CORPORATE GOVERNANCEINTRODUCTION TO CORPORATE GOVERNANCE:
Corporate governance (CG) is a set of process, custom, policies,
laws, institution affecting the way of corporation is directed
administered or control. CG also include the relationship among
many stakeholder involved and the goal for which corporation is
governed. the principle stakeholders are shareholder, board of
directors, employee, customers, creditors, suppliers and the
community at large. CG is a multi- faceted subject. It aims at
ensuring accountability of certain individuals in an organisation.
Through mechanisms that try to reduce or eliminate the principle
agent problem. Corporate governance is a set of system, principles
and processes which ensure that the company is governed in the best
interest of all stakeholder.it is a system by which companies are
directed and controlled. It is about promoting corporate fairness,
transparency and accountability. In other Good corporate governance
is simply good business In the words of MR. NR Murthy, corporate
governance is a mechanisms which enable different group to
contribute capital labour and skills for pursuing their own
interest. The individual who invest in corporation avails an
opportunity to take his portion of profit of business without
participating in the company opration the management of the company
runs the business on behalf of shareholder. Even though the
corporate is an individual entity it is associated with different
constituets. The direction of corporation is influenced by
individual relationship. there has been renewed interest in CG
practices of Modern Corporation since 2001 particularly due to high
profile collapses of number of large US firms such as Enron
corporation MCI
DEFITITION OF CG:1. According to gabrielie O`Donavan , a
business author: CG is an internal system encompassing policies,
processes and people which serve the needs of stakeholder &
shareholder by directing & controlling management activities
with good business survey, activity, accountability. Integrity
2. According to SEBI: CG is acceptance by management of
inalienable right of shareholder as the true owner of the
corporation and their own role as a trustee on behalf of
shareholder. It is about commitment to values, about ethical
business conduct & about making a distinction between
personal& corporate funds in the management of company.
3. According to sir Adrian Cadbury: CG is concern with holding
the balance between economic and social goals & between
individual and communal goals the CG role is to encourage the
efficient use of resources and equally to require accountability
for the stewerd ship of those resources the aim is to align as
nearly as possible the interest of individual. Corporation and
society.
4. According To Kumar Manglam Committee Report: We always have
striven hard for respectability, transparency and to create ethical
organisation. There are certain expectation that we haven`t
fulfilled. But were also young organisation and areas like track
record of management, wemy be low because we `re yet to show
longevity.
5. According to international chamber of commerce: CG is the
relationship between corporate managers, directors, and the
provider of capital people and institution who save and invest
their capital to earn returns. It ensures that the board of
directors are accountable for the pursuit of corporate objective
that the corporation itself confirms to the low &
regulation.
HISTORY OF CORPORATE GOVERNANCE IN INDIA:The history of the
development of Indian corporate laws has been marked by interesting
contrasts. At independence, India inherited one of the worlds
poorest economies but one which had a factory sector accounting for
a tenth of the national product; four functioning stock markets
with clearly defined rules governing listing, trading and
settlements; a well-developed equity culture if only among the
urban rich; and a banking system replete with well-developed
lending norms and recovery procedures3. In terms of corporate laws
and financial system,therefore, India emerged far better endowed
than most other colonies.
The years since liberalization, have witnessed wide-ranging
changes in both laws and regulations driving corporate governance
as well as general consciousness about it. Perhaps the single most
important development in the field of corporate governance and
investor protection in India has been the establishment of the
Securities and Exchange Board of India (SEBI) in 1992 and its
gradual empowerment since then4.Established primarily to regulate
and monitor stock trading, it has played a crucial role in
establishing the basic minimum ground rules of corporate conduct in
the country.Concerns about corporate governance in India were,
however, largely triggered by a spate of crises in the early 90s
the Harshad Mehta stock market scam of 1992 followed by incidents
of companies allotting preferential shares to their promoters at
deeply discounted prices as well as those of companies simply
disappearing with investors money.Corporate governance in India is
evident from the various legal and regulatory frameworks and
Committees set relating to corporate functioning comprising of the
following5:1.The Companies Act, 1956
2.Monopolies and Restrictive Trade Practices Act, 1969 (replaced
by new Competition Law)
3.Foreign Exchange Management Act, 2000
4.Securities and Exchange Board of India Act, 1992
5.Securities Contract Regulation Act, 1956
6.The Depositories Act, 1996
7.Arbitration and Conciliation Act, 1996
8.SEBI Code on Corporate Governance
Apart from these Acts many committees have been set up over the
years to legislate the concept called corporate governance.1)
Desirable Code of Corporate Governance (1998)
Corporate governance has been a buzzword in India since 1998. On
account of the interest generated by Cadbury Committee Report
(1992) in UK corporate governance initiatives in India began in
1998 with the Desirable Code of Corporate Governance a voluntary
code published by the Confederation of Indian Industry (CII), and
the first formal regulatory framework for listed companies
specifically for corporate governance, established by the SEBI6.
The CII Code on corporate governance recommended that the key
information to be reported, listed companies to have audit
committees, corporate to give a statement on value addition,
consolidation of accounts to be optional. Main emphasis was on
transparency.2) Committee on Corporate Governance under the
Chairmanship of Shri Kumar Mangalam Birla (1999).
The Kumar Mangalam Committee made mandatory and nonmandatory
recommendations. Based on the recommendations of the Committee, the
SEBI had specified principles of Corporate Governance and
introduced a new clause 49 in the Listing agreement of the Stock
Exchanges in the year 2000.
3) Naresh Chandra Committee (2002)
The Enron debacle in July 2002, involving the hand-in-glove
relationship between the auditor and the corporate client and
various other scams in the United States, and the consequent
enactment of the stringent Sarbanes Oxley Act in the United States
were some important factors, which led the Indian government to
wake up. The Department of Company Affairs in the Ministry of
Finance on 21 August 2002, appointed a high level committee,
popularly known as the Naresh Chandra Committee, to examine various
corporate governance issues and to recommend changes in the diverse
areas involving the auditorclient relationships and the role of
independent directors.
