CORPERATE GOVERNANCE AND BUSNESS ETHICS

UNIT-2

EMERGENCE AND DEVELOPMENT OF CORPORATE GOVERNANCE IN UK

AND USA

Till 19th century, under the traditional enterprise model - the business landscape was mostly
filled with unincorporated business associations where individual owners were themselves
the controllers of the business. But at the turn-around of the 19th century, registered public
companies emerged with their capability to facilitate large-scale investment with minimum
risk to the investors. This transformation necessitated the requirement of a special cadre of
corporate managers – separate and distinct from the shareholders in such large companies, to
develop and implement corporate strategy on their responsibility.

The reasons for separate ownership and management were:

 In large companies with huge number of shareholders, taking management decisions

through the shareholders meeting would have been extremely cumbersome.
 Since the company’s capital needs led to a public offering of shares, there is no
guarantee that the shareholder have the necessary expertise to run large companies.

This separation became the central issue of the corporate governance debate, because since
the historic development has been one of a movement from a situation in which shareholders
were both investors and managers, to one where the management became a separate function
from that of investment - naturally the accountability of these corporate managers towards
such shareholders became a matter of concern. Hence good corporate governance focuses on
creating lines of accountability on such separate management towards various other groups of
stakeholders who have long term interest in the company.

DEVELOPMENT IN UK:

The sudden concern for the good corporate governance was the result of the appointment of
the Cadbury Committee to reform the UK listed companies due to successive impacts of
scandal and recession in the 1980s and early 1990s in UK.

The Cadbury Committee (1992)

The Cadbury Committee on the Financial Aspects of Corporate Governance: The growing
concern at the general public distrust on large companies and the lack of confidence in
reports, accounts and audit statements following the collapse of some of the prominent listed
companies in UK prompted the creation of the Cadbury Committee by the London Stock
Exchange, The Financial reporting Council and the combined accounting bodies of UK.

Under the chairmanship of Sir Adrian Cadbury, the recommendations of the committee,
which got published as the Code of Best Practice in 1992, were as follows:

 It emphasized the key role of the Board of Directors in the company’s decision
making process, especially in deciding the major transactions.
  The key roles of Managing Director or the Chief Executive Officer and Chairman of
the Board should never be combined to prevent concentration of power and individual
domination in the board.
 The board should have NEDs in sufficient number, who shall be independent of the
company and play significant role in board decisions.
 A committee structure to be set up, whereby sub-committees consisting of NEDs to be
created, to improve the accountability of the appointment of directors, their
remuneration and audit process.

Although these recommendations were not enforceable Listing Rules, yet majority of them
were implemented by the London Stock Exchange.

Greenbury Committee (1995) Recommendations:

 Exclude executives from remuneration committee.

 Consider broader economic factors for executive salary decisions.
 Advocate for higher levels of salary disclosure in annual accounts for scrutiny
of directors’ remuneration.

Hampel Committee (1998) Recommendations:

 Create a leader among Non-Executive Directors (NEDs) for a balanced power

structure.
 Encourage institutional investors to engage in dialogue and voting at Annual
General Meetings.
 Maintain balance between executive and non-executive directors to prevent
individual domination.
 Emphasize transparency in determining executive remuneration and policy
statements in annual reports.

Turnbull Committee (1999) Recommendations:

 Directors should have primary responsibility for establishing internal control

systems.
 Introduction of Directors’ Remuneration Reporting Regulations in 2002 for
shareholder advisory votes on directors' salaries.

Higgs Report (2003) Recommendations:

 NEDs should constitute at least half of the board (excluding Chairman).

 Avoid combining CEO and Chairman roles.
 Enhance NEDs' involvement in strategy, risk management, and executive
remuneration.
 Appoint a senior independent director as a point of contact for shareholders.

Smith Report (2003) Recommendations:

 Ensure auditor independence within corporate governance structures.

 Modifications to the Combined Code in July 2003, applicable to all listed
companies from November 1, 2003.
UK Corporate Governance Code of 2010:

 Influenced by the European Commission’s Corporate Governance and

Company Law Action Plan.
 Emphasize collective responsibility of the board for long-term company
success.
 Clarify division of responsibilities between board and executive management.
 Empower NEDs to challenge board decisions constructively.
 Promote continual skills development within the board and its committees.
 Foster transparent communication with shareholders and dialogue on
objectives.
 Transparent procedures for executive remuneration and dialogue with
shareholders emphasized.
Development in USA:
After the collapses of Enron, WorldCom, Tyco, etc, the US Sarbanes-Oxley Act was passed in
United States on 30thJuly, 2002, which applies to all US companies and non-US companies
that required filing periodic reports with the US Securities and Exchange Commission (SEC).
The Act introduced much more extensive reporting requirements for UK companies listed on
any US Stock Exchange or with registered debt securities in US.

The US Sarbanes-Oxley Act, 2002 (SOX):

In the wake of corporate scandals such as Enron and WorldCom, the United States
government passed the Sarbanes-Oxley Act (SOX) on July 30th, 2002. This landmark
legislation aimed to enhance transparency, accountability, and integrity in corporate
governance practices. Its provisions not only affected US companies but also had
implications for non-US entities filing reports with the US Securities and Exchange
Commission (SEC). Here, we delve into the key provisions of SOX and its profound impact
on corporate governance worldwide.

Key Provisions of SOX:

1. Increased corporate responsibility and penalties for wrongdoing.

2. Protection of objectivity and independence of securities analysts.
3. Establishment of the Public Company Accounting Oversight Board (PCAOB) for firm
inspections.
4. Mandated rotation of lead audit partners and review partners.
5. CEO and CFO certification of financial reports' accuracy.
6. Evaluation of disclosure controls and reporting of deficiencies.
7. Disclosure of changes in internal controls and corrective actions.
8. Prohibition of fraudulent actions to influence audits.
9. Mandatory disclosure of off-balance sheet items.
10. Restrictions on extending credit to directors or executives.
11. Reporting on adequacy of internal financial controls by management and auditors.
12. Inclusion of financial experts on audit committees.
13. CEO and CFO certification accompanying periodic reports.
14. Criteria set for Non-Executive Directors (NEDs) on audit committees.

Impact of SOX:
  Enhanced Investor Confidence: Studies by the Financial Executives International
(FEI) and the Institute of Internal Auditors (IIA) indicated that SOX contributed to
improved investor confidence in financial reporting.
 Global Influence: The principles outlined in SOX influenced corporate governance
practices worldwide, leading to reforms in various countries.
 Alignment with UK Corporate Governance Code: The enactment of the UK
Corporate Governance Code in 2010 demonstrated the global impact of SOX, as it
reflected similar principles of transparency and accountability.

The Sarbanes-Oxley Act (SOX) stands as a pivotal piece of legislation that reshaped
corporate governance practices in the aftermath of major corporate scandals. Its stringent
provisions aimed to restore trust in financial markets and ensure greater accountability among
corporate executives. The impact of SOX extended beyond US borders, influencing corporate
governance reforms globally and underscoring the importance of transparency and integrity
in the business world.

CADBURY COMMITTEE ON CORPORATE GOVERNANCE

The Cadbury Committee, officially known as "The Committee on the Financial Aspects of
Corporate Governance," was a landmark initiative in the United Kingdom that played a
crucial role in shaping corporate governance practices. Established in 1991 in response to
financial scandals and corporate failures, particularly the collapse of Polly Peck and Maxwell
Communications, the committee aimed to address concerns about the lack of transparency,
accountability, and ethical standards in corporate management.

The committee was named after its chairman, Sir Adrian Cadbury, and comprised a group of
experts from various fields, including finance, business, and academia. The Cadbury
Committee's primary objective was to develop a set of recommendations and guidelines to
improve the effectiveness of corporate governance within UK companies.

In its final report, published in 1992, the Cadbury Committee introduced a set of principles
and recommendations that became widely recognized as the Cadbury Code. The key
recommendations of the code focused on issues such as the composition and responsibilities
of boards of directors, the role of non-executive directors in providing independent oversight,
the establishment of audit committees, and the disclosure of financial information.

Some of the key principles and recommendations put forth by the Cadbury Committee
included:

1. Composition of Boards: Emphasized the need for a balanced and independent board
with a sufficient number of non-executive directors to provide impartial oversight.

2. Role of Non-Executive Directors: Highlighted the importance of non-executive

directors in bringing an independent perspective to board decisions and monitoring
executive management.
 3. Audit Committees: Recommended the establishment of audit committees composed
of non-executive directors to enhance the effectiveness of financial reporting and
oversight.

4. Remuneration Committees: Advocated for the creation of remuneration committees

to ensure that executive pay was fair and linked to company performance.

5. Shareholder Communication: Stressed the importance of transparent

communication with shareholders, including clear and understandable financial
reporting.

The Cadbury Code significantly influenced corporate governance practices not only in the
UK but also internationally. Many of its recommendations became integral parts of
subsequent corporate governance codes and guidelines developed in various countries. The
Cadbury Committee's work laid the foundation for ongoing efforts to enhance corporate
governance standards and foster a culture of accountability and responsibility in the business
world.

ORGANIZATION FOR ECONOMIC COOPERATION AND DEVELOPMENT

PRINCIPLES(OECD)

Corporate governance plays a pivotal role in upholding the integrity and efficiency of
financial markets. The significance of robust corporate governance becomes evident as poor
governance practices can diminish a company's potential and pave the way for financial
challenges and fraudulent activities. Well-governed companies, on the other hand, often
outperform their competitors and attract investors who are crucial for financing future
expansions.

