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CORPORATE Excellence Through Presented By: Anushree Chandekar Saumitra Marathe M.M.S. (2 Yrs.

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I Sem. I. I. P. S. D.A.V.V. CONTENTS INDORE 1. Corporate Governance: AN INTRODUCTION

1. 2. 3. 4. Concept of Corporate Governance Definition of Corporate Governance Objective of Corporate Governance Constituents of Corporate Governance 2. GENESIS OF Corporate Governance CODE IN INDIA: 1. Cadbury committee (UK) 2. B lue Ribbon committee (USA) 3. CII Recommendations 4. Kumar Mangalam Birla commit tee report 3. Corporate Governance: ANALYSIS OF CLAUSE 49 OF LISTING AGREEMENT: 1. Board composition 2. Audit committee 3. Remuneration of Director 4. Board pro cedure 5. Management 6. Shareholders 7. Report on Corporate Governance & complia nce certificate

CONCLUSION PURPOSE We believe that any business conduct can be ethical only when it rests on the 9 core values of honesty. ethics & values.e. purposefulness. Entire Corporate Gov ernance philosophy is based on these 9 core values. Case studies 5. fairness. integrity. Corporate Governance code ap plicable to listed companies is a beginning .4. res ponsibility. trust. STATUS REPORT ON Corporate Governance: 1. citizenship & caring. Our two-fold motive is to choose the topic li ke Corporate Governance is that is at first we felt that somewhere these 9 value s are loosing their sight. respect. Indian capital market & for that matter Indian corpor ate sector though works on technical management principles but ultimately compan y's philosophy rests on a single pillar i.

accountability. Even though Corporate Governance has p rovided a code of conduct for effective governing of company. full disclosure. Secondly we find that in today's competitive era where everything is materialistic. We tend to present this topic before general public because we being t he investor or might be the future investors spending our hard earned money shou ld be aware of manipulations & along with it have the courage & awareness to pro tect one's right. but people tend to search for loopholes & to face this situation investors' awareness is extremely i mportant. measur ed in monetary terms people tend to manipulate things as per their convenience f or serving their own ends. faith & justice.whereby it aims to provide fair representation. So. it is rightly said. integrity.º CORPORATE GOVERNANCE An Introduction . responsibility. so is the law. a glimpse of tr ansparency. ªThe best way to make your dreams come tru e is to wake up.

The concept of corporate governance stipulates parameters of accountability. It is therefore. administration. The word company in technical sense can be defined as a legal entity formed & registered under the Companies Act. and judiciary. social. As the corporate governance deals with this ethical aspect of corp orate form of business enterprise. ªCorporateº & ªGovernanceº. contro l & reporting function of Board of Directors & encompasses the relationship amon g various shareholders & other stakeholders. so the issues involving corporate governance are taking high profile globally & have come to the force recently in India. the term corporate governance is made of two words viz. The concept of corporate governance is rounding around these two words in their true sense. a combined p olitical. As referred by c orporate pundits it means the establishment of structural framework or reforming the existing framework to ensure the governing of the company to best serve the interest of all the stakeholders. economic & legal institution. The Concept As the name itself suggests. It is defined as ªan intricate. economic administrative structure run by professional managers who hi re capital from the investorsº.Global opinion is now converging very much in favour of ethics in all aspects of society-politics. ce ntralized. The expression governance used to denote the mecha nism employed . In fact t he Corporate/ Company is not merely a legal institution. business as well as family & p ersonal life. It is rather a legal de vice for attainment of any social or economic end. Corporate governance is the term th at is in use in abundance in corporate circles & seminar halls.

