CORPORATE GOVERNANCE-

EMERGING ISSURS
Recent corporate frauds and scams
 Enron fraud--2001
 Worldcom fraud--2002
 Sathyam Computers LTD--2008
 Tata Finance LTD---2001
 AIG Insurance—2007
 Sahara Scam 2011
 Baring Bank scam
 Lehman Brothers
 DLF
Background of frauds/scams
 Last 30 years we have witness:
 Increase economic integration between and with in nations
 Increase trade integration
 Increased cultural and social integration
 Extensive use of modern technology in production and
distribution
 Huge disparity in the income and wealth distribution-7% of
population holding 80% wealth and 52% holding 2% wealth
 High competition
 Shift from controlled economic system to market driven
system
 Increased importance received to capitalism as an economic
philosophy
Cont..
 Free movement of factors of production between
nations- especially capital
 Change in the relation between capital and
productivity
 Increased dependence of stock market for capital
 Popularity received for corporate model of
economic development
 Increased expectation of investors
 Stake holders pressure on corporate management
 Reduced returns from conventional business
models
 Growth of capital market
 Increased Insider trading
East India Company Fraud
 Fraudulent Financial reporting and corrupt business
practices having its existence since the era of Public
corporations.
 It was the first multinational corporation in the world
and the first company to issue stock.
 In the late 1700s Edmund Burke and Robert Clive,
“the founders of the empire” and Warren Hastings,
India’s Governor-General, brought up on
impeachment charges for corruption issues. Though
the trials failed to convict anybody.
 The Company was subsequently wound up under the
East India Company Stock Redemption Act, 1874.
Mudhra Scam-First Scam of
Independent India
 First successful trial of a financial scandal in
Independent India.
 Haridas Mudhra, a industrialist & stock speculator
sold fictitious shares to LIC and thereby defrauding
LIC by Rs. 125 crores.
 Mr. Jawahar Lal Nehru, set up a one-man
commission headed by Justice Chagla to investigate.
 Justice Chagla concluded that Haridas was guilty
and was sentenced to imprisonment for 22 years.
 T.T. Krishnamachari, the then Finance Minister,
resigned from his position.
ENRON FAILURE
 Established in 1985
 Biggest US energy company based at Huston.
 Founded by Kenneth Lay
 Market capitalization of $ 60 Billions
 70 times earnings.
 6 times book value
 20000 employees
 Worlds biggest electrical and natural gas

company.
 Revenue of $111Billions
Cont….
 America's Most innovative company- 6
consecutive years by Fortune magazine

 Stock price was $90.75 dollars in Aug. 2000

fall to less than $ 1 by Nov. 2001.

 Aruther Anderson one of the top five audit

firms in the world was the auditor.

 Dec.2, 2002 Enron filed bankrupts petition

Course of events
 Jeffrey Skilling joined the company several
years later as CFO.
 Using the accounting loopholes, special

purpose entities and poor financial reporting,

he was able to hide from stakeholders billions
of dollars of debt from failed deals and
projects.
 CFO misled the BOD, audit committee and

even Aurther Anderson was pressurized to

ignore the issues.
Causes for the fraud
 Enron’s complex financial reporting practices
which were confusing to stake holders.
 Complex business models used by Enron.
 Unethical accounting practices followed like

issues relating to –
 A. Revenue recognition
 B. Market to market accounting

 Special purpose entities created.

Cont…
 Enron Senior Management used complex and
murky accounting schemes
 to reduce Enron’s tax payments;
 to inflate Enron’s income and profits;
 to inflate Enron’s stock price and credit rating;
 to hide losses in off-balance-sheet subsidiaries;
 to engineer off-balance-sheet schemes to funnel
money to themselves, friends, and family;
 to fraudulently misrepresent Enron’s financial
condition in public reports
Results
 Company wound up
 Many directors were sent to jail.
 Auditor Arthur Anderson was found guilty

and license cancelled.

 New corporate governance law was

introduced—SARBANES –OXLEY ACT.

WORLDCOM FAILURE
 World com was started as a long distance
telecommunication company in Mississippi.
 Bernad Ebbers was the CEO.
 Second biggest telecom. Company in the world.
 $ 4.4 billion market capitalization.
 $ 39 billion revenue in 2001
 42nd in the Fortune 500 companies.
 Acquired MCI, UUNet, Compuservice during last
10 years.
 Failed in July 2002.
Business reasons contributed to the
failure
 Strong growth strategy through aggressive
acquisitions.
 Raised money continuously by high cost

debt.
 Over supply of telecommunication capacity

resulting in low capacity utilization, high cost

and low revenue.
Accounting frauds comitted
 Classifying the revenue expenditure payable
to other networks as capital expenditure.
 Overstating the earning of 2001 and Q1 of

2002 by more than $ 3.8 billion.

