final hard copy of corporate governance rating

8/2/2019 Final Hard Copy of Corporate Governance Rating.

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PROJECT BY.

Rajani Koundal .. 29

Priyanka Punjabi

Raveena bhakru..08

Hina aswani..04


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INTRODUCTION:

CORPORATE GOVERNANCE: Every society is a structure made up on collective

institutions giving diverse interests. Inspite of diverse interests, each of the institution

pursues a common objective of attaining growth and prosperity. But the social structure

within which these institutions operate leaves much to be desired. The environment is

that of moral degradation and corruption. Obviously, individuals enjoying power and

authority often indulge in immoral and improper behavior. The end result of this is that

everybody appears to be a suspect. All this needs to be changed and what better catalyst

can one look at for bringing about this change than a Corporation.

To govern is to control or keep a check at. Corporate Governance is the system by which

companies are directed and controlled by the management in the best interest of the

shareholders and others ensuring greater transparency and better timely financial

reporting. Corporate governance is governance of affairs of a company by its

stakeholders. As public governance is peoples democracy, corporate governance is

stakeholders democracy. Corporate governance looks at the complete governance of

corporations from their very beginning in entrepreneurship, through their governance

structures, legal framework, privatizations, to market exit and insolvency. The integrity

of corporations, financial institutions and markets is particularly central to the health of

our economics and their stability. Corporate Governance is the adherence to certain

norms with the objective of maximizing shareholders value while ensuring fairness to all

shareholders. It is about creating an outperforming organization which leads to increased

customer satisfaction and shareholder value. It primarily involves transparency, full

disclosure, independent monitoring, the state of affairs and being fair to all shareholders.

It aims at creating a corporate culture of conscience and consciousness, transparency and


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accountability that not only promotes employee morale and commitment, but is also

sensitive to social concerns. It propagates a de-risking approach that recognizes measures

and mitigates risk along every dimension and encourages a corporation to take carefully

thought-out risks. A good structure of corporate governance is that encourages balanced

relationship among shareholders, executive directors and the board of directors.


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NEED FOR CORPORATE GOVERNANCE RATINGS:There is a greater need for CG ratings today than ever before. Issues of corporate

governance have been hotly debated in the United States and Europe over the last decade

or two. In India, these issues have come to the fore only in the last couple of years. In the

Indian corporate scene, there is a need to induct global standards so that at least while the

scope of scams still exists, it can be reduced to the minimum. On the other hand, only a

handful of Indian firms have been ready to voluntarily subject their corporate governance

to assessment by credit rating agencies. Of the 4,700 listed firms whose shares are traded

in India, a mere 19 have made their corporate governance ratings public.

A series of scams back home made CII to take the initiative and so a committee was

appointed under Mr.Rahul Bajaj to look into the issue of Corporate Governance.

Subsequent to this, Securities and Exchange Board of India (SEBI) appointed a

committee under the chairmanship of Kumaramangalam Birla. This committee dealt with

various issues and evolved norms for listing agreement, disclosures and transparency in

corporate governance. Good governance practices maintain the integrity of business

transactions and in so doing strengthen the rule of law and democratic governance.

In the Indian context, the need for corporate governance has been highlighted because of

the scams occurring frequently since the emergence of the concept of liberalization from

1991 such as the Harshad Mehta Scam, Ketan Parikh Scam, UTI Scam, Vanishing

Company Scam, Bhansali Scam and so on.

In India, the Securities and Exchange Board of India (SEBI) was set up as a statutoryauthority in 1992, and has taken a number of initiatives in the area of investor protection.

The SEBI is planning to come out with a corporate governance rating index. The

objective is to gauge the level of corporate governance in a company. The index will be


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based on three principles: the level of wealth creation by a corporate, the quality of

wealth management and sharing of the wealth with all stake holders. In the Indian

corporate scene, there is a need to induct global standards so that atleast while the scope

for scams may still exist, it can be atleast reduced to the minimum. THE CORPORATE

GOVERNANCE RATING index is the second attempt by the capital market regulator

to raise the standard of corporate governance in listed companies. Hence attempts were

made and some rating agencies were established to govern the functioning of corporate

governance. Some of the corporate governance rating agencies are CRISIL, CARE, and

ICRA etc.


