Corporate

Governance
Satyam Vada
Forever speak the truth and follow the
Dharmam Chara
dharma
- Taittariya
Upanishad

Governance Concept in Ramayana

To provide the maximum happiness for the

maximum number of people for the maximum
period, based on the principles of Dharma
righteousness and moral values.
- Ayodhya Kand

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.

Driving Forces of CG in India

1) Unethical Business Practices
Security Scams ---Harshad Mehtha Security 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.
2) Impact of Globalization
Integration with Foreign Market
Foreign Investors expectations
New Business Opportunities --- IT & ITES, BPO etc.,
New Capital formation FII, FDI
3) 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
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, (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 four times a year, with a maximum time
gap of four months between two successive meetings.

If the chairman of the Company is a non-executive then one-third

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 one member must be an expert in finance/accounts.

Must have at least three 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.

Mandated CG guidelines and

disclosures
Disclosures to shareholders in addition to balance sheet, P&L
and cash flow statement

Board composition (executive, non-exec, independent).

Qualifications and experience of directors.

Number of outside directorships held by each director (capped at director

not being a member of more than 10 board-level committees, and
Chairman of not more than 5).

Attendance record of directors.

Remuneration of directors.

Relationship (familial or pecuniary) with other directors.

Warning against insider trading, with procedures to prevent such acts.

Details of grievances of shareholders, and how quickly these were

addressed.

Date, time and venue of annual general meeting of shareholders.

Mandated CG guidelines and

disclosures
Disclosures to shareholders in addition to balance sheet, P&L and
cash flow statement
Dates of book closure and dividend payment.
Details of shareholding pattern.
Name, address and contact details of registrars and/or share
transfer agents.
Details about the share transfer system.
Stock price data over the reporting year, and how the companys
stock measured up to the index.
Financial effects of stock options.
Financial effects of any share buyback.
Financial effects of any warrants that are to be exercised.
Chapter reporting corporate governance practices

Mandated CG guidelines and

disclosures
Disclosures to shareholders in addition to balance sheet, P&L and
cash flow statement

Detailed chapter on Management Discussion and Analysis focusing

on markets, operations, finances, accounts, risks, opportunities and
threats, internal control systems.

Consolidated financial statement, incorporating accounts of all

subsidiaries (over 50% shares held by reporting company).

Details of all significant related party transactions.

Detailed segment reporting (revenues, costs, operating profits and

capital employed).

Deferred tax liabilities and assets and debit/credit in the P&L for the
reporting year

Recent Misconducts: The List Goes On

Computer Associates:
Artificially inflated revenue and improperly rewarded top
executives.

CMS Energy
Overstated revenues in 2000 and 2001 thru round trip energy
trades?

Dynegy
Transactions to cut taxes and artificially increase cash flow ?

Kmart
Suspected improper accounting for vendor allowances

Lucent Technologies
Adjusted fiscal 2000 revenues by $679 million.

Several more names, respected world-over

AOL Time Warner, Bristol-Myers, Elan,Halliburton, ImClone
Systems, Microstrategy, Mirant, Network Associates, Reliant
Resources, Vivendi Universal, Xcel Energy, Xerox.

Corporate Mis-Governance

Theories of Corporate Governance

Anglo-American model
German model of CG
Japanese model of CG

&

Infosys Technologies: The Best among

Indian Corporates

As per the Credit Lyonnais Securities Analysis (CLSA), the

corporate governance ratings of the Software firms are higher than
those of other Indian firms.

Infosys, based in Bangalore, is a publicly held, ISO 9001 certified

company offering information technology consulting & software
services.

The software offered include application development,

Commerce & Internet Consulting, Software Maintenance.

Respected across the country, with very strong systems, high

ethical values & a nurturing working atmosphere.

Net income of US 1,155 million and revenue of US 4,176 million.

At present having US 20.4 billion market capitalisation.

E-

Achievements

Voted as the Best Managed Company in Asia.

Biggest exporters of Software.

First to follow the US Generally Accepted

Accounting Principles before going for Nasdaq
listing in 1991.

Championed Corporate Governance in India.

Narayana Murthys Global Strategy

1)

Global Delivery Model

2)

Moving up the Value Chain

3)

PSPD Model

Producing where it is most cost

effective to produce & selling where it is most profitable to sell.

Getting involved in a
software development project at the earliest stage of its life
cycle.

Predictability of Revenues, Sustainability of

Revenues, Profitability, De-risking.

ICSI National Award for Excellence in

Corporate Governance

Best Governed Companies

Concluding Observations

Code of CG should be redesigned to reflect international best

practices

Stringent enforcement of Law

More effective coordination and cooperation between SEBI, DCA

CG mechanism should be flexible and suitable

Overall ethical values in all segments should be promoted for

effective

accounting, auditing, disclosure and transparent system.

WINNING
WINNING
EMPLOYEES
EMPLOYEES

DELIGHTED
DELIGHTED
CUSTOMERS
CUSTOMERS

TRUSTED
TRUSTED
SUPPLIERS
SUPPLIERS

GROWING
GROWING
INVESTORS
INVESTORS

HAPPY
HAPPY
SOCIETY
SOCIETY

SATISFIED
SATISFIED
GOVERNMENT
GOVERNMENTAND
AND
REGULATORS
REGULATORS

GROUP-8
Debojit Roy H66
Sritanu Das Mahapatra
H57
Abhisek Sahu H3
Krishnakant Pandey H25
Biswajit Ghosh H12