 Manipulating the reserves by $ 3 billion.
 Around $ 9 billion false or unsupported

accounting entries were made to magnify the

results.
Results
 Stock price fall from $ 64.5 per shares to $
1.0 per share in 2002
 CEO was sent to jail for 25 years.
 Company was liquidated
Tata finance fraud
 Profile of Tata finance:
 Started as a Private Limited company in 1984
with an equity capital of Rs. 2.5 crores
 Converted into Public limited company in 1985
 An NBFC from the house of TATA’s mainly to
provide vehicle finance
 Present market capitalization Rs. 1062 crores
 Turnover Rs. 18000 crores
 8000 employees.
 Company had a borrowing of Rs.2700 crores of
which Rs.875 crores where from millions of
small depositors.
The Scam
 Received a letter from one Mr. Sankar sharma in
April 2001 to all directors of the company and
Tata sons stating that –
 -The prospectus issued for right issue of
shares contain false information.
 -Big fraud has been committed in the company.
 Mr. Dilip Pendse was the CEO at that time
 The news spread quickly in the finance capital
of India, Mumbay and virtually shocked Tata
house.
Details of the scam
 Tata finance has started several subsidiaries
for investment including Nishkalp.
 Tata finance lend money to these subsidiaries

which were invested in aggressive stocks with

little standing.
How the situation handled by Tata
sons
 Tata sons BOD took two decisions-
 Immediately repay the deposits of all small
clients.
 Punish the guilty
 An amount of Rs.615 crores has been provided
by Tata sons for this purpose and arranged a
Helicopter at Bombay house for delivering cash
to different branches
 Branch managers were asked to keep the office
open 24 hours for the convenience of depositors
Cont…
 New internal control system introduced
 Duel reporting system introduced– Finance
director to CEO of the concerned company and
Finance Director of Tata sons
 -Chief internal auditor to report CEO and
Chairman of Audit committee.
 In house insider trading code introduced
 Requested for CBI investigation
 MD Mr.Dilip Pendse was charge sheeted
 All BOD of Tata Finance resigned on moral
ground.
Cont…

 Company was saved from the crisis

 Identity of Mr. Shankar Sharma is still

unknown
Sathyam Computers Limited
 On 24th June 1987, Satyam Computer Services Ltd (Popularly
known as Satyam) was incorporated by the two brothers, B
Rama Raju and B Ramalinga Raju, as a private limited
company with just 20 employees for providing software
development and consultancy services to large corporations
 During the year 1996, company promoted four subsidiaries

including Satyam Renaissance Consulting Ltd, Satyam

Enterprise Solutions Pvt. Ltd. Satyam Infoway Pvt. Ltd. and
Satyam Computer Services Ltd

 In 1997 was selected by the Switzerland-based World

Economic Forum and World Link Magazine as one of India's
most remarkable and rapidly growing entrepreneurial
companies
 In 2001, Satyam became world’s first ISO 9001
company .
 In 2003, Satyam started providing IT services to

World Bank and signed up a long term 2 contract

with it.
 IN 2005, Satyam was ranked 3rd in Corporate

Governance Survey by Global Institutional Investors.

 World famous PWC was the auditor.
 53000 employees

 4th largest IT company in India.

 9% market share
 Revenue $2.1billion
The problem
 Problems in Satyam begin when (on December
the 16th, 2008) its chairman Mr. Ramalinga
Raju, in a surprise move announced a $1.6
billion bid for two Maytas companies i.e.
Maytas Infrastructure Ltd and Maytas
Properties Ltd saying he wanted to deploy the
cash available for the benefit of investors.
 The two companies have been promoted and
controlled by Raju’s family
 Investors opposed this move
 Share prices plunges by 55%.
 World Bank announced that Satyam has been
barred from business with World Bank for eight
years for providing Bank staff with “improper
benefits” and charged with data theft and bribing
the staff.
 Share prices fell another 14% to the lowest level
in over 4 years.
 The lone independent director since 1991, a US
 academician Mangalam Srinivasan, announced
resignation
 B. Ramalinga Raju announced confession that over Rs. 7800
crores financial fraud committed.
 He resigned as chairman of Satyam.
 He revealed in his letter that his attempt to buy Maytas
companies was his last attempt to “fill fictitious assets with
real ones”.
 He admitted in his letter, “It was like riding a tiger
 without knowing how to get off without being eaten”.
 Raju brothers were arrested by Andhra Pradesh police
 Central government took control of the tainted company.
 The Raju brothers were booked for criminal breach of trust,
cheating, criminal conspiracy and forgery under the Indian
Penal Code
 Satyam’s auditors Price Waterhouse finally
admitted that its audit report was wrong as it
was based on wrong financial statements
provided by the Satyam’s management.
 Satyam’s CFO Srinivas Vadlamani confessed

