Corporate Governance in India

Group Members

Saleiha Sharif Shams-ud-Din Farhan Kaleemi Asim Ali Hashmi Haseeb Zahrab

 Corporate

Corporate is adjective meaning of or relating to a corporation derived from the noun corporation. A corporation is an organization created (incorporated) by a group of shareholders who have ownership of the corporation. The elected Board of directors appoint and oversee management of the corporation.

Governance
Oxford English Dictionary defines Governance as the act, manner, fact or function of governing, sway, control The word has Latin origins that suggest the notion of 'steering'. It deals with the processes and systems by which an organization or society operates.

 Corporate Governance

It is a broad concept and has been defined and understood differently by different groups and at different points of time. The Cadbury Committee report defines it as the system by which companies are directed and controlled. It is generally understood as the framework of rules, relationships, systems and processes within and by which authority is exercised and controlled in corporations.

Governance
One of the major economic developments of this decade has been the recent take-off of India,

Total equity issuance reached $19.2 billion in India, up 22%, while merger and acquisition volume was a record $27.8 billion, up 38%, driven by a 371% increase in outbound acquisition-exceeding for the first time inbound deal volumes. Debt issuance reached an all-time high of $13.7 billion, up 28% from a year earlier ( 2005&06)
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Governance

Indian Stock Exchanges, was third highest in the world,

The long-term sustainability of the India success story depends critically on the state of corporate governance in the country

A stock market that has risen over three-fold in as many years and a steady inflow of foreign investment.

Before liberalization (before 1991)

India was one of the poorest economy filled with Corruption But yet having factories and two stock exchanges and better comparative to other colonised countries

Corruption and nepotism was hall mark of indian corporate sector. Directors were artificial and shareholder had no say in their selection and usually friends of CEO were lying in that.

After liberalization

Unlike other Asian countries, CG in india was not started due to any serious financial mishap rather it was a step taken to align with changing world realities. Also, unlike most Developed countries, the initiative in India was initially driven by an industry association, the Confederation of Indian Industry 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
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Cont.

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
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Cont

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(1) further increase disclosures, and (2) put in place systems that can further strengthen auditors independence

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Indian scenario
Year Name of Committee/Bo dy
Confederation of Indian Industry (CII) Kumar Mangalam Birla Committee

Areas/Aspects Covered

1998

Desirable Corporate Governance A Code

1999

Corporate Governance

2002

Naresh Chandra Committee

N. R. Narayana Murthy Committee

Corporate Audit & Governance

2003

Corporate Governance
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Recent Codes/Reports on Corporate Governance in India

Report of the Kumara Mangalam Committee on Corporate Governance http://web.sebi.gov.in/co (2000). Report of the Committee Appointed by the SEBI on mmreport/corpgov.ht Corporate Governance under the Chairmanship of Shri Kumar ml Mangalam Birla Report on Excellence in Corporate Governance (2000). Report of the Task Force constituted by the Department of Companies Affairs, http://dca.nic.in/corpMinistry of Law, Justice and Company Affairs, Government of exc.htm India Report of the Committee on Corporate Audit and Governance (Naresh http://dca.nic.in/naresh/in Chandra Committee) dex.htm Report of the SEBI Committee on Corporate Governance (2003)under the chairmanship of Shri N R Narayana Murthy http://web.sebi.gov.in/co mmreport/corpgov.p df

Report of the Expert Committee on Company Law, (2005) JJ Irani http://dca.nic.in/report_e Committee Report, Ministry of Company Affairs, Government of xpert_comt.htm India Report of the Consultative Group of Directors of Banks / Financial Institutions (2002), under the chairmanship of Dr.A S Ganguly, http://www.rbi.org.in Reserve Bank of India

Report of the Advisory Group on Corporate Governance (2001), Dr. R http://www.rbi.org.in H Patil, Reserve Bank of India

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Key players discharging Regulatory functions

Ministry of Company Affairs

RBI - The Banking Regulator SEBI - The Capital Market Regulator IRDA The Insurance Regulator Other regulatory agencies have been set up for various sectors such as Power, TeleCommunications. 14

Clause 49 deals with CG in India

The Listing agreement was first introduced by Bombay Stock Exchange

and later followed by other stock exchanges

SEBI, vide its circular dated February 21, 2000, specified principles of corporate governance and introduced a new clause 49 in the Listing agreement of the Stock Exchanges.