ethics. integrity & accountability of the manage ment. valu es & parameters of conduct & behavior of the company & its management. Other thinks of it in terms of contributions it makes to the efficiency & growt h of business enterprise & countries economy. there is a divorce between capital & management. Corporate governance is concerned with the establishment of a system where by the directors are entrusted with responsibilities & duties in relation to the direction of corporate affairs. This assurance is provided through the mech anism of corporate governance embodied in functioning of corporate form of busin ess enterprise. Definition There is no universally agreed definition of corporate governance. Those who provide the funds & those who manage the fund in a corpora te entity are not necessarily the same people. which aims to assure shareholder that their money is in safe hands. principally because in corporate entity. with an increasingly greater focus on investor protection & . organization or institution. Some people think of it a s a concept. The concept of governance has assumed importance in the corporate entity of business . The fund providers always want to be assured that the funds provided by them are safe & growing & that they are c apable of taking informed decisions. The con cept of corporate governance has two hinges(1) Protection & enhancement of corpo rate wealth. It is concerned with morals. All these views are valid. controlling & directing the affairs of corporate form of b usiness enterprise in such a way so as to best serve the interest of all the sta keholders.to direct & control the affairs of any system. one can conclude that corporate governance referred to as system of regulating. (2) Complete transparency. Different peo ple have different definition of corporate governance. Thus.

This brings into focus the need for a company to strike a balance .public interest. providing the leadership to put them into effect.Corporate governance is the sy stem by which companies are directed & controlled. It is a system of making m anagement accountable to the shareholders for the effective management of the co mpany. state & empl oyees. grow. Corporate governance refers to an economic. In fact. the term corporate governance is much wider than the term corpo rate management or administration. Board of Directors is respons ible for the governance of their companies. According to Cadbury Committee . formulating policies. supervising the management of the business & reporting to the shareholders on their steward ship. It implies authority of setting the objective s & goals. Objectives The basic objective of corporate governance. legal & institutional environ ment that allows companies to diversify. The responsibility of Board include setting the compani es strategic aims. strategic action plan & monitoring their implem entation. procedures. pr actices & implicit rules that determine company's ability to take managerial decis ions vis-à-vis its elements particularly its shareholders. creditors. restructure & exit & do everythin g necessary to maximize long-term shareholders value. According to CII Code ± Corporate governance deals with laws. in the interest of the company & also with adequate concern for ethics & values. The shareholders role in governance is to appoint the directors & the auditors & to project on appropriate governanc e structure is in place. according to K umar Mangle Brita Committee report is ªThe enhancement of long-term shareholders v alue at the same time protecting the interest of other stakeholdersº.

ü Protection of inves tors' interest. customers. roles. Corpor ate governance has following objectives: ü Enhancement of long terms shareholders value. Good corpor ate governance is a must.financial infor mation & transparency. but als o as a part of strategic management for survival. ü High quality of accounting practices. ü Accountability of management. suppliers. not only in order to gain credibility & trust. the government & the society at large. viz. industry & the capital market. employees of the company. Constituents Board of Directors Management Shareholders . ü Bring about high level of public confidence in business.between the goal of enhancing shareholders wealth without harming the interest o f other stakeholders in the company. ü Continuous disclosure of materials financial & non. creditors. consolidation & growth. responsib ilities & accountability of all stakeholders especially management & the Board o f Directors. ü Define clearly the rights. banke rs.

This is the first Indian paper of its kind on . To see necessary disclosures having been made.K. Achieving the objectives set by the Monitoring the Board of Directors. perf ormance. integrity & accountability. This committee recommended a code of bes t practices based on principle of transparency. Earni ng reasonable rate of returns. also Blue Ribbon Committee has been constituted to suggest the ways & means to improve the effectiveness of Audit Committee. Obtain necessary information Need for appro priate governing structure.S. Creating & enhancing Transforming the objectives into end wealth & reso urces. Implementation of Formulating policies & policies. the concept itself is quite o ld. The modern avatar of Corporate Governance concept started with the appointme nt of Cadbury Committee in the U. results.Setting objectives. The Confederation of I ndian Industries (CII) headed by Shri Rahul Bajaj prepared a report titled ºDesira ble Corporate Governance ± A codeº. Responsible & accountable to shareholders. The code was developed following th e collapse of some prominent companies. Genesis Of Corporate Governance Code in India Appointment of Directors & Auditors. action pl ans. The discussion on Corporate Gov ernance in India has gained momentum during the later part of 90's in the light of the liberalisation & globalisation in the Indian market. in 1992. While corporate governance is fairly recent issue. In U .

