CORPORATE GOVERNANCE

(FOR PRIVATE CIRCULATION ONLY)

2018
PROGRAMME COORDINATOR
Dr. Padmpriya Irabatti

COURSE DESIGN AND REVIEW COMMITTEE

Avinash Nene Dr. Ravi Chitnis
Dr. Shrish Limaye Umesh Kulkarni
Uday Kulkarni Dr. Swati Oza
Prof. Sudeep Limaye Prof. Dr. Kalyani Srinivas
Mrs. Parimala Veluvali

COURSE WRITERS
Prof. Dr. Kalyani Srinivas Mrs. Parimala Veluvali

EDITOR
Ms. Neha Mule

Published by Symbiosis Centre for Distance Learning (SCDL), Pune

July, 2006 (Revision 02, 2014)

Copyright © 2018 Symbiosis Open Education Society

All rights reserved. No part of this book may be reproduced, transmitted or utilised in any form or by any
means, electronic or mechanical, including photocopying, recording or by any information storage or retrieval
system without written permission from the publisher.

Acknowledgement
Every attempt has been made to trace the copyright holders of materials reproduced in this book. Should any
infringement have occurred, SCDL apologises for the same and will be pleased to make necessary corrections
in future editions of this book.
 PREFACE

We are glad to write this SLM on “Corporate Governance” for the students of SCDL. With the growth
in globalization, the complexities in the corporate world have increased immensely. Today, companies
are interlinked more than ever before. We could just not think of isolating ourselves from others in
the business world. This leads to the increasing need for trust and transparency in the system. The
idea behind corporate governance is simple - well run companies produce better results. Corporate
governance can be considered as the cement that holds the enterprise together, both internally and
externally. History suggests that it often takes a scandal or two of damaging proportions to really bring
into sharp focus the role of good governance in business.

This SLM covers the basic fundamentals of Corporate Governance. The chapter flow of each unit
comprises of the objective, a detailed presentation of concepts and generalisation to give the students
a clear understanding of the topic, the summary followed by key words and a list of questions for self-
assessment. Special stress has been laid on the simplicity of language. Every effort has been made to
acknowledge the references to the sources of information.

We sincerely hope that this SLM will be interesting and useful and will help students and readers to
learn this subject in a more meaningful and useful manner. We take this opportunity to sincerely extend
our thanks to the SCDL staff for believing in us and giving us an opportunity to write this SLM. We
also thank all those, who directly or indirectly helped us in completing our work.

Dr. Kalyani Srinivas

Mrs. Parimala Veluvali

iii
 ABOUT THE AUTHORS

Dr. Kalyani Srinivas has completed her PhD in Business Administration under the University of Pune
in the area of Corporate Social Responsibility.

She is an enthusiastic educator with a keen commitment to student development. She has a number
of years of experience in teaching General Management and subjects in the Finance specialization
of the MBA course. She is also a Life member of the ISTE (Indian Society for Technical Education).

She has presented a number of papers on the subject of Corporate Ethics, Governance and Social
Responsibility and is currently researching on issues related to that area.

Parimala Veluvali is a Company Secretary by profession and a faculty with Symbiosis Centre for
Management Studies. She is also a post graduate in Economics from Osmania University, Hyderabad.

She has more than 8 years of teaching experience at graduate and post graduate level in many reputed
management institutes. Her areas of teaching include Company Law, Labour Law, Labour Economics
and Legal Aspects of Business. Apart from her teaching experience, she also has industry experience
as a practising company secretary.

She has been associated with Symbiosis Centre for Management Studies since 2004 till date and
has been actively involved in classroom teaching and other academic pursuits. Her unique teaching
methodology, which is student-friendly, has earned her a lot of recognition and affection from her
students. She has contributed to articles in the areas of company law and labour law and has also
authored a book on Business and Industrial Law. Presently, she is working towards her PhD in Law
from Symbiosis International University. To excel in the field of teaching and attain proficiency in the
broad area of legal aspects of business is her mission.

iv
 CONTENTS

Unit No. TITLE Page No.

1 Overview of Corporate Governance 1-22
1.1 Introduction
1.2 Corporate Governance: Concept
1.3 Evolution and Regulation of Corporate Governance
1.4 Need and Significance of Corporate Governance
1.5 Regulation of Corporate Governance
1.6 Components of Corporate Governance
1.7 Models of Corporate Governance
Case Study
Summary
Key Words
Self-Assessment Questions
Answers to Check your Progress
Suggested Reading
2 Corporate Board 23-58
2.1 Introduction - Corporate Governance and Board of Directors
2.2 Categories of Directors
2.3 Fiduciary Role of Directors
2.4 Provisions of Clause 49 of the Listing Agreement
2.4.1 SEBI’s recent amendments of clause 49
2.5 Corporate Governance Voluntary Guidelines 2009
Case Study
Summary
Key Words
Self-Assessment Questions
Answers to Check your Progress
Suggested Reading
Annexure
3 Shaping Directorial Competence and Board Effectiveness 59-72
3.1 Introduction
3.2 The Board of Directors – Roles and Responsibilities
3.3 Classification of Directors’ Duties
3.4 Characteristics of Effective Boards
3.5 Indicators of Good Practice of Boards
3.6 The Role of the Independent Director
3.7 Getting and Keeping Good Board Members
3.8 Performance Evaluation and Appraisal
Summary
Key Words
Self-Assessment Questions
Answers to Check your Progress
Suggested Reading
Annexure
v
 Unit No. TITLE Page No.
4 Financial Institutions and Nominee Directors 73-84
4.1 Introduction
4.2 Composition of the Board of Directors
4.3 Nominee Directors
4.4 Nominee Director: Meaning
4.5 Rationale for Nominee Director
4.6 Appointment of Nominee Directors
4.7 To whom does a Nominee Director owe Duties
4.8 Exemption to Nominee Directors under Provisions of Section 274(1) (G)
4.9 Nominee Directors and Conflict of Interest
4.10 Conclusion
Summary
Key Words
Self-Assessment Questions
Answers to Check your Progress
Suggested Reading
5 Corporate Disclosure and Investor Protection (Listing Agreement 85-102
with Stock Exchange)
5.1 Introduction to Capital Market Regulation
5.2 Securities and Exchange Board of India
5.3 Policy Measures and Initiatives
5.4 Investor Education and Protection
5.5 Should there be a Separate Law for Investor Protection
5.6 Role of Regulators
5.7 Disclosures and Investor Protection
5.8 Conclusion
Summary
Key Words
Self-Assessment Questions
Answers to Check your Progress
Suggested Reading
6 Corporate Reputation 103-112
6.1 Introduction
6.2 Corporate Reputation
6.3 Corporate Legitimacy
6.4 Corporate Crime
6.5 Examples from Real Life
Summary
Key Words
Self-Assessment Questions
Answers to Check your Progress
Suggested Reading

vi
Unit No. TITLE Page No.
7 Corporate Governance and Regulatory Bodies 113-136
7.1 Introduction
7.2 SEBI as a Regulator
7.3 IRDA
7.4 RBI
7.5 PFRDA
7.6 Role of Ministry of Corporate Governance
7.7 Conclusion
Summary
Key Words
Self-Assessment Questions
Answers to Check your Progress
Suggested Reading
8 Globalization and Corporate Governance 137-152
8.1 Introduction
8.2 Globalization and Corporate Governance
Case Study
Summary
Key Words
Self-Assessment Questions
Answers to Check your Progress
Suggested Reading
9 Regulatory Framework and Investor Protection - An Overview of 153-174
existing Measures for Investor Protection
9.1 Introduction
9.2 Existing Regulatory Framework
9.3 Need for Investor Protection
9.4 Role of Corporate Governance in Investor Protection
9.5 A Critical Appraisal of the Extent of Protection Given to the Investors
9.6 Areas that Need Improvement
9.7 Conclusion
Summary
Key Words
Self-Assessment Questions
Answers to Check your Progress
Suggested Reading
Annexure

vii
 Unit No. TITLE Page No.
10 Corporate Social Responsibility and Corporate Governance 175-192
10.1 Introduction
10.2 Meaning of Corporate Social Responsibility
10.3 Diverse Views on Corporate Social Responsibility
10.4 Corporate Social Responsible Practices in India
10.5 Business Ethics and Corporate Social Responsibility
10.6 Corporate Social Responsibility and Corporate Governance
10.7 Areas to Focus for Corporate Social Responsibility
10.8 CSR Activities of Some Companies
10.9 Corporate Social Responsibility - Voluntary Guidelines 2009
Summary
Key Words
Self-Assessment Questions
Answers to Check your Progress
Suggested Reading
11 Majority Rule and Minority Protection - Prevention of Oppression 193-208
and Mismanagement
11.1 Introduction
11.2 Shareholder Democracy
11.3 Factors Contributing to the Empowerment of the Minority
11.4 Safeguards for Minority Shareholders’ Protection
11.5 Related Party Transactions
11.6 SEBI (ICDR) Guidelines 2009
Summary
Key Words
Self-Assessment Questions
Answers to Check your Progress
Suggested Reading
Annexure 209-232
References 233-236

viii
Overview of Corporate Governance
UNIT

1
Structure:
1.1 Introduction
1.2 Corporate Governance: Concept
1.3 Evolution and Regulation of Corporate Governance
1.4 Need and Significance of Corporate Governance
1.5 Regulation of Corporate Governance
1.6 Components of Corporate Governance
1.7 Models of Corporate Governance
Case Study
Summary
Key Words
Self-Assessment Questions
Answers to Check your Progress
Suggested Reading

Overview of Corporate Governance 1

 Notes
Objectives
----------------------

---------------------- After going through this unit, you will be able to:
• Explain the origin of corporate governance.
----------------------
• Analyze the need and significance of corporate governance.
----------------------
• Describe the evolution of the concept of corporate governance in the
---------------------- Indian and global context.

---------------------- • Outline the components of corporate governance.

• Identify models of corporate governance.
----------------------

---------------------- 1.1 INTRODUCTION

----------------------
Ownership and management patterns in businesses have changed
---------------------- phenomenally over decades. The number of stakeholders in every business has
also multiplied. This has given rise to agency costs and ethical issues. However,
---------------------- whether it is the proprietor or the executive managing the business, the basic
objective of wealth generation still remains. Even an owner needs to learn to
----------------------
govern.
---------------------- So how do we understand the concept of governance? Corporate
governance represents the value framework, the ethical framework and the
----------------------
moral framework under which business decisions are taken.
---------------------- Corporate Governance may be defined as a set of systems, processes and
---------------------- principles which ensure that a company is governed in the best interest of all
stakeholders. It is the system by which companies are directed and controlled.
---------------------- It ensures commitment of the board in managing the company in a transparent
manner for maximizing long-term value of the company for its shareholders. It
---------------------- is about promoting corporate fairness, transparency and accountability. In other
---------------------- words, ‘good corporate governance’ is nothing but ‘good business’.

---------------------- 1.2 CORPORATE GOVERNANCE: CONCEPT

---------------------- The concept of corporate governance has been attracting public attention
for quite some time in India. Progressive firms in India have voluntarily put in
----------------------
place systems of good corporate governance which allow sufficient freedom
---------------------- to the boards to take decisions towards the progress of their companies, to
innovate, while remaining within a framework of effective accountability. In
---------------------- other words they have system of good corporate governance.
---------------------- Corporate governance has been defined by various experts and agencies
as follows:
----------------------
1. According to Economist and Noble laureate Milton Friedman “Corporate
---------------------- Governance is to conduct the business in accordance with owner or

2 Corporate Governance
 shareholders’ desires, which generally will be to make as much money as Notes
possible, while conforming to the basic rules of the society embodied in
law and local customs”. ----------------------
2. According to Sir Adrian Cadbury, “Corporate Governance is the system ----------------------
by which companies are directed and controlled.”
----------------------
3. “Corporate Governance is concerned with holding the balance between
economic and social goals and between individual and communal goals. ----------------------
The corporate governance framework is there to encourage the efficient
use of resources and equally to require accountability for the stewardship ----------------------
of those resources. The aim is to align as nearly as possible the interests
----------------------
of individuals, corporations and society” (Sir Adrian Cadbury in ‘Global
Corporate Governance Forum’, World Bank, 2000) ----------------------
4. According to OECD, “The corporate governance structure specifies the ----------------------
distribution of rights and responsibilities among different participants
in the corporation, such as the board, managers, shareholders and other ----------------------
stakeholders, and spells out the rules and procedures for making decisions
on corporate affairs. By doing this, it also provides the structure through ----------------------
which the company objectives are set, and the means of attaining those ----------------------
objectives and monitoring performance.”
5. Report of SEBI Committee (India) on Corporate Governance defines ----------------------
corporate governance as “the acceptance by management of the inalienable ----------------------
rights of shareholders as the true owners of the corporation and of their
own role as trustees on behalf of the shareholders. It is about commitment ----------------------
to values, about ethical business conduct and about making a distinction
between personal & corporate funds in the management of a company.” ----------------------

----------------------
1.3 EVOLUTION AND REGULATION OF CORPORATE
----------------------
GOVERNANCE
----------------------
Throughout the 19th and the early 20th centuries, companies were both
owned and managed by business families and there was no separation of ----------------------
powers in the corporation. After World War I, firms became bigger and more
complex, requiring greater financial resources and broader managerial skills ----------------------
than possessed by the typical owner. Great corporations grew out of once small ----------------------
family businesses and needed professional management to deal with the new
challenges of size, product diversity and modern manufacturing, even in those ----------------------
cases in which ownership remained in family hands. This put too much control
in the hands of managers. Managers needed to address the different concerns of ----------------------
various stakeholder groups. Not only in the United States, but also in France, ----------------------
Germany and the United Kingdom executives were put under pressure by
stakeholders and analysts to explain their actions. ----------------------
The 1950s was the era of excessive managerial power with the ----------------------
separation of ownership and control giving managers great freedom to do
what they pleased. Managerial power was curbed by antitrust policy. In the ----------------------

Overview of Corporate Governance 3

 Notes 1960s and 1970s companies evolved into modern-day conglomerates. But
ultimately, inefficiencies began to creep into these vast organizations, creating
---------------------- indiscriminate corporate expansion and diminishing of profits. This led to the
evolution of hostile takeovers. The 1980s saw insider trading suddenly hold out
---------------------- the potential for vast riches. To counter this, stock options gained popularity
---------------------- as an incentive to create shareholder value, not to destroy it. However in the
1990s, favourable accounting norms encouraged boards to grant options with
---------------------- abandon. The longest bull market in history helped in converting them into
almost unimaginable wealth for top executives. Instead of an incentive to create
---------------------- shareholder value, in many cases they were an incentive to misrepresent the
---------------------- financial numbers. At the same time, governance activists began attacking
managerial power on other fronts pushing for better disclosure, independent
---------------------- boards, and splitting the roles of chairman and CEO.
---------------------- The collapse of Enron and massive accounting fraud at WorldCom in the
2000s ushered in an age of scandal. A massive regulatory push to curb CEO
---------------------- power including the Sarbanes-Oxley Reform Act of 2002 was the fallout of the
situation. The outcome was that directors, auditors, and lawyers emerged with
----------------------
far more power than they had and CEOs with far less.
----------------------
Check your Progress 1
----------------------
State True or False.
----------------------
1. Corporate governance is the system by which companies are directed
---------------------- and controlled.
---------------------- 2. Corporate governance ensures commitment of the board in managing the
company in a transparent manner for maximizing long-term value of the
---------------------- company for its shareholders.
---------------------- Fill in the blanks.

---------------------- 1. Corporate governance is a ________.

2. Corporate Governance is concerned with holding the balance between
---------------------- economic goal and between _________ goals.
----------------------

---------------------- Activity 1

---------------------- Search in the library to know about the contribution of Sir Adrian Cadbury
in the field of corporate governance.
----------------------

---------------------- 1.4 NEED AND SIGNIFICANCE OF CORPORATE

---------------------- GOVERNANCE
---------------------- The adequacy and the quality of corporate governance can shape the
growth and the future of any capital market and economy. Good corporate
----------------------
governance helps an organization to achieve its outcomes and obligations
4 Corporate Governance
through sound planning and risk management. It provides a means to assist Notes
in decision making and to improve accountability. It also helps to provide a
framework for establishing responsibility to the stakeholders. It seeks to achieve ----------------------
the following objectives:
----------------------
1. A properly structured and balanced board comprising of adequate number
of non-executive and independent directors capable of taking independent ----------------------
and objective decisions is in place at the helm of affairs.
----------------------
2. The board adopts transparent procedures and practices and arrives at
decisions on the strength of adequate information; ----------------------
3. The board keeps the shareholders informed of relevant developments ----------------------
impacting the company;
----------------------
4. The board effectively and regularly monitors the functioning of the
management team; ----------------------
5. The board has no conflict of interest in its functioning in the interests of ----------------------
all the stakeholders.
The overall endeavour of the board should be to take the organization ----------------------
forward so as to maximize long term value and shareholders’ wealth. It ensures: ----------------------
1. Adequate disclosures and effective decision making to achieve corporate
----------------------
objectives
2. Transparency in business transactions ----------------------
3. Statutory and legal compliances ----------------------
4. Protection of shareholder interests ----------------------
5. Commitment to values and ethical conduct of business
----------------------
Corporate governance depends upon two factors. The first is the
commitment of the management for the principle of integrity and transparency ----------------------
in business operations. The second is the legal and the administrative framework
----------------------
created by the government.
The corporate practices in India emphasize the functions of audit and ----------------------
finances that have legal, moral and ethical implications for the business and
----------------------
its impact on the shareholders. The Indian Companies Act of 2013 introduced
innovative measures to appropriately balance legislative and regulatory reforms ----------------------
for the growth of the enterprise and to increase foreign investment, keeping
in mind international practices. The rules and regulations are measures that ----------------------
increase the involvement of the shareholders in decision making and introduce
----------------------
transparency in corporate governance, which ultimately safeguards the interest
of the society and shareholders ----------------------

1.5 REGULATION OF CORPORATE GOVERNANCE ----------------------

The international legal and regulatory frameworks for corporate governance ----------------------
include the CG Rules, the Sarbanes-Oxley Act, the UK Cadbury Code of ----------------------

Overview of Corporate Governance 5

 Notes Corporate Governance, EU Regulations, the South African King Report, and
similar regulations and recommendations from other parts of the world.
---------------------- The organizational framework for corporate governance initiatives in
---------------------- India consists of the Ministry of Corporate Affairs (MCA) and the Securities
and Exchange Board of India (SEBI). SEBI monitors and regulates corporate
---------------------- governance of listed companies in India through Clause 49. MCA through
its various appointed committees and National Foundation for Corporate
---------------------- Governance (NFCG), a not-for-profit trust, facilitates exchange of experiences
and ideas amongst corporate leaders, policy makers, regulators, law enforcing
----------------------
agencies and non- government organizations.
---------------------- In India, the Companies Act 1956 was the principle legislation providing
the formal structure for corporate governance. Till May 1992, the office of the
----------------------
Controller of Capital Issues was the regulation authority for the capital market.
---------------------- Thereafter, SEBI has assumed a primary role in this regard.

---------------------- The Indian Companies Act of 2013 introduced some progressive and
transparent processes which benefit stakeholders, directors as well as the
---------------------- management of companies.

---------------------- Corporate advisory services are offered by advisory firms to efficiently

manage the activities of companies to ensure stability and growth of the
---------------------- business, maintain the reputation and reliability for customers and clients.
The top management that consists of the board of directors is responsible for
---------------------- governance. They must have effective control over affairs of the company in
---------------------- the interest of the company and minority shareholders. Corporate governance
ensures strict and efficient application of management practices along with
---------------------- legal compliance in the continually changing business scenario in India.
---------------------- Corporate governance was guided by Clause 49 of the Listing Agreement
before introduction of the Companies Act of 2013. As per the new provision,
---------------------- SEBI has also approved certain amendments in the Listing Agreement so as to
improve the transparency in transactions of listed companies and giving a bigger
----------------------
say to minority stakeholders in influencing the decisions of management. These
---------------------- amendments have become effective from 1st October 2014.
A Few New Provision for Directors and Shareholders
----------------------
One or more women directors are recommended for certain classes of companies
----------------------
Every company in India must have a resident directory
---------------------- The maximum permissible directors cannot exceed 15 in a public limited
---------------------- company. If more directors have to be appointed, it can be done only with
approval of the shareholders after passing a Special Resolution
---------------------- The Independent Directors are a newly introduced concept under the Act.
---------------------- A code of conduct is prescribed and so are other functions and duties
The Independent directors must attend at least one meeting a year
----------------------
Every company must appoint an individual or firm as an auditor. The
---------------------- responsibility of the Audit committee has increased

6 Corporate Governance
Filing and disclosures with the Registrar of Companies has increased Notes
Top management recognizes the rights of the shareholders and ensures
----------------------
strong co-operation between the company and the stakeholders
Every company has to make accurate disclosure of financial situations, ----------------------
performance, material matter, ownership and governance
----------------------
Additional Provisions:
----------------------
Related Party Transactions – A Related Party Transaction (RPT) is the transfer
of resources or facilities between a company and another specific party. The ----------------------
company devises policies which must be disclosed on the website and in the
annual report. All these transactions must be approved by the shareholders by ----------------------
passing a Special Resolution as the Companies Act of 2013. Promotors of the ----------------------
company cannot vote on a resolution for a related party transaction.
Changes in Clause 35B – The e-voting facility has to be provided to the ----------------------
shareholder for any resolution is a legal binding for the company. ----------------------
Corporate Social Responsibility – The company has the responsibility to
promote social development in order to return something that is beneficial for ----------------------
the society. ----------------------
Whistle Blower Policy – This is a mandatory provision by SEBI which is a
----------------------
vigil mechanism to report the wrong or unethical conduct of any director of the
company. ----------------------
In addition to various acts and guidelines by the regulator, non-regulatory
----------------------
bodies like Confederation of Indian Industries (CII) have also published codes
and guidelines on Corporate Governance. The issue of corporate governance ----------------------
for listed companies came into prominence with the report of the Kumar
Mangalam Birla Committee (2000), the Naresh Chandra Committee (2002) and ----------------------
Narayana Murthy Committee (2003) to examine various corporate governance
----------------------
issues. Many of their recommendations were then incorporated in the Revised
Clause 49 that is seen as an important statutory requirement. Recently, ----------------------
the Ministry of Corporate Affairs has placed before the Indian Parliament,
Companies Bill 2009 that provides for greater shareholder democracy and less ----------------------
government intervention. The new legislation will try to promote protection of
----------------------
rights of minority shareholders, self-regulation with adequate disclosure and
accountability, and lesser government control over internal corporate processes. ----------------------

1.6 COMPONENTS OF CORPORATE GOVERNANCE ----------------------

----------------------
The main constituents that create a framework of good corporate governance are:
●● Clear identification of powers, roles, responsibilities and accountability ----------------------
of the Board, CEO and the Chairman of the board.
----------------------
●● A clear and unambiguous legislative and regulatory framework.
----------------------
●● The organization should have a prescribed code of conduct which is
communicated clearly to all stakeholders. Periodic measurement and ----------------------

Overview of Corporate Governance 7

 Notes evaluation of adherence to such code of conduct by each member of the
organization should also be done regularly.
---------------------- ●● The majority of board members should be independent of both the
---------------------- management team and any commercial dealings with the company. Such
independence ensures the effectiveness of the board in supervising the
---------------------- activities of management as well as make sure that there are no actual or
perceived conflicts of interests.
----------------------
●● In order to be able to undertake its functions effectively, the board must
---------------------- possess the necessary blend of qualities, skills, knowledge and experience
so as to make quality contribution. It includes operational or technical
---------------------- expertise, financial skills, legal skills as well as knowledge of government
---------------------- and regulatory requirements.
●● The business environment should be such that there are clear objectives,
---------------------- appropriate ethical framework, due processes providing for transparency,
---------------------- sound business planning, constant business risk assessment, clear
boundaries for acceptable behaviour, clear statement of responsibility and
---------------------- accountability, and performance evaluation measures which recognize
individual and group contribution.
----------------------
●● A well defined and open procedure must be in place for reappointments as
---------------------- well as for appointment of new directors to ensure that the most competent
people are appointed in the board.
---------------------- ●● It is essential to ensure that directors are groomed in the necessary
---------------------- financial and other decision making skills required for their role and
remain abreast of all regulatory and economic developments which may
---------------------- impact governance and other related issues.

---------------------- ●● Board Meetings should have carefully planned agendas and relevant
papers and materials should be provided to directors to enable them to
---------------------- discharge their responsibilities.
●● The company’s long term corporate strategy including an annual business
----------------------
plan together with achievable and measurable performance targets and
---------------------- milestones must be clearly documented.
●● The business must also take care of its community obligations and inform
---------------------- the stakeholders about the proposed and ongoing initiatives.
---------------------- ●● Comprehensive, reliable, timely, and relevant financial and operational
information must be provided to the Board for it to discharge its function
---------------------- of monitoring corporate performance.
---------------------- ●● The board must also monitor and evaluate its combined performance
as well as that of individual directors at periodic intervals, using key
---------------------- performance indicators besides peer review.
---------------------- ●● An effective Audit Committee is responsible for liaison with management,
internal and statutory auditors, reviewing the adequacy of internal control
---------------------- and compliance with significant policies and procedures and reporting to
the board on the key issues.
----------------------

8 Corporate Governance
●● The board has the ultimate responsibility for identifying major risks which Notes
could prevent the company from effectively achieving its objectives,
setting acceptable levels of risks and ensuring that senior management ----------------------
takes steps to detect, monitor and control these risks.
----------------------
Check your Progress 2 ----------------------
State True or False. ----------------------
1. Corporate governance provides a means to assist in decision-making and
----------------------
to improve accountability.
2. Corporate governance depends upon the legal and the administrative ----------------------
framework created by the government.
----------------------
Fill in the blanks.
----------------------
1. Corporate governance depends upon the commitment of the management
for the principle of integrity and __________ in business operations. ----------------------
2. The organizational framework for corporate governance initiatives ----------------------
in India consists of the Ministry of Corporate Affairs (MCA) and the
___________. ----------------------

----------------------
Activity 2
----------------------
Search the SEBI website and find out the report of Kumarmangalam Birla ----------------------
committee report. List down the main recommendations of the committee.
----------------------

1.7 MODELS OF CORPORATE GOVERNANCE ----------------------

In each country, the corporate governance structure has certain ----------------------

characteristics or constituent elements, which distinguish it from structures in ----------------------
other countries. The corporate governance structure in each country develops in
response to country-specific factors and conditions. Researchers have identified ----------------------
three major models of corporate governance in developed capital markets.
These are the Anglo-US model, the Japanese model, and the German model. ----------------------

The Anglo-Saxon Model ----------------------

‘Anglo-Saxon’ model of corporate governance reflected what was ----------------------
considered best practice in the UK and USA. The Anglo-US model governs
corporations in the UK, the US, Australia, Canada, New Zealand and several ----------------------
other countries. The Anglo-US model, developed within the framework of
----------------------
the free market economy, assumes the separation of ownership and control
in most publicly-held corporations. In the UK and US, a wide range of laws ----------------------
and regulatory codes define relationships among management, directors and
shareholders. ----------------------
In comparison with other capital markets, the US has the most ----------------------

Overview of Corporate Governance 9

 Notes comprehensive disclosure requirements and a complex, well-regulated system
for shareholder communication. The regulatory framework of corporate
---------------------- governance in the UK is established in parliamentary acts and rules established
by self-regulatory organizations, such as the Securities and Investment Board,
---------------------- which is responsible for oversight of the securities market. Stock exchanges
---------------------- also play an important role in the Anglo-US model by establishing listing,
disclosure and other requirements. The US has the most comprehensive
---------------------- disclosure requirements of any jurisdiction. While disclosure requirements are
high in other jurisdictions where the Anglo-US model is followed, none are as
---------------------- stringent as those in the US.
---------------------- Characteristic Anglo-US Model
---------------------- 1. Key players in Management, directors, shareholders (especially
the corporate institutional investors), government agencies,
---------------------- environment stock exchanges, self-regulatory organizations
and consulting firms.
----------------------
2. The share Marked shift of stock ownership during the
---------------------- ownership pattern post-war period from individual shareholders to
in the given country institutional shareholders.
---------------------- 3. The composition The board of directors of most corporations
---------------------- of the board of that follow the Anglo-US model includes both
directors “insiders” or executive director and “outsiders”
---------------------- or non-executive director or independent director.
4. The regulatory In the UK and US, a wide range of laws and
----------------------
framework regulatory codes define relationships among
---------------------- management, directors and shareholders. In the
US, a federal agency, the Securities and Exchange
---------------------- Commission (SEC), regulates the securities
industry, establishes disclosure requirements
----------------------
for corporations and regulates communication
---------------------- between corporations and shareholders as well as
among shareholders. The regulatory framework
---------------------- of corporate governance in the UK is established
in parliamentary acts and rules established by self-
----------------------
regulatory organizations, such as the Securities
---------------------- and Investment Board, which is responsible for
oversight of the securities market. It is not a
---------------------- government agency like the US SEC.
----------------------

----------------------

----------------------

----------------------

----------------------

10 Corporate Governance
Characteristic Anglo-US Model Notes
5. Disclosure The US has the most comprehensive disclosure
----------------------
requirements for requirements of any jurisdiction. US corporations
publicly-listed stock are required to disclose a wide range of information. ----------------------
corporations This includes corporate financial data reported
on a quarterly basis in the US; a breakdown of ----------------------
the corporation’s capital structure; substantial
----------------------
background information on each nominee to the
board of directors; the aggregate compensation ----------------------
paid to all executive officers (upper management)
as well as individual compensation data for each ----------------------
of the five highest paid executive officers, who
----------------------
are to be named; all shareholders holding more
than five percent of the corporation’s total share ----------------------
capital; information on proposed mergers and
restructurings; proposed amendments to the ----------------------
articles of association; and names of individuals
----------------------
and/or companies proposed as auditors.
6. Corporate The two routine corporate actions requiring ----------------------
actions requiring shareholder approval under the Anglo-US model
shareholder are elections of directors and appointment of ----------------------
approval auditors. Non-routine corporate actions which ----------------------
also require shareholder approval include: the
establishment or amendment of stock option ----------------------
plans; mergers and takeovers; restructurings;
and amendment of the articles of incorporation. ----------------------
There is one important distinction between the ----------------------
US and the UK: in the US, shareholders do not
have the right to vote on the dividend proposed ----------------------
by the board of directors. In the UK, shareholders
vote on the dividend proposal. ----------------------
7. Interaction among The Anglo-US model establishes a complex, ----------------------
key players. well-regulated system for communication
and interaction between shareholders and ----------------------
corporations. A wide range of regulatory and
independent organizations play an important role ----------------------
in corporate governance. ----------------------
The Japanese Model
----------------------
Japanese model comprises a small number of keiretsu (industrial groups
linked by trading relationships as well as cross-shareholdings of debt and equity), ----------------------
which are less integrated but linked by cross-shareholdings and relationships,
----------------------
together with considerable numbers of smaller businesses which supply their
needs. The Japanese model is characterized by a high level of stock ownership ----------------------
by affiliated banks and companies and a banking system characterized by
----------------------

Overview of Corporate Governance 11

 Notes strong, long-term links between bank and corporation; a legal, public policy
and industrial policy framework designed to support and promote “keiretsu”;
---------------------- boards of directors composed almost solely of insiders; and a comparatively
low level of input of outside shareholders, caused and amplified by complicated
---------------------- procedures for exercising shareholders’ votes.
---------------------- The Japanese model has had difficulties due to an excessive over-reliance
on loans at interest rates reflecting government pres-sure on the savings market.
---------------------- Over-investment by banks in property and prop-erty loans has compounded the
problem. The high value of the yen caused companies to invest heavily overseas
----------------------
and financial problems in Asia increased their difficulties. Japan has a very
---------------------- cohesive society and the individualism which drives Anglo-Saxon economies is
largely unacceptable to it.
----------------------
Characteristic The Japanese Model
---------------------- 1. Key players in The Japanese system of corporate governance
the corporate is many-sided, centering on a main bank and a
----------------------
environment financial/industrial network or keiretsu. The bank
---------------------- provides its corporate client with loans as well
as services related to bond issues, equity issues,
---------------------- settlement accounts, and related consulting
services. The main bank is generally a major
---------------------- shareholder in the corporation. In the Japanese
---------------------- model, the four key players are: main bank (a
major inside shareholder), affiliated company
---------------------- or keiretsu (a major inside shareholder),
management and the government.
---------------------- 2. The share In Japan, financial institutions and corporations
---------------------- ownership pattern firmly hold ownership of the equity market.
in the given country Similar to the trend in the UK and US, the
---------------------- shift has been away from individual ownership
to institutional and corporate ownership. This
---------------------- distinguishes it from the Anglo-US model, where
such relationships are prohibited by antitrust
----------------------
legislation. Instead of relying on a single bank,
---------------------- the US and UK corporations obtain financing
and other services from a wide range of sources,
---------------------- including the well-developed securities market.
3. The composition The board of directors of Japanese corporations
----------------------
of the board of is composed almost completely of insiders, that
---------------------- directors is, executive managers, usually the heads of
major divisions of the company and its central
---------------------- administrative body. In the Japanese model, the
composition of the board of directors is conditional
----------------------
upon the corporation’s financial performance.
---------------------- Japanese boards are generally larger than boards
in the UK, the US and Germany.
----------------------

12 Corporate Governance
Characteristic The Japanese Model Notes
4. The regulatory In Japan, government ministries have traditionally
----------------------
framework been extremely influential in developing
industrial policy and wield enormous regulatory ----------------------
control. The increasing internationalization of
Japanese corporations made them less dependent ----------------------
on their domestic market and therefore somewhat
----------------------
less dependent on industrial policy. In response
to foreign investment, new laws were enacted to ----------------------
improve corporate disclosure.
5. Disclosure Japan’s disclosure regime differs from the US ----------------------
requirements for regime as it needs semi-annual disclosure of ----------------------
publicly-listed stock financial data, compared with quarterly disclosure
corporations in the US; aggregate disclosure of executive and ----------------------
board compensation, compared with individual
data on the executive compensation in the ----------------------
US; disclosure of the corporation’s ten largest ----------------------
shareholders, compared with the US requirement
to disclose all shareholders holding more than five ----------------------
percent of the corporation’s total share capital;
and significant differences between Japanese ----------------------
accounting standards and US Generally Accepted ----------------------
Accounting Practices (US GAAP).
6. Corporate In Japan, the routine corporate actions requiring ----------------------
actions requiring shareholder approval are payment of dividends
shareholder and allocation of reserves, election of directors and ----------------------
approval appointment of auditors. Other common corporate ----------------------
actions which also require shareholder approval
include capital authorizations, amendments to the ----------------------
articles of association and/or charter, payment of
retirement bonuses to directors and auditors, and ----------------------
increase of the aggregate compensation ceilings ----------------------
for directors and auditors. Non-routine corporate
actions which also require shareholder approval ----------------------
include mergers, takeovers and restructurings.
----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

Overview of Corporate Governance 13

 Notes Characteristic The Japanese Model
7. Interaction among Japanese corporations prefer that a majority of its
----------------------
key players shareholders be long-term, preferably affiliated,
---------------------- parties. In contrast, outside shareholders represent
a small constituency and are largely excluded from
---------------------- the process. Shareholder activism is restricted by
an informal yet important aspect of the Japanese
----------------------
system: the vast majority of Japanese corporations
---------------------- hold their annual meetings on the same day each
year, making it difficult for institutional investors
---------------------- to coordinate voting and impossible to attend more
than one meeting in person.
----------------------
The German Model
----------------------
Germany industrialized later than Britain, France and the United States
---------------------- and its laws and structures were designed to facilitate a rapid catching up with
its rivals. The ‘German model’ includes in its governance its investors, both
---------------------- banks and strategic crossholdings, and its employee representatives. Germany
---------------------- has various types of company structure; larger companies tend to be limited
liability companies but most medium and smaller compa-nies are private
---------------------- companies run by a manager appointed by shareholders.
---------------------- Characteristic The Japanese Model
1. Key players in German banks, and to a lesser extent, corporate
---------------------- the corporate shareholders, are the key players in the German
---------------------- environment corporate governance system. Similar to the
Japanese system, banks usually play a multi-
---------------------- faceted role as shareholder, lender, and issuer
of equity and debt, depository and voting agent
---------------------- at AGMs. In Germany, corporations are also
shareholders, sometimes holding long-term stakes
----------------------
in other corporations, even where there is no
---------------------- industrial or commercial affiliation between the
two. The mandatory inclusion of labour/employee
---------------------- representatives on larger German supervisory
boards further distinguishes the German model
---------------------- from both the Anglo-US and Japanese models.
---------------------- 2. The share German banks and corporations are the dominant
ownership pattern shareholders in Germany. Neither institutional
---------------------- in the given country agents nor individual owners are significant in
Germany. Foreign investors and their impact
---------------------- on the German corporate governance system is
---------------------- increasing.

