PARADIGM SHIFT IN CORPORATE GOVERNENCE

IN INDIA

PRESENTED BYOM PRAKASH SATYARTHY

To provide “the maximum happiness for the maximum number of people for the maximum period, based on the principles of Dharma – righteousness and moral values.”

-Ayodhya Kand

Governance Concept in ‘Ramayana’

CORPORATE

A corporation is a separate legal entity that has been incorporated through a legislative or registration process established through legislation. - according to Wikipedia

The word "corporation" derives from corpus, the Latin word for body, or a "body of people."

A corporation is an organization created (incorporated) by a group of shareholders who have ownership of the corporation.

GOVERNENCE

Oxford English dictionary defines “governance

"as the activity of governing a country or

controlling a company or an organization .

The word has Latin origins that suggest the

notion of “steering". it deals with the processes

and systems by which an organization or society

operates

CORPORATE GOVERNENCE

“Corporate Governance is the application of best management practices, Compliance of law in true letter and spirit and adherence to ethical standards for effective management and distribution of wealth and discharge of social responsibility for sustainable development of all stakeholders”.

- The Institute of Company Secretaries of India

CORPORATE GOVERNANCE CORPORATE MANAGEMENT

External Focus Internal Focus

Governance assumes an open system Management assumes a closed system

Strategy-orientated Task-orientated

Concerned with where the company is going

Concerned with getting the company there

DIFFERENCE BETWEEN

Corporate governance is….•A means whereby society can be sure that large corporations are well-run institutions to which investors and lenders can confidently commit their funds. •Is a term that refers broadly to the rules, processes, or laws by which businesses are operated, regulated, and controlled. The term can refer to internal factors defined by the officers, stockholders or constitution of a corporation, as well as to external forces such as customer groups, clients and government regulations.•(Creates)..safeguards against corruption and mismanagement, while promoting fundamental values of a market economy in democratic society.

A basic design of existing corporate governance systems

Corporate

Management

Stakeholders Creditors

Supervisory &enforcementauthorities

Executivedirectors

IndependentDirectors

Shareholders

Accou

nta

bilit

y

Fundamental Pillars of Corporate Governance

Corporate Governance

Tran

sp

are

ncy

Resp

on

sib

ilit

y

Fair

ness

AccountabilityClarifying governance roles & responsibilities, and supporting voluntary

efforts to ensure the alignment of managerial and shareholder interests and

monitoring by the board of directors capable of objectivity and sound

judgment.

TransparencyRequiring timely disclosure of adequate information concerning corporate

financial performance

Responsibility

Ensuring that corporations comply with relevant laws and regulations that

reflect the society’s values

Fairness

Ensuring the protection of shareholders’ rights and the enforceability of

contracts with service/resource providers

Driving Forces of Corporate Governance in India

1) Unethical Business Practices– Security Scams ---Harshad Mehta Security Scam

• Equity allotments at discount rates to the controlling groups

• Disappearance of Companies (1993-94) - around 4,000

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

Brief history of corporate governance in India

Companies Act, 1956 provides for basic framework for regulation of all the companies. Certain provisions were incorporated in the Act itself to provide for checks and balances over the powers of Board viz.: Loan to directors or relatives or associated entities (Sec 295) Interested contract needs Board resolution and to be entered in register (Sec 297) Interested directors not to participate or vote (Sec 300) Appointment of director or relatives for office or place of profit needs approval by shareholders. If the remuneration exceeds prescribed limit , CG approval required (Sec 314)Shareholders holding 10% can appeal to Court in case of oppression or mismanagement (397/398).

Brief history of corporate governance in India

The initiative in India was initially driven by an industry association, the Confederation of Indian IndustryIn December 1995, CII set up a task force to design a

voluntary code of corporate governance.The final draft of this code was widely circulated in

1997.In April 1998, the code was released. It was called

Desirable Corporate Governance: A Code.Between 1998 and 2000, over 25 leading companies

voluntarily followed the code: Bajaj Auto, Hindalco, Infosys, Dr. Reddy’s Laboratories, Bharat Forge, BSES, HDFC, ICICI and many others

Brief history of corporate governance in India

Following CII’s initiative, the Securities and Exchange Board of India (SEBI) set up a committee under Kumar Mangalam Birla to design a mandatory-cum-recommendatory code for listed companies

The Birla Committee Report was approved by SEBI in December 2000.Became mandatory for listed companies through the clause 49 of the listing agreement, and implemented according to a rollout plan:

2000-01: All Group A companies of the 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

Brief history of corporate governance in India

The Naresh Chandra committee was appointed in August 2002 by the department of Company Affairs(DCA) under the Ministry of Finance and corporate Affairs, to examine various corporate governance issues. The Committee submitted its report in December 2002.

It made recommendation in terms of two key aspects of corporate governance: financial and non- financial disclosures, and independent auditing and board oversight of management

Murthy Committee Committee was set up by SEBI under the chairmanship of Mr N.R. Narayana murthy, in order to review clause 49, and to suggest measure to improve corporate governance standardSome of the major recommendation of the committee were primarily related toAudit committees Audit reportsIndependent directorsRelated party transactions Risk managementDirectorship and director compensationCode of conduct Financial disclosures

COMPANY BILL 2012After the murthy committee report provisions were maid for amendments in the companies act 1956.

The bill was presented in parliament in December2011 , Standing committee submitted its report in June 2012. based on report some amendments were made and the bill was passed in Lok Sabha on 18th December 2012.This bill will replace Companies Act,1956.

The bill has470 clauses as against 658 Sections in the existing Companies Act, 1956. the entire bill has been divided into 29 chapters.

Brief overview-COMPANY BILL 2012Key points of COMPANY BILL 2012 are as under Preliminary Compromise, Arrangement and Amalgamations Audit and Auditors Accounts of companies Appointment and Qualifications of Directors Declaration and Payment of Dividend Annual Return Meeting of Board and its Power, etc

CONCLUSION

What began as a voluntary effort soon acquired mandatory status through the adaptation of Clause 49, as all companies( of a certain size) listed on stock exchange were required to comply with these norms, a trend which was further reinforced by the introduction of stringent penalties for violation of prescribed norms. While the Voluntary Corporate guidelines of 2009 represented a move back to a Voluntary framework for corporate governance. Recent COMPANY BILL 2012 marks a reversal.

“Satyam Vada Dharmam Chara”“Forever speak the truth and follow the

dharma”

Thank You