See discussions, stats, and author profiles for this publication at: https://www.researchgate.

net/publication/338414534

CORPORATEGOVERNANCE M.COM2

Presentation · January 2020

DOI: 10.13140/RG.2.2.26625.20328

CITATIONS READS

0 3,743

1 author:

Bhavik Umakant Swadia

GLS University
78 PUBLICATIONS   10 CITATIONS   

SEE PROFILE

Some of the authors of this publication are also working on these related projects:

STUDY OF AWARNESS AND PERCEPTION OF MICRO IRRIGATION SYSTEM AND GOVERNMENT SCHEMES AMONG THE FARMERS IN GUJARAT STATE View project

AN EMPIRICAL STUDY OF SOCIAL IMPACT OF LEVERAGING FINANCIAL STRATEGIES FOR INDIAN CORPORATES View project

All content following this page was uploaded by Bhavik Umakant Swadia on 07 January 2020.

The user has requested enhancement of the downloaded file.

 CORPORATE GOVERNENCE

TABLE OF CONTENTS

1 INTRODUCTION TO CORPORATE GOVERNANCE

2 PRINCIPLES OF CORPORATE GOVERNANCE

3 CORPORATE GOVERNANCE MODELS AROUND THE WORLD

4 EVALUATION OF CORPORATE GOVERNANCE IN INDIA

I. National Task Force Chaired by Rahul Bajaj

II. Kumar Mangalam Birla Committee Report

III. Naresh Chandra Committee Report on Corporate Audit and

Governance (2002)

IV. N R Narayana Murthy Committee Report (2003)

V. Naresh Chandra Committee Report (2009)

6 SEBI AND CORPORATE GOVERNANCE

7 SYSTEMIC PROBLEMS OF CORPORATE GOVERNANCE

1
1. INTRODUCTION TO CORPORATE GOVERNANCE

The system of rules, practices and processes by which a company is directed and Tcontrolled.
Corporate governance essentially involves balancing the interests of the many stakeholders in
a company - these include its shareholders, management, customers, suppliers, financiers,
government and the community. Since corporate governance also provides the framework for
attaining a company's objectives, it encompasses practically every sphere of management,
from action plans and internal controls to performance measurement and corporate
disclosure.

As Per Investopedia.com : Corporate governance became a pressing issue following the 2002
introduction of the Sarbanes-Oxley Act in the U.S., which was ushered in to restore public
confidence in companies and markets after accounting fraud bankrupted high-profile
companies such as Enron and WorldCom. Most companies strive to have a high level of
corporate governance. These days, it is not enough for a company to merely be profitable; it
also needs to demonstrate good corporate citizenship through environmental awareness,
ethical behavior and sound corporate governance practices.

Corporate governance broadly refers to the mechanisms, processes and relations by which
corporations are controlled and directed. A governance structure identify the distribution of
rights and responsibilities among different participants in the corporation (such as the board
of directors, managers, shareholders, creditors, auditors, regulators, and other stakeholders)
and includes the rules and procedures for making decisions in corporate affairs. Corporate
governance includes the processes through which corporations' objectives are set and pursued
in the context of the social, regulatory and market environment. Governance mechanisms
include monitoring the actions, policies and decisions of corporations and their agents.
Corporate governance practices are affected by attempts to align the interests of stakeholders.

“Corporate Governance is the acceptance by management of the inalienable rights of the

shareholders as the true owners of the corporation and of their own role as trustees on behalf
of the shareholders. It is about commitment to values, about ethical business conduct and
about making a distinction between personal and corporate funds in the Management of the

2
Company.” - By N. R. Narayana Murthy, Committee on Corporate Governance
(SEBI).

2. PRINCIPLES OF CORPORATE GOVERNANCE

1. Contemporary discussions of corporate governance tend to refer to principles raised in

three documents released since 1990: The Cadbury Report (UK, 1992), the Principles of
Corporate Governance (OECD, 1998 and 2004), the Sarbanes-Oxley Act of 2002 (US,
2002). The Cadbury and OECD reports present general principles around which
businesses are expected to operate to assure proper governance. The Sarbanes-Oxley Act,
informally referred to as Sarbox or Sox, is an attempt by the federal government in the
United States to legislate several of the principles recommended in the Cadbury and
OECD reports.
2. Rights and equitable treatment of shareholders: Organizations should respect the rights of
shareholders and help shareholders to exercise those rights. They can help shareholders
exercise their rights by openly and effectively communicating information and by
encouraging shareholders to participate in general meetings.
3. Interests of other stakeholders: Organizations should recognize that they have legal,
contractual, social, and market driven obligations to non-shareholder stakeholders,
including employees, investors, creditors, suppliers, local communities, customers, and
policy makers.
4. Role and responsibilities of the board: The board needs sufficient relevant skills and
understanding to review and challenge management performance. It also needs adequate
size and appropriate levels of independence and commitment.
5. Integrity and ethical behavior: Integrity should be a fundamental requirement in choosing
corporate officers and board members. Organizations should develop a code of conduct
for their directors and executives that promotes ethical and responsible decision making.
6. Disclosure and transparency: Organizations should clarify and make publicly known the
roles and responsibilities of board and management to provide stakeholders with a level
of accountability. They should also implement procedures to independently verify and
safeguard the integrity of the company's financial reporting. Disclosure of material
matters concerning the organization should be timely and balanced to ensure that all
investors have access to clear, factual information.