The Committee submitted its Report on 23 December 2002. Naresh
Chandra Committee recommendations relate to the Auditor-Company
relationship and the role of Auditors. Report of the SEBI Committee
on Corporate Governance recommended that the mandatory
recommendations on matters of disclosure of contingent liabilities,
CEO/CFO Certification, definition of Independent Director,
independence of Audit Committee and independent director exemptions
in the report of the Naresh Chandra Committee, relating to
corporate governance, be implemented by SEBI.4) Committee on
Corporate Governance under the Chairmanship of Shri N. R. Narayana
Murthy (2002)
Narayana Murthy Committee recommendations to clause 49 of the
Listing Agreement, include role of Audit Committee, Related party
transactions, Risk management, compensation to Non-Executive
Directors, Whistle Blower Policy, Affairs of Subsidiary Companies,
Analyst Reports and other non mandatory recommendations.
CORPORATE GOVERNANCE UNDER CLAUSE 49 OF THE LISTING
AGREEMENT
Clause 49 of the Listing Agreement, which deals with Corporate
Governance norms that a listed entity should follow, was first
introduced in the financial year 2000-01 based on recommendations
of Kumar Mangalam Birla committee. After these recommendations were
in place for about two years, SEBI, in order to evaluate the
adequacy of the existing practices and to further improve the
existing practices set up a committee under the Chairmanship of Mr
Narayana Murthy during 2002-03.The Murthy committee, after holding
three meetings, had submitted the draft recommendations on
corporate governance norms7. After deliberations, SEBI accepted the
recommendations in August 2003 and asked the Stock Exchanges to
revise Clause 49 of the Listing Agreement based on Murthy committee
recommendations. This led to widespread protests and
representations from the Industry thereby forcing the Murthy
committee to meet again to consider the objections. The committee,
thereafter, considerably revised the earlier recommendations and
the same was put up on SEBI website on 15th December 2003 for
public comments. It was only on 29th October 2004 that SEBI finally
announced revised Clause 49, which had to be implemented by the end
of financial year 2004- 05. These revised recommendations have also
considerably diluted the original Murthy Committee
recommendations.Areas where major changes were made include:
1.Independence of Directors
2.Whistle Blower policy
3.Performance evaluation of nonexecutive directors
4.Mandatory training of non-executive directors, etc.Failure to
comply with clause 49 (corporate governance) of SEBIs listing
agreement is punishable with imprisonment of up to 10 years or a
fine of up to Rs 25 crore or both. Besides, stock exchanges can
suspend the dealing/trading of securities. With over 6000 listed
companies, monitoring and enforcement are significant challenges in
the immediate term. While SEBIs ultimate sanction in cases of
serial non-compliance is delisting, this is unpopular as delisting
penalises the non-controlling dispersed shareholders and closes
their exit options. Hence, SEBI has tended to enforce the
recommendations through dialog and in some cases monetary
penalties8.Corporate Governance under Companies Act, 1956
The Companies Act, 1956 is the central legislation in India that
empowers the Central Government to regulate the formation,
financing, functioning and winding up of companies. It applies to
whole of India and to all types of companies9.The Companies Act,
1956 has elaborate provisions relating to the Governance of
Companies, which deals with management and administration of
companies. It contains special provisions with respect to the
accounts and audit, directors remuneration, other financial and
nonfinancial disclosures, corporate democracy, prevention of
mismanagement, etc.(1) Disclosures on Remuneration of Directors
The specific disclosures on the remuneration of directors
regarding all elements of remuneration package of all the directors
should be made as a part of Corporate Governance. Section 299 of
the Act requires every director of a company to make disclosure, at
the Board meeting, of the nature of his concern or interest in a
contract or arrangement (present or proposed) entered by or on
behalf of the company10. The company is also required to record
such transactions in the Register of Contract under section 301 of
the Act.(2) Requirements of the Audit Committee
Audit Committee has a critical role to play in ensuring the
integrity of financial management of the company. This Committee
add assurance to the shareholders that the auditors, who act on
their behalf, are in a position to safeguard their interests.
Besides the requirements of Clause 49, section 292A of the Act
requires every public having paid up capital of Rs 5 crores or more
shall constitute a committee of the board to be known as Audit
Committee11.As per the Act, the committee shall consist of at least
three directors; two-third of the total strength shall be directors
other than managing or whole time directors. The Annual Report of
the company shall disclose the composition of the Audit
Committee12.If the default is made in complying with the said
provision of the Act, then the company and every officer in default
shall be punishable with imprisonment for a term extending to a
year or with fine up to Rs 50000 or both.(3) Number of
Directorships Restricted
Sections 275, 276 and 277 have been amended to provide that no
person shall hold office as director in more than 15 companies
(excluding private company, unlimited company, etc., as defined in
section 278) instead of 20 companies. This shall enable the
director concerned to devote more time to the affairs of company in
which he is a director13.(4) Corporate Democracy
Wider participation by the shareholders in the decision making
process is a pre-condition for democratizing corporate bodies. Due
to geographical distance or other practical problems, a
substantially large number of shareholders cannot attend the
general meetings. To overcome these obstacles and pave way for
introduction of real corporate democracy, section 192A of the Act
and the Companies (Passing of Resolution by Postal allot), Rules
provides for certain resolutions to be approved and passed by the
shareholders through postal ballots.(5) Appointment of Nominee
Director by Small Shareholders
Section 252 has been amended to provide that a public company
having paid-up capital of Rs. 5 crore or more and one thousand or
more small shareholders can elect a director by small shareholders.
Small shareholders means a shareholder holding shares of nominal
value of Rs. 20,000 or less in a company14. However, this provision
is not mandatory and small shareholders have option to elect a
person as their representative for appointment as director on the
Board of such company.
(6) Directors Responsibility Statement
Sub-section (2AA) in section 217A has provided that the Boards
report shall include a directors responsibility statement with
respect to applicable accounting standards having been followed,
consistent application of accounting policies selected so as to
give a true and fair view of state of affairs and of the profit and
loss of the company, maintenance of adequate accounting records
with proper care for safeguarding assets of company and to prevent
and detect fraud and other irregularities, and the preparation of
annual accounts on a going concern basis.
