Professional Documents
Culture Documents
INTRODUCTION TO CORPORATE
GOVERNANCE IN INDIA
Corporate governance has existed since past but it was in different form. During
Vedic times kings used to have their ministers and used to have ethics, values,
principles and laws to run their state but today it is in the form corporate
governance having same rules, laws, ethics, values, and morals etc which helps in
running corporate bodies in the more effective ways so that they in the age of
globalization become global giants.
Several Indian Companies like PepsiCo, Infuses, Tata, Wipro, TCS, and Reliance
are some of the global giants which have their flag of success flying high in the
sky due to good corporate governance.
Today, even law has a great role to play in successful and growing economy.
Government and judiciary have enacted several laws and regulations like SEBI,
FEMA, Cyber laws, Competition laws etc and have brought several amendments
and repeal the laws in order that they dont act as barrier for these corporate
bodies and developing India. Judiciary has also helped in great way by solving the
corporate disputes in speedy way.
Corporate bodies have their aim, values, motto, ethics and principles etc which
guide them to the ladder of success. Big and small organizations have their
magazines annual reports which reflect their achievements, failure, their profit and
loss, their current position in the market. A few companies have also shown
awareness of environment protection, social responsibilities and the cause of
upliftment and social development and they have deeply committed themselves to
it. The big example of such a company can be of Deepak Fertilizers and
Petrochemicals Corporation Limited which also bagged 2nd runner up award for
the corporate social responsibility by business world in 2005.
CHAPTER II:
METHODOLOGY TO BE USED IN CORPORATE
GOVERNANCE
What is the purpose of doing this methodology? What are there needs?
The main purpose of doing this investigation in corporate governance is to
understand the objectives and its importances and their Drawbacks:
OBJECTIVES:
Corporate governance provides a structure that, at least in theory, works for
the benefit of everyone concerned by ensuring that the enterprise adheres to
accepted ethical standards and best practices as well as to formal laws. To that
end, organizations have been formed at the regional, national, and global levels.
In recent times, corporate governance has received increased attention because of
high-profile scandals involving abuse of corporate power and, in some cases,
alleged criminal activity by corporate officers. An integral part of an effective
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DATA SOURCES
The Data sources mainly collected from secondary sources
through the use of Internet search. It is an External sources i.e through
the Google, Safari etc.. Attempt to make a Descriptive study method
used to understand the performance Principle, objectives, weakness of
corporate governance in India. By Analysing this we understand the
concept of corporate governance in past, present future, law and
framework of our India.
2.
Holistic view
3.
4.
5.
6.
Innovation
7.
8.
9.
1. Value based corporate culture: For any organization to run in effective way,
it needs to have certain ethics, values. Long run business needs to have based
corporate culture. Value based corporate culture is good practice for corporate
governance. It is a set of beliefs, ethics, principles which are inviolable. It can be a
motto i.e. A short phrase which is unique and helps in running organization, there
can be vision i.e. dream to be fulfilled, mission and purpose, objective, goal,
target.
2. Holistic view: This holistic view is more or less godly, religious attitude which
helps in running organization. It is not easier to adopt it, it needs special efforts
and once adopted it leads to developing qualities of nobility, tolerance and
empathy.
3. Compliance with laws: Those companies which really need progress, have
high ethical values and need to run long run business they abide and comply with
laws of Securities Exchange Board Of India (SEBI), Foreign Exchange Regulation
Act, Competition Act 2002, Cyber Laws, Banking Laws etc.
4. Disclosure, transparency, and accountability: Disclosure, transparency and
accountability are important aspect for good governance. Timely and accurate
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But, with the integration of Indian economy with global markets, industrialists and
corporate in the country are being increasingly asked to adopt better and
transparent corporate practices. The degree to which corporations observe basic
principles of good corporate governance is an increasingly important factor for
taking key investment decisions. If companies are to reap the full benefits of the
global capital market, capture efficiency gains, benefit by economies of scale and
attract long term capital, adoption of corporate governance standards must be
credible, consistent, coherent and inspiring. Individual shareholders, who usually
do not exercise governance rights, are highly concerned about getting fair
treatment from controlling shareholders and management. Creditors, especially
banks, play a key role in governance systems, and serve as external monitors over
corporate performance. Employees and other stakeholders also play an important
role in contributing to the long term success and performance of the corporation.
