Assignment 2

BECG (PGDM-IV-IT SPEC)

ADARSH GULATI
ABS/PGDM/JULY18/011
PGDM-4 'IT'

QUES: How corporate governance works in PSU’s and banks?

Indian Economy is a mixed economy, and both the public sector and private sector are
indispensable for the all-round economic growth of the country. The private sector enterprises
are primarily driven by profit motive, not by welfare purposes or public interest. Therefore,
private business owners are not interested in setting up their businesses and investing in those
areas of the economy which are very closely related to public interest, wherein massive capital
investment is required, but profit obtained by such investment is either insufficient or can be
achieved after a long period. The Government directly takes part in the business activities in
those sectors setting up the public-sector undertakings or enterprises. The Central Government or
the state governments are the owners of the publicsector undertakings (PSU) or Public-Sector
Enterprises. The corporate governance of Public Sector Undertakings is not only controlled but
also financed by Central and State government with the basic focus on community benefit and
balanced economic growth. Company’s Act makes the government a major stakeholder in public
Sector Units. Central Public-Sector Units (CPSUs) in India function differently from Private
sector. They have a precise feature like government interference, ministerial command, delays in
appointment of independent director, non-compliance of disclosure of norms, accountability to
both general public and government. Minority shareholders in CPSUs have been given privileges
like expose of Data, receiving notices, participating in the general shareholders meeting,
transferring their shares and receiving dividends. They can apply to Ministry of Corporate affairs
or SEBI in case of any inconsistency noticed. In spite of these major decision taken by the
government without the permission of minority shareholders as they are owner for more than
51% of share in the company. Colgate scam is related example where in the regime of UPA
government where minority shareholders interest was neglected for the conferred benefit of the
lobbies of ministries and industrials.

the good corporate governance of banks is particularly important because banks are the most
significant (and in some cases, only) providers of credit. Difficulties in their operations could
disrupt the entire economy. At the same time, this situation puts banks in a unique position to
influence the governance practices of their corporate borrowers, so reducing risk in their own
operations and becoming promoters of better corporate governance practices for all other
companies.
Our interest in the corporate governance of banks stems both from the EBRD’s role as an active
investor as well as that of an international financial institution deeply involved in policy dialogue
that promotes good governance and resilient economies. So, our approach towards enhancing 
the corporate governance practices of banks in our countries of operations is twofold, as we seek
to implement improvements both at the level of individual companies and at the level of
generally applicable regulations and codes.

QUES: Role of audit committee in PSU's and importance of SEBI in banking

sector.

Roles of an audit committee

Audit committees are unique in that they can be established with outside, independent directors
who are not directly involved in the organization’s day-to-day operations. This allows the
committee to devote more time to overall fiscal responsibility matters based on its defined roles.

Examples of effective audit committee roles include:

 Periodic meetings with government officials to review and monitor internal controls and
preparation of financial reports.

 An active role in the overall prevention and detection of fraud while also encouraging
management to establish a code of conduct.
  Making sure that proper fraud prevention and detection programs are in place and
effective, and that a protocol exists, should a fraud occur (such as a fraud detection
hotline).

 If an internal audit function exists, it should report directly to the audit committee. The
committee can act as the “eyes and ears” of the overall internal control process, including
how well the organization is doing to meet its financial responsibilities.

 Meet with the external auditors to get an independent perspective of management’s

internal control efforts, and to verify that the external auditor is truly independent from
those involved in managing the government organization.

SEBI in banking industry

The Securities and Exchange Board of India (SEBI) has taken a number of steps to improve the
financial markets including a revised risk management framework for liquid funds, revised
norms for investment and valuation of money market and debt securities by mutual funds (MFs),
revised norms for credit rating agencies (CRAs), facilitating new commodity derivative products
and setting up institutional trading platforms (ITPs) on stock exchanges to promote start-ups.

The Insolvency and Bankruptcy Board of India (IBBI) continues to make steady progress in the
resolution of stressed assets. The Insurance Regulatory and Development Authority of India
(IRDAI) has taken initiatives for growth of InsurTech and strengthening insurers’ corporate
governance processes. The Pension Fund Regulatory and Development Authority (PFRDA)
continues to bring more citizens under the pension net.