CHARACTERSTICKS OF CG:1. DisciplineCorporate discipline is a
commitment by a companys senior management to adhere to behavior
that is universally recognized and accepted to be correct and
proper. This encompasses a companys awareness of, and commitment
to, the underlying principles of good governance, particularly at
senior management level.All involved parties will have a commitment
to adhere to procedures, processes, and authority structures
established by the organization.2. TransparencyTransparency is the
ease with which an outsider is able to make meaningful analysis of
a companys actions, its economic fundamentals and the non-financial
aspects pertinent to that business. This is a measure of how good
management is at making necessary information available in a
candid, accurate and timely manner not only the audit data but also
general reports and press releases. It reflects whether or not
investors obtain a true picture of what is happening inside the
company.
All actions implemented and their decision support will be
available for inspection by authorized organization and provider
parties.3. IndependenceIndependence is the extent to which
mechanisms have been put in place to minimize or avoid potential
conflicts of interest that may exist, such as dominance by a strong
chief executive or large share owner. These mechanisms range from
the composition of the board, to appointments to committees of the
board, and external parties such as the auditors. The decisions
made, and internal processes established, should be objective and
not allow for undue influences.
All processes, decision-making, and mechanisms used will be
established so as to minimize or avoid potential conflicts of
interest.4. AccountabilityIndividuals or groups in a company, who
make decisions and take actions on specific issues, need to be
accountable for their decisions and actions. Mechanisms must exist
and be effective to allow for accountability. These provide
investors with the means to query and assess the actions of the
board and its committees.
Identifiable groups within the organization - e.g., governance
boards who take actions or make decisions - are authorized and
accountable for their actions.5. ResponsibilityWith regard to
management, responsibility pertains to behavior that allows for
corrective action and for penalizing mismanagement. Responsible
management would, when necessary, put in place what it would take
to set the company on the right path. While the board is
accountable to the company, it must act responsively to and with
responsibility towards all stakeholders of the company.
Each contracted party is required to act responsibly to the
organization and its stakeholders.6. FairnessThe systems that exist
within the company must be balanced in taking into account all
those that have an interest in the company and its future. The
rights of various groups have to be acknowledged and respected. For
example, minority share owner interests must receive equal
consideration to those of the dominant share owner(s).
All decisions taken, processes used, and their implementation
will not be allowed to create unfair advantage to any one
particular party.7. Social responsibilityA well-managed company
will be aware of, and respond to, social issues, placing a high
priority on ethical standards. A good corporate citizen is
increasingly seen as one that is non-discriminatory,
non-exploitative, and responsible with regard to environmental and
human rights issues. A company is likely to experience indirect
economic benefits such as improved productivity and corporate
reputation by taking those factors into consideration.
OBJECTIVE OF CORPORATE GOVERNANCE:Corporate Governance may be
defined as a set of systems, processes and principles which ensure
that a company is governed in the best interest of all
stakeholders. It is the system by which companies are directed and
controlled. It is about promoting corporate fairness, transparency
and accountability. In other words, 'good corporate governance' is
simply 'good business'. It ensures: Adequate disclosures and
effective decision making to achieve corporate objectives;
Transparency in business transactions; Statutory and legal
compliances; Protection of shareholder interests; Commitment to
values and ethical conduct of business.In other words, corporate
governance is the acceptance by management of the inalienable
rights of shareholders as the true owners of the corporation and of
their own role as trustees on behalf of the shareholders. It deals
with conducting the affairs of a company such that there is
fairness to all stakeholders and that its actions benefit the
greatest number of stakeholders. In this regard, the management
needs to prevent asymmetry of benefits between various sections of
shareholders, especially between the owner-managers and the rest of
the shareholders.It is about commitment to values, about ethical
business conduct and about making a distinction between personal
and corporate funds in the management of a company. Ethical
dilemmas arise from conflicting interests of the parties involved.
In this regard, managers make decisions based on a set of
principles influenced by the values, context and culture of the
organization. Ethical leadership is good for business as the
organization is seen to conduct its business in line with the
expectations of all stakeholders.The aim of "Good Corporate
Governance" is to ensure commitment of the board in managing the
company in a transparent manner for maximizing long-term value of
the company for its shareholders and all other partners. It
integrates all the participants involved in a process, which is
economic, and at the same time social.The fundamental objective of
corporate governance is to enhance shareholders' value and protect
the interests of other stakeholders by improving the corporate
performance and accountability. Hence it harmonizes the need for a
company to strike a balance at all times between the need to
enhance shareholders' wealth whilst not in any way being
detrimental to the interests of the other stakeholders in the
company. Further, its objective is to generate an environment of
trust and confidence amongst those having competing and conflicting
interests.It is integral to the very existence of a company and
strengthens investor's confidence by ensuring company's commitment
to higher growth and profits. Broadly, it seeks to achieve the
following objectives: A properly structured board capable of taking
independent and objective decisions is in place at the helm of
affairs; The board is balance as regards the representation of
adequate number of non-executive and independent directors who will
take care of their interests and well-being of all the
stakeholders; The board adopts transparent procedures and practices
and arrives at decisions on the strength of adequate information;
The board has an effective machinery to subserve the concerns of
stakeholders; The board keeps the shareholders informed of relevant
developments impacting the company; The board effectively and
regularly monitors the functioning of the management team; The
board remains in effective control of the affairs of the company at
all times. The overall endeavour of the board should be to take the
organisation forward so as to maximize long term value and
shareholders' wealth.
PRINCIPLES OF CG:AccountabilityThe Code of Corporate Governance
envisages accountability of the Board of Directors of the Company
before all shareholders in accordance with the legislation in
force, and is the governing document for the Board of Directors in
issues related to strategy planning, administration and control
over the Companys executive bodies.
FairnessThe Company undertakes to protect the rights of its
shareholders and treat all shareholders on an equal basis. The
Board of Directors enables its shareholders to receive efficient
protection if their rights are violated.
TransparencyThe Company shall provide timely disclosure of
credible information on all the important facts related to its
activities, including information on its financial condition,
social and environmental measures, results of activities, ownership
and management structures; the Company shall provide free access to
such information for all interested parties.
ResponsibilityThe Company acknowledges the rights of all
interested parties envisaged by the legislation in force, and aims
at cooperation with such parties in order to provide steady
development and ensure financial stability of the
Company.LeadershipAn effective board should head each company. The
Board should steer the company to meet its business purpose in both
the short and long term.CapabilityThe Board should have an
appropriate mix of skills, experience and independence to enable
its members to discharge their duties and responsibilities
effectively.