In 1999, the Organization for Economic Cooperation and Development (OECD) established
the Principles of Corporate Governance, which have since become a global benchmark for
policymakers, investors, firms, and various stakeholders. These principles have not only
gained recognition as one of the Financial Stability Board's Key Standards for Sound
Financial Systems but also form the basis for the World Bank's Corporate Governance
Reports on the Observance of Standards and Codes (ROSC).

The OECD periodically revises its principles to adapt to evolving economic landscapes. The
2004 revision incorporated new proposals and modifications to existing ones, following a
thorough consultation process involving OECD members, representatives from OECD and
non-OECD regions. Subsequently, a second review of the principles took place in 2014/15,
with substantial input from OECD's regional corporate governance roundtables and various
stakeholders worldwide.

Emphasizing the need for businesses to establish conflict resolution processes and
frameworks for internal complaints regarding management or board appointments, the OECD
principles serve as a guide for companies to ensure transparency, accountability, and
responsible decision-making in the realm of corporate governance.

Corporate Governance Principles

The OECD Principles of Corporate Governance are the international standard for corporate
governance. The principles help policy makers evaluate and improve the legal, regulatory and
institutional framework for corporate governance, with a view to supporting economic
efficiency, sustainable growth and financial stability.
The six OECD Principles are:

 Ensuring the basis of an effective corporate governance framework

 The rights and equitable treatment of shareholders and key ownership functions
 Institutional investors, stock markets, and other intermediaries
 The role of stakeholders in corporate governance
 Disclosure and transparency
 The responsibilities of the board
1. Ensure the basis of an effective corporate governance framework

The corporate governance framework should promote transparent and efficient markets, be
consistent with the rule of law and clearly articulate the division of responsibilities among
different supervisory, regulatory and enforcement authorities.

2. The rights and equitable treatment of shareholders and key ownership function

‘The corporate governance framework should protect and facilitate the exercise of
shareholders’ rights and ensure the equitable treatment of all shareholders, including minority
and foreign shareholders. All shareholders should have the opportunity to obtain effective
redress for violation of their rights.’

Basic shareholder rights should include the right to:

1. Secure methods of ownership registration;

2. Convey or transfer shares;
3. Obtain relevant and material information on the corporation on a timely and regular
basis;
4. Participate and vote in general shareholder meetings;
5. Elect and remove members of the board; and
6. Share in the profits of the corporation.
3. The Institutional investors, stock markets, and other intermediaries

‘The corporate governance framework should provide sound incentives throughout the
investment chain and provide for stock markets to function in a way that contributes to good
corporate governance.’

 All shareholders of the same series of a class should be treated equally

 Insider trading and abusive self-dealing should be prohibited
  Members of the board and key executives should be required to disclose to the board
whether they, directly, indirectly or on behalf of third parties, have a material interest
in any transaction or matter directly affecting the corporation.
4. The role of stakeholders in corporate governance

The corporate governance framework should recognize the rights of stakeholders established
by law or through mutual agreements and encourage active co-operation between
corporations and stakeholders in creating wealth, jobs, and the sustainability of financially
sound enterprises.

5. Disclosure and transparency

The corporate governance framework should ensure that timely and accurate disclosure is
made on all material matters regarding the corporation, including the financial situation,
performance, ownership, and governance of the company.

6. The responsibilities of the board

The corporate governance framework should ensure the strategic guidance of the company,
the effective monitoring of management by the board, and the board’s accountability to the
company and the shareholders.

INDIAN COMITEE AND GUIELINES

1. CONFEDERATION OF INDIAN INDUSTRY (CII) COMITEE

The Confederation of Indian Industry (CII) works to create and sustain an
environment conducive to the development of India, partnering Industry, Government
and civil society, through advisory and consultative processes.
CII is a non-government, not-for-profit, industry-led and industry-managed
organization, with around 9,000 members from the private as well as public sectors,
including SMEs and MNCs, and an indirect membership of over 300,000 enterprises
from 286 national and regional sectoral industry bodies.

The CII Guidelines are an attempt to serve as the base for corporates (large and small;
listed and unlisted) to redesign their governance strategies in the face of ever
changing business and regulatory environment. These Guidelines are a combination
of global practices; existing legal provisions (some of which may currently be
applicable only to listed companies); good to have principles; regulatory policy
suggestions and forward-looking concepts – aimed at enhancing the overall
governance standards of companies in India by encouraging voluntary adherence to
the Guidelines, in letter and spirit.

CII has urged companies to adhere to the Guidelines as below (in brief):
1. Integrity, ethics and governance – Companies should establish a culture of
responsibility with accountability. Training should be imparted to employees to
understand the culture.
 2. Responsible governance and citizenship – Corporates to integrate environmental,
social and governance principles in business and avoid giving and receiving bribes,
corruption, market manipulation and anti-competitive practices. They should take
anti-money laundering steps and precautions.
3. Role of Board – The CII Guidelines cover multiple recommendations for company
Boards including balancing roles of supervision and stewardship, allowing for
dissenting views, set out Key Result Areas and balanced scorecard, etc.
4. Balancing interest of stakeholders – CII has advised disclosure of conflicts of
interest of Directors and management and taking into consideration the interest of
shareholders and other stakeholders in corporate activities.
5. Independent Directors and Women Directors – Corporates to include independent
directors with industry expertise and strive to improve gender diversity by inducting
more women directors.
7. Risk management – Risk Management Committee may be set up and assess various
risks including IT and financial risks.
8. Succession planning – Succession planning should be instituted for chairman,
managing director and other senior management.
9. Role of audit committee – Audit committee briefing to the Board to be formalized
and spend sufficient time on integrity of financial statements, internal controls and so
on, apart from handling whistle blower complaints and internal investigations.
10. Improving audit quality – Managements and audit committees should work
closely together on understanding financial statements.
11. Disclosure and transparency related issues – The organisation should institute a
social media policy to deal with information responsibly including price sensitive
information.
12. Vigil mechanism – A whistle blowing mechanism may be formulated and periodic
updates provided to the Board in its implementation.
13. Stakeholder, vendor and customer governance – The organisation must extend the
concept and principles of governance to a larger number of stakeholders including
bankers, creditors, lenders, customers, and employees, among others. A gifts policy
should be devised.
14. Investor activism – Governance concerns of investors including institutional
investors to be addressed and external stakeholders to be able to raise questions. The
organisations should educate stakeholders to exercise their vote on all matters.
15. MSME and startups – MSME and startups should consider good governances as a
complement to their business growth and appoint non-executive directors with
appropriate skill sets.

SEBI INITIATIVES IN INDIA

2. KUMAR MANGALAM BIRLA COMMITTEE REPORT

Securities and Exchange Board of India (SEBI) in 1999 set up a committee under Shri Kumar
Mangalam Birla, member SEBI Board, to promote and raise the standards of good corporate
governance.
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.
Major Recommendations
 The mandatory recommendations apply to the listed companies with paid up share
capital of 3 crore and above.
 Composition of board of directors should be optimum combination of executive &
non-executive directors.
 Audit committee should contain 3 independent directors with one having financial
and accounting knowledge.
 Remuneration committee should be setup
 The Board should hold at least 4 meetings 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
 Management discussion and analysis report covering industry structure, opportunities,
threats, risks, outlook, internal control system should be ready for external review
 Any Information should be shared with shareholders in regard to their investments.
These recommendations were to apply to all the listed private and public sector companies,
their directors, management, employees and professionals associated with such companies.
The Committee recognizes that compliance with the recommendations would involve
restructuring the existing boards of companies. It also recognizes that smaller ones will have
difficulty in immediately complying with these conditions.

3. KUMAR MANGALAM BIRLA COMMITTEE REPORT

The SEBI Committee on Corporate Governance was established on June 2, 2017, with the
goal of raising the standards of corporate governance for listed companies in India. Mr.
Uday Kotak, executive vice chairman and managing director of Kotak Mahindra Bank,
serves as the committee’s chairman. Other members include academics, proxy advisors,
professional bodies, lawyers, and other stakeholders. The Committee, which had 25
members in total, was asked to deliver its report to SEBI within four months.

In order to raise the corporate governance standards of India’s listed firms, the Committee
was asked to make recommendations on the following topics:
1. Ensuring independent directors’ commitment to independence and their active
involvement in managing the company;
2. Enhancing related party transaction controls and disclosures;
3. Problems with listed businesses’ accounting and auditing procedures;
4. Enhancing the efficiency of board evaluation procedures;
5. Addressing the difficulties investors have with voting and attending general meetings;
6. Concerns relating to disclosure and transparency, if any;
 7. Any other topic relating to corporate governance in India that the committee thinks
appropriate.

Major Recommendations

I. Composition and Role of the Board of Directors

1. Recommended a minimum of six directors on the board for the top 1000 listed entities
by market capitalization (effective from April 1, 2019) and top 2000 listed entities
(effective from April 1, 2020).
2. Introduced gender diversity by suggesting at least one independent woman director on
the board for the top 500 listed entities by April 1, 2019, and top 1000 listed entities
by April 1, 2020.
3. Imposed a higher quorum requirement for board meetings, including at least one
independent director, for the top 1000 and top 2000 listed entities.
4. Recommended the separation of the roles of chairperson and MD/CEO for listed
companies with more than 40% public shareholding from April 1, 2020.

