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Swot analysis of Indian economy

Strengths
Huge pool of labour force High percentage of cultivable land Diversified nature of the economy Huge English speaking population, availability of skilled manpower Stable economy, does not get affected by external changes Extensive higher education system, third largest reservoir of engineers High growth rate of economy Rapid growth of IT and BPO sector bringing valuable foreign exchange Abundance of natural resources

Weakness
Very high percentage of workforce involved in agriculture which contributes only 23% of GDP Arround a quarter of a population below the poverty line High unemployment rate Stark inequality in prevailing socio economic conditions Poor infrastructural facilities Low productivity Huge population leading to scarcity of resources Low level of mechanization Red tapism, bureaucracy Low literacy rates Unequal distribution of wealth Rural-urban divide, leading to inequality in living standards

Opportunities
Scope for entry of private firms in various sectors for business Inflow of Foreign Direct Investment is likely to increase in many sectors Huge foreign exchange earning prospect in IT and ITES sector Investment in R&D, engineering design Area of biotechnology Huge population of Indian Diaspora in foreign countries (NRIs) Area of Infrastructure Huge domestic market: Opportunity for MNCs for sales Huge matural gas deposits found in India, natural gas as a fuel has tremendous opportunities Vast forest area and diverse wildlife Huge agricultural resources, fishing, plantation crops, livestock

Threats
Global economy recession/slowdown High fiscal deficit Threat of government intervention in some states Volatility in crude oil prices across the world Growing Import bill Population explosion, rate of growth of pobulation still high Agriculture excessively dependent on monsoons

SWOT MATRIX of INDIA: Analysis of Indian SocialEconomic- Political- Technological conditions.


Dear Friends, There are few questions about our complex & unique system ofIndia. How we can change our system thinking? How we can make a synergetic triangle: Industry-GOIInstitution for co creation of knowledgeable resources for evolution of innovations. Root Causes Why Plans are not execute at the bottom?Constrains - Where are missing link? Strategy & tactics - What is the action plans? Methods-how these actions plans execute for achieving the end Goal. Kindly download one page colored framework of SWOT MATRIX

ofINDIA. URL: syenrgetic-trinangle-industry-government-instituion.docsyenrgetictrinangle-industry-government-instituion.doc

SW0T ANALYSIS:
INDUSTRY-GOVERNMENT -INSTITUTION

STRENGTHS

Highly educated , skilled ,young, capable & dynamic human resources English speaking & analytical students World class business-social-spiritual political leader, Professor, scientist, ManagerDoctor-Engineer-Civil servants etc

Very rich in Natural & Living resources Biodiversity & Traditional knowledge base Diversity vs. Ideas-Innovation-Integration Powerful spiritual strength (yoga-Ayurvada-Healing-therapy services) Geographical location (whole markets are shifting toward Asian nations) India Strategic position at various platforms Big democracy, Big market & free media Range of emerging professional champions IT & Software superpower WEAKNESSES:

Lack of trained & skill work force Small supply of specialize professional

Lack of spirits of entrepreneurship, patriotisms and leadership skill Lack of effective & execution framework Lack of Indian management models Lack of transparency-Trust-Responsibility Lack of learning habits & Team work spirit Fear of sharing knowledge & taking risk Thinking win-lose lose-win look-outside

Slow absorption of Innovation & change Lack of Indian management models Absence of greater technology impetus Unawareness: Quality-Standardization Lack of Emotional-Spiritual development Rush of getting high marks not Development Blindly respect anything taught by elders
THREATS (Internal & external):

A feeling of unstable government Self centered political leadership Slow & Dysfunctional judiciary and corrupt law enforcers Regulation, protection and restriction Mechanistic -stable-Layered-complex system Corruption, Ignorance & Complacency High competitive & marketing forces To patent Indian intellectual property by outsider (unawareness about own research) Fast change Internet-information technology& new Inventions-Technology-Innovations Diversity vs. Imbalance- clashes Regional-Religion-caste-culture conflicts Migration of all branch to software job Job seeking mind sets, not job creator Unnecessary social pressure on students Excessive rich & powerful mindsets

OPPORTUNITIES

Big potential market in education Sector & emerging new market Segment in services (create it)

General Agreement of trade on Services Research & Development capability Generate intellectual property Resource Building capacity Competition- cost Quality service Collaboration : win-win thinking Hybrid solutionbalancing & blending Tourism, health sector, food processing Rural economy development & social transformation ( PURA model ) Need modernization of infrastructure , Library and laboratory Internet institute network & e-Library Councilors and student advisors

