way of loans
and advances or investments to subsidiary?
• Whether the provisions of the Companies Act, the Foreign Exchange
Management Act, the Factories Act and other statutes are complied with in
letter and in spirit?
• Whether the practices adopted by the company and its Management
towards its shareholders, customers, suppliers, employees and the society at
large are ethical and fair?
• Whether the directors are provided with the information on the
working of the company and whether the institutional and non-executive
directors play an active role in the
functioning of the companies?
• Whether the internal controls in place are effective?
• Whether there is transparent financial reporting and audit practices
and the accounting practices adopted by the company are in accordance
with Accounting Standards of The Institute of Chartered Accountants of India

(17) The three key constituents of corporate governance are the Board of
Directors or Board, the Shareholders and the Management. These can further
be detailed as:

• Role and Powers of Board • Board Meetings

• Composition of Board • Board Induction and Training
• Legislation • Monitoring the Board Performance
• Code of Conduct • Management Skills and
• Board Independence Environment
• Board Skills • Business and Community
• Role and Powers of Shareholders Obligations
• Board Appointments • Audit Committee
• Financial and Operational Reporting
• Risk Management


(A) Organizational Framework: The organizational framework for

corporate governance initiatives in India consists of the Ministry of
Corporate Affairs (MCA), the Confederation of Indian Industry (CII) and
the Securities and Exchange Board of India (SEBI).

(18) In 1998, the Confederation of Indian Industry (CII), "India's premier

business association," unveiled India's first code of corporate governance.
However, since the Code's adoption was voluntary, few firms embraced it.
Soon after, SEBI appointed the Kumar Mangalam Birla Committee to fashion
a code of corporate governance. In 2000, SEBI accepted the
recommendations of the Kumar Mangalam Birla Committee and introduced
Clause 49 into the Listing Agreement of Stock Exchanges. Clause 49
outlines requirements vis-a-vis corporate governance in exchange-traded
companies. In 2003, SEBI instituted the N.R. Narayan Murthy Committee to
scrutinize India's corporate-governance framework further and to make
additional recommendations to enhance its effectiveness. SEBI has since
incorporated the recommendations of the N.R. Narayan Murthy Committee,
and the latest revisions to Clause 49 became law on January 1, 2006 (SEBI,
vide circular SEBI/CFD/DIL/CG/1/2006/13/1 dated 13th
January, 2006). The main provisions of Clause 49 as inserted vide SEBI F.No.
SMDRP/Policy Cir 10/2000 dated 21.02.2000 in the Listing Agreement of
Stock Exchange are:
I. Board of Directors;
II. Audit Committee;
III. Remuneration of Directors;
IV. Board Procedure;
V. Management;
VI. Shareholders;
VII. Report on Corporate Governance; and
VIII. Compliance Certification
(19) The Ministry of Corporate Affairs (MCA) had appointed a Naresh
Chandra Committee on Corporate Audit and Governance in 2002 in order to
examine various corporate governance issues. It made recommendations in
two key aspects of corporate governance: financial and nonfinancial
disclosures: and independent auditing and board oversight of management.
(20) The Ministry of Corporate Affairs (MCA) had also set up a National
Foundation for Corporate Governance (NFCG) in association with the CII, ICAI
and ICSI as a not-for-profit trust to provide a platform to deliberate on issues
relating to good corporate governance, to sensitize corporate leaders on the
importance of good corporate governance practices as well as to facilitate
exchange of experiences and ideas amongst corporate leaders, policy
makers, regulators, law enforcing agencies and nongovernment
organizations. The foundation has been set up with the mission to:
1. Foster a culture for promoting good governance, voluntary
compliance and facilitate effective participation of different stakeholders;
2. Create a framework of best practices, structure, processes and
ethics; and
3. Make significant difference to Indian corporate sector by raising the
standard of corporate governance in India towards achieving stability and

(B) Legal Framework:

