comparing cg of india and singapore

8/14/2019 Comparing CG of India and Singapore

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TABLE OF CONTENTS

Acknowledgement

Abbreviations used

India

ACKNOWLEDGMENT

First of all we would like to show our sincere thanks to theModule Coordinator, Prof. Ashok Sanghi for designing the Module andthe project outlines.

We also like to thank the facilitators for this module Dr.Ashutosh P. Bhupatkar, Dr. Nisha Kohli and Prof. Ashok Sanghi forshowing their immense support, whenever needed, to us forcompleting the project report successfully.

A hearty thanks once again


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GROUP 1

ABBREVIATIONS USED IN THE REPORT

MAS: Monitory Authority of SingaporeCFC: Corporate Finance CommitteeBPG: Best Practices Guide

SGX: Singapore ExchangeCBD: Committee on Banking DisclosureSRC: SES Review CommitteeIAS: International Accounting StandardsIASC: Accounting Standards CommitteeSAS: Statement of Accounting StandardsICPAS: Institute of Certified Public Accountants of SingaporeRAP: Recommended Accounting Practice (RAP)


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RCB: Registry of Companies and Businesses (RCB)NIE: Newly Industrialized Economy (NIE)GIC: Government Investment CorporationGLC: Government Linked CorporationsSSA: Singapore Standards on Auditing

Introduction to Corporate Governance

Corporate governance is a concept, rather than an individual instrument. It includes

debate on the appropriate management and control structures of a company. It includes

the rules relating to the power relations between owners, the board of directors,

management and the stakeholders such as employees, suppliers, customers as well as

the public at large.

Corporations around the world are increasing recognizing that sustained growth of their

organization requires cooperation of all stakeholders, which requires adherence to the

best corporate governance practices. In this regard, the management needs to act as

trustees of the shareholders at large and prevent asymmetry of benefits between various

sections of shareholders, especially between the owner-managers and the rest of the

shareholders.

In India, corporate governance initiatives have been undertaken by the Ministry of of

Corporate Affairs (MCA) and the Securities and Exchange Board of India (SEBI). Thefirst formal regulatory framework for listed companies specifically for corporate

governance was established by the SEBI in February 2000, following the

recommendations of Kumarmangalam Birla Committee Report. It was enshrined as

Clause 49 of the Listing Agreement. Further, SEBI is maintaining the standards of

corporate governance through other laws like the Securities Contracts (Regulation) Act,

1956; Securities and Exchange Board of India Act, 1992; and Depositories Act, 1996.

Good Corporate Governance

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


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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.

PART I: INDIA

An Introduction

During the last decade, there has been a sustained effort on the part of the Indian

regulators to strengthen corporate governance norms. This been strongly influenced by

developments that occurred in other parts of the world, particularly the Sarbanes-Oxley

Act in the U.S. and the Cadbury Committee Report in the U.K.

The two major observations are:

The broad features of the Indian corporate governance norms have been

transplanted from other jurisdictions such as the U.S. and U.K. that follow theAnglo American Model of corporate governance

Recent events involving the collapse of several leading financial institutions

provide evidence that the corporate governance norms followed in the U.S. and

U.K. have not been effective in preventing large-scale corporate governance

failures


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India INC calls for a model of governance that resonates well with Indian business

values and practices from the standpoint of economic, social, and political factors.

Corporate Governance Evolution

Global era of corporate governance was triggered by the developed countries way backin 1950. The evolution of the Anglo American Model which has been a keeninspiration for the norms developed in India is till date searching for the mostappropriate answer for the question The conflict between who runs and who owns

public companies i.e. Ownership & Management. The following timeline indicatesthe emphasis on various aspects of Management:-

1950s - The Era of Excessive Managerial Power

1960s & 1970s -- The Age of Conglomerates

1980s - The Rise of Insider Trading

1990s -- CEO Pay: Nowhere to Go but Up

2000s -- The Age of Scandal

Indian Evolution

The Indian corporate governance can be broadly classified in two eras i.e.

Pre -1991 Companies Act 1956

Post -1992 Desirable Code of Corporate Governance (CII 1998)

Pre -1991 Companies Act 1956

India was governed by the company law which was embodied by the British. The

company law was substantially overhauled about a decade after independence when it

took the form of the Companies Act, 1956.

During this era, the focus was predominantly on the manufacturing sector. The prevalent

license-raj and industrial capacity quota system ensured that only a few businesses

thrived. This led to the growth of certain business families and industrial groups that held

large chunks of capital in even publicly listed companies. Finance was essentially

available only through banking channels (as opposed to the capital markets). The banks


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and development financial institutions took up large shareholdings in companies and

also nominated directors on boards of such companies. During this era, due to

concentrated ownership of shares, the controlling shareholders, which were primarily

business families or the state, continued to exert great influence over companies at the

cost of minority shareholders. Governance structures were opaque as financial

disclosure norms were poor.

Post -1992 Desirable Code of Corporate Governance (CII 1998)

1991 reforms through economic liberalization led to a new era in Indian corporate

governance. The year 1992 witnessed the establishment of the Securities and Exchange

Board of India (SEBI) the Indian securities markets regulator. SEBI rapidly began

ushering in securities market reforms that gradually led to corporate governance reforms

as well.

In 1998, a National Task force constituted by the Confederation of Indian Industry (CII)

recommended a code for Desirable Corporate Governance, which was voluntarily

adopted by a few companies. Thereafter, a committee chaired by Mr. Kumar Mangalam

Birla submitted a report to SEBI to promote and raise the standard of Corporate

Governance in respect of listed companies. Based on the recommendations of the

Kumar Mangalam Birla committee, the new Clause 49 containing norms for corporate

governance was inserted in 2000 into the Listing Agreement that was applicable to all

listed companies of a certain size. Although both the CII Code as well as the Kumar

Mangalam Birla Committee Report expressly cautioned against mechanically importing

forms of corporate governance from the developed world, several concepts introduced

by them were indeed those that emerged in countries such as the U.S. and U.K. Theseinclude the concepts such as an independent board and audit committee.

