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1) Introduction:

Corporate governance:

Corporate governance is the set of processes, customs, policies, laws, andinstitutions affecting the way a corporation is directed, administered orcontrolled. Corporate governance also includes the relationships amongthe many stakeholders involved and the goals for which the corporation isgoverned.

The principal stakeholders are the shareholders/members, management,and the board of directors. Other stakeholders include labour (employees),customers, creditors (e.g., banks, bond holders), suppliers, regulators, andthe community at large.

An important theme of corporate governance is to ensure theaccountability of certain individuals in an organization throughmechanisms that try to reduce or eliminate the principal-agent problem.

It is a system of structuring, operating and controlling a company with aview to achieve long term strategic goals to satisfy shareholders,creditors, employees, customers and suppliers, and complying with thelegal and regulatory requirements, apart from meeting environmental and

local community needs.

Report of SEBI committee (India) on Corporate Governance definescorporate governance as the acceptance by management of theinalienable rights of shareholders as the true owners of the corporationand of their own role as trustees on behalf of the shareholders. It is aboutcommitment to values, about ethical business conduct and about makinga distinction between personal & corporate funds in the management of acompany.

Issues involving corporate governance principles include:

Internal controls and internal auditors The independence of the entity's external auditors and the quality of

their audits Oversight of the preparation of the entity's financial statements Review of the compensation arrangements for the chief executive

officer and other senior executives

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Chapter 2

Introduction of CorporateGovernance

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1. Introduction to corporate governance

The need for corporate governance is not something typical to our countryor economy. Even in the countries where regulatory mechanisms are moredemanding in their content and more vigilant in their implementation,flagrant violations under the veil of corporate impenetrability havegenerated a strident demand for better governance. The advent of theinformation age has created an awakened shareholder, vigilant public andan almost predatory journalistic fervour. Depending upon the model ofcorporate disclosure followed by different legal frameworks, the right toinformation has forced corporate to divulge more than they ever did.

The following definition should help us to understand the concept better:

Corporate Governance is not just corporate management; it is somethingmuch broader to include a fair efficient and transparent administration tomeet certain well defined objectives. It is a system of structuring,operating and controlling a company with a view to achieve long termstrategic goals to satisfy shareholders, creditors employees customersand suppliers, and comply with the legal and regulatory requirements,apart from meeting environmental and local community needs. When it ispracticed under a well laid out system, it leads to building of a legal,commercial and institutional framework and democrats the boundarieswithin which these functions are performed.

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Why Corporate Governance?

In the beginning of the new millennium, several companies in the USA and

elsewhere faced collapse because of corporate misgovernance andunethical practices they indulged in. the then existing regulatoryframework seemed to be inadequate to deal with the gigantic businessconglomerates that committed deliberate frauds.

In the year 2000, several American mega corporations collapsed like apack of cards. The federal administration of President Bush was quick toslap punitive measures on erring corporations and initiated preventivesteps to avoid corporate frauds in future. The Sarbanes-Oxley Act made itmandatory for senior executives to certify reports under oath with thepain of severe penalties if proved wrong.

In India, the governance of most of the countrys industrial and businessorganizations thrived on unethical practices at the market place andshowed scant regard for the timeless human and organizational valueswhile dealing with their shareholders, employees and other stakeholders.

An overwhelmingly large number of Indian corporations used severalillegal tactics such as cornering of industrial licenses with a view tokeeping away competitors, using import licenses to make a quick profit,illegally holding money aboard, and indulging into bribery, corruption andother unethical practices with impunity.

The reasons for the corporate misgovernance in India were many: Aclosed economy, a sheltered market, limited need and access to globalbusiness, lack of competitive spirit and an inefficient regulatoryframework. These were responsible for poor governance of companies inIndia for well over 40 years, between 1951 and 1991.

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What is good Corporate Governance?

Bad governance is being recognized now as one of the root causes ofcorrupt practices in our societies. Major donors, institutional investors andinternational financial institutions provide their aid and loans in conditionthat reforms that ensure good governance are put in place by therecipient nations. As with nations, corporations too are expected toprovide good governance to benefit all their stakeholders. At the sametime, good corporate are not born, but are made by the combined effortsof al stakeholders, which include shareholders, board of directors,employees, customers, dealers, government and the society at large. Lawand regulation alone cannot bring about changes in corporate to behavebetter to benefit all concerned. Directors and management, as goaded bystakeholders and inspired by societal values, have a very important role to

play. The company and its officers, who, inter alia, include the board ofdirectors and the officials, especially the senior management, shouldstrictly follow a code of conduct.