of having inflated the number of employees

by 10,000 and drawn Rs 20 crores per month
from fictitious salary accounts
 PWC auditor arrested
 Central Government reconstituted Satyam's
board that included three-members, HDFC
Chairman Deepak Parekh, Ex Nasscom
chairman and IT expert Kiran Karnik and
former SEBI member C Achuthan.
 The Central Government added three more
directors to the reconstituted Board i.e., CII
chief mentor Tarun Das, former president of
the Institute for Chartered Accountants (ICAI)
TN Manoharan and LIC's S Balakrishnan.
 Sathyam was taken over by Tech Mahendra at
Rs. 53 per share
In short what went wrong to Sathyam
 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
Cont…
 Falsification of Accounts.
 Over stated Assets of Rs. 490 crores.
 Fake cash balances over Rs. 5,000 crores in the
Balance Sheet.
 Interest component of Rs. 376 crores which never
flowed into the company’s coffers.
 Understated Liabilities of Rs. 1,230 crores.
 People lost a staggering Rs 100 billion in Satyam
in market capitalisation as investors reacted
sharply and dumped shares, pushing down the
scrip by 78 per cent
How Sathyam was saved
 SWIFT GOVERNMENT ACTION SAVED SATYAM ULTIMATELY
 Ministry asked its two wings ICAI and ICSI to inquire into the
role of auditors and company secretaries for swift regulatory
action
 An emergency inter-ministerial meeting conducted next day
 The very next day, the Ministry got the CLB order
superseding the Satyam board with government appointed
 directors.
 SEBI relaxed the take-over code per se on an application by
the Satyam board to meet the emergency like Satyam where
government suspended the board of a company
 Appointed new directors who act for the public good without
any payment or compensation.
 Sathyam was taken over by Tech Mahendra at Rs. 53 per
share
AIG fraud ( American International
Group)
 PROFILE
 AIG, American multinational insurance corporation with more
than 88 million customers in 130 countries.
 64,000 people in 90 countries.
 Three core businesses: AIG Property Casualty, AIG Life and
Retirement and United Guaranty Corporation(UGC).
 AIG Property Casualty provides insurance products for
commercial, institutional and individual customers.
 AIG Life and Retirement provides life insurance and retirement
services in the United States. And
 UGC focus on mortgage guaranty insurance and mortgage
insurance.
 AIG also focuses on global capital markets operations, direct
investment and retained interests.
AIG was ranked 40th largest company in the
2014 Fortune 500 list.
 According to the 2014 Forbes Global 2000

list, AIG is the 42nd-largest public company

in the world.
 As of June 1, 2014, it had a market

capitalization of $78.48 billion, as per Google

Finance
 Martin J. Sullivan became CEO of the company.
 AIG then took on tens of billions of dollars of risk
associated with mortgages.
 It insured tens of billions of dollars of derivatives

against default, but did not purchase reinsurance

to hedge that risk.
 Secondly, it used collateral on deposit to buy

mortgage-backed securities.
 When losses hit the mortgage market in 2007-

2008, AIG had to pay out insurance claims and also

replace the losses in its collateral accounts.
 AIG purchased the remaining 39% that it did
not own of online auto insurance specialist
21st Century Insurance in 2007 for
$749 million.
 With the failure of the parent company and

the continuing recession in late 2008, AIG

rebranded its insurance unit to 21st Century
Insurance.
 On June 11, 2008, three stockholders, collectively owning 4% of
the outstanding stock of AIG, delivered a letter to the Board of
Directors of AIG seeking to oust CEO Martin Sullivan and make
certain other management and Board of Directors changes.
 On June 15, 2008, after disclosure of financial losses and

subsequent to a falling stock price, Sullivan resigned and was

replaced by Robert B. Willumstad, Chairman of the AIG Board of
Directors since 2006. Willumstad was forced by the US
government to step down and was replaced by Edward M. Liddy
on September 17, 2008.[41] AIG's board of directors named Robert
Benmosche CEO on August 3, 2009 to replace Mr. Liddy, who
earlier in the year announced his retirement.[42]
 Liquidity crisis and government bailout to the extend of $ 85

billion
 On March 17, 2009, AIG announced that they
were paying $165 million in executive
bonuses,
 President Barack Obama, who voted for the