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CORPORATE GOVERNANCE RATING AND CORPORATEGOVERNANCE RATING AGENCIES:Corporate governance ratings were first undertaken by Crisil Ltd, an associate of global

ratings agency Standard and Poors, in 2003. Two other ratings agencies, ICRA Ltd and

Credit Analysis and Research Ltd, or CARE, followed. The trio has rated around 50

firms, but only 19 have disclosed their ratings to the public. The others have preferred to

keep them secret. Eg: Infosys Technologies Ltd has been rated by both Icra and Crisil and

received the highest ratings from both the agencies.

So far only a limited number of companies have approached for corporate governance

ratings, Companies approach for ratings and also for corporate governance assessment.

Opinions are given on the governance practices and the perceived strengths and

weaknesses from a governance perspective,

Since it is voluntary, according to the rating agencies, only those firms that have a strong

urge to improve their corporate governance or are sure about their governance standards

approach the rating agencies. Firms dont like to make public their ratings when the

ratings do not match their expectations. Apart from corporate governance ratings, the

three agencies also offer company assessments and diagnostic services to firms to help

them improve their governance.

According to the agencies, most companies serious about improving governance

standards generally opt for assessment and diagnostic tools rather than a rating. The

agencies suggest various measures to improve governance standards and some companies

come back to the agencies working on their recommendations, based on which the ratings

are sometimes revised.


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The rating process includes a review of both public and confidential information, as well

as interviews with senior company representatives, including directors.

The survey generally covers four key areas:

-Ownership structure and external influence,

-Shareholder rights and stakeholder relations,

-Transparency, disclosure and audit,

-Board structure and effectiveness.

The corporate governance rating agency will produce a score, which reflects the extent

to which a companys corporate governance practices and policies serve the interests of

investors, shareholders and other stakeholders.

However, corporate frauds is not their job and it a jobbest done by the auditors. Rating

agencies give ratings based on available information. A listed entity has to follow the

corporate governance standards, based on listing agreements.

Even though the rating agencies are not sure whether corporate governance ratings will

be made mandatory, as credit ratings are, they believe shareholders will increasingly

demand corporate governance ratings for the companies they have invested in.Two rating

organisations in India ICRA and CRISIL have developed well thought out criteria for

measuring corporate governance practices and value creation for all stakeholders. These

take into account ratings on wealth creation, wealth management and wealth sharing, and

are based not only on data published in the public domain, but also detailed interviews

with management and stakeholders.

Corporate governance rating is one such opinion, about the level of corporate

governance (practiced by an entity). It takes into consideration aspects like ownership

structure, management style, including board-level issues, quality of financial reporting

and disclosure practices, and sensitivity to the interests of different financial stakeholders.


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I firmly believe that all the stakeholders should have the right to obtain the benefit of an

independent opinion on all the specific areas.

Rating agencies carry out not only a rating, but also monitoring of such ratings, which

will discourage deterioration in the standard of corporate governance. This will be of

great benefit to the different groups of financial stakeholders.

Corporate governance is about commitment to values and ethical business conduct. Good

corporate governance is reflected in fair, transparent and responsible interactions between

a company's management, its board of directors, shareholders and other stakeholders.

This is why it is essential to have a corporate governance rating by a ratings agencyin India.


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ICRAs CORPORATE GOVERNANCE RATING

ICRAs Corporate Governance Rating (CGR) is meant to indicate the relative level to

which an organization accepts and follows the codes and guidelines of corporate

governance practices. The corporate governance practices prevalent in a company reflect

the distribution of rights and responsibilities among different participants in the

organization such as the Board, management, shareholders and other financial

stakeholders, and the rules and procedures laid down and followed for making decisions

on corporate affairs. The emphasis of ICRAs CGR is on a corporates business practices

and quality of disclosure standards that address the requirements of the regulators and are

fair and transparent for its financial stakeholders. The emphasis of ICRAs Stakeholder

Value and Governance (SVG) Rating, on the other hand, is on value creation and value

management for all stakeholders of a company, besides the companys corporate

governance practices. An SVG Rating considers a companys actual performance and the

accrual of the benefits of such performance among all its stakeholders, apart from the

quality of the companys corporate governance practices. It is the combined assessment

of stakeholder value creation and management and the quality of corporate governance

practices that determines the SVG Rating. ICRAs CGR and SVG Ratings may help the

Rated corporate entity in raising funds; listing on the stock exchange; dealing with third

parties like creditors; providing comfort to regulators; improving image, credibility,

improving valuation, and bettering corporate governance practices throughbenchmarking.