Corporate governance
From Wikipedia, the free encyclopedia

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Not to be confused with corporate statism, a corporate approach to government rather than the government of a corporation Corporate governance is a number of processes, customs, policies, laws, and institutions which have impact on the way a company is controlled.[1][2] An important theme of corporate governance is the nature and extent of accountability of people in the business, and mechanisms that try to decrease the principalagent problem.[3] Corporate governance also includes the relationships among the many stakeholders involved and the goals for which the corporation is governed.[4][5] In contemporary business corporations, the main external stakeholder groups are shareholders, debtholders, trade creditors, suppliers, customers and communities affected by the corporation's activities. Internal stakeholders are the board of directors, executives, and other employees. It guarantees that an enterprise is directed and controlled in a responsible, professional, and transparent manner with the purpose of safeguarding its long-term success. It is intended to increase the confidence of shareholders and capital-market investors. [6] A related but separate thread of discussions focuses on the impact of a corporate governance system on economic efficiency, with a strong emphasis on shareholders' welfare; this aspect is particularly present in contemporary public debates and developments in regulatory policy (see regulation and policy regulation).[7] There has been renewed interest in the corporate governance practices of modern corporations since 2001, particularly due to the high-profile collapses of a number of large corporations, most of which involved accounting fraud. Corporate scandals of various forms have maintained public and political interest in the regulation of corporate governance. In the U.S., these include Enron Corporation andMCI Inc. (formerly WorldCom). Their demise is associated with the U.S. federal government passing the Sarbanes-Oxley Act in 2002, intending to restore public confidence in corporate governance. Comparable failures in Australia (HIH, One.Tel) are associated with the eventual passage of the CLERP 9 reforms. Similar corporate failures in other countries stimulated increased regulatory interest (e.g., Parmalat in Italy).
Contents
[hide]

1 Principles of corporate governance 2 Corporate governance models around the world

2.1 Continental Europe 2.2 India 2.3 The United States and the UK

3 Regulation

3.1 Legal environment - General 3.2 Codes and guidelines

4 History - United States 5 Parties to corporate governance

5.1 Ownership structures and elements

5.1.1 Family ownership

6 Mechanisms and controls

6.1 Internal corporate governance controls

6.2 External corporate governance controls

6.3 Financial reporting and the independent auditor

7 Systemic problems of corporate governance 8 Executive remuneration/compensation 9 See also 10 References 11 Further reading 12 External links

[edit]Principles

of corporate governance

Contemporary discussions of corporate governance tend to refer to principles raised in three documents released since 1990: The Cadbury Report (UK, 1992), the Principals of Corporate Governance (OECD, 1998 and 2004), the Sarbanes-Oxley Act of 2002 (US, 2002). The Cadbury and OECD reports present general principals around which businesses are expected to operate to assure proper governance. The Sarbanes-Oxley Act, informally referred to as Sarbox or Sox, is an attempt by

the federal government in the United States to legislate several of the principles recommended in the Cadbury and OECD reports.

Rights and equitable treatment of shareholders:[8][9][10] Organizations should respect the rights of shareholders and help shareholders to exercise those rights. They can help shareholders exercise their rights by openly and effectively communicating information and by encouraging shareholders to participate in general meetings.

Interests of other stakeholders:[11] Organizations should recognize that they have legal, contractual, social, and market driven obligations to non-shareholder stakeholders, including employees, investors, creditors, suppliers, local communities, customers, and policy makers.

Role and responsibilities of the board:[12][13] The board needs sufficient relevant skills and understanding to review and challenge management performance. It also needs adequate size and appropriate levels of independence and commitment

Integrity and ethical behavior:[14][15] Integrity should be a fundamental requirement in choosing corporate officers and board members. Organizations should develop a code of conduct for their directors and executives that promotes ethical and responsible decision making.

Disclosure and transparency:[16][17] Organizations should clarify and make publicly known the roles and responsibilities of board and management to provide stakeholders with a level of accountability. They should also implement procedures to independently verify and safeguard the integrity of the company's financial reporting. Disclosure of material matters concerning the organization should be timely and balanced to ensure that all investors have access to clear, factual information.

[edit]Corporate

governance models around the world

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

Europe

Some continental European countries, including Germany and the Netherlands, require a two-tiered Board of Directors as a means of improving corporate governance.[18] In the two-tiered board, the Executive Board, made up of company executives, generally runs day-to-day operations while the supervisory board, made up entirely of non-executive directors who represent shareholders and employees, hires and fires the members of the executive board, determines their compensation, and reviews major business decisions.[19] See also Aktiengesellschaft.

[edit]India

India's SEBI Committee on Corporate Governance defines corporate governance as the "acceptance by management of the inalienable rights of shareholders as the true owners of the corporation and of their own role as trustees on behalf of the shareholders. It is about commitment to values, about ethical business conduct and about making a distinction between personal & corporate funds in the management of a company."[20] It has been suggested that the Indian approach is drawn from the Gandhian principle of trusteeship and the Directive Principles of the Indian Constitution, but this conceptualization of corporate objectives is also prevalent in Anglo-American and most other jurisdictions.
[edit]The