(21) An effective legal framework is indispensable for the proper and
sustained growth of the
company. In rapidly changing national and global business environment, it
has become necessary that regulation of corporate entities is in tune with
the emerging economic trends, encourage good corporate governance and
enable protection of the interests of the investors and other stakeholders.
The Legal framework for corporate governance consists of the Company
Laws and the SEBI Laws.
Company Laws: The Ministry of Corporate Affairs (MCA) is the main
authority for regulating and promoting efficient, transparent and accountable
form of corporate governance in the Indian corporate sector. The important
legislations governed by MCA for regulating the entire corporate structure
and for dealing with various aspects of governance in companies are
Companies Act, 1956 and Companies Bill, 2004. These laws have been
introduced and amended, from time to time, to bring more transparency and
accountability in the provisions of corporate governance. That is, corporate
laws have been simplified so that they are amenable to clear interpretation
and provide a framework that would facilitate faster economic growth.
The Companies Act, 1956 is the central legislation in India that empowers
the Central Government to regulate the formation, financing, functioning and
winding up of companies. The Companies Act, 1956 has elaborate provisions
relating to the Governance of Companies, which deals with management and
administration of companies. It contains special provisions
with respect to the accounts and audit, directors remuneration, other
financial and non-financial disclosures, corporate democracy, prevention of
mismanagement, etc. The main two Sections of this Act related to the
corporate governance are Section 292A and Section 211.
• Section 292A:
(22) The concept of Corporate Governance receives statutory recognition,
with the insertion of Section 292A in the Companies Act, 1956 with an
amendment made to it through the Companies (Amendment) Act 2000.
The New Section 292A made it obligatory upon a public company having a
paid-up capital of Rs. 5 crores or more to have an audit committee
comprising at least three directors as members. Two-thirds of the total
number shall be nonexecutive directors.
• Section 211:
(23) As per this Section, every Profit and loss account and Balance sheet of
the company shall comply with the Accounting Standards, issued by the
Institute of Chartered Accountants of India as may be prescribed by the
Central Government in consultation with National Advisory Committee on
Accounting Standards, and the Statutory auditors of every company are
required to report whether the Accounting Standards have been complied
with or not. The Securities
Exchange Board of India (SEBI) has added a new clause in the Listing
Agreement to provide that listed enterprises shall compulsory comply with all
the Accounting Standards issued by ICAI from time to time.
(24) The Companies Bill 2004 has been introduced to provide the
comprehensive review of the company law. It contained important provisions
relating to corporate governance, like, independence of auditors, relationship
of auditors with the management of company, independent directors with a
view to improve the corporate governance practices in the corporate sector.
It is subjected to greater flexibility and self-regulation by companies, better
financial and non-financial disclosures, more efficient enforcement of law,
etc. This amendment to the Companies Act 1956 mainly focused on
reforming the audit process and the board of directors.
It mainly aimed at :-
(i) laying down the process of appointment and qualification of
(ii) prohibiting non-audit services by the auditors;
(iii) prescribing compulsory rotation, at least of the Audit Partner;
(iv) requiring certification of annual audited accounts by both CEO and
CFO; etc.
For reforming the boards, the bill included that remuneration of non-
executive directors can be fixed only by shareholders and must be disclosed.
A limit on the amount which can be paid would also be laid down. It is also
envisaged that the directors should be imparted suitable training. However,
among others, an independent director should not have substantial
pecuniary interest in the company’s shares.
SEBI Laws:
(25) Improved corporate governance is the key objective of the regulatory
framework in the securities market. Accordingly, Securities and Exchange
Board of India (SEBI) has made several efforts with a view to evaluate the
adequacy of existing corporate governance practices in the country and
further improve these practices. It is implementing and maintaining the
standards of corporate governance through the use of its legal and
regulatory framework, namely, The
Securities Contracts (Regulation) Act, 1956, Securities and Exchange Board
of India Act, 1992 and the Depositories Act, 1996.
(26) If the Board is in awe of the family executive, it makes it difficult for the
Board sometimes to ask tough questions or at other times the right
questions at the right time in order to serve the interests of the shareholders
better. As a result truly independent directors are rarely found in Indian
(27) Serving on multiple boards is problematic because doing so can
overburden directors, thus hampering their performance, and increase the
potential for directors to experience conflicts of interest between the various
corporations they serve.
(28) It is admitted that contribution of the independent directors is limited
because the average time spent in Board meetings by these directors is
barely 14 to 16 hours in a year.
In some cases, it has been found that no proper training and orientation
regarding the awareness of rights, responsibilities, duties and liabilities of the
directors is provided to an individual before appointing him/her as a director
in the Board.
(29) Also there is unseen but the active participation of political class.
(30) The directors on the board are largely reliant on information from the
management and auditors, with their capacity to independently verify
financial information being quite limited, while auditors, as this case
suggests, have also been equally reliant on management information. The
relevant issue here is the extent and the depth of auditors’ effort in their
exercise of due diligence. Excessive reliance on information from the
management is symptomatic of the ownership or control of companies in
India by business families, and that poses a particular challenge for
corporate governance in India.
(31) The greatest drawback of financial disclosures in India is the absence of
detailed reporting on related party transactions. In addition, poor quality of
consolidated accounting and segment
reporting leads to misrepresentation of the true picture of a business group.
(32) Although India's investor-protection laws are sophisticated, litigants
must wait a long time before receiving a judgment.
(33) Delays in the delivery of verdicts, high costs of litigation and the lengthy
judicial appointment process in courts make the legal enforcement
mechanism ineffective.
(34) According to the OECD, “the credibility and utility of a corporate
governance framework rest on its enforceability.”
(35) In India, the two audit-related issues which are commonly recognized
are that of auditor independence (which is a problem worldwide) because of
the large if segmented market in accounting services, and the perceived
powerlessness of auditors in the face of corporate pressure. In many cases,
they are ill-equipped to handle the needs of large companies, because in the
face of an audit failure, it is very difficult to discern whether the auditors
were complacent or they were pressurized by the concerted efforts of the
insiders. There is no proper system to monitor the work of audit firms or to
review the accounts prepared by the company’s statutory auditors.
However, (36) in the aftermath of the Satyam case, the SEBI has decided to
introduce a peer review mechanism to review the accounts prepared by a
company’s statutory auditor. In addition, the SEBI has also decided to
constitute a panel of auditors to review the financial statement of all BSE
Sensex and NSE Nifty companies. Also there is no statutory compliance for
the companies to obtain a report on Corporate Governance Rating by the
Credit Rating Agencies in India.


