MBA - Banking and Finance

A WORK INTEGRATED LEARNING PROGRAM

TA L E N T | T E C H N O L O G Y | T R A N S F O R M AT I O N
Corporate Governance, Ethics
and Compliance
This Course has 8 Units

1. Introduction to Corporate Governance

2. Corporate Governance in banks in India
3. Companies Act, 2013
4. Basel Committee on Banking Supervision
5. Introduction to Business Ethics
6. Ethics in Functional Areas
7. Compliance in Banks
8. Governance, Risk & Compliance (GRC)
 Brief Profile about the Course Faculty
Dr.Nandeesh V. Hiremath and 4Es
Education : M.Sc.(Agri.), MBA (HRM & Marketing), Ph.D.; PGDHRM, PGDRD;
CCIPRs and ACBT&IPRs (WIPO Academy, Switzerland);
Certificate in HR Analytics (University of Penn & Wharton, USA)
Certificate in Design Thinking for Innovation (Univ. of Virginia, USA)

Experience : 28+ Total years in PG-Teaching, Corporate Training, Research & Consultancy
Trainer at National Institute for Rural Banking (NIRB): 2000-2009 --- 12,500 Bank Executives
19+ years in Management Education: as Professor, Dean / Director of B-Schools (2000 - to date)
21+ years in Techno-management Consultancy with International NGO Agencies (1998 - to date)

Exposure : Visits abroad on Professional Assignments (Total 8)

UK, USA, Singapore, Malaysia, Sri Lanka, Tanzania
Extra – Social contributions:
Founder Trustee, Rotary Cosmopolitan Trust (2015)
Founder Trustee, International Veerashaiva Foundation, Hubli (2008)
Founder President, Prakruthi Foundation, Bangalore (2006)
Founder Secretary, Lokaseva Foundation, Bangalore (2004)
 CONTEXT
to the Corporate Governance
Governance & Leadership
Governance is the act, process or power of governing. Examples

Leadership is the ability to motivate, encourage, inspire, and Effective Governance

challenge individuals toward realizing common goals and * Indian Bank Turn around:
objectives. Ranjana Kumar

* SBI : Mergers
Management is the act of organizing individuals, tasks, and
resources toward realizing a defined goal or objective.

Ineffective Governance
Administration is an organization’s structural resources such as * Kingfisher Airlines
people, resources, policies, or procedures that allows for
collaboration toward realizing defined goals and objectives

4
 Unit Description
Unit 1 – Introduction to Corporate Governance

Since 2001, infamous scandals like Enron Corporation, Satyam Computers etc., have refocused the spotlight on
Corporate Governance. The increasing demand for transparency, accountability and engagement by the investors
and shareholders requires robust corporate governance policy.

This unit covers the evolution of corporate governance methods, models and the associated regulatory framework.

5
 Unit Objectives

At the end of this unit, you will be able to:

• Explain the process of evolution of corporate governance methods and models

• Discuss the regulatory framework associated with corporate governance

6
Understanding Corporate Governance
 Understanding Corporate Governance
Corporate governance is concerned with methods of bringing the interests of managers and investors in to line
and ensuring that businesses run for the benefits of investors.

Corporate governance includes the structures, processes, cultures, and systems that prompt the successful
operation of organizations

In the words of N.R. Narayana Murthy, Chief Mentor, Infosys Limited

“Corporate Governance is maximising the shareholder value in a corporation while

ensuring fairness to all stakeholders, customers, employees, investors, vendors, the
government and the society-at-large.

It is about transparency and raising the trust and confidence of all stakeholders in the
way the company is run. It is about owners and managers operating as the trustees
on behalf of every shareholder large or small”

E.g. HDFC Bank 8

 Salient Features of Corporate Governance

Discipline Transparency Independence

Accountability Responsibility Fairness

Ethical and Responsible

Social Responsibility Timely Disclosure
Decision Making

9
 Scope of Corporate Governance

Corporate governance includes the following functional areas of governance:

• Preparing the company’s financial statements

• Independence of entity's auditors and internal controls

• Compensation arrangements review for CEO and other senior executives

• Nomination procedure for the positions on the board

• The resources made available to directors in carrying out their duties

• Management of risk and oversight

10
 Corporate Governance Principles

OECD countries except the US have implemented corporate

governance codes that work on the “comply and explain” principle.

Organization for Economic The US Sarbanes Oxley Act (“SOX”) works on the basis of
Cooperation and Development “comply or be punished”.

The OECD principles of Corporate

Governance were published in
1999 (revised in 2004).
Post Enron and WorldCom
debacles, and the US Sarbanes
Oxley response in 2002, that most
other OECD countries made a
determined effort to adopt codes of
corporate governance.
Honesty, openness, trust, integrity, responsibility, accountability,
performance orientation, mutual respect and commitment to the
organization are in general few key elements that are included in
good corporate governance.
** E.g. Fines levied non non-compliance
11
 Corporate Governance Principles

Following are some commonly accepted corporate governance principles:

Shareholders rights protection

Interest of other stakeholders

Role and responsibilities of the board

Responsible and ethical behaviour

Disclosure and transparency in reporting

12
 Corporate Governance Theories

Shareholders Theory
Theories have contributed to our understanding or Stakeholders Theory
of corporate governance issues. Agency Theory
We shall discuss four theories which are
frequently used to understand:

• How corporations are governed?

• How the structure of corporate governance

can be improved upon?
Stewardship Theory
Property Rights Theory

13
 Theory 1: Shareholders or Agency Theory
Shareholder theory or agency theory asserts
that shareholders provide capital to a
company’s managers, who are supposed
to spend corporate funds only in ways that
are authorized by the shareholders.
• Agency problem was identified by Adam Smith when he
argued that company directors were not likely to be as
careful with other people’s money as their own.
• This theory offers shareholders (residual risk-takers) a
pre-eminent position in the firm.
• The maximization of shareholder value will result in superior
economic performance, not only for the particular firm, but
also for the economy as a whole.
• Internal and external governance mechanisms help to bring
the interests of managers and those of the shareholders in
line.
E.g. Top 100 Companies in NIFTY / BSE
14
 Theory 2: Stakeholders Theory

Stakeholder theory states that managers have a duty to both the

corporation’s shareholders, individuals and constituencies that
contribute either voluntarily or involuntarily, to a company’s wealth-
creating capacity and activities, and who are therefore its potential
beneficiaries and/or risk bearers.

E.g. Inclusive Management

Infosys, GE, Apple

15
 Theory 3: Stewardship Theory
Steward is a person who manages
other’s property or financial affairs
and is assigned with the responsibility
of proper utilization and development
of organisations resources.
• According to this theory, the behaviour of the steward is
collective, because the steward seeks to attain the
objectives of the organization.,
• Stewards in loosely coupled, heterogeneous organizations
with competing stakeholders and shareholders objectives are
motivated to make decisions that they perceive are in the
best interests of the group.
• A pro-organizational steward is motivated to maximize
organizational performance thereby satisfying the
competing interests of shareholders.
• Stewardship theorists argue that the performance of
stewardship is affected by whether the structural situation in
which he or she is located facilitates effective action.
E.g. Warren Buffet - Berkshire Hathaway
16
 Comparison of Agency Theory and Stewardship Theory
S.NO Criteria Agency Theory Stewardship Theory
1 Model of Man Economic Man Self-Actualizing Man
2 Behaviour Self-Serving Collective Serving
Lower order/economic needs (physiological, security, Higher order needs (growth achievement, self-
3 Motivation
economic) actualization)
4 Social Comparison Other Managers Principal
5 Identification Low value commitment High value commitment
6 Power Institutional (legitimate, coercive, reward) Personal (expert, referent)
7 Management Philosophy Control oriented Involvement oriented
8 Risk Oriented Control mechanisms Trust
9 Time Frame Short-term Long-term
10 Objective Cost control Performance enhancement
Individualism Collective
11 Cultural Difference
High power distance Low power distance
17
 Theory 4: Property Rights Theory
In the new institutional economics,
property rights are viewed simply as control rights over physical and human assets.

Corporate governance is shaped by property rights in two fundamental and

related ways:

1) They determine what types of businesses will emerge in a given

environment.

2) The specific governance mechanism available to firms are constrained by

existing property rights institutions, which specify the legitimate forms of
control in any given community.

18
 Development of Codes and Guidelines

The process of development of codes and guidelines started with the

setting up of different committees on corporate governance.

The Cadbury Report, The Turnbull Report, The Sarbanes Oxley

1992 1999 Act, 2002

19
 The Cadbury Report, 1992

The Cadbury Report focused attention on the board of directors

as being the most important corporate governance mechanisms,
requiring constant monitoring and assessment.

The Cadbury Report and its accompanying

code covered three general areas, namely: Cadbury Report Recommendations:
• Wider use of independent directors
• The Board of directors
• Introduction of audit committee
• Auditing
• Separation between Chairman and CEO
• Shareholders
• Protect rights of shareholders
• Timely and accurate disclosure
• Responsibility of the board of directors

20
 The Turnbull Report, 1999

The Turnbull Report represented an attempt to formalize an

The Turnbull Committee was established
specifically to address the issue of
internal control and to respond to the
provision in the combined code.
explicit framework for internal control in companies.
The aim was to provide companies with general guidance
on how to develop and maintain their internal control
systems and not to specify the details of such a system.

21
 The Sarbanes Oxley Act, 2002
In 2002, Paul Sarbanes, and Michael Oxley were
responsible for a radical piece of corporate legislation.

• In addition, Sarbanes-Oxley severely

restricts the range of additional services
that an audit firm can provide to a client.
The Sarbanes – Oxley Act, introduced corporate law
changes relating to:
• Financial reporting • There are increased penalties for directors
and professionals who have conspired to
• Internal accounting controls commit fraud.
• Personal loans from companies to their directors
• Whistle-blowing
• Destruction of documents
22
 The Sarbanes Oxley Act, 2002

Some of the provisions of the Sarbanes – Oxley Act, 2002:

• Section 906 of the Act requires that all periodic reports containing financial statements by the Chief Executive
Officer (CEO) and Chief Financial Officer (CFO) of the company, certifying that the report fully complies with the
Securities Exchange Act and fairly present, in all material respects, the financial condition and results of operations.
o The penalties for knowingly certifying a statement, which does not comply with the requirements, can be
severe: up to $1 million in fines and/or up to ten years’ imprisonment.
• Section 1102 provides that ‘knowing and willful’ destruction of any record or document with intent to impair an
official proceeding carries fines and/or imprisonment up to 20 years.
• Section 806 provides protection for employees who provide evidence of fraud. There is also protection for
‘whistleblowers’ in publicly traded corporations. No company, officer or employee may threaten or harass an
employee who reasonably believes that a criminal offence has been committed.
• Section 501 of the legislation also aimed to promote rules to address conflicts of interest where analysts
recommend securities when their companies are involved in investment banking activities.
23
 Popular Models for Governance

Corporate governance describes the internal methods by which firms are controlled and operated. While government
plays an essential role in shaping the institutional, legal and regulatory climate within which the individual
corporate governance systems are developed, the main responsibility lies with the private sector.

The unique characteristics and distinctive features of four important models of corporate governance are detailed
below:
• The Anglo-American Model
• The German Model
• The Japanese Model
• The Indian Perspective (Governance in the Public Sector)
24

The Anglo-American Model
• The board appoints and
supervises the managers
who manage the day-to-day
affairs of the corporation.
• The policies are framed by
the board of directors and
implemented by the
management.
• The board overseas the
implementation through a
well-designed information
system.
• Clear separation of
ownership and management,
which minimizes conflict of
interests.
Popular Models for Governance
The German Model
• In this model, although the
shareholders own the
company, they do not entirely
dictate the governance
mechanism.
• Shareholders elect 50% of
members of the supervisory
board and rest by labour
unions.
• The supervisory board
appoints and monitors the
management board.
• Worker participation in
management is practiced.
The Japanese Model
• In this model, financial
institution has an accrual role
in governance.
• The shareholders and the
bank together appoint the
board of directors and the
president.
• Inclusion of President who
consults both the
• supervisory board and
• the executive
management.
The Indian Perspective
• Equity shares are owned
wholly or substantially (51%
or more) by the government
• Good deal of political and
bureaucratic influence over
the management.
• Organization are viewed as
social entity.
• The board of directors are
appointed by the controlling
administrative ministry
• Excessive emphasis on
observing rules, regulations
and guidelines.
25
 Principle Activities of Corporate Governance

Direction Executive Action Supervision Accountability

Formulation of strategic Recognition of

direction for the future of
the organization in the
long term.
Monitoring and overseeing
Involvement in crucial
of management
executive decisions.
performance.
responsibilities to those
making a legitimate demand
for accountability.

* Public Sector Banks Vs. Private Banks

Some of the important features of corporate governance are:
• It helps to ensure that an adequate and appropriate system of control operates within a company and hence assets may be
safeguarded;
• It prevents any single individual having too powerful an influence;
• It is concerned with the relationship between a company’s management, the board of directors, shareholders, and other
stakeholders;
• It aims to ensure that the company is managed in the best interests of the shareholders and the other stakeholders;
• It tries to encourage both transparency and accountability, which investors are increasingly looking for in both corporate
management and corporate performance. 26
 Role of Corporate Governance

The role of effective corporate governance is of immense significance to the society as a whole:
• It ensures the efficient use of resources.
• It provides for choosing the best managers to administer scarce resources.
• It helps managers remain focused on improving performance and making sure that they are replaced when they fail to do so.
• It pressurizes the organization to comply with the laws, regulations and expectations of society.
• It assists the supervisor in regulating the entire economic sector without partiality and nepotism.
• It increases the shareholders’ value, which attracts more investors. Thus, corporate governance ensures easy access to capital.
• It helps in increasing market share and sales.
• It helps reduce the employee turnover, which results in the reduction in the cost of human resource management.
• It reduces the procurement and inventory cost.
• It helps in maintaining a good rapport with suppliers, which results in better and more economical inventory management system.
• It helps in establishing good rapport with distributors providing not only better access to the market, but also reducing the cost of
production. 27
Systems of Corporate Governance
 Systems of Corporate Governance

The need for some kind of regulatory mechanism for corporate governance has been made
obvious by the recurrence of financial scams and scandals.

While forming such a regulatory mechanism, the following two questions are of importance:

• Is it advisable to have definite rules that govern the corporate behavior? or

• Is it better to have self-regulation based on certain principles?

29
 Systems of Corporate Governance

Rule based Systems with Principle based Systems with

External Monitoring Self-Regulation

• Rules are generally well laid down, and there is a clear-
cut demarcation between what is acceptable and what
is not.
• On the flip side, however, it is not possible to formulate
rules to cater for all situations a priori.
• Therefore, the perceived clarity will be available only in
situations that have precedence.
• The rules also often turn out to be impractical.
• Principles are generally defined and formulated by each
sector/ industry and it is left to the individual to
undertake self-regulation.
• Following well-thought-out principles can also prevent
legislation imposed by over-enthusiasm.
• The application of principles, however, during each
situation is liable to individual interpretation and,
therefore, may not be as clear cut as a laid down law.

There are continual arguments going on about the relative merits and demerits of the two approaches
It is a compliance-led approach This is a value-led approach.
30
Regulatory Framework
 Regulatory Framework

• The Ministry Of Corporate Affairs regulates governance by the institution of

various acts.

• The ministry also provides investor protection and provides important

safeguards that are aimed at protecting the interests of stakeholders.
• The ministry of corporate affairs launched an e-governance initiative titled
MCA 21 (mission mode project).
o It involves moving towards a paperless governance model, and the forms
and processes have been made e-centric.

E.g. Banking in 2000

Today’s Banking 2019 (Digital)

eBanking & mBanking : eGovernance
32
 Prevention of Corruption Act
India’s anti-bribery and anti-corruption (ABAC) regime went through a massive change recently.
• The Indian parliament has enacted the Prevention of Corruption (Amendment) Act, 2018 (Amendment Act), bringing
about crucial changes that could really impact the way companies do business in India.
• The amendments brought in by the Amendment Act are prospective in nature and take effect from the date the
legislation received presidential assent – i.e. July 26, 2018.

Major aspects of the Prevention of Corruption (Amendment) Act, 2018 are:

Offense of Giving Bribes Offense of Bribery by Commercial Liability of Management

Giving or promising to give a bribe or
“undue advantage” to a public servant is
now a distinct offense.
Organization
Section 9 of the amended PCA creates the offence
of bribery by commercial organizations and
provides that a commercial organization shall be
fined if any person associated with such
commercial organization bribes a public servant.
The Amendment Act’s
most significant change for management
personnel of a company is the creation of
a specific offense where officials of a
commercial organization may also be
penalized with imprisonment between 3 to
7years along with a fine. 33
 Serious Fraud Investigation Office (SFIO)

Serious Fraud Investigation Office (SFIO), has been formed under the Companies Act, 2013
to investigate serious fraudulent crimes committed by senior executives of large organizations
(generally known as “white-collar crimes”).

• It is a multi-disciplinary organization having the requirement of experts from various fields

such as corporate law, criminal law, banking, accounting, forensic audit, capital markets,
taxation, etc.

• It was set up on the recommendation of a committee headed by Naresh Chandra, a

former Cabinet Secretary on corporate governance in order to tackle serious crimes related
to corporate financial fraud.

34
 Enforcement Directorate (ED)

Directorate of Enforcement is a specialized financial investigation agency under the

Department of Revenue, Ministry of Finance, Government of India, which
enforces the following laws:

• Foreign Exchange Management Act,1999 (FEMA) – a Civil Law

• Prevention of Money Laundering Act, 2002 (PMLA) - A Criminal Law

E.g. Deposits in Swiss Banks

35
 Other Regulations
• The companies act has many provisions that relate to corporate governance.
• The act has provisions related to the composition of the board of directors, constitution of the audit
Companies Act,
committee, internal audit, risk management, etc.
2013
• The companies act requires corporate entities to devise a corporate social responsibility plan and also
specified minimum expenditure on Corporate social responsibility related aspects

• The securities and exchange board of India has laid down guidelines related to corporate governance.
•
SEBI Guidelines
• For instance, the act has guidelines that require shareholder approval for related party transactions.
• The act also has guidelines related to insider trading.