AIG bailout as a Senator] responded to the

planned payments by saying "[I]t's hard to
understand how derivative traders at AIG
warranted any bonuses, much less $165
million in extra pay. How do they justify this
outrage to the taxpayers who are keeping the
company afloat?”
 Finally the Us government bailout AIG.
Lehman Brothers scam
 Alabama based company ESTD. 1844
 Founded by Henry Lehman and his brother as

a small general store

 4th largest US investment company by 1990
 25000 employees
 Survived many crisis such as 1. Rail road

bankruptcy of 1800 2, Great depression of

1930 3, Two world wars 4 American Express
case-1994 5, Russian debt case of 1998
 Market capitalization of $60 billion in 2007.
Cont..
 Acquired 5 mortgage lender companies BNC mortgage
and Aurora Loans
 Housing boom of 2004
 Revenue increased by 56%
 Net income of $4.2 billion of $19.3 billion revenue
 Aggressive lending with out insisting proper asset

backing
 Sept 2008, filed bankruptcy petition with $639 assets

and $ 919 billion liabilities.

 Led to Us subprime crisis led to $ 10 trillion in market

capitalization
 Poor equity to debt ration
 Hedged funds failure
Sahara scam
 On January 4, 2010, Roshan Lal, a resident of Indore, sent a
note, written in Hindi, to the National Housing Bank,
requesting it to look into housing bonds issued by two
companies of the Lucknow-headquartered Sahara group,
Sahara India Real Estate Corporation and Sahara Housing
Investment Corporation.
 Being a chartered accountant, Lal wrote in the small note,
he found that the bonds, bought by a large number of
investors, were not issued according to the rules.
 The National Housing Bank did not have the mechanism to
investigate the allegation, so it forwarded the letter to SEBI.
 That note set in motion a chain of events that resulted in
the Supreme Court ordering the two companies on August
31 to return the money they had raised through the bonds
— Rs 24,029 crore — to the 29.6 million investors, along
with interest (15 per cent per annum).
 Sahara India Real Estate Corporation Ltd. ( SIRECL) and Sahara
Housing Investment Corporation Ltd. (SHICL) filed an appeal before
Supreme Court being aggrieved by the order of Securities Appellate
Tribunal (SAT) .
 In this appeal SC was required to decide the following legal issues.
 Whether OGCD ( Optionally Fully convertible Debentures) issued by
the Appellant are securities within the meaning of Sec 2(h) of SEBI
Act?
 Whether SEBI has jurisdiction u/s 55A(b) of the Companies Act 1956
to call for information and investigate matters relating issue and
transfer of OFCSs offered by Appellant to more than 50 persons ?
 Whether the Appellant has committed any violations of sections of
companies Act relating to issue of prospects , misstatement in
prospectus and criminal liability and penalties for violations
SEBI stand
 SEBI on the basis of complaint, issued a notice to
SAHARA and called for information on OFCDs issued
by SAHARA. SAHARA refused to give information on
the grand that SEBI had no locus standi to call for
such information.
 SEBI had to issue summons calling for information as

interest of investors was involved.

 Ministry of Corporate Affairs ( MCA) had also called

for information and informed SEBI that it fond

compliance in respect of certain queries but advised
SAHARA’s to file prospectus as per Sec 60B(9) of the
Companies Act 1956
 SEBI issued a show case notice alleging that
instances of OFCD was public issue as it involved
more than 50 persons and , therefore , securities
were liable to be listed on a recognized stock
exchange under Sec. 73 of the Companies Act,
1956.
 It is also required to comply with various clauses of
DIP guidelines and violated regulations 4(2), 5(1), 6,
7, 16(1), 20(1), 25, 26, 36, 37, 46 and 57, of
Securities Exchange Board of India ( Issue of Capital
and Disclosure requirements) Regulations,
2009( ICDR 2009)
Sahara stand
SAHARA replied to show cause notice stating that SEBI has
no jurisdiction. It defended its action by stating that:
1. Hybrid Securities are not defined in in SEBI Act or
Securities Contract Regulation Act 1956
2. Issuance of Hybrid Securities in terms of 60B
(Information Memorandum) and only Central Govt. had
jurisdiction u/s 55A(c) of Companies Act 1956
3. Funds are raised by private placement with friends,
associates and group companies as such provisions of
Section 67 and 73 are not applicable
4. Red Herring prospectus was registered with ROC
Kanpur
Cont….
 November 2010 - Securities and Exchange Board of India
 bars Sahara India Pariwar chief Subrata Roy and two of
its companies - Sahara India Real Estate Corp (SIREC) and
Sahara Housing Investment Corp (SHIC) from raising
money from the public as they raised Rs.24000 thousand
crores through optionally fully convertible debentures
which SEBI deemed illegal
 June 2011 - SEBI ordered Sahara firms to immediately

refund the money collected through sales of OFCDs.