Thereafter, following Enron and other global scandals, SEBI decided to strengthen

Indian corporate governance norms. In the wake of the enactment of SOX in the U.S.,

SEBI appointed the Narayana Murthy Committee to examine Clause 49 and recommend

changes to the existing regime. Following the recommendations of the Narayana Murthy

Committee, SEBI, on October 29, 2004, issued a revised version of Clause 49 that was

to come into effect on April 1, 2005. However, since a large number of companies were

not yet in a state of preparedness to be fully compliant with such stringent requirements,

SEBI extended the date compliance to December 31, 2005.

Hence, detailed corporate governance norms were introduced into Indian corporate

regulations only from January 1, 2006. Clause 49 in its present form provides for the

following key features of corporate governance:


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1) boards of directors of listed companies must have a minimum number of

independent directors, with independence being defined in a detailed manner

2) listed companies must have audit committees of the board with a minimum of

three directors, two-thirds of whom must be independent; the roles and

responsibilities of the audit committee are specified in detail

3) listed companies must periodically make various disclosures regarding financial

& other matters to ensure transparency

4) the CEO and CFO of listed companies must (a) certify that the financial

Statements are fair and (b) accept responsibility for internal controls

5) annual reports of listed companies must carry status reports about compliance

with corporate governance norms

Driving Forces behind the Corporate Governance

The drive towards a more stringent corporate governance regulation over the last

decade is due to the following factors:-

1. Internationalization of Indian capital markets

2. Cross-listings by Indian companies

In the pre-1991 era the capital markets were heavily regulated, thereby impeding foreign

investors from investing in the Indian markets. However, with the liberalization of the

Indian economy in 1991 and the consequent promotion of capital market activity by

SEBI, a simplified process became available to Indian companies to access capital from

the public. Simultaneously; the FDI norms were relaxed thereby increasing the avenues

available to foreign investors to participate in the Indian capital markets. These activities& events marked the beginning of the phenomenon of internationalization.

In addition, Indian companies themselves found it essential to issue securities to

investors in other countries to meet their capital needs. These companies that raise

finance by the capital markets were persuaded to comply with corporate governance

norms that most investors around the world understood in order for the securities


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offerings to be successfully marketed overseas. Companies therefore had to depart from

their own norms & meet standards in other countries from where they received

investments. Since a large portion of such foreign investment came from the developed

countries (primarily from U.S. & U.K.), it became convenient for companies to adopt

standards with which investors from those countries were familiar. Such a move was

aided by the Government through imposition of corporate governance norms (in the form

of Clause 49) that met with industry demands.

Apart from seeking capital at better valuations, overseas listings were also driven by the

desire of companies to build credibility and reputation in the international markets.

Greater numbers of offshore listings by Indian companies compelled such companies to

adhere to norms and practices of corporate governance applicable to markets where

they listed their securities.

These motivating factors reveal that apart from the general desire to enhancegovernance & transparency among Indian companies, the developments in Indian

corporate governance since 1991 were also largely driven by the need to attract foreign

capital into the Indian markets which indicates the trend to borrow, well-understood

concepts of corporate governance from the developed economies such as the U.S. and

U.K.

Indian Model of Corporate Governance

Indian corporate governance is not a conflict between management and owners as in

the US & the UK, but a conflict between the dominant shareholders and the minority

shareholders. It is useful at this point to take a closer look at corporate governance

abuses by dominant shareholders in India. The problem of the dominant shareholder

arises in three large categories of Indian companies.

First are the public sector units (PSUs) where the government is the dominant (in fact,

majority) shareholder and the general public holds a minority stake (often as little as

20%).

Second are the multi national companies (MNCs) where the foreign parent is thedominant (in most cases, majority) shareholder.

Third are the Indian business groups where the promoters (together with their friends

and relatives) are the dominant shareholders with large minority stakes, government

owned financial institutions hold a comparable stake,& the balance is held by the general

public.


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The governance issues aroused in each of the above 3 categories are different but the

whole system is yet to find a balance between dominant shareholders & minority

shareholders also taking stakeholders into the context.

The Insider Model of Corporate Governance foot note 49

Indian corporate governance broadly follows an insider model as the ownership &

management are not different in India INC. This model is devised by Stilpon Nestor &

John K. Thompson, Corporate Governance Patterns in OECD Economies: Is

Convergence Under Way?

The insider model is characterized by cohesive groups of insiders who have a closer &

more long-term relationship with the company. This is true even in the case of

companies that are listed on the stock exchanges, let alone privately held companies.The insiders (essentially the controlling shareholders) are the single largest group of

shareholders, with the rest of the shareholding being diffused and held by institutions or

individuals constituting the public. The insiders typically tend to have a controlling

interest in the company and thereby possess the ability to exercise dominant control

over the companys affairs. As to the identity of the controlling shareholders, they tend to

be mostly business family groups or the state.

This is particularly true of Asian countries such as India and China, which are marked

with concentrated stock ownership and a preponderance of family-controlled businesses

while state controlled businesses form an important segment of the corporate sector in

many of these countries. It is also otherwise referred to as the family/state model. Inthis regime, the minority shareholders do not have much of a say as they do not hold

sufficient number of shares in the company to be in a position to outvote or even veto

the decisions spearheaded by the controlling shareholders. The dominant shareholders

often improve their position in the company by seeking control and voting rights in

excess of the shares they hold. In other words, their control rights far exceed their

economic interests in the company.

This is achieved through cross-holdings, pyramid structures, tunneling and other similar

devices. By virtue of their control rights, these dominant shareholders are in a position to

exercise complete control over the company. They are virtually able to appoint and

replace the entire board &, through this, influence the management strategy and

operational affairs of the company. For this reason, the management will likely owe its

allegiance to the controlling shareholders. The controlling shareholders nominate senior

members of management, and even more, they often appoint themselves on the boards

or as managers. It is not uncommon to find companies that are controlled by family

groups to have senior managerial positions occupied by family members.


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India is a classic insider system where most public companies are controlled (by virtue of

dominant shareholding) by either business families or the state. Business families

predominantly own and control companies (even those that are listed on stock

exchanges). This is largely owing to historical reasons whereby firms were mostly owned

by families. In addition, it is quite common to find state-owned firms as well. Several

listed companies are also majority owned by multinational companies. However, diffused

ownership (in the sense of the Berle and Means Corporation) can be found only in a

handful of Indian listed companies, where such structures exist more as a matter of

exception rather than the rule.