SustainabilityThe Board should guide the business to create
value and allocate it fairly and sustainably to reinvestment and
distributions to stakeholders, including shareholders, directors,
employees and customers. IntegrityThe Board should lead the company
to conduct its business in a fair and transparent manner that can
withstand scrutiny by stakeholders.We kept them short, with
purpose, but we also kept them aspirational. None of them should be
a surprise they might be just like you have on your board. Well,
why not share and exchange our ideas - the more we debate, the
better we remember the principles which guide our own
behaviour.
LEGAL FRAMEWORK
An effective regulatory and legal framework is indispensable for
the proper and sustained growth of the company. In rapidly changing
national and global business environment, it has become necessary
that regulation of corporate entities is in tune with the emerging
economic trends, encourage good corporate governance and enable
protection of the interests of the investors and other
stakeholders. Further, due to continuous increase in the
complexities of business operation, the forms of corporate
organizations are constantly changing. As a result, there is a need
for the law to take into account the requirements of different
kinds of companies that may exist and seek to provide common
principles to which all kinds of companies may refer while devising
their corporate governance structure.The important legislations for
regulating the entire corporate structure and for dealing with
various aspects of governance in companies are Companies Act, 1956
and Companies Bill, 2004. These laws have been introduced and
amended, from time to time, to bring more transparency and
accountability in the provisions of corporate governance. That is,
corporate laws have been simplified so that they are amenable to
clear interpretation and provide a framework that would facilitate
faster economic growth.Secondly, the Securities Contracts
(Regulation) Act, 1956, Securities and Exchange Board of India Act,
1992 and Depositories Act, 1996 have been introduced by Securities
and Exchange Board of India (SEBI), with a view to protect the
interests of investors in the securities markets as well as to
maintain the standards of corporate governance in the country.In
india the corporate governance have following legal approaches:
Companies act 1956 SEBI
COMPANIES LAWS
The MINISTRY OF CORPORATIONis the main authority for regulating
and promoting efficient, transparent and accountable form of
corporate governance in the Indian corporate sector. It is
constantly working towards improvement in the legislative framework
and administrative set up, so as to enable easy incorporation and
exit of the companies, as well as convenient compliance of
regulations with transparency and accountability in corporate
governance. It is primarily concerned with administration of the
Companies Act, 1956 and related legislations.1.The companes
act,1956is the central legislation in India that empowers the
Central Government to regulate the formation, financing,
functioning and winding up of companies. It applies to whole of
India and to all types of companies, whether registered under this
Act or an earlier Act. It provides for the powers and
responsibilities of the directors and managers, raising of capital,
holding of company meetings, maintenance and audit of company
accounts, powers of inspection, etc. That is, it empowers the
Central Government to inspect the books of accounts of a company,
to direct special audit, to order investigation into the affairs of
a company and to launch prosecution for violation of the Act. These
inspections are designed to find out whether the companies conduct
their affairs in accordance with the provisions of the Act, whether
any unfair practices prejudicial to the public interest are being
resorted to by any company or a group of companies and to examine
whether there is any mismanagement which may adversely affect any
interest of the shareholders, creditors, employees and others.The
main objectives with which this Act has been introduced are to:-
(i) help in the development of companies on healthy lines; (ii)
maintain a minimum standard of good behaviour and business honesty
in company promotion and management; (iii) protect the interests of
the shareholders as well as the creditors; (iv) ensure fair and
true disclosure of the affairs of companies in their annual
published balance sheet and profit and loss accounts; (v) ensure
proper standard of accounting and auditing; (vi) provide fair
remuneration to management and Board of Directors as well as to
company's employees; etc.The Companies Act, 1956 has elaborate
provisions relating to the Governance of Companies, which deals
with management and administration of companies. It contains
special provisions with respect to the accounts and audit,
directors remuneration, other financial and non-financial
disclosures, corporate democracy, prevention of mismanagement,
etc.Every company shall in each year, hold in addition to any other
meetings, a general meeting as its annual general meeting and shall
specify the meeting as such in the notices calling it; and not more
than fifteen months shall elapse between the date of one annual
general meeting of a company and that of the next. At each annual
general meeting, every company shall appoint an auditor or auditors
to hold office from the conclusion of that meeting until the
conclusion of the next annual general meeting and shall, within
seven days of the appointment, give intimation thereof to every
auditor so appointed.Every auditor of a company shall have a right
of access at all times to the books and accounts and vouchers of
the company, whether kept at the head office of the company or
elsewhere, and shall be entitled to require from the officers of
the company such information and explanations as the auditor may
think necessary for the performance of his duties as auditor.The
auditor shall inquire:- (i) whether loans and advances made by the
company on the basis of security have been properly secured and
whether the terms on which they have been made are not prejudicial
to the interests of the company or its members; (ii) whether
transactions of the company which are represented merely by book
entries are not prejudicial to the interests of the company; etc.In
the case of every company, a meeting of its Board of directors
shall be held at least once in every three months and at least four
such meetings shall be held in every year. Every director of a
company who is in any way, whether directly or indirectly,
concerned or interested in a contract or arrangement, or proposed
contract or arrangement, entered into or to be entered into, by or
on behalf of the company, shall disclose the nature of his concern
or interest at a meeting of the Board of directors.No director of a
company shall, as a director, take any part in the discussion of,
or vote on, any contract or arrangement entered into, or to be
entered into, by or on behalf of the company, if he is in any way,
whether directly or indirectly, concerned or interested in the
contract or arrangement; nor shall his presence count for the
purpose of forming a quorum at the time of any such discussion or
vote; and if he does vote, his vote shall be void.Every company
shall keep one or more registers in which shall be entered
separately particulars of all contracts or arrangements, including
the following particulars to the extent they are applicable in each
case, namely:- (i) the date of the contract or arrangement; (ii)
the names of the parties thereto; (iii) the principal terms and
conditions thereof; (iv) in the case of a contract or arrangement
to which this Act applies, the date on which it was placed before
the Board; (v) the names of the directors voting for and against
the contract or arrangement and the names of those remaining
neutral. Further, every company shall keep at its registered office
a register of its directors, managing director, managing agent,
secretaries and treasurers, manager and secretary.The remuneration
payable to the directors of a company, including any managing or
whole-time director, shall be determined, either by the articles of
the company, or by a resolution or, if the articles so require, by
a special resolution, passed by the company in general meeting; and
the remuneration payable to any such director determined as
aforesaid shall be inclusive of the remuneration payable to such
director for services rendered by him in any other capacity.