3. CORPORATE GOVERNANCE MODELS AROUND THE WORLD

There are many different models of corporate governance around the world. These differ
according to the variety of capitalism in which they are embedded. The Anglo-American
"model" tends to emphasize the interests of shareholders. The coordinated or
Multistakeholder Model associated with Continental Europe and Japan also recognizes the
interests of workers, managers, suppliers, customers, and the community. A related

3
distinction is between market-orientated and network-orientated models of corporate
governance

1. Continental Europe
Some continental European countries, including Germany and the Netherlands, require a
two-tiered Board of Directors as a means of improving corporate governance. In the two-
tiered board, the Executive Board, made up of company executives, generally runs day-
to-day operations while the supervisory board, made up entirely of non-executive
directors who represent shareholders and employees, hires and fires the members of the
executive board, determines their compensation, and reviews major business decisions.

2. India
India's SEBI Committee on Corporate Governance defines corporate governance as the
"acceptance by management of the inalienable rights of shareholders as the true owners of
the corporation and of their own role as trustees on behalf of the shareholders. It is about
commitment to values, about ethical business conduct and about making a distinction
between personal & corporate funds in the management of a company."

3. United States, United Kingdom

The so-called "Anglo-American model" of corporate governance emphasizes the interests
of shareholders. It relies on a single-tiered Board of Directors that is normally dominated
by non-executive directors elected by shareholders. Because of this, it is also known as
"the unitary system". Within this system, many boards include some executives from the
company (who are ex officio members of the board). Non-executive directors are
expected to outnumber executive directors and hold key posts, including audit and
compensation committees. The United States and the United Kingdom differ in one
critical respect with regard to corporate governance: In the United Kingdom, the CEO
generally does not also serve as Chairman of the Board, whereas in the US having the
dual role is the norm, despite major misgivings regarding the impact on corporate
governance. In the United States, corporations are directly governed by state laws, while
the exchange (offering and trading) of securities in corporations (including shares) is
governed by federal legislation. Many US states have adopted the Model Business
Corporation Act, but the dominant state law for publicly traded corporations is Delaware,
which continues to be the place of incorporation for the majority of publicly traded
corporations.

4. EVALUATION OF CORPORATE GOVERNANCE IN INDIA

CORPORATE GOVERNANCE COMMITTEES IN INDIA AND

THEIR RECOMMENDATIONS:

4
I. National Task Force Chaired by Rahul Bajaj

In 1996, CII took a special initiative on Corporate Governance – the first institutional
initiative in Indian industry. The objective was to develop and promote a code for Corporate
Governance to be adopted and followed by Indian companies, be these in the Private Sector,
the Public Sector, Banks or Financial Institutions, all of which are corporate entities. This
initiative by CII flowed from public concerns regarding the protection of investor interest,
especially the small investor; the promotion of transparency within business and industry; the
need to move towards international standards in terms of disclosure of information by the
corporate sector and, through all of this, to develop a high level of public confidence in
business and industry.

A National Task Force set up with Mr. Rahul Bajaj , Past President ,CII and Chairman &
Managing Director, Bajaj Auto Limited, as the Chairman included membership from
industry, the legal profession, media and academia.

This Task Force presented the draft guidelines and the code of Corporate Governance in
April 1997 at the National Conference and Annual Session of CII. This draft was then
publicly debated in workshops and Seminars and a number of suggestions were received for
the consideration of the Task Force.

Desirable Code of Corporate Governance

1. No need for German style two-tiered board.

2. In case of listed company with turnover exceeding Rs.100 crores, independent directors
should consist of: (a). 30% if Chairman is non-executive director, (b).50% if Chairman &
MD is the same person.

3. No single person should hold directorships in more than 10 listed companies.

4. Non-executive directors should be competent and active.

5. Commission not exceeding 1% (3%) of net profits for a company with (out) a MD.

6. Attendance record of directors should be made explicit at the time of reappointment; less
than 50% no re-appointment.

7. Key information that must be reported to and placed before the board.

5
8. Listed companies with turnover over Rs. 100 crores or paid-up capital of Rs. 20 crores
should have an audit committee.

9. Additional Shareholders’ Information of Listed Companies.

10. Compliance certificate signed by CEO & CFO.

11. Credit Rating.

12. Companies that default on fixed deposits should not be permitted to:-

Accept further deposits and make inter-corporate loans or investments until the
default is made good
Declare dividends until the default is made good.

II. Kumar Mangalam Birla Committee Report (2000)

In early 1999, Securities and Exchange Board of India (SEBI) had set up a committee under
Shri Kumar Mangalam Birla, member SEBI Board, to promote and raise the standards of
good corporate governance. The report submitted by the committee is the first formal and
comprehensive attempt to evolve a ‘Code of Corporate Governance', in the context of
prevailing conditions of governance in Indian companies, as well as the state of capital
markets.