United States and the UK

The so-called "Anglo-American model" (also known as "the unitary system"[21]) emphasizes a singletiered Board of Directors composed of a mixture of executives from the company and non-executive directors, all of whom are elected by shareholders.[22] Non-executive directors are expected to outnumber executive directors and hold key posts, including audit and compensation committees. The United States and the United Kingdom differ in one critical respect with regard to corporate governance: In the United Kingdom, the CEO generally does not also serve as Chairman of the Board, whereas in the US having the dual role is the norm, despite major misgivings regarding the impact on corporate governance.[23] In the United States, corporations are directly governed by state laws, while the exchange (offering and trading) of securities in corporations (including shares) is governed by federal legislation. Many U.S. states have adopted the Model Business Corporation Act, but the dominant state law for publiclytraded corporations is Delaware, which continues to be the place of incorporation for the majority of publicly-traded corporations.[24] Individual rules for corporations are based upon the corporate charter and, less authoritatively, the corporate bylaws.[24] Shareholders cannot initiate changes in the corporate charter although they can initiate changes to the corporate bylaws.[24]
[edit]Regulation

Companies law

Company Business

Business entities

Sole proprietorship Partnership (General Limited LLP)

Corporation Cooperative

United States

S corporation C corporation LLC LLLP Series LLC Delaware corporation Nevada corporation Massachusetts business trust Delaware statutory trust Benefit corporation

UK / Ireland / Commonwealth

Limited company (by shares by guarantee Public Proprietary)

Unlimited company Community interest company

European Union / EEA

SE SCE SPE EEIG

Elsewhere

AB AG ANS A/S AS GmbH K.K. N.V. Oy S.A. more

Doctrines

Corporate governance Limited liability Ultra vires Business judgment rule Internal affairs doctrine De facto corporation and corporation by estoppel

Piercing the corporate veil Rochdale Principles

Related areas

Contract Civil procedure

vde

[edit]Legal

environment - General

Corporations are created as legal persons by the laws and regulations of a particular jurisdiction. These may vary in many respects between countries, but a corporation's legal person status is fundamental to all jurisdictions and is conferred by statute. This allows the entity to hold property in its own right without reference to any particular real person. It also results in the perpetual existence that characterizes the modern corporation. The statutory granting of corporate existence may arise from general purpose legislation (which is the general case) or from a statute to create a specific corporation, which was the only method prior to the 19th century. In addition to the statutory laws of the relevant jurisdiction, corporations are subject to common law in some countries, and various laws and regulations affecting business practices. In most jurisdictions, corporations also have a constitution that provides individual rules that govern the corporation and authorize or constrain its decision-makers. This constitution is identified by a variety of terms; in English-speaking jurisdictions, it is usually known as the Corporate Charter or the [Memorandum and] Articles of Association. The capacity of shareholders to modify the constitution of their corporation can vary substantially.
[edit]Codes

and guidelines

Corporate governance principles and codes have been developed in different countries and issued from stock exchanges, corporations, institutional investors, or associations (institutes) of directors and managers with the support of governments and international organizations. As a rule, compliance with these governance recommendations is not mandated by law, although the codes linked to stock

exchange listing requirements may have a coercive effect. For example, companies quoted on the London, Toronto and Australian Stock Exchanges formally need not follow the recommendations of their respective codes. However, they must disclose whether they follow the recommendations in those documents and, where not, they should provide explanations concerning divergent practices. Such disclosure requirements exert a significant pressure on listed companies for compliance. One of the most influential guidelines has been the 1999 OECD Principles of Corporate Governance. This was revised in 2004. The OECD guidelines are often referenced by countries developing local codes or guidelines. Building on the work of the OECD, other international organizations, private sector associations and more than 20 national corporate governance codes, the United Nations Intergovernmental Working Group of Experts on International Standards of Accounting and Reporting (ISAR) has produced their Guidance on Good Practices in Corporate Governance Disclosure. This internationally agreed[25] benchmark consists of more than fifty distinct disclosure items across five broad categories:[26] Auditing Board and management structure and process Corporate responsibility and compliance Financial transparency and information disclosure Ownership structure and exercise of control rights

The investor-led organisation International Corporate Governance Network (ICGN) was set up by individuals centered around the ten largest pension funds in the world 1995. The aim is to promote global corporate governance standards. The network is led by investors that manage 18 trillion dollars and members are located in fifty different countries. ICGN has developed a suite of global guidelines ranging from shareholder rights to business ethics. The World Business Council for Sustainable Development (WBCSD) has done work on corporate governance, particularly on accountability and reporting, and in 2004 released Issue Management Tool: Strategic challenges for business in the use of corporate responsibility codes, standards, and frameworks. This document offers general information and a perspective from a business association/think-tank on a few key codes, standards and frameworks relevant to the sustainability agenda. In 2009, the International Finance Corporation and the UN Global Compact released a report, Corporate Governance - the Foundation for Corporate Citizenship and Sustainable Business, linking the environmental, social and governance responsibilities of a company to its financial performance and long-term sustainability. Most codes are largely voluntary. An issue raised in the U.S. since the 2005 Disney decision[27] is the degree to which companies manage their governance responsibilities; in other words, do they merely try to supersede the legal threshold, or should they create governance guidelines that ascend to the level of best practice. For example, the guidelines issued by associations of directors, corporate

managers and individual companies tend to be wholly voluntary but such documents may have a wider effect by prompting other companies to adopt similar practices.
[edit]History

