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This paper reviews the existing codes of Corporate Governance (CG) in India. It analyzes the CG structures and practices in HDFC bank by using a case study methodology. It uses both primary and secondary data for analyzing the adaptability of CG codes in the Indian context. The primary data regarding the extent of CG practices and reporting in HDFC bank were collected from various towns of Orissa and the secondary data were collected through various published and unpublished reports and websites. The paper reveals that India has a good CG mechanism and disclosure practices on par with world counterparts.
Introduction
In India, Corporate Governance (CG) has assumed importance mainly in the wake of economic liberalization, and deregulation of industry and business. An unbridled pursuit of profit paves the way for unmitigated disaster. Hence, as a guiding principle, it has been prescribed in the Upanishads to enjoy with restraint and renunciation. While planning for tomorrow and grooming the future trade leaders, spiritualism and values need to be inculcated in them. The manipulations and financial fraud done by Ramalingam Raju, proved disastrous for the software giant Satyam, the investors, employees, stakeholders and above all the goodwill of the nation. Price Water Coopers, the audit firm was also involved in this fly-by-night deal and produced a doctored balancesheet to suit the dark designs of Raju. So, good CG is a necessity in the present corporate world to build the confidence of the stakeholder, employees, and interested groups of people. This paper primarily focuses on the codes of CG in emerging economies, which is a driving force for corporate performance and overall economic prosperity. Particularly, in case of India, it is most important because India is one of the fast growing economies of the world. The corporate sector in India remains changing and moving ahead as per the developments that are taking place in other counterparts and developed economies like the US, the UK and other parts of the corporate world. The infamous collapse of Enron in 2001, one of the Americas largest and celebrated companies, has turned the international attention on corporate frauds and the role that a strong CG needs to play to prevent the frauds to happen (Solomon, 2007). The US enacted
* Faculty, Alphia Institute of Business Management, Bhubaneswar, India. E-mail: kirtiranjans@yahoo.com 119
Corporate Governance in India: The Case of Reserved. 2009 The Icfai University Press. All Rights HDFC Bank
the Sarbanes Oxley Act (2002) in response, while the UK responded by producing the Higgs Report (2003) and Smith Report (2003). In India, the CG movement gathered momentum after the publication of the report of Confederation of Indian Industry (CII) on desirable code of CG in 1997. The amount of research carried out in CG in the context of India lacks research evidences to make effective comparisons with its counterparts as well as developed economies to strengthen the governance codes and good mechanism. It is imperative to generate research literature on this subject. Therefore, this paper tries to analyze the code of CG and its effectiveness in the context of India by using a case study method. This paper has discussed some research questions like: What is CG? What is the background of CG? What are the drivers of CG? Are CG reforms necessary? What is a good CG? and What is the compliance of best codes of governance? The paper sums up the analysis of CG practices in HDFC banka leading Indian private sector bank in CG practices.
Country
Table 1: Corporate Governance Across the World Year 2000 2001 2002 2003 2004 2005 2006 2007 Country Denmark, Indonesia, Kenya, Malaysia, Romania and Philippines China, Czech Republic, Malta, Peru, Singapore and Sweden Austria, Cyprus, Hungary, Kenya, Pakistan, Poland, Russia, Solvakia, Switzerland and Taiwan Finland, Lithuania, Macedonia and New Zealand, Turkey, Ukraine and Latin America Argentina, Bangladesh, Iceland, Norway, Slovenia and OECD Jamaica, ICGN, Latvia and Lithuania Estonia, Lebanon, Luxemburg, Nigeria, Sri Lanka and Thailand Bulgaria
Source: Solomon (2007), Corporate Governance and Accountability, p. 188
has been given to the human and organizational values while dealing with their stakeholders in the organization. The increasing corruption in the government and its various services has kept the management of industrial and business organizations above accountability for their misdeeds, thereby encouraging them to indulge in more unethical practices. The state-owned organizations occupy a dominant position in the countrys economy and being monopolistic, force the consumers to pay the costs of their corporate misgovernance. Organizations in the private sector, barring a few exceptions, indulge in all possible unethical practices to fleece their customers on the one hand and deny the benefits to them on the other. The scandals in a large number of private corporations during the last one decade, clearly indicate the nature and extent of corporate misgovernance that exist in the private sector. Gollakota and Gupta (2006) divided the evolution of corporate governance in India into four phases and identified the value system associated with business enterprises during those periods. They are given below: Phase I: Pre-independence (until 1947)eco-centrism and family ownership.