QUES: How RBI and World Bank contributes in corporate governance.

For the co-operative banks in India these are challenging times. Never before has the need for
restoring customer confidence in the cooperative sector been felt so much. Never before has the
issue of good governance in the co-operative banks assumed such criticality. The literature on
corporate governance in its wider connotation covers a range of issues such as protection of
shareholders’ rights, enhancing shareholders’ value, Board issues including its composition and
role, disclosure requirements, integrity of accounting practices, the control systems, in particular
internal control systems. Corporate governance especially in the co-operative sector has come
into sharp focus because more and more co-operative banks in India, both in urban and rural
areas, have experienced grave problems in recent times which has in a way threatened the profile
and identity of the entire co-operative system. These problems include mismanagement, financial
impropriety, poor investment decisions and the growing distance between members and their co-
operative society. The purpose and objectives of co-operatives provide the framework for co-
operative corporate governance. Cooperatives are organised groups of people and jointly
managed and democratically controlled enterprises. They exist to serve their members and
depositors and produce benefits for them. Co-operative corporate governance is therefore about
ensuring co-operative relevance and performance by connecting members, management and the
employees to the policy, strategy and decision-making processes.

World bank contribution in corporate governance

Corporate Governance (CG) concerns the system by which companies are directed and
controlled. It is about having companies, owners and regulators become more accountable,
efficient and transparent, which in turn builds trust and confidence. Well-governed companies
carry lower financial and non-financial risks and generate higher shareholder returns. They also
have better access to external finance and reduce systemic risks due to corporate crises and
financial scandals. Reliable financial reporting, timely disclosures, better boards and accountable
management also facilitate development of stronger capital markets. They improve a country’s
ability to mobilize, allocate and monitor investments and help foster jobs and economic growth.
Better supervision and monitoring can detect corporate inefficiencies and minimize vulnerability
to financial crises.

The World Bank’s Response

The Financial Market Integrity (FMI) group is located in the Finance and Markets Global
Practice in the World Bank Group. Corporate governance (CG) is part of the FMI group’s
mandate. The CG group within FMI focuses on improving corporate governance in emerging
market countries. It does so by providing technical assistance, thought leadership, and support to
the World Bank Group’s advisory service programs and lending/investment operations and
through global engagements with standard setting bodies such as the Organization for Economic
Cooperation and Development (OECD), Financial Stability Board (FSB), and the Basel
Committee on Banking Supervision. 

The demand for good corporate governance is growing in emerging market countries in order to
help companies and financial institutions improve their performance, access affordable external
financing, and lower the cost of capital with the broader goals of advancing financial stability
and economic growth.  Governance of listed companies has a direct impact on capital markets
development and investor protection. In the case of financial institutions, both state-owned and
private institutions, governance is crucial to the sustainability of the banking sector and the
development and growth of pension funds and insurance companies. Governance is also
important to microfinance institutions as they scale up, and to medium and high growth
companies as they seek to access finance for investments and expansion. 

In carrying out its corporate governance works, the CG group has four focus areas: (i)
developing the legal and regulatory foundation for corporate governance of listed and unlisted
companies; (ii) improving the governance of banking institutions, in particular state-owned
banks (development and commercial banks); (iii)  improving the governance of micro-finance
institutions and financial cooperatives; and (iv) strengthening the capacity of regulators and
supervisors to implement and enforce reforms.  In each of these areas, the group works closely
with client countries to carry out diagnostics and roadmaps for reform, and support
implementation through strengthening of legal and regulatory frameworks, building capacity of
regulators and supervisors, and providing advisory services, training, and knowledge sharing.  In
addition to supporting policy level reforms, the group also supports corporate governance
diagnostics and improvements at the institution specific level. The group works closely with
the Corporate Governance Group of the IFC and interacts closely with other WBG global
practices, such as Trade and Competitiveness, Governance, and Macro Fiscal Management. The
group represents the World Bank Group in international fora such as the OECD and ICGN.