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Obligation to society at large

A corporation is a creation of law as an association of persons forming partof a society in which it operates. Its activities are bound to impact thesociety as the societys value would have an impact on the corporation.

Therefore, they have mutual rights and obligations to discharge for thebenefit of each other.

National interest: A company (and its management) should necommitted in all its actions to benefit the economic development ofthe countries in which it operates and should not engage in anyactivity that would militate against such an objective.

Political non-alignment: A company should be committed to andsupport a functioning democratic constitution and system with atransparent and fair electoral system and should not support directlyor indirectly any specific political party or candidate for politicaloffice.

Legal compliances: The management of a company shouldcomply with all applicable government laws, rules and regulations.Legal compliance will also mean that corporations should abide by

the tax laws of the nations in which they operate and these shouldbe paid on time and as per the required amount.

Rule of law: Good governance requires fair, legal frameworks thatare enforced impartially. It also requires full protection of rights,particularly those of minority shareholders. Impartial enforcement oflaws requires an independent judiciary and regulatory authorities.

Honest and ethical conduct: Every officer of the company

including its directors, executives and non executive directors,managing director, CEO, CFO and CCO should deal on behalf of thecompany with professionalism, honesty, commitment and sincerityas well as high moral and ethical standards.

Corporate citizenship: A corporate should be committed to be agood corporate citizen not only in compliance with all relevant lawsand regulations but also by actively assisting in the improvement ofthe quality of life of the people in the communities in which itoperates with the objective of making them self reliant and enjoy a

better quality of life.

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Ethical behaviour: Corporations have a responsibility to setexemplary standards of ethical behaviour, both internally within theorganizations, as well as in their external relationships.

Social concern: The Company should have concerns towards the

society. It can help the needy people & show its concern by notpolluting the water, air & land. The waste disposal should not affectany human or other living creatures.

Healthy and safe working environment: A company should beable to provide a safe and healthy working environment and complywith the conduct of its business affairs with all regulations regardingthe preservations of environment of the territory it operates in.

Competition: A company should market its products & services onits own merits & should not resort to unethical advertisements orinclude unfair & misleading pronouncements on competitorsproducts & services.

Timely responsiveness: Good governance requires thatinstitutions & processes try to serve all stakeholders within areasonable time frame.

Corporations should uphold the fair name of the country.

Obligation to investors

The investors as shareholders and providers of capital are of paramountimportance to a corporation. A company has following obligations toinvestors:

Towards shareholders: A company should be committed to

enhance shareholder value and comply with all regulations and lawsthat govern shareholders rights. The boa5rd of directors of thecompany shall and fairly inform its shareholders about all relevantaspects of the companys business and disclose such information inaccordance with the respective regulations and agreements. Everyemployee shall strive for the implementation of and compliance withthis in his professional environment. Failure to adhere to the codecould attract the most severe consequences including termination ofemployment or directorship as the case may be.

Measures promoting transparency and informed shareholderparticipation: A related issue of equal importance is the need to

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bring about greater levels of informed attendance and meaningfulparticipation by shareholders in matters relating to their companieswithout such freedom being abused to interfere with managementdecision. An ideal corporate should address this issue and relate it tomore meaningful and transparent accounting and reporting.

Transparency means that information is freely available and directlyaccessible to those who will be affected by such decisions and theirenforcement. It also means that enough information is provided andthat it is provided in easily understandable forms and media.

Financial reporting and records: A company should prepare andmaintain accounts of its business affairs fairly and accurately inaccordance with the financial and accounting reporting standards,laws and regulations of the country in which it conducts the

business affairs.Wilful material misrepresentation of and/or misinformation on thefinancial accounts and reports shall be regarded as the violation ofthe firms ethical conduct and also will invite appropriate civil orcriminal action under the relevant laws.

Obligation to employees

In the context of enhanced awareness of better governance practices,managements should realize that they have their obligations towards theirworkers too.

Fair employment practices: An ideal corporate should provideequal access and fair treatment to all employees on the basis ofmerit; the success of the company will be improved while enhancingthe progress of individuals and companies. The applicable labourand employment laws should be followed wherever it operates.

Equal opportunities: A company should provide equal opportunityto all its employees and all qualified applicants for employment

without regard to their race, caste, religion, colour, marital status,sex, age, nationality and disability.