II. Institution of Independent Directors

1. Expanded eligibility criteria for independent directors, excluding those constituting

the 'promoter group' of a listed entity.
2. Required an undertaking from independent directors regarding their ability to
discharge duties objectively and independently.
3. Excluded "board inter-locks" arising due to common non-independent directors on
boards of listed entities.

III. Board Committees:

1. Increased the minimum number of meetings for the Audit Committee to five annually.
2. Mandated that other mandatory board committees (Nomination and Remuneration
Committee, Stakeholders Relationship Committee, and Risk Management
Committee) meet at least once a year.
3. Enhanced the role of the Audit Committee to include the review of the utilization of
funds in subsidiaries and included cyber security in the role of the Risk Management
Committee.

IV. Enhanced Monitoring of Group Entities:

1. Amended the definition of material subsidiary to include those with income or net
worth exceeding ten percent of the consolidated income or net worth of the listed
entity and its subsidiaries.
2. Mandated the appointment of at least one independent director of the holding listed
entity on the board of an unlisted material subsidiary.
3. Introduced mandatory secretarial audit for listed entities and their material unlisted
subsidiaries.

V. Related Party Transactions:

 1. Modified the definition of "Related Party" to include persons holding 20% or more
shareholding in the listed entity.
2. Introduced half-yearly disclosure of related party transactions on a consolidated basis
within 30 days of publishing half-yearly financial results.

VI. Investor Participation in Meetings:

1. Required the top 100 listed entities to hold their annual general meetings within five
months from the date of closing of the financial year.
2. Mandated one-way live webcasts of the proceedings of AGMs for the top 100 listed
entities.

UNIT-3

CODE OF CONDUCT AND ETHICS

A code of conduct and ethics is a set of guidelines and principles that outline the ethical and
behavioral standards expected of individuals within an organization. These codes serve as a
framework to promote integrity, transparency, and responsible conduct. Business ethics
represent the moral duty an organisation and its employees have to their customers, clients
and wider society. Ethics are the fundamental foundation of trust between businesses and
their key stakeholders. As India strives to be a global economic superpower, businesses are
putting greater emphasis on ethics. Business ethics are principles, morals and rules that
companies follow to establish trust with their customers, clients and employees. It is a set of
standards that determines good and bad practices. Organisations seek to uphold business
ethics to recognise the impact they have on society.

In India, business ethics have been integral to business culture. The principles of honesty and
integrity have solidified business relationships over generations. Indian consumers reward
ethical businesses with their loyalty. Therefore it continues to be a key push factor in their
growth and longevity. A code of conduct is closely related to a code of ethics, to the extent
where the phrases are often interchangeable.

Creating a code of conduct is a statement from leadership laying out their expectations and
communicating the ethical principles they feel are most fundamental to success. Generally, it
reflects the culture already present, or the culture leadership is looking to promote.

EVOLUTION OF ETHICS IN INDIA

The evolution of ethics in corporate governance in India has undergone a transformative

journey, influenced by historical, economic, and regulatory factors. The evolution of
corporate governance ethics in India reflects a commitment to aligning business practices
with global standards and ensuring the interests of all stakeholders are protected. Continuous
regulatory updates, committee recommendations, and corporate initiatives contribute to an
evolving landscape of corporate governance in the country.

Key stages in the evolution of corporate governance ethics in India:

 1. Pre-liberalization Era (Pre-1991):

Before the economic liberalization in 1991, corporate governance practices in India were not
well-defined, and there was limited regulatory oversight.The Companies Act of 1956
provided a basic framework, but there was a lack of emphasis on transparency, disclosure,
and shareholder rights

2. Post-liberalization Era (1991 Onward):

Economic liberalization in 1991 marked a significant turning point. India opened up its
economy, attracting foreign investment and necessitating a more robust corporate governance
framework.The Securities and Exchange Board of India (SEBI) was established in 1992 to
regulate the securities market and promote investor protection.

3. Kumar Mangalam Birla Committee (1999):

In response to concerns about corporate governance practices, the Kumar Mangalam Birla
Committee was formed in 1999. The committee proposed recommendations to enhance
transparency, accountability, and disclosure in Indian boardrooms.

4. SEBI Committee on Corporate Governance (1999):

SEBI constituted the Committee on Corporate Governance under the chairmanship of Kumar
Mangalam Birla, which submitted its report in 2000.The recommendations of this committee
laid the foundation for the first formal corporate governance code in India, which was
incorporated into the Listing Agreement of stock exchanges.

5. Companies Act Amendments (2013):

The Companies Act, 2013, replaced the Companies Act of 1956 and introduced several
provisions to strengthen corporate governance practices.The Act emphasized the roles and
responsibilities of directors, audit committees, and the need for transparency and
accountability.

6. SEBI Listing Regulations (2015):

SEBI revised the Listing Agreement and introduced the SEBI (Listing Obligations and
Disclosure Requirements) Regulations, 2015.These regulations brought further enhancements
to corporate governance norms, including the separation of the roles of Chairman and CEO,
increased board independence, and more stringent disclosure requirements.

7. National Financial Reporting Authority (NFRA) (2018):

The NFRA was established in 2018 as an independent regulator overseeing the quality of
audit services and financial reporting.NFRA plays a crucial role in enhancing corporate
governance by ensuring the integrity of financial reporting.

8. Recent Emphasis on ESG and Stakeholder Capitalism:

There is a growing recognition in India, as globally, about the importance of Environmental,
Social, and Governance (ESG) factors in corporate decision-making.Companies are
increasingly considering a broader set of stakeholders and integrating sustainable and
responsible business practices.

9. Technology and Digital Governance:

The digital era has prompted discussions on digital governance and the ethical use of
technology in corporate operations, particularly in areas like data privacy and cybersecurity.

CODE OF CONDUCT AND ETHICS FOR MANAGERS

A Code of Conduct and Ethics for managers outlines the specific ethical standards and
behavioral expectations for individuals in managerial roles within an organization. This code
is tailored to address the unique responsibilities and leadership positions held by managers.
While the specifics may vary between organizations, here are some common elements that
might be included in a Code of Conduct and Ethics for managers:

1. Leadership and Role Modeling :Managers are expected to lead by example,

demonstrating high ethical standards and integrity in all professional interactions.
2. Fair and Consistent Treatment :Managers should ensure fair and consistent treatment
of all employees, promoting a workplace free from discrimination and favoritism.
3. Confidentiality and Information Handling:Managers must handle confidential
information responsibly and avoid unauthorized disclosure of sensitive information.
4. Conflict of Interest Management :Managers are expected to identify and manage
conflicts of interest appropriately, disclosing potential conflicts to the relevant parties
and taking steps to mitigate them.
5. Decision-Making Integrity: Managers should make decisions objectively and
impartially, avoiding personal biases and ensuring that decisions are in the best
interest of the organization.
6. Communication and Transparency :Managers should communicate transparently and
effectively, providing clear expectations, feedback, and information to their teams.
7. Employee Development and Support :Managers are responsible for the professional
development and well-being of their team members, providing support and
opportunities for growth.
8. Ethical Leadership :Managers should actively promote an ethical culture within their
teams, fostering an environment where ethical behavior is valued and encouraged.
9. Compliance with Laws and Regulations :Managers must ensure that their teams
comply with all applicable laws, regulations, and company policies.
10. Conflict Resolution: Managers should be skilled in conflict resolution, promoting a
healthy work environment and addressing conflicts in a fair and timely manner.
11. Promotion of Diversity and Inclusion :Managers should actively promote diversity
and inclusion within their teams, fostering an environment that values differences and
ensures equal opportunities for all employees.

COMMON PRACTICES IN AN ETHICAL WORK ENVIRONMENT:

1. Promote equal opportunities for all

India is a culturally diverse country with people from different backgrounds living and
working in close proximity to each other. As an employee, you have the right to equal
opportunities such as bonuses, promotions and training workshops, regardless of your gender,
caste, sexuality, religion, marital status, disability or political affiliations. Instead, these
opportunities are granted to you on the sole basis of performance.

2. Report conflicts of interest

Many organisations have a policy about receiving gifts from clients or external parties. Some
may even have rules about part-time work. It is best to always consult your supervisor about
any potential conflicts of interest to protect the organisation's integrity.

3. Respect your workplace

Any equipment that is put into your care, such as stationery, technology and office furniture,
is reserved for work purposes only. Store them in a tidy place and use company property
respectfully.

How you present yourself also shows respect for your workplace. Act with integrity,
complete your assignments on time and follow the appropriate dress code. Conduct yourself
in alignment with the occasion. For example, when attending a meeting, you will be expected
to come prepared with your presentation, speak with a gracious attitude and dress in a formal
work suit.

4. Respect your colleagues

Just as every employee is given the right to equal opportunities, you, too, are expected to treat
your coworkers with compassion. Maintain a high level of honesty and communicate your
opinions with kindness. Give your coworkers the opportunity to voice their opinions and
value their experience and knowledge.

5. Use discretion with sensitive information

Some workplaces and roles may interact with sensitive data or materials, which requires
employees to practice discretion through careful organisation, the use of passwords and other
security measures.