The major areas of recommend ations of KMB Committee are composition of board of directors. Corporate Governance: Analysis of Clause 49 of Listing Agreement I. As the Corporate Governance is Internationally considered as a major instrument for investors' pro tection. The report of the K. in order to discharge this function properly f ollowing provisions are inserted by way of part 1 of Clause 49 of Listing Agreem ent. In the above-mentioned co ntext. The code also recommended that the development of capital market is dependent on good Corporate Governance.M. · Board of Directors the company shall have an optimum combination of executi ve & . the SEBI setup a committee under the chairmanship of Shri K. Board of d irectors: The board of directors is accountable to the shareholders for creation & protection of shareholders' value & responsible to them for adequate. Constitution & fu nctioning of Audit committee. timely & transparent reporting. Birla committee was considered & adopted by the SEBI board in its meeting held on Jan 25. The code has recommended transparent corpor ate disclosure norms for all companies beyond a specified ceiling of the paid up share capital.the subject of Corporate Governance. disclosure requirements . remuneration of directors. Therefore. Birla on May 7. without which investors are not like ly to repose confidence in companies. M. Many companies have voluntarily established high stand ards of Corporate Governance results of which are self-evident. 2000. need was felt for a comprehensive approach to accelerate the adoption o f globally accepted practices of Corporate Governance. 1999. Companies following this code are more lik ely to attract investors.

KMB committee has observed that there is a practice i n most of the Indian companies to fill their board with the representatives & re latives of promoters & there is a very little scope for outside directors unless the promoters handpick them. its constituents & its subsidiaries. As the non-executive directors. In a case of non-executive chairman.non-executive directors with not less than 50% of Board of Directors comprising of nonexecutive directors. especia lly independent Directors have wider perspective & independence to decision-maki ng thus bring an independent judgment to bear on the board's deliberations. · The number of indepen dent Directors would depend whether the chairman is executive or non-executive. Audit Committee: One of t he primary objectives of ushering of good Corporate Governance is ensuring prope r . at least one-third of board should comprise of independent Directors & in case of an executive chairman. II. In ord er to ensure that board fulfills its oversight role objective & holds the manage ment accountable. at least half of t he board should comprise of independent Directors. the independence of Directors is a must. The committee observed that presently the boards i n India comprise the following group of directors namely ± · Promoter Directors · Exec utive Directors · Non-executive Directors · Independent Directors among non-executiv e directors The term independent director has been specifically explained in Cla use 49 as a director who does not have any pecuniary relationship with the compa ny.

· The chairman of the committee shall be an independent Director. the management & the Auditors. frequency of its meetings & quorum.accountability to the stakeholders & in present scenario to the shareholders & i nvestors.The board. C. One meeting shall be held before finalization of accounts & one at every six months. In ord er to properly assess the board in discharge of its functions of accountability & transparency. all being non-executive Directors. its powers & its role. Frequency of the meetings of the comm ittee: · The Audit committee shall meet at least thrice a year. as it considers appropriate to be present at the meet ings of the committee. · The chairman shall be present at AGM to answer shareholders' queries. The KMB committee has rightly observed that: A system of good Corporat e Governance promotes relationship of accountability between the principal actor s of sound financial reporting. The finance Director. · The Audit Committee should invi te such of the executives. Powers of the Audit committee: . A. & with al least one Director having financial and accounting knowledge. with majority of them being independ ent. a representative of the external Auditor shall be present as invite es for the meetings of audit committee. the part-2 of Clause 49 contains comprehensive provisions regard ing constitution and composition of Audit committee. Composition of Audit committee: · A qualified & independent committee shall be setup & that committee shall have minimum three members. B. but on occasions it may also meet without the presence of any executive of the company. head of internal Audit & wh en required.

§ Recommending the appointment & removal of external auditor. o Compli ance with accounting standards. Part-D of Part-II of Clause 49 specifically list out certain areas. § Oversight of the company's financial reporting proces s & the disclosure of its financial information to ensure that the financial sta tement is correct. sufficient & credible. § Reviewing the companies financial & risk management policy. . § Reviewing with the management the annual financial statements b efore submission to the board. o Significant adjustments arising out of audit. Role of Audit committee: · The Audit committees role is to act as catalyst for effective financial reporting.· § § § § Clause 49 specifically vested this committee with the following specific powers: To investigate any activity within its terms of reference To seek information f rom any employee To obtain outside legal or other professional advice. To secure attendance of outsiders with the relevant expertise. As the committee acts as a bridge between the boa rd. the Audit committee has been cha rged with the responsibilities of monitoring the financial reporting & disclosur e. D. if it considers necessary. the statutory auditors & internal auditors. focusing primarily ono Any changes in accounting policies and practices. where com mittee has to play its role. o Compliance with Stock Exchange & legal require ments concerning financial statements. fixation of audit fees & also approval for payment for any other services.