----------------------

----------------------

14 Corporate Governance
Characteristic The Japanese Model Notes
3. The composition German corporations are governed by a supervisory
----------------------
of the board of board and a management board. The supervisory
directors board appoints and dismisses the management ----------------------
board, approves major management decisions; and
advises the management board. The supervisory ----------------------
board usually meets once a month. A corporation’s
articles of association sets the financial threshold ----------------------
of corporate acts requiring supervisory board ----------------------
approval. The management board is responsible
for daily management of the company. The ----------------------
management board is composed solely of
“insiders”, or executives. The supervisory board ----------------------
contains no “insiders”, it is composed of labour/
----------------------
employee representatives and shareholder
representatives. The numbers of members of the ----------------------
supervisory board is set by law.
4. The regulatory Germany has a strong federal tradition; both federal ----------------------
framework and state laws influence corporate governance.
----------------------
5. Disclosure Disclosure requirements in Germany are relatively
requirements for stringent, but not as stringent as in the US. These ----------------------
publicly-listed stock include: semi-annual disclosure of financial data,
corporations compared with quarterly disclosure in the US; ----------------------
aggregate disclosure of executive compensation ----------------------
and supervisory board compensation, compared
with individual data on executive and board ----------------------
compensation in the US; no disclosure of share
ownership of members of the supervisory ----------------------
board, compared with disclosure of executive ----------------------
and director’s stock ownership in the US; and
significant differences between German accounting ----------------------
standards and US GAAP. One key accounting
difference in Germany is that corporations are ----------------------
permitted to amass considerable reserves. These ----------------------
reserves enable German corporations to understate
their value. This practice is not permitted under ----------------------
US GAAP.
----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

Overview of Corporate Governance 15

 Notes Characteristic The Japanese Model
6. Corporate The routine corporate actions requiring shareholder
----------------------
actions requiring approval under the German model are: allocation
---------------------- shareholder of net income; ratification of the acts of the
approval management board for the previous fiscal year;
---------------------- ratification of the acts of the supervisory board for
the previous fiscal year; election of the supervisory
----------------------
board; and appointment of auditors. In contrast
---------------------- with the Anglo-US and the Japanese models,
shareholders do not possess the authority to alter
---------------------- the size or composition of the supervisory board.
These are determined by law. Other common
----------------------
corporate actions which also require shareholder
---------------------- approval include capital authorizations, affiliation
agreements with subsidiaries; amendments to the
---------------------- articles of association and/or charter; and increase
of the aggregate compensation ceiling for the
----------------------
supervisory board. Non-routine corporate actions
---------------------- which also require shareholder approval include
mergers, takeovers and restructurings. Shareholder
---------------------- proposals are common in Germany. Provided
that such proposals meet legal requirements, the
----------------------
corporation is required to publish these shareholder
---------------------- proposals in an amended agenda and forward them
to shareholders prior to the meeting.
---------------------- 7. Interaction among The German legal and public-policy framework
key players is designed to include the interests of labour,
----------------------
corporations, banks and shareholders in the
---------------------- corporate governance system. There also exist
several obstacles to shareholder participation as
---------------------- majority of German shares are issued in bearer
---------------------- (not registered) form. Corporations with bearer
shares are required to announce their annual
---------------------- general meeting in an official government bulletin
and forward the annual report and agenda for
---------------------- meeting to custody banks. The banks forward these
---------------------- materials to the beneficial owners of the shares.
This often complicates the procedure for receipt
---------------------- of materials, especially for foreign shareholders.

---------------------- It is not possible to simply select a model and apply it to a given country.
Instead, the process is dynamic: the corporate governance structure in each
---------------------- country develops in response to country-specific factors and conditions. With
the globalization of capital markets, each of the varying models is opening to
---------------------- influences from other models, while largely retaining its unique characteristics.
---------------------- Legal, economic and financial disparities around the world can influence the
choice and adoption of each model.
16 Corporate Governance
 Notes
Case Studies
----------------------
The following are excerpted from the websites of the respective companies. ----------------------

Case Study I ----------------------

INFOSYS LTD. ----------------------

Corporate governance is about maximizing shareholder value legally, ----------------------
ethically and on a sustainable basis, while ensuring fairness to every stakeholder
- our customers, employees, investors, vendor-partners, the governments of the ----------------------
countries in which we operate, and the community. Thus, corporate governance ----------------------
is a reflection of our culture, policies, our relationship with stakeholders and our
commitment to values. ----------------------
We believe that sound corporate governance is critical to enhance and
----------------------
retain investor trust. Accordingly, we always seek to ensure that we attain our
performance rules with integrity. ----------------------
Our Board exercises its fiduciary responsibilities in the widest sense of
the term. Our disclosures always seek to attain the best practices in international ----------------------
corporate governance. We also endeavour to enhance long-term shareholder ----------------------
value and respect minority rights in all our business decisions.
We continue to be a pioneer in benchmarking our corporate governance ----------------------
policies with the best in the world. Our efforts are widely recognized by
----------------------
investors in India and abroad. We have undergone the corporate governance
audit by ICRA and CRISIL. ICRA has rated our corporate governance practices ----------------------
at CGR 1. CRISIL has assigned CRISIL GVC Level 1 rating to us.
We have complied with the recommendations of the Narayana Murthy ----------------------
Committee on Corporate Governance constituted by the Securities and ----------------------
Exchange Board of India (SEBI).
----------------------
Corporate Governance Philosophy
Our corporate governance philosophy is based on the following principles: ----------------------
●● Satisfy the spirit of the law and not just the letter of the law ----------------------
●● Corporate governance standards should go beyond the law
●● Be transparent and maintain a high degree of disclosure levels ----------------------
●● When in doubt, disclose ----------------------
●● Make a clear distinction between personal conveniences and corporate
resources ----------------------
●● Communicate externally, in a truthful manner, about how the Company
----------------------
is run internally
●● Comply with the laws in all the countries in which the Company operates ----------------------
●● Have a simple and transparent corporate structure driven solely by
----------------------
business needs
●● Management is the trustee of the shareholders’ capital and not the owner ----------------------

Overview of Corporate Governance 17

 Notes Board composition
At the core of our corporate governance practice is the Board, which
----------------------
oversees how the management serves and protects the long-term interests of
---------------------- all our stakeholders. We believe that an active, well-informed and independent
Board is necessary to ensure the highest standards of corporate governance. The
---------------------- majority of the Board, eight out of 15, are independent members. Further, we
have audit, compensation, investor grievance, nominations and risk management
----------------------
committees, which comprise independent directors.
---------------------- As a part of our commitment to follow global best practices, we comply
with the Euroshareholders Corporate Governance Guidelines 2000, and the
----------------------
recommendations of the Conference Board Commission on Public Trusts and
---------------------- Private Enterprises in the U.S. We also adhere to the UN Global Compact
Program.
----------------------

---------------------- Case Study II

---------------------- ITC LTD.

Over the years, ITC has evolved from a single product company to a multi-
----------------------
business corporation. Its businesses are spread over a wide spectrum, ranging
---------------------- from cigarettes and tobacco to hotels, packaging, paper and paperboards and
international commodities trading. Each of these businesses is vastly different
---------------------- from the others in its type, the state of its evolution and the basic nature of
its activity, all of which influence the choice of the form of governance. The
----------------------
challenge of governance for ITC therefore lies in fashioning a model that
---------------------- addresses the uniqueness of each of its businesses and yet strengthens the unity
of purpose of the Company as a whole.
----------------------
Since the commencement of the liberalisation process, India’s economic
---------------------- scenario has begun to alter radically. Globalisation will not only significantly
heighten business risks, but will also compel Indian companies to adopt
---------------------- international norms of transparency and good governance. Equally, in the
resultant competitive context, freedom of executive management and its ability
----------------------
to respond to the dynamics of a fast changing business environment will be the
---------------------- new success factors. ITC’s governance policy recognises the challenge of this
new business reality in India.
----------------------
DEFINITION AND PURPOSE
---------------------- ITC defines Corporate Governance as a systemic process by which
---------------------- companies are directed and controlled to enhance their wealth generating
capacity. Since large corporations employ vast quantum of societal resources,
---------------------- we believe that the governance process should ensure that these companies
are managed in a manner that meets stakeholders’ aspirations and societal
---------------------- expectations.
---------------------- CORE PRINCIPLES
---------------------- ITC’s Corporate Governance initiative is based on two core principles.

18 Corporate Governance
These are: Notes
●● Management must have the executive freedom to drive the enterprise
----------------------
forward without undue restraints; and
●● This freedom of management should be exercised within a framework of ----------------------
effective accountability.
----------------------
ITC believes that any meaningful policy on Corporate Governance must
provide empowerment to the executive management of the Company, and ----------------------
simultaneously create a mechanism of checks and balances which ensures that
the decision making powers vested in the executive management is not only not ----------------------
misused, but is used with care and responsibility to meet stakeholder aspirations ----------------------
and societal expectations.
----------------------
Cornerstones
From the above definition and core principles of Corporate Governance ----------------------
emerge the cornerstones of ITC’s governance philosophy, namely trusteeship,
----------------------
transparency, empowerment and accountability, control and ethical corporate
citizenship. ITC believes that the practice of each of these leads to the creation ----------------------
of the right corporate culture in which the company is managed in a manner that
fulfils the purpose of Corporate Governance. ----------------------
Trusteeship ----------------------
ITC believes that large corporations like itself have both a social and ----------------------
economic purpose. They represent a coalition of interests, namely those of the
shareholders, other providers of capital, business associates and employees. This ----------------------
belief therefore casts a responsibility of trusteeship on the Company’s Board of
Directors. They are to act as trustees to protect and enhance shareholder value, as ----------------------
well as to ensure that the Company fulfils its obligations and responsibilities to
----------------------
its other stakeholders. Inherent in the concept of trusteeship is the responsibility
to ensure equity, namely, that the rights of all shareholders, large or small, are ----------------------
protected.
Transparency ----------------------

ITC believes that transparency means explaining Company’s policies and ----------------------
actions to those to whom it has responsibilities. Therefore transparency must
lead to maximum appropriate disclosures without jeopardizing the Company’s ----------------------
strategic interests. Internally, transparency means openness in Company’s ----------------------
relationship with its employees, as well as the conduct of its business in a manner
that will bear scrutiny. We believe transparency enhances accountability. ----------------------
Empowerment and Accountability ----------------------
Empowerment is an essential concomitant of ITC’s first core principle
of governance that management must have the freedom to drive the enterprise ----------------------
forward. ITC believes that empowerment is a process of actualising the ----------------------
potential of its employees. Empowerment unleashes creativity and innovation
throughout the organisation by truly vesting decision-making powers at the ----------------------
most appropriate levels in the organisational hierarchy.
----------------------

Overview of Corporate Governance 19

 Notes ITC believes that the Board of Directors is accountable to the shareholders,
and the management is accountable to the Board of Directors. We believe
---------------------- that empowerment, combined with accountability, provides an impetus to
performance and improves effectiveness, thereby enhancing shareholder value.
----------------------
Control
---------------------- ITC believes that control is a necessary concomitant of its second core
---------------------- principle of governance that the freedom of management should be exercised
within a framework of appropriate checks and balances. Control should prevent
---------------------- misuse of power, facilitate timely management response to change, and ensure
that business risks are pre-emptively and effectively managed.
----------------------
Ethical Corporate Citizenship:
---------------------- ITC believes that corporations like itself have a responsibility to set
---------------------- exemplary standards of ethical behaviour, both internally within the organisation,
as well as in their external relationships. We believe that unethical behaviour
---------------------- corrupts organisational culture and undermines stakeholder value.

---------------------- Check your Progress 3

----------------------
Fill in the blanks.
---------------------- 1. Researchers have identified ______ major models of corporate
governance in developed capital markets.
----------------------
2. The Anglo-US model of corporate governance assumes the separation of
---------------------- _________ and control in most publicly-held corporations.
---------------------- State True or False.
---------------------- 1. The board of directors of Japanese corporations is composed almost
completely of insiders.
----------------------
2. Germany has a strong federal tradition; only federal laws influence
---------------------- corporate governance.

----------------------
Activity 3
----------------------
Search the web to study the Sabarney Oxly Act of United State of America
----------------------
and list down the key recommendations of the same.
----------------------

---------------------- Summary
---------------------- ●● A good corporate governance mechanism recognizes the diverse interests
of shareholders, lenders, employees, government, etc. Markets and
---------------------- investors respond positively to well-managed companies. In today’s
globalised world, unless a corporation demonstrates ethical conduct, it
----------------------
will not be able to attract or retain the best human capital. The credibility
---------------------- offered by good corporate governance procedures also helps maintain

20 Corporate Governance
 the confidence of investors both foreign and domestic to attract more Notes
long-term capital. It contributes not only to the efficiency of a business
enterprise, but also, to the growth and progress of a country’s economy. ----------------------
Legal, economic and financial disparities around the world can influence
the choice and adoption of a particular governance model. ----------------------

----------------------
Keywords
----------------------
●● Corporate Governance: The relationship between the shareholders,
----------------------
directors and management of a company, as defined by the corporate
charter, bylaws, formal policy and rule of law. ----------------------
●● Agency Costs: The incremental costs of having an agent make decisions
for a principal that arise from the inefficiency of a relationship between ----------------------
an agent and a principal. ----------------------
●● Stakeholders: All parties that have an interest, financial or otherwise,
in a firm and can be affected by the organization’s actions, objectives, ----------------------
and policies such as stockholders, creditors, bondholders, employees, ----------------------
customers, management, the community, and the government.
●● Insider Trading: Insider trading is the trading in a security (buying or ----------------------
selling a stock) by someone who has access to material information (the ----------------------
important information about a company that affects its stock price or
might influence investors’ decisions) that is not available to the general ----------------------
public.
----------------------
Self-Assessment Questions ----------------------

1. Define the term of corporate governance. ----------------------

2. Explain the concept of corporate governance. ----------------------
3. Analyze the importance of corporate governance.
----------------------
4. Describe how the concept of corporate governance evolved.
----------------------
5. Elaborate Regulation of corporate governance.
6. What are the essential components of corporate governance? ----------------------
7. Compare the Anglo-Saxon, German and Japanese models of corporate ----------------------
governance.
----------------------
8. Identify the model of corporate governance relevant to India?
----------------------
Answers to Check your Progress
----------------------
Check your Progress 1
----------------------
State True or False.
----------------------
1. True
2. True ----------------------

Overview of Corporate Governance 21

 Notes Fill in the blanks.
1. Corporate governance is a system.
----------------------
2. Corporate Governance is concerned with holding the balance between
---------------------- economic goal and between individual goals.
---------------------- Check your Progress 2

---------------------- State True or False.

1. True
----------------------
2. True
----------------------
Fill in the blanks.
---------------------- 1. Corporate governance depends upon the commitment of the management
for the principle of integrity and transparency in business operations.
----------------------
2. The organizational framework for corporate governance initiatives in
---------------------- India consists of the Ministry of Corporate Affairs (MCA) and the SEBI.
----------------------

---------------------- Check your Progress 3

Fill in the blanks.
----------------------
1. Researchers have identified three major models of corporate governance
---------------------- in developed capital markets.
---------------------- 2. The Anglo-US model of corporate governance assumes the separation of
ownership and control in most publicly-held corporations.
----------------------
State True or False.
---------------------- 1. True
---------------------- 2. False
----------------------
Suggested Reading
----------------------
1. Cadbury, Adrian. 2003. Corporate Governance and Chairmanship: a
---------------------- personal view. Oxford University Press.
---------------------- 2. Das, Subhash Chandra. Corporate Governance in India: An Evaluation.
PHI Learning.
----------------------
3. Gupta, L.C. 1974. Corporate management and Accountability. Chennai:
---------------------- McMillan Institute for FM and Research.
---------------------- 4. Mallin. Corporate Governance2/e. OUP.

----------------------

----------------------

----------------------

22 Corporate Governance
Corporate Board
UNIT

2
Structure:
2.1 Introduction - Corporate Governance and Board of Directors
2.2 Categories of Directors
2.3 Fiduciary Role of Directors
2.4 Provisions of Clause 49 of the Listing Agreement
2.4.1 SEBI’s recent amendments of clause 49
2.5 Corporate Governance Voluntary Guidelines 2009
Case Study
Summary
Key Words
Self-Assessment Questions
Answers to Check your Progress
Annexure
Suggested Reading

Corporate Board 23
 Notes
Objectives
----------------------

---------------------- After going through this unit, you will be able to:
• Discuss the relationship between corporate governance and Board.
----------------------
• Explain the categories of Directors.
----------------------
• Analyze the fiduciary role of Directors.
---------------------- • Describe the outline of Clause 49 and Corporate Governance Voluntary
---------------------- Guidelines 2009.

---------------------- 2.1 INTRODUCTION - CORPORATE GOVERNANCE

---------------------- AND BOARD OF DIRECTORS
---------------------- ●● Corporate governance by definition rests with the conduct of the board
of directors, who are chosen on behalf of the shareholders. - Corporate
---------------------- Governance Forum of Japan 1997
---------------------- ●● Corporate governance is the system by which companies are directed and
managed. It influences how the objectives of the company are set and
---------------------- achieved, how risk is monitored and assessed, and how performance is
---------------------- optimized. Good corporate governance structures encourage companies
to create value (through entrepreneurism, innovation, development and
---------------------- exploration) and provide accountability and control systems commensurate
with the risks involved. - (ASX Principles of Good Corporate Governance
---------------------- and Best Practices Recommendations, 2003)
---------------------- ●● Corporate Governance is a systemic process by which companies are
directed and controlled to enhance their wealth generating capacity.
---------------------- Since large corporations employ vast quantum of societal resources, we
---------------------- believe that the governance process should ensure that these companies
are managed in a manner that meets stake-holders aspirations and societal
---------------------- expectations. – ITC Ltd.

---------------------- Today adoption of good Corporate Governance practices has emerged as

an integral element for doing business. It is not only a pre-requisite for facing
---------------------- intense competition for sustainable growth in the emerging global market
scenario but is also an embodiment of the parameters of fairness, accountability,
---------------------- disclosures and transparency to maximize value for the stakeholders. The
---------------------- three key constituents of corporate governance are the Board of Directors, the
Shareholders and the Management.
---------------------- ●● The pivotal role in any system of corporate governance is performed by
---------------------- the board of directors. It is accountable to the stakeholders and directs
and controls the management. It stewards the company, sets its strategic
---------------------- aim and financial goals and oversees their implementation, puts in place
adequate internal controls and periodically reports the activities and
---------------------- progress of the company in the company in a transparent manner to all

24 Corporate Governance
 the stakeholders. Notes
●● The shareholders’ role in corporate governance is to appoint the directors
and the auditors and to hold the board accountable for the proper ----------------------
governance of the company by requiring the board to provide them ----------------------
periodically with the requisite information in a transparent fashion, of the
activities and progress of the company. ----------------------
●● The responsibility of the management is to undertake the management ----------------------
of the company in terms of the direction provided by the board, to put
in place adequate control systems and to ensure their operation and to ----------------------
provide information to the board on a timely basis and in a transparent
manner to enable the board to monitor the accountability of management ----------------------
to it. ----------------------
The recent corporate governance scandals at Satyam Computers Limited,
provide insight into two major corporate governance events - the first instance ----------------------
was board ineffectiveness on Dec 16, when Satyam’s board approved of an ----------------------
acquisition of two companies – one unlisted – where members of the Chairman’s
family were the main entrepreneurs and had majority or complete shareholding; ----------------------
and the second, an accounting shock, occurred on January 7 when it was
disclosed that the firm had been fudging its accounts for several years and its ----------------------
much-vaunted $1.2 billion cash holding was largely non-existent and the result ----------------------
of a long-drawn accounting fraud. This brings to the fore the importance of
having an effective board of directors. ----------------------
A company’s board of directors helps the management develop business ----------------------
plans, policy objectives, and business strategy. Not all small businesses have or
need a board of directors, but as the business grows, a board is a valuable tool ----------------------
to help management set the direction for growth and provide valuable insights
from a different perspective and knowledge base. ----------------------

The most effective board of directors will be a group of professionals ----------------------

who bring a breadth of skills, experience and diversity to the company. Ideally,
members of the board should have backgrounds and contacts that differ from ----------------------
- but complement - the background of the officers of the company and of the ----------------------
other directors. As a company grows and changes, the governing board also
should evolve to meet changing needs and circumstances. ----------------------
The statutory principles of Corporate Law in India are enshrined primarily ----------------------
in the Companies Act, 1956 with respect to the provisions dealing with the
liabilities of corporate officers and directors in India. The Indian Companies ----------------------
Act does not define the Board of Directors (BoDs). Even ‘Director’ is simply
----------------------
defined as ‘it includes any person occupying the position of Director, by
whatever name called’ [sec.2 (13)]. Section 291 stipulates that the BoDs shall ----------------------
be entitled to exercise all such powers, and to do all such acts and things as the
company authorizes to exercise and do, except those things which can be done ----------------------
in a general meeting of the company.
----------------------

----------------------

Corporate Board 25
 Notes 2.2 CATEGORIES OF DIRECTORS
---------------------- a) Executive Director - No reference is made in the Companies Acts to
“Executive” or “Non Executive” Directors and, in fact, this distinction
---------------------- is one which has arisen under corporate governance norms. Essentially,
Executive Directors are Directors who have an executive responsibility
----------------------
within the Company. Such persons participate in the day-to-day
---------------------- management of the Company and are usually employed by the Company
on a full time basis under a contract of employment and are in receipt of
---------------------- a salary.
---------------------- b) Non Executive Director - Non Executive Directors are those who are
not involved in the day-to-day running of the Company. Such persons
---------------------- are not employed in the business and do not report to the CEO/Managing
---------------------- Director. Legally speaking, there is no distinction between an executive
and non-executive director. Yet there is inescapably a sense that the non-
---------------------- executive’s role can be seen as balancing that of the executive director,
so as to ensure the board as a whole functions effectively. Where the
---------------------- executive director has an intimate knowledge of the company, the non-
---------------------- executive director may be expected to have a wider perspective of the
world at large. Essentially, their role is one which is confined to the
---------------------- Boardroom. Notwithstanding this, their input into the Board decision-
making process is invaluable, given their expected impartiality, objectivity
---------------------- and independence.
---------------------- c) Nominee Director - A Nominee Director is a person who is appointed to
the Board by a shareholder or a particular group of shareholders with a
---------------------- view to representing and safeguarding their interests within the Company.
---------------------- Notwithstanding their brief, such nominee Directors must, nonetheless,
act in the best interest of the Company. Nominee Directors have the same
---------------------- duties and responsibilities as other categories of Directors.
---------------------- d) Alternate Director - An alternate Director is a person who is appointed
to act in place of a Director when that person is unable to act. An alternate
---------------------- Director has the same responsibilities and duties as the Director appointing
him/her.
----------------------
e) Shadow Director - A shadow Director is a person other than a professional
---------------------- advisor who is not formally appointed as Director but who, nonetheless,
is deemed to be a Director because of the influence he exerts over the
----------------------
Company’s Directors who are accustomed to acting in accordance with
---------------------- that persons instructions. The significance of being a shadow Director is
certain sanctions and regulations normally reserved for Directors, can be
---------------------- applicable.
---------------------- f) De Facto Director - A de facto Director is a person who has not been
formally appointed whether on incorporation or subsequently, but who
---------------------- in effect occupies the position of, and acts as if he were a Director. Such
persons, although they have not been formally appointed, may nonetheless
----------------------

26 Corporate Governance
 be deemed to be a Director and may be subject to the provisions of the Notes
Companies Acts as if formally appointed.
----------------------
Check your Progress 1
----------------------
State True or False. ----------------------
1. Corporate governance by definition rests with the conduct of the board of
directors, who are chosen on behalf of the shareholders. ----------------------

2. The term Board of Directors is not defined in the Indian Companies Act ----------------------
1956.
----------------------
Fill in the blanks.
----------------------
1. Good corporate governance structures encourage companies to create
value and provide ____________ and control systems commensurate ----------------------
with the risks involved.
----------------------
2. The three key constituents of corporate governance are the Board of
Directors, the _________ and the Management. ----------------------

----------------------
Activity 1
----------------------
Study the balance sheet of NTPC or IOC and find out the composition of ----------------------
the board of directors of these companies and the details of the nominee
directors. ----------------------

----------------------
2.3 FIDUCIARY ROLE OF DIRECTORS ----------------------
Directors act as fiduciaries to the company, and must serve the best ----------------------
interests of both the company and all of the company’s shareholders who they
were elected by. A director’s fiduciary duty arises out of the board’s fiduciary ----------------------
relationship with the company and shareholders. Through company law, a board
----------------------
is given power to manage the company, and the duty to use that power to benefit
the company and the shareholders. ----------------------
Fiduciary duties of directors fall under two general categories: (i) duty ----------------------
of care; and (ii) duty of loyalty. Under the duty of care, a director’s fiduciary
responsibility is to perform his/her duties with the diligence of a reasonable ----------------------
person in similar circumstances. Under the duty of loyalty, a director’s fiduciary
duty is to act in good faith for the best interests. ----------------------

Other responsibilities of the board ----------------------

The board directs the company, by formulating and reviewing company’s ----------------------
policies, strategies, major plans of action, risk policy, annual budgets and
business plans, setting performance objectives, monitoring implementation and ----------------------
corporate performance, and overseeing major capital expenditures, acquisitions
----------------------

Corporate Board 27
 Notes and divestitures, change in financial control and compliance with applicable
laws, taking into account the interests of stakeholders.
----------------------
It controls the company and its management by laying down the code of
---------------------- conduct, overseeing the process of disclosure and communications, ensuring
that appropriate systems for financial control and reporting and monitoring
---------------------- risk are in place, evaluating the performance of management, chief executive,
executive directors and providing checks and balances to reduce potential
----------------------
conflict between the specific interests of management and the wider interests of
---------------------- the company and shareholders including misuse of corporate assets and abuse
in related party transactions.
----------------------
It is accountable to the shareholders for creating, protecting and enhancing
---------------------- wealth and resources for the company, and reporting to them on the performance
in a timely and transparent manner. However, it is not involved in day-to-day
---------------------- management of the company, which is the responsibility of the management.
----------------------
2.4 PROVISIONS OF CLAUSE 49 OF THE LISTING AGREEMENT
----------------------
Board of Directors - Board of directors of a company shall have an
---------------------- optimum combination of executive and non-executive directors with not
less than fifty percent of the board of directors comprising of non-executive
----------------------
directors. The number of independent directors would depend whether the
---------------------- Chairman is executive or non-executive. In case of a non-executive chairman,
atleast one-third of board should comprise of independent directors and in case
---------------------- of an executive chairman, atleast half of board should comprise of independent
directors. All pecuniary relationship or transactions of the non-executive
----------------------
directors viz-a-viz the company should be disclosed in the Annual Report. As
---------------------- per Clause 49 of the Listing Agreements an ‘independent director’ shall mean
non-executive director of the company who
----------------------
a) apart from receiving director’s remuneration, does not have any material
---------------------- pecuniary relationships or transactions with the company, its promoters,
its senior management or its holding company, its subsidiaries and
---------------------- associated companies;
---------------------- b) is not related to promoters or management at the board level or at one
level below the board;
----------------------
c) has not been an executive of the company in the immediately preceding
---------------------- three financial years;

---------------------- d) is not a partner or an executive of the statutory audit firm or the internal
audit firm that is associated with the company, and has not been a partner
---------------------- or an executive of any such firm for the last three years. This will also apply
to legal firm(s) and consulting firm(s) that have a material association
---------------------- with the entity.
---------------------- e) is not a supplier, service provider or customer of the company. This should
include lessor-lessee type relationships also; and
----------------------

28 Corporate Governance
f) is not a substantial shareholder of the company, i.e. owning two percent Notes
or more of the block of voting shares.
----------------------
g) Institutional directors on the boards of companies shall be considered as
independent directors whether the institution is an investing institution or ----------------------
a lending institution.
----------------------
The reason for introduction of the independent director system in corporate
governance, on one hand, was that the director should express his opinions ----------------------
when the company makes a decision, especially some significant decisions
about enterprise merger, connected transaction, stock repurchase, and interest ----------------------
conflict between large and small stockholders.
----------------------
Key role of an independent director in a company
----------------------
a) Board structure and objectivity of the Board
b) Protection of minorities ----------------------

c) To build up shareholder’s confidence in the company ----------------------

d) To improve relations with investors ----------------------
e) To make coordinated strategic decisions
----------------------
f) To resolve conflicts
----------------------
g) To enhance management transparency
h) To increase company’s value ----------------------

i) Role of other stakeholders in management ----------------------

j) System of reporting and accountability ----------------------
k) Audit and internal control
----------------------
l) Effective supervision and enforcement by regulators
----------------------
m) To encourage Sustainable Development of the Company and its
stakeholders. ----------------------
Companies Act and Independent Directors ----------------------
The Companies Act looks at all directors alike but:
----------------------
i. Adds some extra compliances in case of whole time directors
----------------------
ii. Requires some disclosures by interested directors
iii. Defines “officer in default” giving a degree of immunity to directors other ----------------------
than the whole time directors. ----------------------
a) Does not exempt independent directors from any of the duties,
liabilities, responsibilities of the Board. ----------------------

b) Independent directors as much as part of the corporate governance ----------------------

team as any other director. Independent directors have the same
----------------------
power that other directors have.
Independent Directors under Listing Agreement in India ----------------------

Corporate Board 29
 Notes Composition of the Board - Not less than 50% of the board to be non-executive
directors
----------------------
Independent Directors:
---------------------- a. If the chairman is executive: atleast half of the board should comprise of
independent directors
----------------------
b. If Chairman is non-executive: atleast one-third of the board should
---------------------- comprise of independent directors
---------------------- a) Non-executive directors’ remuneration to be approved by
shareholders
----------------------
b) Board meetings – to meet atleast 4 times, with gap not exceeding 3
---------------------- months.