- United States

In 19th century United States, state corporation laws enhanced the rights of corporate boards to govern without unanimous consent of shareholders in exchange for statutory benefits like appraisal rights, to make corporate governance more efficient. Since that time, and because most large publicly traded corporations in the US are incorporated under corporate administration friendly Delaware law, and because the US's wealth has been increasingly securitized into various corporate entities and institutions, the rights of individual owners and shareholders have become increasingly derivative and dissipated. In the 20th century in the immediate aftermath of the Wall Street Crash of 1929 legal scholars such as Adolf Augustus Berle, Edwin Dodd, and Gardiner C. Means pondered on the changing role of the modern corporation in society. Berle and Means' monograph "The Modern Corporation and Private Property" (1932, Macmillan) continues to have a profound influence on the conception of corporate governance in scholarly debates today. From the Chicago school of economics, Ronald Coase's "The Nature of the Firm" (1937) introduced the notion of transaction costs into the understanding of why firms are founded and how they continue to behave. Fifty years later, Eugene Fama and Michael Jensen's "The Separation of Ownership and Control" (1983, Journal of Law and Economics) firmly established agency theory as a way of understanding corporate governance: the firm is seen as a series of contracts. Agency theory's dominance was highlighted in a 1989 article by Kathleen Eisenhardt ("Agency theory: an assessment and review", Academy of Management Review). US expansion after World War II through the emergence of multinational corporations saw the establishment of the managerial class. Accordingly, the following Harvard Business School management professors published influential monographs studying their prominence: Myles Mace (entrepreneurship), Alfred D. Chandler, Jr. (business history), Jay Lorsch (organizational behavior) and Elizabeth MacIver (organizational behavior). According to Lorsch and MacIver "many large corporations have dominant control over business affairs without sufficient accountability or monitoring by their board of directors." Over the past three decades, corporate directors duties in the U.S. have expanded beyond their traditional legal responsibility of duty of loyalty to the corporation and its shareholders.[28] In the first half of the 1990s, the issue of corporate governance in the U.S. received considerable press attention due to the wave of CEO dismissals (e.g.: IBM, Kodak, Honeywell) by their boards. TheCalifornia Public Employees' Retirement System (CalPERS) led a wave of institutional shareholder activism (something only very rarely seen before), as a way of ensuring that corporate value would not be destroyed by the now traditionally cozy relationships between the CEO and the board of directors (e.g., by the unrestrained issuance of stock options, not infrequently back dated).

In 1997, the East Asian Financial Crisis severely affected the economies of Thailand, Indonesia, South Korea, Malaysia, and the Philippines through the exit of foreign capital after property assets collapsed. The lack of corporate governance mechanisms in these countries highlighted the weaknesses of the institutions in their economies. In the early 2000s, the massive bankruptcies (and criminal malfeasance) of Enron and Worldcom, as well as lesser corporate scandals, such as Adelphia Communications, AOL, Arthur Andersen,Global Crossing, Tyco, led to increased political interest in corporate governance. This is reflected in the passage of the Sarbanes-Oxley Act of 2002.
[edit]Parties

to corporate governance

The most influential parties involved in corporate governance include government agencies and authorities, stock exchanges, management (including the board of directors and its chair, the Chief Executive Officer or the equivalent, other executives and line management, shareholders and auditors). Other influential stakeholders may include lenders, suppliers, employees, creditors, customers and the community at large. The agency view of the corporation posits that the shareholder forgoes decision rights (control) and entrusts the manager to act in the shareholders' best (joint) interests. Partly as a result of this separation between the two investors and managers, corporate governance mechanisms include a system of controls intended to help align managers' incentives with those of shareholders. Agency concerns (risk) are necessarily lower for a controlling shareholder. A board of directors is expected to play a key role in corporate governance. The board has the responsibility of endorsing the organization's strategy, developing directional policy, appointing, supervising and remunerating senior executives, and ensuring accountability of the organization to its investors and authorities. All parties to corporate governance have an interest, whether direct or indirect, in the financial performance of the corporation. Directors, workers and management receive salaries, benefits and reputation, while investors expect to receive financial returns. For lenders, it is specified interest payments, while returns to equity investors arise from dividend distributions or capital gains on their stock. Customers are concerned with the certainty of the provision of goods and services of an appropriate quality; suppliers are concerned with compensation for their goods or services, and possible continued trading relationships. These parties provide value to the corporation in the form of financial, physical, human and other forms of capital. Many parties may also be concerned with corporate social performance. A key factor in a party's decision to participate in or engage with a corporation is their confidence that the corporation will deliver the party's expected outcomes. When categories of parties (stakeholders) do not have sufficient confidence that a corporation is being controlled and directed in a manner consistent with their desired outcomes, they are less likely to engage with the corporation. When this