 October 2011 - Securities Appellate Tribunal (SAT)

ordered two unlisted Sahara Group companies to refund

within six weeks about 17,656.53 crores with 15%
interest which it had raised through a flotation of OFCDs.
[15]
 June 2012 - SEBI informed Supreme Court that real
estate division of Sahara India Pariwar had no right
to mobilise Rs.27,000 crore from investors through
optionally fully convertible debentures (OFCD)
without complying norms of Market regulator –
SEBI.
 August 2012 - Supreme court directs Sahara India

Real Estate Corporation Ltd. (SIRECL) and the

Sahara Housing Investment Corporation Ltd.
(SHICL) to refund over Rs. 24,400 crores
 Finally Subratho Roy was sent to jail
Common types of frauds
 Financial Frauds
 Manipulation, falsification, alteration of accounting records
 Misrepresentation or intentional omission of amounts
 Misapplication of accounting principles
 Intentionally false, misleading or omitted disclosures
 •Misappropriation of Assets
 Theft of tangible assets by internal or external parties
 Sales of proprietary information
 Causing improper payments
 •Corruption
 Making or receiving improper payments
 Offering bribes to public or private officials
 Receiving bribes, kickbacks or other payments
 Aiding and abetting fraud by others
Summary of frauds/ Scams
 Intense competition
 Aggressive business strategy
 Investors pressure for higher growth and returns.
 Personal motives of management
 Creation of special purpose vehicles
 Complex accounting procedure
 Manipulation of accounts
 Absence of whistle bowling mechanism
 Passive role of non executive directors
 Poor auditing system
Cont…
 Corporate ethics and value system
 Over confidence of stakeholders in director
 Absence of multiple reporting channels
What is corporate governance
 Corporate means Company.
 Governance means the process of decision making

and implementing the decisions in the interest of all

stake holders.
 In other words it connected with the structures and

processes for decision making , accountability,

control and behavior of top management of a
corporate organization.
 In the words of Philip and Steven– It is an umbrella

term that includes specific issues arising from the

interaction among senior managers, shareholders,
board of directors and other stake holders.
Corporate stake holders
 Meaning; Those groups with out whose support the
corporate organization would cease to exist.
 Internal and external stakeholders
 A. Internal stakeholders are those who engage in

economic transactions with the organization such as

owners, employees, managers.
 B. External stake holders are those who do not

engage in direct economic transaction but their

actions can affect the business. Examples. Govt.,
Suppliers, Creditors. These stake holders have
certain interest in the organization otherwise some
conflict will arise.
Main stakeholders and their concern
in a company
 Stake holders  Concern

 Value maximization
 Share holders  -Profitability, Liquidity-growth-
market price
 Employees  Benefit maximization
 Government  Tax, employment, True reporting,
diversity.
 Creditors  Liquidity, debt servicing
 Customers  Quality, price, care
 Community  Job, environment protection, equity

 Trade union
 Quality of work life
 Fair play, ethical business
 Competitors
Corporate communication to stake
holders
 Internal stake holders
 Financial statements
 Policies and procedures
 Hierarchy of
responsibility
 Meeting
 Direct communications
 Budgets
 External stake holders
 Annual reports
 Press release
 Promotional campaigns
 Social activities
 Advertisements
 Social medias
 Public documents such
as prospectus etc.
Objectives of corporate governance
 Adequate disclosures
 Transparency-Internal Vs Global
 Legal Compliance
 Share Holder Interest
 Values and Ethics
 Social Responsibility
Principles of good corporate
governance-- Basic
 Fairness principle
 Transparency principle
 Accountability principle
 Integrity principle
 Fiduciary principle– agent with trust for the

principle– Fiduciary owes the duty of loyalty,

Full disclosure, diligence and obedience to
the principle.
 .
additional
 Reliability principle—Honor words and
commitments
 Dignity– respect the dignity of all.
 Citizenship Principle- act as a responsible

citizen
 Property principle—respect the rights of

those who own property.