 To promote or to increase awareness among entrepreneurs
adoption of good corporate governance practices, which are the
integral element for doing and managing business.
 To ensure the quality of audit that is at the root of effective
corporate governance by making the Auditor accountable for the
disclosure of financial information.
 To make the Board of Directors as well as the CEOs and CFOs
accountable for the discharge of their duties with the proper use
of their rights within the powers.
 To form an appropriate system in order to check the Directors
independence in the board and to monitor the work of Audit
 To pay special attention in the quality and effectiveness of the
legal, administrative and regulatory framework.
 To increase the shareholder activism i.e. the exercise and
enforcement of rights by minority shareholders with the
objective of enhancing shareholder value over the long term
 To infuse India’s Business Culture with a “Spirit of Corporate
Governance” in order to maintain sustainable and effective corporate
 To implement more robust Bankruptcy Laws which are a key
component of any corporate governance system
 To eliminate “Regulatory Arbitrage” i.e. to establish a clear mandate for
each regulatory Authority for the enforcement of Clause 49 of the
Listing Agreement, thereby improving India’s corporate governance
enforcement mechanism
 To resolve the conflict between the dominant shareholders and the
minority shareholders by improving the rights of minority shareholders.
 To make a statutory compliance for the listed companies to
compulsorily obtain a report on Corporate Governance Rating (CGR)
from a Credit Rating Agency in India.