The Committee's terms of the reference were to:

1. suggest suitable amendments to the listing agreement executed by the stock exchanges
with the companies and any other measures to improve the standards of corporate
governance in the listed companies, in areas such as continuous disclosure of material
information, both financial and non-financial, manner and frequency of such disclosures,
responsibilities of independent and outside directors;
2. draft a code of corporate best practices; and
3. suggest safeguards to be instituted within the companies to deal with insider information
and insider trading.
The primary objective of the committee was to view corporate governance from the
perspective of the investors and shareholders and to prepare a ‘Code' to suit the Indian
corporate environment. The committee had identified the Shareholders, the Board of
Directors and the Management as the three key constituents of corporate governance and
attempted to identify in respect of each of these constituents, their roles and responsibilities
as also their rights in the context of good corporate governance.

Corporate governance has several claimants –shareholders and other stakeholders - which
include suppliers, customers, creditors, and the bankers, the employees of the company, the
government and the society at large. The Report had been prepared by the committee,
keeping in view primarily the interests of a particular class of stakeholders, namely, the

6
shareholders, who together with the investors form the principal constituency of SEBI while
not ignoring the needs of other stakeholders.

Mandatory and non-mandatory recommendations

The committee divided the recommendations into two categories, namely, mandatory and
non- mandatory. The recommendations which are absolutely essential for corporate
governance can be defined with precision and which can be enforced through the amendment
of the listing agreement could be classified as mandatory. Others, which are either desirable
or which may require change of laws, may, for the time being, be classified as non-
mandatory.

A. Mandatory Recommendations:

1. Applies To Listed Companies With Paid Up Capital Of Rs. 3 Crore And Above
2. Composition Of Board Of Directors – Optimum Combination Of Executive & Non-
Executive Directors
3. Audit Committee – With 3 Independent Directors With One Having Financial And
Accounting Knowledge.
4. Remuneration Committee
5. Board Procedures – At least 4 Meetings of the Board in a Year with Maximum Gap of
4 Months between 2 Meetings. To Review Operational Plans, Capital Budgets,
Quarterly Results, Minutes Of Committee's Meeting. Director Shall Not Be A
Member Of More Than 10 Committee And Shall Not Act As Chairman Of More
Than 5 Committees Across All Companies
6. Management Discussion And Analysis Report Covering Industry Structure,
Opportunities, Threats, Risks, Outlook, Internal Control System
7. Information Sharing With Shareholders

B. Non-Mandatory Recommendations:

1. Role Of Chairman
2. Remuneration Committee Of Board
3. Shareholders' Right For Receiving Half Yearly Financial Performance Postal Ballot
Covering Critical Matters Like Alteration In Memorandum Etc.
4. Sale Of Whole Or Substantial Part Of The Undertaking
5. Corporate Restructuring
6. Further Issue Of Capital
7. Venturing Into New Businesses

7
III. Naresh Chandra Committee Report on Corporate Audit and Governance

(2002)

The Ministry of Corporate Affairs had appointed a high level committee in August 2002 to
examine various corporate governance issues. The committee had been entrusted to analyse
and recommend changes, if necessary, in diverse areas such as:

1. The statutory auditor-company relationship so as to further strengthen the professional

nature of this interface;
2. The need, if any, for rotation of statutory audit firms or partners;
3. The procedure for appointment of auditors and determination of audit fees;
4. Restrictions, if necessary, on non-audit fees;
5. Independence of auditing functions;
6. Measures required to ensure that the management and companies actually present 'true
and fair' statement of the financial affairs of companies;
7. The need to consider measures such as certification of accounts and financial statements
by the management and directors;
8. The necessity of having a transparent system of random scrutiny of audited accounts;
9. Adequacy of regulation of chartered accountants, company secretaries and other similar
statutory oversight functionaries;
10. Advantages, if any, of setting up an independent regulator similar to the Public Company
Accounting Oversight Board in the Sarbanes Oaxley Act (SOX Act), and if so, its
constitution; and
11. Role of independent directors, and how their independence and effectiveness can be
ensured.

The Committee's recommendations relate to:

1. Disqualifications for audit assignments;

2. List of prohibited non-audit services;
3. Independence Standards for Consulting, Other Entities that are Affiliated to Audit Firms;
4. Compulsory Audit Partner Rotation;
5. Auditor's disclosure of contingent liabilities;
6. Auditor's disclosure of qualifications and consequent action;
7. Management's certification in the event of auditor's replacement;
8. Auditor's annual certification of independence;
9. Appointment of auditors;
10. Setting up of Independent Quality Review Board;
11. Proposed disciplinary mechanism for auditors;
12. Defining an independent director;
13. Percentage of independent directors;
14. Minimum board size of listed companies;

8
15. Disclosure on duration of board meetings/committee meetings;
16. Additional disclosure to directors;
17. Independent directors on Audit Committees of listed companies;
18. Audit Committee charter;
19. Remuneration of non-executive directors;
20. Exempting non-executive directors from certain liabilities;
21. Training of independent directors;
22. SEBI and Subordinate Legislation;
23. Corporate Serious Fraud Office; etc.

