CODE

CODE OF
OF CORPORATE
CORPORATE GOVERNANCE
GOVERNANCE IN IN
EMERGING
EMERGING ECONOMIES
ECONOMIES –– A
A CASE
CASE OF
OF INDIA
INDIA

By
HIMACHALAM DASARAJU
Sri Venkateswara University
Tirupati, Andhra Pradesh, India
(Commonwealth Fellow- visiting University of Essex)
10th December, 2008.

Address for correspondence:

Professor Himachalam Dasaraju
Professor of Commerce & Management
Sri Venkateswara University
Tirupati – 517502
Andhra Pradesh, India.
e-mail: dhimach@essex.ac.uk/ dhchalam@gmail.com
FOCUSS:
The main focus of the Paper is:
• Corporate Governance – World Scenario
• Developments in USA
• Developments in UK
• Corporate Governance Guidelines

• Corporate Governance – Indian Scenario

• Corporate Governance Issues in India
• Driving Forces of Corporate Governance
• Corporate Governance in India – A brief Sketch
• Corporate Governance Reforms in India
• Governance Standards in India
• Recommendations of various Committees

• Case Study on Infosys Technologies

AIM OF THE PAPER

• To review the CG Mechanism in the World

• To analyse the rationale for CG reforms
• To study the CG developments in India
• To review various Committees on CG
• To analyse the Codes of CG in India
• Case analysis on Infosys
• To stimulate academic debate on the issue.
Corporate Governance Background: World Scenario

• CG has been gaining momentum world over due to

– Miserable corporate failures like Enron, Maxwell etc.,
– Unethical business practices
– Insufficient disclosure and transparency
– Inefficient Management Boards
– Social concern

• CG has been emerged as means of Corporate Excellence due to

A) To improve overall profitability
B) Stakeholder value creation
C) Building up of Investor Confidence
D) Ethics in Business Practices, Accounting, Auditing and Disclosure
E) Transparency
 World Scenario of CG Reforms.
1992 United Kingdom

1994 South Africa, Canada

1995 Australia, France, Pan-Europe

1996 Spain

1997 USA, Japan, The Netherlands

1998 India, Belgium, Germany, Italy, Thailand

1999 Brazil, Greece, Hong Kong, Ireland, Mexico, Portugal, South Korea, OECD, ICGN, Commonwealth

2000 Denmark, Indonesia, Kenya, Malaysia, Romania, Philippines

2001 China, Czech Republic, Malta, Peru, Singapore, Sweden

2002 Austria, Cyprus, Hungary, Kenya, Pakistan, Poland, Russia, Solvakia, Switzerland, Taiwan

2003 Finland, Lithuania, Macedonia, New zealand,Turkey,Ukraine,Latin America

2004 Argentina, Bangladesh, Iceland, Norway, Solvania, OECD

2005 Jamaika, ICGN, Latvia, Lithuania

2006 Estonia, Labanon, Lexemburg, Nigeria, Sri Lanka, Thailand

2007 Balgaria
 Corporate Governance Guidelines – A Comparison
Table Corporate governance guidelines – a comparative study

No. Key parameters Organisation for Economic International Corporate Network Asia-Pacific
elucidated by the Co-operation and Development (ICGN) global governance Economic Co-
OECD (OECD) guidelines principles operation (APEC)
Principles

1. Rights of • Their rights to attend and participate in
shareholders AGMs, to elect Board members, to receive
dividends, and to avail relevant, timely,
regular and accurate information.
• Right to transfer shares.
• To know capital structures and
arrangements that confers on some
members, disproportionate controlling
rights.
• Corporate control mechanism should
function efficiently and transparently
• Transparent transactions; accountable
management.
• Major organisational changes Establishment of
require their prior approval rights and
• They have the opportunity to responsibilities of
exercise their voting rights, all share- holders.
• Right to have timely disclosure of
the result of resolutions
• Adherence to one-share, one-
vote standard. Institutional
investors have proxy
responsibilities to exercise voting
rights.