becomes an endemic system feature, the loss of confidence and participation in markets may affect many other stakeholders, and increases the likelihood of political action. There is substantial interest in how external systems and institutions, including markets, influence corporate governance.
[edit]Ownership

structures and elements

Ownership structure refers to the types and composition of shareholders in a corporation. Researchers often "measure" ownership structures by using some observable measures of ownership concentration or the extent of inside ownership. Some features or types of ownership structure involving corporate groups include pyramids, cross-shareholdings, rings, and webs. German "concerns" (Konzern) are legally recognized corporate groups with complex structures. Japanese keiretsu () and South Korean chaebol (which tend to be family-controlled) are corporate groups which consist of complex interlocking business relationships and shareholdings. Cross-shareholding are an essential feature of keiretsu and chaebol groups [4]. Corporate engagement with shareholders and other stakeholders can differ substantially across different ownership structures.
[edit]Family ownership

In many jurisdictions, family interests dominate ownership structures. It is sometimes suggested that corporations controlled by family interests are subject to superior oversight compared to corporations "controlled" by institutional investors (or with such diverse share ownership that they are controlled by management). A recent study by Credit Suisse found that companies in which "founding families retain a stake of more than 10% of the company's capital enjoyed a superior performance over their respective sectorial peers." Since 1996, this superior performance amounts to 8% per year.[29] Forget the celebrity CEO. "Look beyond Six Sigma and the latest technology fad. A study by Business Week[30] claims that "BW identified five key ingredients that contribute to superior performance. Not all are qualities are unique to enterprises with retained family interests."

The significance of institutional investors varies substantially across countries. In developed AngloAmerican countries (Australia, Canada, New Zealand, U.K., U.S.), institutional investors dominate the market for stocks in larger corporations. While the majority of the shares in the Japanese market are held by financial companies and industrial corporations, these are not institutional investors if their holdings are largely with-on group. The largest pools of invested money (such as the mutual fund 'Vanguard 500', or the largest investment management firm for corporations, State Street Corp.) are designed to maximize the benefits of diversified investment by investing in a very large number of different corporations with sufficient liquidity. The idea is this strategy will largely eliminate individual firm financial or other risk and. A consequence of this approach is that these investors have relatively little interest in the governance of a particular corporation. It is often assumed that, if institutional investors pressing for

will likely be costly because of "golden handshakes") or the effort required, they will simply sell out their interest.
[edit]Mechanisms

and controls

Corporate governance mechanisms and controls are designed to reduce the inefficiencies that arise from moral hazard and adverse selection. For example, to monitor managers' behavior, an independent third party (the external auditor) attests the accuracy of information provided by management to investors. An ideal control system should regulate both motivation and ability.
[edit]Internal

corporate governance controls

Internal corporate governance controls monitor activities and then take corrective action to accomplish organisational goals. Examples include:

Monitoring by the board of directors: The board of directors, with its legal authority to hire, fire and compensate top management, safeguards invested capital. Regular board meetings allow potential problems to be identified, discussed and avoided. Whilst non-executive directors are thought to be more independent, they may not always result in more effective corporate governance and may not increase performance.[31] Different board structures are optimal for different firms. Moreover, the ability of the board to monitor the firm's executives is a function of its access to information. Executive directors possess superior knowledge of the decision-making process and therefore evaluate top management on the basis of the quality of its decisions that lead to financial performance outcomes, ex ante. It could be argued, therefore, that executive directors look beyond the financial criteria.

Internal control procedures and internal auditors: Internal control procedures are policies implemented by an entity's board of directors, audit committee, management, and other personnel to provide reasonable assurance of the entity achieving its objectives related to reliable financial reporting, operating efficiency, and compliance with laws and regulations. Internal auditors are personnel within an organization who test the design and implementation of the entity's internal control procedures and the reliability of its financial reporting

Balance of power: The simplest balance of power is very common; require that the President be a different person from the Treasurer. This application of separation of power is further developed in companies where separate divisions check and balance each other's actions. One group may propose company-wide administrative changes, another group review and can veto the changes, and a third group check that the interests of people (customers, shareholders, employees) outside the three groups are being met.

Remuneration: Performance-based remuneration is designed to relate some proportion of salary to individual performance. It may be in the form of cash or non-cash payments such as shares andshare options, superannuation or other benefits. Such incentive schemes, however,

are reactive in the sense that they provide no mechanism for preventing mistakes or opportunistic behavior, and can elicit myopic behavior. In publicly-traded U.S. corporations, boards of directors are largely chosen by the President/CEO and the President/CEO often takes the Chair of the Board position for his/herself (which makes it much more difficult for the institutional owners to "fire" him/her). The practice of the CEO also being the Chair of the Board is known as "duality". While this practice is common in the U.S., it is relatively rare elsewhere. It is illegal in the U.K.
[edit]External

corporate governance controls

External corporate governance controls encompass the controls external stakeholders exercise over the organization. Examples include: competition debt covenants demand for and assessment of performance information (especially financial statements) government regulations managerial labour market media pressure takeovers