Key Features of Indian Corporate Governance

1. No Separation of Ownership and Control

In India, controlling shareholders do have a say in themanagement & control of the company. Often, controllingshareholders themselves are managers. Alternatively, & byvirtue of their shareholding, they do possess the power toappoint their own representatives as managers. Due to theircontrolling stake, they take a greater role in assessing theperformance of the company and usually are in control of themanagement in companies as active (as opposed to passive)investors. It is arguable that such direct oversight by controllingshareholders benefits all investors.

2. Lack of Director Primacy or Managerial Superiority

Indian boards are amenable to the wishes of the shareholders. Directors can be

appointed and even removed, all through a simple majority as these decisions

are required to be taken merely by ordinary resolutions at a shareholders

meeting. Where directors or senior management do not demonstrate

performance, they are liable to be removed by the controlling shareholders.

3. Managerial Pay

The remuneration of directors and senior managers in Indian companies are not

Comparable to the kind of proportions witnessed in the U.S., although Indian

pay-scales at the top most layer of the management have seen a steady

increase over the years. However, the key difference in India is that senior

managements pay is subject to shareholders approval & also to certain

maximum limits in view of Sections mention in the Companies Act, 1956.


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(iv) Devising policies to strike an optimal balance in between the interests of

minority shareholders & (dominant) majority shareholders - simultaneously

which looks after the interest of other stakeholders as well

(v) Consider the imposition of fiduciary duties on controlling shareholders in

insider systems (such as India) where such duties do not exist under current

law

(vi) Encourage large investors (such as financial institutions) who are not

controlling shareholders or promoters to take up a more activist role in

corporate governance of Indian companies so as to protect the rights of

minority shareholders

(vii) Corporate Governance measures for SME should be devised separately by

the government as SME sector represents a substantial percentage of theIndian economy & is also a key employer in India INC

PART II: SINGAPORE

History of Singapore Economic Environment

Singapore is a small country (582 square meters) with no naturalresources. It achieved independence in 1965, at which time it had apopulation of 1.9 million and growing at a rate of 2.5% perk annum, and anunemployment rate estimated at 10%. The economy was highly dependenton entrepot trade and the provision of services to British military bases inSingapore. There was a small manufacturing base, limited industrialknow-how and local entrepreneurial capital. In order to developSingapore, the government adopted the following strategies:

A. Industrialization to solve the unemployment problem and industrialdiversification away from regional entrepot trade.

B. Internationalization by attracting foreign investors to develop themanufacturing and financial sectors.

C. Improving the investment environment by introducing employmentand industrial relations legislation and investing in key infrastructure,such as the development of the Jurong Industrial Estate and Port ofSingapore.


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D. Establishing new government controlled companies (e.g., SingaporeAirlines, Neptune Orient Lines, and Development Bank of Singapore) inareas where the domestic private sector lacked capital or expertise.

The result of these policies is an average 10% annual economic growthbetween 1965 and 1980, a culminating unemployment rate of 3% in1980, and a 28% share of GDP by manufacturing in 1980 compared to15% in 1965.To compensate for the tight labor market during the 1980s, thegovernment adopted strategies to restructure the economy towardshigher value-added activities.These strategies included ensuring that wage increases reflect the tightlabor market, increasing emphasis on education and training, encouragingthe increased use of technology, adopting a more selective

Corporate Governance Evolution

By 1990, Singapore was classified a Newly Industrialized Economy (NIE) bythe United Nations. The economy matured, enjoyed rapid growth, andwas hailed as an Asian economic miracle, together with Hong Kong,Taiwan, and Korea. The Strategic Economic Plan was then formulated totransform Singapore into a developed country.Since the 1990s, the aims of Singapore have been to become aglobally-oriented city, a center for high-tech manufacturing industriesand an international hub for business services. It hoped to achieve this bybeing the hub of an Asian Pacific economic community through activeparticipation in regional economic initiatives, and investing in other

rapidly growing economies in the Asia Pacific.

The Impact of the Asian Crisis of 1997

Although Singapore was less affected by the economic crisis thanmost other Asian economies, the effect was still severe relative to itsprevious growth patterns. The strategy of increasing regionalization adoptedin the early 1990s meant that the health of the Singapore economy wasclosely linked to that of other regional economies. Contagion was also widelyseen as contributing significantly to the effects of the crisis on Singapore.

The major effects of the crisis were: Significant decline in stock and property prices.

A large fall in demand in the local property market.

Decline in the value of the Singapore dollar relative the U.S. dollar.

Increasing unemployment and bankruptcies.

Decline in GDP growth.


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only changes the role of regulators, but also requires fundamental changesin the areas such as the legal and regulatory framework, accounting andauditing standards, codes of best practices, and the role of third-partywatchdogs such as the news media and investors' associations.

Key Features of Corporate Governance inSingapore

Companies Legislation and Shareholders Rights

In Singapore, the Companies Act of 1990 governs the registration ofcompanies and is the primary source of law protecting the rights ofshareholders. Most of the rights of shareholders are specified in Articles ofAssociation that companies are required to adopt. A model set ofArticles of Association is contained in the Fourth Schedule of the Act.The Model applies to companies that have not adopted their own Articles, orwhere the companies Articles are silent on specific issues. Under the

model Articles of Association, companies are allowed to issue shareswith different rights pertaining to dividends, voting or return of capital.However, Section64 of the Act requires all ordinary shares to carry one vote pershare (the exception being a management share issued by a newspapercompany under the Newspaper and Printing Presses Act). Other majorfeatures of company legislation relating to shareholders rights include votingby proxies must be in person and not by mail, and cumulative votingfor directors is not permitted.

Regulation of Takeovers

The major source of guidance on the conduct and procedures to be followedin takeover and merger transactions is the Singapore Code onTakeovers and Mergers (hereafter, The Code). The Code is non-statutory and supplements and expands on the statutory provisions ontakeovers found in sections 213 and 214, and the Tenth Schedule ofthe Companies Act. The Code is modeled after the UK model, wherebyshareholders, rather than directors (as is the case in the US), decide whetherto accept or reject an offer. Companies listed on the SGX that are parties toa takeover or merger also have to comply with the provisions in the ListingManual of the SGX.The Securities Industry Council administers the Code, which is divided intoGeneral Principles, Rules and Practice Notes. It was developed to aid

directors and officers in the discharge of their duties in the event of a mergeror takeover of a listed company. In general, the Code was set up as a way toprotect the minority shareholder from possible adverse impact. As theconcentration of stockholdings is very high in Singapore, the likelihoodof minority oppression is very real because many takeover resolutionsrequire only majority, rather than super-majority assent by theshareholders.