To highlight the frauds and irregularities in the corporate sector
(41) The issues of governance, accountability and transparency in the affairs
of the company, As well as about the rights of shareholders and role of Board
of Directors have never been as prominent as it is today. With the integration
of Indian economy with global markets, industrialists and corporations in the
country are being increasingly asked to adopt better and transparent
corporate practices. The degree to which corporations observe basic
principles of good corporate governance is an increasingly important factor
for taking key investment decisions. If companies are to reap the full benefits
of the global capital market, capture efficiency gains, benefit by economies
of scale and attract long term capital, adoption of corporate governance
standards must be credible, consistent, coherent and inspiring.
(42) Hence, in the years to come, corporate governance will become more
relevant and a more acceptable practice worldwide. This is easily evident
from the various activities undertaken by many companies in framing and
enforcing codes of conduct and honest business practices; following more
stringent norms for financial and non-financial disclosures, as mandated by
law; accepting higher and appropriate accounting standards; enforcing tax
reforms coupled with deregulation and competition; etc. but we cannot
eliminate the possibility of frauds and scams as seen in the recent Satyam
(43) Scams are an integral part of corporate history. They come to light only
when the going gets rough. Only when the tide goes out we see all those
swimming naked. Such scams are an opportunity for self-renewal; neither
self-denial nor blame game. The frequency and scale of such scams has been
far more in the West than in India. We need to take such types of scams as
an opportunity in future for overhauling the system of corporate governance
in India.

(44) Good corporate governance may not be the engine of economic growth,
but it is essential for the proper functioning of the engine.
(45) The investors both National and International would be loyal to invest in
the Indian companies if they follow all the standards of corporate governance
(46) Further, to nurture and strengthen this loyalty, our companies need to
give clear-cut signal that the words “your company” have real meaning. That
requires well functioning Board, greater disclosure, better management
practices, and a more open, interactive and dynamic corporate governance
environment. Quite simply, share holders’ and creditors’ support are vital for
the survival, growth and competitiveness of India’s companies.
(47) Effectiveness of corporate governance system cannot merely be
legislated by law neither can any system of corporate governance be static.
As competition increases, the environment in which companies operate also
changes and in such a dynamic environment the systems of
corporate governance also need to evolve. Failure to implement good
governance procedures has a cost in terms of a significant risk premium
when competing for scarce capital in today's public markets. Thus, the
essence of corporate governance is in promoting and maintaining integrity,
transparency and accountability in the management of the company as well
as in manifestation of the values, principles and policies of a corporation. In
order to make an honest and objective assessment on corporate governance
practices we do need more laws but better enforcement because the
effectiveness and the utility of good corporate governance practices rest on
its enforceability. Ultimately, good corporate governance practices in India
will be shaped by our administrative and regulatory authorities like SEBI,
MCA, etc. by implementing transparent and effective corporate governance


RECENT NEWSMAKERS: (can be considered as case studies)

Hirco, the AIM-listed real estate fund of the Hiranandani group, finds itself in

the midst of a corporate governance controversy.

Several shareholders are likely to oppose Hirco’s proposal to acquire two
estate projects owned by the group.

Case insight:
On December 18, the Hirco board had approved the acquisition of two special
purpose vehicles (SPVs) owned by the Hiranandani family. These two companies are
carrying out township developments at Panvel near Mumbai and Chennai. The
merger, once implemented, would take the Hiranandani group’s holding in Hirco to
over 50% from the existing 20%. Hirco had listed on the AIM in 2006 and raised
more than £380 million for investing in residential properties in India.
Hirco has called an Top of Form 2 Bottom of Form 2 extraordinary general meeting
on January 16 in Mumbai to enable the shareholders to vote on the restructuring
proposal. It will begin roadshows for investors early next week.