Accounting • ICAI ( Institute of chartered accountants of India) has laid down guidelines on disclosure norms such
Standards as disclosure of accounting policies followed by preparing financial statements.
36
 Other Regulations
• The Act prohibits anti-competitive agreements, abuse of dominant position by enterprises and regulates
Competition combinations (acquisition, acquiring of control and M&A), which causes or likely to cause an appreciable
Commission of adverse effect on competition within India.
India • Competition commission of India was established by the Central Government with effect rom 14th
October, 2003.

• RBI has laid down guidelines on corporate governance.

Reserve Bank of
• Most of these rules are largely applied to the private sector banks as public sector banks have other
India
governmental regulations that deal with some of these facets.

37
Summary
 Summary
Here is the recap of what you have learnt in this unit.
• Corporate Governance is maximizing the shareholder value in a corporation while ensuring fairness to all
stakeholders, customers, employees, investors, vendors, the government and the society-at-large.
• Corporate governance is about transparency and raising the trust and confidence of stakeholders in the way
the company is run. It is about owners and managers operating as the trustees on behalf of every shareholder
large or small.
• Salient Features of Corporate Governance:
o Transparency
o Independence
o Accountability
o Timely disclosure
o Fairness
o Social Responsibility
o Ethical and responsible decision making 39
 Summary
• Scope of Corporate Governance:
o Preparing the company’s financial statements
o Independence of entity’s auditors and internal controls
o Compensation arrangements review for CEO and other senior executives
o Nominations procedure for the positions of the board
o The resources made available to directors in carrying out their duties
o Management of risk and oversight

• Corporate Governance Principles:

o Shareholders rights protection
o Interest of other stakeholders
o Roles and responsibilities of the board
o Responsible and ethical behaviour
o Disclosure and transparency in reporting
40
 Summary
• Corporate Governance Theories:
o Shareholders theory or agency theory
o Stakeholders theory
o Stewardship theory
o Property rights theory
• The process of development of codes and guidelines started with the setting up of different committees on
corporate governance. The following are the reports and codes:
o The Cadbury Report 1992
o The Turnbull Report 1999
o The Sarbanes-Oxley Act, 2002
• Principle activities of Corporate Governance
o Direction
o Executive Action
o Supervision
o Accountability 41
THANK YOU

42
MBA - Banking and Finance
A WORK INTEGRATED LEARNING PROGRAM
TA L E N T | T E C H N O L O G Y | T R A N S F O R M AT I O N
Corporate Governance, Ethics
and Compliance
This Course has 8 Units

1. Introduction to Corporate Governance

2. Corporate Governance in banks in India
3. Companies Act, 2013
4. Basel Committee on Banking Supervision
5. Introduction to Business Ethics
6. Ethics in Functional Areas
7. Compliance in Banks
8. Governance, Risk & Compliance (GRC)
 Unit 2: Description
Banks are critically important for industrial expansion, the governance of firms and capital allocation.
When banks efficiently mobilize and allocate funds,
▪capital costs are lowered,
▪capital formation gets a boost, and
▪productivity growth is stimulated.
Thus the functioning of Banks has ramifications for the operations of firms and prosperity of nations.
Given the importance of banks, the governance of banks is critical.
This unit will help you understand the CORPORATE GOVERNANCE MECHANISM in Banks in India.

1. Public Sector Banks

What is the Banking 2. Private Sector Banks
3. Cooperative Banks
Structure in India ? 4. Gramin Banks / RRBs
5. NBFCs 3
Public Sector Banks in India
Private Sector Banks in India
Net Sales of Banks : Public & Private
Source : moneycontrol.com as on 8 Sept 2019
 Unit 2 : Objectives

At the end of this unit, you will be able to:

• Explain the role of RBI in Corporate Governance in Banks

• Disscuss the role and powers of board of directors

• Know the board’s committee

4
Role of RBI in Bank Governance
 Role of RBI in Bank Governance

Corporate governance and enforcement mechanism are closely linked

as they form integrated framework of linkages to protect the interest of all stakeholders.

Institutions like Reserve Bank of India (RBI),

Securities and Exchange Board of India (SEBI), and
individual like Comptroller Audit General (CAG) and
others in their capacity as auditors and analysts
can act as gate-keepers.

6
 Reserve Bank of India
Traditionally, central banks have performed the roles of currency authority, banker to the government and
other banks, lender of last resort, supervisor of banks and exchange management authority.

Central bank functions in India have been carried out by the Reserve Bank of India (RBI) since independence.

The broad mandates of RBI currently are:

• Stimulate economic growth by controlling monetary expansion

• Including market adjustments in interest rate structures

• Maintain internal price stability by monitoring inflationary pressures

• Develop the banking and financial sectors and to perform a proper regulatory role.

7
 Reserve Bank of India (RBI) & Corporate Governance

• Banks play a pivotal role in the financial and economic system of any country RBI plays
a leading role in formulating and implementing corporate governance in banks.
• RBI performs the corporate governance function under the guidance of the
Board of the Financial Supervision (BFS).
• The primary objective of BFS is to undertake consolidated supervision of the
financial sector comprising of commercial banks, Financial Institutions (FIs) and
Non-Banking Financial Companies (NBFCs).
• It was constituted in November 1994 as a committee of the Central Board of Directors
of RBI.
• BFS inspects and monitors banks by using the “CAMEL” (Capital Adequacy, Asset
Quality, Management, Earnings, Liquidity & Systems and Controls) approach.
• Through the Audit Sub-Committee BFS also aims to upgrade the quality to the
statutory audit and functions in banks and financial institutions.
8
Reserve Bank of India (RBI) &
Central Board of Directors
Source: RBI, Sept, 2019
 RBI’s Corporate Governance Mechanism

RBI follows three categories to govern the corporate sectors: RBI’s Corporate Governance
Mechanism
i. Disclosure and transparency

ii. Off-site surveillance mechanism Elective Banking Supervision

iii. Prompt Corrective Supervision (PCS)

Triggers CAR, NPA and
ROA (Return on Assets)

Apart from working under the jurisdiction of RBI as mentioned above,

listed banks, NBFCs, and other financial intermediaries Prompt Corrective Action
are governed by SEBI’s Clause 49 on Corporate Governance.
Corporate Governance Compliance
results in Shareholders’ wealth
9
 RBI’s Corporate Governance Mechanism

Additionally, RBI has also issued various circulation and notifications that provide guidelines on:

• Composition, qualification, independence and remuneration of Board of Directors

• Roles, responsibilities and training of Executive Directors

• Resolution of conflict of interest in case of related party transaction

• Constitution of committees: nomination committee, risk management committee & audit committee

One of the inspection and monitoring tools used by the Board of the Financial Supervision (BFS) is the
quality of audit (both statutory and internal) conducted on the banking sector.

The Comptroller and Auditor General (CAG) of India and the Institute of Chartered Accountants of India (ICAI) prepared
a list of auditors and such names are approved by RBI
and the private banks can choose theirs auditors from that list.
10
Board of Directors
 Board of Directors
The separation of the ownership from active directorship and management is
an essential feature of the company form of organization.

• To manage the affairs of the company, the shareholders elect their

representatives in accordance with the laid down policy.

• These representatives are called the “Directors” of the company.

• A number of such directors constitutes the “Board Of Directors” and

that is the top administration body of the corporation.

• The board may sometimes appoint an Executive Committee to carry

on certain assigned functions under its discretion.

• The board generally has only part-time Directors.

12
 Meaning of Directors
In general terms, a Director is someone appointed to take responsibility
• for the policy formation & control of a company because of particular ability and expertise in an industry.
• Directors advise management of the company on behalf of the shareholders (the owners of the company).

Section 2(13) of the Companies Act defines a DIRECTOR as follows:

A director includes any person occupying the position of director, by whatever name
called. A director may, therefore, be defined as a person having control over the
direction, conduct, management or superintendence of the affairs of a company.
Again, any person, in accordance with whose directions or instructions, the board of
directors of a company is accustomed to act is deemed to be a director of the company”.

The Directors act as Agents of the company and the ordinary rules of agency apply.
They exercise the powers and are subject to duties
within the framework of the company's Articles, and the Act.
13
 Types of Directors

Various types of Directors

that can exist in a company are:

• Ordinary Directors • Additional Directors

• Managing Directors • Alternate Directors

• Executive Directors • Professional Directors

• Non-Executive Directors • Nominee Directors

• Shadow Directors • Independent Directors

14
 Directors Appointment

The Articles of Association of a company usually name the first set of

directors by their respective names or prescribe the method of appointing
them.

• If the first set of directors are not named in the Articles, the number
and the names of directors shall be determined in writing by the
subscribers of the Memorandum of Association or majority of them.

• If the first set of directors are not appointed in the above manner, the
subscribers of the Memorandum, who are individuals, become
director’s of the company.

• They shall hold office until directors are duly appointed in the first
general meeting.
15
 Director Identification Number (DIN)

Section 153 of the Companies Act, 2013 requires that every person
who is to be a director of a company has to apply for a Director
Identification Number (DIN).

• DIN is a 8 digit identifier that helps identify a director of a company.

• Only one DIN number is allotted during a person’s lifetime and the
number is the reference number that is used for all purposes of
statutory compliance.

• For obtaining a DIN the director should have a digital signature

certificate (DSC).
o A DSC contains details about the identity and other relevant
details of a person.
Why is DIN necessary?
16
 Duties and Responsibilities of Directors

Directors have certain duties to discharge. These are:

• Fiduciary duties
o Exercise powers honestly and bona fide
o Not to place themselves in a position of conflict of interest
o Not make any secret profit out of their position
o Directors are owned to the company and not to individual shareholders

• Duties of care, skill and diligence

Question :
• Duties to attend the board meetings Have you studied the Board of
Directors in your Bank (Employer)
• Duties not to delegate their functions, except to the extent authorized
by the Act or the constitution of a company and to disclose his
interest. 17
 Duties of Directors as per Companies Act, 2013
1) Subject to the provisions of this Act, a director of a company shall act in accordance with the articles of the company.
2) A director of a company shall act in good faith in order to promote the objects of the company for the benefit of its
members as a whole, and in the best interests of the company, its employees, the shareholders, the community and for the
protection of environment.
3) A director of a company shall exercise his duties with due and reasonable care, skill and diligence and shall exercise
independent judgment.
4) A director of a company shall not involve in a situation in which he may have a direct or indirect interest that conflicts, or
possibly may conflict, with the interest of the company.
5) A director of a company shall not achieve or attempt to achieve any undue gain or advantage either to himself or to his
relatives, partners, or associates and if such director is found guilty of making any undue gain, he shall be liable to pay an
amount equal to that gain to the company.
6) A director of a company shall not assign his office and any assignment so made shall be void.
7) If a director of the company contravenes the provisions of this section such director shall be punishable with fine which
shall not be less than one lakh rupees but which may extend to five lakh rupees.
18
 Powers of Directors : General & Specific
The directors generally acquire their powers from the provisions of the
“Articles of Association” and then from the Companies Act.

Specific Powers of Company Director

1. As per Sec. 262, in the case of a public company or a private company, which is a subsidiary of a
General Powers of a public company, the power to fill a casual vacancy of directors is to be exercised at a Board
Company Director meeting.
2. As per Sec. 292, the following powers of the company shall be exercised by the Board
As per Section 291 by means of resolution passed at the meeting of the Board:
of the Act, the board is entitled • to make calls,
to exercise all such powers • to issue debentures,
and to do all such acts and • to borrow moneys by other means,
things as the company is • to invest the funds of the company, and
authorized to do. • to make loans.
The last three powers cannot be delegated to the Manager or to a Committee of Directors
but must be exercised only at a Board meeting. 19
 Liabilities of the Director

• The Directors of a company may be liable to third parties in connection with the issue of a prospectus, which
does not contain the particulars required under the Companies Act or which contains material misrepresentations.
• The Directors may also incur personal liability under the Act on the following conditions:
o On their failure to repay application money, if the minimum subscription has not been subscribed.
o On an irregular allotment of shares to an allottee (and likewise to the company), if loss or damage is
sustained.
o On their failure to repay the application money if the application for the securities to be dealt in on a
recognized stock exchange is not made or refused and,
o On the failure by the company to pay a bill of exchange, hundi, promissory note, cheque or order for money or
goods wherein the name of the company is not mentioned in legible characters.
o The directors responsible for fraudulent trading on the part of the company may by an order of the Court, be
made personally liable for the debts or the liabilities of the company at the time of its winding up.
20
 Directors Liability to the Company

Ultra Vires Acts

(beyond one's legal power or Negligence Breach of Trust
authority)

Misfeasance Breach of Statutory Liability for Acts of

(wilful misconduct) Duties Co-Directors

21
 Qualification and Disqualification of Directors
To be appointed as a director of a company, public
authorities prescribe some qualifications.
“No corporate, association of firm can be appointed as
director of a company”.
A director must:
• Be an individual
• Be competent to enter in to a contract and
• Hold a share qualification, if so required by the
Articles of Association.
The following persons are disqualified for appointment
as the director of a company:
• A person of unsound mind
• An undischarged insolvent or one whose petition for
declaring himself so is pending in a Court
• A person who has been convicted by a Court for any
offence involving moral turpitude
• A person whose calls in respect of shares of the
company are held for more than 6 months have been
in arrears and
• A person who is disqualified for appointment as
director by an order of the Court on grounds of fraud
or misfeasance in relation to the company
22
 Role of Directors

The Board of Directors has to shoulder a larger responsibility than the CEO, whose role is limited to being actively
engaged with routine management functions.
For better governance, the board should function as follows:
• Directors should exhibit total commitment to the company
• Directors should steer discussions properly
• Directors should make clear their stand on issues (Issue-based approach)
• Director’s responsibility to ensure efficient CEOs
• Challenges posed by decisions on acquisitions
• A board should anticipate business events
• Directors should have long-term focus and stakeholder interests
• Promote overall interests of the company and its stakeholders
23
 Directors Remuneration in India

Section 198 of the Companies Act 1956 deals with the overall maximum managerial remuneration, and managerial
remuneration in case of absence or inadequacy of profits. According to this section:
a. The total managerial remuneration payable by a public limited company or a private company which is a
subsidiary of a public company, to its directors and its managers in respect of any financial year shall not exceed
11 percent of the profits of the company for that financial year, except that the remuneration of the directors
shall not be deducted from the gross profits.
b. The 11 percent shall be exclusive of any fees payable to directors.
c. With the limits of the maximum remuneration specified in sub-section (1), a company may pay a monthly
remuneration to its managing or whole-time director.
d. Notwithstanding anything contained above if, in any financial year, a company has no profits or its profits are
inadequate, the company shall not pay to its directors, including any managing or whole-time director or manager,
by way of remuneration any sum exclusive of fees payable to directors, except with the previous approval of the
central government.
24
 Reserve Bank of India (RBI) &
Board of Directors -- Sitting Fees
Source: RBI, Sept, 2019
 Resignation and Removal of Director

Resignation of Director (Section 168) Removal of Director (Section 169)

A director may resign from his office by giving a A company may, by ordinary resolution, remove a
notice in writing to the company director, not being a director appointed by the Tribunal
and the Board shall on receipt of such notice take under section 242,
note of the same and the company shall intimate the before the expiry of the period of his office after giving
Registrar in such manner, him/her a reasonable opportunity of being heard.
within such time and in such form as may be
prescribed and shall also place the fact of such
resignation in the report of directors laid in the
immediately following general meeting by the
company.
25
Board of Directors and Board Committees
 Board of Directors

At the core of corporate governance practices

is the Board of Directors
which
oversees how the management serves and protects the
long-term interests of all the stakeholders of the company.
Suggestion :
The institution of Board of Directors is based
on the premise that a group of trustworthy and respectable people Study the Board of
should look after the interests of the large number of shareholders Directors in your Bank
who are not directly involved in the management of the company.

The position of board of directors is that of trust as the board

is entrusted with the responsibility to act in the best interests of the company.

27
 Board Committees
Committees appointed by the board focus on specific areas and take informed decisions
within the framework of delegated authority, and make specific recommendations to the board on matters in their
areas or purview.

All decisions and recommendations of the committees are placed before the board for information or for approval.

The following are some of the important committees of the board:

a) Audit Committee
b) Shareholders Grievance Committee
c) Remuneration committee
d) Risk committee
e) Nomination committee
f) Corporate Governance committee
g) Corporate Compliance committee
28
Audit Committees
 Audit Committees

The Audit Committee shall assist the Board of Directors in the oversight of:

• The integrity of the financial statements of the Company,

• The effectiveness of the internal control over financial reporting,

• The independent registered public accounting firm’s qualifications and

independence,

• The performance of the Company’s internal audit function and independent

registered public accounting firms,

• The Company’s compliance with legal and regulatory requirements, Suggestion :

Study the Audit committee
• The performance of the Company’s compliance function. in your Bank

30
 Audit Committees – Organization & Membership

• The committee shall be appointed by the Board and consist of at least three directors,
• each of whom are independent of management and the company as defined by the bylaws of the company, the
SEC and the New York Stock exchange as well Clause 49 of the listing agreement.

• Two thirds (2/3) of the members shall be independent directors.

• All Committee members shall be financially literate, or shall become financially literate within a reasonable period
of time after appointment to the Committee.

• The Committee shall aspire to have at least one member who is an “audit committee financial expert” as such term
is defined by the SEC.