Humane treatment: Companies should treat employees as theirfirst customers and above all as human. They have to meet thebasic needs of all employees in the organization. There should be afriendly, healthy and competitive environment for the workers toprove their ability.

Participation: Participation of both men and women is a keycornerstone of corporate governance. Participation could be either

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direct or through representatives. It needs to be informed andorganized. This means freedom of association and expression onone hand and an organized civil society on the other.

Empowerment: Empowerment unleashes creativity and innovationthroughout the organization by truly vesting decision making powersat the most appropriate levels in the organizational hierarchy.

Equity and inclusiveness: A corporation is a miniature of asociety whose well being depends on ensuring that all its employeesfeel that they have a stake in it and do not feel excluded from themain stream. This requires all groups, particularly the mostvulnerable, have opportunities to improve or maintain their wellbeing.

Participative and collaborative environment: There should notbe any form of human exploitation in the company. There should beequal opportunities for all levels of management in any decision-making. The management should cultivate the culture whereemployees should feel they are secure and are being well takencare of. Collaborative environment would bring peace and harmonybetween the working community and the management, which inturn, brings higher productivity, higher profits and higher marketshare.

Obligation to customers

A companys existence cannot be justified without its catering to he needsof its customers. The companies have an obligation to its employees,without whose assistance they cannot realize their objectives.

Quality of products and services: The Company should becommitted to supply goods and services of the highest qualitystandards, backed by efficient after sales service consistent with therequirements of the customers to ensure their total satisfaction. Thequality standards of companys goods and services should meet notonly the required national standards but also should endeavour toachieve international standards.

Products at affordable prices: Companies should ensure thatthey make available to their customers quality goods at affordable

prices while making normal profit is justifiable, profiteering andfattening on the miseries of the poor consumers is unacceptable.

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Companies must constantly endeavour to update their expertise,technology and skills of manpower to cut down costs and pass onsuch benefits to customers. They should not create a scare in themidst of scarcity or by themselves create an artificial scarcity tomake undue profits.

Unwavering commitment to customer satisfaction: Companiesshould be fully committed to satisfy their customers and earn theirgoodwill to stay long in the business. They should encourage thewarranties and guarantees given on their products and in case ofharmful or sub-standard products should replace them with goodones.

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Managerial obligations

Protecting companys assets: The assets of the company shouldnot be dissipated or misused but invested for the purpose ofconducting the business for which they are duly authorized.Theseinclude tangible as well as intangible assets.

Behaviour toward government agencies: A companysemployees should not offer or give any of the firms funds orproperty as donation to any government agencies or theirrepresentatives directly or through intermediaries in order to obtainany favourable performance of official duties.

Control: control is a necessary principal of governance that thefreedom of management should be exercised within a framework ofappropriate checks and balances. Control should prevent misuse ofpower, facilitate timely management response to change andensure that business risks are pre-emptively and effectivelymanaged.

Consensus oriented: Good governance requires mediation of thedifferent interests in society to reach a broad consensus on what isin the best interest of the whole community and how this can be

achieved.

Gifts and donations: The Companys employees should neitherreceive nor make directly or indirectly any illegal payments,remuneration, gifts, donations or comparable benefits which areintended to or perceived to obtain business or uncompetitivefavours for the conduct of its business.

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3. Landmarks in emergence of corporate governance

OECD Principles

The Organization for Economic Co-operation and Development (OECD)was one of the earliest non-governmental organizations to work on andspell out principles and practices that should govern corporate in theirgoal to attain long-term shareholder value. The OECD Principles were oft-quoted and have won universal acclaim, especially of the authorities onthe subject of corporate governance. Because of the ubiquitous approval,the OECD Principles are as much trendsetters as the Codes of BestPractices associated to the Cadbury Report. A useful first step in creatingor reforming the corporate governance system is to look at the principles

laid out by the OECD and adopted by its member governments. Theyinclude the following elements:

The rights of shareholders: The rights of shareholders include aset of rights to secure ownership of their shares, the right to fulldisclosure of information, voting rights, participation in decisions onsales or modification of corporate assets, merger and new shareissues. The guidelines go on to specify a host of other issuesconnected to the basic concern of protecting the value of thecorporation.

Equitable treatment of shareholders: The OECD is concernedwith protecting minority shareholders rights by setting up systemsthat keep insiders, including managers and directors, from takingadvantage of their roles. Insider trading, for example, is explicitlyprohibited and directors should disclose any material interestregarding transactions.