IMPORTANCE OF BUSINESS ETHICS:

1. Goodwill

Businesses in India have traditionally functioned on the basis of goodwill. In the absence of
technology, it was word-of-mouth that allowed businesses to flourish. An organisation known
for its trustworthiness attracts more customers and larger investments.
As an employee, you want to support an organisation that has a good reputation. After all,
you want to feel proud about the work you do. Thus, a company that values ethics will keep
you motivated and lead to greater job satisfaction.

2. Prevention of malpractice

Business ethics helps you stay accountable. It sets clear guidelines for right and wrong. When
your coworkers witness your commitment to the values of honesty and integrity, they too will
follow in your example. Key decision-makers in a corporation have an even greater
responsibility in acting out the values of the organisation. Showing compassion to your
subordinates will inspire them to behave alike.

3. Reduces risks and costs

Striving to do the right thing always pays back. When businesses compromise on their moral
values, they are at risk of losing loyal customers. The rise of social media has made it much
easier for followers to challenge a corporation's ethical standards. Consumers will be loyal to
your work if you respect their emotional and financial investment in your brand. In a social
media driven world, irrespective of your seniority in the company, you become a reflection of
the organisation as a whole.

4. Attracts investment

As India emerges as a world superpower, business ethics have become increasingly

important. Investors are more likely to invest in you if they believe they can trust you.
Similarly, foreign investors are more likely to partner with Indian companies that show a
commitment to integrity and fidelity.

5. Attracts talented employees

Whether you are a highly qualified job seeker or a millennial trying to secure your first job,
applying for a job with an ethically sound corporation will be at the top of your list. Not only
will you feel more motivated to work for a trustworthy brand, but the experience will also
stand out on your resume.

An employer that follows business ethics is more likely to treat their employees with respect.
This is vital to your career growth. An employer that respects you will continue to give your
new opportunities and constructive feedback.

6. Promotes business health

Acting with integrity reduces your mental stress and maintains a healthy balance. When you
feel you are making a positive impact on society, you will have a more disciplined approach
to your work. This, in turn, will improve the quality of your work. A happier workplace leads
to greater productivity and profitability.

CHALLENGES FOR BUSINESS ETHICS

The changing business environment poses various challenges for business ethics. Here are
some key aspects of the evolving business landscape and the associated challenges for ethical
considerations:

1. Globalization:
 As businesses expand globally, they encounter diverse cultural norms, legal
frameworks, and ethical standards. Navigating these differences while
maintaining a consistent ethical stance can be challenging.
2. Technological Advances:
 Rapid technological advancements, such as artificial intelligence, data
analytics, and automation, bring forth ethical dilemmas related to privacy,
cybersecurity, and the impact on employment.
3. Digital Transformation:
 The shift to digital platforms introduces challenges in areas like online
privacy, cybersecurity, and the responsible use of customer data.
4. Social Media Influence:
 The pevasive nature of social media can amplify the impact of business
decisions, requiring companies to navigate reputational risks and respond to
public opinion swiftly.
5. Supply Chain Complexity:
 Global supply chains can involve numerous stakeholders, making it
challenging to ensure ethical practices throughout the entire chain. Issues such
as child labor, environmental impact, and fair trade become more complex.
6. Environmental Sustainability:
 Increasing emphasis on environmental sustainability requires businesses to
adopt eco-friendly practices. Balancing profitability with environmental
responsibility poses ethical considerations.
7. Corporate Social Responsibility (CSR):
 While CSR is increasingly emphasized, the challenge lies in ensuring that it
goes beyond mere box-ticking and results in genuine positive impacts on
society and the environment.
8. Employee Expectations:
 Employees increasingly expect their organizations to align with their values.
Companies must navigate issues like diversity and inclusion, fair wages, and
work-life balance to meet these expectations ethically.
9. Government Regulations:
 Adhering to diverse and evolving regulations globally requires businesses to
stay informed and ensure compliance, which can be ethically challenging in
regions with less stringent regulations.
10. Ethical Use of Technology:
 The ethical use of emerging technologies, such as artificial intelligence and
biotechnology, involves navigating issues like data privacy, algorithmic bias,
and potential misuse.

RECOGNIZING AN ETHICAL ORGANIZATION

Recognizing an ethical organization involves observing key indicators that reflect a

commitment to integrity, transparency, and responsible business practices. Ethical
organizations prioritize the well-being of all stakeholders, including employees, customers,
and the broader community. One hallmark is a clearly defined and actively promoted code of
conduct that establishes ethical guidelines for employees and leadership. Ethical
organizations also demonstrate a commitment to compliance with laws and regulations,
consistently upholding high standards in their industry. Transparency is another crucial
aspect, with open communication about business practices, financial performance, and social
responsibility initiatives. A focus on fair treatment, diversity, and inclusion is evident through
equitable employment practices and a supportive workplace culture. Moreover, ethical
organizations often engage in socially responsible initiatives, contributing positively to the
communities in which they operate. Continuous improvement, accountability, and a
willingness to address and rectify ethical lapses are further signs of an organization
committed to ethical conduct. Ethical organizations prioritize principles and values, actively
promoting a culture of integrity and responsible business behavior.

CHARACTERISTICS OF ETHICAL BUSINESS

Striving to earn a reputation as an ethical business is noble, but it requires

commitment. Most businesses are financially driven, and it is possible to be both
ethical and successful. But there is a fine line between making choices for financial
gain and making choices that will not adversely affect others. The ethical business
knows the difference. Here are the seven principles most businesses value:

 Honesty: Key stakeholders of a business have the basic right of knowing they can
depend on a business. Businesses are able to build trust through transparency and by
taking ownership of their actions. An example of honesty is good sales practices that
educate customers about products using truthful information.
 Integrity: Integrity is the act of holding yourself accountable. To show integrity, you
should always seek to do the right thing, even when it may not benefit you. Integrity
puts the welfare of society ahead of the profits of a business.
 Confidentiality: This principle safeguards the trust people freely give to a business.
When customers and clients share their personal information, it is your moral
obligation to ensure it is handled with care and respect. If you are in a supervisory
role, you also have a duty to protect any personal information your subordinates share
in confidence with you, provided that it will not compromise the welfare of others.
 Compassion: Treat others the way you want to be treated. Compassion is empathy for
others and an inherent value to help those in need. Compassionate businesses are kind
and considerate to their colleagues and customers. Compassion is also a sign of
integrity. It requires putting your own desires aside for the greater good of your
organisation and its customers.
 Fidelity: When you make a promise, fidelity is a value that pushes you to deliver on
it. As a new recruit, you are expected to perform your duties to the best of your
ability. As a member of an organisation, you are expected to continue to strive for the
best products and services on behalf of your loyal customers. A hunger to learn and
grow your skills shows a commitment to delivering on the organisational objectives.
 Privacy: Every organisation has the right to privacy. As an employee, your moral
duty is to uphold this right. When you are entrusted with trade secrets or sign a
confidential employment contract, this principle means that you respect the
information you are given and take their privacy seriously.
 Respect: The way you behave, speak and present yourself should reflect respect for
both yourself and your colleagues. Dressing professionally in the workplace shows
 your respect for company culture. Listening attentively to your coworkers even when
your views differ demonstrates your desire to maintain a harmonious work
environment.

UNIT-4

CORPORATE ETHICS

Corporate ethics refers to the moral principles and values that guide the behavior of a business
organization in its interactions with various stakeholders, including employees, customers,
shareholders, and the wider community. A commitment to corporate ethics involves conducting
business operations with integrity, honesty, and transparency. It requires companies to adhere to
legal standards and regulations while also considering the broader impact of their actions on
society and the environment. Ethical business practices encompass fair treatment of employees,
responsible environmental stewardship, and the delivery of quality products or services.
Companies that prioritize corporate ethics not only build trust and credibility with their
stakeholders but also contribute to the overall well-being of the communities in which they
operate. In today's interconnected and socially conscious world, corporate ethics is not just a
moral imperative but also a strategic necessity for sustainable and responsible business conduct.

INVESTORS' RIGHTS, PRIVILEGES, AND PROTECTION

Companies have realised that their success is not just an outcome of the management and large
shareholders’ efforts. There are a lot of shareholders who contribute to it. As a result,
stakeholder rights are now very high on their list of priorities. The sum total of all the
mechanisms put in place by a company to protect stakeholder rights, in particular shareholders
rights, is referred to as its corporate governance structure. It consists of policies, procedures and
regulations that define how the management must deal with its stakeholders, and the remedies
available to them in case of a violation.