· Details of the minimum information to be placed before the Board of Direc tors: § Annual operating plans & budgets & any updates. § Capital budgets & any upda tes.III. § Transactions involving subs tantial payments towards intangible assets. § The d etails of joint ventures or collaboration agreement. bonuses. stock options. § Stock options details if any. § Quarterly results for the company & operating divisions or business segment s. IV. notice period & severance fees. · Every Director shall annually inform the company about the committee position he occupies . · There shall be separate section on the Corpo rate Governance in the annual report which contain the following disclosures on the remuneration of the Directors: § All elements of remuneration package of all D irectors ie. Board procedure: · The board meeting shall be held at least four times a year with maximum time gap of four m onths. pensions etc. Salary. benefit. Remuneration of Directors: · The Board of Directors shall decide the remunera tion of the non-executive Director. § Service contract. · A Director shall not be a member of more than 10 committees or act as a chairman of more than 5 committees across al l the companies in which he is a Director. § Minutes of meetings of audit committee & other committees of the board. § Details of f ixed components & performance linked incentives.

managing day-to-day affairs of the company. Management: Th e management is one of the important constituents of Corporate Governance.: § Industry structure & developments § Opportunities & threats § Segment-wise or Product-wise performance § Internal control system & the ir adequacy · Disclosures relating to all material financial & commercial transact ions. facilitating the working of the bo ard & its committees & providing timely & accurate information rests with the ma nagement. . Part V of Clause 49 prescribes that: · As a part of Directors' report a `Man agement Discussion & Analysis Report' should form the part of annual report includ ing the following matters viz. VI. V. it is expecte d that the shareholders exercise all the care & efficiency in selecting the Dire ctors & the auditors & take informed decisions. where management has personal interest. ens uring compliance with all regulations & laws. Further. It is the shareholder s prerogative to appoint the directors & the auditors & therefore. they should demand complete information f rom the board. Shareholders: The shareholder is the most important constituent of Corporate Governance. While the onus of laying down the policies is with the Board of Directors. they are the beneficiar ies of all the disclosures. Therefore.in other companies & notify changes as & when they take place. the functi on of implementing the policies.

§ The aforesaid certificate shall be annexed with the Directors' report. VII.In order to enable the shareholders to exercise this function. nonreceipt of declared dividend etc. & VIII. part VI of Clause 49 requires: · In case of appointment of a new director or re-appointment of a di rector the shareholders must be provided with the following information: § A brief resume of the director § Nature of his expertise in specific functional areas. · Part VIII requires that : § Company shall obtain a certificate from the auditors regarding compliance of C lause 49. w hich is sent annually to all shareholders of the company. non-receipt of balance sheet. · Company shall form Board Com mittee to be designated as `Shareholders/Investors Grievances Committee' under the c hairmanship of a non-executive Directors for grievance redressing of shareholder s/investors like transfer of shares. · Certain inform ation like quarterly results. or shall be sent to the stock exchanges on which the company is listed. Report on Corporate Governance & Compliance Certificate: · To make informed the shareholders of the status of Corporate Gover nance practices followed by the company it is necessary that a part of annual re port contain a separate section on Corporate Governance. Information to the stock exchanges shall be sent in such for m so as to enable them to put it on their web site. § Na mes of companies in which the person also holds the directorship. . presentation made by companies to analysts shall b e put on company's web sites.