The role of stakeholders in corporate governance: the OECDrecognizes that there are other stakeholders in companies ionaddition to shareholders. Banks, bondholders and workers, forexample, are important stakeholders in the way in which companiesperform and make decision. The OECD guidelines lay out severalgeneral provisions for protecting stake holders interests.

Disclosure and transparency; The OECD lays down a number ofprovisions for the disclosure and communication of key facts aboutthe company ranging from financial details to governance structuresincluding the board of directors and their remuneration. Theguidelines also specify that independent auditors in accordance withhigh quality standards should perform annual audits.

The responsibilities of the board: The OECD guideline provides agreat deal of details about the functions of the board in protectingthe company and its shareholders. These include concerns about

corporate strategy, risk, executive compensation and performanceas well as accounting and reporting systems.

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The OECD guidelines are somewhat general, however, there is growingpressure to put more enforcement mechanisms into those guidelines. Thechallenge will be to do this in a way consistent with market oriented

procedures by creating self enforcing procedures that do not impose largenew costs on firms. The following are some ways to introduce moreexplicit standards:

Countries should be required to establish independent shareregistries. All too often, newly privatized or partially privatized firmsdilute stock or simply fail to register shares purchased throughforeign direct investment.

Standards for transparency and reporting of the sales of underlyingassets need to be spelled out along with enforcement mechanismsand procedures by which investors can seek to recover damages.

The discussion of stakeholder participation in the OECD guidelinesneeds to be balanced by discussion of conflict of interest and insidertrading issues. Standards or guidelines are needed in both areas.

Property rights and their protection.

Internationally accepted accounting standards should be explicitlyrequired and national standards should be brought into alignmentwith international standards.

Internal company audit functions and the inclusion of outsidedirectors on audit committees need to be made explicit. The bestpractice would be to require that only outside, independent directors

be allowed to serve on audit committees.

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SEBI Guidelines

All companies are required to submit a quarterly compliance report to thestock exchanges within 15 days from the end of a financial reportingquarter. The report has to be submitted either by the Compliance Officeror by the Chief Executive Officer of the company after obtaining dueapprovals. SEBI has prescribed a format in which the information shall beobtained by the Stock Exchanges from the companies. The companieshave to submit compliance status on eight sub-clauses namely:

Board of Directors;

Audit Committee;

Shareholders / Investors Grievance Committee;

Remuneration of directors;

Board procedures; Management;

Shareholders; and

Report on Corporate Governance.Stock exchanges are required to set up a separate monitoring cell withidentified personnel, to monitor compliance with the provisions of therecommendations. Stock exchanges are also required to submit aquarterly compliance report from the companies as per the Schedule ofImplementation. The stock exchanges are required to submit aconsolidated compliance report within 30 days of the end of the quarter to

SEBI.

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4. Rights and privileges of shareholders

Rights of shareholders

The members of the company enjoy various rights in relation to thecompany. These rights are conferred on the members of the companyeither by the Indian Companies Act 1956 or by the Memorandum andarticles of Association of the company or by the general law, especiallythose relating to contracts under the Indian Contract Act, 1872.

Some of the more important rights of the shareholders as stressed bythese acts are the following:

He has the right to obtain copies of the Memorandum of Association,Article of Association and certain resolutions and agreements onrequest, on payment of prescribed fees.

He has the right to have the certificate of shares held by him within3 months of the allotment.

He has the right to transfer his share or other interests in thecompany subject to the manner provided by the articles of thecompany.

He has a right to appeal to the Company Law Board if the companyrefuses or fails to register the transfer of shares.

He has the right to apply to the Company Law Board for therectification of the register of members.

He has the right to apply to the court to have any variation orabrogation to his rights set aside by the court.

He has a right to inspect the register and the index of members,annual returns, register of charges and register of investments notheld by the company in its own name without any charge.

He is entitled to receive notices of general meetings and to attendsuch meetings and vote either in person or by proxy.

He is entitled to receive a copy of the statutory report.

He is entitled to receive copies of the annual report of directors,annual accounts and auditors report.

He has the right to participate in the appointment of auditors andthe election of directors at the annual general meeting of thecompany.

He has the rights to make an application to Company Law board forcalling annual general meeting, if the company fails to call such ameeting within the prescribed time limits.

He is entitled to obtain and inspect the copies of minutes ofproceedings of general meetings.