Investors in corporations have certain rights, privileges, and protections that are essential
components of corporate ethics. These principles are designed to ensure transparency,
fairness, and accountability in corporate governance. Here are key aspects related to
investors' rights, privileges, and protection in corporate ethics:

1. Right to Information:

Investors have the right to timely and accurate information about the
company's financial performance, operations, and strategies. Transparency in
financial reporting and disclosures is crucial for informed decision-making.
2. Voting Rights:

 Shareholders typically have the right to vote on important matters such as the
election of the board of directors, mergers and acquisitions, and other
 significant corporate decisions. This gives them a say in the company's
direction.
3. Dividend Rights:

 Investors holding dividend-paying securities are entitled to a share of the

company's profits. The payment of dividends is a way for companies to share
their financial success with shareholders.
4. Right to Inspect Corporate Records:

Shareholders often have the right to inspect certain corporate records, ensuring
transparency and allowing them to assess the company's performance and
decision-making processes.
5. Preemptive Rights:

 In certain situations, investors may have preemptive rights, allowing them the
opportunity to maintain their proportional ownership in the company by
purchasing additional shares before they are offered to the public.
6. Protection Against Insider Trading:

 Investors are protected against insider trading, where individuals with access
to non-public information about a company use that information for personal
gain. Insider trading is illegal and unethical.
7. Board Accountability:

 Corporate governance principles emphasize the accountability of the board of

directors to shareholders. This includes the duty to act in the best interests of
the company and its shareholders.
8. Legal Protections:

 Investors have legal recourse if their rights are violated. Securities laws
provide protections against fraud, misinformation, and other unethical
practices that may harm investors.
9. Proxy Voting:

 Shareholders can exercise their voting rights by proxy, allowing them to

appoint someone else to attend and vote at a shareholder meeting on their
behalf.
10. Fair Treatment:

 Investors have the right to fair and equal treatment, regardless of the size of
their investment. Ethical corporations prioritize equitable treatment of all
shareholders.

RIGHTS OF SHAREHOLDERS

1. Voting power on major issues. Voting power includes electing directors and
proposals for fundamental changes affecting the company such as mergers or
liquidation. Voting takes place at the company’s annual meeting. If the shareholder
cannot attend, they can do so by proxy and mail in their vote.
 2. Ownership in a portion of the company. When a business thrives, common
shareholders own a piece of something that has value. Usually, the better a company
performs and the brighter its outlook, the higher its valuation rises and the price that
each share of ownership fetches. So, if you own a stake in a company that keeps
growing profits, your slice of ownership should grow in value and be worth more
than what you initially paid.
3. The right to transfer ownership. The right to transfer ownership means
shareholders are allowed to trade their stock on an exchange. The right to transfer
ownership might seem mundane, but the liquidity provided by stock exchanges is
important. Liquidity—the degree to which an asset or security can be quickly bought
or sold in the market without affecting its price—is one of the key factors that
differentiates stocks from an investment such as real estate. If an investor owns the
property, it can take months to convert that investment into cash. Because stocks are
so liquid, investors can move their money into other places almost instantaneously.
4. Entitlement to dividends. Capital appreciation isn't the only way common
shareholders make money. They also may receive periodic cash payments from the
company they're invested in. Management of a company essentially has two options
with profits: they can be reinvested back into the firm or paid out in the form of
a dividend. Investors do not have a say as to what percentage of profits should be
paid out—the board of directors decides this. However, whenever dividends are
declared, common shareholders are entitled to receive their share.
5. Opportunity to inspect corporate books and records. Shareholders have the right
to examine basic documents such as company bylaws and minutes of board
meetings. In addition, the Securities and Exchange Act of 1934 requires public
companies to periodically disclose their financials.
6. The right to sue for wrongful acts. Suing a company typically takes the form of a
shareholder class-action lawsuit. For example, WorldCom faced a firestorm of
shareholder class-action suits in 2002 when it was discovered that the company had
grossly overstated earnings and given shareholders and investors an erroneous view
of its financial health.

VARIOUS COMITEES ON INVESTORS RIGHTS IN INDIA

1. KUMAR MANGALAM BIRLA COMMITTEE REPORT

Securities and Exchange Board of India (SEBI) in 1999 set up a committee under Shri Kumar
Mangalam Birla, member SEBI Board, to promote and raise the standards of good corporate
governance.
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.
Major Recommendations
 The mandatory recommendations apply to the listed companies with paid up share
capital of 3 crore and above.
 Composition of board of directors should be optimum combination of executive &
non-executive directors.
  Audit committee should contain 3 independent directors with one having financial
and accounting knowledge.
 Remuneration committee should be setup
 The Board should hold at least 4 meetings 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
 Management discussion and analysis report covering industry structure, opportunities,
threats, risks, outlook, internal control system should be ready for external review
 Any Information should be shared with shareholders in regard to their investments.
These recommendations were to apply to all the listed private and public sector companies,
their directors, management, employees and professionals associated with such companies.
The Committee recognizes that compliance with the recommendations would involve
restructuring the existing boards of companies. It also recognizes that smaller ones will have
difficulty in immediately complying with these conditions.

2.NARESH CHANDRA COMMITTEE

The Naresh Chandra committee is the third major corporate governance initiative
launched in India since the mid-1990s, after the first voluntary code of corporate
governance by the Confederation of Indian Industry (CII) in 1998, followed by Clause
49 of the Listing Agreement by SEBI in 2000. The committee presented its report on
Corporate Governance and Audit in November 2002. The primary objective of the
Naresh Chandra Committee was to scrutinize and recommend amendments, if
necessary, for the laws governing auditor-client relationships and the role of
independent directors.

Major Recommendations

1. Compulsory rotation of auditors- Audit partners and not less than 50% of
engagement team engaged in an audit of any listed company, or such companies
whose paid-up share capital and free reserves exceed Rs. 10 crores, or companies
whose annual turnover exceeds Rs 50 crores must be rotated every five years.
2. Appointment of auditors- For audit committees to have a larger role in audit
procedures, the audit committee shall have the first power to appoint an auditor.
3. Auditor’s disclosure of contingent liabilities- Management shall specify each of the
material risks and liabilities of contingent nature in a clear description, followed by
auditor’s comments on the management view, which shall be specified in the
auditor’s report.
4. Auditor’s annual certification of independence- Before agreeing on the terms of
the audit engagement, the audit firm is required to submit a certificate of
independence to the Audit Committee or Board of Directors (BoD) of such company,
as the case may be.
 5. CEO and CFO certification of audited accounts- Designated CEO (or MD) and
CFO of listed companies and public limited companies whose paid-up share capital
and free reserves exceed Rs. 10 crores or whose turnover exceeds Rs 50 crores,
should certify their companies’ annual accounts.
6. Setting up Independent QRB- Three independent Quality Review Board (QRB)
should be set, one for each ICAI, ICSI and ICWAI, to examine audit quality.
7. Percentage of independent directors- At least 50% of the BoD of any listed
company and unlisted public limited companies having paid-up share capital and free
reserves of Rs. 10 crores or more, or a turnover of Rs 50 crores or more, should be the
independent directors. The minimum board size of such companies should be 7, with
at least four independent directors. Audit committees of such companies should
consist of only independent directors.
8. Audit committee charter- The role and functions that an audit committee shall
discharge in a company should be laid out in an audit committee charter.
9. Exempting non-executive directors from certain liabilities- The non-executive and
independent directors shall be exempted from criminal and civil liabilities mentioned
in the Negotiable Instruments Act, Provident Fund Act, ESI Act, Factories Act,
Financial disputes Act, etc.

3.NARAYANMURTHY COMMITTEE

The Committee on Corporate Governance, headed by Shri Narayanmurthy was

constituted by SEBI, to evaluate the existing corporate governance practices and to
improve these practices as the standards themselves were evolving with market
dynamics. The committee’s recommendations are based on the relative importance,
fairness, accountability, transparency, ease of implementation, verifiability and
enforceability related to audit committees, audit reports, independent directors, related
parties, risk management, directorships and director compensation, codes of conduct
and financial disclosures.

Major Recommendations
1. Strengthening the responsibilities of audit committees
At least one member should be ‘financially knowledgeable’ and at least one member should
have accounting or related financial management proficiency.
1. Quality of financial disclosures
Improving the quality of financial disclosures, including those related to related party
transactions.
2. Proceeds from initial public offerings
Companies raising money through an IPO should disclose to the Audit Committee, the uses /
applications of funds by major category like capital expenditure, sales and marketing,
working capital, etc.
3. Other recommendations
 Requiring corporate executive boards to assess and disclose business risks in the
annual reports of companies.
 Should be obligatory for the Board of a company to lay down the code of conduct for
all Board members and senior management of a company.
 The position of nominee directors: Nominee of the Government on public sector
companies shall be similarly elected and shall be subject to the same responsibilities
and liabilities as other directors
 Improved disclosures relating to compensation paid to non-executive directors.

4. CONFEDERATION OF INDIAN INDUSTRY (CII) COMITEE

The Confederation of Indian Industry (CII) works to create and sustain an

environment conducive to the development of India, partnering Industry, Government
and civil society, through advisory and consultative processes.
The CII Guidelines are an attempt to serve as the base for corporates (large and small;
listed and unlisted) to redesign their governance strategies in the face of ever
changing business and regulatory environment. These Guidelines are a combination
of global practices; existing legal provisions (some of which may currently be
applicable only to listed companies); good to have principles; regulatory policy
suggestions and forward-looking concepts – aimed at enhancing the overall
governance standards of companies in India by encouraging voluntary adherence to
the Guidelines, in letter and spirit.