National Foundation for Corporate Governance (NFCG)

Ministry of Corporate Affairs has set up a National Foundation for Corporate Governance
(NFCG) in association with CII, ICAI and ICSI, as a not-for-profit trust. It provides a
platform to deliberate on issues relating to good corporate governance, to sensitise corporate
leaders on importance of good corporate governance practices as well as facilitate exchange
of experiences and ideas amongst corporate leaders, policy makers, regulators, law enforcing
agencies and non- government organizations.

The NFCG has a three-tier structure for its management, viz, the Governing Council under
the Chairmanship of Minister of Corporate Affairs, the Board of Trustees and the Executive
Directorate. NFCG had framed an action plan, which includes development of good corporate
governance principles on identified themes i.e. (i) corporate governance norms for
institutional investors, (ii) corporate governance norms for independent directors, and (iii)
corporate governance norms for audit.

IV. N R Narayana Murthy Committee Report (2003)

With the belief that the efforts to improve corporate governance standards in India must
continue because these standards themselves were evolving in keeping with the market
dynamics, the Securities and Exchange Board of India (SEBI) had constituted a Committee
on Corporate Governance in 2002 , in order to evaluate the adequacy of existing corporate
governance practices and further improve these practices. It was set up to review Clause 49,
and suggest measures to improve corporate governance standards.

The SEBI Committee was constituted under the Chairmanship of Shri N. R. Narayana
Murthy, Chairman and Chief Mentor of Infosys Technologies Limited. The Committee
comprised members from various walks of public and professional life. This included
captains of industry, academicians, public accountants and people from financial press and
industry forums.

9
The terms of reference of the committee were to:

 Review the performance of corporate governance; and

 Determine the role of companies in responding to rumour and other price sensitive
information circulating in the market, in order to enhance the transparency and
integrity of the market.
The issues discussed by the committee primarily related to audit committees, audit reports,
independent directors, related parties, risk management, directorships and director
compensation, codes of conduct and financial disclosures. The committee's recommendations
in the final report were selected based on parameters including their relative importance,
fairness, accountability and transparency, ease of implementation, verifiability and
enforceability.

The key mandatory recommendations focused on:

1. Strengthening the responsibilities of audit committees;

2. Improving the quality of financial disclosures, including those related to related party
transactions and proceeds from initial public offerings;
3. Requiring corporate executive boards to assess and disclose business risks in the annual
reports of companies;
4. Introducing responsibilities on boards to adopt formal codes of conduct; the position of
nominee directors; and
5. Stock holder approval and improved disclosures relating to compensation paid to non-
executive directors.
6. Non-mandatory recommendations included:
7. Moving to a regime where corporate financial statements are not qualified;
8. Instituting a system of training of board members; and
9. Evaluation of performance of board members.

As per the committee, these recommendations codify certain standards of 'good governance'
into specific requirements, since certain corporate responsibilities are too important to be left
to loose concepts of fiduciary responsibility. Their implementation through SEBI's regulatory
framework will strengthen existing governance practices and also provide a strong incentive
to avoid corporate failures. The Committee noted that the recommendations contained in their
report can be implemented by means of an amendment to the Listing Agreement, with
changes made to the existing clause 49.

V. Naresh Chandra Committee Report (2009)

10
The Naresh Chandra committee was appointed in August 2002 by the Department of
Company Affairs (DCA) under the Ministry of Finance and Company Affairs to examine
various corporate governance issues. The Committee submitted its report in December 2002.
It made recommendations in two key aspects of corporate governance: financial and non-
financial disclosures: and independent auditing and board oversight of management. The
committee submitted its report on various aspects concerning corporate governance such as
role, remuneration, and training etc. of independent directors, audit committee, the auditors
and then relationship with the company and how their roles can be regulated as improved.
The committee stingily believes that “a good accounting system is a strong indication of the
management commitment to governance.

The salient recommendations are as follows:

1. Creation of a new post of Intelligence Advisor to assist the NSA and the National
Intelligence Board on matters relating to coordination in the functioning of intelligence
committee.
2. Amendment to Prevention of Corruption Act to reassure honest officers, who take
important decisions about defense equipment acquisition, so that they are not harassed for
errors of judgment or decision taken in good faith.
3. A permanent Chairman of the Chiefs of Staff Committee
4. Expediting the creation of new instruments for counter-terrorism, such as the National
Intelligence Grid and National Counter Terrorism Centre.
5. Deputation of officers from services up to director's level in Ministry of Defense
6. Measures to augment the flow of foreign language experts into the intelligence and
security agencies, which face a severe shortage of trained linguists
7. Promotion of synergy in civil-military functioning to ensure integration. To begin with,
the deputation of armed services officers up to director level in the Ministry of Defence
should be considered.
8. Early establishment of a National Defense University (NDU) and the creation of a
separate think-tank on internal security.