He has the right to participate in the declaration of dividends and

receive his dividends duly. He has a right to demand poll.

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He has a right to apply for investigation of the affairs of thecompany.

He has a right to remove the director before the expiry of the termof his office.

He has a right to make an application to company Law Board for

relief in case of oppression and mismanagement. He can make a petition to the High Court for the winding up of the

company under certain circumstances.

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Guidelines for investors/shareholders

The Securities and Exchange Board of India (SEBI), the Indian capitalmarket regulator in its guidelines to investors/shareholders, titled Quickreference Guide for Investors published recently makes it known that ashareholder of a company enjoys the following rights:

Rights of shareholder, as an individual:

To receive the share certificates on allotment or transfer, as thecase may be, in due time.

To receive copies of abridged annual report, the balance sheet andthe Profit & Loss account and the auditors report.

To participate and vote in general meetings either personally orthrough proxies.

To receive dividends in due time once approved in general meeting.

To receive corporate benefits such as rights, bonus etc. onceapproved.

To apply to Company Law board (CLB) to call or direct theconvening the annual general meeting.

To inspect the minute books of the general meetings and to receive

copies thereof. To proceed against the company by way of civil or criminal

proceedings.

To apply for the winding up of the company.

To demand a poll on any resolution.

To requisition and extraordinary general meeting.

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Rights of a Debenture holder:

To receive interest/redemption in due time.

To receive a copy of the trust deed on request. To apply for winding up of the company if the company fails to

pay its debts.

To approach the debenture trustee with the debenture holdersgrievance.

Shareholders responsibilities:

While a shareholder may be happy to note that one has so many rights asa stakeholder in the company, it should not lead one to complacencybecause one also has certain responsibilities to discharge, such as

To remain informed

To be vigilant

To participate and vote in general meetings

To exercise ones rights on ones own or as a group

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5. Corporate governance and other stakeholders

Corporate governance and employees

An organization needs capital and labour to create wealth. Earlier, themost important need for an organization to be a success was capital. Buttoday the growing recognition that human capital is a source ofcompetitive advantage has led to the understanding that labour is moreimportant than capital. The interest of the employees can be protectedthrough the following:

Trade unions: Trade unions alone can represent the collectiveinterests of employees and fight for what is rightly due to them fromthe organization. They could use this as a platform to negotiateagreements between the organization and labour.

Co-determination: It a situation where there is employeerepresentation on the board of directors of the organization.

Profit sharing: Profit sharing motivates the individual worker toput in his best as his efforts are directly related to the profits of theorganization, in which he gets a share. Profit sharing could be donein many ways, such as

- cash based sharing of annual profits where the annual cashprofits of the organization are shared among the employees,

- Deferred profit sharing where the deferred profits of theorganization are shared among the employees.

The objective of such profit sharing is to encourage employeeinvolvement in the organization and improve their motivation anddistribution of wealth among all the factors of production.

Equity sharing: Under equity sharing, employees are given anoption to buy the companies shares, identify themselves with, and thusbecome the owners of the organization. There are various way sinwhich equity sharing could be done: employees share1) Ownership plans, 2) stock bonus plans, 3) stock option plans, 4)

employee buyout, and 5) worker cooperatives. Team production solution: Team production solution is a situation

where the boards of directors must balance competing interests ofvarious stakeholders and then arrive at decisions that are in the bestinterest of the organization.

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Corporate Governance and Customers

On 15th March 1962, President John F. Kennedy declared four rights ofconsumers- the right to satisfaction of basic needs, the right to safety, theright to be informed, and the right to choose. In 1983, the United Nationsrecommended that world governments develop, strengthen andimplement a coherent consumer protection policy. In India, the ConsumerProtection Act 1986 was passed and the country embarked onstrengthening the consumer protection regime.

The explosion of interest in consumer matters is a very recentphenomenon. The reason is twofold- a combination of new businessmethods and changing attitudes. The all pervasive exaggerated and often

false claims, made for services and goods, emphasize the imperative needfor Consumer Protection Legislation and creation of awareness about itamong the general public.

The rights of the consumer are as follows:

The right to safety: The rights to be protected against themarketing of goods and services which are hazardous to life andproperty.

The right to be informed: The consumer has the right to beinformed about the quality, quantity, potency, purity, standard and

price of goods or services so as to protect them against unfair tradepractices.

The right to choose: The right to be assured, wherever possible,access to variety of goods and services at competitive prices.

