Corporate Governance in India

02.01.2014

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1. 2.

Introduction to India's socio-economic landscape History of CG in India

Titelmasterformat durch Klicken bearbeiten 3. Present Corporate Governance In India

4. Key Issues in Indian Corporate Governance

02.01.2014 5. Case Study: The Satyam Scandal

6. 7. Future Corporate Governance in India Recommendations

Introduction to India's socio-economic landscape

Independent from UK in 1947

Population: 1.2 Billion (2011 census)

Economic system: Market economy with a high proportion of state-owned companies

GDP(PPP) per capita: 3,627 $ (126th of 180)

(2011 estimate) Total GDP(PPP): 4.5 Trillion $ (3rd largest in the world; 2011 estimate) Unemployment rate: 9.8 % (2011 estimate)

Introduction to India's socio-economic landscape

Political system: Federal Republic (28 states and 7 union territories) Human Development Index: 0.55 (Medium) (2011) Largest concentration of people living

below poverty line of 1.25 $ per day (42% in 2005)

Corruption Index: 36 (94th of 176)(2012)

Introduction to India's socio-economic landscape

Indian Market Overview

History of CG in India

1956 1992

Companies Act: Limited governance and disclosure standards Formation of SEBI (Securities and Exchange Board of India)

1998

CII (Confederation of Indian Industry), Indias largest industry and business association comes up with the first voluntary code of corporate governance
SEBI sets up a commitee for good corporate governance under Kumar Mangalam Birla SEBI ratifies the commitees key recommendation and integrates them in clause 49 of the Listing Agreement Establishment of the Narash Chandra commitee to examine various governance issues

1999 2000 2002

2006
2008 2011

Revision of clause 49
Introduction of the Companies bill Reintroduction of revised Companies bill after Satyam scandal

Current CG System

In general India is following the Anglo-saxon model

Legal system Investor protection Ownership concentration Typical owners Board system Managers on board Chair = CEO Employees on Board Bank influence Performance pay

Common law Medium High Families and business groups One tier Yes Yes No Medium to high Medium

Present Corporate Governance In India

Present Corporate Governance In India

Inclusion of Clause 49 SEBI (Securities and Exchange Board of India) added Clause 49 to the Listing Agreement in 2000 on the recomendations of the Kumara Mangalam Birla Committee: Minimum number of Independent Directors on their boards Institution of Audit, Shareholders Grievance Committees etc. Annual reports to include Managements Discussion and Analysis (MD&A) section and Corporate Governance report Fees paid to non-executive directors to be disclosed Limited the number of committees on which a director could serve

Present Corporate Governance In India

Clause 49 revised in 2006 to bring it in line with Sarbanes-Oxley Act by Narayana Murthy Committee Major changes and clarifications in the definition of Independent Directors Responsibilities of audit committees strengthened Financial disclosures to be more comprehensive and include those relating to party transactions and proceeds from public/rights/preferential issues Boards to adopt formal codes of conduct CEO/CFO to certify financial statements Disclosures to shareholders to include more comprehensive information

Present Corporate Governance In India

Why Clause 49?

Clause 49, which has recently been revised by the SEBI, of the listing agreement between listed companies and the stock exchanges is all set to enhance the corporate governance (CG) requirements, primarily through increasing the responsibilities of the Board, consolidating the role of the Audit Committee and making management more accountable

These changes are aimed at moving Indian companies rapidly up the evolutionary path towards business processes and management oversight techniques.

Present Corporate Governance In India

Clause 49 - Provisions

Board of Directors:
Should be an optimum combination of Executive and Non-executive directors. In case of Non-executive Chairman, at least one third of the board should

compromise of Directors.
In case of Executive Chairman, at least half of the board compromise of

Independent Directors.

Present Corporate Governance In India

Clause 49 - Provisions

Audit Committee:
An Audit Committee shall have minimum 3 members, all being Non-executive

Directors, mejority of them being Independent.

The Committee shall meet at least thrice a year. The qourum shall be either two members or one third of the members whichever is higher.
The Committee has power to- investigate any activity within its terms of reference - Seek information from any employee - Obtain outside leagal or professonal advice - Secure attendence of outsiders with relevent expertise, if necessary

Present Corporate Governance In India

Clause 49- Provisions

Remunerations of Directors: The following disclosures about Directors Remunerations should be made in the annual report.

- All elements of remunerations package (Salary, benefits, bonuses, stock

option pention etc)

- Details of fixed component and performance linked incentives

- Service contracts, notice periods etc. - Stock options details

Present Corporate Governance In India

Clause 49- Provisions

Board Procedure:
The board meeting should be held at least four times in a year, with a

maximum time gap four months between any two meetings.