 Responsiveness principle- Responsive to

public needs
Complexities' of the issue
 Qualitative base
 No discrete measure
 Effectiveness determined by people as a group
 Ownership and Management
 Common Interest VS Confined interest
 Blend of political/social/economic

responsibility
Why corporate governance
 Widely distributed ownership
 Separation of owners and managers
 Large size and wide impact on the society
 Conflicting interest of stakeholders
 Use of borrowed capital
 Limited labiality concept
 Media pressure
 Threat of takeover
Theories of corporate governance
 Basis of corporate governance theories

 Based on the Structural process of the corporate

form of organization and fiduciaries responsibility
that the directors and the board to execute
several theories have been formed namely
 Agency theory
 Transaction cost economic theory
 Stewardship theory
 Stakeholders theory
Agency theory
 Way of solving the corporate problems that arise
due to the conflict between agent and principle.
It presupposes that agents are also human
beings and hence there personal goals and
aspirations may affect their while acting as agent.
 Two types of problems:
 1. Problems that arise when the goals of principle

and agent are conflicting and and the principle is

unable to verify what agent is doing.
 2. Problems that arise when the principle and

agent have different attitude towards risk.

Transaction cost economic theory
 It assumes that individuals self interested and
opportunistic in nature and they will cheat
the system if they can.
 The theory emphasis the need of strong legal

mechanism to deal opportunistic behavior.

Stewards ship theory or Share
holders theory
 It assumes that the board have a stewards
role for the resources entrusted with them.
 The power is exercised by directors who are

appointed by the shareholders hence they are

accountable for the stewardship mover the
corporate resources.
 It is based on the belief that directors can be

trusted.
Stake holders theory
 The theory emphasis that the corporate should
attempt to maximize not the value of the share (
financial claim of owners) but also focus their
attention on the interest of all other stake
holders such as customers, government,
employees etc.
 This theory calls for the use of multiple

performance measure while measuring the

performance of agents
 The theory argue that such an attempt will only

lead to total value maximization.

Models of corporate governance
1. Anglo- Saxon model or Market
model– USA, UK
 Features of companies:
 Widely dispersed ownership—High disclosure norms—

High quality share holders— high transparency--

Sophisticated institutional investors taking active interest
in companies affairs- Active private equity market—non
executive majority board- Active share holders

 The model demands directors behave independently and

take independent decisions even though they were
invited by CEO to the meetings
German model or two tyer model
 Company features: Major share holders are
banks and financial institutions—Share
holders can appoint only 50% of supervisory
board members and the rest by employees
and trade unions
 Germany, Holland, France etc. are following

this model

 1. Supervisory board
 2. Management board
Japanese model or Business network
model
 Company features: Share holders are banks
and financial institutions—large family share
holders with corporate shareholders.
 The BOD and president are jointly appointed

by shareholders and financial institutions.

 Out side independent directors are rarely

seen in Japanese boards.

Control model or Asian and Latin American
model
Shareholder environment Independence and performance

Insid
Concentrated er
owners boar
Reliance ds Incentives
on
aligned
family
with core
,bank ,
shareholder
public
s
finance

Underdevelope Ltd closure

d new issue
market
Ltd
takeov Inadequate
er minority
model protection
Institutional context Corporate context
Indian Model
 The model of corporate governance found in
India is a mixture of Anglo- American and
German model as we have three types of
corporations– Purely private companies ( Family
business) – public companies( Majority outside
equity)-- Government companies

 In the first category companies German model is

used
 Second and third category companies Anglo

American model is used.

Whistle Bowling Mechanism
 Whistle bowling mechanism is considered to be highly
desirable in the pursuit of better corporate governance.
 Corporate fraud and consequence failures are causing
miseries to stake holders
 It is based on the principle of “ Prevention is Better then
Cure”
 Institutionalize Whistle bowling mechanism
 It failed in Enron when Mr. Sherro Watkins, director of
the company wrote to the CEO Mr. Kenneth lay who did
not listen it.
 It succeeded in Tata Finance when Mr. Sankar Sharma
wrote to Mr. Ratan Tata
Committees of corporate
governance– International level
 Blue Riband committee (1999) US
 Cadbury Committee- financial

aspects(1992)UK
 Green bury committee– Directors

remuneration (1995)
 Kings committee on corporate

governance( 2002)
 Security Exchange Commission report (2002)

USA
SARBANCES OXLEY ACT(USA) 2002 Security Exchange
Commission

 SEC and Auditors

a)Auditors to register
b)Report on Auditors in Public Domain
c)Auditor/Partner Rotation
d)Second partner review
e)Working paper to be kept for 7 years
f)Annual inspection by SEC
g)Monetary Penalty
h)Restriction on other services
 White collar fraud
 Forfeiture of undue profits
Cadbury committee-objectives
 Uplift the low level of confidence both in
financial reporting and in the ability of
auditors to provide safeguards
 Review the structure, rights and the role of