5. SEBI and CORPORATE GOVERNANCE

Securities and Exchange Board of India (SEBI) was established on April 12, 1992 in
accordance with the provisions of the Securities and Exchange Board of India Act, 1992. It
monitors and regulates corporate governance of listed companies in India through Clause 49
of the Listing Agreement. This clause is incorporated in the listing agreement of stock
exchanges and it is compulsory for them to comply with its provisions. It was first introduced
in the financial year 2000- 01 based on the recommendations of Kumar Mangalam Birla
committee. rovisions of

11
Clause 49 of the Listing Agreement

Board of Directors

Board of directors of a company shall have an optimum combination of executive and non-
executive directors with not less than fifty percent of the board of directors comprising of
non-executive directors. The number of independent directors would depend whether the
Chairman is executive or non-executive. In case of a non-executive chairman, at least one-
third of board should comprise of independent directors and in case of an executive chairman,
at least half of board should comprise of independent directors. All pecuniary relationship or
transactions of the non-executive director’s viz-a-viz. the company should be disclosed in the
Annual Report.

Audit Committee

 A qualified and independent audit committee shall be set up and that:

1. Audit committee shall have minimum three members, all being non-executive directors,
with the majority of them being independent, and with at least one director having
financial and accounting knowledge;

2. Chairman of the committee shall be an independent director;

3. Chairman shall be present at Annual General Meeting to answer shareholder queries;

4. Audit committee should invite such of the executives, as it considers appropriate (and
particularly the head of the finance function) to be present at the meetings of the
committee, but on occasions it may also meet without the presence of any executives of
the company. The finance director, head of internal audit and when required, a
representative of the external auditor shall be present as invitees for the meetings of the
audit committee;

5. Company secretary shall act as the secretary to the 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.

 The audit committee shall have powers, which should include the following to:
1. Investigate any activity within its terms of reference.

2. Seek information from any employee.

3. Obtain outside legal or other professional advice.

12
 4. Secure attendance of outsiders with relevant expertise, if it considers necessary.

 The role of the audit committee shall include the following.

1. 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.

2. Recommending the appointment and removal of external auditor, fixation of audit fee
and also approval for payment for any other services.

3. Reviewing with management the annual financial statements before submission to the
board, focusing primarily on;

a. Any changes in accounting policies and practices.

b. Major accounting entries based on exercise of judgment by management.
c. Qualifications in draft audit report.
d. Significant adjustments arising out of audit.
e. The going concern assumption.
f. Compliance with accounting standards.
g. Compliance with stock exchange and legal requirements concerning financial
statements.
h. 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 potential conflict with the interests of company at large.
 Reviewing with the management, external and internal auditors, and the adequacy of
internal control systems.
 Reviewing the adequacy of internal audit function, including the structure of the
internal audit department, staffing and seniority of the official heading the
department, reporting structure coverage and frequency of internal audit.
 Discussion with internal auditors any significant findings and follow up there on.
 Reviewing the findings of any internal investigations by the internal auditors into
matters where there is suspected fraud or irregularity or a failure of internal control
systems of a material nature and reporting the matter to the board.
 Discussion with external auditors before the audit commences nature and scope of
audit as well as have post-audit discussion to ascertain any area of concern.
 Reviewing the company's financial and risk management policies.
 To look into the reasons for substantial defaults in the payment to the depositors,
debenture holders, shareholders (in case of non-payment of declared dividends) and
creditors.
 If the company has set up an audit committee pursuant to provision of the Companies
Act, the said audit committee shall have such additional functions / features as is
contained in the Listing Agreement.
 Remuneration of Directors

13
  The remuneration of non-executive directors shall be decided by the board of
directors.
 The following disclosures on the remuneration of directors shall be made in the
section on the corporate governance of the annual report.
 All elements of remuneration package of all the directors i.e. salary, benefits, bonuses,
stock options, pension etc.
 Details of fixed component and performance linked incentives, along with the
performance criteria.
 Service contracts, notice period, severance fees.
 Stock option details, if any – and whether issued at a discount as well as the period
over which accrued and over which exercisable.
 Board Procedure
 The board meeting shall be held at least four times a year, with a maximum time gap
of four months between any two meetings.
 The director shall not be a member in more than 10 committees or act as Chairman of
more than five committees across all companies in which he is a director. Furthermore
it should be a mandatory annual requirement for every director to inform the company
about the committee positions he occupies in other companies and notify changes as
and when they take place.

Management

As part of the directors' report or as an addition there to, a Management Discussion and
Analysis report should form part of the annual report to the shareholders. This Management
Discussion & Analysis should include discussion on the following matters within the limits
set by the company's competitive position:

1. Industry structure and developments.

2. Opportunities and Threats.

3. Segment–wise or product-wise performance.

4. Outlook

5. Risks and concerns.

6. Internal control systems and their adequacy.

7. Discussion on financial performance with respect to operational performance.

8. Material developments in Human Resources / Industrial Relations front, including number

of people employed.

14
Disclosures must be made by the management to the board relating to all material financial
and commercial transactions, where they have personal interest that may have a potential
conflict with the interest of the company at large (for e.g. dealing in company shares,
commercial dealings with bodies, which have shareholding of management and their relatives
etc.)