2. Equitable • All shareholders including minority and • One-share, one-vote. Equitable treatment
treatment of foreign share- holders receive equitable • Protection of the rights of of all shareholders.
shareholders treatment. minority and foreign share holders.
• Effective redressal for rights violations.
• Change in voting rights subject to their
vote.
• Prohibition of insider-trading and self-
dealing.
• Directors to avoid decisions concerning
their own interests.
3. Role of • Recognition of their rights as established by • Directors should build good and Establishment of
stakeholders law. productive relationship with effective and
• Encourage their active co- operation in stakeholders. enforceable account-
creating sustain- able enterprises, • Directors are responsible for ability standards.
• Permit performance enhancing mechanisms. providing accountability to
• Access to relevant information. shareholders.

4. Disclosure and Accurate and timely dis- closure on company Timely and full disclosure of all Timely and accurate
trans- parency objective; major share ownership and voting information, disclosure of
rights; financial and operating results; directors • Disclosure of share-holding and financial and non-
and key executives and their remuneration; the status of voting rights, financial information
significant, foreseeable risk factors; governance • Disclosure of Directors’ with regard to
structures and practices; material issues compensation policies, company
regarding employees and other stakeholders. • Annual audits by external performance.
statutory auditors.

5. Responsibilities of Specify key responsibilities of the Board- • Judgement of Directors, Formation of Board
the Board of overseeing the process of disclosure and independent of management of Directors and
Directors communication, monitoring the effectiveness of operation. deciding their
govern- Nance practices and change them, if • Establishment and nomination of remuneration.
necessary. committees for audit, compensation
and outside directors.
CG Reforms in USA & UK
• Major Failures in USA
– Enron, WorldCom etc.,
• The Tread way Commission (1987)
• Sarbanes - Oxley Act (2002)
• Major Failures in UK
– Bank of Credit and Commercial International (BCCI)
– Bearings Bank (1995)
– British Gas (1995)
– Maxwell etc.,
• Prominent Committees in UK
– The Cadbury Committee ( 1992)
– The Greenbury Committee (1995)
– The Hampel Committee (1998)
– The Turnbull Committee (1999)
– The Higgs Committee (2003)
– The Tyson Committee ( 2003)
– The Smith Committee (2003)
 Corporate Governance - Indian Scenario

• Structure of Indian Industry:

• Pre-liberalisation era

– Mixed Economy: Public, Private & Cooperative Sectors Public Sector

Undertakings (PSUs) – under Governament control.
Private Sector - Mostly Family Owned and controlled Business
Ex: Tata group, Birla group, Reliance group -------

• Post-liberalisation era

– Public Sector ( Privatisation Process – disinvestment)

Private Sector - Multinational (Foreign)and Domestic
Cooperative Sector - Poor state of affair
 Driving Forces of CG in India
1) Unethical Business Practices
– Security Scams ---Harshad Mehtha Security Scam
• Equity allotments at discount rates to the controlling groups
• Disappearance of Companies (1993-94) - around 4,000
• companies with 25,000 crores with out starting business
– Misdeed of Companies
• Plantation, Sheep rearing, etc.,

2) Impact of Globalization
– Integration with Foreign Market
– Foreign Investors expectations
– New Business Opportunities --- IT & ITES, BPO etc.,
– New Capital formation – FII, FDI

3) Impact of Privatisation
– New structure of ownership
– Multinational Companies
 CG Reforms in India
• CG initiatives in India was in the background of unethical business Practices,
Security scams, global changes and so on

• But not due to Corporate, Banking and Financial collapses as in case of Asia, US, UK
etc.,

• Initiated by Industry Association (CII), not by the Governament.

• CII set a task force to design a voluntary Code of Governance in 1995

• The draft of the Code was circulated for comments in 1997

• “Desirable Corporate Governance: A Code” was released in 1998

• Around 25 leading companies followed the Code voluntarily (1998-2000)

• The Securities and Exchange Board of India (SEBI) set up a committee
under Kuma Mangalam Birla to design mandatory-cum-recommendatory
Code for listed companie in 1999 and approved in 2000.

• Mandatory for Listed companies through listing agreement and

implemented according to a rollout plan.

• 2000-01: All Group A companies of BSE or those in the S&P CNX Nifty
index…. 80% of market cap.

• 2001-02: All companies with paid up capital of Rs. 100 million or more or
net worth of Rs. 250 million or more.

• 2002-03: All companies with paid up capital of Rs. 30 million or more.

• The Department of Corporate Affairs modified the Companies Act 1956 to
incorporate specific CG provisions regarding independent directors and
audit committees.