Phase II: The License Raj (19471-1981)social altruism and public enterprises. Phase III: Knowledge of professionalism (1981-1991)social justice and professional ownership. Phase IV: Liberalization (1991 onwards)eco-centrism and foreign ownership. After briefly analyzing the historical background, we now describe the major changes that happened in the governance and regulatory system in India including the bank governance and the public sector enterprises governance. The Securities and Exchanges Board of India (SEBI), has made a significant progress in providing a rigorous regulatory regime that helps to ensure transparency and fair practice. But there are some areas of concern as well. Despite the fact that the country has a well-functioning banking sector and ranks high in getting credit, a majority of the countrys Small and Medium-Sized Enterprises (SMEs) still rely on relationship-based, informal control and governance mechanisms that limit financing and keep the cost of capital high. It is found that the enforcement mechanism is not very strong and that has resulted in a system where even in large companies, the shareholdings remain relatively concentrated with promoters. There is significant evidence showing the presence of pyramidal structures and tunneling among the Indian business groups despite stringent regulatory requirements. Many researchers (Chakraborthi et al., 2008) argued that the Indian CG environment has been changing since the past decade, particularly with the enactment of the Sarbanes-Oxley-Type Measures in Clause 49 of the listing agreements. The changes are already visible with the rise of successful companies like Infosys, which are completely free from the influence of a dominant family or group, and have made the individual shareholder, its central governance focus.
to improve the enforceability of the creditors rights. India should have the quality of regulatory institutions to sustain its impressive current growth rates in the future (Chakraborthi et al., 2008). For this purpose, one has to first understand a good CG system and its driving forces. A good CG is a reflection of quality management with highest caliber understanding the role, which a good CG plays in maintaining checks and balances within the organization, while increasing transparency and preventing corporate abuse and mismanagement. The CG provides a mechanism, which improves the efficiency, transparency and accountability of the corporates and builds the confidence of the stakeholders. CG systems also describe the structure of rights and responsibilities among the parties that have a stake in the firm (Aguilera and Jackson, 2003). But the kind of responsibility and structure of the firm varies from region to region and country to country including the emerging economies. These economies however, provide unique opportunities and challenges for governance practices and research (Davis, 2005) as little amount of research has taken place in these countries. In this context, an effort is made to identify the driving forces of CG in India. There are certain major driving forces, which have resulted in the emergence of CG in India and these include: (1) globalization; (2) unethical business practices and security scams; (3) privatization; (4) ownership/capital structure; (5) institutional investors; (6) board characteristics and firm performance; (7) executive compensation; and (8) nature and emergence of CG system in India. After a detailed analysis, it is concluded that in Indian system, certain driving forces take more important role for better CG practices required for the effective and efficient management of the corporate sectors. Otherwise it goes like Satyam. This paper now discusses the CG system in HDFC bank Ltd., one of Indias leading private banks, which is known for its sound CG practices.
Board of Directors
The annual report for the period 2006-2007 of HDFC bank highlights that the composition of the Board of Directors of the bank is governed by the Companies Act, 1956, the Banking Regulation Act, 1949 and the Clause 49 listing requirements of the Indian Stock Exchanges, where the securities issued by the bank are listed. The HDFC Board has nine Directors as on March 31, 2007. All the Directors, other than Aditya Puri, are non-executive directors. The bank
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One meeting held, Shri Jagdish Capoor is the chairman of the committee Proper disclosure and transparent policy No proper disclosure (Cont.)
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Number of Shareholders Proper disclosure: 193 Complaint Received in a Year Number of Complaints Unsolved Number of Share Transfers Pending Proper disclosure: Nil Proper disclosure: 136 General Body Meetings Location and Time of Last Three AGMs Were Special Resolutions Passed? Details of Voting Patterns (Physical and Postal Ballot) Person who Conducted Postal Ballot Exercize Procedure for Postal Ballot Proper disclosure Proper disclosure Proper disclosure: Only physical voting, so no need of postal ballot system. Proper disclosure: Not applicable Proper disclosure: Not applicable Disclosures Disclosure on Materially Significant Related Party Transaction Proper disclosure: There are no materially significant related party transactions which have potential conflict with the interest of the company at large (Cont.)
