CORPORATE GOVERNANCE IN INDIA

- A WAY FORWARD
CG IN INDIA - A WAY FORWARD -
SYNOPSIS
 CONCEPT OF CORPORATE GOVERNANCE
 BASIC PRINCIPLES OF CORPORATE GOVERNANCE
 CORPORATE GOVERNANCE IN INDIA – A REVIEW
 TRANSPARENCY IN ACCOUNTING AND CG
 CORPORATE GOVERNANCE – RESEARCH

FINDINGS
 CG - A WAY FORWARD
 SUM UP
CONCEPT OF CORPORATE
GOVERNANCE
 The Cadbury Report which was released in the
UK in 1991 outlined that "Corporate governance
is the system by which businesses are directed
and controlled.“
Corporate Governance is the system of rules, practices and
processes by which a company is directed and controlled.
Corporate governance essentially involves balancing the
interests of the many stakeholders like shareholders,
management, customers, suppliers, financiers, government
and the community in a company.
 PILLARS OF
CORPORATE GOVERNANCE
 Fairness -Fairness refers to equal treatment,
for example, all shareholders should receive
equal consideration for whatever
shareholdings they hold.
 In addition to shareholders, there should also
be fairness in the treatment of all stakeholders
including employees, communities and public
officials. The fairer the entity appears to
stakeholders, the more likely it is that it can
survive the pressure of interested parties
BASIC PRINCIPLES OF CORPORATE
GOVERNANCE - 2
 Accountability - Corporate accountability refers to the
obligation and responsibility to give an explanation or
reason for the company’s actions and conduct.
 Responsibility - The Board of Directors are given

authority to act on behalf of the company. The Board

of Directors are responsible for overseeing the
management of the business, affairs of the company,
appointing the chief executive and monitoring the
performance of the company. In doing so, it is
required to act in the best interests of the company.
 Accountability goes hand in hand with responsibility.

The Board of Directors should be made accountable to

the shareholders for the way in which the company has
carried out its responsibilities.
BASIC PRINCIPLES OF CORPORATE
GOVERNANCE - 3
 Transparency - A principle of good governance
is that stakeholders should be informed about
the company’s activities, what it plans to do in
the future and any risks involved in its business
strategies.
 Transparency means openness, a willingness by
the company to provide clear information to
shareholders and other stakeholders. For
example, transparency refers to the openness
and willingness to disclose financial performance
figures which are truthful and accurate.
BASIC PRINCIPLES OF CORPORATE
GOVERNANCE - 4
 Disclosure of material matters concerning the
organisation’s performance and activities
should be timely and accurate to ensure that all
investors have access to clear, factual
information which accurately reflects the
financial, social and environmental position of
the organisation.
 Organisations should clarify and make publicly
known the roles and responsibilities of the
board and management to provide
shareholders with a level of accountability
CG IN INDIA – A REVIEW
  Few New Provisions of Companies Act 2013 for Directors and
Shareholders
 One or more women directors are recommended for certain
classes of companies
 Every company in India must have a resident directory
 The maximum permissible directors cannot exceed 15 in a
public limited company. If more directors have to be appointed,
it can be done only with approval of the shareholders after
passing a Special Resolution
 The Independent Directors are a newly introduced concept
under the Act. A code of conduct is prescribed and so are other
functions and duties
 The Independent directors must attend at least one meeting a
year
CG in India - a review – 2
 Every company must appoint an individual or
firm as an auditor. The responsibility of the
Audit committee has increased
 Filing and disclosures with the Registrar of

Companies has increased

 Top management recognizes the rights of the

shareholders and ensures strong co-operation

between the company and the stakeholders
 Every company has to make accurate disclosure

of financial situations, performance, material

matter, ownership and governance
 CG in India - a review – 3
Additional Provisions in Companies Act 2013

 Related Party Transactions – A Related Party Transaction

(RPT) is the transfer of resources or facilities between a
company and another specific party. The company devises
policies which must be disclosed on the website and in the
annual report. All these transactions must be approved by
the shareholders by passing a Special Resolution as the
Companies Act of 2013. Promoters of the company cannot
vote on a resolution for a related party transaction.

Changes in Clause 35B – The e-voting facility has to be

provided to the shareholder for any resolution is a legal
binding for the company.
CG in India – a Review – 4
 Corporate Social Responsibility – The
company has the responsibility to promote
social development in order to return
something that is beneficial for the society.

 Whistle Blower Policy – This is a mandatory

provision by SEBI which is a vigil mechanism
to report the wrong or unethical conduct of
any director of the company.
 
CG deficiency leads to Financial Crisis
CG - TRANSPARENCY IN
ACCOUNTING
 Ineffective corporate governance may result in
financial crisis both for the company and the
stakeholders. Shareholders lose confidence in the
company and share prices will decline. The high profile
corporate governance failure scams like stock market
scam, the UTI scam, Ketan Parekh scam, Satyam scam
which were severely criticized by the shareholders
called for a need to make corporate governance in India
transparent as it greatly affects the development of the
country. (James Mc Ritchie, May 12, 2015)
CG – Investment decisions
 Good corporate governance helps in improving the
competitiveness of the firm strengthening the
relationship with the interested and all contracting
parties.
 Over 60 percent of investors cite Good Corporate