• In 2001-2002 certain accounting standards were modified to increase

financial disclosures.
– Disclosure of related party transactions
– Disclosure of segment income- revenues profits and capital employed
– Deffered tax liabilities or assets
– Consolidated accounts

• The Department of Corporate Affairs (DCA) appointed a task force on

corporate excellence in 2000

• DCA constituted High level committee under Naresh C handra in 2002 to

examine corporate auditing and independent directors following the
collapse of Enron in 2001 and enactment of Sarbanes-Oxely Act in 2002.

• SEBI formed a new committee in 2003 under N.R. Narayana Murthy to study
the adequacy of existing CG practices and to improve these further.

• Government of India constituted a committee on Company Law under

J.J.Irani in 2005.
 Recommendations of Committee Reports on Corporate
Governance in India
CII Code recommendations (1997)
a) No need for German style two-tiered
board
b) For a listed company with turnover
exceeding Rs.100 crores, if the Chairman is
also the MD, at least half of the board
should be Independent directors,
else at least 30% .
c) No single person should hold directorships
in more than 10 listed companies.
d) Non-executive directors should be
competent and active and have clearly
defined responsibilities like in the Audit
Committee.
e) Directors should be paid a commission not
exceeding 1% (3%) of net profits for a
company
With (out) an MD over and above sitting
fees. Stock options may be considered too.
f) Attendance record of directors should be
made explicit at the time of re-
appointment. Those with less than 50%
attendance should not be reappointed.
g) Key information that must be presented
to the board is listed in the code.
h) Audit Committee: Listed companies with
turnover over
Birla Committee (SEBI)
recommendations (2000)
Board of Directors
a) At least 50% non-executive members
b) For a company with an executive
Chairman, at least half of the board should
be independent
directors¨, else at least one-third.
c) Non-executive Chairman should have an
office and be paid for job related expenses.
d) Maximum of 10 directorships and 5
chairmanships per person.
e) Audit Committee: A board must have an
qualified and independent audit committee,
of
minimum 3 members, all non-executive,
majority and chair independent with at least
one having financial and accounting
Knowledge. Its chairman should attend AGM
to answer shareholder queries. The
committee should confer with key
executives as necessary
and the company secretary should be he
secretary of the committee. The committee
should meet at least thrice a year -- one
before finalization of annual accounts and
one
necessarily every six months with the
quorum being the higher of two members or
one-third
Narayana Murthy committee (SEBI)
Recommendations (2003)
a) Training of board members suggested.
b) There shall be no nominee directors. All
directors to be elected by shareholders with
same responsibilities and accountabilities.
c) Non-executive director compensation to
be fixed by board and ratified by
shareholders and reported. Stock options
should be vested at
least a year after their retirement.
Independent directors¨ should be treated
the same way as
non-executive directors.
d) The board should be informed every
quarter of business risk and risk
management strategies.
e) Audit Committee: Should comprise
entirely of “financially literate” non-
executive members with at least one
member having
accounting or related financial management
expertise. It should review a mandatory list
of
documents including information relating to
subsidiary companies. “Whistle blowers”
should have direct access to it and all
Rs.100crores or paid-up capital of
Rs.20crores should have an audit committee
of at least three members, all non-
executive, competent and willing to work
more than other non-executive
Directors, with clear terms of reference and
access to all financial information in the
company and should periodically interact
with statutory auditors and internal auditors
and assist the board in corporate accounting
and reporting.
I) Reduction in number of nominee directors.
Fish should withdraw nominee directors
from companies
with individual FI shareholding below 5% or
total
FI holding below 10%.
of members with at least two independent
directors. It should have access to
information
from any employee and can investigate any
matter within its TOR, can seek outside
legal/professional service as well as secure
attendance of outside experts in meetings.
It
should act as the bridge between the board,
statutory auditors and internal auditors with
far-ranging
Powers and responsibilities.
f) Remuneration Committee: The
remuneration committee should decide
remuneration packages for executive
directors.
It should have at least 3 directors, all no
executive and be chaired by an independent
director.
g) The board should decide on the
remuneration of non executive directors and
all
remuneration information should be
disclosed in annual report
h) At least 4 board meetings a year with a
maximum gap of 4 months between any 2
meetings. Minimum information available to
boards stipulated.
aemployees are informed of such policy (and
this should be affirmed annually by
management). All “related party”
transactions must be
approved by audit committee. The
committee should be responsible for the
appointment, removal and remuneration of
chief internal auditor.
f) Boards of subsidiaries should follow
similar composition rules as that of parent
and should
have at least one independent director s of
the parent company.
g) The Board report of a parent company
should have access to minutes of board
meeting
in subsidiaries and should affirm reviewing
its affairs.
h) Performance evaluation of non-executive
directors by all his fellow Board members
should inform a re -appointment decision.
i) While independent and non-executive
directors should enjoy some protection from
civil and criminal litigation, they may be
held responsible of the legal compliance in
the company’s affairs.
j) Code of conduct for Board members and
senior management and annual affirmation
of compliance to it.
 Disclosure and Transparency