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This is to prevent directors from taking their own interests intoconsideration during a tender offer, and such interests being toprevent the loss of a position or to capitalize on a golden parachute.Partly this is a reflection of the thinness of the market and theconcentration of shareholdings that can lead to minority oppression.

Disclosure Regulation

Regulation in the public sector is effected primarily by the Registry ofCompanies and Businesses (RCB), which administers the Companies Act of1990, and the Monetary Authority of Singapore, which administers theSecurities Industry Act of 1986. The Companies Act requires financialstatements to comply with the detailed disclosure requirements in theNinth Schedule and to present a true and fair view. There are somedifferences in accounting and auditing requirements for privatecompanies, public companies and listed companies. The regulation ofaccounting in Singapore involves a combination of private sector and publicsector regulation. The Statements of Accounting Standards (SAS) together

with the rules contained in the Stock Exchange Listing Manual (administeredby the SGX) and the Companies Act determine how accounting is practiced inSingapore.The two major institutions involved in private sector regulation are theprofessional accounting body, The Institute of Certified Public Accountants ofSingapore (ICPAS), and the Singapore Exchange (SGX).5 The ICPAS has soleresponsibility for developing and maintaining the Statements ofAccounting Standards (SAS) and issuing Statements of RecommendedAccounting Practice (RAP), which specify how to account for variousbusiness transactions. Standards-setting is done through the AccountingStandards Committee appointed by the Council of the ICPAS. Each new

Standard becomes part of GAAP, the accounting law of the land. There isalso the Financial Statements Review Committee of the ICPAS whichreviews published financial statements for compliance with statutoryrequirements.

Since the SAS issued by the ICPAS does not have legal backing and theICPAS only has the authority to require members to follow its standards andguidelines, compliance with these standards depends largely on generalacceptance by the business community. The SAS is based on theInternational Accounting Standards (IAS) issued by the InternationalAccounting Standards Committee (IASC). In most cases, SAS areidentical to IAS, although there are occasional deviations and omissions.

Financial Sector RegulationUnderstanding the institutional environment in which corporate governance isplayed out in Singapore would be incomplete without understanding the roleand importance of the financial services sector. The Singapore government,as an early part of its industrial policy, targeted the financial services sectorfor development into one of the three lynchpins of the local economy


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(information technology and logistics and distribution being the others). Tohelp the financial services sector develop, local banks and insurancecompanies were protected from competition through restrictions on the entryor types of services offered by foreign financial institutions. The regulation ofdisclosure standards in financial institutions is spread over a number ofinstitutions, namely the SGX, Monetary Authority of Singapore (MAS),Securities Industry Council, Registrar of Companies and CommercialAffairs Department of the Ministry of Finance. Thus, there is no singlepoint of reference both for companies and stockholders, which contributes toa potential lack of transparency in the governance process. Forexample, the Banking Act of 1970 limits the investments of banks inother commercial enterprises to a specified percentage of its capital funds,the most recent of which is 10% in the share capital of a company.The exception to this rule is when a bank invests in companies setup to promote development in Singapore, which has to be approved by theMAS. In order to take high levels of ownership positions, banks have toundergo a judicial review process by the MAS.

Banks have traditionally being subject to lower disclosurestandards than other corporations because of the stated concern thatfuller disclosure may have an adverse impact on the stability of the bankingsystem. Instead, governance standards are maintained by a regime ofregulation and direct supervisory oversight by the MAS. Thus, in additionto enforcing legislation, the MAS also performs regulatory oversight bydirect intervention in matters of corporate governance. For example, itmaintains the right to approve the appointment of directors on theboards of financial institutions.

Government Ownership

A major feature of the Singapore economic landscape is the dominance ofgovernment linked corporations (GLCs). Up to 80% of some GLCs are directlyand indirectly controlled by the government while a smaller percentage ofmajor non-GLCs in the banking, shipping, and technology sectors arecontrolled indirectly through inter-corporate equity shares between the GLCsand non-GLCs. At the end of the 1980s, GLCs comprised 69% of total assetsand 75% of profits of all domestically controlled companies in Singapore. Inthe 1990s, through a program of privatization, which dispersed the equity ofthese companies, those numbers have been reduced. However, thegovernment continues to hold majority ownership in these GLCs. Directors ofGLCs are often also senior government or ex-government officials, so it isan indirect method for controlling and monitoring corporate activities

and business policies by the government.However, the government appears to facilitate governance through GLCs,there are some problems associated with this approach. The appointment ofgovernment officers to senior management and board positions withinGLCs raises the question as to whether the best managers are runningcorporations that form an important part of the economy. In addition, eventhough GLCs are supposed to be run like commercial enterprises, they mayhave to meet objectives that are associated with the well-being of the


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country and which may conflict with commercial objectives. As a result, GLCsmay also face less pressure in earning acceptable returns. In addition, thegovernment is expected to play the role of the long-term investor in theseGLCs. Therefore, GLCs are even more protected from an already weakmarket for corporate control. GLCs are also likely to have easier access todifferent sources of capital when compared to non-GLCs. Often, thegovernment is perceived by the lenders to have a moral and legalresponsibility for their liabilities and this tacit backing of the state impliesthat the enterprise is guaranteed solvency. This results in a greaterwillingness by banks and non-bank financial institutions such as insurancecompanies to lend money liberally to these enterprises. This reduces thepotential discipline to which a GLC will be exposed in a competitive capitalmarket.There is little doubt that GLCs were instrumental in the rapid transformationof the Singapore economy from an entrepot-based economy to anindustrialized economy. Most commentators would also agree thatrelative to state-owned enterprises in most other countries, GLCs in

Singapore are much better run. One significant advantage that SingaporeGLCs have over those in some other countries is that the Government'semphasis on clean government and the severe penalties it imposes oncorruption has meant that directors and senior management of GLCs inSingapore (which often include government officials) are generally honest.However, the relative success of the GLCs may have come at the cost ofdevelopment of private enterprise. Entrepreneurs wanting to start their ownbusinesses in Singapore often have to contend with well-resourced andpowerful GLCs.The government recognizes these problems and has recently indicated that itis willing to divest more of its ownership. Therefore, government ownership

in Singapore companies may be further reduced in the near future. Theauthors believe that further divestment of government ownership willhave multiple benefits of stimulating private enterprise, energizingthe local equity markets (by improving liquidity and increasing theinvestment by international institutional investors), improving efficiency inthe management of GLCs, and contributing significantly to the developmentof the fund management industry in Singapore (if funds released fromprivatization are re-invested through fund managers).