However, any remuneration for services rendered by any such
director in any other capacity shall not be so included if:- (i)
the services rendered are of a professional nature; and (ii) in the
opinion of the Central Government, the director possesses the
requisite qualifications for the practice of the profession.A
director may receive remuneration by way of a fee for each meeting
of the Board, or a committee thereof, attended by him. A director
who is neither in the whole-time employment of the company nor a
managing director may be paid remuneration, either by way of a
monthly, quarterly or annual payment with the approval of the
Central Government; or by way of commission if the company by
special resolution authorises such payment. However, the
remuneration paid to such director, or where there is more than one
such director, to all of them together, shall not exceed:- (i) one
per cent of the net profits of the company, if the company has a
managing or whole-time director, a managing agent or secretaries
and treasurers or a manager; (ii) three per cent of the net profits
of the company, in any other case.Every public company having
paid-up capital of not less than five crores of rupees shall
constitute a committee of the Board knows as 'Audit Committee'
which shall consist of not less than three directors and such
number of other directors as the Board may determine of which two
thirds of the total number of members shall be directors, other
than managing or whole-time directors. The annual report of the
company shall disclose the composition of the Audit Committee. The
auditors, the internal auditor, if any, and the director-in-charge
of finance shall attend and participate at meetings of the Audit
Committee but shall not have the right to vote.The Audit Committee
should have discussions with the auditors periodically about
internal control systems, the scope of audit including the
observations of the auditors and review the half-yearly and annual
financial statements before submission to the Board and also ensure
compliance of internal control systems. It shall have authority to
investigate into any matter in relation to the items specified by
the Board and for this purpose, shall have full access to
information contained in the records of the company and external
professional advice, if necessary. The recommendations of the Audit
Committee on any matter relating to financial management, including
the audit report, shall be binding on the Board. If the Board does
not accept the recommendations of the Audit Committee, it shall
record the reasons thereof and communicate such reasons to the
shareholders.Besides, a listed public company may, and in the case
of resolutions relating to such business as the Central Government
may, by notification, declare to be conducted only by postal
ballot, shall, get any resolution passed by means of a postal
ballot, instead of transacting the business in general meeting of
the company. Where a company decides to pass any resolution by
resorting to postal ballot, it shall send a notice to all the
shareholders, along with a draft resolution explaining the reasons
thereof, and requesting them to send their assent or dissent in
writing on a postal ballot within a period of thirty days from the
date of posting of the letter. If a resolution is assented to by a
requisite majority of the shareholders by means of postal ballot,
it shall be deemed to have been duly passed at a general meeting
convened in that behalf. However, if a shareholder sends his assent
or dissent in writing on a postal ballot and thereafter any person
fraudulently defaces or destroys the ballot paper or declaration of
identify of the shareholder, such person shall be punishable with
imprisonment for a term which may extend to six months or with fine
or with both.2.In the competitive and technology driven business
environment, while corporates require greater autonomy of operation
and opportunity for self-regulation with optimum compliance costs,
there is a need to bring about transparency through better
disclosures and greater responsibility on the part of corporate
owners and management for improved compliance. In response to such
changing corporate climate, the Companies Act, 1956 has been
amended from time to time so as to provide more transparency in
corporate governance and protect the interests of small investors,
depositors and debenture holders, etc.The important step in this
direction has been the companies bill 2004, which has been
introduced to provide the comprehensive review of the company law.
It contained important provisions relating to corporate governance,
like, independence of auditors, relationship of auditors with the
management of company, independent directors with a view to improve
the corporate governance practices in the corporate sector. It is
subjected to greater flexibility and self-regulation by companies,
better financial and non-financial disclosures, more efficient
enforcement of law, etc.This amendment to the Companies Act 1956
mainly focused on reforming the audit process and the board of
directors. It mainly aimed at:- (i) laying down the process of
appointment and qualification of auditors, (ii) prohibiting
non-audit services by the auditors; (iii) prescribing compulsory
rotation, at least of the Audit Partner; (iv) requiring
certification of annual audited accounts by both CEO and CFO; etc.
For reforming the boards, the bill included that remuneration of
non-executive directors can be fixed only by shareholders and must
be disclosed. A limit on the amount which can be paid would also be
laid down. It is also envisaged that the directors should be
imparted suitable training. However, among others, an independent
director should not have substantial pecuniary interest in the
companys shares.