The directors should not be a member in more than ten committees or act as a chairman of more than five committees across all companies in which he is a Director.

Present Corporate Governance In India

Clause 49- Provisions

Management:
A management discussion and analysis report should form part of annual

report.

The discussion includes details on following matters.

- Industry structure and developments - Opportunities and threats - Segment wise or product wise performance

- Internal control systems and their adequacy

- Risks and concerns - Outlook

Present Corporate Governance In India

Clause 49- Provisions

Shareholders:
All details of appointment of a new director or reappointment of a director

should be shared with the shareholders.

Quarterly results should be put up on companys website or should be sent to

the Stock Exchange to put up on its own website.

Redressal of shareholder and investor compains should be undertakenby a

Board Committee under the chairmanship of a Non-executive Director. The board of the company shall delegate the power of share transfer to an officer/ committee or to the register and share transfer agents.

Present Corporate Governance In India

Clause 49- Provisions

Report on Corporate Governance:

There should be a seperate section on Corporate governance in annual reports

of the company.
Non compliance of any mandatory requirments shouldbe specifically

highlighted.

Compliance: Certificate from auditors of the company.

Present Corporate Governance In India

Industrial Policy and Foreign Investment:

Industrial policy introduced in July 1991 achieved dramatic overhaul of regulations governing foreign investment Automatic government approval for equity investments of up to 51 percent in 35 industries Requests to increase equity stakes beyond 51 percent still require approval from the Government's Foreign Investment Promotion Board All sectors of the Indian economy are now open to foreign investors except those with security concerns such as defense, railways, and atomic energy

Present Corporate Governance In India

Key Issues in Indian Corporate Governance

Managing Dominant Shareholders

In India the agency gap is actually between the majority shareholders and other stakeholders The will of the majority shareholder prevails This applies across the spectum of Indian companies with dominant shareholders

PSU

Public sector units Government as the dominant shareholder

MNCs

Multinational Companies Parent company as the dominant shareholder

Family Business

Private Sector Family owned companies and Business groups

Key Issues in Indian Corporate Governance

Promoters

In addition to the corporate governance issues arising from the dominant family holding in the Indian business companies, there exists an additional complexity on account of `promoter control` in Indian companies.
A promoter has been defined as: ...a person or persons who are in overall control of the company or persons, who are instrumental in the formulation of a plan or program pursuant to which securities are offered to the public.

Promoters may be in control of the company`s resources even though they might not be the dominant shareholders and because of their position, they have superior information about the company affairs.
In an organization, promoters and non promoters constitute two distinct groups which may have different interests which leads to organizational and managerial issues.

The Satyam Scandal

Satyam was established in 1987. 4th largest IT company in India. 9% market share 53,000 employees Revenue $2.1billion First Indian company to be listed in three International Exchanges :NYSE, DOW and EURONEXT and boasted 185 Fortune 500 companies on its client list Satyam share price was Rs. 139.15

The Satyam Scandal

The Game Plan

Overstated assets on Satyam's balance sheet by $1.47 billion Satyam overstated income nearly every quarter over the course of several years.

The results announced on October 17, 2009 overstated quarterly revenues by 75 percent and profits by 97 percent.
The global head of internal audit also forged board resolutions and illegally obtained loans for the company. 13000 fake salary accounts The company's global head of internal audit created fake customer identities and generated fake invoices against their names to inflate revenue

The Satyam Scandal

The Background

Maytas Infra Ltd., Company owned by Two sons of Raju were investing in the real estate business and recently their real estate business was not in good shape.
Raju started using the manpower and other resources for the Satyam Company for the welfare of his sons real estate business. Four main shareholders of Satyam Company were horrified by the changing behavior of Raju. With Sat yam's management focused elsewhere, business suffered. Clients complained about lack of attention, and many professional managers began to leave.

1 Crore = 10 Mio. Rs.

The Satyam Scandal

Confession and Aftermaths

The CEO was convinced that the gap in the balance sheets reached an unmanageable heights and could not be filled in future by any means. Satyam Computer crashed by Rs 139.15 or 77.69 per cent to close at Rs 39.95, after the Chairman`s confession Bombay stock exchange fell 700 points The declining Sensex recorded the biggest single-day loss in the past two months, after Satyam Computers Services, the country's fourth-largest software developer, plunged around 80 per cent.