Foreign Share Ownership

As at June 30, 1998, there were a total of 31 companies on the SingaporeStock Exchange (SGX) that had imposed restrictions on foreign ownership.

Foreign ownership limits range from 20% to 49%. As noted earlier, foreignownership limits were imposed by statute in the banking and news mediaindustries. In other cases, these restrictions are adopted voluntarily by thefirms themselves through amendments to their Memorandum andArticles of Association (M&A). The justification given for imposing foreignownership limits include strategic (i.e., defense) and national interests.The imposition of a foreign ownership limit prevents control of the firm frombeing passed to the hands of foreign investors. It also reduces the ability of


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foreign investors to acquire large stakes in these firms, therebyreducing the potential monitoring that can be provided by large foreigninvestors. It can also reduce the vulnerability of the firm to takeovers.Where the firm has dual listings of foreign and local stocks, the foreign stockstend to trade at a substantial premium over the local stocks. The lawrequires the mandatory takeover (triggered when an investor acquires morethan 25% of the voting stocks) to be conducted at the highest price paid bythe acquirer for the stocks over the last 12 months. If the acquisition is donesolely through the purchase of local stocks, then the highest price paid isunlikely to be higher than the prevailing foreign price. This means thatforeign stockholders are unlikely to sell their stocks to the acquirer. To theextent that foreign stockholders have some control over the firms votingrights, the fact that transfers of restricted stocks have to be approved by thefirm essentially precludes a takeover of the firm.However, recently the Government has removed the statutory40% foreign shareholding limit for banks. As a result of this change, all thefive local listed banks have merged their foreign and local shares, and

the market has reacted positively to this development. Nevertheless, the5% limit on shareholding by a single party in banks remains, and this 5%limit applies to nominee interests. This precludes institutional investorsholding nominee interests from acquiring shares above these limits forbanks. We believe that these limits should be reviewed as they discouragelarge institutional investors from investing in these companies, and restricttheir ability or incentives to participate in the corporate governance ofthese companies. There is now considerable empirical evidenceinternationally on the positive role of unaffiliated institutional shareholders(such as pension and mutual funds) in corporate governance.

Managerial and Substantial Shareholder OwnershipUnder the Companies Act (s.201), the directors' report must reportthe interests of each director in the shares of the company (or its relatedcompanies). These interests include both direct and deemed interests. Underthe Companies Act (s. 88), all listed companies must maintain a register ofsubstantial shareholders, defined as shareholders with an interest in 5%ormore of the voting shares of the company. The SGX Listing Rules (Appendix11) also requires the disclosure of substantial shareholders and their directand deemed interests, and the names and holdings of the top 20shareholders of the company.However, there are several limitations with the disclosure of interestsin voting shares. Since the top 20 shareholders disclosure relate only to

direct interests only, this disclosure often include many nomineeshareholders, and therefore the identity of the beneficial shareholders is notknown. Although the substantial shareholders' disclosures include direct anddeemed interests, under the Act, more than one shareholder can havedeemed interests in the same shares. Therefore, there are often significantoverlapping substantial shareholders' interests reported, leading tocumulative substantial shareholdings of more than 100% of the shares of thecompany. More importantly, substantial shareholders often include


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investment holding or other private companies, and the controllingshareholders of these companies are often not easy to determine. Inother words, control over voting rights of the company is not verytransparent.Substantial shareholders are further classified into individuals and families,financial institutions, corporate, and nominees. However, there are someimportant differences between substantial shareholders in Singaporecompanies compared to other countries.A survey identified clear separation of ownership and management as anarea requiring improvement. In Singapore, the Banking Act of 1970limits the investments of banks in other commercial enterprises to aspecified percentage if its capital funds, the most recent of which is 20%.They are more severely limited in their ability to take large positions in asingular company even though it may be less than the 20% limit. Theexception to this rule is when a bank invests in companies set up to promotedevelopment in Singapore, which have to be approved by the regulatoryauthorities (MAS). In order to take high levels of ownership positions, banks

have to undergo a judicial review process by the MAS.Institutional investors with no affiliation with management and whichhave sufficient voting clout to monitor management do not currently play asignificant role in corporate governance in Singapore. While largeshareholders can potentially improve the monitoring of managers because ofthe alignment of cash flow and control rights, large shareholders representtheir own interests. Where corporate governance is weak, large shareholdersmay expropriate wealth from minority investors and other stakeholders.Large shareholdings may also result in a loss of diversification and inefficientrisk-sharing. Thus, due to the relatively weak takeover market, lowerdisclosure standards, and weaker protection of minority shareholders rights,

the high concentration of shareholdings in Singapore may actually result in aweak corporate governance environment by Anglo-American standards.The government has recently changed the rules on the use of CPF savings forinvestment, with a reduction of the percentage of savings (above specifiedminimum sums) for investment in individual equities from 80% to 50%, andan increase in the percentage that can be invested in unit trusts from80% to 100%. This change is designed to encourage greater diversificationand reduced speculative trading in equities by individuals. Although highentry fees are still seen as a barrier to the growth of unit trusts in Singapore,over time, this move is likely to increase ownership by unit trusts inSingapore companies. The use of external fund managers and thedevelopment of the local fund management industry may alter the ownership

structure of Singapore companies, with a shift towards greater ownership bythese institutional investors.

Market for Corporate Control

The hostile takeover market, as might be surmised from earlierdiscussions, is still relatively inactive in Singapore. This is due, in largepart, to the concentration of stockholdings, the pervasive presence ofinterlocking directorates, the prevalence of government control, and


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tight controls by the SGX (e.g., secrecy rules are strictly enforced toattenuate the creation of false markets). Thus, the discipline of a takeovermarket on board behavior largely does not exist in Singapore.