[edit]Financial

reporting and the independent auditor

The board of directors has primary responsibility for the corporation's external financial reporting functions. The Chief Executive Officer and Chief Financial Officer are crucial participants and boards usually have a high degree of reliance on them for the integrity and supply of accounting information. They oversee the internal accounting systems, and are dependent on the corporation'saccountantsand internal auditors. Current accounting rules under International Accounting Standards and U.S. GAAP allow managers some choice in determining the methods of measurement and criteria for recognition of various financial reporting elements. The potential exercise of this choice to improve apparent performance (see creative accounting and earnings management) increases the information risk for users. Financial reporting fraud, including non-disclosure and deliberate falsification of values also contributes to users' information risk. To reduce these risk and to enhance the perceived integrity of financial reports, corporation financial reports must be audited by an independent external auditor who issues a report that accompanies the financial statements (see financial audit). It is One area of concern is whether the auditing firm acts as both the independent auditor and management consultant to the firm they are auditing. This may result in a conflict of interest which places the integrity of financial reports in doubt due to client pressure to appease management. The

power of the corporate client to initiate and terminate management consulting services and, more fundamentally, to select and dismiss accounting firms contradicts the concept of an independent auditor. Changes enacted in the United States in the form of the Sarbanes-Oxley Act (following numerous corporate scandals, culminating with the Enron scandal) prohibit accounting firms from providing both auditing and management consulting services. Similar provisions are in place under clause 49 of Standard Listing Agreement in India.
[edit]Systemic

problems of corporate governance

Demand for information: In order to influence the directors, the shareholders must combine with others to form a voting group which can pose a real threat of carrying resolutions or appointing directors at a general meeting.

Monitoring costs: A barrier to shareholders using good information is the cost of processing it, especially to a small shareholder. The traditional answer to this problem is the efficient market hypothesis (in finance, the efficient market hypothesis (EMH) asserts that financial markets are efficient), which suggests that the small shareholder will free ride on the judgments of larger professional investors.

Supply of accounting information: Financial accounts form a crucial link in enabling providers of finance to monitor directors. Imperfections in the financial reporting process will cause imperfections in the effectiveness of corporate governance. This should, ideally, be corrected by the working of the external auditing process.

[edit]Executive

remuneration/compensation

Research on the relationship between firm performance and executive compensation does not identify consistent and significant relationships between executives' remuneration and firm performance. Not all firms experience the same levels of agency conflict, and external and internal monitoring devices may be more effective for some than for others. Some researchers have found that the largest CEO performance incentives came from ownership of the firm's shares, while other researchers found that the relationship between share ownership and firm performance was dependent on the level of ownership. The results suggest that increases in ownership above 20% cause management to become more entrenched, and less interested in the welfare of their shareholders. Some argue that firm performance is positively associated with share option plans and that these plans direct managers' energies and extend their decision horizons toward the long-term, rather than the short-term, performance of the company. However, that point of view came under substantial criticism circa in the wake of various security scandals including mutual fund timing episodes and, in particular, the backdating of option grants as documented by University of Iowa academic Erik Lie and reported by James Blander and Charles Forelle of the Wall Street Journal.

Even before the negative influence on public opinion caused by the 2006 backdating scandal, use of options faced various criticisms. A particularly forceful and long running argument concerned the interaction of executive options with corporate stock repurchase programs. Numerous authorities (including U.S. Federal Reserve Board economist Weisbenner) determined options may be employed in concert with stock buybacks in a manner contrary to shareholder interests. These authors argued that, in part, corporate stock buybacks for U.S. Standard & Poors 500 companies surged to a $500 billion annual rate in late 2006 because of the impact of options. A compendium of academic works on the option/buyback issue is included in the study Scandal by author M. Gumport issued in 2006. A combination of accounting changes and governance issues led options to become a less popular means of remuneration as 2006 progressed, and various alternative implementations of buybacks surfaced to challenge the dominance of "open market" cash buybacks as the preferred means of implementing a share repurchase plan

DEFINITION

corporate governance
Corporate governance is a term that refers broadly to the rules, processes, or E-mail This A Print AAA AA Facebook LinkedIn Share Twitter Reprints laws by which businesses are operated, regulated, and controlled. The term can refer to internal factors defined by the officers, stockholders or constitution of a corporation, as well as to external forces such as consumer groups, clients, and government regulations. Learn more about corporate governance at SeachCompliance.com. A well-defined and enforced corporate governance
LEARN MORE

Financial Security Resources Compliance best practices

provides a structure that, at least in theory, works for the benefit of everyone concerned by ensuring that the enterprise adheres to accepted ethical standards and best practices as well as to formal laws. To that end, organizations have been formed at the regional, national, and global levels. In recent years, corporate governance has received increased attention because of high-profile scandals involving abuse of corporate power and, in some cases, alleged criminal activity by corporate officers. An integral part of an effective corporate governance regime includes provisions for civil or criminal prosecution of individuals who conduct unethical or illegal acts in the name of the enterprise.