CII has urged companies to adhere to the Guidelines as below (in brief):
1. Integrity, ethics and governance – Companies should establish a culture of
responsibility with accountability. Training should be imparted to employees to
understand the culture.
2. Responsible governance and citizenship – Corporates to integrate environmental,
social and governance principles in business and avoid giving and receiving bribes,
corruption, market manipulation and anti-competitive practices. They should take
anti-money laundering steps and precautions.
3. Role of Board – The CII Guidelines cover multiple recommendations for company
Boards including balancing roles of supervision and stewardship, allowing for
dissenting views, set out Key Result Areas and balanced scorecard, etc.
4. Balancing interest of stakeholders – CII has advised disclosure of conflicts of
interest of Directors and management and taking into consideration the interest of
shareholders and other stakeholders in corporate activities.
5. Independent Directors and Women Directors – Corporates to include independent
directors with industry expertise and strive to improve gender diversity by inducting
more women directors.
6. Risk management – Risk Management Committee may be set up and assess various
risks including IT and financial risks.
8. Succession planning – Succession planning should be instituted for chairman,
managing director and other senior management.
 9. Role of audit committee – Audit committee briefing to the Board to be formalized
and spend sufficient time on integrity of financial statements, internal controls and so
on, apart from handling whistle blower complaints and internal investigations.
10. Improving audit quality – Managements and audit committees should work
closely together on understanding financial statements.
11. Disclosure and transparency related issues – The organisation should institute a
social media policy to deal with information responsibly including price sensitive
information.
12. Vigil mechanism – A whistle blowing mechanism may be formulated and periodic
updates provided to the Board in its implementation.
13. Stakeholder, vendor and customer governance – The organisation must extend the
concept and principles of governance to a larger number of stakeholders including
bankers, creditors, lenders, customers, and employees, among others. A gifts policy
should be devised.
14. Investor activism – Governance concerns of investors including institutional
investors to be addressed and external stakeholders to be able to raise questions. The
organisations should educate stakeholders to exercise their vote on all matters.
15. MSME and startups – MSME and startups should consider good governances as a
complement to their business growth and appoint non-executive directors with
appropriate skill sets.

SECURITIES AND EXCHANGE BOARD OF INDIA (SEBI)

The Securities and Exchange Board of India (SEBI) was first established in 1988 as a non-
statutory body for regulating the securities market. Before it came into existence, the
Controller of Capital Issues was the market's regulatory authority, and derived power from
the Capital Issues (Control) Act, 1947. SEBI became an autonomous body on 30 January
1992 and was accorded statutory powers with the passing of the SEBI Act, 1992 by
the Parliament of India.It has its headquarters at the business district of Bandra Kurla
Complex in Mumbai and has Northern, Eastern, Southern and Western Regional Offices
in New Delhi, Kolkata, Chennai, and Ahmedabad, respectively. Up until June 2023, it also
had 17 local offices spread all over India to promote investor education; however, 16 of them
were closed as part of a restructuring exercise.
SEBI is entrusted with regulating the functioning of the Indian capital market. The objectives
of SEBI as a regulatory body are to monitor and regulate India's securities market to
safeguard investors' interests.It aims to inculcate a safe investment environment by
implementing several rules and regulations and formulating investment-related
guidelines.Furthermore, one of the other main objectives was to avoid malpractices in the
Indian stock market.

FUNCTIONS OF SEBI

 To protect the interests of Indian investors in the securities market.

 To promote the development and hassle-free functioning of the securities market.
 To regulate the business operations of the securities market.
  To serve as a platform for portfolio managers, bankers, stockbrokers, investment
advisers, merchant bankers, registrars, share transfer agents and others.
 To regulate the tasks entrusted to depositors, credit rating agencies, custodians of
securities, foreign portfolio investors and other participants.
 To educate investors about securities markets and their intermediaries.
 To prohibit fraudulent and unfair trade practices within the securities market and
related to it.
 To monitor company takeovers and acquisition of shares.
 To keep the securities market efficient and up to date through proper research and
developmental tactics.

POWERS OF SEBI

Following are the key powers of SEBI-

 Quasi-judicial Powers--In cases of fraud and unethical practices in the securities

market, SEBI India can pass judgements.The said power of SEBI facilitates
transparency, accountability and fairness in the securities market.
 Quasi-executive Powers--SEBI can examine the Book of Accounts and other vital
documents to identify or gather evidence against violations. If it finds one violating
the regulations, the regulatory body can impose rules, pass judgements and take legal
actions against violators.
 Quasi-Legislative Power--To protect the interest of investors, the authoritative body
has been entrusted with the power to formulate pertinent rules and regulations. Such
rules tend to encompass listing obligations, insider trading regulations and essential
disclosure requirements.The body formulates rules and regulations to eliminate
malpractices in the securities market.


SEBI GUIDELINES FOR INVESTORS AND ITS PERFORMANCE

The Securities and Exchange Board of India (SEBI) plays a pivotal role in regulating and
safeguarding the interests of investors in the Indian securities market. SEBI's comprehensive
guidelines for investors encompass a range of aspects aimed at ensuring fair and transparent
market practices. These guidelines include provisions for investor protection, disclosure
requirements, corporate governance standards, and measures to prevent market manipulation
and fraud. Its performance in overseeing the securities market reflects a commitment to
maintaining market integrity, fostering investor confidence, and facilitating the efficient
functioning of capital markets. By enforcing stringent regulations, promoting investor
education, and swiftly addressing grievances, SEBI contributes significantly to the
development and sustenance of a robust and investor-friendly financial ecosystem in India.

1. Investor Protection:
- SEBI has implemented various measures to safeguard the interests of investors, including
the establishment of an Investor Grievance Redressal Mechanism. Investors can register
complaints and grievances through SEBI's SCORES (SEBI Complaints Redress System)
platform.
2. KYC (Know Your Customer) Norms:
- SEBI has laid down stringent KYC norms to ensure proper identification of investors.
These norms help prevent fraudulent activities and ensure the integrity of the securities
market.

3. Disclosure and Transparency:

- SEBI mandates companies to adhere to disclosure norms, ensuring that they provide
accurate and timely information to investors. This includes financial statements, annual
reports, and disclosures about material events.

4. Corporate Governance:
- SEBI has issued the SEBI (Listing Obligations and Disclosure Requirements)
Regulations, which include provisions related to corporate governance practices that listed
companies must follow. These regulations aim to enhance transparency and accountability in
corporate operations.

5. Insider Trading Regulations:

- SEBI has established regulations to prevent insider trading and protect investors from
unfair practices. These regulations prohibit insiders from trading based on unpublished price-
sensitive information.

6. Mutual Funds Regulations:

- SEBI regulates the functioning of mutual funds in India, establishing guidelines to protect
the interests of mutual fund investors. These guidelines cover areas such as fund
management, disclosure, and investor communication.

7. Market Conduct and Surveillance:

- SEBI actively monitors market conduct to detect and prevent market manipulation and
fraudulent activities. The organization employs surveillance systems and takes enforcement
actions against entities violating market regulations.

8. Investor Education and Awareness:

- SEBI focuses on investor education and awareness programs to empower investors with
the knowledge needed to make informed investment decisions. These initiatives aim to create
a more informed and responsible investor community.

9. Performance Evaluation:
- SEBI periodically reviews and evaluates its regulations and guidelines to ensure their
effectiveness. The organization may make amendments and enhancements based on market
dynamics and emerging challenges.

UNIT-5

What Is an Audit?

The term audit usually refers to the financial audit or review of financial statements. A
financial audit is an objective examination and evaluation of the financial statements of an
organization to make sure that the financial records are a fair and accurate representation of
the transactions they claim to represent. The audit can be conducted internally by employees
of the organization or externally by an outside certified public accountant (CPA) firm. An
audit is the review or inspection of a company or individual's accounts by an independent
body. Auditors may be hired internally by the company or work for an external third-party
firm. Almost all companies receive a yearly audit of their financial statements. This includes
the review of statements like the income statement, balance sheet, and cash flow statement.

OBJECTIVES OF AUDITING

The objectives of auditing can be categorized into primary and secondary objectives:

1. Primary Objective:

- The primary duty of an auditor, as per Section 227 of the Companies Act 1956 (or
relevant legislation), is to report to the owners (shareholders or stakeholders) whether the
company's financial statements, including the balance sheet and profit and loss account,
present a true and fair view of the company's financial position and performance for the
financial year. This involves ensuring accuracy, completeness, and reliability of financial
information.

2. Secondary Objective (or Incidental Objective):

- Detection and Prevention of Frauds: Auditors are responsible for identifying and
preventing material frauds, which involve intentional misrepresentation of financial
information with the intention to deceive. Fraudulent activities may include manipulation of
accounts, misappropriation of assets (such as cash or inventory), or other deceptive
practices.

- Detection and Prevention of Errors: Auditors also aim to detect and prevent unintentional
errors in financial reporting. Errors may arise due to ignorance of accounting principles
(principle errors) or negligence of accounting staff (clerical errors). It is crucial for auditors
to identify and rectify errors to ensure the accuracy and reliability of financial statements.

The incidental objective of detecting and preventing frauds and errors stems from the
primary objective of providing assurance on the accuracy and reliability of financial
statements. Auditors are guided by professional standards, such as the Statement on
Auditing Practices issued by relevant professional bodies, to remain vigilant about the
possibility of frauds or errors during the audit process. By fulfilling both primary and
secondary objectives, auditors contribute to maintaining the integrity and transparency of
financial reporting, thereby enhancing stakeholders' confidence in the company's financial
statements.

TYPES OF AUDIT

Audits can be categorized into various types based on their scope, purpose, and nature. Here
are some common types of audits:

1. Financial Audit:
 - Financial audits focus on examining an organization's financial records and statements to
ensure accuracy, completeness, and compliance with accounting standards, regulations, and
laws. The primary objective is to provide assurance on the fairness and reliability of financial
information.