Thus, it is necessary to apply governance practices in a right manner for better
growth of a company. There are two types of mechanism that resolve the conflicts
among different corporate claim-holders, especially, the conflicts between owners
and managers, and those between controlling shareholders and minority
shareholders. The first type consists of various internal variables, e.g.
(1) the ownership structure,
(2) Board of directors
(3) Executive compensation and
(4) Financial disclosure.
The second includes external mechanism with variables, e.g.
(1) Effective takeover market,
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shareholders may be legal, if this trading is done in a way that does not take
advantage of non-public information. However, the term is frequently used to refer
to a practice in which an insider or a related party trades based on material nonpublic information obtained during the performance of the insiders duties at the
corporation, or otherwise in breach of a fiduciary or other relationship of trust and
confidence or where the non-public information was misappropriated from the
company. Such corporate insiders use these information in such a way to reap
profits or avoid losses on the stock market, to the detriment of the source of the
information and to the typical investors who buy or sell their stock without the
advantage of inside information. The term insider trading is popularly used in
the negative sense as it is perceived that the persons having access to the price
sensitive and unpublished information used the same for their personal gains.
However insider trading per se does not mean any illegal conduct. It encompasses
both legal as well as illegal conduct. The legal version is when corporate insiders
officers, directors, and employees buy and sell stock in their own companies. In
order to legalize their transactions, the directors and employees of the company
should inform about their dealing with the securities to the SEBI. Insider trading is
defined as-The use of material non public information in trading the shares of the
company by a corporate insider or any other person who owes a fiduciary duty to
the company. SEBI is the watchdog of all the stock exchanges in India. It has
been obligated to protect the interest of the investors in the securities market and
to regulate the stock market through such other regulations as it deems fit. It is due
to the very fact that the investors invest on the shares being speculative, but when
the prices of the shares could be predicted well before in hand then they may take
a decision accordingly. Hence, pre determined price may result in undesired
consequences as people may buy huge amount of shares whose value may
appreciate.
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Section 17 Securities Exchange Act, 1933 contained prohibitions to deal with the
fraud in the sale of the securities in the most stringent manner possible. The Act
addressed insider trading directly through Section 16(b) and indirectly through
Section 10(b). Section 16(b) of the Securities Exchange Act, 1934 prohibits the
purchase and sale of the shares within six month period involving the directors,
officers, stock holders owning more than 10% of the shares of the company. The
rationale behind the incorporation of this provision is that it is only the substantial
shareholders and the persons concerned with the decision and management of the
company who can have access to the price sensitive information and therefore
there should be bar upon them to transact in securities.
In the case of Samir.C.Arora vs. SEBI Mr. Arora was prohibited by the SEBI in its
order not to buy, sell or deal in securities, in any manner, directly or indirectly, for
a period of five years. Also, if Mr. Arora desired to sell the securities held by him,
he required a prior permission of SEBI. Mr. Arora contested this order of SEBI in
the Securities Appellate Tribunal. SAT set aside the order of SEBI on grounds of
insufficient evidence to prove the charges of insider trading and professional
misconduct against Mr. Arora.
This case testifies the fact that the SEBI lacks the thorough investigative
mechanism and a vigilant approach due to which the culprits are able to escape
from the clutches of law. In most of the cases, SEBI failed to adduce evidence and
corroborate its stance before the court. Unlike the balance of probabilities that is
required in proving a civil liability, a case involving criminal liability requires the
allegations to be proved beyond reasonable doubts. Therefore there should be
thread bare investigation and all the loopholes if any should be properly plugged
in.
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One of the big problems with Indian corporate governance is that too many
listed companies and directors follow the letter of the law, rather than the
spirit. Clause 49 of the countrys listing rules sets out a series of corporate
governance regulations. For example, a listed company must have a nonexecutive and one-third of its board should be non-executive directors. The
nonexecutives should be on the board to challenge management, but in
reality they tend not to.