11. Committees on flow of Credit to SSI/SME sector 11.1Report of the Committee to Examine the Adequacy of Institutional Credit to SSI Sector and Related Aspects (Nayak Committee) The Committee was constituted by Reserve Bank of India in December 1991 under the Chairmanship of Shri P. R. Nayak, the then Deputy Governor to examine the issues confronting SSIs in the matter of obtaining finance. The Committee submitted its report in 1992. All the major recommendations of the Committee have been accepted and the banks have been inter-alia advised to: i) give preference to village industries, tiny industries and other small scale units in that order, while meeting the credit requirements of the small scale sector; ii) grant working capital credit limits to SSI units computed on the basis of minimum 20% of their estimated annual turnover whose credit limit in individual cases is upto Rs.2 crore [ since raised to Rs.5 crore ]; iii) prepare annual credit budget on the `bottom-up basis to ensure that the legitimate requirements of SSI sector are met in full; iv) extend Single Window Scheme of SIDBI to all districts to meet the financial requirements (both working capital and term loan) of SSIs; v) ensure that there should not be any delay in sanctioning and disbursal of credit. In case of rejection/curtailment of credit limit of the loan proposal, a reference to higher authorities should be made; vi) not to insist on compulsory deposit as a `quid pro-quo for sanctioning the credit; vii) open specialised SSI bank branches or convert those branches which

have a fairly large number of SSI borrowal accounts, into specialised SSI branches; viii) identify sick SSI units and take urgent action to put them on nursing programmes; ix) standardise loan application forms for SSI borrowers; and x) impart training to staff working at specialised branches to bring about attitudinal change in them.

Understanding Foreign Exchange Reserves


WEDNESDAY, 01 JULY 2009 00:00 MANU GUPTA STRATEGY - LEGAL & POLICY

Top of Form User Rating: / 16

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Poor Best Bottom of Form How does a country's foreign exchange reserves affect businesses, with a special focus on India and China Foreign exchange reserves in popular usage commonly includes foreign exchange and gold, Special Drawing Rights and International Monetary Fund reserve positions held by central banks and monetary authorities.

They are something like family ornamentsnot in regular use, but in case of an emergency (like a currency crisis, for example), they are an extremely good fallback to have. Again, like with ornaments, some countries like China, India, Japan and Korea keep on accumulating lots of it, while others like the US and UK maintain a steady state, while yet others like Germany have actually seen a decline in forex reserve levels. How are forex reserves built up? Building up of forex reserves is actually a complicated picture, but can be simplified as follows. Foreign exchange comes into a country in the form of investments, payments for exports, loans and bilateral aid among other things. It goes out as payments for imports, payment of interest, repayment of loans and repatriation of investments and profits. The difference stays on to build up the reserves.

Who maintains forex reserves? The monetary authority and central bank of each country, like the Reserve Bank of India (RBI), the Federal Reserve of the US and the Peoples Bank of China, maintain the forex reserves of the country. Then there are other big investment funds that some countries like Abu Dhabi and Singapore maintain. Many argue that these should be included in the forex reserve count. India has also been speaking about setting up such an investment fund. Why forex reserves? These are maintained primarily to protect a countrys domestic currency from losing its value or, in other words, to avoid a currency crisis. Just like other goods, a countrys currency can lose its value when demand for it falls or when there is excess supply of it. Such a situation may arise when investors do not want to stay invested in that country and want to transfer their funds out of that country or from the currency of that country. For example, suppose due to any reason a foreign investor wants to sell out his equity holdings in Indian companies and want to transfer these funds to the USA. In this case, he or she would convert the Indian rupees received by selling the equities into US dollars. If a large number of investors do this simultaneously

while the reverse (fresh investments by foreign investors into Indian equities) is not happening, it will lead to a fall in the value of the rupee. Which is to say, it would lead to the depreciation of the Indian rupee against the dollar and there is a net outflow of dollars. Sometimes this depreciation (or need for devaluation) could be large in magnitude. Such instability in exchange rates and loss of confidence in the currency have an effect on the economy. So to avoid such sudden changes and to maintain confidence in the currency, reserves are maintained. Forex reserves are also maintained to achieve some level of exchange rates. These levels are determined based on the policies and objectives of the country. Generally, developing economies, in order to increase exports and decrease imports, try to keep their exchange rates low (so that a given sum of foreign currency can buy more goods from them) and the value of their currency low and in order to do so build up reserves. Forex reserves are generally deployed in low-risk liquid assets having sovereign guarantee. Reserves are often advanced as loans to other countries, other central banks, Bank for International Settlements and highly rated foreign commercial banks. Foreign exchange reserves are also used to manage liquidity in the system.