• The Chairman of the Committee shall be an independent director.

• The Committee shall meet at least quarterly and otherwise as the members of the Committee deem appropriate.

• Minutes of the Meeting (MoM) shall be kept of each meeting of the Committee. 31
 Audit Committee - Meeting and Powers
Meeting of Audit Committee

• The audit committee shall meet at least thrice a year. One meeting shall be held before finalization of annual accounts
and one every six months.
• The quorum shall be either two members or one third of the members of the audit committee, whichever is higher and
minimum of two independent directors.

Powers of Audit Committee

The audit committee shall have powers which should include the following:
• To investigate any activity within its terms of reference.
• To seek information from any employee.
• To obtain outside legal or other professional advice.
• To secure attendance of outsiders with relevant expertise, if it considers necessary.
32
 Role of Audit Committee
• Oversight of the company’s financial reporting process and the disclosure of its financial information to ensure
that the financial statement is correct, sufficient and credible.
• Recommending the appointment and removal of external auditor, fixation of audit fee and also approval for payment
for any other services.
• Reviewing with management the annual financial statements before submission to the board, focusing primarily on
o Any changes in accounting policies and practices.
o Major accounting entries based on exercise of judgment by management.
o Significant adjustments arising out of audit.
o The going concern assumption.
o Compliance with accounting standards.
o Compliance with stock exchange and legal requirements concerning financial statements
• Discussion with external auditors before the audit commences about nature and scope of audit as well as post-audit
discussion to ascertain any area of concern.
• Reviewing the company’s financial and risk management policies. 33
 Review of Information
by Audit Committee

The Audit Committee shall mandatorily review the following information:

• Financial statements and draft audit report, including quarterly / half-yearly financial
information;
• Management discussion and analysis of financial condition and results of operations;
• Reports relating to compliance with laws and to risk management;
• Management letters / letters of internal control weaknesses issued by statutory /
internal auditors; and
• Records of related party transactions
• The appointment, removal and terms of remuneration of the Chief internal auditor
shall be subject to review by the Audit Committee

34
Summary
 Summary
Here is the recap of what you have learnt in this unit.
• Corporate governance and enforcement mechanism are closely linked as they form integrated framework of
linkages to protect the interest of all stakeholders.
• Institutions like Reserve Bank of India (RBI), Securities and Exchange Board of India (SEBI), and individual like
Comptroller Audit General (CAG) and others in their capacity as auditors and analysts can act as gate-keepers.
• RBI performs the corporate governance function under the guidance of the Board of the Financial Supervision
(BFS).
• The primary objective of BFS is to undertake consolidated supervision of the financial sector comprising of
commercial banks, financial institutions and non-banking financial companies.
• RBI follows three categories to govern the corporate sectors:
i. Disclosure and transparency
ii. Off-site surveillance mechanism
iii. Prompt Corrective Supervision (PCS) 36
 Summary
Continued ...
• The separation of the ownership from active directorship and management is an essential feature of the company
form of organization.
• In general terms, a director is someone appointed to take responsibility for the policy formation and control of a
company because of particular ability and expertise in an industry. Directors advise management of the company
on behalf of the shareholders (the owners of the company).
• Section 153 of the Companies Act requires that every person who is to be a director of a company has to apply
for a Director Identification Number (DIN). DIN is a 8 digit identifier that helps identify a director of a company.
• Directors have certain duties to discharge. These are:
• Fiduciary duties
• Duties of care, skill and diligence
• Duties to attend the board meetings
• Duties not to delegate their functions, except to the extent authorized by the Act or the constitution of a company and to
disclose his interest. 37
 Summary
Continued ...
• Directors liability to the company:
o Ultra Vires Acts
o Negligence
o Breach of Trust
o Misfeasance
o Breach of statutory duties
o Liability for acts of co-directors
The Audit Committee shall have powers which should include the following:
o To investigate any activity within its terms of reference.
o To seek information from any employee.
o To obtain outside legal or other professional advice.
o To secure attendance of outsiders with relevant expertise, if it considers necessary. 38
 Some Reference Books on
CORPORATE GOVERNANCE
THANK YOU
MBA - Banking and Finance
A WORK INTEGRATED LEARNING PROGRAM
TA L E N T | T E C H N O L O G Y | T R A N S F O R M AT I O N
Corporate Governance, Ethics
and Compliance
This Course has 8 Units

1. Introduction to Corporate Governance

2. Corporate Governance in banks in India
3. Companies Act, 2013
4. Basel Committee on Banking Supervision
5. Introduction to Business Ethics
6. Ethics in Functional Areas
7. Compliance in Banks
8. Governance, Risk & Compliance (GRC)
 Unit Description
The Companies Act of 1956 needed a substantial revamp for quite some time now, to make it more
contemporary and relevant to corporates, regulators and other stakeholders in India.
Companies Bill, 2009 --- Companies Bill, 2011 : The Parliamentary Standing Committee on Finance, as report 26th June 2012

The revised bill was considered and approved by the Rajya Sabha on 8th August 2013. It received the
President’s assent on 29th August, 2013 and has now become the Companies Act, 2013.
This unit will deal with the changes in the 2013 Act and
its far-reaching implications implications on corporates operating in India.

3
 Unit Objectives

At the end of this unit, you will be able to:

• Explain the key essentials of the Companies Act 2013

• Illustrate the need for governance with respect to the Companies Act 2013

• Explain insider trading and whistle blowing policy

4
 CONTEXT to study the Companies Act 2013 …

WHY should we understand the key essentials of the Companies Act 2013

• # of Companies (listed & non-listed)

• # of Banks (Public, Private, RRBs, Cooperative, NBFCs)

• # of MNCs (Multinational Corporations) in India : Operating directly or with

subsidiaries or through FDI

• # of IMEs (Indian Multinational Enterprises) : Operating directly or with

subsidiaries or through FDI eg., Tata, M&M, Dr.Reddy’s Pharma, Biocon

• # of MSMEs (Micro, Small & Medium Enterprise)

Forex earnings by MSMEs to GDP

• # of Start-ups : Bangalore is 15th Rank out of Top 20 Start-up

hubs Globally Start-up India Policy of Govt of India
5
Introduction to Companies Act 2013
 Key Definitions and Concepts

The 2013 Act has introduced several new concepts and has also tried to streamline many of the requirements by
introducing new definitions. This unit covers some of these new concepts and definitions in brief.

• One-person Company (OPC) - An OPC means a company with only one person as its member [section 3(1)
of 2013 Act].

• Private Company - The 2013 Act introduces a change in the definition for a private company, inter-alia, the new
requirement increases the limit of the number of members from 50 to 200. [section 2(68) of 2013 Act].

• Small Company - A small company has been defined as a company, other than a public company:
Companies o Paid-up share capital of which does not exceed INR 50 lakh or such higher amount as may be prescribed which
shall not be more than INR 5 crore
o Turnover of which as per its last profit-and-loss account does not exceed 2 crore INR or such higher amount as
may be prescribed which shall not be more than 20 crore INR

o Dormant Company - The 2013 Act states that a company can be classified as dormant when it is formed and
registered under this 2013 Act for a future project or to hold an asset or intellectual property and has no significant
accounting transaction. 7
 Key Concepts
Officer : The definition has been extended to include promoters and key managerial personnel

Key Managerial Personnel : The term ‘key managerial personnel’ has been defined in the 2013 Act and has been used in several
sections.

Promoter : A person who has been named as such in a prospectus or is identified by the company in the annual return referred to in
Section 92 of 2013 Act that deals with annual return (or)
•Who has control over the affairs of the company, directly or indirectly
•whether as a shareholder, director or otherwise (or)
• in accordance with whose advice, directions or instructions the Board of Directors of the company is accustomed to act.

Independent Director : The term’ Independent Director’ has now been defined in the 2013 Act, along with several new requirements
relating to their appointment, role and responsibilities.

Subsidiary : The definition of subsidiary as included in the 2013 Act states that certain class or classes of holding company (as may
be prescribed) shall not have layers of subsidiaries beyond such numbers as may be prescribed. 8
 Key Concepts

Financial Statements

• Financial Year: It has been defined as the period ending on the 31st day of March every year, and where it has
been incorporated on or after the 1st day of January of, the period ending on the 31st day of March of the following
year, in respect whereof financial statement of the company or body corporate is made up.

• Consolidated financial statements: The 2013 Act now mandates Consolidated Financial Statements (CFS) for
any company having a subsidiary or an associate or a joint venture, to prepare and present consolidated financial
statements in addition to standalone financial statements.

• Conflicting definitions: There are several definitions in the 2013 Act divergent from those used in the notified
accounting standards, such as a joint venture or an associate, etc., which may lead to hardships in compliance.

9
 Audit and Auditors
Revisions done in Companies Act, 2013

a) Mandatory auditor rotation and joint auditors

b) Non-audit services – any services to be rendered by the auditor should be approved by the board of directors or
the audit committee.

c) Auditing standards

d) Cognizance to Indian Accounting Standards

e) Secretarial Audit for bigger companies

f) Internal Audit - The 2013 Act now moves a step forward and mandates the appointment of an internal auditor who
shall either be a chartered accountant or a cost accountant, or such other professional as may be decided by the
Board to conduct internal audit of the functions and activities of the company.

g) Audit of items of cost 10


National Company Law Tribunal
(NCLT)
Appeals from the Tribunal shall
lie with the NCLT.
Chapter XXVII of the 2013 Act
consisting of section 407 to
434 deals with NCLT and
appellate Tribunal.
Regulators
National Financial Reporting Serious Fraud Investigation
Authority (NFRA) Office (SFIO)
The 2013 Act requires the The 2013 Act has bestowed
constitution of NFRA, legal status to SFIO.
which has been bestowed with
significant powers
not only in issuing the
authoritative pronouncements,
but
also in regulating the audit
profession.
11
 Other Concepts

• Mergers & Acquisitions – The 2013 Act has streamlined as well as introduced concepts such as reverse
mergers. It has also introduced the requirement for valuations in several cases, including mergers and
acquisitions, by registered values.

• Corporate Social Responsibility – The 2013 Act requires companies to formulate a corporate social
responsibility policy and at least incur a given minimum expenditure on social activities.

• Class Action Suits - The 2013 Act introduces a new concept of class action suits which can be initiated by
shareholders against the company and auditors.

• Prohibition of association or partnership of persons exceeding certain number – The 2013 Act puts a
restriction on the number of partners that can be admitted to a partnership at 100.

• Powers to remove difficulties - The Central government will have the power to exempt or modify provisions of
the 2013 Act for a class or classes of companies in public interest.
12
 Purpose / Objectives of the Companies Act 2013

a) To develop the economy by encouraging entrepreneurship

b) Creating flexibility and simplicity in the formation and maintenance of

companies.

c) To encourage transparency and high standards of corporate governance.

d) To recognize new concepts and procedures to facilitate ease of doing business

while protecting interests of all the stakeholders

e) To enforce strict action against fraud

f) To set up institutional structure in the form of various authorities, bodies and

panels.

g) To cater to the need for more effective and time bound approvals and
13
compliance requirements
 Definition of a Company

• As per the Indian Companies Act a company is “one formed or registered under the Indian Companies Act 2013
or an existing company”. An existing company is a company formed or registered under any of the previous
company laws. The distinctive characteristics of a company are not revealed by this definition.

• According to Marshall, “A company is a person artificial, invisible, intangible and existing only in the contemplation
of law. It possesses only those properties which the character of its creator confers upon it either expressly or as
incidental to its very existence”.

• Lord Justice Lindlay gives us alternative comprehensive and clear definition of a company,
“A company means an association of many persons who contribute money or money’s worth to a common stock
and employs it in some trade or business, and who share the profit and loss (as the case may be) arising there
from. The common stock contributed is denoted in money as the capital of the company. The persons who
contribute it, or to whom it belongs are members. The proportion of capital to which each member is entitled is his
share. Shares are always transferrable although the right to transfer them is often more or less restricted.”

14
 Characteristics of a Company

1. Artificial Legal Person 8. Capacity to Sue and be Sued

2. Separate Legal Entity 9. Contractual Rights

3. Limited Liability 10. Limitation of Actions

4. Perpetual Succession 11. Separate Management

5. Separate Property 12. Voluntary Association for Profit

6. Transferability of shares 13. Termination of Existence

7. Common Seal
15
 Types of Company

According to Haney, “A Joint Stock Company is a voluntary association of individuals for profit, having a capital divided into
transferable shares. The ownership of which is the condition of membership”.
Joint Stock Company can be of different types. The following are the important types:

On the basis of Mode On the basis of On the basis of On the basis of

On the basis of
of Incorporation Number of Members Ownership Nationality
Control
• Chartered
Companies
• Private Company • Holding Company • Government • Indian Companies
• Public Company • Subsidiary Company • Foreign
• Statutory Companies
Company • Non-Government Companies
• Registered
Companies Company
❖ Limited by shares
❖ Limited by
guarantee
❖ Unlimited
Companies 16
 Forms of Business Organizations

Right from the beginning of economic history of mankind to date,

the business is carried out in four different forms, namely:

Sole Proprietorship Form Partnership Form

Corporate Form Co-operative Form

In above all forms of Organizations, the Governance & Leadership challenges exist.
Robust & streamlined LEGAL SYSTEM is an essential factor; Growth & Consolidation is name of game…TODAY
hence revisions in Companies Act, 2013 becomes more relevant 17
Corporate Governance
and
Companies Act 2013
 Corporate Governance & Companies Act 2013

The Companies Act, 2013 has taken a foot forward from SEBI’s Clause 49 of listing
agreement by introducing provision in the Companies Act, 2013

a) which promotes corporate governorship code in such a manner that it

will no longer be restricted to only listed public companies
b) but also unlisted public companies.

The new Companies Act, 2013 has introduced various key provisions which have
changed the corporate regime in such a way
•to run the corporate machinery in alignment with the globalized corporate
world by mandatory disclosure requirements.

19
 Key Provisions
The strength of number of Independent Directors for the prescribed companies under
Section 149(4) read with Rule 4 of Companies (appointment and qualifications of directors)
Independent
rules, 2014
Director
Under the •for listed public company is at least one third of total number of directors and
Companies Act, public companies having turnover of 100 crores rupees or more
2013 •at least 2 directors and public companies having paid up capital of 10 crores rupees
or more at least 2 directors.

The Audit Committees of the Companies Act, 2013 has undertaken both private and public
companies within its ambit to constitute audit committees.
Audit Committee
Under the •The constitution of audit committee has also seen change as compared to clause 49
Companies Act, with minimum with 3 independent directors on the board
2013 •along with the chairperson who should be able to read and understand the financial
statement.
20
 Key Provisions

Companies Act, 2013 has mandated the internal audit for certain classes of companies as
specified under Section 138.
Internal Audit The class or classes of companies which shall be required to mandatorily appoint an
internal auditor as per the draft rules are as follows:
• Every listed company
• Every public company having paid-up share capital of more than 10 crore INR

Section 211 (1) of the Companies Act, 2013 shall establish an office called the Serious
Serious Fraud Fraud Investigation office to investigate fraud relating to Company.
Investigation •The powers are given to SFIO under the act as mentioned that he can investigate
Offence (SFIO) into the affairs of the company or
•on receipt of report of Registrar or inspector or
•in the public interest or request from any Department of Central Govt. or State Govt.
21
E-Governance under the Companies Act, 2013
 E-Governance under the Companies Act, 2013

In this age of well-developed information technology and telecommunications,

the Electronic Governance of all business-related activities, administrative activities, and managerial
functions of the corporate world,
can certainly be
very convenient, efficient, transparent, and fully accountable and responsible.

Government of India
has rightly promulgated the
provisions for e-governance in the corporate sector of the
country, in its latest Companies Act of 2013.

23
 Key Provisions on E-Governance

a) Maintenance, Security, and Inspection of Books and Record in Electronic Form: The Section 120 facilitates that a company
must keep a safe account of all business and management related documents, records, registers, minutes, etc., preferably in the
electronic forms, in such a manner that these could easily be inspected or reproduced whenever necessary.
b) Service of Documents – This advocates that every presentation, submission, or dispatch of company related documents should
preferably be made through electronic means, to the concerned officials, shareholders, or the registrar. Eg. Cheque Clg in Banks
c) Notice of Meetings - The notices of the Board Meetings and the General Meetings, are also to be sent by electronic means and in
the prescribed manner, as are described in the Section 173(3), and Section 101, respectively. Also, the Rule 18 of the Indian
Companies Rules of 2014 recommends that a record of any failed transmissions of such notices and subsequent re-sending of
these, must be retained by the company as "Proof of Sending".
d) Payment of Dividend - As per Section 123, any dividend payable in cash, can also be remitted in any electronic mode to the
entitled shareholders, besides being paid by Cheques or Warrant.
e) Admissibility of Certain Documents as Evidence - Any document reproduced from returns, or any document related with the
administration, management, or business activities of a company formally filed with the Registrar on paper of in electronic form and
duly authenticated by the Registrar, shall be admissible.
f) Voting through Electronic Means - Voting through electronic means at the general meetings of a company, is one of the
highly significant provisions introduced by the new Indian Companies Act of 2013, to support e-management and governance.
24
Companies (Amendment) Act, 2015
 Companies (Amendment) Act, 2015

Some of the major and most significant changes are:

The changes
introduced by this a) No minimum paid-up share capital
Companies
Amendment Act of b) No requirement for getting the commencement of business certificate
2015,
are related with many c) Common seal made optional
aspects
d) Rigorous penalty for company inviting or accepting deposit
of
Corporate e) Board resolutions are made confidential
Establishment &
Corporate f) Dividends not to be declared by companies having losses
Governance.
g) Clarifications on loans from the holding company to subsidiary company

26
Insider Trading
 Measuring Productivity in Service Operations
Insider trading is the buying or selling of a security by someone who has access to material non-public information
about the security.
Insider trading can be illegal or legal depending on when the insider makes the trade.
It is illegal when the material information is still non-public.
The 2013 Act for the first time defines ‘insider trading and price-sensitive information and prohibits any person
including the director or key managerial person from entering into insider trading [section 195 of 2013 Act].
Further, the Act also prohibits directors and key managerial personnel from forward dealings in the company
or its holding, subsidiary or associate company [section 194 of 2013 Act].