Good people are very few partly because there is a legal limit on the
amount companies can pay non-executives. They are not allowed to receive
a salary and can only be paid for attendance at board meetings That gives
the non-executives little incentive to fulfill their obligations properly.
Directors remuneration needs a rethink, as does the process of appointing
directors. Currently, non-executives are generally selected by the board,
with little input from shareholders they should become more active. An
independent agency should also rate the standards of corporate governance
at listed companies.
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CHAPTER III
Corporate Governance Framework In India
Ever since India's biggest-ever corporate fraud and governance failure unearthed
at Satyam Computer Services Limited, the concerns about good Corporate
Governance have increased phenomenally.
Internationally, there has been a great deal of debate going on for quite some time.
The famous Cadbury Committee defined "Corporate Governance" in its Report
(Financial Aspects of Corporate Governance, published in 1992) as "the system by
which companies are directed and controlled".
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published
its Principles
of
Corporate
Governance gives
very
governance. Law provides certain ethics to govern one and all so as to have
maximum satisfaction and minimum friction. It plays a complementary role. Role
of law in corporate governance is in Companies Act which imposes certain
restrictions on Directors so that there is no misrepresentation of documents, there
is no excessive of power, so that it imposes duty not to make secret profit and
make good losses due to breach of duty, negligence, etc, duty to act in the best
interest of the company etc.
Before dealing with perspectives of corporate governance lets understand what is
meant by the term perspective. Oxford Advanced Learner Dictionary defines the
term perspective as:1.
The Art of drawing solid objects on a flat surface so as to give the right
3. Stakeholders: here, it says that for long term business, only shareholders value
maximization should not be seen as sole goal but it should be for well being of all
groups with stake of long run of business and it should be goal of corporate
governance.
true and fair view of the state of affairs of the company or companies, comply
with the accounting standards notified under s 133 of the New Companies Act. It
is further provided that items contained in such financial statements shall be in
accordance with the accounting standards.
5. Secretarial Standards issued by the Institute of Company Secretaries of
India (ICSI): ICSI is an autonomous body, which issues secretarial standards in
terms of the provisions of the New Companies Act. So far, the ICSI has issued
Secretarial Standard on "Meetings of the Board of Directors" (SS-1) and
Secretarial Standards on "General Meetings" (SS-2). These Secretarial Standards
have come into force w.e.f. July 1, 2015. Section 118(10) of the New Companies
Act provide that every company (other than one person company) shall observe
Secretarial Standards specified as such by the ICSI with respect to general and
board meetings.
Key legal framework for corporate governance in India
The Companies Act, 2013
The Government of India has recently notified Companies Act, 2013 ("New
Companies Act"), which replaces the erstwhile Companies Act, 1956. The New
Act has greater emphasis on corporate governance through the board and board
processes. The New Act covers corporate governance through its following
provisions:
New Companies Act introduces significant changes to the composition of
the boards of directors.
Every company is required to appoint 1 (one) resident director on its board.
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1. Board of Directors
The Board of Directors shall comprise of such number of minimum independent
directors, as prescribed. In case where the Chairman of the Board is a nonexecutive director, at least one-third of the Board shall comprise of independent
directors and where the Chairman of the Board is an executive director, at least
half of the Board shall comprise of independent directors. A relative of a promoter
or an executive director shall not be regarded as an independent director.
2. Audit Committee
The Audit Committee to be set up shall comprise of minimum three directors as
members, two-thirds of which shall be independent.
3. Disclosure Requirements
Periodical disclosures relating to the financial and commercial transactions,
remuneration of directors, etc, to ensure transparency.
4. CEO/ CFO Certification
To certify to the Board that they have reviewed the financial statements and the
same are fair and in compliance with the laws/ regulations and accept
responsibility for internal control systems.
5. Report and Compliance
A separate section in the annual report on compliance with Corporate Governance,
quarterly compliance report to stock exchange signed by the compliance officer or
CEO, company to disclose compliance with non-mandatory requirements in
annual reports.