Developing nations Emerging and developing economies are racing to attract foreign flows as they are limited. It is done primarily on the belief that this will lead to increase in investments and their ability to import, which would overcome domestic supply constraints in their economy and will insure them against crisis. China has the largest forex reserves in the world. India, Korea and Brazil are also building up huge forex reserves. Indias foreign exchange reserves have increased from a mere $19,553 million in March 1994 to $309,723 million in March 2008, and then fell to $253,000 million in March 2009. One of the reasons for such a trend is Indias fundamentals, which made its corporate sector highly profitable and new investment opportunities kept coming up. This attracted foreign capital into the country. The general build-up of forex reserves is also due to the large inflow of foreign investors. These investors come into developing or emerging economies as a result of the increase in availability of finance and credit for investments. The best opportunities were often found in these economies characterized by high interest rate regimes and large profitable/returns. For example, fundamentals and returns in the Indian economy is still far better than many others. The recent dip happened because of the selling of US dollars by the RBI to contain depreciation or fall in value of the Indian rupee. Primarily, the RBI has to do so because of the increasing (negative) gap in the balance of trade. That is, to balance the

increase in import costs (mainly because of burgeoning price of petroleum, which peeked in July 2008) given dismal growth in exports. Selling of equities by foreign institutional investors (FII) also contributed to it. Also, there were outflows because foreign investors who invested in India were required to clear their liabilities or payments and losses abroad made during the ongoing slowdown. In order to clear their losses, funds were arranged from other economies. Capital flight and hence reduction in reserves happen not only due to the needs or policies of the host, but also take into account the supply side, the interest of the foreign investors and their position. Another reason for fall in reserves is the appreciation of the US dollar vis-a-vis other currencies. This can be explained with the help of the following example. Suppose India has reserves worth $100, half in $ and half in euro. Lets assume for simplicity that $1 = 1. Now suppose there is appreciation of the dollar vis-a-vis the euro and new rate is $1 = 2. Now the reserves that India has will have reduced and would be worth only $75. Developed countries Developed countries in comparison tend to have lower forex reserves. The reason for not accumulating large reserves is that their currencies are often reserve currencies themselves and, therefore, are highly liquid, so there does not exist that high a precautionary motive for them. Also these economies have export sectors that are not driven by exchange rates. So they do not have to manage their exchange rates in order to support their domestic industry. However, Japan is an exception to this trend. Compared to the other developed nations, Japans dependence on exports is very high. The reason why it accumulates forex and has the second highest reserves in the world after China is to prevent the yen from appreciating, thereby incentivizing its export sector. Also, Japans history of having lost two World Wars and having to live with the limitations (particularly on militarization) imposed by its eventual victors may have an important role in this Japanese mentality. Cost of reserves There are costs associated with maintaining these reserves. Investments made by foreign funds in a country tend to earn much higher returns than what a central bank gets by investing its reserves. For example, an FII coming in earns much higher rates of return by investing in equities, but the government earns only a nominal (or very low) rate of return by investing in debt instruments of other central banks. Forex reserves are kept in highly liquid assets in order to fulfill needs of foreign exchange when it arises. The government cannot invest these reserves in projects or physical infrastructure. So there is an opportunity cost of holding the reserves. The reserves also impact government policy negatively in the sense that it has to consider the effects of policy changes on its reserves. For example, in October 2007, Securities and Exchange Board of India (SEBI) came up with a new ruling regarding participatory notes and FIIs, but were forced to make necessary amendments because of the threat of FIIs pulling out. There is also another significant management activity, which is referred to in economic terms as sterilization. Suppose an investor wants to invest in India and brings in US dollars. However, in order to buy assets in India, they need to make payments in rupees. So they exchange their dollars with RBI for rupees, which they then put into the Indian economy and purchase assets. In this whole transaction, the quantity of Indian currency (money supply) has increased in the Indian economy. To negate this increase in money supply, the RBI can issue debt or bonds to mop up that amount of currency from the system. This method of reducing the increased money supply in market is called sterilization. However, generally interest rates are relatively higher on such bonds and debt relative to what the RBI earns by investing reserves. Also, partial or incomplete sterilization could lead to inflation. Impact of reserves on businesses As far as businesses are concerned, in the short run they definitely benefit from larger forex reserves as they can access more liquidity if there is ineffective, partial or no sterilization. Increased liquidity also creates demand in the economy. Due to build-up of such reserves, volatility in exchange rates is often checked, which provides a conducive environment to businesses. Stable exchange rates allow exporters and importers to engage in futures contracts. Also, the expectation of the currency and the economy being crisis-proof raises confidence among investors. However, this can have repercussions as well. Often businesses are badly hurt when there is a bursting of bubbles in asset markets. Inflation is also not good for businesses in the medium to long run. The government may not also be able to provide adequate support to businesses due to net loss of earnings. There may be cuts in subsidies, investments and other expenditure, which may have an effect too.

China versus India The large reserve position of China could effect Indian businesses in two ways. It may put pressure on the Chinese yuan to appreciate. This may allow an opportunity for the Indian export sector to expand as Indian businesses can tap into the share of Chinese export businesses. Also, in such a situation India could increase its exports to China. However, at the same time Indian importers who are importing from China may be on the losing side. On the other side, such large reserves held by China make it more investment friendly and the Indian economy may not see that much foreign direct investment. Indian businesses in that case may not enjoy linkages that might have come through those investments.