The term ‘insider’ has been defined under Regulation 2(e) of SEBI (Prohibition of Insider
Trading) Regulations, 1992.
Meaning of the Basically, the term ‘insider’ can be classified into three broad categories, which are:
term “Insider” 1) Persons who are connected to the company,
2) Persons who were connected with the company,
3) Persons who are deemed to be connected to the company.
28
 Insider Trading Provisions
• Unpublished price sensitive information means any information which refers to the internal matters of the company
and ordinarily not disclosed by the company in the regular course of the business.
• In India, SEBI (Insider Trading) Regulation, 1992 framed under the Section 11 of the SEBI Act, 1992 intends to curb
and prevent the menace of insider trading in securities.
• An insider is a person who is an accepted member of a group or organization who has special
knowledge regarding his firm.

• The penalties and punishments for committing insider trading have been defined under Chapter IV-A of SEBI Act.
The penalties have been discussed below according to the SEBI (Amendment) Act, 2002.
o Section 15(G)(i) – if an insider either on its own or on behalf of any person has dealt on behalf of his company
any unpublished information then he may be fined with RS. 25 crores or 3 times the profit made, whichever is
higher.
o Section 15G(ii) – if an insider has given any price sensitive information then he may be fined up to Rs.25 crores or
3 times the profit made.
o Section 15G(iii) – if an insider has procured any other person to deal in securities of anybody corporate on basis
of published information then he may be fined up to RS. 25 crores or 3 times the profit made which is higher. 29
 Role and Power of SEBI in Curbing Insider Trading

SEBI is established as a statutory body which works under the framework of Securities and Exchange Board of
India, 1992.
The various roles and power of SEBI have been discussed under Section 11 of the SEBI Act,1992.
a) The main duty of SEBI is to protect the safeguard of investors and ensure proper trading.
b) The main power of SEBI is that if any person has violated the provisions of this Act then SEBI set up an
enquiry committee.
c) In order to investigate SEBI may appoint officers who look after the books and records of insider and
other connected persons.
d) It is the duty of SEBI to give a reasonable notice to the insider before starting the investigation.
e) The board can also appoint an auditor who may inspect the books of accounts and affairs of an insider.
f) SEBI has to communicate the findings to the insider and issue a show cause to the insider or other
person within 21 days of the receipt of the communication.
30
 Insider Trading and Companies Act 2013

Prohibition on Insider Trading of Securities:

1. No person including any director or key managerial personnel of a company shall enter in to insider trading:

Provided that nothing contained in this sub-section shall apply to any communication required in the ordinary
course of business or profession or employment or under any law.

2. If any person contravenes the provisions of this section, he shall be punishable with imprisonment for a term
which may extend to five years or with fine

• which shall not be less than 5 lakh rupees but which may extend 25 crore rupees or
• 3 times of the amount of profits made out of insider trading, whichever is higher,
• or with both,

31
Whistle Blower Policy
 Whistle Blower Policy

• The term “whistle-blowing” originates from the practice of British policemen who blew their whistles whenever they
observed commission of crime.
✓ Whistle blowing means calling the attention of the top management to some wrong doing occurring
within an organization.

• A whistle blower may be an employee, former employee or member of an organization, a government agency, who
have willingness to take corrective action on the misconduct.

• As per Sec.177 of the Companies Act, 2013, certain companies have to establish Vigil/ Whistle-Blowing
mechanism to report any unethical behavior or other concerns to the management.
✓ E.g. IIM Bangalore / any Bank, as a Notice (with email &/or contact number)

• A whistle blower may be:

a) Internal – Employee, Superior Officer or Any designated Officer

33
b) External – Lawyers, Media, Law Enforcement, Watchdog Agencies
 Sarbanes Oxley Act, 2002 (SOX)
An Act enacted by US Congress in 2002 to protect investors by improving the accuracy and reliability of corporate
disclosures made pursuant to the securities law, and for other purposes.

• It is a set of standards that all US public companies and public accounting firms must comply and adhere with
good quality reporting.

• All companies, including Indian, which are listed on US stock exchanges, are required to comply with the
requirements of the Act.
• Corporate governance in India too has taken a folio from provisions of Section 404 of the Act.

• Provisions of SOX for Whistle-Blowers:

a) Make it illegal to “discharge, demote, suspend, threaten, harass or in any manner discriminate against” whistle blowers
b) Establish criminal penalties of up to 10 years for executives who retaliate against whistle blowers
c) Require board audit committees to establish procedures for hearing whistle blower complaints
d) Allow the secretary of labor to order a company to rehire a terminated employee with no court hearing.
e) Give a whistle blower the right to a jury trial, bypassing months or years of administrative hearings 34
 Objectives & Barriers to Whistle-Blowing

Objectives Barriers

• To encourage employees to bring ethical and • A lack of trust in the internal system
legal violations they are aware of to an internal
authority so that action can be taken immediately • Unwillingness of employees to be “snitches”
to resolve the problem.
• Belief that management is not held to the same
• To minimize the organization’s exposure to the
standard
damage that can occur when employees
circumvent internal mechanisms.
• Fear of retaliation
• To let employees know the organization is serious
about adherence to codes of conduct. • Fear of alienation from peers

35
Process for Whistle-Blowing Mechanism

36
Summary
 Summary
Here is the recap of what you have learnt in this unit.
• The revised will was considered and approved by the Rajya Sabha on 8th August 2013. It received the President’s assent on
29th August, 2013 and has now become the Companies Act, 2013.
• One-person Company (OPC) - An OPC means a company with only one person as its member [section 3(1) of 2013 Act].
• Financial Year: It has been defined as the period ending on the 31st day of March every year, and where it has been
incorporated on or after the 1st day of January of, the period ending on the 31st day of March of the following year, in respect
whereof financial statement of the company or body corporate is made up.
• Types of companies:
a) On the basis of mode of operation – Chartered, Statutory & Registered Companies
b) On the basis of number of members – Private & Public Company
c) On the basis of control – Holding Company & subsidiary Company
d) On the basis of ownership – Government Company & Non-government Company
e) On the basis of Nationality – Indian Companies & Foreign Companies
38
 Summary
Continued
• Revisions done in Companies Act, 2013
o Mandatory auditor rotation and joint auditors
o Non-audit services
o Auditing standards
o Cognizance to Indian Accounting Standards
o Secretarial Audit for bigger companies
o Internal Audit
o Audit of items of cost
o Government of India has rightly promulgated the provisions for e-governance in the corporate sector of the country, in its
latest Companies Act of 2013.
o Highlights of Companies (Amendment) Act, 2015 –
o No minimum paid-up share capital, no requirement for getting the commencement of business certificate,
o common seal made optional, rigorous penalty for company inviting or accepting deposits,
o board resolutions are made confidential, dividends not be declared by companies having losses. 39
 Summary
Continued ...

• Insider trading is the buying or selling of a security by someone who has access to material non-public information about the
security. Insider trading can be illegal or legal depending on when the insider makes the trade. It is illegal when the material
information is still non-public.
• SEBI (Insider Trading) Regulation, 1992 framed under the Section 11 of the SEBI Act, 1992 intends to curb and prevent the
menace of insider trading in securities. An insider is a person who is an accepted member of a group or organization who has
special knowledge regarding his firm.
• The penalties and punishments for committing insider trading have been defined under Chapter IV-A of the SEBI Act.
• The term “whistle-blowing” originates from the practice of British policemen who blew their whistles whenever they
observed commission of crime. Whistle blowing means calling the attention of the top management to some wrong doing
occurring within an organization.
• A whistle blower may be an employee, former employee or member of an organization, a government agency, who have
willingness to take corrective action on the misconduct.
• As per Sec.177 of the Companies Act, 2013, certain companies have to establish Vigil/Whistle-Blowing mechanism to
report any unethical behavior or other concerns to the management. 40
THANK YOU
MBA - Banking and Finance
A WORK INTEGRATED LEARNING PROGRAM
TA L E N T | T E C H N O L O G Y | T R A N S F O R M AT I O N
Corporate Governance, Ethics
and Compliance
This Course has 8 Units

1. Introduction to Corporate Governance

2. Corporate Governance in banks in India
3. Companies Act, 2013
4. Basel Committee on Banking Supervision
5. Introduction to Business Ethics
6. Ethics in Functional Areas
7. Compliance in Banks
8. Governance, Risk & Compliance (GRC)
 Unit Description
Banks, in a broad sense, are institutions whose business is handling other’s money. Banks are a critical
component of any economy.
They provide financing for commercial enterprises, basic financial services to a broad segment of the population
and access to payment systems. In addition, some banks are expected to make credit and liquidity available in
difficult market conditions.
It is of crucial importance, therefore, that banks have strong corporate governance.
This unit will help you identify the provisions of Basel Committee on Corporate governance.

3
 Unit Objectives

At the end of this unit, you will be able to:

• Identify the provisions of Basel Committee on Corporate Governance

• Impact analysis of Basel – III on Indian Banking

• Identify the practices to be viewed as critical elements of any corporate governance process

• Identify the phases of growth in Indian Banks

4
Corporate Governance in Banks
 Corporate Governance in Banks

If we examine the need for improving corporate governance in banks, two reasons stand out:
1. Banks exist because they are willing to take on and manage risks. Banking business is becoming more complex
and diversified.
• Risk taking and management in a less regulated competitive market will have to be done in such a way that
investors’ confidence is not eroded.
2. Even in a regulated set-up, as it was in India prior to 1991, some big banks in the public sector and a few in the
private sector had incurred substantial losses.
• This, along with the massive failures of non-banking financial Companies (NBFCs), had adversely impacted
investors’ confidence.

To sum up, the objective of corporate governance in banks should first be protection of depositor’s
interest and then be to “optimize” the shareholder’s interests.
All other considerations would fall in place once these two are achieved.
6
 Basel Committee on Corporate Governance

In December 2010, the Basel Committee on Banking Supervision (BCBS) published its reforms on capital and
liquidity rules to address problems, which arose during the financial crisis.
• One of the main reasons the crisis became so severe was that the banking sectors of many countries had built
up excessive on and off-balance sheet leverage.
• This was accompanied by the wearing down of quantity and quality of capital. Therefore, the banking system
was unable to absorb the resulting losses.

• The objective of the BCBS to strengthen the regulatory capital framework resulted in the Basel III framework.
• The framework consists of two separate policy documents (BCBS 2010a) and (BCBS 2010b) wherein
capital and liquidity standards are set out.
• Basel III strengthens the Basel II framework.
• Basel II focused on the asset side of the balance sheet,
• Basel III mostly addresses the liabilities, i.e. capital and liquidity. 7
 Basel III Framework
The new framework will:
a. impose higher capital ratios, including a new ratio focusing on common equity,
b. increase capital charges for many activities, particularly involving counterparty risk and
c. narrow the scope of what constitutes Tier 1 (T1) and Tier 2 (T2) capital.

Pillars of Basel Framework

Pillar 2
Pillar 1 Pillar 3
Sets out the process by
Sets out calculations of which a bank should Sets out the disclosure
regulatory capital review its overall capital requirements for banks to
requirements for credit, adequacy and the publish certain details of
market and operational process for assessing their risk, capital and risk
risk risks and appropriate management.
actions. 8
 Objectives of Basel III

Basel III measures aim to:

1. Improve the banking sector’s ability to absorb ups and downs from financial and economic instability.
2. Improve risk management ability and governance of banking sector
3. Strengthen banks' transparency and disclosures

Major challenges in Basel III with respect to Basel I and Basel II

1. Better Capital Quality – Higher loss-absorbing capacity

2. Capital Conservation Buffer – Banks are required to hold capital conservation buffer of 2.5%
3. Counter Cyclical Buffer – Introduced with objective to increase capital requirement in good
times and decrease the same in bad times. The buffer will range from 0% to 2.5%
9
 Objectives of Basel III

4. Minimum Common Equity and Tier 1 Capital Requirements:

• The minimum requirement for common equity, the highest form of loss-absorbing capital, has been raised under Basel III
from 2% to 4.5% of total risk-weighted assets.
• The overall Tier 1 capital requirement, consisting of not only common equity but also other qualifying financial instruments,
will also increase from the current minimum of 4% to 6%.
• Although the minimum total capital requirement will remain at the current 8% level, yet the required total capital will
increase to 10.5% when combined with the conservation buffer.
5. Leverage Ratio - Basel III rules include a leverage ratio to serve as a safety net. A leverage ratio is the relative
amount of capital to total assets (not risk-weighted).
6. Liquidity Ratios - A new Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) are to be
introduced in 2015 and 2018, respectively.
7. Systematically Important Financial Institutions - Systemically important banks will be expected to have loss-
absorbing capability beyond the Basel III requirements.
10
 Basel III Principles

The Financial Stability Board (FSB) reviewed in 2013. The FSB underscored the critical role of the Board of Directors
and the Board Risk Committees in strengthening the banks risk governance.

This includes involvement in evaluating and promoting a strong risk culture in the organization.
Establishing the bank’s risk appetite and overseeing its implementation.

The increased focus on risk and supporting governance framework includes “three lines of defense” as follows:

• 1st line of defense – The business line, which manages risk that incurs in conducting the business.

• 2nd line of defense: Identifying, measuring, monitoring and reporting risk, independently from the 1st line of defense.

• 3rd line of defense: Conduct of risk-based general audits.

The implementation of these principles should be commensurate with the size, complexity, structure, economic
significance and risk profile of the bank.
11
 Impact Analysis of Basel III on Indian Banking

Basel III guidelines attempt to enhance the ability of banks to withstand periods of economic & financial stress
by prescribing more stringent capital and liquidity requirements for them.
1) The new Basel III capital requirement would be a positive impact for banks as it raises the minimum core capital
stipulation, introduces counter-cyclical measures, and enhances banks' ability to conserve core capital in the event
of stress through a conservation capital buffer.
2) The prescribed liquidity requirements, on the other hand, would bring in uniformity in the liquidity standards followed
by the banks globally. This liquidity standard requirement, would benefit the Indian banks manage pressures on
liquidity in a stress scenario more effectively.
3) Its implementation would lead to reduced risk of systemic banking crisis as the enhanced capital and liquidity
buffers together lead to better management of probable risks
4) It would strengthen the banking sector’s ability to absorb financial and economic shocks.
5) Increased supervisory vigil
6) Reorganization of institutions
7) International arbitrage
12
8) Capital standards for India
Sound Corporate Governance
Practices for Banks
 Sound Corporate Governance Practices for Banks

The practices to be viewed as critical elements of any corporate governance process are:
1. Establishing strategic objectives and a set of corporate values that are communicated throughout the banking
organization.
2. Setting and enforcing clear lines of responsibility and accountability throughout the organization.
3. Ensuring that board members are qualified for their positions, have a clear understanding of their role in corporate
governance and are not subject to undue influence from management or outside concerns.
4. Ensuring that there is appropriate oversight by senior management
5. Effectively utilizing the work conducted by internal and external auditors, in recognition of the important control
function they provide.
6. Ensuring that compensation approaches are consistent with the bank’s ethical values,, objectives, strategy and
control environment.
7. Conducting corporate governance in a transparent manner. 14
Ensuring Sound Corporate
Governance Environment
 Ensuring Sound Corporate Governance Environment

The Basel Committee recognizes that primary responsibility for good corporate governance rests with
boards of directors and senior management of banks; however, there are many other ways that corporate
governance can be promoted, which include the following:

a) Government — through laws.

b) Securities’ regulators, stock exchanges — through disclosure and listing requirements.

c) Auditors — through audit standards on communications to board of directors, senior management and
supervisors.

d) Banking industry associations — through initiatives related to voluntary industry principles and agreement
on and publication of sound practices.

16
Phases of Growth in Indian Banks
 Phases of Growth in Indian Banks
Since Independence, organised Western type of banking in India has evolved through four distinct phases.

1. Foundation phase covering the decades of 1950s and 1960s: This period witnessed the development of the
required legislative framework for facilitating the organization of the banking system to cater to the growing and
development need of the Indian economy.

2. Expansion phase of the mid-1960s: This trend gained momentum after the nationalization of private banks in late
1960s.

3. Consolidation phase since 1985: Greater attention was paid to improving housekeeping, customer service, credit
management, productivity and profitability of banks starting 1985 onwards.

4. Reforms phase commencing from 1991: Important and significant initiatives were taken with a view to reforming
the banking system such as the introduction of accounting and prudential norms relating to income recognition,
provisioning and capital adequacy in 1991.
18
Corporate Governance in Indian Banks
 Reasons for Corporate Governance in Banks

The question of corporate governance in banks is important for several reasons.

1) First, banks have an overwhelmingly dominant position in developing the economy’s financial system and are
extremely important engines of growth.

2) Second, as the country’s financial markets are underdeveloped, banks in India are the most significant source of
finance for a majority of firms in Indian industry.

3) Third, banks are also the channels through which the country’s savings are collected and used for investments.

4) Fourth, India has recently liberalized its banking system through privatization, disinvestments and has reduced the
role of economic regulation and consequently managers of banks have obtained greater autonomy and freedom
with regard to running of banks.

Corporate governance in banks has assumed importance in India post-1991 reforms because
competition compelled banks to improve their performance. 20
Policy Implications
 Policy Implications

The special nature of banking institutions necessitates a broad view of corporate governance where regulation of
banking activities is required to protect depositors.
✓ A broad view of corporate governance where regulation of banking activities is required is to protect depositors.