CORPORATE GOVERNANCE : SEBI`S LOW:An improved corporate
governance is the key objective of the regulatory framework in the
securities market. Accordingly,sebihas made several efforts with a
view to evaluate the adequacy of existing corporate governance
practices in the country and further improve these practices. It is
implementing and maintaining the standards of corporate governance
through the use of its legal and regulatory framework,
namely:-1.securities contract(regulation) act,1956:This Act was
enacted to prevent undesirable transactions and to check
speculation in the securities by regulating the business of dealing
therein. Any stock exchange, which is desirous of being recognised,
may make an application in the prescribed manner to the Central
Government. Every application shall contain such particulars as may
be prescribed, and shall be accompanied by a copy of the bye-laws
of the stock exchange for the regulation and control of contracts
as well as a copy of the rules relating in general to the
constitution of the stock exchange, and in particular to:- (i) the
governing body of such stock exchange, its constitution and powers
of management and the manner in which its business is to be
transacted; (ii) the powers and duties of the office bearers of the
stock exchange; (iii) the admission into the stock exchange of
various classes of members, the qualifications for membership, and
the exclusion, suspension, expulsion and re-admission of members
there from or there into; (iv) the procedure for the registration
of partnerships as members of the stock exchange, in cases where
the rules provide for such membership; and the nomination and
appointment of authorised representatives and clerks.Every
recognised stock exchange shall furnish the Central Government with
a copy of the annual report, and such annual report shall contain
such particulars as may be prescribed. It may make rules or amend
any rules made by it to provide for all or any of the following
matters, namely:- (i) the restriction of voting rights to members
only in respect of any matter placed before the stock exchange at
any meeting; (ii) the regulation of voting rights in respect of any
matter placed before the stock exchange at any meeting so that each
member may be entitled to have one vote only, irrespective of his
share of the paid-up equity capital of the stock exchange; (iii)
the restriction on the right of a member to appoint another person
as his proxy to attend and vote at a meeting of the stock exchange;
etc.If, in the opinion of the Central Government, an emergency has
arisen and for the purpose of meeting the emergency, the Central
Government considers it expedient so to do, it may, by notification
in the Official Gazette, for reasons to be set out therein, direct
a recognised stock exchange to suspend such of its business for
such period not exceeding seven days and subject to such conditions
as may be specified in the notification, and, if, in the opinion of
the Central Government, the interest of the trade or the public
interest requires that the period should be extended, it may, by
like notification extend the said period from time to
time.Securities Contracts (Regulation) Amendment Act, 2007 has been
enacted in order to further amend the Securities Contracts
(Regulation) Act, 1956, with a view to include securitisation
instruments under the definition of 'securities' and provide for
disclosure based regulation for issue of the securitised
instruments and the procedure thereof. This has been done keeping
in view that there is considerable potential in the securities
market for the certificates or instruments under securitisation
transactions. Further, replication of the securities markets
framework for these instruments would facilitate trading on stock
exchanges and, in turn, help development of the market in terms of
depth and liquidity.2.SEBI act,1992This Act was enacted to protect
the interests of investors in securities and to promote the
development of, and to regulate, the securities market and for
matters connected therewith or incidental thereto. For this
purpose, the SEBI (the Board), by regulation, specify:- (i) the
matters relating to issue of capital, transfer of securities and
other matters incidental thereto; and (b) the manner in which such
matters shall be disclosed by the companies.No stock-broker,
sub-broker, share transfer agent, banker to an issue, trustee of
trust deed, registrar to an issue, merchant banker, underwriter,
portfolio manager, investment adviser and such other intermediary
who may be associated with securities market shall buy, sell or
deal in securities except under, and in accordance with, the
conditions of a certificate of registration obtained from the Board
in accordance with the regulations made under this Act.No
depository, participant, custodian of securities, foreign
institutional investor, credit rating agency, or any other
intermediary associated with the securities market as the Board may
by notification in this behalf specify, shall buy or sell or deal
in securities except under and in accordance with the conditions of
a certificate of registration obtained from the Board in accordance
with the regulations made under this Act.Further, no person shall
sponsor or cause to be sponsored or carry on or caused to be
carried on any venture capital funds or collective investment
scheme including mutual funds, unless he obtains a certificate of
registration from the Board in accordance with the
regulations.Every application for registration shall be in such
manner and on payment of such fees as may be determined by
regulations. The Board may, by order, suspend or cancel a
certificate of registration in a prescribed manner, as may be
determined by regulations under this Act. However, no order shall
be made unless the person concerned has been given a reasonable
opportunity of being heard.3.Depositories act,1996 This Act was
enacted to provide for regulation of depositories in securities and
for matters connected therewith or incidental thereto. It provides
for the introduction of scripless trading system and settlement,
which is considered necessary for the effective functioning of the
securities markets. As per the Act, the term 'depository' means "a
company formed and registered under the Companies Act, 1956 and
which has been granted a certificate of registration under
sub-section (1A) of section 12 of the Securities and Exchange Board
of India Act, 1992".No depository shall act as a depository unless
it obtains a certificate of commencement of business from the Board
(the SEBI). The Board shall grant a certificate only if it is
satisfied that the depository has adequate systems and safeguards
to prevent manipulation of records and transactions. However, a
certificate shall not be refused unless the depository concerned
has been given a reasonable opportunity of being heard.A depository
shall enter into an agreement with one or more participants as its
agent, in such form as may be specified by the bye-laws. Any
person, through a participant, may enter into an agreement, in such
form as may be specified by the bye-laws, with any depository for
availing its services. Any such person shall surrender the
certificate of security, for which he seeks to avail the services
of a depository, to the issuer in such manner as may be specified
by the regulations. The issuer, on receipt of certificate of
security, shall cancel the certificate of security and substitute
in its records the name of the depository as a registered owner in
respect of that security and inform the depository accordingly. A
depository shall, on receipt of information, enter the name of the
person referred in its records, as the beneficial owner.On receipt
of intimation from a participant, every depository shall register
the transfer of security in the name of the transferee. If a
beneficial owner or a transferee of any security seeks to have
custody of such security, the depository shall inform the issuer
accordingly.Every person subscribing to securities offered by an
issuer shall have the option either to receive the security
certificates or hold securities with a depository. Where a person
opts to hold a security with a depository, the issuer shall
intimate such depository the details of allotment of the security,
and on receipt of such information the depository shall enter in
its records the name of the allottee as the beneficial owner of
that security.A depository shall be deemed to be the registered
owner for the purposes of effecting transfer of ownership of
security on behalf of a beneficial owner. However, it shall not
have any voting rights or any other rights in respect of securities
held by it. The beneficial owner shall be entitled to all the
rights and benefits and be subjected to all the liabilities in
respect of his securities held by a depository.The Board, on being
satisfied that it is necessary in the public interest or in the
interest of investors so to do, may, by order in writing,:- (i)
call upon any issuer, depository, participant or beneficial owner
to furnish in writing such information relating to the securities
held in a depository as it may require; or (ii) authorise any
person to make an enquiry or inspection in relation to the affairs
of the issuer, beneficial owner, depository or participant, who
shall submit a report of such enquiry or inspection to it within
such period as may be specified in the order.