The Listing agreement contains 51 clauses

Listing means admission of the securities to dealings on a recognised stock exchange. The securities may be of any public limited company, Central or State Government, quasi governmental and other financial

institutions/corporations, municipalities, etc.

Listing helps in free transferability , leads to transparency in disclosure of information and ensures official quotation is available.
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Applicability of clause 49

All listed entities having a paid up share capital of Rs 3 crores and above or net worth of Rs 25 crores or more at any time in the history of the company For other listed entities which are not companies, but body corporate (e.g. private and public sector banks, financial institutions, insurance companies etc.) incorporated under other statutes, the revised Clause 49 will apply to the extent that it does not violate their respective statutes and guidelines or directives issued by the relevant regulatory authorities.

The revised Clause 49 is not applicable to Mutual Funds Revised clause 49 has come into effect from January 1, 2006

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Birds eye view of Clause 49

Annexure
Annexure I Annexure I A

Contents
Clause 49 - Corporate Governance Information to be placed before Board of Directors

Annexure I B
Annexure I C

Format of Quarterly Compliance Report on Corporate Governance

Suggested List of Items to Be Included in the Report on Corporate Governance in the Annual Report of Companies

Annexure I D

Non-Mandatory Requirements

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Annexure I
I.

Board of Directors

II.
III. IV. V. VI. VII.

Audit Committee
Subsidiary Companies Disclosures CEO/CFO certification Report on Corporate Governance Compliance

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Overview of Clause 49 Corporate Governance

I. Board of Directors

(A) Composition of Board

(B) Non executive directors compensation and disclosures (C) Other provisions as to Board and Committees (D) Code of Conduct II. Audit Committee (A) Qualified and Independent Audit Committee (B) Meeting of Audit Committee (C) Powers of Audit Committee (D) Role of Audit Committee (E) Review of information by Audit Committee
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Overview of Clause 49
III. IV. Subsidiary Companies Disclosures (A) Basis of related party transactions (B) Disclosure of Accounting Treatment (C) Board Disclosures Risk management (D) Proceeds from public issues, rights issues, preferential issues etc.

(E) Remuneration of Directors

(F) Management (G) Shareholders
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Overview of Clause 49.

V. CEO/CFO certification a) Financial Statements (i) Do not contain any materially untrue statement. (ii) Present true and fair view of the state of affairs and are in compliance with AS and applicable laws..
b) c)

No transactions entered is fraudulent or illegal. Accepted the responsibility for establishing and maintaining Internal Controls for the purpose of financial reporting(amended on 13.1.2006) Disclosed to the auditors and Audit Committee deficiencies in the design or operation of internal control.

d)

VI. VII.

Report on Corporate Governance Compliance

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Major challenges

Rule are better shaped just on paper but actual implementation is yet to be made sure The true spirit has yet not been implemented at average Indian companies Sophistication in law is yet required. Corporate governance is quite visible on in few notable companies. And widespread corruption is required to be curbed as well.
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References

R. Chakrabarti,W. Megginson,P. Yadav(2007). Corporate Governance in India, Journal of Applied Corporate Finance Varma R.J(1997). Corporate Governance in India: Disciplining the Dominant Shareholder, The journal of the Indian, 9(4), 518. SAMEER RASTOGI Indian Institute of Foreign Trade NEW DELHI Corporate Governance dated 5TH MARCH 2005 CORPORATE GOVERNANCE & AUDIT COMMITTEE by rajkumar

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References

http://www.sebi.gov.in/ - Securities and Exchange Board of India

http://www.bseindia.com/ - Bombay Stock Exchange Limited

http://www.nfcgindia.org/library_int.htm - National Foundation for Corporate Governance http://www.ita.doc.gov/goodgovernance/ -International Trade Administration http://www.oecd.org/ -Organisation for Economic Co-operation and Development http://www.corpgov.net/ - Corporate governance network

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References

Doing Things Right: Corporate Governance in India Omkar Goswami Chief Economist Confederation of Indian Industry 11-13 November, Mumbai, India http://web.sebi.gov.in/commreport/corpgov.html http://dca.nic.in/corp-exc.htm http://dca.nic.in/naresh/index.htm http://web.sebi.gov.in/commreport/corpgov.pdf http://dca.nic.in/report_expert_comt.htm http://www.rbi.org.in http://www.rbi.org.in

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