In order to deal with these problems, some analysts suggest that India needs to adopt the following measures:

1) First, liberalization policies need to be gradual, and should be dependent upon improvements in prudential
regulation.

2) Second, India need to expend resources enhancing the quality of their financial reporting systems, as well as the
quantity and quality of bank supervisors.

3) Third, given that bank capital plays such an important role in prudential regulatory systems, it may be necessary to
improve investor protection laws, increase financial disclosure and impose fiduciary duties upon bank directors so
that banks can raise the equity capital required for regulatory purposes
22
CGEC - Unit 4 – (Additional :
Comprehensive
Basel III - Principles Information)

23
Summary
 Summary
Here is the recap of what you have learnt in this unit.
• The objective of corporate governance in banks should first be protection of depositor’s interest and then be to
“optimize” the shareholder’s interests. All other considerations would fall in place once these two are achieved.
• The objective of the BCBS to strengthen the regulatory capital framework resulted in the Basel III framework.
• The framework consists of two separate policy documents (BCBS 2010a) and (BCBS 2010b) wherein capital and
liquidity standards are set out.
• Basel III strengthens the Basel II framework.
• Basel II focused on the asset side of the balance sheet,
• Basel III mostly addresses the liabilities, i.e. capital and liquidity.
• The new framework will:
a. impose higher capital ratios, including a new ratio focusing on common equity,
b. increase capital charges for many activities, particularly involving counterparty risk and
25
c. narrow the scope of what constitutes Tier 1 (T1) and Tier 2 (T2) capital.
 Summary
Continued ...

• The Financial Stability Board (FSB) reviewed in 2013. The FSB underscored the critical role of the Board of
Directors and the Board Risk Committees in strengthening the banks risk governance.
• The increased focus on risk and supporting governance framework includes “3 lines of defense” as follows:
a) 1st line of defense – The business line, which manages risk that incurs in conducting the business.
b) 2nd line of defense: Identifying, measuring, monitoring and reporting risk, independently from the 1st line of
defense.
c) 3rd line of defense: Conduct of risk-based general audits.
• Phases of growth in Indian Banks:
o Foundation phase covering the decades of 1950s and 1960s
o Expansion phase of the mid-1960s
o Consolidation phase since 1985
o Reforms phase commencing from 1991 26
 Summary
Continued ...

• The practices to be viewed as critical elements of any corporate governance process are:
o Establishing strategic objectives and a set of corporate values that are communicated throughout the banking
organization.
o Setting and enforcing clear lines of responsibility and accountability throughout the organization.
o Ensuring that board members are qualified for their positions, have a clear understanding of their role in
corporate governance and are not subject to undue influence from management or outside concerns.
o Ensuring that there is appropriate oversight by senior management
o Effectively utilizing the work conducted by internal and external auditors, in recognition of the important
control function they provide.
o Ensuring that compensation approaches are consistent with the bank’s ethical values,, objectives, strategy
and control environment.
o Conducting corporate governance in a transparent manner. 27
THANK YOU
MBA - Banking and Finance
A WORK INTEGRATED LEARNING PROGRAM
TA L E N T | T E C H N O L O G Y | T R A N S F O R M AT I O N
Corporate Governance, Ethics
and Compliance
This Course has 8 Units

1. Introduction to Corporate Governance

2. Corporate Governance in banks in India
3. Companies Act, 2013
4. Basel Committee on Banking Supervision
5. Introduction to Business Ethics
6. Ethics in Functional Areas
7. Compliance in Banks
8. Governance, Risk & Compliance (GRC)

2
 Unit Description
Not all organizations are the same; even organizations of comparable size have different cultures and values, for an
organization is not a machine, nor is it a passive vehicle for carrying out tasks, it is an entity that embodies the collective
values and efforts of the people who inhabit and control it.

So in understanding organizations, we must also take into consideration the prevailing views, customs, and
values of the society within which the organization operates and within which the employees live.

This unit will provide an understanding to corporate culture and characteristics of an ethical organization.

3
 Unit Objectives

At the end of this unit, you will be able to:

• Define corporate culture

• Identify the components of corporate culture
• Identify the characteristics of an ethical organization
• Explain ethical dilemma
• Identify steps to resolve ethical dilemmas and problems

4
Corporate Culture and Values
 Defining Corporate Culture

Corporate Culture is more than

simply a set of company rules, the
Culture incorporates:
mission statement and corporate
objectives, or even et of common • Unwritten rules;
values; it is a more complex mix of
factors that combine together to • Assumptions about expected behavior;
form the prevailing culture of the
organization. • Styles and attitudes formed from national culture; and

• Prevailing orthodoxies or moralities in the society and environment that

surrounds the organization and from which most of the employees come.
Some of these attributes of culture
Examples
are visible but one key aspect of •Toyota: Quality
corporate culture is not. •Google: Innovation
•PSUs: Work
•Pvt Banks: Service 6
•NGO (Theresa): Selflessness
 Components of Corporate CUlture

The visible aspects of culture are what you see when

Iceberg Model of Corporate Culture you walk in the door.
shows the combination of factors that
are similar to the iceberg in so far as They include the:
only a portion of it is visible and a
• Attitude of the staff
large proportion isn’t.
• The expression of common corporate objectives
Clearly this is not a representation of
proportions, it is a picture of the • The staff handbook containing all the policies
construct of corporate culture, but it
makes the point. • The management style and how this affects the
employees of the organization.

7
 Components of Corporate Culture

• Espoused (promoted) Values - These are the overt values of the organization, the
ones they make public. They are the mission statement, the corporate objectives,
and goals, in other words, they are the stated aims and aspirations of the
10% organization that someone new to it is told about and which existing staff has been
made familiar with through training and management reminders.
• Infy Values; Tata Ethics; Apple Innovation

• Artefacts - These are the visible manifestation of the espoused values that are
comprised, for example, in the hierarchical structure of the organization, its
arrangements for management and supervision and the policies and procedures in
the staff handbook. Employees will be familiar with these.
90% • HDFC systems; ICICI Technology; SBI processes

• Unwritten Rules - What is not apparent are the hidden or unwritten rules of the
organization that can derive from the prevailing national culture or is unwritten rules
of the business.
8
Six Components of Corporate Culture
1. Vision: Great culture starts with a vision or mission statement.

2. Values: The Company’s values are core of its culture.

3. Practices: Values of the company are important but it is of little importance if

it is not practiced.

4. People: Company cannot build a coherent culture without the people in the
company who share the core values and have the willingness and ability to
embrace these values.

5. Narrative: Ability to unearth the history of the company and craft it into a
narrative is a core element of corporate creation.

6. Place: Geography, architecture or aesthetic design impacts the values and

behaviors of the people in a workplace.
9
Introduction to Business Ethics
 Business Ethics
Different meaning is given to business as follows:
• Business ethics are the application of general ethical rules to business behavior.
• Business ethics are rules of business by which propriety of business activity may be judged.
“Business ethics is generally coming to know what is right or wrong in the workplace and doing what is right
– this is in regard to effects of products/services and in relationship with stakeholders.” “Attention to ethics
in the workplace sensitizes managers and staff to know they should act so that they retain a strong moral compass.
Consequently, business ethics can be strong preventive medicine.” - By Cater McNamara

• Business ethics concentrate on moral standards as they apply to business policies, institutions, and behavior. It
is a specialized study of moral right or wrong. It is a form of applied ethics.
• Business ethics are nothing but the application of ethics in business. It proves that business can be and have
been ethical and still make profits. Today more and more interest is being given to the application of ethical
practices in business dealings and the ethical implications of business.
11
 Ethical Principles in Business
Ethical principles can be classified into two categories:
1. Teleological - The teleological theories determine the ethics of an act by looking at the consequences of the
decision (the end). Teleological (Utilitarianism) Ethical System: The teleological morality of a decision is
determined by measuring the probable outcome
2. Deontological - Deontological theories determine the ethics of an act by looking to the process of the decision
(the means). Deontological Ethical System: A deontological system is based on rules or principles that govern
decisions. In this system, ethics are measured by the rightness of an act and depend little on the results of the act.

• Hybrid Theory: Robert Nozick holds that justice and fairness, right and wrong are measured not by equality of results for all,
but from ensuring equal opportunity for all to engage in informed choices about their own welfare.
• Distributive Justice and Social Contract: Prof. Rawls of Harvard University propounded this theory. According to it, that
when people get together, they form societies and engender cooperation, but when they come together conflict also arises
because people do not receive a just distribution of the benefits yielded through their activities.
• Individual Freedom: According to this theory, all individuals must be allowed to make informed choices by society. Such
choices must be within the law and the same freedom enjoyed by one individual in the society must be extended to all within
the society. 12
 Need for Business Ethics

The needs for business ethics arises on account of:

• The business operates within the society

• Every business irrespective of size exists more on ethical

means or in total regards to all its social concern to survive
long.

• Business needs to function as a responsible corporate citizen

in a country. -→ Corporate Citizenship Behaviour

13
 Objectives of Business Ethics

According to Peter Pratley – Business ethics has two fold objectives – “it evaluates human practices by calling
upon moral standards”, also it may give prescription advice on how to act morally in a specific kind of
situation”.
• Analysis and evaluation: Ethical analysis and ethical diagnosis of past events, happenings, clarifying the
standards, uncover the moral values, habits of thought.
o How to evaluate the situation? Ethics provides rational methods for answering the present situation and related
future issues. Well-equipped information is a must to achieve this second objective, a careful assessment of
relevant information will lead to balanced judgments.
• Approaches to resolving ethical dilemmas: It provides therapeutic advice when facing the present dilemmas and
future dangers. Only the condition which requires a true identification of relevant stakeholder and a clear-cut
understanding of crucial issues at stake.

14
 What Business Ethics is Not?

It is equally important to clarify what is not ethics:

• Ethics is different from religion

• Ethics is not synonymous with law

• Ethical standards are different from cultural traits

• Ethics is different from feelings

• Ethics is not a science in the strictest sense of the term

15
 Importance of Business Ethics

“Good business ethics promotes good business”, this statement is supported by the research findings of some
well-known authorities – Raymond Baumhart, Brener and Molander, and Strom and Ruch.

Following are the reasons for business ethics:

• It leads to positive consequences

• It will increase the goodwill of the business and businessman

• Protection – both sides. Ethics protects people in dealing with each other.

• Encourage others

• Success & development

• New Management
16
 3 C’s of Business Ethics

Consequences
Contribution
Compliance (of business activity)
(business can make to
(the need for compliance of • Toward the environment
society)
rules including) inside and outside the
• The core values organization
• Laws
• Quality of products/services • Social responsibility toward
• Principles of morality
• Employment shareholders, bankers,
• The policy of the company customers, and employees
• The usefulness of activities of the organization
to surrounding activities
Tata Vs. Reliance • Good public image, sound
• Quality of work life (QWL) activity, good image
HDFC-SBI Vs. Andhra Bank
IBM & Infosys......
SBI, ICICI, HDFC…… NBFCs
Pvt Banks Vs. Coop Banks / NBFC
17
 Why should businesses act ethically?
There are a number of reasons why businesses should act ethically:

• to protect its own interest;

• to protect the interests of the business community as a whole so that the public will have trust in it;
• to keep its commitment to society to act ethically;
• to meet stakeholder expectations;
• to prevent harm to the general public;
• to build trust with key stakeholder groups;
• to protect themselves from abuse of unethical employees and competitors;
• to protect their own reputations;
• to protect their own employees; and
• to create an environment in which workers can act in ways consistent with their values.
18
 How Ethics can make Corporate Governance Meaningful?

• Corporate governance is meant to run companies ethically in a manner that all stakeholders, creditors,
distributors, customers, employees and even competitors, the society at large – are dealt with in a fair manner.
• Good corporate governance should look at all stakeholders and not just shareholders alone.
• Corporate Governance is not something which regulators have to impose on management, it should come from
within. There is no point in making statutory provisions for enforcing ethical conduct.
• There are several provisions in the Companies Act, e.g.,
o Disclosing the interest of directors in contracts in which they are interested;
o Abstaining from exercising voting rights in matters they are interested; and
o Statutory protection to auditors who are supposed to go into the details of the financial management of the company and
report the same to the shareholders of the company.
But most of these may be observed in the letter, not in spirit.
Members of the board and top management should ensure that these are followed both in letter and spirit.
19
 Characteristics of Ethical Organization

Mark Pastin in his work, The Hard Problems of Management – Gaining an Ethical Edge provides the following
characteristics of ethical organizations:
a) They are at ease interacting with diverse internal and external stakeholders’ groups. The ground rules of
these firms make the good of these stakeholder groups part of the organization’s own good.
b) They are obsessed with fairness. Their ground rules emphasize that the other persons’ interests count as much
as their own.
c) Responsibility is individual rather than collective, with individuals managing personal responsibility for actions
of the organization. These organizations’ ground rules mandate that individuals are responsible for themselves.
d) They see their activities in terms of purpose. This purpose is a way of operating that members of the
organization highly value. And purpose ties the organization to its environment.

20
 Benefits of Managing Ethics in workplace

Several benefits accrue to an enterprise if it is managed ethically.

They are the following:

1. Attention to business ethics has substantially improved society

2. The ethical practice has contributed to high productivity and strong teamwork

3. Changing situations require ethical education

4. Ethical practices create a strong public image

21
 Code of Conduct & Ethics for Managers

In the exercise of their duties and responsibilities, managers must observe the following ethical values:

a) Integrity
b) Impartiality
c) Responsiveness to the public interest.
d) Accountability
e) Honesty
f) Transparency
Eg.
Being punctual •Sir MV
What values are to individuals, Being time-bound in reporting •Lal Bahadur Shastri
ethics is to business. Being ethical

Leader knows, shows & walks the way 22

Ethical Dilemma
 What is an Ethical Dilemma?
An ethical dilemma is a moral situation on which a choice has to be made between two equally undesirable
alternatives.
• Dilemmas may arise out of various sources of behavior or attitude, as for instance, it may arise out of the failure of
personal character, conflict of personal values & organizational goals, organizations goals versus social values, etc.,

As we can see, many of these ethical choices involve a conflict of values.

Doing what is A bad outcome or Eg.

Either Results in
morally right bad effects
Using Agent to Driving
Licence (DL)
Good or at least
Doing what is Giving bribe to get
Or Results in better effect or
morally wrong Govt Licence
outcome

24
 Ethical Issues in Organizations

Some of the ethical issues in an organization or at the workplace are:

• Identification of conflict issues and trying to avoid them.

• Deciding different methods of motivating the employees.

• Fairness in employee performance appraisals.

25
 Corporate Dilemma over Ethical Behaviour
Several corporate managements are in a dilemma whether it is worth their while to act ethically and practice
corporate governance in their companies.
Investing in ethical practices and being fair to all stakeholders will cost the corporates dearly.
Therefore, most of them are in a dilemma.

Those in business come across several ethical problems that cause ethical dilemmas. The following are some instance:

1) They feel that there is a lack of a clear linkage between business ethics and financial success

2) They are not clear as to how much they should invest in the business ethics system; they would like to know how
much is good enough.

3) They are unclear about the right balance between business ethics and the investment required for the same

4) The seemingly long gestation periods and the lack of short-term gains is an obstacle. Investment in ethical business
may be large, in diverse areas and multi-dimensional. They may bear fruits after a very long time.
26
 How to resolve an Ethical Problem?

• Is it a policy, a decision or an action?

• Is it ethical or unethical?

To resolve these questions that create a dilemma, ask three questions:

• Utility – Does its benefits exceed the cost (shareholder)?

• Right – Does it respect human rights (society)?

• Justice – Does it distribute benefits and burdens evenly (employees)?

Answers to these questions in the affirmative will be the first step in the process of solving ethical problems.

27
 Approaches to Resolving Ethical Dilemmas

There are two basic approaches to resolving ethical dilemmas:

• Deontological – in this approach, an ethical standard is consistent with the fact that it is performed by a rational
and free person.
o These fundamental moral rights are inherent in our nature and are universally recognized as part of human beings,
defining their very nature.
o If we follow a deontological outlook while analyzing an ethical dilemma, we are led to a much narrow focus.
o We confront such questions as: ‘Which actions are inherently good?’ ‘Does it respect the basic rights of everyone
involved?’ ‘Does it avoid deception, coercion, and manipulation?’ ‘Does it treat people equitably?’
o Ethicists are of the view that the major problem with this approach is its inflexibility and uncompromising stance.

• Teleological - This approach to ethics takes a pragmatic, common sense, layman’s approach to ethics. According
to this school of thought,
• ‘The moral character of actions depends on the simple, practical matter of the extent to which actions actually help or hurt
people.
• Actions that produce more benefits than harms are “right”; those that don’t are “wrong”. 28
 3 Step Strategy to solve Ethical Problems
There are two basic approaches to resolving ethical dilemmas:

• Step 1 – Analyze the consequences

o Ethical dilemmas that arise in business should be resolved at least within the bare minimum of law and legal
framework that would follow one’s proposed actions.
➢ And when one has several options to choose from, there will be an array of consequences connected
with each of such options, both positive and negative.
o Before one acts, answers to the following questions will help find the type of action that can be contemplated:
➢ Who are the beneficiaries of your action?
➢ Who is likely to be harmed by the action?
➢ What is the nature of the ‘benefits’ and ‘harms’?
➢ How long or how fleetingly are these benefits and harms likely to exist?
29
 3 Step Strategy to solve Ethical Problems
There are two basic approaches to resolving ethical dilemmas:

• Step 2 – Analyze the actions

o Once you identified the best possible option, concentrate on the actions.
o Find out how your proposed actions measure against moral principles such as ‘honesty, fairness, equality,
respect for the dignity and rights of others, and recognition of the vulnerability of people who are weak,
etc.,’.
• Step 3 – Make a decision
o Having considered all factors that lead to choices among various options, analyze them carefully and then
take a rational decision.