Board Responsibilities and Structure

Section 157 of the Companies Act requires directors to act honestly at alltimes and use reasonable diligence in discharging their duties. In addition,directors are also subject to common law and equitable rules established bycases. Directors have three major categories of duties Fiduciary duties Duties of skill and care Diligence and statutory dutiesHowever, apart from these broad duties and responsibilities of directorsestablished by statute and case law, the responsibilities of boards of directorsare relatively vague. The SGX BPG is silent on board responsibilities. Clearly,one of the major responsibilities of the board of directors is tomonitor management on behalf of shareholders. To perform this role

effectively, the board must have some measure of independence frommanagement. Two characteristics of the board that are generally believed tobe related to board independence are the separation of the CEO andChairman roles, and the inclusion of non-executive, especially independent,directors. In two surveys conducted by PWC in 1997 and 2000, both theseareas were identified as requiring improvement.The PWC (1997) survey reported that 17% of companies had 2, 23% had 3,and 60% had more than 3 non-executive directors. However, non-executivedirectors were seen to be valuable for their contacts, rather than for theirindependence per se. This raises questions as to the criteria by which thesedirectors are selected. In the case of the separation of the CEO and Chairman

roles, 37% of the companies indicated that they already split these roles.Appendix 1a of the SGX Listing Rules requires companies applying for listingto have at least two non-executive directors who are independent andfree of any material business or financial connection with the issuer.15Since the Companies Act (s. 210B) requires listed companies to have anaudit committee of at least 3 members, with a majority being independent,listed companies are also required to have at least 2 independent directorson the board under the Act.16 Specifically, the Act, through its auditcommittee requirements, considers the following directors to be non-independent: executive directors of the company or any related corporation;a spouse, parent, brother, sister, son or adopted son or daughter or adopteddaughter of an executive director or of any related corporation; or any

person having a relationship which would, in the opinion of the boardof directors, interfere with the exercise of independent judgment incarrying out the functions of the audit committee (s.201B(2)). Section201B (10) further defines a non-executive director as "a director who is notan employee of and does not hold any other office of profit in, the companyor in any subsidiary or associated company of the company in conjunctionwith his office of director and his membership of an audit committee".Although the listing rules and the Act together require two directors who are


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non-executives of the company or its related companies, not immediatefamily members, and who do not have "material" financial or businessinterests with the company, it remains possible for more distant relatives and"grey" directors who have business relationships (such as consultant orlawyer) with the company to qualify as independent directors.However, note that the ability to accurately classify non-executive directorsas independent or grey is limited by the quality of disclosure of directors'background in the annual reports, which is often poor. To classify directors,we relied on any explicit classification used by the company either inthe audit committee disclosures or elsewhere in the annual report, relatedparty disclosures in the notes, disclosures of directors' interests in thedirectors' report, amongst others. A grey director is either one who was notspecifically identified as independent in the annual report, who has arelationship with the company that may contravene the concept of directorindependence in the Singapore context, or who has a relationship with thecompany that certain overseas jurisdictions (such as U.S.) may consider tobe prejudicial to independence. Therefore, our distinction between grey and

independent directors should be interpreted with caution. This limitationapplies to our classification of independent and grey directors relating toboard composition, board leadership and audit committee membership.The average board size is about 7, with a range of 4 to 15 board members.Subject to the above caveat regarding the classification of independent andgrey directors, on average, boards in Singapore have 42% executivedirectors, 27% grey directors, and 30% independent directors. Therefore, thetypical board tends to have a majority of non-executive (grey orindependent) directors.In terms of board leadership, 23% have a CEO who is also the Chairman,46% have an executive director other than the CEO as the Chairman,

24% have a grey director as Chairman, while 6% have an independentdirector as Chairman. Therefore, using the traditional definition of unitaryleadership (where CEO is also the Chairman), only 23% of companies havethis board leadership structure. However, a majority of Singapore companieshave a Chairman who is an executive director (either the CEO or anotherexecutive director), and very few appear to have a Chairman who is clearlyindependent. On the surface, boards of Singapore companies do notseem to exhibit the three features that are considered to be indicativeof ineffective boards, i.e., being too large, dominated by executivedirectors or having unitary leadership (Jensen, 1993).Recently, the Government introduced new requirements regarding thecomposition of the board of directors for banks. Under these requirements,

the board of directors of local banks must comprise a majority of Singaporecitizens or permanent residents, and must have a majority of independentnon-executive directors. In addition, where the bank is not a subsidiary ofanother bank incorporated in Singapore, the board of directors must have amajority of directors who are not substantial shareholders of the bank andare independent of the substantial shareholders of the bank. Where the bankis a subsidiary of another bank incorporated in Singapore, the board ofdirectors must have a majority of directors who are not substantial


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shareholders of the parent bank and are independent of thesubstantial shareholders of the parent bank. In addition, the candidate mustbe fit and proper for the position and be the best and most qualifiedcandidate nominated for the office, taking into account the candidate's trackrecord, age, experience, capabilities and other relevant factors.

Board and Senior Management Compensation

Under the SGX Listing Rules, companies are only required to disclose, for thecurrent year and the previous year, the number of directors whoseremuneration falls within the following bands: Below $250,000, $250,000-$499,000, and $500,000 and above. The Companies Act (s. 164A) statesthat 10% of shareholders of the company or shareholders in aggregateholding at least 5% of the company's shares can require the company toprovide an audited statement of individual directors' remuneration.