---------------------- c) Minimum information for board meetings laid down

d) Committees of Directors – Some of the main committees are-
----------------------
Audit Committee: requirements other than those u/s 292A
----------------------
a) A qualified and independent audit committee shall be set up
---------------------- and that:

---------------------- i. audit committee shall have minimum three members,

all being non-executive directors, with the majority of
---------------------- them being independent, and with atleast one director
having financial and accounting knowledge;
----------------------
ii. chairman of the committee shall be an independent
---------------------- director;
---------------------- iii. chairman shall be present at Annual General Meeting to
answer shareholder queries;
----------------------
iv. audit committee should invite such of the executives,
---------------------- as it considers appropriate (and particularly the head
of the finance function) to be present at the meetings
---------------------- of the committee, but on occasions it may also meet
without the presence of any executives of the company.
----------------------
The finance director, head of internal audit and when
---------------------- required, a representative of the external auditor shall
be present as invitees for the meetings of the audit
---------------------- committee;
---------------------- v. Company secretary shall act as the secretary to the
committee.
----------------------
b) The audit committee shall meet atleast thrice a year. One meeting
---------------------- shall be held before finalisation of annual accounts and one every
six months. The quorum shall be either two members or one third
---------------------- of the members of the audit committee, whichever is higher and
---------------------- minimum of two independent directors.

30 Corporate Governance
 c) The audit committee shall have powers, which should include the Notes
following to:
----------------------
i. investigate any activity within its terms of reference.
ii. seek information from any employee. ----------------------
iii. obtain outside legal or other professional advice. ----------------------
iv. secure attendance of outsiders with relevant expertise, if it ----------------------
considers necessary.
d) The role of the audit committee shall include the following. ----------------------

i. Oversight of the company’s financial reporting process and ----------------------

the disclosure of its financial information to ensure that the
financial statement is correct, sufficient and credible. ----------------------

ii. Recommending the appointment and removal of external ----------------------

auditor, fixation of audit fee and also approval for payment
----------------------
for any other services.
iii. Reviewing with management the annual financial statements ----------------------
before submission to the board, focusing primarily on;
----------------------
a. Any changes in accounting policies and practices.
----------------------
b. Major accounting entries based on exercise of judgement
by management. ----------------------
c. Qualifications in draft audit report. ----------------------
d. Significant adjustments arising out of audit.
----------------------
e. The going concern assumption.
----------------------
f. Compliance with accounting standards.
g. Compliance with stock exchange and legal requirements ----------------------
concerning financial statements. ----------------------
h. Any related party transactions i.e. transactions of the
company of material nature, with promoters or the ----------------------
management, their subsidiaries or relatives etc. that may ----------------------
have potential conflict with the interests of company at
large. ----------------------
iv. Reviewing with the management, external and internal ----------------------
auditors, and the adequacy of internal control systems.
----------------------
v. Reviewing the adequacy of internal audit function, including
the structure of the internal audit department, staffing and ----------------------
seniority of the official heading the department, reporting
structure coverage and frequency of internal audit. ----------------------
vi. Discussion with internal auditors any significant findings and ----------------------
follow up there on.
----------------------

Corporate Board 31
 Notes vii. Reviewing the findings of any internal investigations by the
internal auditors into matters where there is suspected fraud
---------------------- or irregularity or a failure of internal control systems of a
material nature and reporting the matter to the board.
----------------------
viii. Discussion with external auditors before the audit commences,
---------------------- nature and scope of audit as well as have post-audit discussion
to ascertain any area of concern.
----------------------
ix. Reviewing the company’s financial and risk management
---------------------- policies.
---------------------- x. To look into the reasons for substantial defaults in the payment
to the depositors, debenture holders, shareholders (in case of
---------------------- non-payment of declared dividends) and creditors.
---------------------- e) If the company has set up an audit committee pursuant to provision
of the Companies Act, the said audit committee shall have such
---------------------- additional functions/features as is contained in the Listing
---------------------- Agreement.
Disinvestment Committee: This Committee shall review Investments of the
---------------------- Company. The Committee shall also decide on whether to hold the current
---------------------- Investments or to sell the same at a prevailing good market price.
Shareholders/Investors Grievance Committee - The role of this committee is
----------------------
a) To review statutory compliance regarding share and debenture holders
---------------------- (Investors).
---------------------- b) To review various reports related to Investors.

---------------------- c) To review grievances of Investors.

d) To review transfer of shares.
----------------------
e) To review transmission of shares.
----------------------
f) To review deletion of names from share certificates.
---------------------- g) To review consolidation of share certificates.
---------------------- h) To review change of name of member on share certificates.

---------------------- i) To review issue of duplicate share certificates.

j) To review de-materialization of shares.
----------------------
Nomination Committee: Nomination committee is usually set up to select new
---------------------- non-executive directors. The chairman of the board heads the committee.
---------------------- Remuneration Committee: This committee determines on behalf of the
Board and on behalf of the shareholders policy of the Company on specific
---------------------- remuneration packages for executive directors including pension rights and
any compensation payment. The Committee also determines the remuneration
----------------------
packages of the executive directors. It consists of independent directors and
----------------------

32 Corporate Governance
drafts the remuneration policy of the company, which checks the unreasonable Notes
increase in the executive compensations.
----------------------
Remuneration of Directors
a) The remuneration of non-executive directors shall be decided by the ----------------------
board of directors.
----------------------
b) The following disclosures on the remuneration of directors shall be made
in the section on the corporate governance of the annual report. ----------------------
i. All elements of remuneration package of all the directors, i.e. salary, ----------------------
benefits, bonuses, stock options, pension, etc.
----------------------
ii. Details of fixed component and performance linked incentives,
along with the performance criteria. ----------------------
iii. Service contracts, notice period, severance fees. ----------------------
iv. Stock option details, if any – and whether issued at a discount as
----------------------
well as the period over which accrued and over which exercisable.
Board Procedure ----------------------
i. The board meeting shall be held atleast four times a year, with a maximum ----------------------
time gap of four months between any two meetings.
----------------------
ii. The director shall not be a member in more than 10 committees or act as
Chairman of more than five committees across all companies in which he ----------------------
is a director. Furthermore it should be a mandatory annual requirement
for every director to inform the company about the committee positions ----------------------
he occupies in other companies and notify changes as and when they take ----------------------
place.
Management Discussion and Analysis ----------------------

i. As part of the directors’ report or as an addition thereto, a Management ----------------------

Discussion and Analysis report should form part of the annual report
----------------------
to the shareholders. This Management Discussion & Analysis should
include discussion on the following matters within the limits set by the ----------------------
company’s competitive position:
----------------------
a) Industry structure and developments.
b) Opportunities and Threats. ----------------------
c) Segment-wise or product-wise performance. ----------------------
d) Outlook. ----------------------
e) Risks and concerns.
----------------------
f) Internal control systems and their adequacy.
----------------------
g) Discussion on financial performance with respect to operational
performance. ----------------------
h) Material developments in Human Resources/Industrial Relations ----------------------
front, including number of people employed.

Corporate Board 33
 Notes ii. Disclosures must be made by the management to the board relating to all
material, financial and commercial transactions, where they have personal
---------------------- interest that may have a potential conflict with the interest of the company
at large (for e.g. dealing in company shares, commercial dealings with
---------------------- bodies, which have shareholding of management and their relatives, etc.)
---------------------- Shareholders
---------------------- i. In case of the appointment of a new director or re-appointment of a director,
the shareholders must be provided with the following information:
----------------------
a. A brief resume of the director;
---------------------- b. Nature of his expertise in specific functional areas; and
---------------------- c. Names of companies in which the person also holds the directorship
and the membership of Committees of the board.
----------------------
ii. The information like quarterly results, presentation made by companies
---------------------- to analysts shall be put on company’s web-site, or shall be sent in such a
form so as to enable the stock exchange on which the company is listed to
---------------------- put it on its own web-site.
---------------------- iii. A board committee under the chairmanship of a non-executive director
shall be formed to specifically look into the redressing of shareholder
----------------------
and investors complaints like transfer of shares, non-receipt of balance
---------------------- sheet, non-receipt of declared dividends, etc. This Committee shall be
designated as ‘Shareholders/Investors Grievance Committee’.
----------------------
iv. To expedite the process of share transfers, the board of the company shall
---------------------- delegate the power of share transfer to an officer or a committee or to the
registrar and share transfer agents. The delegated authority shall attend to
---------------------- share transfer formalities atleast once in a fortnight.
---------------------- Report on Corporate Governance

---------------------- There shall be a separate section on Corporate Governance in the annual

reports of company, with a detailed compliance report on Corporate Governance.
---------------------- Non-compliance of any mandatory requirement i.e. which is part of the listing
agreement with reasons thereof and the extent to which the non-mandatory
---------------------- requirements have been adopted should be specifically highlighted.
---------------------- Compliance
---------------------- A company shall obtain a certificate from the auditors of the company
regarding compliance of conditions of corporate governance as stipulated in this
---------------------- clause and annex the certificate with the directors’ report, which is sent annually
to all the shareholders of the company. The same certificate shall also be sent to
----------------------
the Stock Exchanges along with the annual returns filed by the company.
---------------------- The Clause 49 of the listing agreement, after taking into account the
recommendations of the Narayana Murthy Committee came into effect on
----------------------
January 1, 2006. SEBI vide circular SEBI/CFD/DIL/CG/1/2008/08/04 dated
---------------------- April 08, 2008 amended Clause 49 of the Equity Listing Agreement inter-alia

34 Corporate Governance
including a provision stating that if the non-executive Chairman is a promoter Notes
or is related to promoters or persons occupying management positions at the
board level or at one level below the board, atleast one-half of the board of the ----------------------
company should consist of independent directors.
----------------------
2.4.1 SEBI’s recent amendments of clause 49
----------------------
Significant amendments to the revised provisions of the clause 49 as
released by the SEBI in April 2014 ----------------------
Applicability of clause 49
----------------------
The clause 49 continues to be applicable to all listed companies with
effect from 1 October 2014*. ----------------------

However, the SEBI has amended the applicability criteria to provide that ----------------------
the clause 49 is not mandatory, for the time being, to the following class of
companies : ----------------------

a. Companies having paid up equity share capital not exceeding INR 100 ----------------------
million and net worth not exceeding INR 250 million, as on the last day
of the previous financial year. ----------------------

b. Companies whose equity share capital is listed exclusively on the SME ----------------------
(small and medium enterprises) platforms and SME – ITP (Institutional
----------------------
Trading Platforms)
If the provisions of clause 49 become applicable to a company at a later ----------------------
date, such a company would comply with the requirements of the clause 49
----------------------
within six months from the date on which the provisions became applicable to
the company. ----------------------
*Appointment of woman director ----------------------
Clause 49 (II)(A)(1) :
----------------------
The SEBI has amended the clause relating to ‘composition of board’ to
provide that provisions regarding appointment of a woman director will be ----------------------
applicable with effect from 1 April 2015.
----------------------
Independent directors
----------------------
Pecuniary relationship (49(II)(B)(1)(c)):
The SEBI has amended the clause to state that an independent director ----------------------
should not have any ‘material’ pecuniary relationship with the company, its
----------------------
holding, subsidiary or associate company, or their promoters, or directors,
during the two immediately preceding financial years or during the current ----------------------
financial year apart from receiving director’s remuneration.
----------------------
As per the earlier provisions, an independent director was prohibited from
having any pecuniary relationship, even if it was not material, in the ordinary ----------------------
course of business and at an arm’s length.
----------------------

----------------------

Corporate Board 35
 Notes Maximum tenure of an independent director
(clause 49(II)(B)(3)(a)):
----------------------
The SEBI has amended the clause and has aligned the maximum tenure
---------------------- of the independent directors as per the Companies Act, 2013 and related
---------------------- clarifications/circulars issued by the Ministry of Corporate Affairs (MCA) in
this regard.
---------------------- Letter of appointment to independent directors
---------------------- (clause 49(II)(B)(4)(b)) :
---------------------- The SEBI has amended the clause to require disclosure of terms and
conditions of appointment on the website of the company instead of the earlier
---------------------- requirement of disclosing the letter of appointment along with the detailed
profile of the independent director.
----------------------
Further the requirement to provide such a disclosure on the website of the
---------------------- stock exchanges within one working day from the date of such appointment has
been removed.
----------------------
Familiarisation programme for independent director
----------------------
(clause 49(II)(B)(7)):
---------------------- The SEBI has amended this clause to provide that independent directors
---------------------- should be familiarised with the company, their roles, rights, responsibilities in
the company, nature of the industry in which the company operates, business
---------------------- model of the company, etc., through various programmes instead of the earlier
requirement of a specific training to be provided to the independent directors.
---------------------- Additionally, these details of the familiarisation programmes should be disclosed
---------------------- on the website of the company, and a web link to be mentioned in the annual
report, instead of providing detailed disclosures in the annual report.
---------------------- Nomination and remuneration committee (NRC)
---------------------- Clause 49(IV)(A):
---------------------- This clause has been amended to require the board of directors to constitute
NRC to comprise at least three directors, all of whom should be non – executive
---------------------- directors and at least half should be independent directors.
---------------------- The Chairman of the committee should be an independent director.

---------------------- The chairman of the company (whether executive or nonexecutive) may

be appointed as a member of the NRC but he should not chair the NRC.
---------------------- Material subsidiaries Requirement for disclosure of policy to determine
---------------------- ‘material subsidiaries’
(clause 49 (V)(D)):
----------------------
The clause 49 issued in April 2014 required disclosure of the policy
---------------------- relating to material subsidiaries as follows:
----------------------

36 Corporate Governance
●● to the stock exchanges Notes
●● in the annual report
----------------------
●● on the company’s website
SEBI has amended this clause and now requires such policy to be disclosed ----------------------
on the company’s website and a web link to that to be provided in the annual ----------------------
report.
Disposal of shares in material subsidiary ----------------------

(clause 49 (V)(F)): ----------------------

The clause 49 issued in April 2014 did not allow a company to dispose off ----------------------
shares in its material subsidiary which would reduce its shareholding (either on
its own or together with other subsidiaries) to less than 50 per cent or cease the ----------------------
exercise of control over that subsidiary, without passing a special resolution in
----------------------
its general meeting.
SEBI has amended this clause to allow an exception to such cases where ----------------------
divestment is made under a scheme of arrangement duly approved by a court/
----------------------
tribunal.
Selling, disposing and leasing of assets of material subsidiaries (clause 49 ----------------------
(V)(G)):
----------------------
The clause 49 issued in April 2014 required prior approval of shareholders
by way of special resolution for selling, disposing and leasing the assets ----------------------
amounting to more than 20 per cent of the assets of the material subsidiary. ----------------------
SEBI has amended this clause to allow an exception to such cases where
the sale/ disposal/lease, is made under a scheme of arrangement duly approved ----------------------
by a court/ tribunal. ----------------------
Risk and management committee (RMC)
----------------------
Clause 49 (VI):
----------------------
This clause has been amended and prescribes composition of the RMC as
follows: ----------------------
●● majority of members of the RMC should consist of members of the board ----------------------
of directors
●● senior executives of the company may become members of the RMC ----------------------
●● chairman of the RMC should be a member of the board of directors. ----------------------
Related party transactions
----------------------
Definition of a related party transaction (clause 49 (VII)(A)):
----------------------
An explanation has been added to the clause to explain that a ‘transaction’
with a related party would be construed to include a single transaction or a ----------------------
group of transactions in a contract.
----------------------

----------------------

Corporate Board 37
 Notes Definition of a related party (clause 49(VII)(B)):
This clause has been substituted to revise the definition of a related party
----------------------
to refer to an entity related under section 2 (76) of the Companies Act, 2013 or
---------------------- a related party as per Accounting Standards.
Meaning of material related party transaction (clause 49(VII)(C)):
----------------------
This clause has been amended to change the monetary limit for considering
---------------------- material related party transactions.
---------------------- Materiality in this regard is now defined as 10 per cent of the annual
consolidated turnover of the company as per its last audited financial statements.
----------------------
The criteria of five per cent of turnover or 20 per cent of net worth,
---------------------- whichever is higher, has been removed.

---------------------- Approval of related party transactions (clause 49 (VII)(D)):

The requirement for prior approval by an audit committee for the related
----------------------
party transactions has been amended to include that the audit committee may
---------------------- grant omnibus approval for related party transactions proposed to be entered
into by the company subject to following conditions:
----------------------
a. The criteria for granting omnibus approval should be laid down by the
---------------------- audit committee in line with the policy on the related party transactions
of the company and such approval will be applicable in respect of
---------------------- transactions which are repetitive in nature
---------------------- b. The audit committee should satisfy itself of the need for such omnibus
approval and that such approval is in the interest of the company
----------------------
c. Such omnibus approval should specify
---------------------- ●● he name of the related party, nature of the transaction, period of
T
---------------------- the transaction, maximum amount of the transaction that can be
entered into
---------------------- ●● The indicative base price/current contracted price and the formula
---------------------- for variation in the price, if any
●● Such other conditions as the audit committee may deem fit.
----------------------
Additionally for situations where the need for a related party transaction
---------------------- can not be foreseen and aforesaid details are not available, the audit
committee may grant omnibus approval for such transactions subject to
---------------------- their value not exceeding INR 10 million per transaction.
---------------------- d. The details of a related party transaction entered into by the company
pursuant to each of such omnibus approval given should be reviewed by
---------------------- the audit committee at least on a quarterly basis.
---------------------- e. Such omnibus approvals should be valid for a period not exceeding one
year and will require fresh approvals after the expiry of one year.
----------------------

----------------------

38 Corporate Governance
Approval of related party transactions (clause 49(VII)(E)): Notes
The clause 49 issued in April 2014 requires approval of shareholders
----------------------
through a special resolution for all material related party transactions and that
related parties should abstain from voting on such resolutions. ----------------------
This clause has been amended to provide that such shareholder approval
----------------------
and the approval of the audit committee as per clause 49 (VII)(D) as mentioned
above is not required in the following cases: ----------------------
a. where the transactions have been entered into between two government
----------------------
companies (government company to have the same meaning as per section
2 (45) of the Companies Act, 2013) ----------------------
b. Where transactions are entered into between a holding company and its ----------------------
wholly owned subsidiary whose accounts are consolidated with such
holding company and placed before the shareholders at the general ----------------------
meeting for approval.
----------------------
However, the amendment additionally provides that all entities falling
under the definition of related parties should abstain from voting irrespective of ----------------------
whether that entity is a party to the particular transaction or not.
----------------------
This is a stringent condition and is not in line with the clarification
provided by the MCA on 17 July 2014 which stated that a member would be ----------------------
considered as a related party only with reference to a contract or arrangement
in which he is interested and thus, would not be barred from voting on every ----------------------
contract or arrangement entered into by the company. ----------------------
Disclosure of related party transactions (clause 49(VIII)(A)(2)):
----------------------
The clause has been amended to provide that since these details are
required to be disclosed on the website of the company, it is sufficient to provide ----------------------
such web link in the annual report, instead of providing detailed disclosures in
----------------------
the annual report as well.
Disclosures ----------------------
Deletion of clauses 49 (VIII)(F),(G),(H): ----------------------
The clause 49 issued in April 2014 required certain disclosures to be ----------------------
made relating to resignation of directors on the company’s website and stock
exchanges; disclosure of establishment of a vigil mechanism on the company’s ----------------------
website and in the Board’s report; disclosure of remuneration policy in the
company’s annual report. SEBI has now deleted these clauses. ----------------------

Certification by the CEO Clause 49(IX): ----------------------

Regarding certification to the board on financial statements and true and ----------------------
fair view of the company’s affairs, this clause has been amended to provide
that such certification should be given by ‘the CEO or the managing director ----------------------
or manager or in their absence, a whole time director appointed in terms of the
----------------------
Companies Act, 2013 and the CFO’.
----------------------

Corporate Board 39
 Notes
Check your Progress 2
----------------------
Fill in the blanks.
----------------------
1. As per the provisions of clause 49 of the listing agreement, a company
---------------------- shall have at least ______ percent of directors as non-executive directors.

---------------------- 2. Fiduciary duties of directors fall under the general categories of duty of
care and duty of ________.
---------------------- 3. The board meeting shall be held at least four times a year, with a maximum
---------------------- time gap of ______ months between any two meetings.
State True or False.
----------------------
1. The remuneration of non-executive directors is decided by the board of
---------------------- directors of the company.
----------------------
----------------------
Activity 2

---------------------- Check the website of Wipro and Nestle India and find out the details of the
members of the Shareholders/Investors Grievance Committee of board of
---------------------- directors of these companies.
----------------------

---------------------- 2.5 CORPORATE GOVERNANCE VOLUNTARY

---------------------- GUIDELINES 2009

---------------------- Ministry of Corporate Affairs, Government of India, published the

Corporate Governance Voluntary (CGV) Guidelines 2009 with the objective
---------------------- of encouraging the use of better practices through voluntary adoption, which
not only serves as a benchmark for the corporate sector but also helps them in
----------------------
achieving the highest standard of corporate governance.
---------------------- The guidelines broadly focus on areas such as Board of Directors,
responsibilities of the Board, audit committee functions, roles and
----------------------
responsibilities, appointment of auditors, Compliance with Secretarial Standards
---------------------- and a mechanism for whistle blower support.
The CGV Guidelines suggest guidelines with reference to:
----------------------
I Board of Directors i. Appointment of Directors
----------------------
ii. Independent Directors
----------------------
iii. Remuneration of Directors
---------------------- II Responsibilities of Board i. Training of Directors
---------------------- ii. Quality Decision Making

---------------------- iii. Risk Management

40 Corporate Governance
 iv. 
Evaluation of Performance of Notes
Directors
----------------------
v. Board to ensure compliance of law
III Audit Committee i. Constitution ----------------------
ii. Powers ----------------------
iii. Roles and Responsibilities ----------------------
IV Auditors iv. Appointment
----------------------
v. Certificate of Independence
----------------------
vi. Rotation of Auditors
vii. Clarity of Information ----------------------
viii. Internal Auditor ----------------------
V Secretarial Audit ----------------------
VI Whistle Blowing Mechanism
----------------------
Board of Directors
----------------------
The Board should consist of a balanced combination of Executive
Directors and Non-Executive Directors, so as to take a proper and reasoned ----------------------
decision. The Directors are appointed in a company in a General meeting as
per the provisions of the Act, however the policies and terms of appointment of ----------------------
a Director vary from company to company and from director to director. The
----------------------
guidelines suggest formal letters of appointment to Non-Executive Directors
and Independent Directors, clearly stating the term of the appointment, ----------------------
fiduciary duties, liabilities and remuneration of the appointed Director. The
Non-Executive Directors and Independent Directors should be recommended ----------------------
by nomination committee, comprising of majority of Independent Directors
----------------------
including its Chairman. The nomination committee should clearly set out the
guidelines for evaluating the skill, knowledge, experience and effectiveness of ----------------------
individual directors. The Independent Directors should provide a certificate of
independence at the time of appointment and thereafter annually. Further to ----------------------
ensure independent approach of Independent Directors, the maximum tenure
----------------------
for Independent Director in a company should not be more than six years,
and a period of three years should elapse before such an individual is inducted ----------------------
again in the same company in any capacity. No individual may be allowed to
have more than three tenures as Independent Director in a company and the ----------------------
maximum number of public companies in which an individual may serve
----------------------
as an Non-Executive Directors/Independent Directors should be restricted to
seven. Independent Directors should be allowed to have the option and freedom ----------------------
to meet company management periodically to enable them to study and
analyze various information and data provided by the company management. ----------------------
A Chairman of a company presides over the Board meetings, he has a ----------------------
casting vote in decisions of the Board, whereas the Chief Executive Officer
(CEO) is incharge of day to day functioning and the management of affairs of ----------------------

Corporate Board 41
 Notes the company. Both the positions are senior and helps to provide a check within
the top level management. However, in a number of Indian companies, the
---------------------- position of Chairman and CEO is enjoyed by the same individual, resulting in
unfettered decision making power with a single individual. Thus the guidelines
---------------------- suggest separation of offices of Chairman & CEO, and a clear demarcation
---------------------- of the roles and responsibilities of the Chairman of the Board and that of the
Managing Director/CEO such as to promote balance of power.
----------------------
Remuneration of Directors and senior managerial personnel is an
---------------------- arena which in most vulnerable to conflict of interest between management
and stakeholders. Though there are legal provisions set to govern managerial
---------------------- remuneration, there is a more discipline required through these guidelines
which suggest to clearly lay down and disclose Remuneration Policy for the
----------------------
members of the Board and Key Executives. The companies should pay either a
---------------------- fixed contractual remuneration to its Non-Executive Directors, or an appropriate
percent of the net profits of the company. The structure of compensation to
---------------------- Non-Executive Directors may have a fixed and variable component based
on attendance in Board and Committee meetings. Whereas the Independent
----------------------
Directors should be paid adequate sitting fees (not stock options) which may
---------------------- depend upon the twin criteria of Net Worth and Turnover of companies.
The company should form a Remuneration Committee for determining
----------------------
the remuneration of executive directors and executive chairman including
---------------------- compensation payments. The Remuneration committee should consist of atleast
three members, majority being non executive directors with atleast one being an
---------------------- Independent Director. Further, no director is to be involved in deciding his or her
own remuneration. The committee should also determine principles, criteria and
----------------------
the basis of remuneration policy of the company and any deviation from such
---------------------- policy, should be brought to the notice of shareholders with justification/reasons.
Responsibilities of the Board
----------------------
1. Generally the Non-executive Directors and Independent Directors do not
---------------------- take active part in the day-day functioning of the company and may not
---------------------- be aware of the technical and operational details. The companies should
have a proper induction program for Directors, also providing adequate
---------------------- training to familiarise them with the operational aspect of the company.

---------------------- 2. The Board should ensure that there are systems, procedures and resources
available to ensure that every Director is supplied, in a timely manner,
---------------------- with precise and concise information in a form and of a quality appropriate
to effectively enable/discharge his duties. The Directors should be given
---------------------- substantial time to study the data and contribute effectively to Board
---------------------- discussions.
3. The Board, its Audit Committee and its executive management should
---------------------- collectively identify the risks impacting the company’s business and
---------------------- document their process of risk identification, risk minimization, risk
optimization as a part of a risk management policy; and should make
---------------------- disclosure in the Directors’ Report.

42 Corporate Governance
4. A formal and rigorous annual evaluation of its own performance and that Notes
of its committees and individual directors.
----------------------
5. The Board should place systems to ensure Compliance with Laws, to
safeguard shareholders’ investment and the company’s assets. It should ----------------------
review of the effectiveness of the company’s system of internal controls
and should report to shareholders. ----------------------
Audit Committee of Board ----------------------
Section 292A requires every company with a paid up capital not less
----------------------
than five crores to have a Audit Committee to ensure compliance of internal
control systems. Listing agreement has also provision for Audit Committee, ----------------------
which is applicable to listed companies. Now, the guidelines also suggest
that the companies should have atleast a three-member Audit Committee, ----------------------
with Independent Directors constituting the majority. The Chairman of such
----------------------
Committee should be an Independent Director. All the members of audit
committee should have knowledge of financial management, audit or accounts. ----------------------
The Audit Committee should have the responsibility to -
----------------------
a) monitor the integrity of the financial statements of the company;
b) review the company’s internal financial controls, internal audit function ----------------------
and risk management systems; ----------------------
c) make recommendations in relation to the appointment, reappointment
and removal of the external auditor and to approve the remuneration and ----------------------
terms of engagement of the external auditor; ----------------------
d) review and monitor the external auditor’s independence and objectivity
----------------------
and the effectiveness of the audit process.
e) monitor and approve all Related Party Transactions including any ----------------------
modification/amendment in any such transaction.
----------------------
Auditors
----------------------
The Statutory Auditors of a company verifies and states that the financial
statements of the company reflect a true and fair view of the state of affairs of ----------------------
the company. The Auditor acts as a watchdog and protects the interest of the
stakeholders. The CGV Guidelines suggest appointment of Auditors should be ----------------------
referred by the Audit Committee. Every company should obtain a certificate ----------------------
of independence from the auditor certifying his/its independence and arm’s
length relationship with the client company. ----------------------
Since the havoc created by Satyam episode in December 2008, where the ----------------------
leading audit firm failed to check deep irregularities in the financial statements
of a giant IT company leading to fraud of billions of rupees of a publicly listed ----------------------
company, there has been constant attempts to make and implement a rule for
rotation of Auditors. The CGV Guidelines suggest that a policy of rotation of ----------------------
auditors should be adopted where a Audit partner should be rotated once every ----------------------
three years, whereas an Audit firm may be rotated once every five years. A
cooling off period of three or five years should elapse before a partner or audit ----------------------
firm respectively, can resume the same audit assignment.
Corporate Board 43
 Notes Further to strengthen the independence and credibility of the internal
audit process, an internal auditor should be appointed, not being an employee
---------------------- of the Company.
---------------------- Secretarial Audit
Good corporate governance practices enhance companies’ value and
----------------------
stakeholders’ trust; hence it is essential to ensure transparent, ethical and
---------------------- responsible governance of the company. A company can ensure standard
corporate governance practices through Secretarial Audit by an Independent
---------------------- Professional.
---------------------- Institution of mechanism for Whistle Blowing

---------------------- The whistle blowing is a mechanism for employees to raise a concern

about wrongdoing occurring in an organization or body of people, such as
---------------------- suspected fraud or violation of the company’s code of conduct or ethics policy.
The guidelines suggest to set up whistle blowing mechanism to track frauds
---------------------- or non-violation occurring in the company. However, it is also essential to
---------------------- have adequate safeguards against victimization of employees who avail the
mechanism.
----------------------

---------------------- Case Studies

----------------------
Case Study I
----------------------
COLGATE-PALMOLIVE
----------------------
Derrick Samuel – [Chairman] - Mr. Derrick Samuel is President of
---------------------- the Greater Asia Division of Colgate-Palmolive Company, responsible for
Colgate’s highly profitable and growing businesses across the vast and diverse
----------------------
geography in Asia and Eurasia. He joined the Company in 1983. Derrick’s
---------------------- global operating experience, together with the strong strategic capabilities he
demonstrated leading Global Technology (Global Supply Chain and Research
---------------------- & Development), prior to taking over as President of the Greater Asia Division,
make him ideally suited to lead Colgate’s highly important Asian business and
----------------------
drive continued growth in these dynamic and fast-growing markets. Derrick
---------------------- was elected a Corporate Officer of Colgate-Palmolive Company in 2008. He
served as Vice President and Managing Director of the South Asia Region in
---------------------- 1999, responsible for business in India as well as Bangladesh, Nepal and Sri
Lanka. As the Managing Director of Colgate-Palmolive (India) Limited, he led
----------------------
the Company through significant change, strengthened toothpaste, toothpowder
---------------------- and toothbrush market shares. Appointed Non-retiring Director and Chairman
to the CPIL Board from 1 April 2010.
----------------------
R. A. Shah – [Vice-Chairman] - Mr. R. A. Shah is a leading Solicitor and a
---------------------- Senior Partner of M/s Crawford Bayley & Co., a firm of Solicitors & Advocates.
He specialises in a broad spectrum of corporate laws. He is also the Chairman/
---------------------- Member of audit committees of a number of public limited companies in India.