30
Summary
 Summary
Here is the recap of what you have learnt in this unit.

• Not all organizations are the same; even organizations of comparable size have different cultures and values, for
an organization is not a machine, nor is it a passive vehicle for carrying out tasks, it is an entity that embodies the
collective values and efforts of the people who inhabit and control it.
• Corporate Culture is more than simply a set of company rules, the mission statement and corporate objectives, or
even et of common values; it is a more complex mix of factors that combine together to form the prevailing culture
of the organization.
• Culture incorporates:
o Unwritten rules;
o Assumptions about expected behavior;
o Styles and attitudes formed from national culture; and
o Prevailing orthodoxies or moralities in the society and environment that surrounds the organization and from
which most of the employees come.
32
 Summary
Continued ...

• Six Components of Corporate Culture:

1. Vision
2. Values
3. Practices
4. People
5. Narrative
6. Place
Ethical principles can be classified into two categories:
1. Teleological - The teleological theories determine the ethics of an act by looking at the consequences of the
decision (the end).
2. Deontological - Deontological theories determine the ethics of an act by looking to the process of the decision
(the means). 33
 Summary
Continued ...
• An ethical dilemma is a moral situation on which a choice has to be made between two equally undesirable
alternatives. Dilemmas may arise out of various sources of behavior or attitude, as for instance, it may arise out of
the failure of personal character, conflict of personal values & organizational goals, organizations goals versus
social values, etc.,
• Some of the ethical issues in an organization or at the workplace are:
o Identification of conflict issues and trying to avoid them.
o Deciding different methods of motivating the employees.
o Fairness in employee performance appraisals.
• 3 Step strategy to solve ethical problems:
o Analyze the consequences
o Analyze the actions
o Make a decision
34
THANK YOU
MBA - Banking and Finance
A WORK INTEGRATED LEARNING PROGRAM
TA L E N T | T E C H N O L O G Y | T R A N S F O R M AT I O N
Corporate Governance, Ethics
and Compliance
This Course has 8 Units

1. Introduction to Corporate Governance

2. Corporate Governance in banks in India
3. Companies Act, 2013
4. Basel Committee on Banking Supervision
5. Introduction to Business Ethics
6. Ethics in Functional Areas
7. Compliance in Banks
8. Governance, Risk & Compliance (GRC)

2
 Unit Description
Ethics in the functional areas of any business is necessary to ensure a good rapport between the
management and the employees. In fact, all functional areas, namely marketing, finance, human resources as
well as information technology should follow code of ethics so as to function well and give maximum output.

Only one person alone cannot achieve this. Each employee should feel responsible and try to stand by what is
right in any given situation. In other words, it should be a team effort across all levels of the organization.

This unit will help you identify the ethical guidelines applicable to various functional areas.

3
 Unit Objectives

At the end of this unit, you will be able to:

• Identify the ethical guidelines applicable to various functional areas

• Explain corporate social responsibility

4
Ethics in the Functional Area
 Introduction to Customer Service
Ethical issues can arise in various functional areas of a business such as marketing, research and development, human
resources, production and finance. Ethical issues in all these functional areas must be controlled or coordinated by the
Chief Executive Officer (CEO) of the enterprise.

Figure below shows the main functional areas of a business that usually give rise to ethical issues.

6
 Ethics in Marketing

Marketing is a management process that identifies, anticipates and supplies consumer requirements efficiently
and effectively.

• The main aim of marketing is to make customers aware of the products and services.

• It also focuses on attracting new customers and keeping existing customers interested in the product.

The marketing department consists of various subdivisions, such as sales, after-sales service, advertising and
promotion, marketing and research

7
 Sales and Ethics

In the field of sales, the following ethical issues require safeguards against unethical behaviors:
• Not supplying the products made by the company as per the order
• Not accepting responsibility for the defective product
• Not giving details about the hidden costs, such as transportation cost, while making the contract with the client
• Changing the specifications of the product without giving any prior information to the customer
• Changing the terms of the business without taking any approval from the client
• Delaying the delivery of the goods without giving any proper reason
• Treating two customers differently
• Not providing the after sales service as per the contract
• Selling the same product at different prices to different customers
8
 Advertising, Promotion and Ethics

Advertising and promotion provide the means for communicating with the customer. In the field of advertising
and promotion, the following are examples of unethical communication practices:
• Making false commitments to the customers about the benefits of the product
• Supplying products that are different from those that are advertised
• Giving wrong prices to the customers during advertising
• Not giving the promised gift in the promotional campaign
• Hiding major flaws of the product
• Providing wrong testimonials about the product to prospective customers
• Not providing the advertised service to the customers as a part of the promotional plans
• Increasing the price of the product before starting its promotional campaign
• Making false references about the competitive products
9
 Advertising, Promotion and Ethics

Organizations follow various methods that are unethical while

advertising for their products and services.

These methods are:

• Ambiguity

• Concealed facts

• Exaggeration

• Psychological appeal

10
 After Sales and Ethics

In the field of after-sales service, the following ethical issues require safeguards against unethical behavior:
• Using below-standard material for the service and charging for relatively better material from the customer
• Using outmoded service equipment which can be harmful for the products during service
• Not taking the service calls if the location is not easy to reach, while free service was promised before the sale of the
product
• Making only temporary adjustment in the product, which can last only for a short time or to make the product useful
for the time being
• Not keeping proper service records of major products for future use, as they can help in easy diagnosis of problem
• Overbilling the service charges, when the customer is not aware of the actual rates
• Using rejected or below-standard components for customer’s temporary relief
• Refusing the service of the product due to personal reasons
• Exchanging healthy parts with below-standard parts when the product comes for servicing 11
 Marketing Research and Ethics

Marketing research is done to find out the needs of the market, its trends and competitive activities.
In the field of marketing research, the following are example of unethical behavior:
• Research is conducted only to substantiate the viewpoint of the manager.
• Research is focused on the areas that do not need to be covered.
• Some old research is presented as the new one just for the purpose of financial gain.
• A biased research report is prepared to suit the marketing manager.
• The research report is sold to the competitor.
• The report does not include important facts.

12
Ethics in Information Technology
 Ethics in Information Technology

Information technology refers to the gathering, processing, creation, delivery and storage of information and all the
processes that make all this possible. The volume of work that is handled using IT continues to increase almost
everyday. Whatever be the field, one is sure to find IT at work.

The characteristic of IT is that it is a particular field which has no geographical boundaries but application of IT may
affect culture and environment differently. The features which are acceptable in one culture may be unethical in another.

In 1986, Masovi had classified ethical issues in the following four groups:
• Accessibility: It involves the right of accessing the required information as well as the true payment of charges to
access the information.
• Privacy: It deals with the degree of privacy and dissemination of information about an individual.
• Property: It talks about ownership and value of information.
• Accuracy: The information which is viable and being accessed is now much more accurate and authentic. 14
 Ten Commandments of Computer Ethics
10 commandments of computer ethics:
1. You will not use computer to harm other people.
2. You will not interfere with the computer network of other people.
3. You will not snoop around in files of other people’s computer.
4. You will not use a computer to steal.
5. You will not use a computer to bear false witness.
6. You will not copy or use proprietary software for which you have not paid.
7. You will not use other people’s computer resources without authorization.
8. You will not use other people’s intellectual output.
9. You will think about the social consequences of the program you are writing or the system you are designing.
10. You will always use a computer in ways that demonstrate considerations and respect for your fellow humans.
15
Ethics in Banking and Finance
 Finance Department and Ethics
The finance department of an enterprise is prone to the following unethical practices:
a) Overestimating promoters’ capital utilization
b) Overbudgeting project costs
c) Using underhand tactics with the financers to gain benefits for the firm as well as for themselves
d) Purchasing capital equipment's at a time when there is no requirement for it
e) Selling the capital equipment's in order to raise additional and unaccounted funds
f) Siphoning funds for the promoter’s personal benefit
g) Investing unapproved funds in order to gain extra profits
h) Claiming insurance cover for losses that never happened
i) Overpricing the current assets in order to gain more working capital than permitted
j) Using working capital funds for personal gains
17
 Accounting and Ethics

The accounts department of an enterprise is prone to the following types of unethical issues:
a) Showing inflated salaries and getting receipts from employees for an amount larger than what they actually get
b) Playing inflated vendor bills in order to get discounts or commissions
c) Paying overtime wages when there in no requirement for them
d) Maintaining two different sets of books, one for the management and the other for income tax
e) Refusing to reject unacceptable raw materials when the vendor bills have to be paid
f) Delaying the clearance of the bills payable in order to get maximum interest for the amount to be paid
g) Allotting extra travelling allowances to favorite employees
h) Showing wrong figures in the monthly trial balances for personal benefits

18
 Costing and Ethics

The following are the unethical practices of the costing manager:

a) Reducing manufacturing costs by manipulating work hours
b) Ignoring cost of rejects
c) Ignoring cost of rework
d) Not accounting for man-hours lost due to strikes and absenteeism
e) Not accounting for man-hours lost in maintenance work
f) Not considering the work stoppages due to change in models
g) Ignoring the man-hours lost due to change in the manufacturing process
h) Ignoring time lost in failed experimentations
i) Not taking into account the benefits of economies of sales and experience curve

19
 Auditing and Ethics

The following points describe the unethical behavior of the auditing manager:
a) Ignoring major deviations from the budgets
b) Rejecting the tender having lowest cost among all due to personal reasons
c) Helping in hiding black money in order to reduce the tax payable amount
d) Ignoring inflated travel bills of selected employees
e) Accepting payments made by the directors for personal purchases as official payments
f) Enabling the directors in sending and receiving money from overseas through unofficial hawala channels
g) Approving payments to suppliers without checking bills or deliverables
h) Approving the sub-standard construction made by the constructor and approving their bills for payment

20
Business Ethics in India
 Ethical Indian Firms

They are both spiritual and many a time religious with the following managerial styles:
a) Decisions are taken on the basis of the merit of the case and these are not unreasonable or unethical.
b) At the working place, respect is shown to elderly people and senior officials.
c) Work is regarded as worship and official duty is performed without much consideration for its material reward
d) Human rights are respected & allowed & disputes are amicably settled on the basis of cooperation & negotiation.
e) Women employees are allowed privacy and respect.
f) Working place discrimination is avoided as far as possible.
g) Firms are engaged in performing social and ethical responsibilities.
h) Employees are treated well. And often empathy plays an important role.
i) Sexual harassment is conspicuous by its absence.
j) Management is value-based and embezzlement, bribery and corruption are mostly absent.
k) Accountability and transparency are widely practiced.
22
 Unethical Indian Firms
Unethical firms are characterized by many overwhelmingly unethical practices. The following are the
manifestations of some of these practices:
a) Discrimination is rampant in the matter of selection, promotion and job allocation. Nepotism and favoritism are
widely prevalent.
b) Adulteration, sub-standard and even dangerous products are marketed.
c) Imitation of foreign brand names to hoodwink customers.
d) Political pressure impinges on the ethical standard of firms. The appointment in the high post is often political.
e) In some types of industries, like carpet manufacturing, use of child labor is rampant.
f) Delay in wage payments and promotions are the usual practices in many small and medium firms.
g) Window-dressing in the balance sheet is widely done to attract investors and increase the share prices.
h) Many types of company scams have cropped up in India (for details, see Fernando, 2006). Some of the scams
include issues by non-descript companies (1993-94), Mutual fund scam (1998), Market manipulation scams of
Harshad Mehta (1992 and 1998), insider trading scam (1994), fraudulent share delivery scam (1995) and IT
scam (2000). 23
 Why are some firms unethical in India?
All firms are not basically unethical to begin with.
But as it goes on doing the business, it is confronted with a number of problematic situations that almost compel a firm to
deviate from its chartered path of honesty and scruple.

The circumstances are:

a) Bureaucratic Pressure
b) To keep up with the Joneses
c) To survive competition
d) Absence of strong and ethical corporate policy
e) Absence of ethical leadership 24
Differences between Indian and Western Cultural Differences

25
Future of Business Ethics
 The Path Forward

Every employee in the company needs to consider ethical issues from a strategic perspective, making special effort
to behave in a way that is consistent with their statements of purpose.
a) Codes of conduct and values statements should be backed with meaningful commitments, resources, and
processes.
b) Particular attention needs to be paid to potential contradictions between what a company says and what it
does.

27
 The Path Forward

Ethics don´t count when they just remain as written laws, they count only when they are put in to practice.
1. The path forward for banks:
2. Recover the social role of banks
3. Transparency beyond the law
4. Intelligent administration of funds
5. Know where credits go
6. Do not abuse dominant position
7. Avoid sale pressures in employees investment advice
8. Use moral imagination
9. Don’t condone or cooperate with unethical practices or behaviors
10. Sense of civic responsibility
11. Integrity
28
Corporate Social Responsibility
 Corporate Social Responsibility: CSR Act, 2013

The money that business borrows from banks is that of the society. Business directly or indirectly uses natural
resources of the nation which belong to the society.
Business uses human resources of society, and above all, exists because of society. It is the society that gives
business an opportunity to earn.

So business is primarily accountable to society.

The socio-economic obligation of business refers to its responsibility in preventing to prevent economic consequences
of business from adversely affecting public welfare.

Social-human obligation denotes to the obligation of business to nurture and develop its human resources so that
employees get every opportunity to grow, develop and advance through life and their careers and to promote human
values within the organization.
30
 Justification
The major arguments that justify the need for the social responsibility of
business are as follows:
1. Public Expenditure
2. Long Run Viability
3. Public image
4. Better environment
5. Avoidance of government regulation
6. Let business try
7. Business has the resources
8. Problem can become profit
9. Prevention is better than cure
10. Shareholder interest
31
 Scope of Corporate Social Responsibility

Corporate Social Responsibility is one such niche area of Corporate Behavior and Governance that needs to get
aggressively addressed and implemented tactfully in the organizations.
At the same time CSR is one such effective tool that synergizes the efforts of Corporate and the social sector agencies
towards sustainable growth and development of societal objectives at large.
The following forces ensure that businesses recognize and honor its new social responsibilities:
1. The pressure of organized labor.
2. Growing public awareness about quality of life and the need to remove all types of pollution.
3. Public opinion stressing on business morality and integrity to be observed by all organizations in any field of human
endeavor.
4. The threat of nationalization or of severe regulations in business, to prevent public exploitation and evils of
monopoly.
5. The development of consumerism in many countries, insisting on consumer protection in the market place.
6. The managerial revolution enabling managers to act as trustees and to adopt an objective attitude in the distribution
of surplus among all the interested parties. 32
 Responsibility Towards Shareholders

People invest in money to make money.

Milton Friedman claims that the ethical mandate of business is to increase shareholders’ profit.

1) The primary responsibility of business is to increase shareholders’ wealth, to give good returns on investment,
to give dividends at the proper time, to protect the interests of even small shareholders, to listen to and
respect shareholders, to regularly invite shareholders to participate in decision-making.
2) So, the basic responsibility of a business towards shareholders is to create wealth for them. Economic Value-
Added analysis is an effective tool to measure the increment in shareholder wealth.
3) Economic values added are increments in the shareholder’s wealth beyond its expected return.

33
 Responsibility Towards Employees

The Success of an organization is dependent on its employees. Organizations have many responsibilities, towards
their employees:
1. Fair treatment, Fair wages, Fair appraisal system
2. No discrimination on the basis of sex, caste or creed
3. Healthy and safe working environment
4. Establishment of fair work standards and norms
5. The provision of labor welfare facilities
6. Fair opportunity for accomplishment and promotion
7. Proper recognition, appreciation and encouragement
8. An opportunity for participating in managerial decisions to the extent desirable
9. Proper training and development programs
10. Family Welfare
34
 Responsibility Towards Customers
1. Providing products of proven quality
2. Regular R&D to augment the product and to innovate
3. To ensure that product reaches the customer and to check any sort of black marketing or Notes profiteering by
middlemen and anti social elements
4. To supply goods at reasonable prices
5. To provide required after-sale services, and to ensure that spare parts should be available in the market
6. To fulfil its commitments impartially and courteously, in accordance with sound and straightforward business
principles
7. To provide sufficient information about the product, including its adverse effects, risks and the care to be taken
while using the product
8. To ensure that the product supplied does not have any adverse effect on the customer
9. To hear and redress the genuine grievances of customers
10. To avoid any type of lobby formation that attempts to reap monopoly profits
35
 Responsibility Towards Community

1. To prevent environmental pollution and to prevent ecological imbalance

2. Improve the efficiency of business operations
3. Contributing to research and development
4. Development of backward areas
5. Promotion of small-scale industry
6. Development of region in which they are operating. This includes working on
development of schools, social awareness programs, adult education, health,
medical facilities, helping NGOs and the government for social causes such as the
Pulse Polio Mission, etc.
7. Taking steps to conserve scarce resources and developing alternatives,
wherever possible.