Incentive Compensation

In recent years, many Singapore companies have adopted employee share

option schemes (ESOS) as a means of compensating directors, managersand employees. However, most companies only issue options to seniormanagement and directors, although there have been several recentinstances of the adoption of broad-based ESOS that include stock options forlower-level employees. Stock options can be an effective tool for aligning theinterests of managers/employees and shareholders and provide astronger link between pay and performance, and therefore perform animportant corporate governance function. However, as many writers havenoted, providing proper incentives through stock options requires a well-designed ESOS. Further, as the recent U.S. experience indicates, stockoptions can be controversial as they are often seen to lead to an inflation of

executive compensation. Further, questionable practices such as re-pricingoptions can mitigate the incentive effects associated with options.In Singapore, ESOS are subject to rules in the SGX Listing Requirements

(Practice Note No. 9h) and the Companies Act 1990. The Companies Act (s.201) requires the number and class of shares for which options are issued,date of expiration of the options, and basis upon which the options may beexercised to be disclosed in the directors' report. The maximum expirationterm of options is 10 years. The SGX Rules relate to matters such asexercise price, expiration terms, vesting periods, total size of thescheme, number of options issued to particular individuals, participationin ESOS, and administration of the ESOS. In general, options are to beissued at the market price. However, options may be issued at a discount of

up to 20% provided they have a minimum vesting period of 2 years and areapproved by shareholders. Controlling shareholders and their associates whoare directors or employees may participate in the ESOS provided it isapproved by independent shareholders for each person. Award of options tocontrolling shareholders, awards to employees receiving in aggregate5% or more of the options, and aggregate number of options to be madeavailable for grant have to be approved by independent shareholders. ForMain Board companies, the number of shares available under the ESOS must


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not exceed 15% of the issued share capital. There are also limits onproportion of options that may be issued to controlling shareholders and toeach individual participant. The ESOS has to be administered by a board-level committee.In the annual report, the name of each participant who is a director,controlling shareholder or who receive 5% or more of the total number ofoptions available must be disclosed, together with the number and terms ofoptions, aggregate number of options issued since commencement of theESOS, aggregate number of options exercised since commencement,and aggregate outstanding options.

Share Buybacks

This limit is 3% for media companies. The government has given priority tothe national interest and highlighted the requirement to create NominatingCommittees, and to have a majority of citizens and permanent residents onthe board, will effectively ensure that control of the banks rests withindividuals or groups who will act in a manner consistent with the national

interest. In addition, MAS will tighten existing safeguards on theaccumulation of significant ownership in a local bank". Therefore, the need toprevent local banks from falling into foreign control remains a concern for theSingapore government.

Board Committees

Under the Companies Act, all listed companies in Singapore are required tohave an Audit Committee with at least 3 members. The majority of themembers must be independent directors, and the Chairman must be a non-executive director. The SGX Listing Manual also requires listed companies tohave an audit committee. The Best Practices Guide states that a majority of

audit committee members, including the Chairman, should be independent ofmanagement. A director can be considered as independent if any relationshiphe may have would not, in the individual case, be likely to affect his exerciseof independent judgment.Most companies have the minimum of 3 members on the audit committee asrequired by the Companies Act and SGX Rules. Apart from the AuditCommittee, neither statute nor listing rules contain requirements for otherboard committees. The exception is the recently introduced requirement forlocal banks to form a Nomination Committee and a CompensationCommittee. The Nominating Committee must comprise of five boardmembers to be approved by the MAS. This committee is responsible foridentifying individuals and reviewing nominations by the board or

shareholders for the following positions: Board membership, the ExecutiveCommittee of the Board, the Compensation Committee, the AuditCommittee, the Chief Executive Officer / Deputy Chief Executive Officer /President / Deputy President, and Chief Financial Officer. Since three of thefive local banks are family-controlled (the other two being government-controlled), there was a prevailing view that board members and seniorexecutives of the family-controlled banks were traditionally chosen fromfamilies and relatives of the controlling shareholders. The Compensation


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Committee must have at least 3 members of the Board, a majority of whoare not employees of the bank.Apart from the Audit Committee for listed companies, and theNomination and Compensation Committees for banks, companies arenot required to form other board committees. An exception is thecommittee responsible for administering the Employee Share Option Scheme(ESOS). Under the SGX Practice Note No. 9h, companies having an ESOShave to form a board-level committee, and to disclose the members of thiscommittee in the annual report. Not surprisingly, therefore, by far the nextmost common committee disclosed by companies in the annual report is theCompensation Committee, including the committee responsible for the ESOS(or its equivalent). Forty-two companies (28%) reported the use of thiscommittee. However, the functions of the Compensation Committee inSingapore may be more limited than in other countries, because they areoften formed to administer the ESOS as required by SGX rules. The nextmost common committee reported is the Executive or ManagementCommittee.

Some other committees reported were Nomination Committee, FinanceCommittee, Investment Committee, Policy Committee, Strategy Committee,Risk Management Committee, Credit Committee, Management DevelopmentCommittee, and Y2K Committee but these were relatively uncommon.

Disclosure and Accounting

The disclosure of information is covered by several chapters and appendicesin the SGX Listing Rules. Chapter 9 requires immediate announcements tothe SGX for any information necessary to avoid the establishment of a falsemarket or which would be likely to materially affect the price of thecompany's securities, including appointment or resignation of directors and

senior management, appointment of special auditors, appointment ofauditors, general meetings, acquisitions and disposals, winding up, andearnings and dividends. It also requires half-yearly and annual reports.Chapter 9A requires shareholder approval and immediate announcement ofinterested party transactions. Chapter 12 requires companies to disclose tothe SGX, shareholders and other security holders, as soon as reasonablypracticable, any material information that is necessary for them toappraise the position of the group, is necessary to avoid theestablishment of a false market in the securities, and which might reasonablybe expected to materially affect the market activity or price of thesecurities.In the case of financial reporting, SAS are identical to IAS in most cases,

although there are occasional deviations and omissions. A notable departurefrom IAS is the Singapore accounting standard dealing withextraordinary items, which still follows the previous IAS. As a result,companies commonly treat items such as profits from the sale of investmentsor assets as extraordinary, and banks usually treat loan provisions asextraordinary rather than operating items. In addition, it is not uncommonfor companies to change their accounting policy for such items in order to


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manage their reported operating profits. These practices introduce a lack ofcomparability of financial statements over time and across companies.One improvement in disclosure that has been introduced is theshortening of the publication of the annual report from 6 months to 5months. There also appears to be considerable support for the CFCrecommendation of quarterly reporting by listed companies, compared to thehalf-yearly reporting currently required. However, one sector that has seen aconsiderable improvement in disclosure is the banking sector. Given theextent to which the banking sector has been implicated in the financialcrisis, it is not surprising that one of the first tasks undertaken by the FSRGwas a review of banking disclosure. The Committee on Banking Disclosurereleased its report in May 1998 (Report on Banking Disclosure). In terms ofbanking disclosure, the more significant improvements that have occurredinclude:(a) Discontinuation of the practice of maintaining hidden reserves,(b) Provision of details on loan loss provisions,(c) Disclosure of off-balance sheet items in notes to accounts, and

(d) Disclosure of significant exposures.With the raising of disclosure standards, disclosure practices of Singaporebanks are now comparable with the requirements of international accountingstandards. However, commentators have noted that disclosure practices ofSingapore banks are still below those of U.K./European and U.S. banks. Thegovernment has indicated that a further review of the banking sector isimminent, one of the objectives being to further enhance disclosure bybanks.