Each of these variables is evaluated with respect to a set of attributes and a composite

score is computed using a proprietary model developed by ICRA.


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The rating process also looks at compliance with statutory regulations. The

ICRA opinion, is, however not a certificate of statutory compliance but a comment on

companys future financial performance, credit rating or stock price.

ICRAs RATING MethodologyCorporate governance rating is being done by ICRA, where assigning it is still very

much a learning process. In order to evaluate corporate governance, ICRA has decided tolook at the following:

Shareholding Structure:

A transparent shareholding structures where the key shareholders are clearly identifiable

and where an absence of opaque cross holdings is considered positive feature.

Governance structure and management process:

This focuses on the internal decision making process and the quality and nature of

information presented to a companys board. In looking at the decision making process,

how responsibility is delegated and how accountability is ensured, a view is taken of not

just what is laid down in procedures but what is actually practiced. As to the quality of

information submitted to the board, what is examined whether it is told enough to know

what is going on and whether its quality is satisfactory, are important. Emphasis is laid on

matters such as inter-corporate loans, related-party transactions, large capital

expenditure, diversification and of course, mergers and acquisitions.

Board Structure and Process:


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The board structure and process of decision making is all very important. The bottom line

in whether a company is board-managed or its board is a rubber stamping body whose

members hold their positions at the pleasure of the effective owner. For this, the size of

the board, selection criteria for directors, proportion of independent directors and the

expertise they can command, compensation policy for (directors, number and nature of

board committees, attendance record of t directors and frequency of board meetings are

all taken into consideration.)

Examine Stakeholder Relations:

ICRAs methodology on this matter relates almost wholly to the rights of shareholders

and the duty of the company to service them well. There is a passing reference to other

financial stakeholders such as banks, financial institutions and fixed-deposit holders. But

the whole idea of stakeholder is that it goes far beyond the shareholder and includes the

workers, a companys customers and the society at large.

Transparency and disclosures:

It is found that better-run companies disclose more than they are required by the law. But

in assessing a companys performance in this regard, emphasis is laid on how

materialistic the disclosures are and whether they really shed any light or hide more than

they reveal.

FinancialDiscipline:

Considerations under the criterion would broadly overlap with the determinants

governing financial rating. But it is emphasized that a financial rating says nothing about

the nature of corporate governance prevailing in a company and similarly, a governance

rating says nothing about the financial position of a company. The risk of governance

failure will not be apparent from the financial rating of a company, but from its corporate


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governance rating. Here again, the conceptual scope of corporate governance and the way

ICRA sees the idea may be a little divergent. While discussing financial discipline, it says

that the ultimate objective of corporate governance is to maximize shareholder value to

the extent that if the company goes down in its governance record, no matter how

excellent otherwise, will mean nothing. But what if a companys shareholders are happy

with it but its workers or society at large is not, then the conflict of interest needs to be

arrived at, but one should remember that shareholders are also members of the society.

Credit ratings for debt paper, which did not start off very well, later picked up

thanks to the pressures of the market which forced issuers of debt to get them rated in

order to raise money. Similarly, market pressures will force more and more corporate in

India to go in for corporate governance ratings. Eventually, SEBI, which can legitimately

take credit for spearheading the movement for corporate governance ratings in India,

must make such ratings mandatory for issuers of equity, so that investors have a

comprehensive understanding of the companies where they are putting their money.

ICRAs Corporate Governance Rating (CGR) is meant to indicate the relative level to

which an organization accepts and follows the codes and guidelines of corporate

governance practices. Corporate Governance practices prevalent in a company reflect the

distribution of rights and responsibilities among different participants in the organization

such as the Board, management, shareholders and other financial stakeholders and the

rules and corporate affairs. The emphasis of ICRA rating is on corporate business

practices and quality of disclosure standards that addresses the requirements of the

regulators and is fair and transparent for its financial stakeholders. The variables, whichare analysed for arriving at the rating, are the shareholding structure, executive

management processes, board structure and processes, stakeholder relationship,

transparency and disclosures and financial discipline. Each of these variables is evaluated

with respect to a set of attributes and a composite score is computed using a proprietary


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model developed by ICRA. The rating processes also looks at compliance with statutory

agreement. The focus, however, is on substance over form and compliance with

regulations in only the starting point. The ICRA opinion, is, however not a certificate of

statutory compliance or a comment on companys future financial performance, credit

rating or stock price.