44 Corporate Governance
Appointed Vice-Chairman on the CPIL Board from 23 May 1983. Notes
P. K. Ghosh – [Deputy Chairman] - Mr. P. K. Ghosh is a Fellow of the
----------------------
Institute of Chartered Accountants of India and a former Managing Director
of Colgate-Palmolive, India. Since 1974, he served the Company in various ----------------------
capacities. Mr. Ghosh brings to the CPIL Board, his rich experience and
understanding of the consumer product business and the Company stands to ----------------------
benefit significantly from his expertise. Appointed Dy. Chairman on the CPIL
----------------------
Board from 1 July 1988.
Mukul Deoras – [Managing Director] - Mr. Mukul Deoras joined ----------------------
Colgate-Palmolive in 2004 as Director, Special Projects for the Asia Pacific
----------------------
Division. He later became General Manager of Colgate-Palmolive, Thailand
where he led the team through significant sales and profit growth achieving ----------------------
record high market shares in oral & personal care products. Prior to taking
over as Managing Director, Colgate-Palmolive India in February 2010, Mr. ----------------------
Mukul Deoras was Vice President and General Manager - Personal Care Global
----------------------
Marketing. Under his leadership, the Personal Care business delivered strong
organic growth in 2008-09 with outstanding improvement in its profitability in ----------------------
a challenging economic environment. Prior to joining Colgate - Palmolive, Mr.
Mukul Deoras worked at Unilever India in roles of increasing responsibility in ----------------------
Marketing and Sales. Appointed as Managing Director to the CPIL Board from
----------------------
1 February 2010.
M. A. Elias – [ Whole-time Director] - Mr. Moses A. Elias is a Whole-time ----------------------
Director on the CPIL Board since April 1997. He joined the Colgate-Palmolive
----------------------
Company in 1976 and has held a series of significant positions in the Company’s
subsidiary at Zambia, at Boston, at the corporate headquarters in New York and ----------------------
in the Asia-Pacific Region including joint venture activities in Vietnam, South
Korea and Indonesia, as well as Finance Director, Asia Business Development ----------------------
Group of Colgate-Palmolive Company, USA prior to coming to India as Chief
Financial Officer, a position that he has held till recently, prior to taking on his ----------------------
new role in the area of business development & strategy. ----------------------
Paul Alton – [Whole-time Finance Director] - Mr. Paul Alton joined
Colgate in 1989 in the Operational Analysis Department of the European ----------------------
Division, based in Brussels, where he held positions of increasing responsibility. ----------------------
In 1995, Mr. Alton became General Manager of Project Catalyst where he played
a vital leadership role in successfully rolling out SAP across the European ----------------------
Division. He has since, held a series of key financial positions in Colgate-
Palmolive Company’s subsidiaries at Turkiye, Germany and Austria. Mr. Alton ----------------------
made significant contributions to the business in Germany and Austria, inspite
----------------------
of the challenge of tough operational environments. He has been appointed
to the current position having most recently been the Group Finance Director ----------------------
of Colgate’s Affiliate, Hawley & Hazel Chemical Co (H.K.) Limited at Hong
Kong. Mr. Alton holds a bachelor degree in chemical engineering and an MBA ----------------------
finance from Cranfield School of Management in the U.K. Appointed Whole-
time Finance Director and Chief Financial Officer to the CPIL Board effective ----------------------
from 1 September 2010. ----------------------

Corporate Board 45
 Notes K. V. Vaidyanathan – [Whole-time Director] - Mr. Vaidyanathan is a
lawyer with varied professional experience and expertise in a broad spectrum
---------------------- of corporate laws, economic laws and intellectual property rights and is also a
member of the Institute of Company Secretaries of India. He joined Colgate-
---------------------- Palmolive, India as Company Secretary in 1991. He has made significant
contributions to the Company’s growth and implementation of investment plans
----------------------
and business strategies. Appointed Whole-time Director to the CPIL Board
---------------------- from 1 April 1997.
Vikram Singh Mehta – [Director]- Mr. Vikram Singh Mehta is Chairman
----------------------
of the Shell Group of companies in India since 1994. His illustrious career
---------------------- began as Member of the Indian Administrative Service of the Government of
India. Mr. Mehta has held Advisory positions with world-renowned petroleum
---------------------- companies and the Indian Government’s Ministry of Petroleum. Appointed
Director to the CPIL Board from 25 October 2001.
----------------------
J. K. Setna – [ Director] - Mr. J. K. Setna is a trustee of the N.M. Wadia
---------------------- Charities and its associated Trusts and also Director on the Board of Governors
of Escorts, Heart Institute & Research Centre. Mr. Setna is a special permanent
----------------------
invitee to the Executive Council of Indo-American Chamber of Commerce.
---------------------- He is Chairman/Director for a number of Indian and foreign body corporates.
Appointed Director to the CPIL Board from 21 September 1978.
----------------------

---------------------- Case Study II

---------------------- POWER GRID CORPORATION OF INDIA LIMITED

CODE OF CONDUCT FOR BOARD MEMBERS
----------------------
1. INTRODUCTION
----------------------
1.1 This Code of Conduct (“this Code”) shall be called “The Code of
---------------------- Conduct for Board Members” of Power Grid Corporation of India
Limited (POWERGRID) hereinafter referred to as “the Company”.
----------------------
1.2 This code is in alignment with the Mission & Objectives of the
---------------------- Company and aims at enhancing ethical and transparent process in
managing the affairs of the Company.
----------------------
1.3 The Company currently has Conduct, Discipline & Appeal Rules
---------------------- (“CDA Rules”), which govern the conduct of all permanent
employees of the Company including Whole-time Directors but
---------------------- excluding Non Whole-time Directors and those governed by the
---------------------- Standing Orders under the Industrial Employment (Standing
Orders) Act, 1946. This Code for Board Members has now been
---------------------- framed specifically in compliance with the provisions of Clause 49
of the Listing Agreements entered into by the Company with the
---------------------- Stock Exchanges. In respect of Whole-time Directors this Code is
---------------------- to be read in conjunction with the CDA Rules.
1.4 It shall come into force with immediate effect.
----------------------

46 Corporate Governance
2. DEFINITIONS AND INTERPRETATION Notes
In this Code, unless repugnant to the meaning or context thereof, the
----------------------
following expressions shall have the meaning given to them below:
2.1 The term “Board/Board of Directors” shall mean the Board of ----------------------
Directors of the Company.
----------------------
2.2 The term “Board Members” shall mean the Members on the Board
of Directors of the Company. ----------------------
2.3 The term “Whole-time Directors” shall mean the Board Members ----------------------
who are in whole-time employment of the Company.
----------------------
2.4 The term “Non-Whole-time Directors” shall mean the Board
Members who are Part-time Directors and not in whole time ----------------------
employment of the Company.
----------------------
2.5 The term “Relative” shall mean ‘relative’ as defined in Section
2(41) and Section 6 read with Schedule IA of the Companies Act, ----------------------
1956. (Refer Appendix-I)
----------------------
2.6 The term “Conflict of Interest” means where the interests or benefits
of one person or entity conflict with the interests or benefits of the ----------------------
company.
----------------------
2.7 The Term “Public Spokesperson” shall mean the Officer of the
Company nominated as such under the Code of Corporate Disclosure ----------------------
Practices for Prevention of Insider Trading.
----------------------
In this Code, words importing masculine shall include feminine and
words importing singular shall include plural or vice versa. ----------------------
3. APPLICABILITY ----------------------
This Code shall be applicable to the following persons: ----------------------
a) All Whole-time Directors.
----------------------
b) All Non Whole-time Directors unless specifically exempted from some
provisions of this Code. ----------------------
4. KEY REQUIREMENTS ----------------------
Board Members shall act within the authority conferred upon them, ----------------------
keeping the best interests of the Company in view and observe the following:
i) Shall act with utmost care, skill, diligence and integrity. ----------------------

ii) Shall act in utmost good faith and fulfil the fiduciary obligations without ----------------------
allowing their independence of judgment to be compromised.
----------------------
iii) Shall not involve in taking any decision on a subject matter in which a
conflict of interest arises or which in his opinion is likely to arise. ----------------------
iv) Shall make disclosures to the Board relating to all material, financial and ----------------------
commercial transactions, if any, where they have personal interest that
may have a potential conflict with the interest of the company at large. ----------------------

Corporate Board 47
 Notes v) Shall not, in his official capacity, enter into business with
(a) a relative or
----------------------
(b) a Private Limited Company in which he or his relative is a Member
---------------------- or a Director
---------------------- (c) a Public Limited Company in which he or his relative holds 2% or
more paid-up share capital and
----------------------
(d) with a firm in which the relative is a partner, except with the prior
---------------------- approval of the Board unless otherwise permitted by law.

---------------------- v) Shall avoid having any personal and/or financial interest in any business
dealings concerning the Company.
---------------------- vi) Shall avoid any dealing with a Contractor or Supplier that compromises
---------------------- the ability to transact business on a professional, impartial and competitive
basis or that may influence discretionary decision to be made by the Board
---------------------- Members/Company.
---------------------- vii) Shall not hold any position or job or engage in outside business or other
interest that is prejudicial to the interests of the Company.
----------------------
viii) Shall not exploit for their own personal gain, opportunities that are
---------------------- discovered through use of corporate property, information or position,
unless the opportunity is disclosed fully in writing to the Board of Directors
---------------------- of the Company and the Board declines to pursue such opportunity and
allow him to avail such opportunity.
----------------------
ix) Shall not seek or accept, directly or indirectly any gift from anyone having
---------------------- business dealings with the Company.
---------------------- x) Shall not make any statement which has the effect of adverse criticism
of any policy or action of the Government or of the Company or which
---------------------- is capable of embarrassing the relations between the Company and the
---------------------- public including all the stakeholders.
Provided that nothing in this clause shall apply to any statement made or
---------------------- views expressed by a Board Member, which are purely factual in nature
---------------------- and are not considered as confidential, in his official capacity or in due
performance of the duties assigned to him.
----------------------
xi) Shall not commit any offence involving moral turpitude.
---------------------- 5. COMPLIANCE OF LAW
---------------------- The Board Members shall comply with all laws, rules and regulations
relating to the business of the Company.
----------------------
6. OTHER DIRECTORSHIPS
---------------------- Unless specifically permitted by the Board, the Board Members shall not
---------------------- serve as Director of any other Company or as Partner of a Firm that is engaged
in a business competing with the Company or with which the Company has
---------------------- business relations. This clause is not applicable to Ex-officio Government
Nominee Directors.
48 Corporate Governance
 The Board Members shall not accept any appointment or post, whether Notes
advisory or administrative, in any company or firm, whether Indian or Foreign,
having competitive nature of business (other than (i) Joint Venture Companies ----------------------
with management control vested in POWERGRID and (ii) Subsidiary
Companies of POWERGRID) or with which the Company has or had business ----------------------
relations, within two years from the date of cessation of Directorship/service ----------------------
of the Company unless approved by the Government in case of Whole-time
Directors, Board of Directors in case of Non Whole-time Directors. ----------------------
7. PREVENTION OF INSIDER TRADING ----------------------
The Board Members shall comply with the Code of Internal Procedures
----------------------
and conduct for prevention of Insider Trading in dealing with securities of the
Company. ----------------------
8. CORPORATE DISCLOSURE PRACTICES
----------------------
The Code of Corporate Disclosure Practices regulates disclosure of
“Unpublished Price Sensitive Information”. ----------------------

The Public Spokesperson is responsible for overseeing and coordinating ----------------------

disclosure of “Unpublished Price Sensitive Information” to stock exchanges,
analysts, shareholders and media including drafting of the press release or the ----------------------
text of the information to be posted on the Company’s web-site/released to the ----------------------
press with the approval of the Director (Finance). No person except the Public
Spokesperson or those authorized by the Public Spokesperson, shall disclose ----------------------
any information relating to the Company’s Securities to analysts/research
persons and institutional investors. The Board Members shall comply with the ----------------------
Code of Corporate Disclosure Practices. ----------------------
9. RELATED PARTY DISCLOSURES
----------------------
The Board Members shall make disclosure of related party transactions
to the Board of Directors in the format provided under Accounting Standard ----------------------
18 (AS- 18) (Appendix II) issued by the Institute of Chartered Accountants of
----------------------
India (ICAI) and/or any modification or re-codification thereof.
10. CONFIDENTIALITY OF INFORMATION ----------------------
Subject to the Code of Corporate Disclosure Practices as may be prevalent ----------------------
in the Company from time to time, any information concerning the Company’s
business, its customers, suppliers, etc. to which the Board Members have access ----------------------
or which are in their possession, must be considered confidential and held in ----------------------
confidence. No Board Member shall provide any information either formally
or informally, to the press or any other media, unless specifically authorized. ----------------------
Provided that Board Members shall in consultation/under intimation to the
Public Spokesperson of the Company be free to disclose such information ----------------------
which is: ----------------------
(a) part of the public domain at the time of disclosure; or
----------------------
(b) authorised or required to be disclosed pursuant to a decision of the Board
or any of its Sub-Committees; or ----------------------

Corporate Board 49
 Notes (c) required to be disclosed in accordance with applicable laws, rules,
regulations, guidelines, or directions from the Ministry of Power.
----------------------
11. PROTECTION OF ASSETS
---------------------- The Board Members shall protect the Company’s assets including
physical assets, information and intellectual rights and shall not use the same
----------------------
for personal gain.
---------------------- 12. AMENDMENTS TO THE CODE
---------------------- The provisions of this Code can be amended/modified by the Board
of Directors of the Company from time to time and all such amendments/
---------------------- modifications shall take effect from the date stated therein.
---------------------- 13. PLACEMENT OF THE CODE ON WEBSITE
---------------------- Pursuant to Clause 49 of the Listing Agreement, this Code and any
amendment thereto shall be hosted on the website of the Company.
----------------------
14. ANNUAL COMPLIANCE REPORTING
---------------------- 14.1 In terms of Clause 49 of the Listing Agreement, all Board Members
shall affirm compliance of this Code within 30 days of close of every
----------------------
financial year. The Annual Report of the company shall contain
---------------------- a declaration to this effect signed by the Chairman & Managing
Director. A proforma of Annual Compliance Report is at Appendix-
---------------------- III. The Annual Compliance Report shall be forwarded to the
Company Secretary. If any Director/Senior Management Personnel
----------------------
leaves the Company any time during a financial year, he shall send a
---------------------- communication to Company Secretary affirming compliance of the
Code till the date of his association with POWERGRID.
----------------------
14.2 The Chairman & Managing Director of the Company and the Whole
---------------------- Time Finance Director or any other person heading the finance
function shall certify to the Board that there are, to the best of their
---------------------- knowledge and belief, no transactions entered into by the Company
---------------------- during the year which are fraudulent, illegal or in violation of this
Code.
---------------------- 15. ENFORCEMENT OF CODE OF CONDUCT
---------------------- Each Board Member shall be accountable for fully complying with this
Code.
----------------------
16. CONSEQUENCES OF NON-COMPLIANCE OF THIS CODE
----------------------
16.1 In case of breach of this Code by the Non Whole-time Directors,
---------------------- the same shall be considered by the Board of Directors for initiating
appropriate action, as deemed necessary.
----------------------
16.2 In case of breach of this Code by the Whole-time Directors, the
---------------------- same shall be dealt with in accordance with the CDA Rules of the
Company.
----------------------

50 Corporate Governance
17. ACKNOWLEDGEMENT OF RECEIPT OF THE CODE Notes
All Board Members shall acknowledge receipt of this Code or any
----------------------
modification(s) thereto, in the acknowledgement form as at Appendix-IV and
forward the same to the Company Secretary indicating that they have received, ----------------------
read, understood and agreed to comply with this code.
----------------------
Summary ----------------------
●● Good Corporate Governance practices are an integral element for doing ----------------------
business.
●● A company’s board of directors helps the management develop business ----------------------
plans, policy objectives, and business strategy. ----------------------
●● A director’s fiduciary duty arises out of the board’s fiduciary relationship
with the company and shareholders. ----------------------
●● Provisions of clause 49 of the listing agreement say that board of directors ----------------------
of a company shall have an optimum combination of executive and non-
executive directors. ----------------------
●● Independent director system in corporate governance enables the director ----------------------
to express his opinions when the company makes a decision, especially
some significant ones about enterprise merger, connected transaction, stock ----------------------
repurchase, and interest conflict between large and small stockholders.
----------------------
●● There shall be a separate section on Corporate Governance in the annual
reports of company, with a detailed compliance report on Corporate ----------------------
Governance.
----------------------
●● Corporate Governance Voluntary (CGV) Guidelines 2009 which
encourage the use of better practices through voluntary adoption focus ----------------------
on areas such as Board of Directors, responsibilities of the Board, audit
----------------------
committee functions, roles and responsibilities, appointment of auditors,
Compliance with Secretarial Standards and a mechanism for whistle ----------------------
blower support.
----------------------
Keywords ----------------------
●● Fiduciary Role: A legal duty where one is bound to act in another’s best ----------------------
interest, such as a trustee acting on behalf of a beneficiary.
----------------------
●● Executive Director: An executive director is a senior manager of an
organization who is remunerated for his work and usually works full time ----------------------
as a director of the company.
----------------------
●● Compliance: Acting according to certain accepted standards.
●● Whistle Blower: A whistleblower is a person who raises a concern about ----------------------
wrongdoing occurring in an organization; usually this person would be
from that same organization. ----------------------

----------------------

Corporate Board 51
 Notes
Self-Assessment Questions
----------------------
1. Discuss the responsibilities of BoDs.
---------------------- 2. What is the role of an independent director?
---------------------- 3. What is the composition of the audit committee?

---------------------- 4. What is whistle blowing mechanism?

5. What does the management discussion and analysis state?
----------------------

---------------------- Answers to Check your Progress

---------------------- Check your Progress 1
---------------------- State True or False.
1. True
----------------------
2. True
----------------------
Fill in the blanks.
---------------------- 1. Good corporate governance structures encourage companies to create
---------------------- value and provide accountability and control systems commensurate with
the risks involved.
---------------------- 2. The three key constituents of corporate governance are the Board of
---------------------- Directors, the Shareholders and the Management.

----------------------
Check your Progress 2
----------------------
Fill in the blanks.
---------------------- 1. As per the provisions of clause 49 of the listing agreement, a company
---------------------- shall have at least 50 percent of directors as non-executive directors.
2. Fiduciary duties of directors fall under the general categories of duty of
---------------------- care and duty of loyalty.
---------------------- 3. The board meeting shall be held at least four times a year, with a maximum
time gap of four months between any two meetings.
----------------------
State True or False.
----------------------
1. True
----------------------

----------------------

----------------------

----------------------

----------------------

52 Corporate Governance
 Notes
Suggested Reading
----------------------
1. www.mca.gov.in/.../CG_Voluntary_Guidelines_2009_24dec2009.pdf
2. Cadbury, Adrian. 2003. Corporate Governance and Chairmanship: a ----------------------
personal view. Oxford University Press.
----------------------
3. Gupta, L.C. 1989. Corporate Boards and Nominee Directors. Oxford
University Press. ----------------------

4. Gupta, L.C. 1974. Corporate management and Accountability. Chennai: ----------------------

McMillan Institute for FM and Research.
----------------------
5. McGregor, Lynn. The human face of Corporate Governance. Palgrave
Publishers. ----------------------

----------------------

----------------------
----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

Corporate Board 53
 Notes ANNEXURE - I
---------------------- POWER GRID CORPORATION OF INDIA LIMITED

---------------------- CODE OF CONDUCT FOR BOARD MEMBERS

EXTRACT OF SECTION 6 OF THE COMPANIES ACT, 1956
----------------------
Meaning of “relative”
----------------------
6. A person shall be deemed to be a relative of another if, and only if,-
---------------------- (a) they are members of a Hindu undivided family; or
---------------------- (b) they are husband and wife; or

---------------------- (c) the one is related to the other in the manner indicated in Schedule
IA.
---------------------- SCHEDULE IA
---------------------- LIST OF RELATIVES
---------------------- 1. Father 12. Son’s daughter
---------------------- 2. Mother (including step-mother) 13. Son’s daughter’s husband
----------------------
3. Son (including step-son) 14. Daughter’s husband
----------------------
4. Son’s wife 15. Daughter’s son
----------------------
5. Daughter (including step-daughter) 16. Daughter’s son’s wife
----------------------
6. Father’s father 17. Daughter’s daughter
----------------------
7. Father’s mother 18. Daughter’s daughter’s husband
----------------------
8. Mother’s mother 19. Brother (including step-brother)
----------------------
9. Mother’s father 20. Brother’s wife
----------------------
10. Son’s son 21. Sister (including step sister)
----------------------
11. Son’s son’s wife 22. Sister’s husband
----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

54 Corporate Governance
ANNEXURE - II Notes
POWER GRID CORPORATION OF INDIA LIMITED ----------------------
CODE OF CONDUCT FOR BOARD MEMBERS ----------------------
The Board Members shall disclose the following, in respect of all
transactions with related parties, as covered in AS-18 issued by ICAI: ----------------------

(i) the name of the transacting related party; ----------------------

(ii) a description of the relationship between the parties; ----------------------
(iii) a description of the nature of transactions;
----------------------
(iv) volume of the transactions either as an amount or as an appropriate
proportion; ----------------------

(v) any other elements of the related party transactions necessary for an ----------------------
understanding of the financial statements.
----------------------
Signature:..........................................................
----------------------
Name .................................................................
----------------------
Designation ......................................................
----------------------
Date:
----------------------
Place:
Note: The following are illustrative and not exhaustive list of examples of the ----------------------
related party transactions in respect of which disclosures should be made by
----------------------
Board Members:
●● purchases or sales of goods (finished or unfinished); ----------------------
●● purchases or sales of fixed assets; ----------------------
●● rendering or receiving of services;
----------------------
●● agency arrangements;
----------------------
●● leasing or hire purchase arrangements;
●● transfer of research and development; ----------------------
●● license agreements; ----------------------
●● finance (including loans and equity contributions in cash or in kind);
----------------------
●● guarantees and collaterals; and
●● management contracts including for deputation of employees. ----------------------

----------------------

----------------------

----------------------

----------------------

Corporate Board 55
 Notes ANNEXURE - III
---------------------- POWER GRID CORPORATION OF INDIA LIMITED

---------------------- CODE OF CONDUCT FOR BOARD MEMBERS

ANNUAL COMPLIANCE REPORT*
----------------------
I …………………………………………………………..do hereby solemnly
---------------------- affirm that to the best of my knowledge and belief, I have fully complied with
the provisions of the CODE OF CONDUCT FOR BOARD MEMBERS during
----------------------
the financial year ending 31st March 20__.
----------------------
Signature:..........................................................
----------------------
Name .................................................................
----------------------
Designation ......................................................
---------------------- Date:
---------------------- Place:

---------------------- * To be submitted by 30th April each year.

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

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56 Corporate Governance
ANNEXURE - IV Notes
POWER GRID CORPORATION OF INDIA LIMITED ----------------------
CODE OF CONDUCT FOR BOARD MEMBERS ----------------------
ACKNOWLEDGEMENT FORM
----------------------
I ……………………………………….., have received and read the Company’s
“CODE OF CONDUCT FOR BOARD MEMBERS” (“this Code”). I have ----------------------
understood the provisions and policies contained in this Code and I agree to
----------------------
comply with this code.
Signature: ----------------------
Name: ----------------------
Designation: ----------------------
Date:
----------------------
Place:
----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

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Corporate Board 57
 Notes

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58 Corporate Governance
Shaping Directorial Competence and Board Effectiveness
UNIT

3
Structure:
3.1 Introduction
3.2 The Board of Directors – Roles and Responsibilities
3.3 Classification of Directors’ Duties
3.4 Characteristics of Effective Boards
3.5 Indicators of Good Practice of Boards
3.6 The Role of the Independent Director
3.7 Getting and Keeping Good Board Members
3.8 Performance Evaluation and Appraisal
Summary
Key Words
Self-Assessment Questions
Answers to Check your Progress
Suggested Reading
Annexure

Shaping Directorial Competence and Board Effectiveness 59

 Notes
Objectives
----------------------

---------------------- After going through this unit, you will be able to:
• State the roles and responsibilities of the board of directors.
----------------------
• Explain the duties of directors.
----------------------
• Analyze the characteristics of effective boards.
---------------------- • Identify indicators of good practice.
---------------------- • Describe the role of the independent director.
---------------------- • Recognize the value of getting and keeping good board members.
• Appreciate the importance of performance evaluation and appraisal of
----------------------
boards.
----------------------
3.1 INTRODUCTION
----------------------
As corporations grow in size and complexity and are increasingly doing
---------------------- business in the global arena, it becomes essential for boards to uphold the
---------------------- highest standards of corporate governance and to perform their role effectively.
There has been a constant transformation in corporate governance in
----------------------
Europe. Changes in the US have been more visible due to the impact of Sarbanes-
---------------------- Oxley Act. In India, with the advent of Clause 49, board structures have started
to change; board committees are playing a more central role, and it is now a
---------------------- requirement for a majority of board directors to be independent. However, the
reality is that most listed company boards have little experience of what it means
----------------------
to hear independent voices around the table and little appreciation of the value
---------------------- that a truly diverse group of directors can bring to board performance. As Indian
companies participate in the global business arena alongside multinationals,
---------------------- there is a more widespread understanding of fiduciary responsibility and
governance and expectations over governance standards will rise yet further.
----------------------

---------------------- 3.2 THE BOARD OF DIRECTORS – ROLES AND

---------------------- RESPONSIBILITIES

---------------------- Directors’ duties and individual director responsibilities are dependent

on the particular type of company, board structure and board dynamics. The
---------------------- key function of the board is to manage the business so that it is a success and
shareholders realize returns. A director’s duties greatly depend on how the entire
---------------------- board of director approaches its duties. The board’s key purpose is to ensure the
---------------------- company’s prosperity by collectively directing the company’s affairs, whilst
meeting the appropriate interests of its shareholders and stakeholders. The
---------------------- objects of the company are defined in the Memorandum of Association and
regulations are laid out in the Articles of Association.
----------------------

60 Corporate Governance
 Directors look after the affairs of the company, and are in a position of Notes
trust. They might abuse their position in order to profit at the expense of their
company, and, therefore, at the expense of the shareholders of the company. ----------------------
Consequently, the law imposes a number of duties, burdens and responsibilities
upon directors, to prevent abuse. ----------------------

a) The directors must always exercise their powers for a ‘proper purpose’ ----------------------
– that is, in furtherance of the reason for which they were given those
----------------------
powers by the shareholders.
b) Directors must act in good faith in what they honestly believe to be the ----------------------
best interests of the company, and not for any collateral purpose. This
----------------------
means that, particularly in the event of a conflict of interest between the
company’s interests and their own, the directors must always favour the ----------------------
company.
----------------------
c) Directors must act with due skill and care.
d) Directors must consider the interests of employees of the company. ----------------------
----------------------
3.3 CLASSIFICATION OF DIRECTORS’ DUTIES
----------------------
The major duties of the directors of a company can be grouped as given
below on the basis of the nature of those duties- ----------------------
a) Set strategy and structure ----------------------
i. Review and evaluate present and future opportunities, threats and ----------------------
risks in the external environment and current and future strengths,
weaknesses and risks relating to the company. ----------------------
ii. Determine strategic options, select those to be pursued, and decide ----------------------
the means to implement and support them.
----------------------
iii. Determine the business strategies and plans that underpin the
corporate strategy. ----------------------
iv. Ensure that the company’s organizational structure and capability
----------------------
are appropriate for implementing the chosen strategies.
b) Delegate to management ----------------------

i. Delegate authority to management, and monitor and evaluate the ----------------------

implementation of policies, strategies and business plans.
----------------------
ii. Determine monitoring criteria to be used by the board.
----------------------
iii. Ensure that internal controls are effective.
iv. Communicate with senior management. ----------------------
c) Exercise accountability to shareholders and be responsible to relevant ----------------------
stakeholders
----------------------
i. Ensure that communications both to and from shareholders and
relevant stakeholders are effective. ----------------------

Shaping Directorial Competence and Board Effectiveness 61

 Notes ii. Understand and take into account the interests of shareholders and
relevant stakeholders.
----------------------
iii. Monitor relations with shareholders and relevant stakeholders by
---------------------- gathering and evaluation of appropriate information.
iv. Promote the goodwill and support of shareholders and relevant
----------------------
stakeholders.
---------------------- From directors and executives to stakeholders and consumers, virtually
everyone is touched in some way by the actions of a company’s board. Every
----------------------
company should be headed by an effective board, which should lead and control
---------------------- the company. The board is collectively responsible for promoting the success of
the company by directing and supervising the company’s affairs.
----------------------
Ideally, a board of directors operates independently from a company, but
---------------------- oversees it with the company’s best interests in mind. It is the chief executive’s
job to run the company day-to-day and the chairman’s job is to make sure that
---------------------- the board and its responsibilities are properly discharged. Company directors
---------------------- and boards are appointed on behalf of the shareholders to look after the affairs
of the organization and run the day-to-day business. In addition to business
---------------------- and financial issues, boards of directors must deal with challenges and issues
relating to corporate governance, corporate social responsibility and corporate
---------------------- ethics. Company boards can determine the success of a company or organization.
---------------------- Their effectiveness is crucial – and yet many boards lack effective processes.

---------------------- Check your Progress 1

---------------------- State True or False.
---------------------- 1. Directors look after the affairs of the company and are in a position of
trust.
----------------------
2. In the event of a conflict of interest between the company’s interests and
---------------------- their own, the directors must always favour the company.
---------------------- 3. The key function of the board is to manage the business so that it is a
success and shareholders realize returns.
----------------------
4. Directors are concerned with the interest of the business and not connected
---------------------- with the interests of employees of the company.