BENEFITS OF CORPORATE GOVERNANCECorporate governance is often
associated with public companies, but small businesses can also
benefit from this practice. Corporate governance consists of rules
that direct the roles and actions of key people rather than
processes. Unlike simple policies and procedures, such as a dress
code or expense reimbursement procedure, corporate governance rules
focus on creating better management and fewer ethical or legal
problems. Examples of corporate governance include setting rules
for using business funds for personal use; serving on a board of
directors; hiring family members; conflicts of interest; notifying
owners, investors and partners of key meetings and decisions; and
disbursing profits.Improved ReputationA corporate governance
program can boost your company's reputation. If you publicize your
corporate governance policies and detail how they work, more
stakeholders will be willing to work with you. This can include
lenders who see you have strong fiscal policies and internal
controls, charities you might partner with to promote your
business, government agencies, employees, the media, vendors and
suppliers. The practice of sharing internal information with key
stakeholders is known as transparency, which allows people to feel
more confident you have little or nothing to hide.Fewer Fines,
Penalties, LawsuitsCorporate governance includes instituting
policies that require the company to take specific steps to stay
compliant with local, state and federal rules, regulations and
laws. For example, as part of corporate governance, an executive
management team or board of directors might conduct a review of the
companys hiring practices if it falls under the guidelines of the
Equal Opportunity Employment Commission. You might require that
your accounting department undergo an external audit by an
independent auditor every quarter or year.Decreased Conflicts and
FraudCorporate governance limits the potential for bad behavior of
employees by instituting rules to reduce potential fraud and
conflict of interest. For example, the company might draft a
conflict of interest statement that top executives must sign,
requiring them to disclose and avoid potential conflicts, such as
awarding contracts to family members or contracts in which an
executive has an ownership interest. The company might forbid loans
to officers and family members or the hiring of family members.
External audits or requiring checks over a certain amount to be
approved and signed by two people help reduce errors and
fraud.LIMITATIONS OF CGCorporate governance is one of the law's
most intensely regulated fields. This is because corporations are
privately owned but are treated as independent legal entities,
rendering their assets vulnerable to a variety of potential abuses.
Corporate governance is generally governed by state law, although
the federal government has also enacted legislation to curb
abuses.Ownership-Management SeparationThe officers and directors
who run the day-to-day affairs of a corporation and make most of
its policy decisions are not necessarily shareholders. This can
become a problem in large, publicly traded corporations. If no
hareholder holds a controlling interest in the corporation, and
most shareholders vote by proxy, the corporation's assets are
controlled by the board of directors and the officers. The
separation of ownership and management can lead to a conflict of
interest between management's duty to maximize shareholder value
and its interest in maximizing its own income. A CEO, for example,
might be paid a large bonus even as the corporation approaches
bankruptcy.Illegal Insider TradingThe term "corporate insiders"
refers to corporate officers, directors and employees because they
may have access to confidential, non-public information about the
corporation that might affect the value of its shares. Corporate
insiders are not strictly prohibited from trading corporate shares
but must report these trades to the Securities and Exchange
Commission. Illegal insider trading occurs when a shareholder,
while in possession of confidential information relevant to the
future value of his shares, sells shares to a buyer without access
to this information. Illegal insider trading can also be committed
by a shareholder not directly affiliated with the corporation, such
as an outside auditor, a government regulator or a relative of a
corporate insider. Because access to confidential corporate
information can be widely dispersed, laws against insider trading
can be difficult to enforce.Misleading Financial StatementsThere
are many ways to present factually accurate information on a
financial statement in a manner that is misleading to investors --
by, for example, selling property from a parent company to a
subsidiary to maximize parent company revenues. It is also possible
to present factually incorrect information that is difficult to
detect by establishing complex networks of subsidiaries and
cross-shareholdings.Costs of RegulationThe abuse of corporate
governance has triggered the enactment of a large body of state and
federal laws designed to prevent such abuses from recurring.
Compliance with these laws can be burdensome and expensive for
corporations. For example, the Securities and Exchange Act of 1933
requires companies seeking to list on a stock exchange to make such
extensive disclosures to potential investors that compliance can
cost hundreds of thousands of dollars. More recently, the
Sarbanes-Oxley Act of 2002 requires corporations to establish
extensive systems of internal controls to ensure that their
financial statements are both factually accurate and
non-misleading.
ISSUES IN CG:Issues in Corporate Governance Major issues in
corporate governance reports have included the role of board, the
quality of financial reporting and auditing, directors
remuneration, risk management and corporate social responsibility.
In order to clear the above statement I need to expand on these
issues in later articles but for now lets examine the major areas
that have been affected by the corporate governance.Duties of
Directors The corporate governance reports have aimed to build on
the directors duties as defined in statutory and case law duties of
directors. These include the fiduciary duties to act in the best
interests of the company, use their powers for a purpose, avoid
conflicts of interest and exercise a duty of care.Composition and
Balance of the Board A feature of many corporate governance
scandals has been boards dominated by a single senior executive or
small cabinet of kitchen with other member of board who are working
just as a robot toy. It is possible that a single person may bypass
the board directions to meet his own personal interests. The report
on the UK Guinness case suggested that the Earnest Saunders chief
executive paid himself a reward of 3million without the consent of
other directors. In the case where the organization is not
dominated by a single person, there may be other problem in the
composition of board of directors. The organization may be run by a
minority group revolve around CEO or CFO and recruitment and
appointments may be done by personal recommendations rather than
formal system. So in order to run a smooth business a board must be
balanced in sense of talents, skills, and competence from numerous
specialisms related to the organizations situation and also in
terms of age (in order to ensure that senior directors are bringing
on newer ones to assist in the planning of succession).
Remuneration and Reward of Directors Directors being paid
excessive bonuses and salaries have been identified as significant
corporate abuses for a large number of years. It is, however,
unavoidable that the corporate governance codes have been targeted
this significant issue.Reliability of Financial Reporting and
External Auditors Financial reporting and auditing issue are seen
more critical to corporate governance by the investors because of
their main consideration in ensuring management accountability. It
is the reason that they have been must debated and the focus of
serious litigation. Whilst considering the corporate governance
debate only on reporting and accounting issues is insufficient, the
greater regulation of practices such as off-balance sheet financing
has directed to greater transparency and a reduction in risks faced
by investors. The necessary questioning may not be carried out by
external auditor from senior management because the auditors may
have threat of loosing audit assignment. In the same way internal
auditor may not ask an alien question to senior member because
their employment matters are determined by the CFO. But generally
the external auditors become the reason of corporate collapse, for
instance in the case of Barlow Clowes that was poorly focused and
planned audit failed to determine the illegal usage of monies from
clients.Boards Responsibility for Risk Management and Internal
Control If the board does not arrange the regular meetings in order
to consider the organizational activities systematically show that
the board is not meeting their responsibilities. But this thing
also occurred sometime when the board is not provided by full
information to properly oversight on business activities. All this
mess results in the poor system that may unable to report and
measure the risks associated with business.Shareholders Rights and
Responsibilities Shareholders role and rights is subject of
particular importance. They should be informed about all those
information that are material to them because these information may
influence their amount of investment. They should also be given the
right to vote on policies affecting the governance of
organization.Corporate Social Responsibility and Business Ethics
The lack of mutual decision and sense of responsibility for
businesses and stakeholders has unavoidably turned out the business
ethics and social responsibility a significant part of corporate
governance debate.