Internal Auditing and ControlInternal Auditing is done with own initiative and mostly companies has an

internal audit function. In one survey, 77% of companies reported thatthey have an internal audit function or share one with a relatedcompany. Seventy-one percent of these companies outsource this activity.In two-thirds of the companies that have an internal audit function, thisfunction reports solely to the Audit Committee, while in 13% of thesecompanies, the internal audit function reports to both the Audit Committeeand executive management.For ensuring effective internal control, the most important was theAudit Committee, followed by the CFO, Executive Directors and then theChairman and/or CEO. In terms of detecting fraud, the CFO was the mostimportant, followed by the Executive Directors and then the AuditCommittee.

External Auditing

The external auditor is another important element in the system of corporategovernance. He/she lends credibility to the financial statements prepared bymanagement, so that users of the statements can rely on their fairness andcompleteness. The effectiveness of the external auditor as a corporategovernance mechanism depends on the quality of the auditor (independenceand expertise), the quality of the audit (audit planning, procedures and


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communication), and the enforcement of standards by a regulatorybody. In Singapore, a Public Accountants Board was set up under theAccountants Act of 1987 (revised 1998) to register and regulate publicaccountants who include external auditors.Applicants for registration must satisfy requirements in regard to professionalexamination, post-examination experience, pre-registration course on ethicsand professional practice subjects (no examination), and proficiency in locallaws. In this regard, the Board has issued a Code of Professional Conductand Ethics (Third Schedule to the PAB Rules), which lays outfundamental principles and more specific principles on pertinent issues suchas independence, use of designator letters, advertising, fees andconfidentiality.Under the Code, a public accountant or his firm cannot be appointed as anexternal auditor of a company if:1. He or his immediate family holds a significant beneficial interest, directlyor indirectly, in shares of the company (significant = 5% or more for publiccompanies and 20% or more for private companies)

2. For the year immediately preceding prospective appointment, hewas an officer or employee of the subject company, or was a partner ofsuch person(s)3. He has a direct or indirect material financial interest in the company.With regard to external auditing, ICPAS (more specifically, its predecessorthe Singapore Society of Accountants) issued Statements of AuditingGuideline (SAG) and Statements of Auditing Practice (SAP) in the early 80s.SAGs are guidance statements on generally accepted auditing practices andon the form and content of audit reports. SAPs deal with the detailed work oracts which the auditor has to carry out in accordance with the guidelines setout in the SAGs. The SAGs and SAPs are based on the International

Guidelines on Auditing and Related Services issued by IFAC. Following IFAC,the SAGs were codified in 1997 and are now referred as the SingaporeStandards on Auditing (SSAs) to better describe their authority. However,the SSAs are strictly professional and not legal pronouncements failure tocomply is a disciplinary and not a legal breach.

Investor RelationsSingapore companies generally do not place significant emphasis oncommunication with investors. It is only very recently that analysts briefingsand conference calls are starting to be used more widely bycompanies.

Issues Arising from the current corporateGovernance policies1. Because the disclosure of directors' background in annual reports,

including director independence, is inconsistent across companies


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and often vague, it is difficult for investors to properly gauge the

quality of the board or its independence.

2. The effectiveness of Singapore boards in monitoring management

is likely to be further limited by the fact that new directors are

typically nominated or proposed by existing directors, who areoften themselves either controlling shareholders or who are affiliated

to controlling shareholders.

3. Other problems include the difficulty of removing ineffective directors

and appointing new ones due to the large stakes held by directors,

family members and passive shareholders, the lack of cumulative

voting which may help minority shareholders appoint their own

directors, and the weak market for corporate control which results in

few board upheavals even when corporate performance is poor.

4. There is little disclosure of how the level and mix of director

remuneration is determined. Therefore, disclosure relating to

directors' remuneration and mix is poor.

5. One other issue relating to compensation is the remuneration of

employees or management (who are not directors of the company)

but who may be related to directors or controlling shareholders.

This is an important issue especially for family-controlled

companies where family members may be employees or managers,

but not directors of these companies. The current rules on

disclosure of directors' remuneration will not cover theremuneration of these employees or managers.

Benefits of Corporate Governance

The concept of corporate governance has been attracting public attention for quite some

time. It has been finding wide acceptance for its relevance and importance to the

industry and economy. It contributes not only to the efficiency of a business enterprise,

but also, to the growth and progress of a country's economy. India INC represents a

heterogeneous mixture of small & large businesses & as an implication we have many

companies which adopted the code of corporate governance voluntarily well in advance

such as Infosys, Tatas but at the same time we have many companies which have

adopted the systems to protect from the huge liabilities which they could have incurred

by violating the governments code of policies & guidelines.

Firms which have voluntarily adopted systems of good corporate governance may be

due to one of the following reasons:-


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quality & frequency of financial and managerial disclosure, compliance with the code of

best practice, roles & responsibilities of Board of Directories, shareholders rights, etc.

There have been many instances of failure & scams in the corporate sector, like

collusion between companies & their accounting firms, presence of weak or ineffective

internal audits, lack of required skills by managers, lack of proper disclosures, non-

compliance with standards, etc. As a result, both management and auditors have come

under greater scrutiny. But, with the integration of Indian economy with global markets,

industrialists & 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.

Quality of corporate governance primarily depends on following factors, namely:- Integrity of the management

Ability of the Board

Adequacy of the processes

Commitment level of individual Board members

Quality of corporate reporting; etc.

Hence, in the years to come, corporate governance will become more relevant & a more

acceptable practice worldwide.

comparing cg of india and singapore

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