----------------------
Activity 1
----------------------
1. Check the website of SEBI and study meaning of the clause 49 of the
----------------------
listing agreement.
----------------------

----------------------

----------------------

62 Corporate Governance
3.4 CHARACTERISTICS OF EFFECTIVE BOARDS Notes
a) Diversity: The board as a whole contains differences in talents, skills, ----------------------
experience, interest, and social background.
----------------------
b) Structure: The board is organized in such a way that individuals and
committees assume a proper and active role in its functions. ----------------------
c) Member Involvement: Members demonstrate a high degree of interest ----------------------
in their role and responsibilities and are genuinely concerned about the
organization’s problems and prospects. ----------------------
d) Knowledge: Members are well informed about the organization’s ----------------------
operation and about the social forces that are affecting service delivery.
----------------------
e) Rapport: Members of the board maintain a productive working
relationship with one another and with the executive director. ----------------------
f) Sensitivity: The board is representative of, and sensitive to, different
----------------------
constituencies and viewpoints.
g) Sense of Priorities: Board members are concerned with important and ----------------------
long range issues, not trivial matters. ----------------------
h) Direction: The president is skilled in making certain that various points
of view are expressed in reaching satisfactory decisions. ----------------------

i) Strength: The board is strong enough to achieve effective policy ----------------------

decisions.
----------------------
In addition, personal qualities relevant to the role of director can be
identified as follows: ----------------------
a) Strategic perception and decision-making ----------------------
b) Analytical understanding
----------------------
c) Communication
----------------------
d) Interacting with others
----------------------
e) Board management
f) Achieving results ----------------------
It is important to acknowledge that not all directors will possess each ----------------------
necessary skill but the board as a whole must possess them.
----------------------
3.5 INDICATORS OF GOOD PRACTICE OF BOARDS ----------------------
a) Organizing and running the board effectively ----------------------
b) Establishing vision, mission and values
----------------------
c) Setting strategy and structure
----------------------
d) Delegation to management
e) Exercising responsibility to shareholders and other interested parties ----------------------

Shaping Directorial Competence and Board Effectiveness 63

 Notes Effective directors and boards are the key to the long term success of an
organization. They have the maximum leverage for change; they provide the
---------------------- leadership and role models for the rest of the organization. Good governance
can be seen in the quality of decisions and robust systems and processes that
---------------------- are used effectively by leaders in a culture that supports challenge and scrutiny.
---------------------- Good governance can support the decision-making process from policy setting
to execution and review, by:
----------------------
a) achieving balance
---------------------- b) maintaining an outward focus
---------------------- c) sustaining a culture of accountability

---------------------- d) encouraging effective relationships between those in key governance

positions
---------------------- Openness and honesty create the right internal environment for making
---------------------- better decisions. An organization that is aware of the current position, its
deficiencies and options and is honest in its discussions on how to deal with
---------------------- them will have a strong foundation for good governance and the basis of future
improvement or sustained good performance. Responsibility for developing
---------------------- strategy rests with the chief executive in conjunction with senior management.
---------------------- The board then brings its combined experience to challenge and test both the
overarching framework of the business as well as specific proposals for strategic
---------------------- management, divestment and change. Clarity of direction and understanding
of purpose is set by the key relationship between the chief executive and the
---------------------- chairman.
---------------------- Good corporate governance dictates that the board be comprised of
individuals with certain personal characteristics and core competencies
---------------------- such as recognition of the importance of the board’s tasks, integrity, a sense
---------------------- of accountability, track record of achievements, and the ability to ask tough
questions. Besides, having financial literacy, experience, leadership qualities
---------------------- and the ability to think strategically, the directors must show significant degree of
commitment to the company and devote adequate time for meeting, preparation
---------------------- and attendance.
---------------------- Directors need to play both a strategic and a control role, and their
effectiveness in both aspects of the role is achieved through the strength and
----------------------
rigor of processes of board accountability. This is especially true of the role of
---------------------- an independent director.

---------------------- 3.6 THE ROLE OF THE INDEPENDENT DIRECTOR

---------------------- New directors are often promoted from a senior management position
---------------------- in the same company, which means that they bring with them the legacy of
relationships and identity of their previous role. Non-executive directors are
---------------------- appointed from outside the organization, possibly retaining a management role
elsewhere.
----------------------

64 Corporate Governance
 The task of the independent director is to ask common sense questions. Notes
There are certain key questions that an independent board member must ask,
to do with company strategy, evaluating the performance of the CEO and ----------------------
measuring the contribution that he makes.
----------------------
The effectiveness of the independent director is influenced by
several factors - the nature of the company itself: multinationals, minority ----------------------
shareholder companies, public sector enterprises, group-affiliated companies
----------------------
and entrepreneurial businesses will expect and tolerate varying degrees of
involvement by independent directors, something that should always be taken ----------------------
into account when considering a directorship and the circumstances surrounding
the appointment of independent directors. These have a marked effect on the ----------------------
way directors go about their duties.
----------------------
Directors appointed via the “old boy network” are more likely to be brought
on to a board for reputational reasons rather than to provide an objective, critical ----------------------
perspective on key issues. The expectation in countries like the US and the
----------------------
UK is that independent directors will be selected by a nominations committee
following a rigorous search process. In India, few companies go through such a ----------------------
formal process when appointing independent directors to their boards.
----------------------
To be fully effective, independent directors should prepare well for board
meetings, but they must also be adequately informed and briefed about the ----------------------
company; only then are they in a position to comment on significant issues,
including company’s vision or strategy. Often a disproportionate amount of ----------------------
board time is spent reviewing management presentations, leaving very little
----------------------
time for actual discussion among board members. Independent directors sit at
the apex of commercial organizations that have to deliver results. Therefore, ----------------------
it is critical to a company’s success for directors to strike a balance between
governance oversight and providing constructive support to the management. ----------------------

----------------------
Check your Progress 2
----------------------
State True or False.
----------------------
1. A member of the board of directors should have a strategic perception
and good decision making abilities. ----------------------
2. The board of directors of a company is organized in such a way that ----------------------
individuals and committees assume a proper and active role in its
functions. ----------------------
3. Responsibility for developing strategy and presenting it to the board ----------------------
of directors rests with the chief executive in conjunction with senior
management. ----------------------
Fill in the blanks. ----------------------
1. The effectiveness of the independent director is influenced by the
----------------------
_______ of the company.
----------------------

Shaping Directorial Competence and Board Effectiveness 65

 Notes
Activity 2
----------------------
Check websites of any 2 major IT companies and find out the Vision
----------------------
and Mission of these companies. Compare them with any 2 major Auto
---------------------- manufacturing companies.

----------------------

---------------------- 3.7 GETTING AND KEEPING GOOD BOARD MEMBERS

---------------------- a) Electing board members who have an active commitment to the purpose
of the organization.
----------------------
b) Assessing annually the particular knowledge, skills, experiences, and
---------------------- connections needed on the board for the organization’s development.
c) Recruiting constantly to build a pool of potential board members. The
----------------------
nominations committee process should involve defining what kind of
---------------------- person the board needs, someone who will fit the profile of the company
and the board. The more rigorous the process, the more likely it is that a
---------------------- board will be able to identify and select the best available talent.
---------------------- d) Making sure that prospective board members know exactly what is
expected of them.
----------------------
e) Orienting new board members carefully by giving them information of
---------------------- the organization which includes:

---------------------- i. Articles of incorporation

ii. Bylaws
----------------------
iii. Annual budget
----------------------
iv. Most recent financial statements
---------------------- v. Minutes of the last 2-4 board meetings
---------------------- vi. Conducting meetings regularly and well-publishing agendas ahead
of time, starting and stopping on time, keeping discussion crisp and
---------------------- focused.
---------------------- To improve the effectiveness of the board, in addition to the selection,
orientation and regularity of meetings, focus should also be on making the board
---------------------- aware and participative. This can be done by conducting ongoing training for
---------------------- the board members. Board education is moving to the top of corporate agendas.
Some companies seek to satisfy SEBI listing requirements, while others
----------------------
desire to demonstrate good governance to stakeholders. As organizations look
---------------------- for ways to address their educational needs, many are trying to provide their
directors with the right opportunities to sharpen their oversight skills. The
---------------------- training program for the board members should include the following:
----------------------

66 Corporate Governance
a) The program should be led by someone who thoroughly understands the Notes
business and who works well with the board.
----------------------
b) Tailoring the program to suit the needs dictated by its board members, its
industry and the nature of its business. ----------------------
c) Educating individual committees separately - Board committees have
----------------------
specialized roles, and their knowledge requirements can vary. An audit
committee may need to fine-tune its understanding of critical accounting ----------------------
policies, while a compensation committee may require more information
on executive compensation strategies and a shareholders/Investors’ ----------------------
Grievance Committee may need to understand procedures to address
----------------------
complaints and process applications for share transfer and report on the
same to the Board. ----------------------
d) Planning ahead for accreditation - In some companies, the ratings of the
----------------------
credit rating agencies are very important, especially when issuing shares/
listing for funding financial requirements. One of the criteria the rating ----------------------
agencies generally use for rating the issue is Corporate Governance
practices in a company. This includes transparency and disclosure practices, ----------------------
board composition and functioning, and management assessment.
----------------------

3.8 PERFORMANCE EVALUATION AND APPRAISAL ----------------------

A framework of clearly established standards of good practice enables all ----------------------

directors, including non-executive directors, to be appraised and supported with
----------------------
the professional development necessary to ensure optimum performance.
a) The performance of the board as a whole, of its committees and of its ----------------------
members should be evaluated atleast once a year. The evaluation process
----------------------
is a mechanism to improve board effectiveness. It should enable the board
to assess how they are performing and identify how certain elements of ----------------------
their performance might be improved.
----------------------
b) Directors and boards overall must make efforts to ensure each member
remains up to date in both skills and knowledge of the company. The ----------------------
board must make an effort to regularly measure and assess the contribution
each board member makes and take steps to address any deficiencies that ----------------------
become apparent. ----------------------
c) Boards should regularly audit the skills required by the company and
adapt or make changes to the board membership according to changing ----------------------
needs. The use of an external third party to conduct the evaluation will ----------------------
bring objectivity to the process.
Unlike the US and the UK where listed companies are required to undergo ----------------------
a board evaluation each year, board performance review in India is in its infancy. ----------------------
An evaluation normally falls into two parts: the first reviews the board as a
whole, and the second the performance of the individual directors. A twelve- ----------------------
member board may comprise of seven independent directors and five executives,
but what tends to happen is that independent directors get evaluated, whereas ----------------------

Shaping Directorial Competence and Board Effectiveness 67

 Notes executive directors are evaluated on the basis of their functional, executive role,
but not on the basis of their performance as directors of the board. Independent
---------------------- directors should mentor executive directors to enable a continuous cycle of
feedback and for a steady flow of communication among board members.
----------------------

---------------------- Summary

---------------------- ●● As corporations grow in size and complexity and are increasingly doing
business in the global arena, it becomes essential for boards to uphold
---------------------- the highest standards of corporate governance and to perform their role
effectively.
----------------------
●● The board’s key purpose is to ensure the company’s prosperity by
---------------------- collectively directing the company’s affairs, whilst meeting the appropriate
interests of its shareholders and stakeholders.
----------------------
●● Company directors and boards are appointed on behalf of the shareholders
---------------------- to look after the affairs of the organization and run the day-to-day business.
In addition to business and financial issues, boards of directors must deal
---------------------- with challenges and issues relating to corporate governance, corporate
---------------------- social responsibility and corporate ethics.
●● To be fully effective, independent directors should prepare well for board
---------------------- meetings, but they must also be adequately informed and briefed about
---------------------- the company; only then are they in a position to comment on significant
issues, including company’s vision or strategy. Effective directors and
---------------------- boards are the key to the long term success of an organization.
---------------------- ●● To improve the effectiveness of the board, in addition to the selection,
orientation and regularity of meetings focus should also be on making the
---------------------- board aware and participative.

---------------------- ●● Directors need to play both a strategic and a control role, and their
effectiveness in both aspects of the role is achieved through the strength
---------------------- and rigor of processes of board accountability.
●● The performance of the board as a whole, of its committees and of its
----------------------
members should be evaluated atleast once a year. The evaluation process
---------------------- is a mechanism to improve board effectiveness.

---------------------- Keywords
---------------------- ●● Memorandum of Association: The memorandum of association of a
---------------------- company is the first constitutional document of a company, which must
be submitted to the Registrar of Companies together with its Articles of
---------------------- Association. It contains company name, address of its registered office,
objects and powers, authorized share capital, and statement of limited
---------------------- liability often and is the document that governs the relationship between
---------------------- the company and the outside.
●● Stakeholder: A stakeholder is a party that can affect or be affected by the
---------------------- actions of the business as a whole.

68 Corporate Governance
●● Accountability: Accountability is a concept in ethics and governance Notes
often used to mean responsibility and answerability and other terms
associated with the expectation of account-giving. ----------------------
●● SEBI: Securities and Exchange Board of India (SEBI) is the regulator ----------------------
for the Securities Market in India. It was formed officially by the
Government of India in 1988 with SEBI Act 1992 being passed by the ----------------------
Indian Parliament.
----------------------
Self-Assessment Questions ----------------------

1. Describe in detail the role of the board in an organization. ----------------------

2. What are the characteristics of an effective board? ----------------------
3. How can an organization ensure that its board is effective?
----------------------
Answers to Check your Progress ----------------------
Check your Progress 1 ----------------------
State True or False. ----------------------
1. True
----------------------
2. True
3. True ----------------------
4. False ----------------------
Check your Progress 2
----------------------
State True or False.
1. True ----------------------
2. True ----------------------
3. True ----------------------
Fill in the blanks.
----------------------
1. The effectiveness of the independent director is influenced by the nature
of the company. ----------------------

----------------------
Suggested Reading
----------------------
1. www.mca.gov.in/.../CG_Voluntary_Guidelines_2009_24dec2009.pdf
----------------------
2. Chandratre, K R and A N Navare. 2010. Corporate Governance – A
Practical Handbook. Bharat Law House Pvt. Ltd. ----------------------
3. Gupta, L.C. 1989. Corporate Boards and Nominee Directors. Oxford ----------------------
University Press.
----------------------
4. Gupta, L.C. 1974. Corporate management and Accountability. Chennai:
McMillan Institute for FM and Research. ----------------------

Shaping Directorial Competence and Board Effectiveness 69

 Notes ANNEXURE
---------------------- [Based on the Institute of Directors publication “Good Practice for Directors –
Standards for the Board”]
----------------------
Quick Check - board performance
---------------------- 1. We define and review the role and responsibilities of each individual
director and how these contribute to the effectiveness of the board.
----------------------
2. Board members are effectively briefed in time to prepare for meetings.
----------------------
3. We regularly review the quality of the board’s decisions, advice and its actions.
---------------------- 4. The company’s organization structure and capability is appropriate for
---------------------- implementing its chosen strategies.
5. Company objectives are consistent with the mission, values and needs of
---------------------- stakeholders, and form the basis of company strategy.
---------------------- 6. The entire board champions the vision and mission throughout the organisation.
---------------------- 7. The vision and mission are monitored and reviewed regularly.
8. Company objectives are Specific, Measurable, Achievable, Realistic and
---------------------- Time-bound.
---------------------- 9. The board regularly reviews the company’s Strengths, Weaknesses,
Opportunities and Threats.
----------------------
10. The organization’s culture encourages continuous change and questioning
---------------------- of convention.
---------------------- 11. The board clearly delegates authority to management and regularly
reviews management’s effectiveness.
----------------------
12. All staff receive a personal development review atleast annually.
---------------------- Quick Check - Director Performance
---------------------- 1. Directors rise above the immediate problem or situation and see the wider
issue and implications.
----------------------
2. Directors are aware of the organization’s strengths and weaknesses and of
---------------------- the impact of the board’s decisions upon them.
3. Directors generate and recognize imaginative solutions and innovations.
----------------------
4. Directors show a readiness to take decisions, make judgments, take action
---------------------- and make commitments.
---------------------- 5. Directors insist that sufficiently detailed and reliable information is taken
account of, and reported as necessary.
----------------------
6. Directors probe the facts, challenge assumptions, identify the advantages
---------------------- and disadvantages of proposals, provide counter arguments, and ensure
discussions are penetrating.
----------------------
7. Directors listen compassionately, intently and carefully; key points are
---------------------- recalled and taken into account.

70 Corporate Governance
8. Directors are frank and open in their communications. They are willing to Notes
admit errors and shortcomings.
9. Directors are able to persuade others to give their agreement and ----------------------
commitment; in face of conflict, they use personal influence to achieve ----------------------
compromise and agreement.
10. Directors adopt a flexible (but not compliant) style when interacting with ----------------------
others. They take others’ views into account and are prepared to change ----------------------
position when appropriate.
----------------------

----------------------

----------------------

----------------------

----------------------
----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

Shaping Directorial Competence and Board Effectiveness 71

 Notes

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------
----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

72 Corporate Governance
Financial Institutions and Nominee Directors
UNIT

4
Structure:
4.1 Introduction
4.2 Composition of the Board of Directors
4.3 Nominee Directors
4.4 Nominee Director: Meaning
4.5 Rationale for Nominee Director
4.6 Appointment of Nominee Directors
4.7 To whom does a Nominee Director owe Duties
4.8 Exemption to Nominee Directors under Provisions of Section 274(1) (G)
4.9 Nominee Directors and Conflict of Interest
4.10 Conclusion
Summary
Key Words
Self-Assessment Questions
Answers to Check your Progress
Suggested Reading

Financial Institutions and Nominee Directors 73

 Notes
Objectives
----------------------

---------------------- After going through this unit, you will be able to:
• Describe the composition of the board of directors.
----------------------
• Explain the role of nominee directors.
----------------------
• Discuss exemption to nominee directors under provisions of Section
---------------------- 274(1).

---------------------- • Recognize how nominee directors can have conflict of interest.

---------------------- 4.1 INTRODUCTION

----------------------
The fundamental objective of corporate governance is the “enhancement
---------------------- of shareholder value, keeping in view the interests of other stakeholder”. This
definition 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.
----------------------
The pivotal role in any system of corporate governance is performed
---------------------- by the board of directors. It is accountable to the stakeholders and directs and
controls the Management. It stewards the company, sets its strategic aim and
----------------------
financial goals and oversees their implementation, puts in place adequate internal
---------------------- controls and periodically reports the activities and progress of the company in a
transparent manner to the stakeholders.
----------------------
The shareholders’ role in corporate governance is to appoint the directors
---------------------- and the auditors and to hold the board accountable for the proper governance
of the company by requiring the board to provide them periodically with the
---------------------- requisite information, in a transparent fashion, of the activities and progress of
---------------------- the company.
The responsibility of the management is to undertake the management
---------------------- of the company in terms of the direction provided by the board, to put in
---------------------- place adequate control systems and to ensure their operation and to provide
information to the board on a timely basis and in a transparent manner to enable
---------------------- the board to monitor the accountability of Management to it.
---------------------- The measure of the board is not simply whether it fulfils its legal
requirements but more importantly, the board’s attitude and the manner it
---------------------- translates its awareness and understanding of its responsibilities. An effective
corporate governance system is one, which allows the board to perform these
---------------------- dual functions efficiently.
----------------------
4.2 COMPOSITION OF THE BOARD OF DIRECTORS
----------------------
The composition of the board is important in as much as it determines the
---------------------- ability of the board to collectively provide the leadership and ensures that no one

74 Corporate Governance
individual or a group is able to dominate the board. Till recently, it has been the Notes
practice of most of the companies in India to fill the board with representatives
of the promoters of the company, and independent directors if chosen were also ----------------------
handpicked thereby ceasing to be independent. This has undergone a change
and increasingly the boards comprise of following groups of directors – ----------------------

a) Promoter director; ----------------------

a) The executive directors (like director-finance, director-personnel) are ----------------------
involved in the day to day management of the companies;
----------------------
b) The non-executive directors bring external and wider perspective and
independence to the decision making. ----------------------
Among the non-executive directors are independent directors, who have ----------------------
a key role in the entire mosaic of corporate governance. Independent directors
are directors who apart from receiving director’s remuneration do not have ----------------------
any other material pecuniary relationship or transactions with the company,
its promoters, its management or its subsidiaries, which in the judgement of ----------------------
the board may affect their independence of judgement. Further, all pecuniary ----------------------
relationships or transactions of the non-executive directors should be disclosed
in the annual report. ----------------------
Independence of the board is critical to ensuring that the board fulfils ----------------------
its oversight role objectively and holds the management accountable to the
shareholders. The board of a company should have an optimum combination ----------------------
of executive and non-executive directors with not less than fifty percent of the
board comprising of the non-executive directors. In case a company has a non- ----------------------
executive chairman, at least one-third of board should comprise of independent ----------------------
directors and in case a company has an executive chairman, at least half of
board should be independent. This is a mandatory recommendation. The tenure ----------------------
of office of the directors will be as prescribed in the Companies Act.
----------------------
4.3 NOMINEE DIRECTORS ----------------------
Besides the above categories of directors, there is another set of directors ----------------------
in Indian companies who are the nominees of the financial or investment
institutions to safeguard their interest. The nominees of the institutions are often ----------------------
chosen from among the present or retired employees of the institutions or from ----------------------
outside.
----------------------
4.4 NOMINEE DIRECTOR: MEANING
----------------------
A nominee director is a director who is appointed to the board of a ----------------------
company like any other director but, crucially, whose appointment is at the
request or on the nomination of a third party and whose job is to “look after” ----------------------
such party’s interests. The right to appoint a nominee director is often enshrined
in the articles of association of the company. In a joint venture, there is often ----------------------
more than one nominee director on the board, appointed by each joint venture ----------------------
party.

Financial Institutions and Nominee Directors 75

 Notes
Check your Progress 1
----------------------
State True or False.
----------------------
1. The pivotal role in any system of corporate governance is performed by
---------------------- the board of directors.

---------------------- 2. Independent directors do not have any other material or financial

relationship with the company.
---------------------- 3. The shareholders’ role in corporate governance is limited to appointing
---------------------- the directors and the auditors and to hold the board accountable for the
proper governance of the company.
----------------------

---------------------- Activity 1
----------------------
Study the annual report of ONGC and find out the list of nominee directors
---------------------- appointed on to the board by financial institutions.

----------------------
4.5 RATIONALE FOR NOMINEE DIRECTOR
----------------------
Business finance is needed at every stage of a business life cycle.
---------------------- In starting a business, it is essential for acquiring fixed assets, such as land,
building, plant and machinery, etc as well as for meeting the day-to-day expenses
---------------------- (working capital) in the form of payment of wages and salaries, purchasing
raw materials, etc. In order to successfully operate and expand the business,
----------------------
funds are necessary for promoting and marketing the product; distributing it to
---------------------- the prospective consumers; as well as for managing the firm’s human resource
base. Further, in the changing business environment marked by increasing
---------------------- competition, additional funds are desirable for continuous modernization and
upgradation of the business unit. This is contributed by the financial system.
----------------------
The major constituents of the Indian financial system are banks, financial
---------------------- institutions, non-banking financial companies and venture capital companies.
---------------------- Banks are the most important source of institutional credit in India and consist
of nationalized banks; regional rural banks; co-operative banks; private sector
---------------------- banks including foreign banks. A wide variety of financial institutions have been
set up both at the national and the State level, which cater to the diverse financial
---------------------- requirements of the industry. Besides, the non-banking financial companies are
---------------------- a group of institutions which perform financial intermediation in various forms.
On the other hand, venture capital is an important source of funding for the
---------------------- formation of small and medium enterprises in their early stages of development.

---------------------- In the context of corporate governance, there could be arguments both for
and against the institution of nominee directors. Those who favour this practice
---------------------- argue that nominee directors are needed to protect the interest of the institutions
who are custodians of public funds and who have high exposures in the projects
---------------------- of the companies both in the form of equity and loans.

76 Corporate Governance
 On the other hand those who oppose this practice, while conceding that financial Notes
institutions have played a significant role in the industrial development of the country
as a sole purveyor of long term credit, argue that there is an inherent conflict when ----------------------
institutions through their nominees participate in board decisions and in their role as
shareholders demand accountability from the board. They also argue that there is a ----------------------
further conflict because the institutions are often major players in the stock market in ----------------------
respect of the shares of the companies on which they have nominees.
----------------------
4.6 APPOINTMENT OF NOMINEE DIRECTORS ----------------------
The committee, headed by N.R. Narayana Murthy, said if an institution ----------------------
wishes to appoint a director on the board of a company, it should be approved
by the shareholders of the company. Such directors shall not be considered as ----------------------
independent directors.
----------------------
An institutional director, so appointed, shall have the same responsibilities
and shall be subject to the same liabilities as any other director. The nominee ----------------------
of the government on public sector companies shall be similarly elected and
shall be subject to the same responsibilities and liabilities as other directors, the ----------------------
committee recommended in its draft report. ----------------------
It is necessary that all directors, whether representing institutions or
----------------------
otherwise, should have the same responsibilities and liabilities, the report
said. The committee recommended that companies should lay down a code of ----------------------
conduct for all the board members and the senior management of company.
----------------------
Naresh Chandra Committee on Corporate Governance states that a
nominee director cannot be considered as an independent director and said that ----------------------
an independent director actually is a non-executive director of company. It gave
a criteria to define the independent director and suggested to make that criteria ----------------------
to be applicable for all listed, as well as unlisted public limited companies with
----------------------
a paid-up share capital and free reserves of Rs. 10 crore and above or turnover
of Rs. 50 crore and above with effect from the financial year beginning 2003. ----------------------

4.7 TO WHOM DOES A NOMINEE DIRECTOR OWE DUTIES ----------------------

----------------------
Under law, no distinction is drawn between the duties of a nominee
director and any other director, and so nominee directors owe the same duties ----------------------
as other directors to the company, its creditors and employees. Their duty is
to act in the interests of the company. They have also got a duty to act on the ----------------------
instructions of their nominating party. Where the nominee does owe some duty
----------------------
to his appointer, he is entitled to have regard to the appointer’s interests but only
to the extent that they are not incompatible with his duty to act in the interests ----------------------
of the company itself.
----------------------
When a nominee of the institution is appointed as a director of the company,
he should have the same responsibility, be subject to the same discipline and be ----------------------
accountable to the shareholders in the same manner as any other director of the
company. ----------------------

Financial Institutions and Nominee Directors 77

 Notes Nominee director’s right to corporate information: A nominee
director, like any other directors is bound by the rules of confidentiality. He is
---------------------- not allowed to make unauthorized disclosures to his nominator.
---------------------- Liability of nominee directors: Nominee directors are in the same
position and they owe same duties to the companies as any other director.
----------------------
Liabilities under Companies Act, 1956: A nominee director like any
---------------------- other director is liable for the default committed in Companies Act. For example,
there are two basic documents, Balance Sheet and Annual Return, are required
---------------------- to be filed every year, with Registrar of Companies (ROC), within stipulated
time. Apart from the fine, that shall be charged by ROC, every director may also
----------------------
be prosecuted.
----------------------
Check your Progress 2
----------------------
State True or False.
----------------------
1. As per the Naresh Chandra Committee, a nominee director cannot be
---------------------- considered as an independent director.
---------------------- 2. As per the applicable law, no distinction is drawn between the duties of a
nominee director and any other director of a company.
----------------------
3. The N.R. Narayana Murthy committee said that if an institution wishes
---------------------- to appoint a director on the board of a company, it should be approved by
the shareholders of the company.
----------------------

----------------------
Activity 2
----------------------
Check the website of SEBI and read the report of Naresh Chandra committee.
---------------------- List down the major recommendations that have been implemented.
----------------------

----------------------
4.8 EXEMPTION TO NOMINEE DIRECTORS UNDER
PROVISIONS OF SECTION 274(1) (G)
----------------------
The provisions of Section 274 of the Companies Act, 1956 were amended
---------------------- through Companies (Amendment) Act, 2000 (w.e.f. 13-12-2000) and a new
---------------------- clause (g) was inserted to sub-section (1) of this Section. Through this clause,
a director of a public company, which has made defaults in filing of annual
---------------------- accounts and annual returns and in repaying deposits/interests thereon on due
date or redeeming its debentures on due date or in paying dividend for period
---------------------- specified in that Section, is disqualified to be appointed as director of other
---------------------- public companies for a period of five years from the date on which such public
company(ies) so defaulted.
---------------------- A high proportion of the companies had been defaulting in filing the annual
---------------------- accounts and annual returns and a large number of companies were defaulting in

78 Corporate Governance
repayment of deposits/interest thereon and in redemption of debentures which Notes
put investor to lots of hardships and the remedial action including a deterrent
punishment to the errant directors was essential. But ironically, the errant ----------------------
directors were not only continuing in the defaulting companies but becoming
directors in other companies too. It was in this context that in the Companies ----------------------
Act, 1956 the new sub-section 274(1)(g) was inserted and the RBI also took ----------------------
some remedial measures.
----------------------
The intention and purpose of the above amendment was to disqualify the
errant directors, protect the investors from mismanagement, ensure compliance ----------------------
in filing of annual accounts and annual returns which are the means of disclosure
to all the stakeholders, increase the compliance rate of filing of the statutory ----------------------
documents and infuse good corporate governance in the regulation of corporate
----------------------
affairs in the country.
Keeping in view on the one hand, the need for strict compliance with the ----------------------
provisions of the clause (g) of sub-section (1) of Section 274 of the Companies
----------------------
Act, 1956 and on the other hand the non-obstante clause in statutes of some
of the Public Financial Institutions and the special situation of the nominee ----------------------
directors of Public Financial Institutions/Banks and the nominees of Central
and State Government companies, Nominee Directors appointed by the Public ----------------------
Financial Institutions and Companies established under the Acts of Parliament
----------------------
having non-obstante* provisions over the Companies Act, 1956, like IDBI, LIC,
UTI, IIBI etc., in their respective statutes shall not be liable to be disqualified ----------------------
for appointment as directors by virtue of Section 274(1)(g) of the Companies
Act, 1956. ----------------------
Nominee Directors appointed on the Boards of assisted concerns or other ----------------------
public companies by (a) public financial institutions within the meaning of
Section 4A of the Companies Act, 1956; (b) Central or State Government; and ----------------------
(c) banking companies are also exempt from the provisions of Section 274(1)
----------------------
(g) of the Companies Act, 1956.
While considering the applicability of the provisions of Section 274(1) ----------------------
(g) of the Companies Act, 1956, the Government has taken into account the ----------------------
following points:
a) In addition to protecting the interests of the Public Financial Institution/ ----------------------
Bank which they represent, the Nominee Directors are also expected to ----------------------
serve the best interest of sound public policy and bring about higher levels
of corporate governance. ----------------------
b) In view of implicit disqualification in Section 274(1) (g), qualified and ----------------------
experienced professionals, both official and non officials, suitable for being
appointed on the Boards of assisted concerns may not agree/available, ----------------------
thus adversely affecting the interests of the Financial Institutions.
----------------------
c) Presence of the Nominee Directors on the Boards of assisted concerns and
close monitoring through them of all the affairs of the assisted concerns is ----------------------
far more desirable when the company is in default to the Banks/Financial
----------------------
Institutions.

Financial Institutions and Nominee Directors 79

 Notes d) However, the Government further clarified that the Nominee Directors of
Public Financial Institutions/Banks/Government should in order to avail
---------------------- the relief granted are expected to comply with the following:
---------------------- i. The Nominee Directors are expected to work assiduously towards
observance of good corporate governance practices in the company
---------------------- with due regard to the legitimate interests of the various stakeholders.
The various provisions relating to good corporate governance
----------------------
have been introduced in the Companies Act Rules/Regulations
---------------------- and clause 49 of the Listing Agreement introduced by the SEBI.
The Nominee Directors are expected to study these provisions of
---------------------- corporate governance and have them implemented.
---------------------- ii. Ensure that the operations of the company are conducted in
consonance with public policy.
----------------------
iii. Ensure strict compliance in letter and spirit of all the statutory
---------------------- provisions in particular the provisions of the Companies Act and
the regulations, clarifications, etc. issued thereunder. It is the duty
---------------------- of the nominee directors to fully acquaint themselves in the relevant
provisions of the Company Law and ensure that measures are
----------------------
instituted to monitor and certify that these statutory provisions are
---------------------- being observed.