Shareholders

In case of the appointment of a new director or re-appointment of a director the shareholders

must be provided with the following information:

1. A brief resume of the director;

2. Nature of his expertise in specific functional areas; and

3. Names of companies in which the person also holds the directorship and the membership
of Committees of the board.

 The information like quarterly results, presentation made by companies to analysts shall
be put on company's web-site, or shall be sent in such a form so as to enable the stock
exchange on which the company is listed to put it on its own web-site.
 A board committee under the chairmanship of a non-executive director shall be formed to
specifically look into the redressing of shareholder and investors complaints like transfer
of shares, non-receipt of balance sheet, non-receipt of declared dividends etc. This
Committee shall be designated as ‘Shareholders/Investors Grievance Committee'.
 To expedite the process of share transfers the board of the company shall delegate the
power of share transfer to an officer or a committee or to the registrar and share transfer
agents. The delegated authority shall attend to share transfer formalities at least once in a
fortnight.

Report on Corporate Governance

There shall be a separate section on Corporate Governance in the annual reports of company,
with a detailed compliance report on Corporate Governance. Non-compliance of any
mandatory requirement i.e. which is part of the listing agreement with reasons thereof and the
extent to which the non-mandatory requirements have been adopted should be specifically
highlighted.

Compliance

A company shall obtain a certificate from the auditors of the company regarding compliance
of conditions of corporate governance as stipulated in this clause and annexed the certificate
with the directors' report, which is sent annually to all the shareholders of the company. The

15
same certificate shall also be sent to the Stock Exchanges along with the annual returns filed
by the company.

6. SYSTEMIC PROBLEMS OF CORPORATE GOVERNANCE

 Demand for information: In order to influence the directors, the shareholders must
combine with others to form a voting group which can pose a real threat of carrying
resolutions or appointing directors at a general meeting.
 Monitoring costs: A barrier to shareholders using good information is the cost of
processing it, especially to a small shareholder. The traditional answer to this problem is
the efficient-market hypothesis (in finance, the efficient market hypothesis (EMH) asserts
that financial markets are efficient), which suggests that the small shareholder will free
ride on the judgments of larger professional investors.
 Supply of accounting information: Financial accounts form a crucial link in enabling
providers of finance to monitor directors. Imperfections in the financial reporting process
will cause imperfections in the effectiveness of corporate governance. This should,
ideally, be corrected by the working of the external auditing process.

7. Systemic Failures of Corporate Governance

A systemic failure of corporate governance means the failure of the whole set of regulatory,
market, stakeholder and internal governance, which has largely contributed to the on-going
financial crisis.

[1] Regulatory governance failure

A regulatory failure in governing financial companies before the financial crisis was
manifested in substantial deregulation and lack of regulation in the finance industry. In 1933,
the US President Franklin D. Roosevelt declared that ‘There must be a strict supervision of
all banking and credits and investments; there must be an end to speculation with other
people’s money’ (Rosenman, 1938, p. 14). However, the strict supervisory rules over the
finance industry in response to the Great Depression had been gradually abandoned from the
1980s onwards. For instance:

 In 1999, the US Congress passed the Gramm-Leach-Bliley Act, which repealed the
Glass-Steagall Act of 1933 that separated commercial banks from investment banks.
 In 2000, the US Congress passed the Commodity Futures Modernization Act, which
allowed the self-regulation of futures and derivatives, declaring that all attempts to
regulate the derivatives market are illegal.
 Investment banks were permitted to substantially increase their debt level and
leverage.
 Depository banks were permitted to move massive amounts of assets and liabilities
off balance sheets into structured investment vehicles and conduits to hide their debts,
insufficient capital and high risks taken.

16
  There was a lack of regulation over the shadow banking system that consisted of non-
depository bank financial institutions to lend businesses money or invest in ‘toxic
assets’ (such as subprime mortgage backed securities) with a significant high level of
financial leverage.

[2] Market governance failure

The claim that the market is the most efficient and rational way of allocating resources,
monitoring corporations and disciplining corporate underperformance and misbehaviour has
been advocated and promoted by neoclassical economists and modern finance theorists. Yet,
the optimal market governance hypothesis does not work well in practice. In capital market,
for instance, the share prices of many corporations did not reflect the managerial
inefficiencies. The market for corporate control movement in the 1980s brought about more
negative than positive effects. Information failure is inherently embedded in a ‘complex
system’ of financial markets where price volatility and liquidity were nonlinear functions of
patterns arising from the interactive behaviour of many independent and constantly adapting
market participants (Schwarcz, 2011). Joseph E. Stiglitz, a Nobel laureate in economics,
points out that ‘when information is imperfect, markets do not often work well – and
information imperfections are central in finance’ (Stiglitz, 2009, p. 9). Overall, the
fundamental prerequisites for the operation of market disciplinary force were not in place
prior to the financial crisis (Clarke, 2011).

[3] Stakeholder governance failure

Stakeholder governance is typically seen in German and Japanese corporations where banks,
employees, suppliers and major customers exert significant influence on corporate decision-
making through specific institutional arrangements. However, there is no formal stakeholder
governance system and structure established in the Anglo-American model. For stakeholder
theorists, the reason why the Anglo-American corporate governance system failed is due to
the absence of stakeholder involvement in corporate governance (e.g., Blair, 1995; Hutton,
1995).