British media reports on Wednesday had suggested that some shareholders were
opposed to the restructuring plan on the ground that it would dilute shareholding
interests and effectively cede control to the Hiranandanis.
A section of Hirco’s investors, led by Laxey Partners, an activist shareholder whose
holdings exceeds 10%, have termed the restructuring plan as “shocking and ill-
conceived.” In a letter dated 30 December — a copy of which is with ET — Laxey
urged the other shareholders to vote against the plan, which involves, “injecting
loss-making development vehicle owned by the Hiranandani family into Hirco,” and
handing the family an equity stake of up to 50.6% in Hirco.

As part of the proposal, shareholders will lose their preferential claim on £350.8
million of shares that pay an annual dividend of 12%. Earlier in October, Laxey
Partners had demanded a relook at the Hirco fund’s corporate strategy and asked
its management to bridge the gap between the company’s listed price and the NAV.

Many foreign funds own large stakes in Hirco, including the UK’s Standard Life
(13.11%), HSBC Holdings (10.13%), Laxey Partners (10.05%), Halbis Capital
(7.84%), Fortress Investment (4.57%) and Lazard AM (4.57%). The Hiranandani
group is unlisted in India.

On October 28, ET had reported that India’s sagging real estate story has sent
negative signals to the London’s AIM, where at least five India-focused real estate
funds are listed. Investors in other funds have called for new corporate and
investment strategies following a 50% dip in their net asset value (NAV) over the past
few months.


Besides rattling investor confidence, Satyam computer services fizzled
$1.6 billion acquisition of Maytas Infra and Maytas Properties has
raised the issue of corporate governance for a company which has

bagged a number of excellence awards over the years.

As recently as September 2008, Satyam was awarded the coveted
Golden Peacock Global Award for Excellence in Corporate Governance,
an honor bestowed on companies for following best practices.

Late Tuesday, Satyam announced the acquisition of the privately held

Maytas Properties for $1.3 billion and increasing its stake in Maytas
Infra to 51 per cent for $300 million. However, the company had to eat
humble pie and withdrew its proposal due to strong opposition from

The hasty retreat has dealt a severe blow to Satyam's credibility and
made it the laughing stock of the investor fraternity. Analysts said the
deal was unethical as it aimed to bail out firms owned by promoter and
chairman Ramalinga Raju's sons. According to them, the company
grossly overvalued the real estate and infrastructure firms, especially
at a time when the two sectors were not in a good shape.

This raises the issue of corporate governance and it will take some time to
regain investor confidence. When the chairman himself is not proactive and
confident of his bread-and-butter business, it does not augur well for the
stock. I believe it is time for the company to hire professional management
services just as Bill Gates stepped down from his position as CEO of Microsoft
to become chief mentor. Probably, such a move could help revive investor
sentiment," said Chintan Mewar, head of research at Finquest Securities.

Analysts questioned the motives of Satyam's top executives, saying there

was a potential conflict of interest because they hold stakes in both
Chairman Ramalinga Raju and others hold 36 percent in Maytas Infra and 35
percent in Maytas Properties.

They also said the acquisitions made little sense at a time when technology
outsourcing companies are preserving cash to help weather the global
economic slowdown.

Analysts were also not convinced by Raju's argument that the acquisition
would help Satyam diversify its business and tap the growing opportunities in
infrastructure and real estate sectors.

Anita Gandhi, head-institutional business at Arihant Capital, said, "Even

though Satyam's deal with Maytas has been called off, it has completely
shattered investor confidence, which is clearly seen in the way the stock is
being pounded. Although the company may have no malified intentions in the
acquisition, this is definitely not a good strategic move to enter into a sector
like infrastructure, which is itself in bad shape. The justification by the
chairman is not satisfying. After all, the funding of this deal would have been
from its core business which is information technology."

Naushil Shah of Anand Rathi Securities said, "The episode will still raise
concerns regarding Satyam's corporate governance for a while to come. It will
also raise questions regarding the financial health of the Maytas entities, their
promoters and its impact on Satyam finances ahead."
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