---------------------- iv. The Nominee Directors should see that important committees
of the Board of Directors are constituted and are functioning
---------------------- effectively such as Audit Committee, Nominations Committee,
and Remuneration Committee, etc. The Nominee Directors are
---------------------- expected to seek membership of these important committees and
---------------------- through their active participation in such committees ensure that the
objectives of setting up these committees are being achieved.
---------------------- v. The Nominee Directors are expected to regularly attend and actively
---------------------- participate in the proceedings of the Boards and in committee on
which they are included. Their frequent absence for insufficient
---------------------- reasons from the meetings of the Board of Directors/Committees
would negate the purpose for which the Nominee Directors have
---------------------- been nominated by the Institutions and they would not be able to
---------------------- perform the various responsibilities.
vi. Duly safeguard the interest of the Government/Banks/Financial
---------------------- Institutions which they represent. Ensure proper utilization of
---------------------- financial assistance by the assisted company and prevent any
misuse/diversion of funds by the promoters/management of the
---------------------- companies.
---------------------- vii. Provide adequate feedback to the nominating Institutions/Banks/
Companies on the affairs and operations of the assisted concerns.
----------------------
viii. The Financial Institutions are expected to closely monitor the
---------------------- participation by the Nominee Directors in the Boards/Committees

80 Corporate Governance
 as above and to ensure that they are discharging their responsibilities Notes
as listed out above. In case any Nominee Director is failing to
discharge his/her responsibilities, the Institutions are expected to ----------------------
take steps to replace him/her. The Institutions are also expected to
send a six monthly report to the Department of Company Affairs ----------------------
(ROC) bringing out the steps taken by them to ensure that their ----------------------
Nominee Directors are discharging their responsibilities. The
Financial Institutions should also in a separate section of their ----------------------
Annual Report clearly bring out the measures instituted by them
to ensure that the system of Nominee Directors is functioning ----------------------
effectively. ----------------------
* “A non-obstante clause is usually used in a provision to indicate that the
----------------------
provision should prevail despite anything to the contrary in the provision
mentioned in such non-obstante clause. In case there is any inconsistency or ----------------------
a departure between the non-obstante clause and another provision, one of the
objects of such a clause is to indicate that it is the non-obstante clause which ----------------------
would prevail over the other clause.”
----------------------
4.9 NOMINEE DIRECTORS AND CONFLICT OF INTEREST ----------------------

There may be occasions when directors represent certain parties in the ----------------------
Board in addition to their directorship. This usually happens when foreign
collaborators holding companies etc. nominate a director to represent them on ----------------------
the board. ----------------------
The phenomenon of nominee directors has an important feature of the
----------------------
modern corporate scenario. The background is the financing methods. Companies
have to borrow amounts sometimes even larger than the amount of paid-up share ----------------------
capital. They have to depend for this purpose on lending institutions like Banks,
Mutual Funds, and Public Financial Corporations, etc. All such providers of ----------------------
money stipulate for safeguarding their financial involvement in the company
----------------------
that the company should appoint as members of its Board of Directors one or
two persons nominated by them. ----------------------
The Securities and Exchange Board of India (SEBI) committee on
----------------------
corporate governance has recommended doing away with the practice of
appointing nominee directors by financial institutions on the board of companies. ----------------------
The rationale to do away with the nominee directors’ position follows the
----------------------
view that the institution of nominee directors creates a conflict of interest that
should be avoided. Such directors often claim that they are answerable only ----------------------
to the institutions they represent and take no responsibility for the company’s
management or fiduciary responsibility to other shareholders. ----------------------

----------------------

----------------------

----------------------

Financial Institutions and Nominee Directors 81

 Notes
Check your Progress 3
----------------------
State True or False.
----------------------
1. SEBI is against the appointment of financial institution’s nominee as
---------------------- directors in companies.

---------------------- Fill in the blanks.

1. The financial institutions are also expected to send a report every _____
---------------------- months to the Department of Company Affairs (ROC) bringing out the
---------------------- steps taken by them to ensure that their Nominee Directors are discharging
their responsibilities.
----------------------

---------------------- Activity 3
----------------------
Check the website of Air India and Maruti Suzuki Motors Ltd. List down the
---------------------- nominee directors on their board.

----------------------
4.10 CONCLUSION
----------------------
The association of financial institutions in the management of corporate
---------------------- bodies has considerably facilitated the process of progressive professionalism
of the corporate management. Financial institutions have been able to convince
----------------------
the corporate managements to appropriately re-orient their organizational
---------------------- structure, personal policies and planning and control systems. In many cases,
financial institutions have successfully inducted experts on the Boards of assisted
---------------------- companies. As part of their project follow-up work and through their nominee
directors, financial institutions have also been able to bring about progressive
----------------------
adoption of modern management techniques, such as corporate planning and
---------------------- performance budgeting in the assisted units.

---------------------- Summary
----------------------
●● The pivotal role in any system of corporate governance is performed by
---------------------- the board of directors.
●● The board comprises of Promoter director, executive directors and non-
---------------------- executive directors.
---------------------- ●● Among the non-executive directors are independent directors and nominee
directors.
----------------------
●● A nominee director is a director who is appointed to the board of a
---------------------- company like any other director but, crucially, whose appointment is at
the request or on the nomination of a third party and whose job is to “look
---------------------- after” such party’s interests.
----------------------

82 Corporate Governance
●● An institutional director shall have the same responsibilities and shall be Notes
subject to the same liabilities as any other director.
●● According to the Companies Act, a director of a public company, which ----------------------
has made defaults in filing of annual accounts and annual returns and ----------------------
in repaying deposits/interests thereon on due date or redeeming its
debentures on due date or in paying dividend for period specified in ----------------------
that Section, is disqualified to be appointed as director of other public
companies for a period of five years from the date on which such public ----------------------
company(ies) so defaulted. However, Nominee Directors appointed by ----------------------
the Public Financial Institutions and Companies established under the
Acts of Parliament having non-obstante provisions over the Companies ----------------------
Act, 1956, like IDBI, LIC, UTI, IIBI, etc. in their respective statutes shall
not be liable to be disqualified for appointment as directors by virtue of ----------------------
Section 274(1)(g) of the Companies Act, 1956. ----------------------
●● The Securities and Exchange Board of India (SEBI) committee on
corporate governance has recommended doing away with the practice ----------------------
of appointing nominee directors by financial institutions on the board of ----------------------
companies as such directors often claim that they are answerable only to
the institutions they represent and take no responsibility for the company’s ----------------------
management or fiduciary responsibility to other shareholders.
----------------------
Keywords ----------------------

●● Non-Banking Financial Companies: Non-banking financial companies ----------------------

(NBFCs) are financial institutions that provide banking services without
meeting the legal definition of a bank, i.e. one that does not hold a banking ----------------------
license. ----------------------
●● Venture Capital: Venture capital (also known as VC) is a type of private
equity capital typically provided for early-stage, high-potential, growth ----------------------
companies in exchange for shares of ownership that are expected to ----------------------
generate a return through an eventual realization within a few years as the
successful start-ups go public or are acquired. ----------------------
●● Conflict of Interest: A conflict of interest occurs when an individual or ----------------------
organization is involved in multiple interests, one of which could possibly
corrupt decisions in one capacity due to personal interests in the other. ----------------------

----------------------
Self-Assessment Questions
----------------------
1. Who is a Nominee Director?
----------------------
2. What are the major constituents of the Indian financial system?
3. To whom does a Nominee Director owe duties? ----------------------
4. How can there be a conflict of interest in the nominee director’s role? ----------------------
5. Explain exemption to nominee directors under provisions of Section ----------------------
274(1) (g).

Financial Institutions and Nominee Directors 83

 Notes Answers to Check your Progress
---------------------- Check your Progress 1

---------------------- State True or False.

1. True
----------------------
2. True
----------------------
3. True
----------------------

---------------------- Check your Progress 2

---------------------- State True or False.

1. True
----------------------
2. True
----------------------
3. True
----------------------

---------------------- Check your Progress 3

---------------------- State True or False.

1. True
----------------------
Fill in the blanks.
----------------------
1. The financial institutions are also expected to send a report every six
---------------------- months to the Department of Company Affairs (ROC) bringing out the
steps taken by them to ensure that their Nominee Directors are discharging
---------------------- their responsibilities.
----------------------
Suggested Reading
----------------------
1. www.mca.gov.in/.../CG_Voluntary_Guidelines_2009_24dec2009.pdf
----------------------
2. Chandratre, K R and A N Navare. 2010. Corporate Governance – A
---------------------- Practical Handbook. Bharat Law House Pvt. Ltd.
---------------------- 3. Das, Subhash Chandra. Corporate Governance in India: An Evaluation.
PHI Learning.
----------------------
4. Gupta, L.C. 1989. Corporate Boards and Nominee Directors. Oxford
---------------------- University Press.

---------------------- 5. Gupta, L.C. 1974. Corporate management and Accountability. Chennai:

McMillan Institute for FM and Research.
----------------------

----------------------

----------------------

84 Corporate Governance
Corporate Disclosure and Investor Protection (Listing
Agreement with Stock Exchange) UNIT

Structure:
5.1 Introduction to Capital Market Regulation
5
5.2 Securities and Exchange Board of India
5.3 Policy Measures and Initiatives
5.4 Investor Education and Protection
5.5 Should there be a Separate Law for Investor Protection
5.6 Role of Regulators
5.7 Disclosures and Investor Protection
5.8 Conclusion
Summary
Key Words
Self-Assessment Questions
Answers to Check your Progress
Suggested Reading

Corporate Disclosure and Investor Protection (Listing Agreement with Stock Exchange) 85
 Notes
Objectives
----------------------

---------------------- After going through this unit, you will be able to:
• Discuss capital market regulation.
----------------------
• Explain the role of the Securities and Exchange Board of India.
----------------------
• Describe the policy measures and initiatives undertaken by the
---------------------- government.

---------------------- • Assess the need for investor education and protection.

• Elaborate on the investor protection and disclosure norms in brief.
----------------------

---------------------- 5.1 INTRODUCTION TO CAPITAL MARKET REGULATION

---------------------- In India, the capital market is regulated by the Capital Markets Division
of the Department of Economic Affairs of the Ministry of Finance. The division
---------------------- is responsible for formulating the policies related to the orderly growth and
development of the securities markets (i.e. share, debt and derivatives) as well
----------------------
as protecting the interest of the investors.
---------------------- In particular, it is responsible for (i) institutional reforms in the securities
---------------------- markets, (ii) building regulatory and market institutions, (iii) strengthening
investor protection mechanism, and (iv) providing efficient legislative
---------------------- framework for securities markets, such as Securities and Exchange Board of
India Act, 1992 (SEBI Act 1992); Securities Contracts (Regulation) Act, 1956;
---------------------- and the Depositories Act, 1996. The division administers these legislations and
---------------------- the rules framed there-under.

---------------------- 5.2 SECURITIES AND EXCHANGE BOARD OF INDIA

---------------------- The Securities and Exchange Board of India (SEBI) is the regulatory
authority established under the SEBI Act 1992, in order to protect the interests
----------------------
of the investors in securities as well as promote the development of the capital
---------------------- market. It involves regulating the business in stock exchanges; supervising the
working of stock brokers, share transfer agents, merchant bankers, underwriters,
---------------------- etc; as well as prohibiting unfair trade practices in the securities market.
----------------------
5.3 POLICY MEASURES AND INITIATIVES
----------------------
A number of initiatives have been undertaken by the Government, from
---------------------- time to time, so as to provide financial and regulatory reforms in the primary
and secondary market segments of the capital market. These measures broadly
----------------------
aim to sustain the confidence of investors (both domestic and foreign) in the
---------------------- country’s capital market. The policy initiatives that have been undertaken in the
primary market include:
----------------------

86 Corporate Governance
●● SEBI has notified the disclosures and other related requirements for Notes
companies desirous of issuing Indian depository receipts in India. It has
been mandated that: ----------------------
(i) the issuer must be listed in its home country; ----------------------
(ii) it must not have been barred by any regulatory body; and
----------------------
(iii) it should have a good track record of compliance of securities
market regulations. ----------------------
●● As a condition of continuous listing, listed companies have to maintain ----------------------
a minimum level of public shareholding at 25 per cent of the total shares
issued. The exemptions include: ----------------------
(i) companies which are required to maintain more than 10 per cent, ----------------------
but less than 25 per cent in accordance with the Securities Contracts
(Regulation) Rules, 1957; and ----------------------
(ii) Companies that have two crore or more of listed shares and Rs. ----------------------
1,000 crore or more of market capitalisation.
----------------------
●● SEBI has specified that shareholding pattern will be indicated by listed
companies under three categories, namely, ‘shares held by promoter and ----------------------
promoter group’; ‘shares held by public’ and ‘shares held by custodians
and against which depository receipts have been issued’. ----------------------
●● In accordance with the guidelines issued by SEBI, the issuers are required ----------------------
to state on the cover page of the offer document whether they have opted
for an IPO (Initial Public Offering) grading from the rating agencies. In ----------------------
case the issuers opt for a grading, they are required to disclose the grades ----------------------
including the unaccepted grades in the prospectus.
●● SEBI has facilitated a quick and cost effective method of raising funds, ----------------------
termed as ‘Qualified Institutional Placement (QIP)’ from the Indian
----------------------
securities market by way of private placement of securities or convertible
bonds with the Qualified Institutional Buyers. ----------------------
●● SEBI has stipulated that the benefit of ‘no lock-in’ on the pre-issue shares
----------------------
of an unlisted company making an IPO, currently available to the shares
held by Venture Capital Funds (VCFs)/Foreign Venture Capital Investors ----------------------
(FVCIs), shall be limited to:
----------------------
(i) The shares held by VCFs or FVCIs registered with SEBI for a
period of atleast one year as on the date of filing draft prospectus ----------------------
with SEBI; and
----------------------
(ii) The shares issued to SEBI registered VCFs/FVCIs upon conversion
of convertible instruments during the period of one year prior to the ----------------------
date of filing draft prospectus with SEBI.
----------------------
●● In order to regulate pre-issue publicity by companies which are planning
to make an issue of securities, SEBI has amended the ‘Disclosure and ----------------------
Investor Protection Guidelines’ to introduce ‘Restrictions on Pre-issue
Publicity’. The restrictions, inter alia, require an issuer company to ensure ----------------------

Corporate Disclosure and Investor Protection (Listing Agreement with Stock Exchange) 87
 Notes that its publicity is consistent with its past practices, does not contain
projections/estimates/any information extraneous to the offer document
---------------------- filed with SEBI.
---------------------- The policy initiatives that have been undertaken in the secondary market
include:
---------------------- ●● In continuation of the comprehensive risk management system put in
---------------------- place since May 2005 in T+2 rolling settlement scenario for the cash
market, the stock exchanges have been advised to update the applicable
---------------------- Value at Risk (VaR) margin atleast 5 times in a day by taking the closing
price of the previous day at the start of trading and the prices at 11:00
---------------------- a.m., 12:30 p.m., 2:00 p.m. and at the end of the trading session. This has
---------------------- been done to align the risk management framework across the cash and
derivative markets.
---------------------- ●● In order to strengthen the ‘Know Your Client’ norms and to have sound
---------------------- audit trail of the transactions in the securities market, ‘Permanent Account
Number (PAN)’ has been made mandatory with effect from January 1,
---------------------- 2007 for operating a beneficiary owner account and for trading in the cash
segment.
----------------------
●● In order to implement the proposal on creation of a unified platform for
---------------------- trading of corporate bonds, SEBI has stipulated that the BSE Limited
would set up and maintain the corporate bond reporting platform. The
---------------------- reporting shall be made for all trades in listed debt securities issued by
---------------------- all institutions such as banks, public sector undertakings, municipal
corporations, corporate bodies and companies.
---------------------- ●● In line with the Government of India’s policy on foreign investments
---------------------- in infrastructure companies in the Indian securities market, the limits
for foreign investment in stock exchanges, depositories and clearing
---------------------- corporations, have been specified as follows:
(i) Foreign investment up to 49 per cent will be allowed in these
----------------------
companies with a separate Foreign Direct Investment (FDI) cap
---------------------- of 26 per cent and cap of 23 per cent on Foreign Institutional
Investment (FII);
----------------------
(ii) FDI will be allowed with specific prior approval of Foreign
---------------------- Investment Promotion Board (FIPB);

---------------------- (iii) FII will be allowed only through purchases in the secondary market;
and
----------------------
(iv) FII shall not seek and will not get representation on the board of
---------------------- directors.
●● The application process of FII investment has been simplified and new
----------------------
categories of investment (insurance and reinsurance companies, foreign
---------------------- central banks, investment managers, international organizations) have
been included under FII.
----------------------

88 Corporate Governance
●● Initial issue expenses and dividend distribution procedure for mutual Notes
funds have been rationalized.
●● Mutual funds have been permitted to introduce Gold Exchange Traded ----------------------
Funds. ----------------------
●● In the Government securities market, the RBI has ceased to participate
in primary issues of Central Government securities, in line with the ----------------------
provisions of Fiscal Responsibility and Budget Management Act (FRBM ----------------------
Act).
●● Foreign institutional investors have been allowed to invest in security ----------------------
receipts. ----------------------
Thus, the capital market which plays a vital role in fostering economic
growth of the country, as it augments the quantities of real savings; increases ----------------------
the net capital inflow from abroad; raises the productivity of investments by
----------------------
improving allocation of investible funds; and reduces the cost of capital in the
economy, is well monitored and governed by the SEBI with the objective of ----------------------
investor protection.
----------------------
Check your Progress 1 ----------------------
State True or False. ----------------------
1. In India, the capital market is regulated by the Capital Markets Division
----------------------
of the Department of Economic Affairs of the Ministry of Finance.
2. FDI will be allowed with specific prior approval of Foreign Investment ----------------------
Promotion Board (FIPB) ----------------------
Fill in the blanks.
----------------------
1. The main function of SEBI is to protect the interests of the __________
in securities as well as promote the development of the capital market. ----------------------
2. As a condition of continuous listing, listed companies have to maintain a ----------------------
minimum level of public shareholding at ____ per cent of the total
shares issued. ----------------------

----------------------
Activity 1 ----------------------

Check the website of Securities and Exchange Board of India (SEBI) and ----------------------
find out the different committees that are formed by SEBI for regulation of
----------------------
stock market and investor protection. Study their scope and functions.
----------------------

5.4 INVESTOR EDUCATION AND PROTECTION ----------------------

The Expert Committee under the chairmanship of Dr. J.J. Irani, Director, ----------------------
Tata Sons, with the task of advising the Government on the proposed revisions ----------------------
to the Companies Act, 1956 noted that in addition to FIIs and Institutional

Corporate Disclosure and Investor Protection (Listing Agreement with Stock Exchange) 89
 Notes Investors, small investors were also gradually beginning to regain the confidence
in the capital markets that had been shaken consequent to the stock market
---------------------- scams during the past decade. For the healthy growth of the corporate sector
that this confidence is maintained, corporate systems and processes must be
---------------------- credible and transparent, the interests of the investors may be safeguarded in a
---------------------- manner that enables them to exercise their choice in an informed manner while
making investment decisions, and also providing them with a fair exit option.
---------------------- The concept of investor protection has to be looked at from different angles
taking into account the requirements of various kinds of investors, i.e.
----------------------
(i) investors in equity
----------------------
(ii) large institutional investors
---------------------- (iii) Foreign Investors
---------------------- (iv) investors in debentures and

---------------------- (v) Small investors/deposit holders, etc.

---------------------- 5.5 SHOULD THERE BE A SEPARATE LAW FOR

---------------------- INVESTOR PROTECTION
---------------------- It is essential to ensure safeguarding the interest of investors through proper
articulation of corporate governance in a manner that ensures transparency and
---------------------- accountability. The concept of investor protection cannot be treated in isolation
---------------------- from all the corporate processes. As such a framework exists in the country to
deal with criminal offences. The requirement is to provide a suitable orientation
---------------------- to corporate law so that the investor, irrespective of size, is recognized as a
stakeholder in the corporate processes. Besides, a separate Act would require
---------------------- special enforcement mechanism with attendant coordination issues. Therefore,
---------------------- a separate Act for investor protection is not considered necessary. This aspect
may be dealt with comprehensively and effectively in the Company Law itself.
----------------------
5.6 ROLE OF REGULATORS
----------------------

---------------------- a) The interface between the companies and its stakeholders including
investors should be regulated through the legislative framework of the
---------------------- Companies Act and other civil and criminal laws of the country as well as
by different regulators such as SEBI, RBI, etc. as well as institutions such
---------------------- as the Stock Exchanges through their rules of operation.
---------------------- Sometimes, various agencies pursue action in their respective domain
without regard to the comprehensive picture. This results in overlap of
---------------------- jurisdiction or regulatory gaps. There is a need to bring about coordination
---------------------- in the role and action of various regulatory agencies to enable effective
investor protection. In particular, the capital market regulator, SEBI has a
---------------------- significant role to play in safeguarding the interest of investors. SEBI has
done a commendable job in developing the framework for Indian capital
---------------------- market in its formative stages subsequent to the liberalization process

90 Corporate Governance
 initiated in the 1990s. However, to develop the framework further in a Notes
balanced manner, the regulator must examine different aspects of capital
market operation and the roles played by different intermediaries as also ----------------------
the interaction amongst them so that the capital market is able to deliver
finance to meet requirements of the corporate sector promptly, in a cost ----------------------
effective manner and in keeping with the changing requirements of new ----------------------
business models while ensuring the credibility of its processes in the eyes
of the investors. ----------------------
b) End use of Funds ----------------------
The regulators also need to monitor the end use of funds collected from
----------------------
the public. This should be the responsibility of the shareholders of the
company who should charge company management with the responsibility ----------------------
coupled with adequate authority to ensure prudent and proper use of
funds collected from the public. In doing so however, there is need for ----------------------
transparency so that both the regulators, investigative agencies as well as
----------------------
the investor are able to access appropriate financial information to form
an opinion as to the financial conduct and performance of the company. ----------------------
Therefore, there should be a proper regime of disclosures in the public
domain so that various agencies are able to reach their conclusion in a non- ----------------------
intrusive manner. Private companies could devise their own mechanism
----------------------
to the satisfaction of shareholders and lending institutions.
c) Credit Rating ----------------------
While credit rating could provide indicative information for the investor ----------------------
to assess the general standing of the company, it was not an infallible
assessment of the company. Credit rating is mandated by law for ----------------------
companies accepting public deposits. ----------------------
d) Special Provisions for Depositors
----------------------
i. Risk cover for depositors
----------------------
The Irani Committee felt that while risk cover may not be possible
for equity investors, the insurance option should be explored ----------------------
for deposits with companies. It was felt that while the Banking
companies and NBFCs were regulated by the RBI in the interest ----------------------
of the depositors, there was no similar mechanism in the case of
----------------------
deposits with other types of companies. Depositors, being in the
nature of unsecured creditors, some protection would be available ----------------------
to the depositors if the companies seeking deposits were also
compelled to obtain insurance coverage for deposits. The Committee ----------------------
felt that this was a mechanism which would compel scrutiny into
----------------------
the credit-worthiness of the companies by the insurance companies
in the interest of the depositors and hence recommend the same. ----------------------
Companies accepting public deposits should be required to
----------------------
1. appoint independent directors;
----------------------

Corporate Disclosure and Investor Protection (Listing Agreement with Stock Exchange) 91
 Notes 2. appoint audit/remuneration/stakeholders relationship
committees; ·
----------------------
3. undertake deposit insurance;
---------------------- 4. undertake credit rating;
---------------------- 5. create adequate cash reserves being set aside for repayment of
deposits as may be prescribed by the rules;
----------------------
6. be subjected to close monitoring in respect of implementation
---------------------- of any scheme for repayment of deposits that may be
sanctioned by CLB/Tribunal/Court;
----------------------
7. be subjected to a stringent disclosure regime; and
---------------------- 8. be subjected to stringent penalties for irresponsible/fraudulent
---------------------- behaviour by the companies.
ii. Compensation to Investors
----------------------
The Committee felt that the capital market included investment
---------------------- return into risk bearing instruments. In such cases, the investor
was required to make his own assessment of risk and reward.
----------------------
No compensation could be visualized for such investors whose
---------------------- investments were in risk bearing instruments. Besides, the capital
market also provides an opportunity for an investor to exit.
---------------------- Therefore compensation to investors may be payable only in cases
of established fraud, through a judicial process from the assets of
----------------------
the company or by lifting the corporate veil, those of the promoters
---------------------- or other beneficiaries of such fraud, accessed through a process of
disgorgement.
----------------------
iii. Investor Grievance Redressal
---------------------- The phenomenon of vanishing companies had undermined investor
---------------------- confidence. An effective investor grievance redressal mechanism
at the corporate level could ensure protection of the interest of
---------------------- investors through timely interventions. The Irani Committee
recommended that Stakeholders Relationship Committee should be
---------------------- mandatory for a company having a combined shareholder/deposit
---------------------- holder/debenture holder base of 1000 or more.
iv. Consumer Courts/Capital Market Ombudsman
----------------------
Since shares and securities are also legally deemed to be “goods”
---------------------- under the Consumer Protection Act, 1986, investors should have
the option to approach Consumer Courts under the Consumer
----------------------
Protection Act as a forum to redress their complaints. The extent to
---------------------- which the jurisdiction of the Consumer Courts may apply in such
cases would have to be defined with regard to the nature of the
---------------------- investment and the entitlements arising from the related transaction.
The capacity of the consumer courts to adjudicate on such matters
----------------------

92 Corporate Governance
 will have to be upgraded through capacity building and training of Notes
judicial officers manning such courts. Training institutes may be
set up by Government/Capital Market Regulator to provide such ----------------------
training.
----------------------
With the increase in the number of investors and greater awareness
on their part, timely and simplified institutional structure for dispute ----------------------
resolution is desirable so that the investors are not compelled to
----------------------
resort to costly legal proceedings for protection of their rights.
This would be particularly relevant for the small investors. In this ----------------------
context, the institution of Ombudsman for Capital Market set up by
SEBI should also be strengthened. ----------------------
v. Investor Education and Protection Fund ----------------------
The Government has established an Investor Education and
----------------------
Protection Fund (IEPF) under Sec. 205 C of the Companies Act,
1956 under which unclaimed funds on account of dividends, ----------------------
matured deposits, matured debentures, share application money,
etc. are transferred through the IEPF to the Government by the ----------------------
company on completion of seven years. The Government is
----------------------
required to utilize this amount through an Investor Education and
Protection Fund. For this purpose, the proceeds from the companies ----------------------
are credited to the Consolidated Fund of India through this fund.
This constitutes a cumbersome mechanism and has to be carefully ----------------------
examined in context of the rights of holders of securities and the role
----------------------
of the Government in protecting them while providing resources for
investor education. ----------------------
The Committee recognized a need for ensuring the expropriated ----------------------
amounts to be credited back to the IEPF in their entirety. It would
be desirable if this is enabled through a direct transfer of unclaimed ----------------------
amounts directly to a separate statutory fund under the control,
supervision and management of an Administrator, without routing ----------------------
it through Consolidated Fund of India. The Government should also ----------------------
provide funds to augment the corpus of the fund through grants
which may be properly deployed and managed. Returns from such ----------------------
a Fund should be available to be utilized for a comprehensive
program of education of small investors. The Fund may then be ----------------------
entrusted with full fledged responsibility to carry out activities for ----------------------
education of investors and protection of their rights.
The Committee also recommended that the structure and ----------------------
administration of the Fund should be revamped and their scope ----------------------
expanded to enable flow of correct information to the investors as
well as their education in respect of their rights. Such programs ----------------------
should have special components for education at school/college
level, on line and distance learning, support genuine efforts in the ----------------------
Non-Governmental sector, information collection, research and ----------------------

Corporate Disclosure and Investor Protection (Listing Agreement with Stock Exchange) 93
 Notes analysis on matters of small investor concerns, enable capacity
building of adjudicators such as Consumer Courts on issues
---------------------- involved in legal redressal of investor complaints.
---------------------- vi. State expropriation of dividend
The mechanism of expropriating certain unclaimed amounts due to
----------------------
the investors for transfer to the IEPF as provided in the present law
---------------------- also raises a basic issue as to the right of the State to expropriate
such proceeds when the underlying instrument or security is still
---------------------- in the hands of the investor who has not been able to claim it for
any reason. In view of the Committee, law should enable investors
----------------------
to claim returns on the securities as long as such instruments are
---------------------- held by them. Court ordered refunds should also be made from
the funds available with IEPF. For this purpose, there should be
---------------------- suitable amendment in the law. The procedure for making claims
also needs to be simplified to facilitate reimbursement of such
----------------------
claims speedily and payment of unpaid dividend to the legitimate
---------------------- claimants irrespective of the lapse of time.
vii. Role of NGOs in Investor’s Education
----------------------
Many problems relating to investors, particularly, small investors,
---------------------- can be tackled by educating the investors. Small investors should
---------------------- be encouraged to either invest through Mutual Fund mechanisms,
or should take investment decisions only after getting adequate
---------------------- information about risks and rewards. The investors should also be
encouraged to participate in the proceedings at general meetings
---------------------- (either physically or through postal ballot, including by electronic
---------------------- media) in a constructive manner. This requires improving the
general awareness of the investors through informal mechanisms.
---------------------- The help of various NGOs engaged in investor protection activities
should also be taken for this purpose.
----------------------
viii. Class Action/Derivative Suits
---------------------- A situation may arise whereby the interest of the company may
---------------------- need to be protected from the actions of the persons in control of
the company. At the same time, the interests of the larger body of
---------------------- investors/shareholders may have to be provided with legal avenues
to protect the company in their interest. For this purpose, the
---------------------- law should provide for ‘class action/derivative suits on behalf of
---------------------- depositors/shareholders. The promoters, managers held guilty of
misfeasance/fraud should be asked to pay the legal costs, if proven
---------------------- guilty. This concept has been considered by the Committee while
examining issues relating to minority rights. The Committee felt
---------------------- that similar principles would also be relevant for investor protection
---------------------- and recommended the same.

