Q1.

“If we are now aware of the major charges of governance

failure at reliance, it was only because Mr. Anil Ambani had
chosen to make them public”. Was Anil Ambani performing the
role of a whistle-blower trying to safeguard the shareholder
interests? 

Ans: -

Clause 49 has recommended that companies establish a mechanism for employees to

report to the management concerns about unethical behaviour, actual or suspected
fraud or violation of the company's code of conduct or ethics. Even though companies
have adopted and communicated the existence of a whistle-blowing policy, we have
not seen any success on this front in corporate India. The Task Force pondered over
what organisations can do to create an environment which helps employees to prevent
undesirable practices. It was felt that adoption and encouragement of the policy should
be made mandatory for all listed companies. This is bound to send a positive signal to
employees that the management is willing and able to prevent any illegal activity and
also ensure that there is a process by which the individuals can expose the problem to
the appropriate authority who can\ take action. The employees would need to be
oriented towards the company’s ethics policy. HR Department can play an effective
role in the process by assigning. Report of the CII Task Force on Corporate
Governance ombudsmen, providing special telephone numbers and email IDs. Since
whistle blowers need to be provided high degrees of protection, the Listing Agreement
should consider providing statutory protection from dismissal or wrongful termination
for acting as a whistle blower. There are adequate precedents in other jurisdictions for
such laws and these could be examined. Fostering a culture which promotes and
supports institutionalisation of whistle blowing policy shall deter corrupt practices and
help in preventing corporate disgrace and debacles. No, Anil Ambani was not
performing the role of a whistle blower trying to safeguard the shareholder interests. A
decade ago it was enough to manage efficiently and produce results. . Millions of
people, who had all along assumed that RIL belonged to the Ambanis, find themselves
facing the rather simple question: "Who controls Reliance?" The extensive
speculation about the most basic of issues relating to ownership in Reliance has led
observers to point to the pitifully poor standards of governance, transparency and
public accountability. Ambanis produced superlative results, almost always. delighted
shareholders ,be it government institutions ,foreign investors or retail shareholders
.but today it is not enough to manage efficiently manage and produce results but
values and the means by which things are done is more important. So corporate
governance was all about protecting shareholder’s interest. Reliance continues to
review its corporate governance practices to ensure that they continue to reflect
domestic and international developments to position itself to conform to the best
corporate governance practices. It also takes into the account in its periodic reviews of
the guidelines to ensure their continuing relevance, effectiveness, and responsiveness
to the needs of local and international investors and all other stakeholders. Anil is
reported to have made specific allegations about irregularities and improprieties being
committed by the company. A clear strategy is required to manage family shareholder
expectations and must be ensured that communication channels (e.g. family councils
and other governance structures ) are open and effective but then it is not so in case of
Reliance /Ambanies.

According to Anil, the company’s account did not provide the necessary explanations,
details and disclosures and there was silence on related party transactions, especially
those involving Info-comm group.

Anil also made an issue when he resigned as Vice-chairman and director from the
board of reliance group company IPCL by saying that he would not share a seat on it
with Jain, who is also a close associate with Mukesh and whom he accused of
conspiring to divide the family.

Every director of a company who is in any way, whether directly or indirectly

concerned or interested in a contract or arrangement, shall disclose the nature of his
concern or interest at the meeting of the board. So if RIL’S claims that company
follows international governance practices, then its CMD Mukesh should have made it
complete disclosure of all his interests including the sweat equity to the board which
was bound to disclose it explicitly to the shareholders.

The audit committee has to “review any related party transactions, i.e. transactions of
the company of material nature with promoters or the management, their subsidiaries
or relatives etc. that may have a potential conflict of interests with the company at
large. Reliance board too setup such a committee but this committee found no reason
for any conflict of interest.

Every company should maintain a register of contracts in which its directors are
interested in with specifying the details like date of contract and the terms and
conditions of the contract, also the register has to be signed by every director which
also implies that they are aware of and have approved these transactions, these
registers has to be kept open for inspection by any shareholders and if minority
shareholder feels that his interest have been prejudiced then he can approach the
company law board.

Anil Ambani was not supposed to be present when reliance industries board was
discussing reliance energy and similar rule also applies on Mukesh when reliance
Info-comm was discussed.

In reliance industries annual report, detailed disclosures of transactions between

reliance industries and other related parties have been made and so shareholders felt
that they were not given other details necessary for a correct understanding of the
financial transactions.

Reliance shareholders will be allotted shares in the special purpose vehicles in the
same proportion as their holdings in RIL. As per the arrangement ,for every 100
shares held, the RIL shareholders will get 5 shares of reliance capital , 7 of reliance
energy and 100 of reliance communications ventures limited, a new holding company
for all its telecom ventures.

Even the same RIL shareholder would get 100 shares of global fuel management
services ltd. If Reliance Industries argues that as a shareholder it has to be consulted
on every project then so can the other common shareholders. It simply does not work
that way and it would be impractical to argue that a company should secure
shareholder permission for every project that it plans in the routine course of its
business.