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CRISILCRISIL is a global analytical company providing ratings, research, and risk and policy

advisory services. It is the Indias leading ratings agency and also the foremost provider

of high-end research to the world's largest banks and leading corporations. With

sustainable competitive advantage arising from our strong brand, unmatched credibility,

and market leadership across businesses, and large customer base, it delivers analysis,

opinions, and solutions that make markets function better. CRISIL is the largest credit

rating agency in India.

CRISIL pioneered ratings in India more than 20 years ago, and is today the undisputed

business leader, with the largest number of rated entities and rating products. CRISIL's

rating experience covers more than 45,676 entities, including 23,500 small and medium

enterprises (SMEs). As on September 30, 2011, and had more than 15,643 ratings

(including over 8000 SMEs).

RATING PROCESSCRISIL's ratings process is designed to ensure that all ratings are based on the highest

standards of independence and analytical rigour. From the initial meeting with the

management to the assignment of the rating, the rating process normally takes three to

four weeks. However, CRISIL has sometimes arrived at rating decisions in shorter

timeframes, to meet urgent requirements. The process of rating starts with a rating

request from the issuer, and the signing of a rating agreement. CRISIL employs a multi-

layered, decision-making process in assigning a rating. A detailed flow chart of CRISIL's

rating process is as below:


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CORPORATE GOVERNANCE RATING IN INDIAThe beginning of corporate developments in India were marked by the managing agency

system that contributed to the birth of dispersed equity ownership but also gave rise to the

practice of management enjoying control rights disproportionately greater than their stock

ownership.

India has one of the best corporate governance laws but poor implementation together

with socialistic policies of the pre-reform era has affected corporate governance. Recent

high-profile corporate governance failures in developed countries have brought the

subject to media attention, the issue has always been central to finance and economics.

The issue is particularly important for developing countries since it is central to financial

and economic development.

Sustainable growth and success of any country or society depend upon collective function

of its resources, starting from the vast use of natural resources, strategic, geographic

location, labour (people) and intellectual capital. In a society where private participants

have prominent role in utilization of all these resources, governance or public governance

plays a vital role in sustainable development of the society. Governance, as it is said

relates to decisions that define expectations, grant power or verify performance. It

consists either of a separate process or of a specific part of management or leadership

processes. Good governance creates a strong future for an organization by continuously

steering towards a vision and making sure that day-to-day management is always lined up

with the organization's goals.


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CONCLUSION

All the top rating agencies in the country are now working overtime on their own CG

rating initiatives. Rating services are increasingly wielding significant power in advising

investors with respect to issuers corporate governance and disclosure practices. Low

ratings can increase the companys cost of capital by reducing the share price and

encouraging shareholder activism. A proactive approach to integrating the new ratings

dynamic into shareholder relations planning and execution will go a long way toward

maintaining the highest sustainable shareholder value.

Credit ratings for debt paper, which didnt start off with a bang, later picked up thanks to

the pressures of the market which forced issuers of debt to get them rated in order to raise

money. Similarly, market pressures will force more and more corporate in India to go in

for CG ratings. Eventually, SEBI, which can legitimately take credit for spearheading the

movement for CG ratings in India, must make such ratings mandatory for issuers ofequity, so that investors have a comprehensive understanding of the companies where

they are putting their monies.

Corporate governance rating is gaining popularity not just with stakeholders; even

regulators in many countries have taken cognisance of its utility and are working out how

to make best use of such a rating to facilitate healthy development of capital market.

There is a strong emphasis on improving corporate governance practices and a lot of

these companies have gone beyond what is mandated by the prevailing laws and

instituted best practices in terms of corporate governance


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According to Raman Uberoi, senior director, corporate governance ratings, for Crisil,

though there is an improvement in corporate governance standards in India, a lot more

needs to be done, particularly in family-owned firms that went public or are planning to

go public.

final hard copy of corporate governance rating

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