BOD, shareholders and auditors by making

them more effective
 Address various aspects of accounting

profession
 Raise the standard of corporate governance
General principles of C.G developed
by Cadbury committee
 Rights and equitable treatment of
shareholders- Minority Vs Majority
 Recognition and protection of other

stakeholders interest
 Role and responsibilities of BOD– Size,

independence, commitment, skills

 Integrity and ethical behavior
 Disclosure and transparency-Timing, facts

etc
Indian Initatives
 Birla committee on corporate governance
1999
 Naresh chandra committee 2002
 Narayana Moorthy committee on corporate

governance 2003
 JJ Irani committee 2005
CORPORATE GOVERNANCE
FRAMEWORK

Reporting
Whistle
framework
blowing
mechanism Board of
directors

Investors Corporate
level of governance
satisfaction Audit
committee

Board Performance
meetings of other
statutory
officers
Board composition

Board composition

Resident director Independent director Woman director

 Board committee

Board committee

Nomination and Stakeholders Corporat

Audit committee remuneration relationship respon
committee committee comm
Consolidated recommendations of
various committees of CG
 BOS
 Audit committee
 Shareholders grievance committee
 Remuneration committee
 Board procedure
 Management
 Stakeholders role
 Disclosure pattern
Financial reporting details
 Remuneration package
 Service, contract and remuneration of directors.
 Reporting of stock option scheme
 Accounting standards and financial reporting
 Consolidation of accounts of subsidiaries
 Disclosure of related party transaction
 Treatment of deferred taxation
 Reporting of risk
 Reporting of industry structure
 Reporting of opportunity and threats
Cont..
 Reporting of internal control system
 Reporting of Hr procedure and number of

employees
 Proceeds of IPO
 Training of BOD
 Evaluation of performance of BOD
 Reporting of critical business events–

Acquisition, sale of important assets

 Disclosure of independent security analysts

view
Cont..
 Disclosure of contingent liability
 Certification by CDO/CEO on F. Statement
 Reporting of corporate governance rating
 Reporting of media scrutiny.

Compliance of the good CG-2002
 BOS-999
 Audit committee-961
 Shareholders grievance committee-1005
 Remuneration committee-677
 Board disclosure—575
 Management-774
 Report of CG-786
 Total companies -1026
Birla committee on CG
 Main observations:
 1. Investors take note of well managed
companies and respond positively with higher
valuation
 2. Transparent disclosure is highly appreciated
 3. Issue of insider trading
 4. Stake holders theory is more appropriate
 5. Key constituents of Cg are share holders-
BOD-Management
 Applicability – All listed companies
Task of the committee
◦ to suggest suitable amendments to the listing
agreement executed by the stock exchanges with the
companies and any other measures to improve the
standards of corporate governance in the listed
companies, in areas such as continuous disclosure of
material information, both financial and non-
financial, manner and frequency of such disclosures,
responsibilities of independent and outside directors;
◦ to draft a code of corporate best practices; and
◦ to suggest safeguards to be instituted within the
companies to deal with insider information and
insider trading
a. Mandatory recommendations
 1. Applicable to all listed companies with 3 crore
and above
 2. composition of BOD: Executive, Non executive
and independent directors
 -- Not less than 50% non executive directors
 --In case non executive chairman, one third
 independent directors
 --In case executive chairman one half
independent directors
 -- Nominated directors: Financial institution
nominees with all responsibilities of a full director
Cont….
 2. Audit committee
 Minimum 3 directors all non executive with

majority independent directors.

 Chairman of the committee must be a

independent director and company secretary

as the secretary of the audit committee
 Meet al least 3 times in a year
 Quorum: one third or two members which

ever is higher
Cont..
 Powers of the audit committee
9.9  Being a committee of the board, the audit
committee derives its powers from the authorisation
of the board. The Committee recommends that such
powers should include powers:
 To investigate any activity within its terms of
reference.
 To seek information from any employee.
 To obtain outside legal or other professional advice.
 To secure attendance of outsiders with relevant
expertise, if it considers necessary.
Remuneration committee
 For this purpose the Committee recommends that
the board should set up a remuneration committee
to determine on their behalf and on behalf of the
shareholders with agreed terms of reference, the
company’s policy on specific remuneration
packages for executive directors including pension
rights and any compensation payment
 Quorum for the committee is least three directors,

all of whom should be non-executive directors, the

chairman of committee being an independent
director
Board meeting
 The board meetings should be held at least
four times in a year, with a maximum time
gap of four months between any two
meetings.
Financial reporting
 Consolidation of Accounts of subsidiaries
 Segment reporting where a company has

multiple lines of business

 Disclosure and treatment of related party

transactions.
 Treatment of deferred taxation
 ICA is requested to issue standards for the