So if we go through the complete issue then we come to know that all the issue related
to failure of corporate governance at reliance was made public by Anil Ambani and
hence he was not playing the role of whistle blower to safeguard the interest of his
shareholders.

Q2. “The Reliance case proves what experts of corporate

governance have been saying. Corporate governance cannot be
imposed alone by law or by the regulator. It has to be practiced
by the people at the top of the corporate bodies so that it could
percolate down to the bottom.” Offer your comments on this
statement.

Ans: -

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

and institutions affecting the way a corporation (or company) is directed, administered
or controlled. Corporate governance also includes the relationships among the
many stakeholders involved and the goals for which the corporation is governed. The
principal stakeholders are the shareholders, the directors, employees,
customers, creditors, suppliers, and the community at large.

Corporate governance is a multi-faceted subject. An important theme of corporate

governance is to ensure the accountability of certain individuals in an organization
through mechanisms that try to reduce or eliminate the principal-agent problem. A
related but separate thread of discussions focuses on the impact of a corporate
governance system in economic efficiency, with a strong emphasis on shareholders'
welfare. There are yet other aspects to the corporate governance subject, such as
the stakeholder view and the corporate governance models around the world.

The case shows the lack of good corporate governance in RIL and it is being
questioned. The corporate governance policy of a company is being questioned if it is
not being practiced properly. The report of Corporate governance committee, headed
by Y.P Trivedi, was the bone of contention with Anil questioning the credentials of
the members even before the meeting of the board saying that it did not even bother to
consult him while raising the issues by him. Among the issues raised by Anil included
non-disclosure of the marketing agreement between RIL and Reliance Infocomm and
elder brother Mukesk’s conflict of interest as CMD of RIL, Reliance communications
and Infrastructure and Reliance infocomm. These maurky goings-on in the RIL board
have raised some disturbing questions on corporate governance practices adopted at
RIL, especially between the principles highlighted and practices followed in the
company.

Good corporate governance is characterized by a firm commitment and adoption of

ethical practices by an organization across its entire value chain and in all of its
dealings with a wide group of stakeholders encompassing employees, customers,
vendors, regulators and shareholders (including the minority shareholders), in both
good and bad times. To achieve this, certain checks and practices need to be whole-
heartedly embraced.

The corporate governance structure in India consist of many challenges like: Low
financial discipline, Lack of respect for share holder community, weak oversight and
monitoring system, inadequate independence system, management over ride etc…

Many Indian companies operate in a family-owned culture. There has been an implicit
assumption amongst boards that senior managers know their job and have the best
interests of companies they manage at heart.
This has sometimes resulted in boards refraining from asking the difficult questions to
senior managers when the company has been performing well or until there is a crisis.
The selection of independent directors who are known to promoter directors has
further compounded the problem. From a governance standpoint, boards should
address the following key areas specifically concerning independent directors:

 Adoption of a formal and transparent process for director appointments. The

conflict of interest involved in managements appointing independent directors
should be tackled through nomination committees (comprising independent
directors) for identification of directorial candidates

 Alignment of needs of the company to the skills required in the boardroom

 Segregation of the roles of CEO and chairman of the board of directors. The
concept of CEO and board chair separation is well accepted in Europe and is
being steadily adopted in the US. The chairman of the board should be an
independent director who plays a key role in setting the priorities of the board

 Planning for CEO and board succession in different scenarios

 Formal evaluation of the CEO and senior management team’s performance at

least annually. CEO performance evaluation process should be introduced
when the company is performing well. Evaluation of CEO performance sends a
clear message that the CEO is accountable to the board and introduces a
healthy balance of power.

 Peer evalution of independent directors should be adopted. This would enable

independent directors to openly discuss amongst their group how they are
performing and take tangible steps to improve their individual and collective
functioning.

 Independent directors should take steps to make themselves aware of their

rights, responsibilities and liabilities.
There are some measures to improve the corporate governance in Indian companies,
they are:

 Striving to ensure that the code of conduct is understood and adhered to by all
members of the organization

 The performance management system should recognize and reward ethical

behavior

 Extensive background checks should be performed on the senior employees

joining the organization

 •Companies should screen third parties (customers, vendors, JV partners) with

whom it does business for their commitment and adherence to ethical practices

 The scope of whistle blower policies should be extended to the wider

stakeholder group

 Chairman of the audit committee should have direct oversight of whistle

blower incidents

 Investors, lenders, analysts should pro-actively question/challenge management

on areas pertaining to corporate governance comprising protecting minority
interests, management compensation, government dealings, risk management
practices, related party transactions, fraud risk management and CSR.

Corporate governance policy has to be started from the top management. The
CEO, Directors, chairman and all the employees has their own role in the
corporate governance of an organisation. We have a good example of failure of
practicing corporate governance at top level, “Satyam Computers”. The scam
started at the top level of the stayam computers by one of the director Mr
Ramalinga Raju. This incident shows the importance of corporate governance
at higher levels of the companies.