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Corporate Governance
What is Governance?
Corporate Governance is the application of best management practices, Compliance of law in true letter and spirit and adherence to ethical standards for effective management and distribution of wealth and discharge of social responsibility for sustainable development of all stakeholders. -The Institute of Company Secretaries of India

Purpose of corporate governance is to have a demonstrable IMPACT on a corporations FINANCIAL PERFORMANCE.

Unethical Business Practices:

Driving Forces of Corporate Governance in India

Security Scams ---Harshad Mehta Security Scam, Ketan Parekh Scam Equity allotments at discount rates to the controlling groups Disappearance of Companies (1993-94) - around 4,000 companies with 25,000 crores without starting business Misdeed of Companies Plantation, Sheep rearing, etc.

Impact of Globalisation: Integration with Foreign Market Foreign Investors expectations New Business Opportunities --- IT & ITES, BPO etc., New Capital formation FII, FDI

Impact of Privatisation:
New structure of ownership Multinational Companies

Brief history of corporate governance in India

Unlike South-East and East Asia, the corporate governance initiative in India was not triggered by any serious nationwide financial, banking and economic collapse The initiative in India was initially driven by an industry association, the Confederation of Indian Industry ( CII) In December 1995, CII set up a task force to design a voluntary code of corporate governance. The final draft of this code was widely circulated in 1997. In April 1998, the code was released. It was called Desirable Corporate Governance: A Code. Between 1998 and 2000, over 25 leading companies voluntarily followed the code: Bajaj Auto, Hindalco, Infosys, Dr. Reddys Laboratories, Nicholas Piramal, Bharat Forge, BSES, HDFC, ICICI and many others

Brief history of corporate governance in India

Following CIIs initiative, the Securities and Exchange Board of India (SEBI) set up a committee under Kumar Mangalam Birla to design a mandatory-cum-recommendatory code for listed companies
The Birla Committee Report was approved by SEBI in December 2000

Became mandatory for listed companies through the listing agreement, and implemented according to a rollout plan:
2000-01: All Group A companies of the BSE or those in the S&P CNX Nifty index 80% of market cap. 2001-02: All companies with paid-up capital of Rs.100 million or more or net worth of Rs.250 million or more. 2002-03: All companies with paid-up capital of Rs.30 million or more

Brief history of corporate governance in India

Following CII and SEBI, the Department of Company Affairs (DCA) modified the Companies Act, 1956 to incorporate specific corporate governance provisions regarding independent directors and audit committees. In 2001-02, certain accounting standards were modified to further improve financial disclosures. These were: Disclosure of related party transactions. Disclosure of segment income: revenues, profits and capital employed. Deferred tax liabilities or assets. Consolidation of accounts. Initiatives are being taken to (i) account for ESOPs( employee share ownership plan), (ii) further increase disclosures, and (iii) put in place systems that can further strengthen auditors independence.

Mandated CG guidelines and disclosures

Board of Directors: frequency of meetings and composition Board must meet at least 4 times a year, with a maximum time gap of 4 months between two successive meetings. If the chairman of the Company is a non-executive then 1/3 of the board should consist of independent directors, and 50% otherwise. Independent defined as those directors who, apart from receiving directors remuneration , do not have any other monetary relationship or transactions with the company, its promoters, management or subsidiaries, which in the view of the board may affect independence of judgment.

Mandated CG guidelines and disclosures

Board of Directors: frequency of meetings and composition The frequency of board meetings and board committee meetings, with their dates, must be fully disclosed to shareholders in the annual report of the company. The attendance record of all directors in board meetings and board committee meetings must be fully disclosed to shareholders in the annual report of the company. Full and detailed remuneration of each director (salary, sitting fees, commissions, stock options and perquisites) must be fully disclosed to shareholders in the annual report of the company. Loans given to executive directors are capped (no loans permitted to non-executives), and must be fully disclosed to shareholders in the annual report of the company.

Mandated CG guidelines and disclosures

Board of Directors: information that must be supplied Annual, quarter, half year operating plans, budgets and updates. Quarterly results of company and its business segments. Minutes of the audit committee and other board committees. Recruitment and remuneration of senior officers. Materially important legal notices and claims, as well as any accidents, hazards, pollution issues and labor problems. Any actual or expected default in financial obligations. Details of joint ventures and collaborations. Transactions involving payment towards goodwill, brand equity and intellectual property. Any materially significant sale of business and investments. Foreign currency and other risks and risk management. Any regulatory non-compliance.

Mandated CG guidelines and disclosures

Board of Directors: Audit Committee

Audit Committee is mandatory.

Must have minimum of three members, all non-executive directors, the majority of whom are independent. Chairman must be an independent director, and must be present at the annual shareholders meeting to answer audit or finance related questions. At least 1 member must be an expert in finance/accounts. Must have at least 3 meetings per year, including one before finalisation of annual accounts. Must meet with statutory auditors and internal auditors; have the powers to seek any financial, legal or operational information from the management; obtain outside legal or professional advice.

Mandated CG guidelines and disclosures

Board of Directors: Audit Committee functions
Oversight of the companys financial reporting process to ensure that the financial statement is correct, sufficient and credible Appointment / removal of external auditor and fixing of audit fees Reviewing with management the annual financial statements before submission to the board, focusing on: Changes in accounting policies and practices Major accounting entries Qualifications in draft audit report Significant adjustments arising out of audit The going concern assumption Compliance with accounting standards, with stock exchange and legal requirements Any related party transactions

Mandated CG guidelines and disclosures

Board of Directors: Audit Committee functions Adequacy of internal audit and internal control systems, through discussion with internal and statutory auditors as well as management. Significant findings, follow-up and action taken reports. Discussion with internal and statutory auditors about scope and design of audits. Reviewing financial and legal risks and companys risk management policies. Examining reasons behind any materially significant default to creditors, bond-holders, suppliers and shareholders.

Best companies for Corporate Governance (2011)

HDFC Godrej Group Mahindra & Mahindra Tata Group Infosys Hindustan Unilever

Theories of Corporate Governance

Anglo-American model
German model of CG

Japanese model of CG

Anglo- American model

Liberal model of governance in a body corporate Chief characteristic: protection of interests of the shareholders Lesser role of banking & financial institutions Main financial tool: equity financing (selling of shares by companies)

German model
Fundamentals& principles based on German Stock Corporation Act & German Codetermination Act Prescribes 2 boards ( mgmt & supervisory) with separate members Voting right restrictions are legal Banks hold long-term stakes and banking representatives are elected to German boards

Japanese model
Characterised by high level of stock ownership by affiliated banks and companies Financial network is called keiretsu Equity financing plays a major role Based on the corporations financial performance, the BoD is selected