MODELS OF CORPORATE GOVERNANCE :The following are some of the
models of corporate governance :Anglo-American model : This model
is also called an Anglo-Saxon model and is used as basis of
corporate governance in U.S.A, U.K, Canada, Australia, and some
common wealth countries. The shareholders appoint directors who in
turn appoint the managers to manage the business. Thus there is
separation of ownership and control. The board usually consist of
executive directors and few independent directors. The board often
has limited ownership stakes in the company. Moreover, a single
individual holds both the position of CEO and chairman of the
board. This system (model) relies on effective communication
between shareholders, board and management with all important
decisions taken after getting approval of shareholders (by
voting).
German model : This is also called as 2 tier board model as
there are 2 boards viz. The supervisory board and the management
board. It is used in countries like Germany, Holland, France, etc.
Usually a large majority of shareholders are banks and financial
institutions. The shareholder can appoint only 50% of members to
constitute the supervisory board. The rest is appointed by
employees and labour unions. .The supervisory board appoints and
monitors the management board. There is a reporting relationship
between both the boards although the management board independently
conducts the day-to-day operations of the company. One important
feature is that the labor relations director is represented on the
management board. Therefore, the governance mechanisms have imbibed
workers participation. German banks can own corporate stock unlike
the U.S. banks. Although the German Universal Banks as group cast
54 to 64 percent of the votes in 1992 without absolute majority
there is no evidence that they had acted as effective institutional
monitors on behalf of the shareholders.
Japanese model : This model is also called as the business
network model, usually shareholders are banks/financial
institutions, large family shareholders, corporate with
cross-shareholding. There is supervisory board which is made up of
board of directors and a president, who are jointly appointed by
shareholder and banks/financial institutions. This is rejection of
the Japanese keiretsu- a form of cultural relationship among family
controlled corporate and groups of complex interlocking business
relationship, where cross shareholding is common most of the
directors are heads of different divisions of the company. Outside
director or independent directors are rarely found of the
board.
Although shareholders own the company, the financing bank has a
crucial role. The executive management, which steps into the shoes
of the board of directors, performs the management function. In
fact, the financing bank provides even the managerial personnel and
monitors the management function. It also has powers to supersede
the board when it becomes expedient or in a state of emergency.
Indian model : The model of corporate governances found in India
is a mix of the Anglo-American and German models. This is because
in India, there are three types of Corporation viz. private
companies, public companies and public sectors undertakings (which
includes statutory companies, government companies, banks and other
kinds of financial institutions). Each of these corporation have a
distinct pattern of shareholding. For e.g. In case of companies,
the promoter and his family have almost complete control over the
company. They depend less on outside equity capital. Hence in
private companies the German model of corporate governance is
followed.
The pattern of private companies is mostly that of closely held
or dominated by a founder, his family, and associates. The role of
external equity finance is small; the business is financed by
retained earnings and heavily by debt (Tata group, Reliance group,
Birla group etc.).In respect of public enterprises, the board is
formed by the central/state government and even where divestiture
has taken place, hold of the government continues to be dominant.
Here, the issues concerning protection of stakeholders generally
take a back seat. Large corporations are, therefore, often run more
in the interest of the government than in the interest of
efficiency and maximization of aggregate shareholder wealth.
CONCLUSIONWith the recent spate of corporate scandals and the
subsequent interest in corporate governance, a plethora of
corporate governance norms and standards have sprouted around the
globe. After the Satyam Scandal, corporate governance, which is the
system that helps firms control and direct operations, is in the
spotlight as key parts of the governance framework such as audit
and finance functions have failed to check the promoter-driven
agendas.Corporate governance extends beyond corporate law. Its
objective is not mere fulfillment of legal requirements but
ensuring commitment on managing transparentcy for maximising
shareholder values. As competition increases, technology pronounces
the deal of distance and speeds up communication, environment also
changes. In this dynamic environment, the systems of Corporate
Governance also need to evolve, upgrade in time with the rapidly
changing economic and industrial climate of the country.Corporate
Governance has become the latest buzzword today. Almost every
country has institutionalized a set of Corporate Governance codes,
spelt out best practices and has sought to impose appropriate board
structures. Despite the Corporate Governance revolution there
exists no universal benchmark for effective levels of disclosure
and transparency. There are several corporate governance structures
available in the developed world but there is no one structure,
which can be singled out as being better than the others. There is
no one size fits all structure for corporate governance. Corporate
governance extends beyond corporate law. Its fundamental objective
is not the mere fulfillment of the requirements of law but in
ensuring commitment of the board in managing the company in a
transparent manner for maximizing long term shareholder value.
Effectiveness of corporate governance system cannot merely be
legislated by law. As competition increases, technology pronounces
the death of distance and speeds up communication. The environment
in which companies operate in India also changes. In this dynamic
environment the systems of corporate governance also need to
evolve. The recommendations made by different expert committees
will go a long way in raising the standards of corporate governance
in Indian companies and make them attractive destinations for local
and global capital. These recommendations will also form the base
for further evolution of the structure of corporate governance in
consonance with the rapidly changing economic and industrial
environment of the country in the new millennium.BIBLOGRAPHYBook1.
Investor Protection and Corporate Governance: Firm-level-Alberto
Chong,Florencio Lopez-de-Silanes2. Business ethics and corporate
governance - archana prabhu desai3. Corporate Governance - Robert
A. G. Monks,Nell Minow
Websites:1. www.google.com2. www.wikipidia.com3. www.sebi.com4.
www.ask.com
Articles: kumar manglam Birla committee report on CG Naresh
Chandra Committee (2002) Report on Corporate Governance under the
Chairmanship of Shri N. R. Narayana Murthy (2002)