2. Internal Audit:

- Internal audits are conducted by internal auditors who are employed by the organization
itself. They evaluate and assess the effectiveness of internal controls, risk management
processes, and governance structures. Internal audits help identify areas for improvement and
ensure compliance with internal policies and procedures.

3. External Audit:

- External audits are conducted by independent external auditors who are not employed by
the organization. They provide an unbiased assessment of the organization's financial
statements and report their findings to external stakeholders, such as shareholders, regulators,
or creditors. External audits are often required by law or regulations for publicly traded
companies.

4. Operational Audit:

- Operational audits focus on evaluating the efficiency and effectiveness of an

organization's operations, processes, and procedures. They aim to identify opportunities for
cost savings, process improvements, and risk mitigation. Operational audits cover areas such
as production, sales, marketing, human resources, and IT systems.

5. Compliance Audit:

- Compliance audits assess whether an organization is complying with relevant laws,

regulations, policies, and contractual agreements. They ensure that the organization is
meeting its legal and regulatory obligations and avoiding potential penalties or sanctions.
Compliance audits may cover areas such as taxation, environmental regulations, labor laws,
and industry standards.

6. Information Technology (IT) Audit:

- IT audits focus on evaluating the security, integrity, and reliability of an organization's IT

systems, infrastructure, and data. They assess controls related to data confidentiality,
availability, and integrity, as well as compliance with IT policies and regulations. IT audits
are essential for identifying and mitigating cyber risks and ensuring the reliability of IT
systems.

7. Forensic Audit:

- Forensic audits involve investigating financial transactions, records, and activities to

uncover fraud, embezzlement, or other financial misconduct. Forensic auditors use
specialized techniques and procedures to gather evidence, analyze financial data, and support
legal proceedings or dispute resolutions.
TYPES OF AUDITOR

Auditors can be categorized into various types based on their roles, responsibilities, and
affiliations. Here are some common types of auditors:

1. External Auditor:

- External auditors are independent professionals or firms hired by an organization to

conduct audits of their financial statements. They provide an unbiased assessment of the
organization's financial records and report their findings to external stakeholders, such as
shareholders, regulators, or creditors. External auditors ensure compliance with accounting
standards, laws, and regulations and provide assurance on the fairness and reliability of
financial information.

2. Internal Auditor:

- Internal auditors are employed by the organization itself and are responsible for evaluating
and improving the effectiveness of internal controls, risk management processes, and
governance structures. They conduct audits of various operational areas, including finance,
operations, compliance, and information technology. Internal auditors help identify areas for
improvement, assess risks, and ensure compliance with internal policies and procedures.

3. Government Auditor:

- Government auditors work for government agencies or departments and are responsible
for auditing public sector organizations, government programs, and government-funded
projects. They ensure accountability, transparency, and compliance with laws, regulations,
and budgetary requirements. Government auditors may also conduct performance audits to
evaluate the efficiency and effectiveness of government programs and services.

4. Forensic Auditor:

- Forensic auditors specialize in investigating financial fraud, embezzlement, or other

financial misconduct. They use forensic accounting techniques and procedures to gather
evidence, analyze financial data, and support legal proceedings or dispute resolutions.
Forensic auditors may work for accounting firms, consulting firms, or law enforcement
agencies and play a crucial role in uncovering financial crimes and resolving disputes.

5. Tax Auditor:

- Tax auditors are responsible for examining and verifying taxpayers' compliance with tax
laws and regulations. They review tax returns, financial records, and other relevant
documents to ensure accuracy, completeness, and compliance with tax obligations. Tax
auditors work for government tax agencies, such as the Internal Revenue Service (IRS) in the
United States, and help enforce tax laws and collect revenue for the government.

6. Information Technology (IT) Auditor:

- IT auditors specialize in assessing the security, integrity, and reliability of an

organization's IT systems, infrastructure, and data. They evaluate controls related to data
confidentiality, availability, and integrity, as well as compliance with IT policies and
regulations. IT auditors help identify and mitigate cyber risks, ensure the reliability of IT
systems, and protect sensitive information from unauthorized access or misuse.

ROLES OF AN AUDITOR

The role of an auditor is multifaceted and crucial in ensuring the integrity, accuracy, and
reliability of financial information within organizations. Here are the primary roles of an
auditor:

1. Independent Verification: Auditors provide an independent and objective assessment of an

organization's financial statements, ensuring they present a true and fair view of its financial
position and performance. Their independence is vital to maintain credibility and trust in the
audit process.

2. Compliance Assurance: Auditors ensure that the organization complies with relevant laws,
regulations, accounting standards, and internal policies. By verifying compliance, auditors
help mitigate legal and regulatory risks and ensure the organization's operations are
conducted ethically and lawfully.

3. Risk Assessment: Auditors assess and analyze the risks faced by the organization,
including financial, operational, and compliance risks. By identifying potential risks, auditors
help management implement effective risk management strategies to mitigate threats and
safeguard the organization's assets and interests.

4. Internal Control Evaluation:Auditors evaluate the effectiveness of internal controls

established by the organization to safeguard assets, prevent fraud, and ensure accuracy in
financial reporting. By assessing internal controls, auditors help improve operational
efficiency, enhance accountability, and minimize the risk of errors and irregularities.

5. Fraud Detection and Prevention: Auditors are responsible for detecting and preventing
fraud, including misappropriation of assets, fraudulent financial reporting, and other
fraudulent activities. Through rigorous examination and testing procedures, auditors identify
suspicious transactions, anomalies, and red flags indicative of fraudulent behavior.

6. Financial Reporting Oversight: Auditors review and validate the accuracy and
completeness of financial statements, including balance sheets, income statements, and cash
flow statements. Their scrutiny ensures that financial information is transparent, reliable, and
in accordance with accounting principles and standards.

7. Stakeholder Assurance:Auditors provide assurance to stakeholders, including shareholders,

investors, lenders, and regulators, regarding the reliability and credibility of the organization's
financial statements. By issuing audit reports, auditors enhance stakeholders' confidence and
trust in the organization's financial reporting processes and outcomes.

8. Consultative Support: Auditors often offer valuable insights, recommendations, and

advisory services to management based on their findings and observations during the audit
process. Their expertise helps improve internal controls, streamline operations, and enhance
financial performance.
DUTIES OF AN AUDITOR AND AUDITING FIRMS
1. Prepare an Audit Report
An audit report, in simple terms, is an appraisal of a business’s financial position. The
auditor is liable for preparing an audit report supported by the financial statements of the
corporate. The books of accounts so examined by him should be maintained per the relevant
laws. He must ensure that the financial statements comply with the relevant provisions of the
Companies Act 2013, relevant Accounting Standards, etc., In addition to the present, he must
ensure that the entity’s financial statements depict a real and fair view of the company’s
financial position. The fundamental duty of a company’s auditor is to make a report regarding
accounts and financial statements examined by him and present the same to the members of
the company. Such an opinion of the auditor enhances the credibility of the financial
statements.
2. Form a negative opinion, where necessary
The auditor’s report features a high degree of assurance and reliability because it contains the
auditor’s opinion on the financial statements. Where the auditor feels that the statements don't
depict a real and fair view of the financial position of the business, he's also entitled to make
an adverse opinion on the same. Additionally, when he finds that he's dissatisfied with the
knowledge provided and finds that he cannot express a correct opinion on the statements, he
will issue a disclaimer of opinion. A disclaimer of opinion indicates that thanks to the
shortage of data available, the financial status of the entity can't be determined.
3. Make inquiries
Each auditor must hunt access to books of accounts, vouchers, and other information and
explanation from the corporate. One of the auditor’s important duties is to form inquiries, as
and when he finds it necessary. A few of the inquiries include: -
 Whether the loans and advances made by the company based on security have
been properly secured. Furthermore, he must inquire whether the terms and
conditions on the idea of which such loans and advances are made aren't unfair.
 if the transactions of the company represented only by book entries have taken
place and are not unjust to the company in any way
 whether loans and advances made by the company are shown as deposits
if the private expenses (expenses not related to the company) are charged to the revenue
amount
 Whether cash has been received for the shares that were issued for cash.
However, if no cash has been received, the auditor shall verify that the
company’s position as stated within the books of accounts is correct, regular, and
not misleading.
4. Lend assistance in case of a branch audit
Where the auditor is the branch auditor and not the auditor of the corporate, he will lend
assistance within the completion of the branch audit. He shall prepare a report supporting the
accounts of the branch as examined by him and then send it across to the corporate auditor.
The company auditor will then incorporate this report into the most audit report of the
corporate. In addition to the present, for the asking, if he wishes to, he may provide excerpts
of his working papers to the corporate auditor to assist with the audit. The accounts of a
branch office are often audited by:
 a company’s auditor
 any individual appointed as the branch auditor as per the act
 company’s auditor or accountant or any competent person appointed as per the
laws of the foreign country in case of a foreign branch
Thus, a branch auditor must prepare a report with regards to the accounts of the branch
examined by him. He must make sure that proper books are maintained and hence give
reasons of qualification within the report. After preparing the report, the branch auditor must
submit this to the company’s auditor. Furthermore, the company’s auditor shall examine such
a report in a manner as he deems fit.
5. Comply with Auditing Standards
The Auditing Standards are issued by the Central Government in consultation with the
National Financial Reporting Authority. These standards aid the auditor in performing his
audit duties with relevant ease and accuracy. The auditor must suit the standards while
performing his duties as this increases his efficiency comparatively. The central government
establishes the auditing standards in consultation with the ICAI and National Financial
Reporting Authority (NFRA). These standards help the auditors to look at the books of
accounts effectively and with great accuracy. Thus, every auditor must suit the established
auditing standards while examining a company’s books of accounts
6. Reporting of fraud
Generally, within the course of performing his duties, the auditor may have certain suspicions
regarding fraud that’s happening within the corporate, certain situations where the financial
statements and the figures contained therein don’t quite add up. When he finds himself to be
in such situations, he will need to report the interest to the Central Government immediately
and within the manner prescribed by the Act. A company’s auditor while performing his
duties might encounter fraudulent situations. In such circumstances, the auditor may believe
that an offense like fraud has been committed against the corporate. And such fraud has been
committed by any of the officers or the company’s employees. Thus, in such situations, the
auditor must report such matters to the central government within 60 days of his knowledge.
7. Adhere to the Code of Ethics and Code of Professional Conduct
The auditor, being knowledgeable, must adhere to the Code of Ethics and therefore the Code
of Professional Conduct. Part of this involves confidentiality and ordinary care within the
performance of his duties. Another important requisite is professional scepticism. In simple
words, the auditor must have a questioning mind and must be aware of possible mishaps,
errors, and frauds within the financial statements. One of the essential principles that govern
an audit is confidentiality. Thus, the auditor should maintain the confidentiality of data
acquired while performing his duties as an auditor. He shouldn't disclose the client's
information without his prior permission. Furthermore, the auditor must be honest, sincere,
impartial, and free from biasness. Thus, he should exercise a high degree of integrity and
objectivity while examining the company’s books of accounts.
8. Assistance in an investigation
In the case where the company is under the scope of an investigation, it is the duty of
the auditor to provide assistance to the officers as required for the same. Hence, it is often
seen that the duties of the auditor are pretty diverse, it's an all-around and far-reaching
impact. The level of assurance provided by a group of audited financial statements is
relatively far higher as compared to regular unaudited financial statements. Investigation
refers to checking specific records of a business systematically and critically. Such an
examination is conducted when a fault on the part of the corporate already exists and
therefore the investigation intends to seek out a reason and person involved in such an
activity. Thus, it's the duty of an auditor to help the officers undertaking such an
investigation.