above
Independent directors
 The Committee therefore agreed on the
following definition of "independence".
Independent directors are directors who apart
from receiving director’s remuneration do not
have any other material pecuniary relationship
or transactions with the company, its
promoters, its management or its subsidiaries,
which in the judgment of the board may affect
their independence of judgment. Further, all
pecuniary relationships or transactions of the
non-executive directors
Functions of Management
 Assisting the board in its decision making process in respect of the
company’s strategy, policies, code of conduct and performance targets, by
providing necessary inputs.
 Implementing the policies and code of conduct of the board.
 Managing the day to day affairs of the company to best achieve the targets
and goals set by the board, to maximize the shareholder value.
 Providing timely, accurate, substantive and material information, including
financial matters and exceptions, to the board, board-committees and the
shareholders.
 Ensuring compliance of all regulations and laws.
 Ensuring timely and efficient service to the shareholders and to protect
shareholder’s rights and interests.
 Setting up and implementing an effective internal control systems,
commensurate with the business requirements.
 Implementing and comply with the Code of Conduct as laid down by the
board.
 Co-operating and facilitating efficient working of board committees.
Narayana Moorthy committee
 Preamble
 Corporations pool capital from a large investor base both in
the domestic and in the international capital markets. In this
context, investment is ultimately an act of faith in the ability
of a corporation’s management.
 When an investor invests money in a corporation, he expects
the board and the management to act as trustees and ensure
the safety of the capital and also earn a rate of return that is
higher than the cost of capital.
 In this regard, investors expect management to act in their
best interests at all times and adopt good corporate
governance practices.
 Corporate governance is the acceptance by management of
the inalienable
Main recommendations
 Strengthen the whistle bowling mechanism in audit
committee.
 Strengthening the responsibilities of audit committee.

 Improving the quality of financial disclosure

 Reporting of related party transactions

 Reporting of business risk in annual reports

 Reporting of the use of the proceeds of IPO

 Improve disclosure of compensation to non executive

directors
 Ensuring financial literacy for audit committee

members
Cont..
 Disclosure of accounting standards followed
 Exclusion of nominee directors form the definition of
independent directors
 Fix limit on the compensation to independent directors
 More comprehensive definition to independent
directors
 Introduction of real time disclosure
 Introduction of mechanism for evaluation of non
executive directors
 Disclosure of reports issued by independent security
analysts
 Implement the recommendation by modifying clause
49 of listing agreement.
Corporate governance in India
 Slow growth
 Indian legal system provides high investor

protection
 Family business system in which promoters

own and manage business- major stake with

promoters
 India still have poor bankruptcy laws Weak

stock market conditions

 Absence of internationalization of accounting

standards
Essentials of good corporate
governance
 BOD must consist of people with different
interest
 Audit committee consisting of independent

directors
 Existence of remuneration committee
 Fair reporting
 Management analysis system
 Existence of shareholders and investors

grievance committee
FRAMEWORK ON INDIAN C.G
 Legal Frame Work
 Organizational framework
 Disclosure Norms
 Auditor’s Independence
 Independent Directors
Legal Framework of Indian C.G
Legal frame work
I-COMPANIES ACT
 Audit Committee
 Register of Contracts
 Special Audit
 Board Meetings
 Interested Director
 Directors Remuneration
 Disclosure of Attendance
Cont…
II-COMPANIES AMENDMENT ACT 1956
 Compulsory Rotation of Auditors
 Training Directors
Cont…
III-SEBI
 Securities Contract Act 1956

 Registration of Broker, Bankers to issue , Registrar to

Issue , Merchant Bankers , Portfolio Manager ,

Investment Advisor , to buy or sell or deal with shares.
 Registration on Depository participating Custodian of

securities ,FII Credit rating Agency to buy or sell or

deal in securities.
 Depositories Act 1996

 Clause 49 of listing Agreement

Administrative frame work
Key issues of corporate – 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

 1. PSUS –Government
 2. Multinational companies– Parent company
 3. Family business-Closely held ownership
Auditors and corporate governance

 Well framed policy and Corporate Governance

 Audit Committee
 Personal Quality, Integrity, Independence
 Internal Control
 Ensure Quality
 Symptoms of Fraud
 Certification
Executives and corporate governance

 Every executive to know about Corporate Governance Policy

 Act with Integrity-Honesty- Transparency
 Device proper documentation Standards
 Device compliance standards
 Device value based management system
 Propagate the theme of Corporate Governance within and
outside.
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
• Growing corporate complexities.
• Changes in ownership pattern
• Absence of good business knowledge to independent directors
• Shareholders greed and over expectation
• Society’s over expectation from corporate houses
• Cultural difference