At present. While going through the survey & analysis. Status Report on Corporate Governance: A Critical Analysis The advent of Corporate Governance code has introduced a breeze of fresh air in the corporate world. investors' behav iour & the famous Indian bureaucracy. whether it will live up to the expectations of its makers is very difficult to judge. A concept. . from management autocracy to corporate democracy. Indian corporate philosophies. which started working on it & ultimately the recommendatio ns of KMB committee were accepted & made mandatory for each listed company. it is found that the rosy picture that the law present is entirely different from the bitter reality. But. from grave depths to great heights. was introduced by Cadbury committee showed its streak to Ind ian corporate sector. though quite old. So far. which is being discussed in v arious conferences & seminars across the country. & at present. it is a buzzword.§ The same certificate should also be sent to the stock exchanges. it is rather impossible to answer. it has filled the air with Adrenaline & the code is b eing viewed as an important step to pull the Indian corporate sector from dusk t o dawn. we had a deep insight into various provisions of the code in context to the Indian economy. the question is. b ut with a new face. sub-standard position to global comp etitiveness. Now each eye is focused on it.

P. KMB committee made its recommendations on the basis of Cadbury committee report without testing under Indian corporate environment. Reasons being: There is a big difference between de veloped capital markets like in US & UK & than that of India. The obvious consequence is that the ultimate burden will fall on the investor. in spite of the fact that e quity shares are globally known as the most productive investment in the long ru n. Saving Schemes etc. It adopted the Cadbury committee recommendations without much modification. There the prime in vestment by general public is in capital market rather than banks. while the situation is totally opposite in India. the scene in developed capital market is totall y different. D ue to this unsecured feeling the investor tries to seclude himself & restricts h imself from raising questions on authenticity & credibility of the decisions tak en. He is so do rmant that he doesn't even wake up when company continuously runs into losses & do esn't pay dividend. which help them to judge the authenticity & credibility of the . receiving timely information about compa ny affairs & to have a probe into the causes of its non-performance. whic h is a very strange mistake. A typical Indian investor does not even know the correct n ames of the companies in which he has invested his money. as the company remains secured with its intact capital. For instance. There the investors are well aware of their rights & duties.. In contrast. Another major factor of such behaviour is the unsecured feelin g among the investors about the ability to provide justice as & when required. Market Cap. Here the investor is not a long-term investor but he is a speculator.F.. Hence he is interested in earning big returns in short run and ultimately res orts to speculations. Debt-Equity ratio etc. Thus he is not at all intereste d in attending meetings of the company. leave the case of know ing its EPS. the worst thing that can happen is that the trading of its shares will b e suspended or the company can be de-listed.· The foremost observation about the code is that it is not a ball game made to be played on the Indian turf. if a listed company does not follow the clauses of listing agr eement.

While the code unde r . starting from little neglects like non-dispatch of notices of meetings. The dormant behaviour of investors gives companies a liberty to make use of this opportunity for doing scams & frauds. & institutional investors Inc. which gave them 16% rise in divi dend rate.000 listed companies.000 non-listed companies & 248 PSUs. annual reports. Investors View on Good Corporate Governance This survey shows that out of 100 major investors nearly two-third of the invest ors voted in favour of well-governed companies..000-12.85. nearly 5. · Another important fact about Indian corporate sector is that it comprises of 11.divisions taken at the right time. This thought has been strengthened further by the survey conducted by McKinsey & co. t hen taking a step further by appointing their favorite persons at important plac es & ultimately deploying the company's funds for their own use. balance sheets etc.

for converting themselves from loss making corporations to Govt. · After much analysis. its practical application may be beset with inability to acc ommodate certain family aspirations & also likely paucity of competent non-execu tive Directors qualifying to be independent. But it is pertinent to note that the ultimate auth ority to appoint auditors & to fix his audit fees rests with shareholders. we will find the following areas of debate: o With the gr owing trend towards non-executive & independent Directors' on board. The code is needed to these corporations in comparison to only listed companies. deptt need Corporate Governance code or any other code as near to as circumstances admit. While this may be germane to measure objectivity in board's decision. fixation of audit fees & approval f or payment of other services. which should be the first target on the hit list. o Audit has been empowered to recommend to the board regarding appointment of external auditors. SEBI & RBI Rules & Regulations etc. & also the approval of shareholders by way of a resoluti on passed in general meeting for paying remuneration other than by way of commis sion to such Directors. cash cows.discussion is applicable on listed companies. Further. non-listed companies & PSUs cover the major sector. Especially P SUs & Govt. the criteria of independen ce need further discussion. it is very much clear that the code unde r discussion is not made in consonance with its parent act that is Companies Act 1956. the companies are required to get ap proval of central Govt. . the Indian co de introduced the same concept. In fact. Some of its clauses are in repugnancy with above mentioned laws & legislations. As per Sec. If we step-wise analyse the Clause 49 of listing agreement. o Par t III of Clause 49 requires the companies to undertake that the board shall deci de the remuneration to non-executive Directors. 309. this requirement seems to be superfluous as there is already a more stringent provision exists u/s 309 of the Companies Act 1956.