[4] Internal governance failure

In the Anglo-American corporate governance model, the triple relationship between

shareholders, the boardroom and management has been broken since the separation of
ownership from control (Berle and Means, 1932). Shareholders are largely reluctant to
monitor corporations and passive in attending shareholder general meetings. Both
institutional and individual shareholders do not behave like owners (Monks, 2011).
Institutional investors even encouraged adoption of high-risk business strategies before the

17
financial crisis (Barker, 2011). The issues of board incompetence and lack of independence
as well as CEO dominance and abuse of power have long been concerned, but unsolved (Sun,
2009).

8. MAJOR CORPORATE SCANDALS IN INDIA:

A. Ramalinga Raju-Satyam
The biggest corporate scam in India has come from one of the most respected
businessmen. Satyam founder By Ramalinga Raju resigned as its chairman after
admitting to cooking up the account books. His efforts to fill the fictitious assets with
real ones through Maytas acquisition failed, after which he decided to confess the
crime. With a fraud involving about Rs 8,000 crore (Rs 80 billion), Satyam is heading
for more trouble in the days ahead. O n Wednesday, India fourth largest IT company
lost a staggering Rs 10,000 crore (Rs 100 billion) in market capitalisation as investors
reacted sharply and dumped shares, pushing down the scrip by 78 per cent to Rs 39.95
on the Bombay Stock Exchange. The NYSE-listed firm could also face regulator
action in the US.

I am now prepared to subject myself to the laws of the land and face consequences
thereof Raju said in a letter to SEBI and the Board of Directors, while giving details
of how the profits were inflated over the years and his failed attempts to fill the
fictitious assets with real ones Raju said the company balance sheet as of September
30 carries inflated (non-existent) cash and bank balances of Rs 5,040 crore (Rs 50.40
billion) as against Rs 5,361 crore (Rs 53.61 billion) reflected in the books.

He was known as the Big Bull However, his bull run did not last too long. He
triggered a rise in the Bombay Stock Exchange in the year 1992 by trading in shares
at a premium across many segments. Taking advantages of the loopholes in the
banking system, Harshad and his associates triggered a securities scam diverting
funds to the tune of Rs 4000 crore (Rs 40 billion) from the banks to stockbrokers
between April 1991 to May 1992.

B. Harshad Mehta
Harshad Mehta worked with the New India Assurance Company before he moved
ahead to try his luck in the stock markets. Mehta soon mastered the tricks of the trade
and set out on dangerous game plan. Mehta has siphoned off huge sums of money
from several banks and millions of investors were conned in the process. His scam
was exposed, the markets crashed and he was arrested and banned for life from
trading in the stock markets.

18
 He was later charged with 72 criminal offences. A Special Court also sentenced
Sudhir Mehta, Harshad Mehta brother, and six others, including four bank officials, to
rigorous imprisonment (RI) ranging from 1 year to 10 years on the charge of duping
State Bank of India to the tune of Rs 600 crore (Rs 6 billion) in connection with the
securities scam that rocked the financial markets in 1992. He died in 2002 with many
litigations still pending against him.

C. Ketan Parekh
Ketan Parekh followed Harshad Mehta footsteps to swindle crores of rupees from
banks. A chartered accountant he used to run a family business, NH Securities. Ketan
however had bigger plans in mind. He targetted smaller exchanges like the Allahabad
Stock Exchange and the Calcutta Stock Exchange, and bought shares in fictitious
names.

His dealings revolved around shares of ten companies like Himachal Futuristic,
Global Tele-Systems, SSI Ltd, DSQ Software, Zee Telefilms, Silverline, Pentamedia
Graphics and Satyam Computer (K-10 scrips). Ketan borrowed Rs 250 crore from
Global Trust Bank to fuel his ambitions. Ketan alongwith his associates also managed
to get Rs 1,000 crore from the Madhavpura Mercantile Co-operative Bank. According
to RBI regulations, a broker is allowed a loan of only Rs 15 crore (Rs 150 million).
There was evidence of price rigging in the scrips of Global Trust Bank, Zee Telefilms,
HFCL, Lupin Laboratories, Aftek Infosys and Padmini Polymer.

D. Bhansali scam
The Bhansali scam resulted in a loss of over Rs 1,200 crore (Rs 12 billion). He first
launched the finance company CRB Capital Markets, followed by CRB Mutual Fund
and CRB Share Custodial Services. He ruled like a financial wizard 1992 to 1996
collecting money from the public through fixed deposits, bonds and debentures. The
money was transferred to companies that never existed. CRB Capital Markets raised a
whopping Rs 176 crore in three years. In 1994 CRB Mutual Funds raised Rs 230
crore and Rs 180 crore came via fixed deposits. Bhansali also succeeded to to raise
about Rs 900 crore from the markets. However, his good days did not last long, after
1995 he received several jolts. Bhansali tried borrowing more money from the market.
This led to a financial crisis. It became difficult for Bhansali to sustain himself. The
Reserve Bank of India (RBI) refused banking status to CRB and he was in the dock.
SBI was one of the banks to be hit by his huge defaults.