a) Companies should inform their a) Companies should provide consolidated a) Management should explain and justify
shareholders about the high and low monthly accounts for subsidiaries where they have any deviation from accounting standards in
averages of their majority shareholding. financial statements.
share prices and about share, performance b) Disclosure list pertaining to “related b) Companies should move towards a regime
and prospects of major business segments party” transactions provided by committee of unqualified financial statements.
(exceeding 10% of turnover). till ICAI’s norm is established. c) Management should provide a clear
b) Consolidation of group accounts should be description, followed by auditor’s
optional and subject to FI’s and IT c) A mandatory Management Discussion & comments, of each material contingent
department’s assessment norms. If a Analysis segment of annual report that liability and its risks.
company consolidates, no includes d) CEO/CFO certification of knowledge,
need to annex subsidiary accounts but the discussion of industry structure and veracity and comprehensiveness of financial
definition development, opportunities, threats, statements and directors’ reports and
of “group” should include parent and outlook, risks etc. as well as financial and affirmation of maintaining proper internal
subsidiaries. operational control as well as appropriate disclosure to
c) Stock exchanges should require performance and managerial developments auditors and audit committee.
compliance certificate from CEOs and CFOs in HR/IR front. e) Security analysts must disclose the
on company accounts. d) Management should inform board of all relationship of their employers with the
d) For companies with paid-up capital potential conflict of interest situations. client
exceeding Rs.20crore, disclosure norms for e) On (re)appointment of directors, company as well as their actual or intended
domestic issues should be same as those for shareholders must be informed of their shareholding in the client company.
GDR issues. resume, expertise, and names of companies
where they are directors.

Creditors’ Rights
a) FIs should rewrite loan covenants
eliminating nominee directors except in case
of serious and systematic debt default or
provision of insufficient information.
b) In case of multiple credit ratings, they
should all be reported in a format showing
relative position of the company.
c) Same disclosure norms for foreign and
domestic creditors.
d) Companies defaulting on fixed deposits
should not be permitted to accept further
deposits and make inter-corporate loans or
investments or declare dividends until the
default is made good.
Other issues
Shareholders’ Rights Special Disclosure for IPOs
a) Quarterly results, presentation to analysts a) Companies making Initial Public Offering
etc. should be communicated to investors, (“IPO”) should inform the Audit Committee of
Possibly over the Internet. Category-wise uses of funds every quarter. It
b) Half-yearly financial results and significant should get non-pre-specified uses approved by
events reports be mailed to shareholders. auditors on an annual basis. The audit
c) A board committee headed by a committee should advise the Board for action
nonexclusive director look into shareholder in this matter.
complaints/grievances.
d) Company should delegate share transfer
power to an
officer/committee/registrar/share
transfer agents. The delegated authority
should attend to share transfer formalities at
least once in a fortnight.
Case Study : Infosys Technologies
Infosys Technologies: The Best among Indian Corporates
• As per the Credit Lyonnais Securities Analysis (CLSA), the corporate
governance ratings of the Software firms are higher than those of other
Indian firms.
• Software firms are on average, more exposed to global competition than
• other Indian firms.
• It is an interesting success story with good spirit of entrepreneurship.
• Started as a small unit in 1981 by Mr. Narayana Murthy with his six
colleagues in Bombay in a single room.
• with a small amount of investment of Rs. 10,000 (US 250) as capital.
• 91,187 employees in 63 cities across 26 countries
• Net income of US 1,155 million and revenue of US 4,176 million.
• At present having US 20.4 billion market capitalisation
Progress Of Infosys Technologies
Custom
as on 31st March 2008 -ers
538*
Market
Capitaliz
at-ion
US $20.2 billion*
Reven-
ue
US $4,176 million**
Net
income
US $1,155 million**
Global
presenc
-e
63 cities across 26 countries