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CHAPTER IV
SUGGESTIONs to Improve Overall Structure Of Corporate
Governance.
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CHAPTER V
CASE STUDY ON ASIA FOREX SCANDAL
CITIC PACIFIC: Foreign Exchange Scandal Case Overview
return for AUD and EUR. These actions were common to mitigate business risks.
The unique problem faced by CP, however, arose from its use of foreign
exchange accumulators.
Accumulators, including currency target redemption forward contracts and daily
accrual contracts, were employed by CP. Unlike regular derivatives, accumulators
have a unique characteristic: the knock-out clause. The knock-out feature causes
the contracts to expire once CP achieves a stipulated profit from the contracts.
While the upside gain of the hedging instrument was confined, losses could be
unlimited, thus resulting in an asymmetrical payoff.
This wasnt a hedge, this was an outright bet, said David Webb, a well known
corporate governance activist in Hong Kong. CPs transactions involved
substantial risks that far exceeded its actual hedging needs. The mining project
required only an initial capital expenditure of a$1.6 billion, yet it entered into
contracts for over a$9 billion. 90 per cent of these hedging contracts were entered
into when the Australian Dollar hit a high of 87 cents against the USD in October
2008. Hence, when the Australian dollar fell by 20 percent to 70 cents against the
USD, a loss of HK$15.5 billion was expected.
This news alarmed investors, who were unaware of the extent of exposure to
these leveraged Australian Dollar contracts . It also became clear that the company
knew of the exposure as early as 7 September 2008, six weeks before giving a
profit warning.
The profit warning caused a 74.8 per cent plunge in CPs share price from
HK$14.52 to a record low of HK$3.66, compared with its HK$43 peak in
February 2008.
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3) Executive Compensation
CPs compensation strategy was set to cultivate a pay-for-performance culture .
CPs senior management personnel had a substantial portion of cash compensation
linked to performance-based variables to reflect their contribution to the firms
financial performance. Yungs total remuneration was made up of 94 per cent of
discretionary bonuses and share-based payment, while for Managing Director
Henry Fan Hung Ling, it was 95 per cent. On top of his compensation, Yung
received an additional HK$569 million in dividends from his 19 per cent stake in
CP.
4) Amalgamation of Ownership and Management
Control of the company rested in the hands of Yung and CPs major corporate
shareholder, CITIC Group . This was a situation where the major shareholders
held both ownership and management control over the company.
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Exchange Scandal 93 controversy, Frances Yung, the daughter of Larry Yung, also
occupied a senior management position of Director, Group Finance.
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CONCLUSION
One of the challenges faced by both scholars of corporate governance and
by organizations that intend to provide enabling frameworks for good corporate
governance is the complexity of the relationships that exist between companies on
one side and their shareholders, stakeholders and gatekeepers on the other side.
This complexity seems to be one of the main reasons why corporate scandals still
occur, despite the existence of an extensive academic literature on corporate
governance and the sustained efforts by national as well as cross-national
regulators over the last decades to improve corporate governance. The recent
credit crunch is a reminder that corporate governance at company and industry
level, as well as regulation on corporate governance more widely, is deficient in
the sense that it does not properly deal with the complex nature of these
relationships and the potential conflicts of interests therein. Banks over the last
few years have not only failed their shareholders, but also their customers, the
taxpayer and society at large. The fact that bank failures have to a large degree
been concentrated in Anglo-Saxon countries also suggests that no one corporate
governance system is superior, despite the widely accepted view in the academic
literature claiming that investor protection is higher in common law countries
(such as the UK and the US) than in civil law countries (such as France and
Germany). The recent events have included UK banks, such as HBOS, being
rescued by banks (such as the Spanish Santander Group) based in countries with
corporate law.
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BIBLIOGRAPHY
Study.com/what-is-corporate governance-definition-benefits-quiz.html
www.techrepublic.com/blog/10-things/10-drawbacks
www.google.com
http//www.safari.com
http//www.wikipedia.com
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