----------------------

94 Corporate Governance
 Notes
Check your Progress 2
----------------------
State True or False
----------------------
1. The concept of investor protection is separate and is to be treated in
isolation from all the corporate processes. ----------------------
2. It is mandatory for private companies to follow the SEBI for devising their ----------------------
mechanism to the satisfaction of shareholders and lending institutions for
end use of funds. ----------------------
3. As per the consumer protection act 1986, shares are treated as good. ----------------------
Fill in the blanks.
----------------------
1. The unclaimed funds on account of dividends, matured deposits, matured
debentures, share application money, etc. are transferred through the ----------------------
IEPF to the Government by the company on completion of _____ years.
----------------------
----------------------
Activity 2
----------------------
Visit the website of SEBI and study the recent orders passed by SEBI on
----------------------
insider trading in India.
----------------------
5.7 DISCLOSURES AND INVESTOR PROTECTION ----------------------
The primary function of Securities and Exchange Board of India under ----------------------
the SEBI Act, 1992 is the protection of the investors’ interest and the healthy
development of Indian financial markets. It is a very difficult task for the ----------------------
regulators to prevent the scams in the markets considering the great difficulty in ----------------------
regulating and monitoring each and every segment of the financial markets. But
what are the responsibilities of the regulators to set the system right once the ----------------------
scam has taken place, especially the responsibility of redressing the grievances
of the investors so that their confidence is restored? ----------------------

The redressal of investors’ grievances, after a scam, is the most challenging ----------------------
task before the regulators all over the world and the Indian regulator is not an
exception. One of the weapons in the hands of the regulators is the collection ----------------------
and distribution of disgorged money to the aggrieved investors. ----------------------
SEBI had issued guidelines for the protection of the investors through the
Securities and Exchange Board of India (Disclosure and Investor Protection) ----------------------
Guidelines, 2000. These Guidelines have been issued by the Securities and ----------------------
Exchange Board of India under Section 11 of the Securities and Exchange
Board of India Act, 1992. ----------------------
Proper and timely disclosures are central to safeguarding investor ----------------------
interests. The law should ensure a disclosure regime that compels companies
to disclose material information on a continuous, timely and equitable basis. ----------------------

Corporate Disclosure and Investor Protection (Listing Agreement with Stock Exchange) 95
 Notes Information should be disclosed when it is still relevant to the market. The
companies should, therefore, be made to disclose routine information on a
---------------------- periodic basis and price sensitive information on a continuous basis. Capital
market regulator and stock exchanges have a significant role to play in ensuring
---------------------- that such information is accessible by all market participants rather than a few
---------------------- select market players.
Disclosures
----------------------
(A) Basis of related party transactions
----------------------
(i) A statement in summary form of transactions with related parties in
---------------------- the ordinary course of business shall be placed periodically before
the audit committee.
----------------------
(ii) Details of material individual transactions with related parties which
---------------------- are not in the normal course of business shall be placed before the
audit committee.
----------------------
(iii) Details of material individual transactions with related parties or
---------------------- others, which are not on an arm’s length basis should be placed before
the audit committee, together with Management’s justification for
---------------------- the same.
---------------------- (B) Disclosure of Accounting Treatment
---------------------- Where in the preparation of financial statements, a treatment different
from that prescribed in an Accounting Standard has been followed,
---------------------- the fact shall be disclosed in the financial statements, together with the
management’s explanation as to why it believes such alternative treatment
----------------------
is more representative of the true and fair view of the underlying business
---------------------- transaction in the Corporate Governance Report.
(C) Board Disclosures – Risk Management
----------------------
The company shall lay down procedures to inform Board members about
---------------------- the risk assessment and minimization procedures. These procedures shall
---------------------- be periodically reviewed to ensure that executive management controls
risk through means of a properly defined framework.
---------------------- (D) Proceeds from public issues, rights issues, preferential issues,. etc.
---------------------- When money is raised through an issue (public issues, rights issues,
preferential issues etc.), it shall disclose to the Audit Committee, the uses/
---------------------- applications of funds by major category (capital expenditure, sales and
---------------------- marketing, working capital, etc), on a quarterly basis as a part of their
quarterly declaration of financial results. Further, on an annual basis, the
---------------------- company shall prepare a statement of funds utilized for purposes other
than those stated in the offer document/prospectus/notice and place it
---------------------- before the audit committee. Such disclosure shall be made only till such
---------------------- time that the full money raised through the issue has been fully spent. This
statement shall be certified by the statutory auditors of the company. The
----------------------

96 Corporate Governance
 audit committee shall make appropriate recommendations to the Board to Notes
take up steps in this matter.
----------------------
(E) Remuneration of Directors
(i) All pecuniary relationship or transactions of the non-executive ----------------------
directors vis-à-vis the company shall be disclosed in the Annual
----------------------
Report.
(ii) Further the following disclosures on the remuneration of directors ----------------------
shall be made in the section on the corporate governance of the
----------------------
Annual Report:
(a) All elements of remuneration package of individual directors ----------------------
summarized under major groups, such as salary, benefits, ----------------------
bonuses, stock options, pension etc.
(b) Details of fixed component and performance linked incentives, ----------------------
along with the performance criteria. ----------------------
(c) Service contracts, notice period, severance fees.
----------------------
(d) Stock option details, if any – and whether issued at a discount
as well as the period over which accrued and over which ----------------------
exercisable.
----------------------
(iii) The company shall publish its criteria of making payments to non-
executive directors in its annual report. Alternatively, this may be ----------------------
put up on the company’s website and reference drawn thereto in the
----------------------
annual report.
(iv) The company shall disclose the number of shares and convertible ----------------------
instruments held by non-executive directors in the annual report. ----------------------
(v) Non-executive directors shall be required to disclose their
shareholding (both own or held by/for other persons on a beneficial ----------------------
basis) in the listed company in which they are proposed to be ----------------------
appointed as directors, prior to their appointment. These details
should be disclosed in the notice to the general meeting called for ----------------------
appointment of such director
----------------------
(F) Management
----------------------
(i) As part of the directors’ report or as an addition thereto, a
Management Discussion and Analysis report should form part of the ----------------------
Annual Report to the shareholders. This Management Discussion &
Analysis should include discussion on the following matters within ----------------------
the limits set by the company’s competitive position:
----------------------
1. Industry structure and developments.
----------------------
2. Opportunities and Threats.
3. Segment–wise or product-wise performance. ----------------------

4. Outlook. ----------------------

Corporate Disclosure and Investor Protection (Listing Agreement with Stock Exchange) 97
 Notes 5. Risks and concerns.
6. Internal control systems and their adequacy.
----------------------
7. Discussion on financial performance with respect to
---------------------- operational performance.
---------------------- 8. Material developments in Human Resources/Industrial
Relations front, including number of people employed.
----------------------
(ii) Senior management shall make disclosures to the board relating
---------------------- to all material, financial and commercial transactions, where they
have personal interest, that may have a potential conflict with the
---------------------- interest of the company at large (for e.g. dealing in company shares,
---------------------- commercial dealings with bodies, which have shareholding of
management and their relatives, etc.)
---------------------- Explanation: For this purpose, the term “senior management”
---------------------- shall mean personnel of the company who are members of its core
management team excluding the Board of Directors). This would
---------------------- also include all members of management one level below the
executive directors including all functional heads.
----------------------
(G) Shareholders
----------------------
(i) In case of the appointment of a new director or re-appointment of
---------------------- a director, the shareholders must be provided with the following
information:
----------------------
(a) A brief resume of the director;
---------------------- (b) Nature of his expertise in specific functional areas;
---------------------- (c) Names of companies in which the person also holds the
directorship and the membership of Committees of the Board;
---------------------- and
---------------------- (d) Shareholding of non-executive directors as stated in Clause
49 (IV) (E) (v) above
----------------------
(ii) Quarterly results and presentations made by the company to analysts
---------------------- shall be put on company’s web-site, or shall be sent in such a form
so as to enable the stock exchange on which the company is listed
----------------------
to put it on its own web-site.
---------------------- (iii) A board committee under the chairmanship of a non-executive
director shall be formed to specifically look into the redressal of
----------------------
shareholder and investors complaints like transfer of shares, non-
---------------------- receipt of balance sheet, non-receipt of declared dividends, etc.
This Committee shall be designated as ‘Shareholders/Investors
---------------------- Grievance Committee’.
---------------------- (iv) To expedite the process of share transfers, the Board of the company
shall delegate the power of share transfer to an officer or a committee
---------------------- or to the registrar and share transfer agents. The delegated authority

98 Corporate Governance
 shall attend to share transfer formalities atleast once in a fortnight. Notes
(H) Other Disclosures
----------------------
i. Disclosures on materially significant related party transactions that
may have potential conflict with the interests of company at large. ----------------------
ii. Details of non-compliance by the company, penalties, strictures ----------------------
imposed on the company by Stock Exchange or SEBI or any
statutory authority, on any matter related to capital markets, during ----------------------
the last three years.
----------------------
iii. Whistle Blower policy and affirmation that no personnel has been
denied access to the audit committee. ----------------------

iv. Details of compliance with mandatory requirements and adoption ----------------------

of the non-mandatory requirements of this clause
----------------------
5.8 CONCLUSION ----------------------
Use of modern technology, internet, computers, should be used to enhance ----------------------
the efficiency of the disclosure process. It should be possible to submit and
disseminate financial and non-financial information by electronic means. ----------------------

Law should also provide a regime for enforcement of standards for ----------------------
accounting, audit and non-financial disclosure through setting of such
standards and their effective monitoring and enforcement. At the same time, the ----------------------
Government should ensure the professional independence of standard setters, ----------------------
transparency of their activities and adequate means of disciplining defaulters.
There should be a regime of stringent penalties, both civil and criminal for ----------------------
default in disclosure.
----------------------
Summary ----------------------
●● In India, the capital market is regulated by the Capital Markets Division ----------------------
of the Department of Economic Affairs of the Ministry of Finance. It is
responsible for formulating the policies related to the orderly growth and ----------------------
development of the securities markets (i.e. share, debt and derivatives) as ----------------------
well as protecting the interest of the investors.
●● The Securities and Exchange Board of India (SEBI) is the regulatory ----------------------
authority established under the SEBI Act 1992, in order to protect the
----------------------
interests of the investors in securities as well as promote the development
of the capital market. ----------------------
●● A number of initiatives have been undertaken by the Government, from
----------------------
time to time, so as to provide financial and regulatory reforms in the
primary and secondary market segments of the capital market. ----------------------
●● The capital market plays a vital role in fostering economic growth of
----------------------
the country, as it augments the quantities of real savings; increases the
net capital inflow from abroad; raises the productivity of investments by ----------------------

Corporate Disclosure and Investor Protection (Listing Agreement with Stock Exchange) 99
 Notes improving allocation of investible funds; and reduces the cost of capital
in the economy.
---------------------- ●● It is essential to ensure safeguarding the interest of investors through
---------------------- proper articulation of corporate governance in a manner that ensures
transparency and accountability.
---------------------- ●● Many problems relating to investors, particularly, small investors, can be
---------------------- tackled by educating the investors.
●● SEBI had issued guidelines for the protection of the investors through
---------------------- the Securities and Exchange Board of India (Disclosure and Investor
---------------------- Protection) Guidelines, 2000. These Guidelines have been issued by the
Securities and Exchange Board of India under Section 11 of the Securities
---------------------- and Exchange Board of India Act, 1992.
●● Proper and timely disclosures are central to safeguarding investor interests.
----------------------
●● The law should ensure a disclosure regime that compels companies to
---------------------- disclose material information on a continuous, timely and equitable
basis regarding transactions with related parties in the ordinary course
----------------------
of business, disclosure of accounting treatment, risk assessment and
---------------------- minimization procedures, the uses/applications of funds by major
category (capital expenditure, sales and marketing, working capital, etc),
---------------------- on a quarterly basis as a part of their quarterly declaration of financial
results, remuneration of directors, management discussion and analysis,
----------------------
new director or re-appointment of a director and other disclosures.
---------------------- ●● There should be a regime of stringent penalties, both civil and criminal
for default in disclosure.
----------------------

---------------------- Keywords
---------------------- ●● Qualified Institutional Placement: Qualified institutional placement
(QIP) is a capital raising tool, primarily used in India, whereby a listed
----------------------
company can issue equity shares, fully and partly convertible debentures,
---------------------- or any securities other than warrants which are convertible to equity
shares to a Qualified Institutional Buyer. Qualified Institutional Buyers
---------------------- are those institutional investors who are generally perceived to possess
expertise and the financial muscle to evaluate and invest in the capital
----------------------
markets.
---------------------- ●● Know Your Client: Know your customer (KYC) is the due diligence and
bank regulation that financial institutions and other regulated companies
----------------------
must perform to identify their clients and ascertain relevant information
---------------------- pertinent to doing financial business with them.
●● Permanent Account Number: Permanent Account Number (PAN) is
----------------------
unique alphanumeric combination issued to all legal entities identifiable
---------------------- under the Indian Income Tax Act 1961.

----------------------

100 Corporate Governance

 Notes
Self-Assessment Questions
----------------------
1. How is capital market regulation done in India?
2. Define briefly the role of the Securities and Exchange Board of India. ----------------------
3. What are the policy measures and initiatives undertaken by the government ----------------------
in the primary and secondary markets?
----------------------
4. Assess the need and means of investor education and protection.
5. State the investor protection and disclosure norms in brief. ----------------------

----------------------
Answers to Check your Progress
----------------------
Check your Progress 1
----------------------
State True or False.
----------------------
1. True
2. True ----------------------
Fill in the blanks. ----------------------
1. The main function of SEBI is to protect the interests of the investors in ----------------------
securities as well as promote the development of the capital market.
2. As a condition of continuous listing, listed companies have to maintain ----------------------
a minimum level of public shareholding at 25 per cent of the total shares ----------------------
issued.
----------------------

Check your Progress 2 ----------------------

State True or False. ----------------------
1. False ----------------------
2. False
----------------------
3. True
----------------------
Fill in the blanks.
1. The unclaimed funds on account of dividends, matured deposits, matured ----------------------
debentures, share application money, etc. are transferred through the IEPF
----------------------
to the Government by the company on completion of seven years.
----------------------

----------------------

----------------------

----------------------

----------------------

Corporate Disclosure and Investor Protection (Listing Agreement with Stock Exchange) 101
 Notes
Suggested Reading
----------------------
1. http://www.sebi.gov.in/sebiweb/
---------------------- 2. Chandratre, K R and A N Navare. 2010. Corporate Governance – A
Practical Handbook. Bharat Law House Pvt. Ltd.
----------------------
3. Das, Subhash Chandra. Corporate Governance in India: An Evaluation.
---------------------- PHI Learning.
---------------------- 4. Gupta, L.C. 1974. Corporate management and Accountability. Chennai:
McMillan Institute for FM and Research.
----------------------
5. Mallin. Corporate Governance2/e. OUP.
----------------------

----------------------

----------------------
----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

102 Corporate Governance

Corporate Reputation
UNIT

6
Structure:
6.1 Introduction
6.2 Corporate Reputation
6.3 Corporate Legitimacy
6.4 Corporate Crime
6.5 Examples from Real Life
Summary
Key Words
Self-Assessment Questions
Answers to Check your Progress
Suggested Reading

Corporate Reputation 103

 Notes
Objectives
----------------------

---------------------- After going through this unit, you will be able to:
• Describe the concept of corporate reputation and its sources.
----------------------
• Explain how corporates acquire their legitimacy.
----------------------
• Define corporate crime.
---------------------- • Identify some major incidents of corporate crime.
----------------------
6.1 INTRODUCTION
----------------------
The emerging global business environment has undergone extraordinary
---------------------- changes and raised challenges for existing business models to accommodate
these changes. While globalization has been an advantage in business operations,
----------------------
it has also made corporations vulnerable to greater risk, abuse and fraud on
---------------------- a global scale. This emerging scenario has given rise to the serious issue of
the inadequacies of governance and demands for new reforms, bringing new
---------------------- models of operation and re-evaluation of systems.
---------------------- In the United States, numerous numbers of corporate scandals including
Enron’s accounting fraud, WorldCom’s accounting scandals and bankruptcy,
---------------------- destruction of natural environments due to oil spillage, etc. have occurred and
many of them have suffered serious problems such as bankruptcy, corporate
----------------------
crisis, or loss of social credibility.
---------------------- In Japan also, numerous corporate scandals including violation of
---------------------- regulations by fast growing ventures, false food labelling and time limit for
consumption by food companies, accidents resulting from defective products,
---------------------- fraudulent accounting, false anti-quake strength of buildings, etc. have occurred
and many of them have suffered keen plunge of stock prices, sharp diminution
---------------------- of sales, corporate crisis, and even bankruptcy. All these incidents result in
---------------------- damaged corporate reputation and loss of corporate legitimacy.

---------------------- 6.2 CORPORATE REPUTATION

---------------------- A corporate reputation is a collective representation of a firm’s past
actions and results that describes the firm’s ability to deliver valued outcomes
----------------------
to multiple stakeholders. It gauges a firm’s relative standing both internally
---------------------- with employees and externally with its stakeholders, in both its competitive and
institutional environments (Fombrun & Rindova 1996).
----------------------
The company’s reputation can either attract or dissuade business and
---------------------- investment partners, increase or damage sales, recruit or discourage employees,
persuade lawmakers and legislators, and simply touch all audiences. Nowadays,
---------------------- there is an ever increasing focus on the business of corporate reputation
---------------------- management. A firm and solid corporate reputation establishes confidence in

104 Corporate Governance

the future of the company and can boost the success of the business by pushing Notes
profitable sales in busy markets, attracting and retaining capable employees,
dissuade competition, appeal to capital investors and business partners and a ----------------------
number of other advantages.
----------------------
Five Sources of Reputation and Reputation Management
----------------------
Source Measures
----------------------
Visibility 1. Public Prominence
 Public Exposure “On the Street” ----------------------
 Proclaim their National Heritage ----------------------
 A Strong Presence in the Media
----------------------
2. Market Prominence
----------------------
 Powerful Corporate Brand or Brand Portfolio
 Listed on a Public Stock Exchange ----------------------
 Pursue High-profile Corporate Citizenship Practice ----------------------
Distinctiveness 1. Creating reputation platform ----------------------
 Activity Theme
----------------------
 Benefits Theme
----------------------
 Emotional Theme
2. Setting Distinctive Slogans ----------------------
3. Setting Trademarks & Logos ----------------------
4. Setting Corporate Stories
----------------------
Authenticity 1. Process of Discovery
----------------------
 Constructed Identity
2. Internal Expression ----------------------
 Employee Identification ----------------------
3. External Expression ----------------------
 Stakeholder Identification
----------------------
Transparency 1. Cycle of Transparency
----------------------
 Corporate Actions
 Public Disclosure ----------------------
 Evaluations by Government, Press, NGOs and ----------------------
Informed Publics
----------------------
 Trust and License to Operate
----------------------

----------------------

Corporate Reputation 105

 Notes Source Measures
---------------------- 2. Five drivers
 Market Pressure
----------------------
 Social Pressure
----------------------  Political Pressure
----------------------  Legal Pressure
----------------------  Internal Pressure

---------------------- 3. Five platforms of transparency

 Products and Services
----------------------
 Financial Performance
----------------------  Leadership and Vision
----------------------  Corporate Citizenship
----------------------  Workplace Environment
Consistency 1. Establishing a Dialogue with Stakeholders
----------------------
2. Enforcing a Shared Identity
----------------------
3. Implementing an Integrated Communication System
---------------------- 4. Coaching Employees and Partners
---------------------- 5. Adopting a Measurement and Tracking Scorecard

---------------------- (Source: Fombrun & van Riel 2004)

Corporate reputation management is accomplished utilizing a range of
----------------------
highly developed systems and techniques which include reputation scorecards,
---------------------- KPIs or key performance indicators, competitive benchmarks, media content
analysis, journalism surveys, research on PR, evaluation of stakeholders,
---------------------- measurement of internal communications, opinion polls, research on crisis and
new media measurement.
----------------------
These tools and techniques can be designed to bolster corporate reputation
---------------------- management, which may boost and protect the reputation of an organization
from negative publicity from all kinds of media, and to maintain the company’s
----------------------
name in the perception of the public.
---------------------- A comprehensive reputation management for corporations is considered
---------------------- of high quality if and when it includes proactive, reactive and continuous
measures that guarantee the protection and improvement of your company’s
---------------------- reputation. If problems have already arisen and there is a need for a resolution
to control the damage for the company, then reactive reputation management is
---------------------- the best option to create a plan to resolve the issues.
---------------------- 84 percent of global senior executives surveyed by the Economist
Intelligence Unit reported that reputation risk increased significantly. When
---------------------- executives were asked to choose among 13 risk types, reputation risk emerged

106 Corporate Governance

as the most significant threat to global corporate business. Reputation risk Notes
exceeded all others, including regulatory risk, human capital risk, information
technology (IT) network risk, and market risk. Reputation risk was considered ----------------------
even more threatening than terrorism, natural hazards, and physical security.
----------------------
It is important to note that corporate reputation management is only
effective when there is continuous implementation of professionally designed ----------------------
measures with the aim of enhancing the company’s current and standing
----------------------
reputation. As whistleblowers, e-mail trails and deliberate leaks emerged; it
became apparent that corporate downfalls were not accidental. A lengthy trail ----------------------
of missed or misinterpreted signals usually preceded a crisis. By identifying
these overlooked warnings reputation-damaging crises can be prevented before ----------------------
they occurred, and if they did occur, make sure they were never repeated.
----------------------
Common business wisdom had always assumed that an organization
would rebound from an incident within two years due to the inevitable waning ----------------------
of public interest, such an assumption is no longer true in an age of 24/7 media
----------------------
coverage, the internet coupled with the public’s growing appetite for sensational
news, companies and even entire industries were likely to wear a scarlet letter ----------------------
for many years. Stakeholders now demand far more assurance and evidence
before declaring that a company has turned around. ----------------------

----------------------
Check your Progress 1
----------------------
State True or False.
----------------------
1. A corporate reputation is a collective representation of a firm’s past
actions and results, which describes the firm’s ability to deliver valued ----------------------
outcomes to multiple stakeholders.
----------------------
2. A lengthy trail of missed or misinterpreted signals usually preceded a
crisis of governance in a company. ----------------------
Fill in the blanks. ----------------------
1. A firm and solid corporate ________ establishes confidence in the future
of the company and can boost the success of the business ----------------------

----------------------

----------------------
Activity 1
----------------------
Visit the library and understand the meaning of the term reputation
management. ----------------------

----------------------
6.3 CORPORATE LEGITIMACY ----------------------
Legitimacy is a generalized perception or assumption that the actions of ----------------------
an entity are desirable, proper, or appropriate within some socially constructed
system of norms, values, beliefs, and definitions (Suchman 1995; p.574). ----------------------

Corporate Reputation 107

 Notes While legitimacy is the social acceptance resulting from adherence to
regulative, normative or cognitive norms and expectations, reputation is a social
---------------------- comparison among organizations on a variety of attributes, which could include
these same regulative, normative or cognitive dimensions (Deephouse & Carter
---------------------- 2005: p.332).
----------------------
6.4 CORPORATE CRIME
----------------------
Corporates represent a distinct and powerful force at the regional, national
---------------------- and global levels and they wield enormous economic powers. Corporate crimes
---------------------- result from a corporate business houses’ motive to profit at any cost. The major
corporate crimes prevalent in the global economic scenario include within
---------------------- its realm: financial crimes, insider trading, tax evasion, anti-trust, bribery,
siphoning company funds, embezzlement, falsification of financial documents
---------------------- and data, public corruption, etc.
---------------------- Lack of corporate governance is one of the primary factors contributing
to corporate crimes. Corporate governance denotes the set of processes,
---------------------- customs, policies and laws governing the manner in which a corporation is
directed, administered and controlled. One of the principle objects of corporate
---------------------- governance is to ensure accountability of individuals in an organization.
---------------------- The incidence of various frauds and scandals of enormous proportions
have disrupted both the international and domestic capital markets, which
---------------------- has resulted in market regulators being constrained to devise mechanisms
---------------------- and establish standards which act as a barrier to prevent the re-occurrence of
corporate scams and frauds, in the form of corporate governance standards.
---------------------- The legal, regulatory, and political environment within which a corporation
---------------------- operates, determines in large measure the quality of corporate governance.
Corporate governance mechanisms are economic and legal and are often the
---------------------- outcome of political decisions. Properly constituted audit committees and board
risk committees play an important role in the sustained growth of a corporation
---------------------- and eliminate the risk of corporate crimes. With the increase in the number
of business transactions, combined with the lack of effective monitoring and
----------------------
adequate risk management strategies, corporate frauds are a real-time threat for
---------------------- most corporations globally.
Corporate criminality represents the means through which the trust of
----------------------
investors is betrayed by persons in position of responsibility, authority and
---------------------- power in the business sector.
In the United Kingdom, the Cadbury Committee was set up in 1991
----------------------
to make recommendations on Corporate Governance which, inter alia,
---------------------- recommended that all listed companies should mandatorily appoint audit
committees comprising of non-executive directors with clear duties and
---------------------- authority. The guidelines laid down by the Cadbury Committee underscore
shareholder accountability and transparency by recommending a non-executive
---------------------- board of directors in professionally managed companies and a non-family board
---------------------- in family run companies.

108 Corporate Governance

 Similarly, the Blue Ribbon Committee set up in USAmade recommendations Notes
on the effectiveness of Corporate Audit Committees, which should disclose its
self-determined role, structure, and practices. Such transparency is at the heart ----------------------
of good governance, serves to inform investors, and also acts as a disciplinary
measure. ----------------------

In India, as a part of Corporate Governance practices to be followed, ----------------------

the Code on Corporate Governance released by the Confederation of Indian
----------------------
Industries (CII) in 1997, recommended the establishment of Audit Committees
by listed and public companies having a prescribed paid-up capital and turnover. ----------------------
The Audit Committees have been mandated to consider and evaluate all
financial parameters and policies, internal controls, review of auditing, project ----------------------
implementation, reconstruction, merger and amalgamation and any financial
----------------------
irregularities. Audit Committees are also required to periodically consider
internal control systems, the scope of audit including the observations of the ----------------------
auditors, review half-yearly and annual financial statements and also ensure
compliance of internal control systems. ----------------------
The J.J. Irani Committee Report on Indian Company Law, proposed that ----------------------
in order to ensure compliance with corporate governance, the appointment of
independent directors well versed in financial management, audit or accounts ----------------------
should be made by Indian companies.
----------------------
In order to deal with increasing incidents of white collar crimes globally,
the CBI has formed an Economic Intelligence Wing, to investigate and tackle ----------------------
the growing menace of economic crimes. This Wing has been tasked to gather
----------------------
intelligence and also share and act on information furnished by regulatory
authorities. ----------------------
Further, Indian companies listed on the US stock exchanges are obligated ----------------------
to adhere to and comply with the provisions of the US Foreign Corrupt Practices
Act that requires them to accurately record their transactions and imposes ----------------------
several sanctions, fines and penalties for potential violations.
----------------------
In India, establishment of the Serious Fraud Investigation Office is a
landmark development for forensic accountants. Increasing cyber crimes, failure ----------------------
of regulators to track security scams have necessitated forensic accounting.
----------------------
The SFIO was set up in the backdrop of the recent stock market scams,
failure of non-financial banking companies and the phenomena of vanishing ----------------------
companies. The SFIO is a multidisciplinary organization comprising of experts
from the financial sector, capital market, accountancy, forensic audit, taxation, ----------------------
law, information technology, corporate laws, customs and investigation. ----------------------
The prime responsibility of the SFIO is to investigate corporate frauds,
----------------------
referred to it by the governmental authorities and forward its investigation
reports on violations of the provisions of Indian law to the concerned agencies, ----------------------
for prosecution and appropriate action.
----------------------

----------------------

Corporate Reputation 109

 Notes
Check your Progress 2
----------------------
Fill in the blanks.
----------------------
1. Corporate crimes result from a corporate business houses’ motive to
---------------------- _____ at any cost.

---------------------- 2. The legal, regulatory and _________ environment determines in large

measure the quality of corporate governance.
---------------------- Multiple Choice Single Response.
---------------------- 1. Serious Fraud Investigation Office in India is under which department?
---------------------- i. SEBI
ii. Finance ministry
----------------------
iii. RBI
----------------------
iv. Department of company Affairs
----------------------

---------------------- Activity 2
----------------------
Visit a library and find out the causes of the corporate crime committed by
---------------------- Satyam computers.

----------------------
6.5 EXAMPLES FROM REAL LIFE
----------------------
White collar crimes constitute serious legal and regulatory contraventions
---------------------- of the process of law. These crimes are committed by means of deliberate and
planned conspiracies and were originally synonymous with crimes committed
----------------------
by the middle and upper strata of corporate personnel, in the normal course of
---------------------- their employment.
The first major scandal of the 21st century was that of the Enron
----------------------
Corporation, which inflicted tremendous damage upon the company and created
---------------------- a crisis of investor’s confidence and has since become a popular symbol of
wilful corporate fraud and corruption. In the American context, annual losses
---------------------- from white collar crimes have been estimated to be as high as $200 billion.
---------------------- Exxon Corporation paid $125 million in claims for the 1991 Valdez oil
spill for direct and unforeseen damage to the Alaskan wilderness and fisheries.
---------------------- It is contesting another five billion dollars in punitive damages.
---------------------- Since the deregulation of Indian capital markets in 1992, some 3,500
Indian companies and 250 billion rupees of investment have disappeared off
---------------------- the Mumbai Stock Exchange. Fraud is alleged in many of these disappearances.
---------------------- The British pharmaceutical giant GlaxoSmithKline was under investigation
in Germany (2002) and Italy (2003) for bribing doctors to prescribe its drugs
---------------------- with everything from cash payments to luxury travel and World Cup tickets.

110 Corporate Governance

 In July 2003, Xerox reported certain ‘improper’ payments totalling Notes
$700,000 from their Indian subsidiary to government officials.
----------------------
The oil giant Esso was officially blamed for a ‘grievous, tragic and
avoidable’ 1998 gas explosion that killed two workers and injured eight others ----------------------
at its Langford site in southern Australia.
----------------------
On 3 December 1984, the gas leak at a Union Carbide agrochemical
plant in Bhopal, central India, caused the death of 8,000 residents and caused ----------------------
permanent and debilitating injuries to another 150,000 in the surrounding areas.
----------------------
In Satyam computers in January 2009, Chairman B. Ramalinga Raju,
admitted a fraud of Rs. 78 billion causing the regulators and the investors ----------------------
everywhere to re-examine the corporate governance standards. The fact that
company which was audited by one of the most prestigious audit firms and ----------------------
adopted most advanced accounting and transparent IFRS accounting systems
----------------------
much ahead of time can penetrate such a colossal and a global fraud is clearly
eye opening. It was triggered by Satyam’s bid to acquire Maytas companies for ----------------------
US$ 1.6 billion.
----------------------
Summary ----------------------
●● Corporate crimes inflict irreparable damage upon the economy. Over ----------------------
the years, the approach to corporate criminal liability has changed from
there being no concept of liability for crimes committed by corporates ----------------------
to liability based on identification of some persons as the alter ego of
----------------------
the company. To combat the frauds effectively, one needs the active
support of the government at every stage. Governmental authorities must ----------------------
take more aggressive actions against fraud, corrupt practices, and other
measures designed to control corporate and white collar crimes. ----------------------

----------------------
Keywords
----------------------
●● Corporate Citizenship: The role of a company in considering its
responsible involvement within the wider community. It is a form of ----------------------
corporate self-regulation integrated into a business model.
----------------------
●● Forensic Accounting: Forensic accounting is the specialty practice area
of accountancy that describes engagements that result from actual or ----------------------
anticipated disputes or litigation.
----------------------

Self-Assessment Questions ----------------------

1. Define corporate reputation. What are the sources of corporate reputation? ----------------------

2. Name the types of risks which are faced by an organization. ----------------------

3. Distinguish between corporate reputation and legitimacy. ----------------------
4. What are the types of cases of corporate crime which are seen in an
----------------------
organization?

Corporate Reputation 111

 Notes 5. Outline the measures taken by various nations to detect and deter corporate
crime.
----------------------
6. Name five instances of crimes committed by corporates and specify their
---------------------- nature.

---------------------- Answers to Check your Progress

---------------------- Check your Progress 1
---------------------- State True or False.
---------------------- 1. True
2. True
----------------------
Fill in the blanks.
----------------------
1. A firm and solid corporate reputation establishes confidence in the future
---------------------- of the company and can boost the success of the business.
----------------------
Check your Progress 2
----------------------
Fill in the blanks.
----------------------
1. Corporate crimes result from a corporate business houses’ motive to profit
---------------------- at any cost.

---------------------- 2. The legal, regulatory and political environment determines in large

measure the quality of corporate governance.
---------------------- Multiple Choice Single Response.
---------------------- 1. Serious Fraud Investigation Office in India is under which department?
---------------------- iv. Department of company Affairs

----------------------
Suggested Reading
----------------------
1. http://www.sebi.gov.in/sebiweb/
----------------------
2. Chandratre, K R and A N Navare. 2010. Corporate Governance – A
---------------------- Practical Handbook. Bharat Law House Pvt. Ltd.
3. Gupta, L.C. 1974. Corporate management and Accountability. Chennai:
----------------------
McMillan Institute for FM and Research.
---------------------- 4. Mallin. Corporate Governance2/e. OUP.
---------------------- 5. McGregor, Lynn. The human face of Corporate Governance. Palgrave
Publishers.
----------------------

----------------------

----------------------

112 Corporate Governance

Corporate Governance and Regulatory Bodies
UNIT

7
Structure:
7.1 Introduction
7.2 SEBI as a Regulator
7.3 IRDA
7.4 RBI
7.5 PFRDA
7.6 Role of Ministry of Corporate Governance
7.7 Conclusion
Summary
Key Words
Self-Assessment Questions
Answers to Check your Progress
Suggested Reading

Corporate Governance and Regulatory Bodies 113

 Notes
Objectives
----------------------

---------------------- After going through this unit, you will be able to:
• Explain the regulation mechanism in India
----------------------
• Elaborate on the regulatory role of the Securities and Exchange Board
---------------------- of India
• Recognise I.R.D.A’s role
----------------------
• State the responsibility of R.B.I. in the financial system
---------------------- • Appreciate the function of Ministry of Corporate Governance
----------------------
7.1 INTRODUCTION
----------------------
There are four primary financial regulators - Reserve Bank of India,
---------------------- Insurance Regulatory and Development Authority, Securities Exchange Board
---------------------- of India and Pension Fund Regulatory Development Authority in the Indian
Financial System. The RBI is the apex body in the system. The governmental
---------------------- role is played by the Ministry of Corporate Affairs.