Employ
e-es
91,187*

Compa
n-y
Started in 1981,with seven founders, US $250,and a dream
Vision and Mission of Infosys

The vision of Infosys is “to be a globally respected corporation that provides best-of-

breed business solutions, leveraging technology, delivered by best- in-class people”. Its

mission is “to achieve our objectives in an environment of fairness, honesty and

courtesy towards our clients, employee’s vendors and society at large”.

Value System at Infosys Technologies

Integrity
&
transper
-ancy
Corporate Governance Philosophy

• The philosophy of corporate governance is based on the following principles.

– 1.Satisfy the spirit of the law

– 2. Transparent and high degree of disclosure levels

– 3. Distinction between personal conveniences and corporate resources

– 4. Truthful external communication

– 5. Comply with laws of all countries in which the company operates

– 6. Simple and transparent corporate structure driven solely by business needs

– 7. Management is the trustee of the shareholders’ capital and not the owner.
Unique Practice
• The Infosys Technologies believe that the Board of Directors is at the core of
corporate governance practice
• Oversees how management serves and protects the long term interest of all
stakeholders.
• Active and well informed and independent board is necessary to ensure highest
standards of corporate governance.
• The majority of the, 8 out of 15 are independent members.
• Infosys have audit, compensation, investor grievances, nominations, and risk
management committees which comprises only independent directors.
• The company comply with Euroshareholders corporate governance guidelines, 2000.
• The recommendations of The Conference Board Commission on public trust and
private enterprises in the US.
• The company also adhere to the UN global compact programme.
• furnish in the annual reports about its compliance with the corporate
governance guidelines of six countries in their national languages.
 Corporate Governance achievements and Ratings
• Infosys is committed to long-term shareholder value.

• its business activities are anchored in three pillars of corporate behaviour, Viz.,
Business Ethics, Corporate Governance and Corporate Social Responsibility.

• In 2000, the company was conferred the National Award for Excellence in Corporate
Governance by the Government of India.

• The Business World — IMRB Survey ranked Infosys number one among the most
respected companies in India, in 2001.

• It was voted as India’s best managed company for 6 years in a row, between 1996
and 2001 by the Asia Money Poll.

• In the year 2000, in the survey of Far Eastern Economic Review, Infosys was
selected as one of Asia’s leading corporations and was ranked first as “The
Company that Others Try to Emulate”.
• The company was voted “India’s Most Admired Company” in Economic Times in
2000.

• In 2003, Infosys Technologies co-founder and chairman, Mr. N. R. Narayana Murthy,

won the Ernst &t Young World Entrepreneur of the Year award and his company’s
“outstanding financial performance and global impact in a dynamic and volatile
industry”.

• Infosys Technologies has won the prestigious “Global Most-Admired Knowledge

Enterprises (MAKE)” Award, for 2004.

• Infosys Technologies made a winning sweep in the Business World “Most Respected
Companies’ Award” 2004.
• The latest Business Today—AT Kearney study conducted in March 2005 placed
Infosys Technologies as “India’s Best Managed Company”. It was also recognised in
a number of other categories including corporate governance, creation of
shareholder value, corporate social responsibility and innovation.

• CRISIL assigned the company the “CRISIL GVC Level 1” rating, indicates the
capability to create wealth for all stakeholders while adopting sound corporate
governance practices.

• ICRA assigned “CGR 1” rating to the company corporate governance practices.

• The asset magazine acclaims Infosys’s corporate governance and has been named as
the best company in India in corporate governance in 2008. 25
Effects of Infosys Corporate Governance Initiatives
 Concluding Observations

• Code of CG should be redesigned to reflect international best practices

• Stringent enforcement of Law

• More effective coordination and cooperation between SEBI, DCA and SEs

• CG mechanism should be flexible and suitable

• Overall ethical values in all segments should be promoted for effective

• accounting, auditing, disclosure and transparent system.

Thanking you all for your participation
and suggestions.