Governance Practices in corporations as a key factor in

their investment decisions (Mc Kinsey study ,2002
Scams and CG in India
Corporate Governance in India
• Corporate governance is not so matured in South Asia like

it is in U.S. or U.K. In India, the effective initiative for

corporate governance came from the listed companies and
industrial association, Confederation of Indian Industry
(CII) in 1997. Ever since India’s biggest ever corporate
fraud and governance failure unearthed at Satyam
Computer Services Limited, the concerns about good
corporate governance have increased phenomenally.
(Vaish Associates Advocates (8 January, 2016)
SEBI and CG in India
 In 1999, The Securities and Exchange Board of India
(SEBI) made it mandatory for all listed companies in
phases. From April 2003, all the listed companies were
brought under mandatory requirement to follow the
SEBI corporate governance code.
Accounting Standards and CG in India
 The objective of accountants is to ensure good corporate
governance by reducing the gap between insiders and
outsiders to a corporation through the disclosure of right and
timely information. (Nikhil Chandra Shil (2008)
 Accounting standards assumed greater importance with the
growing concern for effective corporate governance. Almost
all the high profile failures of large global corporations are the
result of the combined effect of failures in business, failures in
governance and failures in reporting. (Mohit Baijal).
 The practice of proper accounting standards is more relevant
issue of good corporate governance in the present competitive
era as the standards provide a useful mechanism to restructure
the core corporate values. (Dr.K.Shankaraiah and D.N.Rao
(June 2004).
Corporate governance and IFRS
 Corporate Governance requirements imposed internationally as
part of the New International Financial Architecture (NIFA)
include compliance with International Financial Reporting
Standards (IFRS). (Ronita D.Singh & Susan Newberry (Dec,
2009
 The focus of IFRS is to provide the necessary
financial information to the primary users of
financial statements who cannot get any financial
information from any other source (other than the
financial statements.
 IFRS strives for transparency. Substance over form is one of the
principles of IFRS that brings out the essence of the transaction
and how it is to be reported in the financial reports. Time value
of money is also an important principle of IFRS.
CG in India – Research findings
 The results of regression show that when the number of
Independent directors on the board is higher, discretionary
accruals are lower. This finding is consistent with past
research and illustrates a setting in which a large
proportion of independent directors is associate with better
monitoring (Govind and others in JIAA Vol XLVII (2) Dec
2015)
 Financial leverage is significantly related to discretionary
accruals as the literature supports that earnings
management is carried out in order to avoid debt covenants
or to meet contractual obligations. The results evidenced
that higher the leverage, lesser are the chances of earnings
management. More debt in the capital structure of the
company will force the company to limit its earnings
management activities as the lenders fully scrutinize the
financials of that company. (Govind and others in JIAA Vol
XLVII (2) Dec 2015)
CG in India – Research findings (2)
 Major key factors that influence the CG System
are: Disclosures in Annual Report, Quality of
Corporate Reporting, Adequacy of Processes,
Involvement of Managers in CG activities,
Management continuous interaction with
functional departments, Board and Corporate
ethics, Role of Independent Directors, Quality
of Board and CSR and CG System – a tool or
developing managerial activities ( S.Mohan –
unpublished PhD thesis of JNTU Hyderabad)
CG in India – Research findings ( 3)
 Empirical investigation of the relationship between
ownership/control structure, in terms of identity of
the shareholder, and firm performance essentially
attempts to test the managerial/agency theory
propositions that different ownership control
structure result in different performance (Short and
others 1994).
 There is lot of evidence to show that institutional

shareholders do not adopt a monitoring role,

preferring to sell their holding in problem
companies rather than intervening in the
management of the company (Hirschman 1970,
Myners 2001)
Intangibles and CG - findings
 Summers C 1982, Masahiko Aoki 1983 say that after
industrialization the shift in the factors of production shows
that the employees should have a greater say in CG.
 Drucker 2000 emphasize that emergence of the knowledge
worker as the key player in the knowledge economy, has
implications for the governance of corporation in the
future.
 Raghuram Rajan and others 2000 state the when most of
the value was embedded in assets that could be owned, the
boundaries were fixed and there was nothing directors
could or were required to do, to guard them. But now most
of the value comes from the assets that cannot be easily
appropriated, like information or human capital. This raises
new challenge to the directors in CG.
 There is no single model of good CG that fits for all
(Narayana Murthy Committee Report 2003)
 Intangibles and CG – findings
 Rajni Deverajan 2004 –observed that shareholders are
not the primary factors that drive good governance. The
new drivers are the stakeholders and their intangible
contributions. Firms in the IT sector adopt good
governance standards to attract these stakeholders
namely, good employees (the knowledge workers) who
create value for the new age companies and attract
prospective clients and retain the existing clients.
 It also leverages the establishment of strategic alliances

that act as a platform for sustainable development.

 Benchmark for good governance should also include

benchmarks for monitoring and managing the value

creators i.e. intangibles.
 Good governance should also encompass evolving

standards to protect, preserve and enhance the value of

CG – A WAY FORWARD
 Basic Principles of Fairness, Accountability, Responsibility,
Transparency and Disclosure must be internalized in the
firm
 Companies Act 2013 is in right direction. It is in

consistence with changes in the world

 Transparency in Accounting gets improved with immediate

convergence of Accounting standards in India with IFRS

 CG is related to Investment Decisions, Intangibles

Contribution, Information technology changes and there is

a need for sensitization among all stakeholders
 Hence there is strong need for International Corporate

Governance Day to be adopted and ICSI efforts are in right

direction
Sum Up
 CG Concept and principles
 CG in India – Companies Act changes
 Transparency in Accounting – Convergence to

IFRS
 CG and role of Intangibles
 CG and ICSI Role
 Need for ICGD – a good initiative by ICSI
THANK YOU