36
 Major Social Responsibilities of Business

1. Optimum utilization of scarce natural resources

2. Responsibility not to make losses
3. Improved quality of life
4. Responsibility of employment and income
5. Offering quality products at fair prices
6. Environmental protection
7. Fair trade practices
8. Avoidance of formation of cartels / lobby or following monopolistic practices.
o Not creating shortages for the purpose of black marketing and speculation.
o Not exaggerating and making false statements regarding claims.
o Not buying political favors to sway decisions it its favor.
o Following healthy competition with competitors by not indulging in industrial espionage or other unethical means.
o Not deliberately making the organization sick to avoid obligations or to escape from responsibilities.
37
 CSR and Indian Corporations
CSR initiatives by Indian Companies
• Aircel: Mobilizes public opinion in partnership with WWF India for the ‘Save Our Tigers Initiative’
• Coca-Cola India: Partners with government agencies and NGOs to combat water scarcity and
depleting groundwater levels
• Dabur India: Its initiative, SUNDESH, in UP and Uttarakhand aims for the overall socio-economic
development of the poor
• Maruti Suzuki India: Runs employee volunteering program, ‘e-Parivartan’, with NGO Literacy India,
for teaching underprivileged people
• Nasscom Foundation: Promotes development through use of information and communication
technology, provides tech donations to NGOs.
• Infosys: Adoption of Schools ITC : Choupal (Farmers Marketing)
• Azim Premji Foundation : University – Teachers Training
• Ashok Leyland : Drivers Training Schools 38

Moreover, in 2009, the government made it mandatory for all public sector oil companies to spend 2 per cent of their
net profits on corporate social responsibility. However, for private sector it is still voluntary, but government is making
effort to make it mandatory for all companies to invest 2% of their net profits on CSR.
Summary
 Summary
Here is the recap of what you have learnt in this unit.

• Ethics in the functional areas of any business is necessary to ensure a good rapport between the management
and the employees. In fact, all functional areas, namely marketing, finance, human resources as well as
information technology should follow code of ethics so as to function well and give maximum output.
• Ethical issues can arise in various functional areas of a business such as marketing, research and development,
human resources, production and finance.
• Organizations follow various methods that are unethical while advertising for their products and services. These
methods are:
o Ambiguity
o Concealed facts
o Exaggeration
o Psychological appeal

40
 Summary
Continued ...

• Masovi had classified ethical issues in the following four groups:

o Accessibility: It involves the right of accessing the required information as well as the true payment of charges
to access the information.
o Privacy: It deals with the degree of privacy and dissemination of information about an individual.
o Property: It talks about ownership and value of information.
o Accuracy: The information which is viable and being accessed is now much more accurate and authentic.
• Every employee in the company needs to consider ethical issues from a strategic perspective, making special
effort to behave in a way that is consistent with their statements of purpose.
• Codes of conduct and values statements should be backed with meaningful commitments, resources, and
processes.
• Particular attention needs to be paid to potential contradictions between what a company says and what it does.

41
 Summary
Continued ...

• The socio-economic obligation of business refers to its responsibility in preventing to prevent economic
consequences of business from adversely affecting public welfare.

• CSR is one such effective tool that synergizes the efforts of Corporate and the social sector agencies
✓ towards sustainable growth and
✓ development of societal objectives at large.

42
THANK YOU
MBA - Banking and Finance
A WORK INTEGRATED LEARNING PROGRAM
TA L E N T | T E C H N O L O G Y | T R A N S F O R M AT I O N
Corporate Governance, Ethics
and Compliance
This Course has 8 Units

1. Introduction to Corporate Governance

2. Corporate Governance in banks in India
3. Companies Act, 2013
4. Basel Committee on Banking Supervision
5. Introduction to Business Ethics
6. Ethics in Functional Areas
7. Compliance in Banks
8. Governance, Risk & Compliance (GRC)

2
 Unit Description
Every organization has a set of rules and regulations that employees across all levels have to abide by.
Most of them are clearly stated and documented set of rules and some are implied.

These guidelines are framed based on regulatory and statutory requirements. It is necessary for organizations
to ensure compliance with statutory guidelines to avoid consequences and penalty.

This unit will help you understand the compliance mechanism and the regulatory guidelines applicable.

3
 Unit Objectives

At the end of this unit, you will be able to:

a) Identify the compliance mechanism

b) Identify the banking regulatory authorities

c) Identify the capital adequacy norms

d) Explain the RBI’s customer service guidelines

4
7.1 Compliance
 Compliance

Compliance with laws, regulations and other statutory requirements is a matter of course
for organizations whose violations can lead to both legal and business issues.

On a broader perspective, for any company, compliance with rules and regulations is important for the following reasons:
• To maintain stability and confidence in the economic system, thereby reducing the risk of loss to stakeholders.
• To encourage good corporate governance (through an appropriate structure and set of responsibilities) and enhancing market
transparency and surveillance.
• To have operational independence so as to carry out tasks effectively.
• To ensure that the risks incurred are being adequately managed to the maximum extent possible;
• To have effective control systems, standards and accounting records in place;
• To hold a close cooperation with other supervisors across boundaries for better trade relations;
• To generate greater confidence in the organizational processes and thereby generate greater trust and confidence in the
organization.
6
Compliance Mechanism

7
 Compliance in Organizations
In an organization, several duties should be performed as part of compliance. Some of the key duties are:
1. Assigning overall responsibility for overseeing compliance with established standards, policies and procedures to a specific
high-level individual within the organizations, such as a compliance officer.
2. Establish compliance standards, policies and procedures to be followed by employees and other company representatives
3. Effectively communicate compliance standards, policies and procedures to all employees and other company representatives.
4. Establish compliance training programs to ensure employees and other company representatives are aware of their
compliance responsibilities. Ensure substantial discretionary authority is delegated to trustworthy individuals
5. Maintain monitoring and auditing systems that are based on a compliance risk assessment and are designed to detect
intentional or unintentional regulatory compliance violations by employees and other company representatives.
6. Maintain and publicize a whistle-blower hotline and e-mail account, whereby individuals can report potential regulatory
compliance violations by employees and other company representatives confidentially and without fear of reprisal.
7. Consistently enforce compliance standards, policies and procedures through appropriated, case-specific disciplinary
mechanisms, including discipline of individuals responsible for the failure to detect a violation.
8. Take all reasonable steps to respond appropriately to violations that have been detected and to prevent future similar
occurrences, including making any necessary modifications to the compliance program. 8
 Compliance Function
The complexity of interpreting the law and ensuring its compliance has forced large organizations to create the role of a
compliance officer.
The chief compliance officer should consider establishing a corporate compliance committee that includes representation from:
1) Internal Auditing
2) Finance The committee, under the direction of the
3) Human Resources Corporate Compliance Officer (CCO),
4) Regulatory compliance would
oversee and administer the corporate compliance
5) Quality assurance program and framework, including
6) Information Technology a) developing a charter for the corporate
7) Environmental health and safety compliance committee,
b) defining goals and objectives of the
8) Legal and ethics
corporate compliance function, and
9) Contracts and procurement c) determining the functional operating
10) Risk management structure.
11) Corporate security
9
Indian Banks and Compliance
 Indian Banks & Compliance
Indian banks, once admired for their sound and safe conduct, are now increasingly getting caught breaking the rules.
• This week, the Reserve Bank of India (RBI), has slapped a hefty fine of Rs 58.9 crore on the country's second large
private bank, ICICI Bank Ltd, for the failure to follow the maturity guidelines for securities portfolio.
• Imagine a new bank, Airtel Payments Bank, just starting its operations, has been caught for violating the Know
Your Customer (KYC) guidelines, which is the most basic requirement in the banking industry.
• In less than a year, the private banks, which are perceived to be well-managed, have often received the wrath of the
banking regulator. Some of the banks fined, recently, were IDFC Bank, Yes Bank and IndusInd Bank.

Why are banks falling by the wayside on the most critical compliance issues?
So is there a lack of focus as most resources are chasing growth or
just a casual attitude towards compliance?

Clearly, the cost of non-compliance would be heavy. 11

7.2 Banking regulatory Authorities
 Banking Regulatory Authorities
The RBI supervises and is responsible for managing the operation of the Indian financial system.
In addition to issuing regulations and guidelines for banking operations, it also administers the
provisions of the RBI Act, the BR Act and FEMA.

It has wide discretionary powers and is authorized to inspect and investigate the affairs of banks
and to impose penalties in the event of non-compliance.

The key statues and regulations that govern the banking industry in India and particularly scheduled commercial
banks are as follows:

RBI Act: The Reserve Bank of India Act, 1934 was enacted to constitute the Reserve Bank of India with an
objective to:
a) Regulate the issue of bank notes
b) for keeping reserves to ensure stability in the monetary system
c) to operate effectively the nation’s currency and credit system.

The RBI Act covers – the constitution, powers and functions of the Reserve Bank of India
13
 Key Statues and Regulations
BR Act: The Banking Regulation Act, 1949, governs the financial sector.
Some of the key regulations impacting banks are:
a) It prescribes minimum capital requirement of banks
b) Regulates opening of branches and change of location of branches
c) To ensure smooth and efficient working of banks it empowers RBI to approve appointment, reappointment and removal of
chairman, directors or officers of the Bank
d) It prescribes cash reserve and liquidity ratios to ensure that depositor’s interests are protected

FEMA : Foreign Exchange Management Act, 1999

•FEMA is the primary exchange control legislation in India.
•FEMA and the rules made thereunder regulate cross-border activities of banks. These are administered by the RBI.

Other Key Statutes:

• The Negotiable Instruments Acts, 1881;
• The Recovery of Debts Due to Banks and Financial Institutions Act, 1993;
• The Bankers Books Evidence Act, 1891;
• The Payment and Settlement Systems Act, 2007;
• The Banking Ombudsman Scheme 2006 14
 Principle Regulatory Challenges for Indian Banking Industry

The key regulatory challenges are as follows:

a) Basel III implementation

b) Specialized banking

c) Rise in non-performing assets (NPAs) / Asset quality

d) Priority sector lending and NPAs

e) Challenges from the cashless economy

f) Enforcement of the new insolvency regime

15
 Extent of Oversight by Banking Regulators

1) The RBI conducts periodic audits and also acts as a consumer disputes ombudsman for retail banking.
Based on its findings, and sometime Suo-moto, the RBI also supervises the Indian Banking system through
various methods such as on-site inspection, surveillance and reviewing regulatory filings made by the
banks.
2) Each year, the RBI conducts an on-site financial inspection of a bank’s books of accounts, loans and
advances, balance sheet and investments.
3) The RBI also monitors compliance on an ongoing basis by requiring banks to submit detailed information
periodically under an off-site surveillance and monitoring system
4) Additionally, the RBI conducts:
a) quarterly discussions with the banks’ executives on issues emanating from analysis of off-site surveillance,
status of compliance with annual inspection findings and new products introduced by banks; and
b) bi-annual meetings with the chief executive officers of the banking groups identified as financial
conglomerates.
16
 Enforcement of Banking Regulations

1) The RBI issues directions from time to time to ensure compliance with the banking statutes and rectify
non-compliance, if any. In the case of non-compliance with regulatory requirements, the RBI may impose a
variety of sanctions, including fines, orders for the suspension of a bank’s business and cancellation of the
bank’s banking license.
2) Common enforcement issues:
a) Deterioration of asset quality in the banking system
b) Deficiencies in compliance with know-you-customer (KYC) and anti-money laundering (AML) norms by
banks
c) Mis-selling of financial and structured products
d) Internal fraud
e) Financial inclusion
17
7.3 a Capital Adequacy Norms
 Capital Adequacy Norms

• On 2 May 2012, the RBI laid down guidelines for Indian banks as recommended under the Basel III Capital
Accord of the Basel Committee on Banking Supervision (BCBS) and introduced the Basel Regulations.

• The Basel Regulations have been implemented with effect from 1 April 2013 and are going through a
transitional period that lasts until 31 March 2019.

• The capital adequacy framework is based on three mutually reinforcing pillars:

o Pillar 1 - Minimum capital requirements

o Pillar 2 - Supervisory review of capital adequacy

o Pillar 3 - Market discipline

19
 Capital Adequacy Norms

• The minimum capitalization requirements under Pillar 1 require banks in India to maintain a minimum capital
to risk-weighted assets ratio (CRAR) of 13 % for the first three years of commencing operations subject to a
higher ratio specified by the RBI) and 9 % on an ongoing basis (against the 8 % requirement under the Basel II
accord).

• CRAR is the ratio of a bank’s capital in relation to its risk-weighted assets.

• The requirement under Pillar 1 includes the total regulatory capital (comprising of Tier 1 and Tier 2 capital)
and the different approaches for risk-weighting the assets in terms of their credit, operational and market risk
(comprising of the standardized framework and basic indicator framework).

• Tier 1 capital, among others, consists of paid-up capital, stock surplus, statutory reserves and Tier 2 capital,
among others, comprises debt capital instruments, preference share capital and revaluation reserves, etc.

• In addition to the minimum 9 per cent requirement, there are contingent capital arrangements that a bank is
required to make in the form of maintaining a capital conservation buffer (CCB), countercyclical capital
buffer (CCCB) and Tier 1 leverage ratio.
20
 Capital Adequacy Norms
Serial Number Type Ratio
1 Capital Conservation Buffer (CCB) 2.5 percent
2 Counter Cyclical Capital Buffer (CCCB) 0 to 0.25 percent
3 Tier 1 Leverage Ratio 3 percent

• Payment banks are required to maintain a CRAR of 15 percent on an ongoing basis and a minimum Tier 1
capital ratio of 7.5 percent. These banks are not required to maintain a CCB and a CCCB ratio.
• The Basel III framework applies to all scheduled commercial banks (except regional rural banks) and such
banks are required to comply with the Basel Regulations on a ‘solo and consolidated basis’.
• Every year commencing from April 2015, the RBI categorizes some systematically important financial institutions
as D-SIBs under different buckets, who are then required to maintain certain additional capital.
• At present, three banks, namely State Bank of India, ICICI Bank Limited and HDFC Bank Limited have
been declared as D-SIBs maintaining an additional current ratio of 0.6 per cent and 0.2 per cent respectively.
The RBI requires the D-SIBs to maintain an additional common equity Tier 1 capital ratio ranging from 0.2 per
cent to 0.8 per cent. 21
 Enforcing Capital Adequacy Norms

• The capital adequacy requirements are enforced under Pillar 2 and Pillar 3 of Basel III regulations.
• Pillar 2 provides for supervision at the bank level and at the supervisory authority level.
o Supervision at the bank level includes assessment of capital adequacy of banks in relation to their risk
profiles by implementing an internal process called the Internal Capital Adequacy Assessment Process
(ICAAP).
o Banks are required to annually submit the ICAAP report to the RBI.
o Supervisory at the supervisory authority level (i.e. by the RBI) makes all banks subject to an evaluation
process called the Supervisory Review and Evaluation Process (SREP)
o Pursuant to the SREP, the RBI reviews and evaluates a bank’s ICAAP, indirectly evaluates a bank’s
compliance with the regulatory capital ratios and takes remedial action if such a ratio is not maintained.
• Pillar 3 implements market discipline through extensive disclosure by banks that allow market participants to
assess the risk exposure, risk assessment process and capital adequacy of a bank.
22
7.3 b Audits in Banks
 Audits in Banks

The following are some types of audits followed at Banks to ensure compliance with the various statutes as also their
internal stipulations:

1) Statutory Audit – Stipulated by statute such as balance sheet related audit, RBI audit etc.,

2) Concurrent audit – audit on an ongoing basis at large branches (in terms of volume of business)

3) Internal audit

4) Stock audit

5) Revenue audit

6) Snap audits – surprise audits conducted by management

(Periodic inspection and rating of branches based on inspection reports

is one of the key stipulations of the Jilani committee recommendations)
24
7.4 RBIs Customer Service Guidelines
 RBIs Customer Service Guidelines
Customer service has great significance in the banking industry. While the coverage of banking services has
been expanding day by day, the quality and content of dispensation of customer service has come under
tremendous pressure mainly owing to the failure to handle soaring demands and expectations of the
customers.
Reserve Bank, as the regulator of the banking sector, has been actively engaged from the very beginning in
the review, examination and evaluation of customer service in banks.
It has constantly brought into sharp focus the inadequacy in banking services available to the common
The person and the need to:
Need
a) Benchmark the current level of service
b) Review the progress periodically,
c) Enhance the timeliness and quality
d) Rationalize the processes taking into account technological developments, and
e) Suggest appropriate incentives to facilitate change on an ongoing basis through instructions/guidelines.
26
 Definition of Customer

Broadly, a customer can be defined as a user or a potential user of bank services.