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Market Price Data, i.e., Proper disclosure: Data of high, low, average volume per day, High/Low During Each Month average number of trades per day and value per day for the period in Last Financial Year from April 2006 to March 2007 Performance through BSE, SENSEX, CRISII, Index, etc. Registrar and Transfer Agents Proper disclosure Proper disclosure: Mrs. V Sajan/Mr. S Manve/Mr. V Deshmukh, MCS Inf. Registrars and Transfer Agents, Unit: HDFC Bank, Shree Venkatesh Bhawan, Plot No. 27, Road No. 11, MIDC Area, Andheri (E), Mumbai 400093, Tel: 022 28215235/6/7; FAX: 022 28350456; E-mail: mcssvp@eth.net Proper disclosure Proper disclosure
Address for Correspondence Proper disclosure: HDFC Bank, 2nd Floor, Process House, Senapati Bapat Marg, Kamla Mills Compound, Lower Parel (W), Mumbai 400013; Tel: 022 24988484, 24961616, Et. 3463, FAX: 022 24965235. E-mail: investorhelpdesk@hdfcbank.com
has four independent directors and five non-independent directors. The annual report points out that the Board consists of eminent persons with considerable professional expertise and experience in banking, finance, agriculture, small-scale industries and other related fields.
Governance Policy in HDFC Bank HDFC bank has laid the foundation for CG in line with international best practices.
The chairman is a non-executive director. Not more than 25% of the Board comprises of executive members. HDFC bank Board has many board committees including the following: Audit Committee Board Governance Committee Management Committee Majority of Board committees are presided over by independent professional directors. The Board is responsible for policy formulation, setting up of goals, and evaluation of performance and exercising control. The Board sub-committee is responsible for overseeing the functions of the management. There is a complete separation of executive management from the Board functioning.
Findings
An evaluation of the results reveals that HDFC has shown very good performance in the disclosure policies of CG and attaining the quality of governance practices. The areas, which HDFC bank needs to pay attention are: Disclosure of the power and responsibility for designations at at the helm of affairs of the bank, i.e., to the post of chairman and CEO. Disclosure of tenure and age limit of all the executives, non-executives as well as independent directors. Disclosure of the definition of independent director, financial expert, and disclosure of selection criterion for non-executive and independent directors. Proper appointment of Lead Independent Director in the Board in strict compliance with the provisions of Clause 49 I (A) (iii) (a) and (d) (ii) of SEBI Listing Agreement. Disclosure of breakup of remuneration policy as well as detailed breakup of salary, fixed component and performance linked incentives, perks and allowances of each executive director separately. Affirmation of compliance code of conduct and declaration to the shareholders in a proper and acceptable format.
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Disclosure of the reports of Audit Committee, Remuneration Committee and Shareholders/Investors Grievance Committee in the CG report. Constitution of separate board committees for effective governance of the companys affairs, e.g., Ethics Committee, Nomination Committee, Investment Committee, etc., and disclosure of the reports of these committees in the annual report. Disclosure on mechanism of evaluation of non-executive directors performance in the bank.
Conclusion
The emergence of CG has its own history in different parts of the world. In the present global environment, where economies are integrated with global market environment, it is imperative to develop a sound system of CG. It is more so in emerging economies like India. The first major stimulus for CG reforms was the Southeast Asian crisis during 1997-98 followed by the Enron debacle in 2001, which necessitated the need for ensuring better CG practices, culminating in the enactment of legal measures like Sarbanes-Oxley Act of 2002 in the US. Though there are exceptions like Global Trust Bank and Satyam Computer, India did face miserable corporate failures as in the west, such as Enron, Maxwell, WorldCom, etc. In India, the initial drive for better CG and disclosureperhaps as a result of the 1992 stock market scam and the fast emerging international competition as a consequence of liberalization of the economy that began in 1991came from the CII and the Department of Corporate Affairs. HDFC Bank is one of the largest private sector bank in India, whose practices attract a lot of attention. In spite of some limitations of the study, the primary and secondary sources of data help us to pinpoint the effectiveness of CG practices in HDFC bank. It is important to note the areas where HDFC bank needs to improve its CG practices.
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