AUDIT COMMITTEE

An audit committee is a pivotal component of the corporate governance framework in public

companies. It is established to enhance public confidence in the reliability of the company's
internal control mechanisms, financial reporting, and disclosures. The primary
responsibilities of an audit committee revolve around disclosure and financial reporting.

The following classes of companies and every listed company are required to have an audit
committee of the board, in accordance with Section 177 of the Act and Rule 6 of the
Companies (Meetings of the Board and Powers) Rules, 2014:

1. All public companies having a minimum paid-up capital of ten crore rupees.
2. All public companies with turnover of at least one hundred crore rupees.
3. All public companies with aggregate outstanding loans, borrowings, debentures, or
deposits exceeding fifty crore rupees.
The paid-up share capital, turnover, outstanding loans, borrowings, debentures, or deposits as
appropriate as they existed on the date of the most recent audited financial statements shall be
taken into consideration for the purpose of this rule.

Composition:

According to Section 177(2) of the Companies Act, 2013, an audit committee must consist
of a minimum of three directors, with independent directors forming the majority. The
chairperson and the majority of the members must possess the ability to read and understand
financial statements.

Functions of the audit committee

According to Section 177(4) of the Companies Act, 2013, every audit committee must
operate in accordance with the written terms of reference set forth by the board, which must
include:-

1. The recommendation for the appointment, remuneration, and terms of appointment

of the company’s auditors.
 2. Examine and monitor the auditor’s independence and performance, as well as the
efficiency of the auditing process.
3. Examination of the audit report and the financial statements;
4. Approval or any subsequent modification of the company’s transactions with
related parties.
5. Examination of inter-corporate investments and loans.
6. Valuation of the company’s undertakings or assets, as necessary.
7. Valuation of the internal financial controls and risk management systems.
8. Monitoring the end use of funds raised through open offers and related matters.

Powers of the audit committee

1. The audit committee, before the financial statements are presented to the board,
has the power to ask the auditors for their opinions on internal control
mechanisms, the scope of the audit, including their observations, and a review of
the financial statements.
2. The audit committee may also speak with the management of the company,
external and internal auditors, and auditors regarding any pertinent issues.
3. The audit committee has the power to look into any matter related to the matters
listed in its terms of reference or those that the board has referred to, and the
committee for this purpose may seek professional advice from external sources.
4. To have complete access to the information contained in the records of the
company.

NARESH CHANDRA COMMITTEE

The Naresh Chandra committee is the third major corporate governance initiative
launched in India since the mid-1990s, after the first voluntary code of corporate
governance by the Confederation of Indian Industry (CII) in 1998, followed by Clause
49 of the Listing Agreement by SEBI in 2000. The committee presented its report on
Corporate Governance and Audit in November 2002. The primary objective of the
Naresh Chandra Committee was to scrutinize and recommend amendments, if
necessary, for the laws governing auditor-client relationships and the role of
independent directors.

Major Recommendations

1. Compulsory rotation of auditors- Audit partners and not less than 50% of
engagement team engaged in an audit of any listed company, or such companies
whose paid-up share capital and free reserves exceed Rs. 10 crores, or companies
whose annual turnover exceeds Rs 50 crores must be rotated every five years.
2. Appointment of auditors- For audit committees to have a larger role in audit
procedures, the audit committee shall have the first power to appoint an auditor.
 3. Auditor’s disclosure of contingent liabilities- Management shall specify each of the
material risks and liabilities of contingent nature in a clear description, followed by
auditor’s comments on the management view, which shall be specified in the
auditor’s report.
4. Auditor’s annual certification of independence- Before agreeing on the terms of
the audit engagement, the audit firm is required to submit a certificate of
independence to the Audit Committee or Board of Directors (BoD) of such company,
as the case may be.
5. CEO and CFO certification of audited accounts- Designated CEO (or MD) and
CFO of listed companies and public limited companies whose paid-up share capital
and free reserves exceed Rs. 10 crores or whose turnover exceeds Rs 50 crores,
should certify their companies’ annual accounts.
6. Setting up Independent QRB- Three independent Quality Review Board (QRB)
should be set, one for each ICAI, ICSI and ICWAI, to examine audit quality.
7. Percentage of independent directors- At least 50% of the BoD of any listed
company and unlisted public limited companies having paid-up share capital and free
reserves of Rs. 10 crores or more, or a turnover of Rs 50 crores or more, should be the
independent directors. The minimum board size of such companies should be 7, with
at least four independent directors. Audit committees of such companies should
consist of only independent directors.
8. Audit committee charter- The role and functions that an audit committee shall
discharge in a company should be laid out in an audit committee charter.
9. Exempting non-executive directors from certain liabilities- The non-executive and
independent directors shall be exempted from criminal and civil liabilities mentioned
in the Negotiable Instruments Act, Provident Fund Act, ESI Act, Factories Act,
Financial disputes Act, etc.
ROLE OF INTERNAL AUDITORS IN CORPORATE GOVERNANCE

1. Promoting Accountability and Transparency:*Corporate governance principles

emphasize the importance of accountability and transparency in organizational operations.
Internal auditors help achieve these objectives by conducting independent and objective
assessments of the organization's internal controls, risk management processes, and
financial reporting practices. By providing unbiased evaluations and recommendations,
internal auditors contribute to the transparency of operations and decision-making
processes.

2. Enhancing Risk Management: Effective corporate governance requires robust risk

management practices to identify, assess, and mitigate risks that could impact the
organization's objectives. Internal auditors play a key role in evaluating the effectiveness
of the organization's risk management framework, including the identification of emerging
risks, the adequacy of controls to mitigate risks, and the overall risk culture within the
organization. By providing insights into risk exposures and control weaknesses, internal
auditors help management and the board of directors make informed decisions to manage
risks effectively.

3. Monitoring Compliance: Corporate governance frameworks often include compliance

with laws, regulations, and internal policies as essential components. Internal auditors
assist in monitoring compliance by conducting regular audits to assess adherence to legal
and regulatory requirements, industry standards, and internal policies. Through compliance
audits, internal auditors identify areas of non-compliance and recommend corrective
actions to address deficiencies and mitigate compliance risks.

4. Safeguarding Assets and Preventing Fraud: Protecting the organization's assets and
preventing fraud are fundamental aspects of corporate governance. Internal auditors
perform audits to evaluate the effectiveness of controls designed to safeguard assets and
prevent fraudulent activities. They conduct forensic audits and investigations to detect and
investigate instances of fraud, misappropriation, or unethical behavior. By identifying
control weaknesses and instances of fraud, internal auditors help strengthen internal
controls and mitigate the risk of financial losses or reputational damage.

5. Providing Assurance to Stakeholders: Corporate governance aims to build trust and

confidence among stakeholders, including shareholders, investors, regulators, and the
public. Internal auditors provide independent assurance to stakeholders by evaluating the
effectiveness of governance processes, risk management practices, and internal controls.
Their audit findings and recommendations help stakeholders assess the reliability of
financial reporting, the integrity of operations, and the organization's overall governance
framework.