So, a ‘Customer’ may include:

a) a person or entity that maintains an account and/or has a business relationship

with the bank;

b) one on whose behalf the account is maintained (i.e. the beneficial owner);

c) beneficiaries of transactions conducted by professional intermediaries, such as

Stock Brokers, Chartered Accountants, Solicitors, etc., as permitted under the
law, and

d) any person or entity connected with a financial transaction which can pose
significant reputational or other risks to the bank, say, a wire transfer or issue of
a high value demand draft as a single transaction.
27
 Customer Rights as per RBI

The Customer Rights as per RBI are:

a) Right to fair treatment

b) Right to transparency, fair and honest dealing

c) Right to suitability

d) Right to privacy

e) Right to grievance redressal and compensation

28
 Important RBI Guidelines on Banking Services
a) Banks have been advised to ensure that full address/telephone number of the branch is invariably mentioned in
the passbook/statement of accounts.
b) Invariably offer passbook facility to all savings account holders (individuals) or issue monthly statement of
accounts.
c) Banks are advised to make the customer aware of the options of dropping cheques in the drop box or tendering
them at the counters and obtain acknowledgement.
d) Banks are advised to give wide publicity and provide guidance to deposit account holders on benefits of
nomination facility & the survivorship clause.
e) Banks with core banking solution are advised to provide “payable at par"/ "Multi-city” cheque issuance facility to
all the eligible & requesting customers.
f) Banks are required to display and update, on their websites, the details of certain service charges.
g) Banks are required to place a complaint form, along with the name of the nodal officer for complaint redressal, in
the homepage itself to facilitate complaint submission by customers.
h) Detailed guidelines have been issued by RBI on Safe Deposit Locker facility offered by the Banks, including
prohibition of linking allotment of lockers to placement of fixed deposits. 29
 Customer Relationship Management (CRM):
8 types of CRM Quality in Banking Services
1. Customer = Institution + Purpose
2. Customer Service = Customer + Need Identification
3. Customer Satisfaction = Customer + Service
4. Customer Intimacy = Customer Satisfaction + Employee involvement
5. Customer Delight = Customer Intimacy + Value Addition in Service (Surprise/ unexpected)
6. Customer Bliss = Customer Delight + Error Free Timely Service
7. Customer Enthralling = Customer Bliss + Out of lot / World class Service
8. Customer Advocacy = Customer Enthralling + Customer Involvement

NOTE: These above inputs are additionally provided by Dr.Nandeesh V. Hiremath (Faculty), which is of practical relevance 30
 KYC.... KYS & KYB
KYC KYS & KYB
• Know Your Customer • Know Your Service & Business
• RBI → Statutory • Profession + Career → Super-statutory
• Estd. Year • Cash on hand %
• TOTAL Branches • % Profit making Branches
• TOTAL Turn over • C: D Ratio
•HNIs (High Net worth Individuals)
• TOTAL Deposits • Key competitors
•HPEs (High Potential Employees)
•HPBs (High Potential Branches) • TOTAL Loans & Advances • Per employee Productivity
• TOTAL # Customers • Total Profit
• Gross NPA % • Profit: .....Crores Profitability ?
• NET NPA % • CRM & Business strategies,
etc etc...
NOTE: These above inputs are additionally provided by Dr.Nandeesh V. Hiremath (Faculty), which is of practical relevance 31
Importance of Maintaining Accuracy
and Adherence to Compliance
Importance of Maintaining Accuracy and Adherence to Compliance

a) Strong business relationships

b) Helps in avoiding system breaches

c) Improvement in customer satisfaction

d) Improved business opportunities and business growth

e) Increased efficiency in business operations

f) Greater focus on core business priorities

33
Summary
 Summary
Here is the recap of what you have learnt in this unit.
• Compliance with laws, regulations and other statutory requirements is a matter of course for organizations whose
violations can lead to both legal and business issues.
• The committee, under the direction of the corporate compliance officer, would oversee and administer the
corporate compliance program and framework, including developing a charter for the corporate compliance
committee, defining goals and objectives of the corporate compliance function, and determining the functional
operating structure.
• The RBI supervises and is responsible for managing the operation of the Indian financial system. In addition to
issuing regulations and guidelines for banking operations, it also administers the provisions of the RBI Act, the BR
Act and FEMA. It has wide discretionary powers and is authorized to inspect and investigate the affairs of banks
and to impose penalties in the event of non-compliance.
• Key statutes and regulations that govern the banking industry in India are:
o RBI Act
o BR Act
o FEMA & Other key statues like – The Negotiable Instrument Act, The Bankers Books Evidence Act, 1891, The Payment
35
and Settlement Systems Act, 2007 etc.,
 Summary
Continued ...

• Principal regulatory challenges for Indian Banking industry:

a) Basel III implementation
b) Specialized banking
c) Asset quality
d) Priority sector lending and NPAs
e) Challenges from the cashless economy
f) Enforcement of the new insolvency regime

• Types of Audits in banks:

a) Statutory audit
b) Concurrent audit – audit on an ongoing basis at large branches (in terms of volume of business)
c) Internal audit
d) Stock audit
e) Revenue audit
f) Snap audits 36
 Summary
Continued ...

• The minimum capitalization requirements under Pillar 1 require banks in India to maintain a minimum capital to risk-weighted
assets ratio (CRAR) of 13 % for the first three years of commencing operations subject to a higher ratio specified by the RBI)
and 9 % on an ongoing basis (against the 8 % requirement under the Basel II accord).
• CRAR is the ratio of a bank’s capital in relation to its risk-weighted assets.
• The requirement under Pillar 1 includes the total regulatory capital (comprising of Tier 1 and Tier 2 capital) and the different
approaches for risk-weighting the assets in terms of their credit, operational and market risk (comprising of the standardized
framework and basic indicator framework).
• Tier 1 capital, among others, consists of paid-up capital, stock surplus, statutory reserves and Tier 2 capital, among others,
comprises debt capital instruments, preference share capital and revaluation reserves, etc.
• In addition to the minimum 9 per cent requirement, there are contingent capital arrangements that a bank is required to make
in the form of maintaining a capital conservation buffer (CCB), countercyclical capital buffer (CCCB) and Tier 1 leverage ratio.
• Customer rights as per RBI are: Right to fair treatment, Right to transparency, fair and honest dealing, Right to suitability,
Right to privacy, Right to grievance redressal and compensation.

37
THANK YOU
MBA - Banking and Finance
A WORK INTEGRATED LEARNING PROGRAM
TA L E N T | T E C H N O L O G Y | T R A N S F O R M AT I O N
Corporate Governance, Ethics
and Compliance
This Course has 8 Units

1. Introduction to Corporate Governance

2. Corporate Governance in banks in India
3. Companies Act, 2013
4. Basel Committee on Banking Supervision
5. Introduction to Business Ethics
6. Ethics in Functional Areas
7. Compliance in Banks
8. Governance, Risk & Compliance (GRC)

2
 Unit Description
A culture of compliance is crucial.
Compliance must be visible, embraced by senior management and built in to the hiring and training
process. Right metrics can make the culture of compliance concrete. This unit would help answer some
important questions such as:
• Who delivers the compliance message – line or staff?
• How seniors are the messengers?
• How often do they address compliance issues

3
 Unit Objectives

At the end of this unit, you will be able to:

1) To understand why compliance culture is important to any compliance program.

2) To understand the GRC model and why an integrated approach is necessary.
3) To study the importance of whistle-blower mechanism to prevent or curb frauds and compliance
failures.

4
Creating Compliance Culture across the
Organization
 Creating Compliance Culture across the Organization

Culture, like other aspects of compliance process, can be managed and measured over time.
The Indian Financial Regulators always emphasize the importance of an organization’s “Culture of Compliance”.
Having a robust compliance can help firms avoid severe financial consequences.

What is Culture of Compliance?

Essentially, it is an overall environment that fosters ethical behavior and decision making.

To develop a culture of compliance, here are 10 typical attributes that regulators look for:
1. Tone at the top 6. Resources
2. Integration across the enterprise 7. Employee buy-in
3. Silos 8. Living compliance program
4. Power 9. Technology
5. Cowboys 10. Documentation 6
 Good Record Keeping Reflects Compliance Culture

Good record keeping reflects a strong compliance culture.

a) When testing compliance policies, can be organization prove that they work?
b) Is testing documented?
c) Is a documented workflow in place to track the process of marketing materials being approved, and how to
show that sign-off was received from the legal department?

7
Governance, Risk and Compliance
GRC Framework
 GRC Framework

Growing regulatory environment, higher business complexity and increased focus on accountability
have led enterprises to pursue a broad
range of governance, risk and compliance initiatives across the organisation.

Governance, Risk and Compliance (GRC) process through

control,
definition,
enforcement and
monitoring
has the ability to coordinate and integrate these initiatives.

9
 Benefits of Integrated GRC Approach
Many organizations find themselves managing their governance, risk and compliance initiatives in silos – each initiative
managed separately even if reporting needs overlap.
By taking an integrated GRC process approach and deploying a single system to manage the multiple
governance, risk and compliance initiatives across the organisation, the issues listed above can be easily addressed.

Such an approach can:

a) Have a dramatic positive impact on organizational effectiveness by providing a clear, unambiguous process and a
single point of reference for the organisation.
b) Eliminate all redundant work in various initiatives.
c) Eliminate duplicative software, hardware, training and rollout costs as multiple governance, risk and compliance
initiatives can be managed with one software solution.
d) Provide a “single version of the truth” available to employees, management, auditors and regulatory bodies.
e) An integrated GRC approach enables an organisation to integrate and streamline these individual compliance
initiatives. So it can significantly reduce the cost of compliance.
10
Additional Information Broad types of GRC
When reviewed as individual GRC areas, the three most common individual headings are considered to be Financial
GRC, IT GRC, and Legal GRC.
1) Financial GRC relates to the activities that are intended to ensure the correct operation of all financial processes,
as well as compliance with any finance-related mandates.
2) IT GRC relates to the activities intended to ensure that the IT (Information Technology) organization supports the
current and future needs of the business, and complies with all IT-related mandates.
3) Legal GRC focuses on tying together all three components via an organization's legal department and chief
compliance officer.
Broadly, the vendor market can be considered to exist in 3 segments:
a) Integrated GRC solutions (multi-governance interest, enterprise wide)
b) Domain specific GRC solutions (single governance interest, enterprise wide)
c) Point solutions to GRC (relate to enterprise wide governance or enterprise wide risk or enterprise wide
compliance but not in combination.)

ISO 19600:2014, Compliance management systems -- Guidelines, is a compliance standard introduced by the
International Organization for Standardisation (ISO) in April 2014. 11
 Five Layers of GRC
Suresh Sankaran, Principal Operations Officer
Additional Information International Finance Corporation (IFC),
The World Bank Group Washington DC, USA

SI# Layer Personality Sample Components

-Visibility through the full spectrum of enterprise and operational risk Risk & compliance(Enterprise
-Align performance with corporate objectives & IT) Dashboards with
1 Governance Layer -Provides metrics & in-depth insight to Financial, operational and other analytics, Audit management,
data regarding the overall health of the business CSR management, Board/
-Manages information, scheduling & workflow of corporate boards Entity management etc.,
- Policy & Procedure management (both IT & enterprise)
-Collection and analysis of data from business systems, GRC support
systems, business and IT control systems
- Risk & control management Control definition & integration,
Risk/ Compliance
- Issue & action management control/policy mgmt, Manual/
2 Layer
-Risk & control assessment automated risk & control
– Hub for GRC
- Define and manage IT controls assessment etc.,
-Interface between IT GRC & Enterprise GRC
-Translate policies into controls to distributes into different systems &
users 10
12

Additional Information
SI# Layer
3 GRC support Layer
4 Business Layer
5 IT infrastructure Layer - Assures that Information is properly controlled
Source : https://asianbankingandfinance.net/blogs-opinion/commentary/governance-risk-and-compliance-grc-%E2%80%93-appreciating-enigma-around-it
Five Layers of GRC
Suresh Sankaran, Principal Operations Officer
International Finance Corporation (IFC),
The World Bank Group Washington DC, USA
Personality Sample Components
-Carry out essential elements of a comprehensive GRC
program like Financial risk management, keep GRC Whistle blower hotline, Credit/market risk
programs updated on regulatory changes, help employees management,
adopt proper conduct, collect anonymous reports etc., Regulatory/ risk content feed,
-Collate important information that contributes to broad risk
and compliance management like capital investments, legal/case mgmt, Asset mgmt
Employee health & safety, Hazardous materials and Environment mgmt, Quality mgmt, etc.,
pollution, litigation, product quality etc.,
Segregation of Duties, Trade compliance,
- Translates compliance policies into business level controls Anti Money laundering, Fraud prevention
prevent unauthorized actions
Data security, content security,
access control,
application security
13
Whistle Blower Mechanism
 Whistle Blower Mechanism
Securities Exchange Board of India (SEBI) has prescribed the listing agreement that is required to be executed
between a stock exchange and a company whose securities are to be listed on that exchange.

Clause 49 of the listing agreement is titled “Corporate Governance” and lays down the principles of Corporate
Governance that are required to be followed by the listed company.

Clause 49 of the Listing Agreement of Stock Exchanges places a non-mandatory requirement for listed companies in India to adopt
a Whistle-Blower Policy. The specific recommendation, placed in Annexure I D to clause 49 specifies that:
a) The company will establish a mechanism for employees to report to the management concerns about unethical behavior, actual
or suspected fraud or violation of the company’s Code of Conduct or Ethics policy.
b) The mechanism must provide for adequate safeguards against victimization of employees who avail of the mechanism.
c) The mechanism must also provide, where senior management is involved, direct access to the Chairman of the Audit
Committee.
d) The existence of the mechanism must be appropriately communicated within the organisation.
e) The Audit Committee must periodically review the existence and functioning of the mechanism. 15
 Components of Whistle-Blower Policy
There are four broad components of whistle-blower policy:
1. A whistle-blower - A whistle-blower is a person who raises a concern about wrong-doing occurring in an
organisation or body of people.
2. A wrongful or unethical practice - These practices may concern
• serious disregard to the law of the land (e.g., dealing in narcotics),
• a crime against human rights (e.g., child trafficking, dealing in human organs),
• corruption of a high order (e.g., supply/use of substandard or expired medicines in a hospital),
• compromise of the organizational values (e.g., bribery, unfair trade practices) and similar serious acts.
3. An authority - The person/authority to which the communication may be sent, the manner of sending
communication and the manner in which the information received would be dealt with is clearly defined in the policy.
4. A policy - A whistle-blower policy is thus an internal policy on access to the appropriate designated authority,
by persons who wish to report on unethical or improper practices.

16
 Why Employees Don’t Report Unethical Conduct
The Corporate Governance Code in India specifically states that
the whistle-blower must have a direct access to the Chairman of the Audit Committee for reporting
on wrong doings by the senior management.

The Association of Certified Fraud Examiners has highlighted five reasons for “why employees
don’t report unethical conduct”
a) No corrective action
b) No confidentiality of reports
c) Retaliation by superiors
d) Retaliation by co-workers
e) Unsure whom to contact

17
 Benefits of Whistle-Blower Policy

There is no doubt that in today’s fast-paced world and mega corporations, institution
of a whistle-blower policy is not a corporate luxury, but an organizational necessity.
The benefits of such a policy are many:
a) Fostering good governance by encouraging employees to escalate deceitful actions by
colleagues/seniors/third parties.
b) Promotion of the organizational values thus nurturing a culture of openness in
workplace.
c) Sending a clear message that severe action will be taken against unethical and
fraudulent acts.
d) Dissuading employees from committing fraud by instilling fear of unfavorable
consequences when caught.
e) Early alerts to diffuse a potentially larger disaster.
18
 How to make Whistle-Blower Policy a Success?
The success of the Whistle-Blower Policy largely depends upon various factors viz.
a) the level of the tone at the top and
b) the signals that it sends down the level,
c) organizational philosophy and code of conduct;
d) whistle-blower policy campaigning, orientation and awareness in the organisation.

The Whistle-Blower Policy should clearly state that:

1) Anonymity of the informant will be maintained.
2) The authenticity of the information will be confirmed and there will be no reprisal for reporting the
information.
3) Appropriate and disciplinary action will be taken after investigation and on confirmation of the information.
19
 Reasons for Compliance Failures

a) Failure to understand law f) Procedural injustice

b) Collapse of belief in law g) Deterrence failure
c) Overly legalistic regulation h) Failures of administrative capacity
d) Regulation is at odds with market incentives or i) Failure to understand the problem
cultural practices
j) Failure of casual relation between regulation and
e) Failure to monitor objective

20
Summary
 Summary
Here is the recap of what you have learnt in this unit.

• Culture of Compliance is an overall environment that fosters ethical behavior and decision making.
To develop a culture of compliance, here are 10 typical attributes that regulators look for:
1. Tone at the top
2. Integration across the enterprise
3. Silos
4. Power
5. Cowboys
6. Resources
7. Employee buy-in
8. Living compliance program
9. Technology
10. Documentation
22
 Summary
Continued ...

• Integrated GRC process approach and deploying a single system to manage the multiple governance, risk and
compliance initiatives across the organisation can have a dramatic positive impact on organizational effectiveness
by providing a clear, unambiguous process and a single point of reference for the organization.

• Such an approach can:

o Eliminate all redundant work in various initiatives.
o Eliminate duplicative software, hardware, training and rollout costs as multiple governance, risk and
compliance initiatives can be managed with one software solution.
o Provide a “single version of the truth” available to employees, management, auditors and regulatory bodies.
o An integrated GRC approach enables an organisation to integrate and streamline these individual compliance
initiatives. So it can significantly reduce the cost of compliance.

23
 Summary
Continued ...

• Clause 49 of the Listing Agreement of Stock Exchanges places a non-mandatory requirement for listed companies
in India to adopt a Whistle-Blower Policy.
• The specific recommendation, placed in Annexure I D to clause 49 specifies that:
a) The company will establish a mechanism for employees to report to the management concerns about
unethical behavior, actual or suspected fraud or violation of the company’s Code of Conduct or Ethics policy.
b) The mechanism must provide for adequate safeguards against victimization of employees who avail of the
mechanism.
c) The mechanism must also provide, where senior management is involved, direct access to the Chairman of
the Audit Committee.
d) The existence of the mechanism must be appropriately communicated within the organisation.
e) The Audit Committee must periodically review the existence and functioning of the mechanism

24
 Open Discussion / Q&A Session + FEEDBACK
Corporate Governance, Ethics 4P Mantra
and Compliance (CGEC) • Planning
• Practice
1. Introduction to Corporate Governance • Performance
2. Corporate Governance in banks in India • Progress

3. Companies Act, 2013 “If you work more than you are paid for,
One day you will be paid more than you work for”
4. Basel Committee on Banking Supervision
Success Mantra :
5. Introduction to Business Ethics Continuous Practice to make a habit
6. Ethics in Functional Areas • 21 days formula : approx. 60% success
• 66 days formula : approx. 80% success
7. Compliance in Banks • 91 days formula : almost 95-100% success
8. Governance, Risk & Compliance (GRC) Never Give up : Derek Redmund’s Video
 Conclusion : FOOD FOR THOUGHT
Bharat Ratna Dr.APJ Abdul Kalam
(Avul Pakir Jainulabdeen Abdul Kalam) 83 years [Oct 15,1931, Rameswaram & 27 July 2015, Shillong]

If you FAIL, never give up because

F.A.I.L. means “First Attempt in Learning”

END is not the end; in fact

E.N.D. means “Effort Never Dies”

If you get NO as an answer, remember N.O.

means “Next Opportunity”
THANK YOU