it is highly questionable that the authorities reside with other person. CASE STUDY The basic motive of Corporate Governance code is maintaining high standards of t ransparency & disclosure norms so as to gain trust & confidence of investors. CASE STUDY 1: . Th e companies who comply with this ethical code of conduct also follow the princip le of fair representation & full disclosure in all of its dealings & communicati on. but experts feel that the authority who has extension knowledge on cor porate laws & legislation & its procedural aspects is company secretary. Hence. So it i s recommended to authorize company secretary to certify the report.o The irony of the situation lies in the certification of Corporate Governance r eport. At present it is the chartered accountant who is authorized to certify th e report.

Satwalekar 9 3 Y 9 3 Y Prof. Marti G. Of Board meetings No. In 9 N. independent 5 50 Directors TOTAL 10 10 0 Attendance of each Director at the board meetings & the last AGM. Composition & Category of Directors as of Mar 31st 2000 Category No. Data 9 5 Y Deepak M.A. Feb. 9 5 Y Subrahmanya m Philip Yeo (Ret. Of Director s % Founder Directors 5 50 Non-executive. This case study reveals the disclosure made in annual report of the company regarding the composition & category of Directors as of Ma r 31st 2000 & attendance of each Director at the board meetings & the last AGM. Of board meetings Last AGM attendance held attended (Yes/No) Susim M.2000) Directors . No.INFOSYS TECHNOLOGIES LTD.

The following data & figures demonstrate some of the disclosures made under the Corporate Governance report for the better understanding of the invest or regarding income inflow & outflow.29. Dinesh Shibulal S.R.D. Nilekani N. K. CASE STUDY 2: . assets profile etc. 9 9 9 9 9 9 8 9 9 9 9 8 Y Y Y Y Y Y HDFC Ltd.N.S. Raghavan (joined on Oct. 99) Gopal Krishnan S. Narayanmurthi Nandam M.

ASSETS PROFILE .

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the shoe . the rider was lost A& for want of rider the war was lost.º ªA little neglect may breed great mischief ¼for want of a nail.CONCLUSION was lost. for want of shoe the horse was lost & for the want of horse.

The investor i s the key factor around which the whole cycle of Corporate Governance revolves. its objects. its provisions. It's the prerogative of investors to demand & force the board of directors & manageme nt to follow norms. Investor . aims of transparency. . the Corporate Go vernance code. and laws. integrity. make them accountable for frailties & flaws & in the long run enhance shareholders value while at the same time protection of interest of other stakeholders for survival & growth. responsibility . The complete basket of laws. The Indian investor is like a sleeping volcano residing in very inner core of th e earth crust.-Benjamin Franklin Little neglects add up to mischiefs & mischiefs ultimately le ad to bigger frauds & scams & corporate enterprise are no exception. rules. accountability.e. Its high time for Indian investors to get themselves involve in real flow. The basic r ationale for high standards of Corporate Governance stems from the inherent char acteristics of the investors along with the form of organization. rules. protection rest on a single milestone i. regulations.

BCC finance LTD) Mr. M. 2. 3. D. 5. Mr. Dinesh Kumar Sh arma (ACS) .in h ttp://www.com http://www. Sunil JAIN (ACS. 63rd Secretarial modular training programme (New Delhi) http://www.REFERENCES: 1. 4.com http://www.P. K.sebi. Glychem) Mr. 4.gov.com EXPERTS VIEW: 1. 2. Kavita Sethi ( CS. 5. 3. JAIN (FCS.business-today. Abhishek Singhai (CS.bseindia. AICWA) Ms. ICSA London) Mr.nseindia.