The right to be heard: The right to be assured that consumersinterests will receive due consideration at appropriate forums.

The right to seek redressed: the right against unfair tradepractices or restrictive trade practices or unscrupulous exploitationof consumers.

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Corporate Governance and Institutional Investors

Most of the reports on corporate governance have emphasized the rolewhich institutional investors play in corporate governance. In India, thereare broadly four types of institutional investors:

The financial institutions, such as IFCI, ICICI, IDBI, the StateFinancial Corporation, etc.

Insurance companies such as LIC, GIC, and their subsidiaries.

All banks

All Mutual funds (MF) including UTI.While an investor decision is under consideration, the key factors to betaken into consideration are

Financial results and solvency:This is the most important factoramong the factors such as an upward trend in earnings per shareand profits, a healthy cash flow and a reasonable level of dividendpayment. All these are considered major indicators of a companysfinancial health and are indicated in the financial results. However, aconsistent dividend policy is less significant.

Financial statements and annual reports: There are twoimportant aspects under this head.

o Extent of disclosure: The quality of the financial statements isthe next most influential factor when it comes to investmentdecisions. Institutional investors consider the level of

disclosure of the companys strategies, initiatives and qualityof managements discussion and analysis of the years results.Financial position in the annual report is equally important.

This is a strong indication of the investing publics emphasisand preference for clear disclosures in a companys annualreport, in excess of regulatory requirements.

o Comparability with international GAAP: a significant5proportion of institutional investors do not invest in a companyif the financial statements are non-comparable to InternationalGenerally Accepted Accounting Principles. Implicitly, this couldmean that comparability of financial statements of companieswith International GAAP is important in the eyes of theinvestor.

Investor communications: Institutional investors value thewillingness of companies to provide additional information toinvestors, analysts and other commentators, their prompt release ofinformation about transactions affecting minority shareholders andthe existence of other transparency mechanisms that help ensurefair treatment to all shareholders.

Composition and quality of the board: The most importantaspect within this factor is the quality and experience of the

executive directors on the board. In contrast, investors wouldconsider investing even though they are dissatisfied with the

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quality, qualification and experience of independent non-executivedirectors and their role in board meetings. In addition, manyinvestors are not too concerned if there are insufficient independentnon-executive directors on the board.

Corporate governance practices: Investors consider corporate

governance practices when they make investment decisions. Thecompany should follow the principles for corporate governancebeing- auditing and compliance, disclosure and transparency andboard processes.

Corporate image: The image of the company in the community isalso considered when an institutional investor is called on to take aninvestment decision. The image of the organization should not bebad.

Share price: This is the last factor that is considered by aninstitutional investor when an investment decision is made. If theshares of the company enjoy continuously rising prices in thebourses, investors could be encouraged to invest in them.

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Corporate governance and Creditors

Banks and other creditors have an extremely important role to play infostering efficiency in medium and large private firms. Creditors, in turn,rely for their survival on debt repayment by their borrowers. Withoutdependable debt collection, no amount of supervision or competition canmake banks run efficiently. Strong creditors are as critical to the efficientfunctioning of enterprises as are strong owners.

Creditor monitoring and control

There are three crucial elements in creditor monitoring and control inmarket economies:

Adequate information: Lenders need information on thecreditworthiness or otherwise of potential borrowers, and depositorsand bank supervisors need information on bank portfolios.

Creditor incentives: The second requirement for debt to serve acontrol function is the existence of appropriate market basedincentives for creditors, be they banks, trade creditors orgovernment. These incentives may be in the form of higher marginof profit, high interest charges from customers and sometimes evenreduction in the quantum of Non-Performing Assets.

Debt collection: without an effective system of debt collection,

debtors lose repayment discipline, the flow of credit is constrained,and creditors may be forced to come to the state to cover theirlosses if they are to survive. Well designed and implemented rulesfacilitate rapid and low cost debt recovery in cases of default,thereby lowering the risk of lending and increasing the availability ofcredit to potential borrowers. Poorly designed and implementedrules make lending more costly and stifle the flow of credit.

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Corporate governance and the Government

The government plays the key role in corporate governance by definingthe legal environment and sometimes by directly influencing managerialdecisions. Beyond defining the rules of the game, the government maydirectly influence corporate governance. At one extreme, the governmentowns the firm, so that the government is charged with monitoringmanagerial decisions and limiting the ability of managers to maximizeprivate benefits at the cost of society.