19
E. THE COBBLER’S SCAM SOHIN DAYA.
Sohin Daya, son of a former Sheriff of Mumbai, was the main accused in the multi-
crore shoes scam. Daya of Dawood Shoes, Rafique Tejani of Metro Shoes, and
Kishore Signapurkar of Milano Shoes were arrested for creating several leather co-
operative societies which did not exist. They availed loans of crores of rupees on
behalf of these fictitious societies. The scam was exposed in 1995. The accused
created a fictitious cooperative society of cobblers to take advantage of government
loans through various schemes. Officials of the Maharashtra State Finance
Corporation, Citibank, Bank of Oman, Dena Development Credit Bank, Saraswat Co-
operative Bank, and Bank of Bahrain and Kuwait were also charge sheeted.

F. “DINESH DALMIA’S” STOCK SCAM.

Dinesh Dalmiawas the managing director of DSQ Software Limited when the Central
Bureau of Investigation arrested him for his involvement in a stocks scam of Rs 595
crore (Rs 5.95 billion). Dalmia group included DSQ Holdings Ltd, Hulda Properties
and Trades Ltd, and Power flow Holding and Trading Pvt Ltd. Dalmia resorted to
illegal ways to make money through the partly paid shares of DSQ Software Ltd, in
the name of New Vision Investment Ltd, UK, and unallotted shares in the name of
Dinesh Dalmia Technology Trust.Investigation showed that 1.30 crore (13 million)
shares of DSQ Software Ltd had not been listed on any stock exchange.

G. THE FAKE STAMP RACKET.

He paid for his own education at Sarvodaya Vidyalaya by selling fruits and vegetables
on trains. He is today famous (or infamous) for being the man behind one of The
Telgi case is another big scam that rocked India. The fake stamp racket involving
Abdul Karim Telgiwas exposed in 2000. The loss is estimated to be Rs 171.33 crore
(Rs 1.71 billion), it was initially pegged to be Rs 30,000 crore (Rs 300 bilion), which
was later clarified by the CBI as an exaggerated figure.

In 1994, Abdul Karim Telgi acquired a stamp paper license from the Indian
government and began printing fake stamp papers. Telgi bribed to get into the
government security press in Nashikand bought special machines to print fake stamp
papers. Telgi networked spread across 13 states involving 176 offices, 1,000
employees and 123 bank accounts in 18 cities.

H. THE MONEY MARKET FRAUD

Virendra Rastogi chief executive of RBG Resources was charged with for deceiving
banks worldwide of an estimated $1 billion. He was also involved in the duty-
drawback scam to the tune of Rs 43 crore (Rs 430 milion) in India. The CBI said that
five companies, whose directors were the four Rastogi brothers -- Subash, Virender,

20
 Ravinde and Narinder -- exported bicycle parts during 1995-96 to Russia and Hong
Kong by heavily over invoicing the value of goods for claiming excessduty draw back
from customs.

I. THE UTI SCAM

Former UTI chairman P S Subramanyam and two executive directors -- M M Kapur
and S K Basu -- and a stockbroker Rakesh G Mehta, were arrested in connection with
the; UTI scam. UTI had purchased 40,000 shares of Cyberspace On September 25,
2000, for about Rs 3.33 crore (Rs 33.3 million) from Rakesh Mehta when there were
no buyers for the scrip. The market price was around Rs 830. The CBI said it was the
conspiracy of these four people which resulted in the loss of Rs 32 crore (Rs 320
million). Subramanyam, Kapur and Basu had changed their stance on an investment
advice of the equities research cell of UTI. The promoter of Cyberspace Infosys,
Arvind Johari was arrested in connection with the case. The officials were paid Rs 50
lakh (Rs 5 million) by Cyberspace to promote its shares. He also received Rs 1.18
crore (Rs 11.8 million) from the company through a circuitous route for possible
rigging the Cyberspace counter.

J. SANJAY AGARWAL’S FINANCE PORTAL

Home Trade had created waves with celebrity endorsements. But Sanjay Agarwal
finance portal was just a veil to cover up his shady deals. He swindled a whopping Rs
600 crore (Rs 6 billion) from more than 25 cooperative banks. The government
securities (gilt) scam of 2001 was exposed when the Reserve Bank of India checked
the acounts of some cooperative banks following unusual activities in the gilt market.

Co-operative banks and brokers acted in collusion in abide to make easy money at the
cost of the hard earned savings of millions of Indians. In this case, even the Public
Provident Fund (PPF) was affected. A sum of about Rs 92 crore (Rs 920 million) was
missing from the Seamen's Provident Fund. Sanjay Agarwal, Ketan Sheth (a
broker), Nandkishore Trivedi and Baluchan Rai (a Hong Kong-based Non-Resident
Indian) were behind the Home Trade scam.

K. Gilt funds
Gilt funds, as they are conveniently called, are mutual fund schemes floated by asset
management companies with exclusive investments in government securities. The
schemes are also referred to as mutual funds dedicated exclusively to investments in
government securities. Government securities mean and include central government
dated securities, state government securities and treasury bills. The gilt funds provide
to the investors the safety of investments made in government securities and better
returns than direct investments in these securities through investing in a variety of

21
 government securities yielding varying rate of returns gilt funds, however, do run the
risk. The first gilt fund in India was set up in December 1998.

22

View publication stats