The Satyam Scandal

Impacts on IT industry

It is surely going to be more difficult for other Indian IT service players to win business. Undoubtedly, this is going to hurt the prospects of foreign money flowing into India. Global perception about Indian companies. Indian stock market slipped over 7% on 7th Jan., 09. Jobs of 40,000 people at risk, which also caused political unrest

Satyam Scandal
How did it happen ?

Ambitious growth drive

Audit Failure Deceptive reporting practices: Lack of transparency ESOP`s issued to those who prepared fake bills Excessive interest in maintaining stock prices High risk deals that went sour Above all, greed and lack of ethical values

Satyam Scandal
Corporate Lessons to be learnt

Rotation of auditing firms Joint auditors to audit a company beyond a certain size Strengthening of quality review Internal audit of financials by an external firm

Composition of Boards and quality and qualification of independent directors

Criteria for remuneration to key personnel Education on ethical values

CG Reforms After Satyam Scandal

Company Bill 2011

The new companies bill 2011 proposes fundamental changes in the way companies are run in India. Lesson has been learnt from Satyam Scam and the gaps in the governance systems that led to this historical scam are thought to be filled.

1. Governance Reform Independent Directors 2. Disclosure of Pledged Securities 3. Increased Financial Accounting Disclosures 4. IFRS (Adoption of International Standards) 5. Strict civil and criminal laws

Future Corporate Governance in India

Major Challenges in the Future

The major challenges to corporate governance reforms in india are: Power of the dominant shareholder

Lack of incentives for companies to implement corporate governance reforms

Underdeveloped external monitoring systems Shortage of real independent directors Weak regulatory oversight including multiple regulators

Future Corporate Governance in India

Importance of CG to India

Cost Factor
India is the one of the most cost-efficient locations for many mncs from Europe and U.S. More than of fortune 500 companies have outsourced to india

McKinsey Study:
The production cost in India will be below 50% cost of Germany at least for the next 5 years

Future Corporate Governance in India

Mergers & Acquisitions

The process of mergers and takeovers in India involves: Approval of board of directors Information to the stock exchange Application in the high court Shareholders and creditors meeting Sanction by the high court

Filing the court order

Transfer of assets and liabilities Payment by cash and securities

Future Corporate Governance in India

Indians shopping abroad: International Acquisitions

Company Tata Steel Vodafone India Hindalco ONGC Tata Motors Suzlon Energy

Acquired company Corus Steel Hutchison Essar Novellis Imperial Energy Jaguar Land Rover RE Power

Dealing amount $ 12.2 Billion $ 10 $ 6 Billion (67% stake) Billion

$ 2.8 Billion $ 2.3 Billion $ 1.7 Billion

Recommendations

Good corporate governance may not be the engine of economic growth, but it is essential for the proper functioning of the engine Securing foreign and national investments is crucial for the rapid development of the Indian economy, however, this is only possible when a sound Corporate Governance Code and Conduct is adopted The achievement of this goal depends strongly on a solid legal system binding the companies Monitoring of companies actions has to be improved to avoid information problems This can only be done when the auditors professionalism is verified Total transparency has to be secured at all levels

References

http://transparency.org/cpi2012/results

accessed 10.01.13 accessed 04.01.13 accessed accessed 11.01.13

http://www.iica.in/images/Evolution_of_Corporate_Governance_in_India.pdf http://www.indexmundi.com/india/unemployment_rate.html

http://www.complianceonline.com/ecommerce/control/articleDetail?contentId=12294&catId=10004 10.1.13

http://books.google.de/books?hl=de&lr=&id=3aEiS4lu2hkC&oi=fnd&pg=PA249&dq=corporate+governance+in+in dia&ots=o31jirwId7&sig=UZt0rgC6NHdGQpnN7Is_RPDyN7A#v=onepage&q=corporate%20governance%20in%2 0india&f=false accessed 07.01.13 http://newsdawn.blogspot.de/2012/01/corporate-governance-in-india-aims-and.html http://www.econstor.eu/bitstream/10419/41393/1/582127289.pdf http://en.wikipedia.org/wiki/India 10.01.13 10.01.13 10.01.13 10.01.13 10.01.13 accessed 07.01.13 http://www.scu.edu/ethics/practicing/focusareas/business/conference/2007/presentations/ItiBose.pdf 09.01.13

http://en.wikipedia.org/wiki/List_of_countries_by_GDP_(PPP)_per_capita http://en.wikipedia.org/wiki/Economy_of_India http://www.geographia.com/india/indiamap.gif http://www.mckinsey.com