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6. Corporate governance: The Indian scenario

In India the real history of corporate governance dates back to the year1992, following efforts made in many countries of the world to put in placea system suggested by the Cadbury Committee. The Confederation ofIndian Industry framed a voluntary code of corporate governance for listedcompanies in 1998. This was followed by the recommendations of theKumar Mangalam Birla Committee set up in 1999 by SEBI culminating inthe introduction of Clause 49 of the standard Listing Agreement to becomplied with all the listed companies in stipulated phases. The KumarMangalam Birla committee divided its recommendations into mandatoryand non-mandatory. Mandatory recommendations included such issues as

the composition of board, appointment and structure of audit committees,remuneration of directors, board procedures, and additional informationregarding management, discussion and analysis as a part of annualreport. Its non-mandatory recommendations included issues concerningthe chairman of the board, setting up of remuneration committee, halfyearly information to shareholders and appointment of nominee directors.

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Suggestions to improve overall structure of CorporateGovernance:

Companies should appoint more internal auditor for auditcommittee.

Cross check step should be implemented for betterment ofinvestors.

Stakeholders value enhancement steps should be considered atlarge.

More and More programmes should be arranged to educateshareholder about corporate governance.

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Chapter 6

Findings and Suggestions

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Findings:

We conducted survey of investors with mainly focus on fundamentalanalyst as well as of Company Secretaries. In our research we findfollowing findings.

Main purpose of investment in stock market is High return andSafety.

Though safety is one of the major objectives, awareness level ofcorporate governance in general public was not found even atconsiderable amount.

75% of respondents are investing on delivery basis.

Out of all other options like, Industry, Price Fluctuations, BOD,Dividend and Market Capitalization, 70% people prefer to checkCompany Name before investing in stock market. Thus BrandImage of companies is of much important and all functions andpolicies by their Board of Directors affects companys image.

Satyam Computers- before 1 year, it was one of the most desiredcompanies for investment according to shareholders viewpoint.After the Scam occurred, brand image of the same is ruined in

investors eyes.

Investors do not have any specific choice regarding companiesfor investment like only specific sector or BSE 30/NSE 50companies.

35% of Fundamental Analysts only regularly analyze the AnnualReports of the companies.

Retail investors do not analyze annual report of the companiesbecause of lack of knowledge, interest and time.

55% believe that Indian regulatory system for security of shareholder is efficient.

50% of those who analyze the performance of GrievanceCommittee believe that it is moderate in terms of efficiency while40% ranked it Efficient.

56% of those who analyze the performance of RemunerationCommittee believe that it is moderate in terms of efficiency whileonly 22% ranked it Efficient.

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45% of those who analyze the performance of Audit Committeebelieve that it is moderate in terms of efficiency while 33%ranked it Efficient.

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According to investors efficiency of Indian Companies in contextof:

o

Grievance settlement is 16%.o Transparency is 26%.

o Legal code of Conduct is 10%.

o Ethics is 16%.

All Company Secretaries are in opinion that current level ofcorporate governance in India is at Initial and it must beimproved.

SEBI has given list of 33 disclosures which are mandatory to bedisclosed in annual report of the all listed companies. We haveanalyzed annual reports of BSE-30 companies for five years.Surprisingly, we found that only TATA Steel has disclosed alldisclosures. Only few companies like TCS, RIL, REL, ONGC, SBI,Infosys, ACC, NTPC, BHEL and DLF were there which has notshown one disclosers.

ICICI, HUL, ITC were companies which are not showing majordisclosures.

During this research we also came to know that CorporateGovernance of the company is still not consider as one of theimportant parameter to be taken into consideration beforeinvesting in it.

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Recommendations:

From our research and observations we give followingrecommendations.

To improve in current system:

Current norms of corporate governance are efficient but atInitial level. There must be improvement in terms of codeof conduct of corporate governance.

Lack of awareness is found among investors. More andmore development programmes should be conduct to

improve the awareness level of Investors.

Implementation of current norms should be made efficient.

To Investors:

Main purpose of corporate governance is safety ofinvestors. It must be taken into consideration as parameterto evaluate before investing.

Investors should attend Annual General Meetings of the

companies. Independent Directors- who mainly focus onshareholders and their grievances are being appointed inAGM only.

Annual reports of the companies give companies detailsregarding their functions, governing body, ratio ofindependent directors in the Board etc. It must beevaluated.

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