---------------------- Corporate governance specifies the relationship among various primary

participants (shareholders, directors, and managers) in determining the directions
---------------------- and performance of corporations. Because insiders have an inherent informational
advantage over outside stakeholders, it is required that the governance systems
---------------------- empower independent parties to monitor their behaviour and reports. The legal
---------------------- and regulatory system of a country plays a crucial role in creating an effective
corporate governance mechanism in a country, the development of markets and
---------------------- economic growth. The regulatory bodies in India have advocated comprehensive
and rigorous corporate governance reforms which emphasize the importance
---------------------- of the credibility and integrity of the listed companies, the responsibilities of
---------------------- minority shareholders, and the necessity for information disclosure. The regulatory
framework of corporate governance consists of:
----------------------
1. Laws
---------------------- a) Companies Bill 2008
---------------------- b) Securities Law - The Securities Contract (Regulations) Act, 1956;
and the Securities and Exchange Board of India (SEBI) Act, 1992
----------------------
2. Accounting Standards
---------------------- 3. Listing Rules
---------------------- 4. Official Codes and Guidelines
---------------------- a) Corporate Governance Voluntary Guidelines 2009 (December 24,
2009)
----------------------
b) Guidelines on Corporate Governance for Central Public Sector
---------------------- Enterprises 2007 (June 2007)

114 Corporate Governance

 c) Enhanced Disclosure and Investor Protection Guidelines (November Notes
2002)
----------------------
d) National Code on Corporate Governance (1999)
5. Private Codes and Guidelines ----------------------
a) CII Code on Corporate Governance (April 1998) ----------------------
6. Policy Committees ----------------------
a) Expert Group Headed by Justice M.H. Kania (former chief justice of
India) for Suggesting Amendments to SEBI Act, 1992 (July 2005) ----------------------

b) Expert Committee on Company Law (May 2005) ----------------------

c) Murthy Committee on Corporate Governance (February 2003) ----------------------
d) Chandra Committee on Auditing and Governance (2002)
----------------------
e) Task Force on Corporate Excellence (November 2000)
----------------------
7.2 SEBI AS A REGULATOR ----------------------
SEBI is the regulator for the Security Market in India. In 1988, the ----------------------
Securities and Exchange Board of India (SEBI) was established by the
Government of India through an executive resolution, and was subsequently ----------------------
upgraded as a fully autonomous body. On April 12, 1992 the Securities and
----------------------
Exchange Board of India was constituted in accordance with the provisions of
the Securities and Exchange Board of India Act 1992. ----------------------
Preamble: “…To protect the interests of investors in securities and to promote ----------------------
the development of, and to regulate the securities market and for matters
connected therewith or incidental thereto”. ----------------------
Functions of SEBI: ----------------------
SEBI is responsible for
----------------------
1. securing the interests of investors in securities and
----------------------
2. facilitating the growth of and
3. monitoring the securities market in an appropriate manner ----------------------
4. monitoring and controlling the performance of stock exchange and ----------------------
derivative markets
----------------------
5. listing and monitoring the functioning of stock brokers, sub brokers, share
transfer agents, bankers to an issue, trustees of trust deeds, registrars to ----------------------
an issue, merchant bankers, underwriters, portfolio managers, investment
advisers and others associated with securities markets by any means ----------------------

6. monitoring and controlling the functioning of venture capital funds and ----------------------
mutual funds
----------------------
7. controlling unjust and dishonest trade practices in the security markets
and insider trading in the security market ----------------------

Corporate Governance and Regulatory Bodies 115

 Notes 8. undertaking periodic audits of stock exchanges, mutual funds, individuals
and self regulatory organizations associated with the security market
----------------------
Stock Exchanges in India were continued to be regulated directly by
---------------------- the Government of India under powers conferred in terms of the Securities
Contract (Regulations) Act 1956 up to the late Eighties. In the year 1988,
---------------------- the Government of India constituted the Securities and Exchange Board of
India (popularly referred as ‘SEBI’) with Head office at Mumbai through an
----------------------
executive resolution to act as the independent regulator of Stock exchanges, the
---------------------- primary market, Mutual Funds, etc. The Capital Issues (Control) Act of 1947
was abolished in May 1992. The abolition of CCI (Controller of Capital Issues)
---------------------- and allowing free pricing of issues prompted many companies to raise funds
from the equity market at a premium. The ground was cleared for the incoming
----------------------
of a market regulatory authority replacing direct government control.
---------------------- SEBI was made into a statutory corporate body in the year 1992 with
the passing of the Securities and Exchange Board of India Act in 30th January
----------------------
1992. The objects clause of the Act explained the scope and purpose of the Act
---------------------- in the following words “An Act to provide for the establishment of a Board to
protect the interests of investors in securities and to promote the development
---------------------- of, and to regulate the securities market and for matters connected therewith or
incidental thereto”.
----------------------
Subsequently on 13th September 1994, the Government of India through
---------------------- a Gazette Notification delegated the powers conferred to it under the Securities
Contracts (Regulation) Act 1956 to SEBI. The Government in the year 1996
----------------------
also passed the Depositories Act 1996, which came into retrospective operation
---------------------- from 20 September 1995. SEBI was made the Regulator for monitoring the
due compliance and enforcing the provisions of this Act also. The following
---------------------- departments of SEBI take care of the activities in the secondary market:
---------------------- ●● Market Intermediaries Registration and Supervision Department
(MIRSD) - concerned with the registration, supervision, compliance
---------------------- monitoring and inspections of all market intermediaries in respect of all
---------------------- segments of the markets, such as equity, equity derivatives, debt and debt
related derivatives.
---------------------- ●● Market Regulation Department (MRD) - concerned with formulation
of new policies as well as supervising the functioning and operations
----------------------
(except relating to derivatives) of securities exchanges, their subsidiaries,
---------------------- and market institutions such as clearing and settlement organizations and
depositories.
----------------------
●● Derivatives and New Products Departments (DNPD) - concerned
---------------------- with supervising trading at derivatives segments of stock exchanges,
introducing new products to be traded and consequent policy changes.
----------------------
Organizational Structure of SEBI
---------------------- 1. The Board, i.e. SEBI consists of a Chairman; two members from amongst
the officials of the Ministries of the Central Government dealing with
----------------------

116 Corporate Governance

 Finance and Law; one member from amongst the officials of the Reserve Notes
Bank of India constituted under section 3 of the Reserve Bank of India Act,
1934; two other members, to be appointed by the Central Government. ----------------------
2. The general superintendence, direction and management of the affairs ----------------------
of the Board shall vest in a Board of members, which may exercise all
powers and do all acts and things which may be exercised or done by the ----------------------
Board.
----------------------
3. Save as otherwise determined by regulations, the Chairman shall also
have powers of general superintendence and direction of the affairs of the ----------------------
Board and may also exercise all powers and do all acts and things which
----------------------
may be exercised or done by the Board.
4. The Chairman and members shall be appointed by the Central Government ----------------------
and the members shall be nominated by the Central Government and the
----------------------
Reserve Bank of India respectively and shall be from amongst the persons
of ability, integrity and standing who have shown capacity in dealing ----------------------
with problems relating to securities market or have special knowledge
or experience of law, finance, economics, accountancy, administration or ----------------------
in any other discipline which, in the opinion of the Central Government,
----------------------
shall be useful to the Board.
Powers and Functions of the Board (SEBI): ----------------------

These are detailed in the second chapter of the Act under Section 11(1). ----------------------
The section points out that it shall be the duty of the Board to protect the interests
of the investors in securities and to promote and to develop, and to regulate ----------------------
the securities market by such measures as it thinks fit. In brief the statutory ----------------------
objectives of the SEBI enshrined in the SEBI Act are four-fold:
1. Protection of investor’s interests in securities ----------------------
2. Promotion of the development of the securities market ----------------------
3. Regulation of the securities market and
----------------------
4. Matters connected therewith and incidental thereto.
By way of augmentation of the above core objectives, the different powers ----------------------
and functions of SEBI are: ----------------------
a. regulating the business in stock exchanges and any other securities
----------------------
markets;
b. registering and regulating the working of stock brokers, sub-brokers, share ----------------------
transfer agents, bankers to an issue, trustees of trust deeds, registrars to
----------------------
an issue, merchant bankers, underwriters, portfolio managers, investment
advisers and such other intermediaries who may be associated with ----------------------
securities markets in any manner.
----------------------
(ba) registering and regulating the working of the depositories,
participants, custodians of securities, foreign institutional investors, ----------------------
credit rating agencies and such other intermediaries as the Board
may, by notification, specify in this behalf. ----------------------

Corporate Governance and Regulatory Bodies 117

 Notes c. registering and regulating the working of venture capital funds and
collective investment schemes including mutual funds;
----------------------
d. promoting and regulating self-regulatory organizations;
---------------------- e. prohibiting fraudulent and unfair trade practices relating to securities
markets;
----------------------
f. promoting investors’ education and training of intermediaries of securities
---------------------- markets;
---------------------- g. prohibiting insider trading in securities;

---------------------- h. regulating substantial acquisition of shares and take-over of companies;

i. calling for information from, undertaking inspection, conducting
---------------------- inquiries and audits of the stock exchanges, mutual funds and other
---------------------- persons associated with the securities market and intermediaries and self-
regulatory organizations in the securities market;
----------------------
j. performing such functions and exercising such powers under the provisions
---------------------- of Securities Contracts (Regulation) Act, 1956, as may be delegated to it
by the Central Government;
----------------------
k. levying fees or other charges for carrying out the purpose of this section;
---------------------- l. conducting research for the above purposes;
---------------------- (la) calling from or furnishing to any such agencies, as may be specified
by the Board, such information as may be considered necessary by
---------------------- it for the efficient discharge of its functions;
---------------------- m. performing such other functions as may be prescribed.
---------------------- For the due exercise of its responsibilities under the Act, the Board is
vested with the same powers as are vested in a civil court, in respect of the
---------------------- following matters, namely:-
---------------------- i. the discovery and production of books of account and other documents, at
such place and such time as may be specified by the Board;
----------------------
ii. summoning and enforcing the attendance of persons and examining them
---------------------- on oath;

---------------------- iii. inspection of any books, registers and other documents of any person
referred to in section 12, at any place.
---------------------- Matters to be Disclosed by the Companies to the Board [Section
---------------------- 11(A)] The Board may, for the protection of investors, specify, by regulations,-
a. the matters relating to issue of capital, transfer of securities and other
---------------------- matters incidental thereto; and
---------------------- b. the manner in which such matters, shall be disclosed by the
companies.
----------------------
Power to Issue Directions [Section 11(B)] SEBI is empowered to issue
---------------------- Directions to the following intermediaries:

118 Corporate Governance

●● stock-broker, sub-broker, share transfer agent, banker to an issue, trustee Notes
of trust deed, registrar to an issue, merchant banker, underwriter, portfolio
manager, investment adviser and such other intermediary who may be ----------------------
associated with securities market
----------------------
●● Depository, depository participant, custodian of securities, foreign
institutional investor, credit rating agency or any other intermediary ----------------------
associated with the securities market
----------------------
●● sponsors of venture capital funds, or collective investment schemes
including mutual funds and ----------------------
●● any Company with regards to matters to be disclosed by the Companies ----------------------
as specified in Section 11(A)
Registration of Intermediaries connected with Securities Market: ----------------------
Different intermediaries mentioned above can commence functioning in their
----------------------
respective activities only after registration with SEBI and complying with
requirements as stated under specific regulations intended for each. ----------------------
(1) No stock-broker, sub-broker, share transfer agent, banker to an ----------------------
issue, trustee of trust deed, registrar to an issue, merchant banker, underwriter,
portfolio manager, investment adviser and such other intermediary who may ----------------------
be associated with securities market shall buy, sell or deal in securities except
under, and in accordance with, the conditions of a certificate of registration ----------------------
obtained from the Board in accordance with the regulations made under the Act. ----------------------
(1A) No depository, participant, custodian of securities, foreign
institutional investor, credit rating agency or any other intermediary associated ----------------------
with the securities market as the Board may by notification in this behalf specify, ----------------------
shall buy or sell or deal in securities except under and in accordance with the
conditions of a certificate of registration obtained from the Board in accordance ----------------------
with the regulations made under the Act.
----------------------
(1B) No person shall sponsor or cause to be sponsored or carry on or cause
to be carried on any venture capital funds or collective investment schemes ----------------------
including mutual funds, unless he obtains a certificate of registration from the
Board in accordance with the regulations. ----------------------

SEBI has issued detailed Rules and Regulations to be adhered to by each ----------------------
of the intermediaries specified above.
----------------------
Establishment of Securities Appellate Tribunals: The Central
Government shall by notification, establish one or more Appellate Tribunals to ----------------------
be known as the Securities Appellate Tribunal to function as Appellate Authority
----------------------
and hear appeals.
Civil Court not to have jurisdiction (Section 15Y): No civil court shall ----------------------
have jurisdiction to entertain any suit or proceeding in respect of any matter ----------------------
which an adjudicating officer appointed under the Act or a Securities Appellate
Tribunal constituted under the Act is empowered by or under the Act to determine ----------------------
and no injunction shall be granted by any court or other authority in respect of
any action taken or to be taken in pursuance of any power conferred by or under ----------------------

Corporate Governance and Regulatory Bodies 119

 Notes the Act. However, appeals against the decision of Securities Appellate Tribunal
can be preferred before a High Court.
----------------------
Achievements of SEBI
---------------------- 1. Automated On-line Screen Based Trading System: The trading system
has become on-line, fully automated, screen-based. Open outcry is now
----------------------
outmoded and discarded. Manual trading has yielded place to terminal
---------------------- trading. It has brought about efficiency and transparency. It has cut
down the cost, time and risk involved. A large number of participants,
---------------------- irrespective of their location, now trade with one another simultaneously,
improving the depth and liquidity of the market. The system provides
----------------------
perfect audit trail. Given the size and complexity of the country, that we
---------------------- could click the system and stabilize it so successfully is, by no means, a
mean achievement.
----------------------
2. Dematerialization of Securities: A cent percent dematerialization-
---------------------- trading dream, too, has virtually materialized. Today, the investing public
has been saved from the trouble of safe keeping, bad delivery, delayed
---------------------- delivery, share duplicity, bogus documents and also from irritating
headaches of intimation of change of address, watching the receipt of
----------------------
bonus or rights shares, etc.
---------------------- 3. Rolling Settlement: Rolling settlement on T+2 basis was made
---------------------- compulsory for all scripts on BSE and NSE.
4. Elimination of Counterparty Risk & Investor Protection: Following
---------------------- introduction of T+2 rolling settlement, the risk containment measures were
---------------------- rationalized. Based on classification of the scripts depending on liquidity and
volatility, VaR based margins have been made applicable to these scripts.
---------------------- 5. G-Sec Trading in Stock Exchanges: In order to make the market more
---------------------- efficient and provide more investment opportunities to the investors,
trading in government securities on stock exchanges was permitted.
----------------------
6. Establishment Central Listing Authority: With a view to harmonizing
---------------------- the listing requirements across the various stock exchanges and
centralizing the listing powers in one single authority, an independent
---------------------- body viz. Central Listing Authority has been conceived and is to come
into being.
----------------------
7. Demutualization of Stock Exchanges: In order to eliminate conflict
---------------------- of interest situation and ensure alignment of investors’ interest with the
Exchanges, the process of demutualization and corporatization of stock
----------------------
exchange has already been initiated.
---------------------- 8. Trading in Derivatives Products: The introduction of the derivatives
---------------------- in the market and the gradual enlargement of the basket of products has
further enhanced the liquidity, efficacy of the market and also provided
---------------------- hedging opportunities. The risk management system which includes VAR
based margining, online monitoring of margin and automatic disablement
---------------------- features has stood the test of stress.

120 Corporate Governance

9. Corporate Accountability & Corporate Governance: The corporate Notes
governance standard is a crucial factor for ensuring investors confidence.
While the Company Law would take care of the basic requirement of ----------------------
the form of corporate governance structure, SEBI is concerned with the
corporate governance practices on on-going basis. Disclosures on corporate ----------------------
governance standard observation form part of the listing agreement ----------------------
requirement. Simultaneously, SEBI encouraged the credit rating agencies
- ICRA and CRISIL, to evolve a suitable corporate governance index as ----------------------
a measure of wealth creation by the corporates. Some of the companies
have been rated against this index. ----------------------

10. Enforcement of Code of Conduct for Market Intermediaries: In the ----------------------

dynamic conditions of the market, the regulation cannot remain static.
----------------------
As a measure of regulatory dynamism, various regulatory guidelines
concerning intermediaries, listed entities, and trade practices have been ----------------------
reviewed and suitably modified.
----------------------
11. Public Issues - Disclosure & Investor Protection Norms: Over the
years, SEBI has taken several initiatives to improve the operational ----------------------
efficiency and transparency in equity market and to provide investors
with the security issues of high quality and to enable entities to raise ----------------------
resources in a cost effective manner. The disclosures prescribed for
----------------------
new issues in India are comparable, in terms of contents and stringency,
to those obtaining in most of the advanced markets. Entry norms and ----------------------
track record criteria have also been attuned to ensure the quality of new
issues and to protect the investors. These relate to publication of annual ----------------------
audited results and quarterly results in prescribed format and time
----------------------
frame, consolidated results, segmental reporting, cash flow, auditors
qualifications and their impact quantification, and disclosures of certain ----------------------
transactions. To enable electronic filing of information, Electronic Data
Information Filing System has been set up in association with National ----------------------
Informatics Centre.
----------------------
12. Vigilance Enforcement & Curbs on Market Manipulation: The
regulations have been overhauled; risk management system has been ----------------------
streamlined; code of conduct for various intermediaries and players has
----------------------
been put in place. While these are reviewed and modified from time to
time, the major area of concern for the regulator and the investors is the ----------------------
possibility of price manipulation and malpractices.
----------------------
13. Investor Awareness Programs: SEBI has started conducting Investor
Awareness Programs at various places across the country in collaboration ----------------------
with different agencies.
----------------------
Safeguards for Investors
A number of steps have been taken to ensure that investors are enabled to ----------------------
make informed choices and decisions and achieve fair deals in their financial ----------------------
dealings. Some of them are:
----------------------

Corporate Governance and Regulatory Bodies 121

 Notes 1. SEBI brought a scheme to enable individuals and companies to disclose
the irregularities in reporting of acquisition of shares under the SEBI
---------------------- (SAST) Regulations, 1997.
---------------------- 2. Introduction of scientific model for risk management, based on VaR.
3. Introduction of Electronic Data Information Filing and Retrieval
----------------------
(EDIFAR) System to facilitate electronic filing of certain documents/
---------------------- statements by the listed companies and their immediate disclosure to the
market participants.
----------------------
4. Launch of Securities Market Awareness Campaign.
---------------------- 5. Introduction of rating corporate governance on the principles of wealth
---------------------- creation, wealth management and wealth sharing.
6. Implementation of a comprehensive risk management system for Mutual
---------------------- Funds.
---------------------- 7. Establishment of the Central Listing Authority (CLA). Issuance of
necessary guidelines/circulars for Corporatization and Demutualization
---------------------- of stock exchanges.
---------------------- 8. Introduction of the trading of Government Securities on the Stock
Exchanges.
----------------------
9. Posting all the orders passed by the Securities Appellate Tribunal (SAT)
---------------------- and the Board on the SEBI website, to bring in regulatory transparency.
---------------------- 10. Issuance of guidelines on Delisting of Securities from the Stock
Exchanges.
----------------------
11. Establishment of inter-depository transfer through on-line connectivity
---------------------- between CDSL and NSDL.

---------------------- 12. Announcement of Accounting Standards and disclosure practices of the

Indian companies by ICAI in consultation with SEBI in accordance with
---------------------- International Accounting Standards.
---------------------- 13. Expansion of the derivatives products basket.
14. Introduction of benchmarking of all the Mutual Fund Schemes to facilitate
----------------------
the understanding of the investors about the performance of the funds.
---------------------- Introduction of nomination facility for the unit holders of mutual funds.
15. Simplification of documentation procedure for FII registration and
----------------------
reduction of registration fee for FIIs.
---------------------- Responsibility vs. Powers
---------------------- Statutorily, SEBI is required to develop the Indian securities market,
regulate it, and, importantly, to protect the investors. For this, SEBI has been
---------------------- granted the powers of a Civil Court to inspect the books or records of any
---------------------- listed or to-be-listed companies. The powers given to SEBI included those to
levy penalty against corporates and individuals for violation of regulations,
---------------------- manipulation of market, insider trading and unfair practices. It can suspend the

122 Corporate Governance

trading of any security, restrain persons from accessing the securities market or Notes
prohibit any person associated with the securities market from buying, selling
or dealing in securities or direct any intermediary or person associated with the ----------------------
securities market not to dispose off an asset forming part of transaction under
investigation or impound the proceeds or securities of such transactions, and ----------------------
attach bank accounts. Significantly, search and seizure powers have also been ----------------------
vested with SEBI. It can even issue immediate cease and desist order, where
warranted. ----------------------
SEBI was established by the Government of India with the objectives ----------------------
towards protecting the interest of the investors in securities; to promote the
development of, and regulate the securities market and matters connected ----------------------
therewith or incidental to. SEBI has drawn a comprehensive Strategic Action
----------------------
Plan in order to realize this vision. The plan envisages achievement of strategic
aims laid down for: ----------------------
a. corporate,
----------------------
b. markets, and
----------------------
c. regulatory regime
----------------------
Check your Progress 1
----------------------
Fill in the blanks.
----------------------
1. There are _____ primary financial regulators in India.
----------------------
2. The ____ is the apex body in the system of financial regulators in India.
State True or False. ----------------------

1. SEBI has been granted the powers of a Civil Court to inspect the books ----------------------
or records of any listed or to-be-listed companies.
----------------------
2. The chairman and members of SEBI are appointed by the central
government. ----------------------

----------------------
Activity 1 ----------------------

Check the website of SEBI for the policy on whistle blowers. List down the ----------------------
protection given to a corporate whistle blower as per SEBI website.
----------------------

7.3 IRDA ----------------------

----------------------
Evolution of Insurance in India
Insurance in India has evolved over time heavily drawing from other ----------------------
countries, England in particular. 1818 saw the advent of life insurance business
----------------------
in India with the establishment of the Oriental Life Insurance Company in
Calcutta. This Company however failed in 1834. In 1829, the Madras Equitable ----------------------

Corporate Governance and Regulatory Bodies 123

 Notes had begun transacting life insurance business in the Madras Presidency. 1870
saw the enactment of the British Insurance Act and in the last three decades of
---------------------- the nineteenth century, the Bombay Mutual (1871), Oriental (1874) and Empire
of India (1897) were started in the Bombay Residency. This era, however,
---------------------- was dominated by foreign insurance offices which did good business in India,
---------------------- namely Albert Life Assurance, Royal Insurance, Liverpool and London Globe
Insurance and the Indian offices were up for hard competition from the foreign
---------------------- companies.
---------------------- In 1914, the Government of India started publishing returns of Insurance
Companies in India. The Indian Life Assurance Companies Act, 1912 was the
---------------------- first statutory measure to regulate life business. In 1928, the Indian Insurance
Companies Act was enacted to enable the Government to collect statistical
----------------------
information about both life and non-life business transacted in India by Indian
---------------------- and foreign insurers including provident insurance societies. In 1938, with a
view to protecting the interest of the Insurance public, the earlier legislation
---------------------- was consolidated and amended by the Insurance Act, 1938 with comprehensive
provisions for effective control over the activities of insurers.
----------------------
The Insurance Amendment Act of 1950 abolished Principal Agencies.
---------------------- However, there were a large number of insurance companies and the level of
competition was high. There were also allegations of unfair trade practices. The
----------------------
Government of India, therefore, decided to nationalize insurance business.
---------------------- An Ordinance was issued on 19th January, 1956 nationalizing the Life
Insurance sector and Life Insurance Corporation came into existence in the same
----------------------
year. The LIC absorbed 154 Indian, 16 non-Indian insurers as also 75 provident
---------------------- societies—245 Indian and foreign insurers in all. The LIC had monopoly till the
late 90s when the Insurance sector was reopened to the private sector.
----------------------
The history of general insurance dates back to the Industrial Revolution in
---------------------- the west and the consequent growth of sea-faring trade and commerce in the 17th
century. It came to India as a legacy of British occupation. General Insurance in
---------------------- India has its roots in the establishment of Triton Insurance Company Ltd., in the
---------------------- year 1850 in Calcutta by the British. In 1907, the Indian Mercantile Insurance
Ltd. was set up. This was the first company to transact all classes of general
---------------------- insurance business.

---------------------- 1957 saw the formation of the General Insurance Council, a wing of the
Insurance Association of India. The General Insurance Council framed a code
---------------------- of conduct for ensuring fair conduct and sound business practices.
---------------------- In 1968, the Insurance Act was amended to regulate investments and set
minimum solvency margins. The Tariff Advisory Committee was also set up
---------------------- then.
---------------------- In 1972 with the passing of the General Insurance Business (Nationalization)
Act, general insurance business was nationalized with effect from 1st January,
---------------------- 1973. 107 insurers were amalgamated and grouped into four companies, namely
National Insurance Company Ltd., the New India Assurance Company Ltd., the
----------------------

124 Corporate Governance

Oriental Insurance Company Ltd and the United India Insurance Company Ltd. Notes
The General Insurance Corporation of India was incorporated as a company in
1971 and it commenced business on January 1st 1973. ----------------------
The process of re-opening of the sector began in the early 1990s. In 1993, ----------------------
the Government set up a committee under the chairmanship of RN Malhotra,
former Governor of RBI, wherein, it recommended that the private sector be ----------------------
permitted to enter the insurance industry and that foreign companies be allowed
to enter by floating Indian companies, preferably a joint venture with Indian ----------------------
partners. ----------------------
Following the recommendations of the Malhotra Committee report, in
1999, the Insurance Regulatory and Development Authority (IRDA) was ----------------------
constituted as an autonomous body to regulate and develop the insurance ----------------------
industry. The IRDA was incorporated as a statutory body in April, 2000. The
key objectives of the IRDA include promotion of competition so as to enhance ----------------------
customer satisfaction through increased consumer choice and lower premiums,
while ensuring the financial security of the insurance market. ----------------------
The IRDA opened up the market in August 2000 with the invitation for ----------------------
application for registrations. Foreign companies were allowed ownership of up
to 26%. The Authority has the power to frame regulations under Section 114A ----------------------
of the Insurance Act, 1938 and has from the year 2000 onwards framed various
----------------------
regulations ranging from registration of companies for carrying on insurance
business to protection of policyholders’ interests. ----------------------
In December, 2000, the subsidiaries of the General Insurance Corporation
----------------------
of India were restructured as independent companies and at the same time GIC
was converted into a national re-insurer. Parliament passed a bill de-linking the ----------------------
four subsidiaries from GIC in July, 2002.
----------------------
Today there are 24 general insurance companies including the ECGC
and Agriculture Insurance Corporation of India and about 23 life insurance ----------------------
companies operating in the country.
----------------------
The insurance sector is a colossal one and is growing at a rapid rate.
Together with banking services, insurance services contribute greatly to the ----------------------
country’s GDP. A well-developed and evolved insurance sector is a boon
for economic development as it provides long-term funds for infrastructure ----------------------
development at the same time strengthening the risk taking ability of the country.
----------------------
Section 14 of IRDA Act, 1999 lays down the duties, powers and functions
of IRDA. ----------------------
Subject to the provisions of this Act and any other law for the time being in ----------------------
force, the Authority shall have the duty to regulate, promote and ensure orderly
growth of the insurance business and re-insurance business. The powers and ----------------------
functions of the Authority shall include, -
----------------------
a) issue to the applicant a certificate of registration, renew, modify, withdraw,
suspend or cancel such registration; ----------------------

----------------------

Corporate Governance and Regulatory Bodies 125

 Notes b) protection of the interests of the policy holders in matters concerning
assigning of policy, nomination by policy holders, insurable interest,
---------------------- settlement of insurance claim, surrender value of policy and other terms
and conditions of contracts of insurance;
----------------------
c) specifying requisite qualifications, code of conduct and practical training
---------------------- for intermediary or insurance intermediaries and agents;

---------------------- d) specifying the code of conduct for surveyors and loss assessors;
e) promoting efficiency in the conduct of insurance business;
----------------------
f) promoting and regulating professional organizations connected with the
---------------------- insurance and re-insurance business;
---------------------- g) levying fees and other charges for carrying out the purposes of the Act;
h) calling for information from, undertaking inspection of, conducting
----------------------
enquiries and investigations including audit of the insurers, intermediaries,
---------------------- insurance intermediaries and other organizations connected with the
insurance business;
----------------------
i) control and regulation of the rates, advantages, terms and conditions that
---------------------- may be offered by insurers in respect of general insurance business not so
controlled and regulated by the Tariff Advisory Committee under section
---------------------- 64U of the Insurance Act, 1938 (4 of 1938);
---------------------- j) specifying the form and manner in which books of account shall be
maintained and statement of accounts shall be rendered by insurers and
---------------------- other insurance intermediaries;
---------------------- k) regulating investment of funds by insurance companies;
---------------------- l) regulating maintenance of margin of solvency;
m) adjudication of disputes between insurers and intermediaries or insurance
----------------------
intermediaries;
---------------------- n) supervising the functioning of the Tariff Advisory Committee;
---------------------- o) specifying the percentage of premium income of the insurer to finance
schemes for promoting and regulating professional organizations referred
---------------------- to in clause (f);
---------------------- p) specifying the percentage of life insurance business and general insurance
business to be undertaken by the insurer in the rural or social sector; and
----------------------
q) exercising such other powers as may be prescribed
---------------------- As per the section 4 of IRDA Act 1999, Insurance Regulatory and
---------------------- Development Authority (IRDA, which was constituted by an act of parliament)
is a ten member team consisting of a Chairman; five whole-time members; and
---------------------- four part-time members, (all appointed by the Government of India).
----------------------

----------------------

126 Corporate Governance

7.4 RBI Notes
History ----------------------
The Reserve Bank of India was established on April 1, 1935 in accordance ----------------------
with the provisions of the Reserve Bank of India Act, 1934. The Central Office
of the Reserve Bank was initially established in Calcutta but was permanently ----------------------
moved to Mumbai in 1937. The Central Office is where the Governor sits
and where policies are formulated. Though originally privately owned, since ----------------------
nationalization in 1949, the Reserve Bank is fully owned by the Government of ----------------------
India.
The Preamble of the Reserve Bank of India describes the basic functions ----------------------
of the Reserve Bank as: ----------------------
“...to regulate the issue of Bank Notes and keeping of reserves with a view
----------------------
to securing monetary stability in India and generally to operate the currency and
credit system of the country to its advantage.” ----------------------
The Reserve Bank’s affairs are governed by a central board of directors
----------------------
comprising of Full-time Official Directors including the Governor and not
more than four Deputy Governors and ten Non-Official Directors from various ----------------------
fields and one government official. The board is appointed/nominated by the
Government of India in keeping with the Reserve Bank of India Act for a period ----------------------
of four years. The functions include general superintendence and direction of
----------------------
the Bank’s affairs.
There are also four Local Boards one each for the four regions of the ----------------------
country in Mumbai, Calcutta, Chennai and New Delhi consisting of five
----------------------
members each appointed by the Central Government for a term of four years.
The functions of these are: ----------------------
a) To advise the Central Board on local matters and ----------------------
b) to represent territorial and economic interests of local cooperative and
indigenous banks; ----------------------

c) to perform such other functions as delegated by Central Board from time ----------------------
to time.
----------------------
The Reserve Bank of India performs the function of financial supervision
under the guidance of the Board for Financial Supervision (BFS). The Board is ----------------------
constituted by co-opting four Directors from the Central Board as members for
----------------------
a term of two years and is chaired by the Governor. The Deputy Governors of
the Reserve Bank are ex-officio members. One Deputy Governor, usually, the ----------------------
Deputy Governor in charge of banking regulation and supervision, is nominated
as the Vice-Chairman of the Board. The BFS oversees the functioning of ----------------------
Department of Banking Supervision (DBS), Department of Non-Banking
----------------------
Supervision (DNBS) and Financial Institutions Division (FID) and gives
directions on the regulatory and supervisory issues. Some of the initiatives ----------------------
taken by BFS include:
----------------------

Corporate Governance and Regulatory Bodies 127

 Notes i. restructuring of the system of bank inspections,
ii. introduction of off-site surveillance,
----------------------
iii. strengthening of the role of statutory auditors, and
----------------------
iv. strengthening of the internal defences of supervised institutions.
---------------------- Current Focus includes:
---------------------- ●● supervision of financial institutions
---------------------- ●● consolidated accounting
●● legal issues in bank frauds
----------------------
●● divergence in assessments of non-performing assets, and
---------------------- ●● supervisory rating model for banks.
---------------------- Legal Framework
a) Umbrella Acts
----------------------
●● eserve Bank of India Act, 1934: governs the Reserve Bank
R
---------------------- functions
---------------------- ●● Banking Regulation Act, 1949: governs the financial sector
b) Acts governing specific functions
----------------------
●● ublic Debt Act, 1944/Government Securities Act (Proposed):
P
---------------------- Governs government debt market
---------------------- ●● ecurities Contract (Regulation) Act, 1956: Regulates government
S
securities market
----------------------
●● Indian Coinage Act, 1906: Governs currency and coins
---------------------- ●● oreign Exchange Regulation Act, 1973/Foreign Exchange
F
Management Act, 1999: Governs trade and foreign exchange
----------------------
market
---------------------- ●● “ Payment and Settlement Systems Act, 2007: Provides for regulation
and supervision of payment systems in India”
----------------------
c) Acts governing Banking Operations
----------------------
●● Companies Act, 1956: Governs banks as companies
---------------------- ●● anking Companies (Acquisition and Transfer of Undertakings)
B
Act, 1970/1980: Relates to nationalization of banks
----------------------
●● Bankers’ Books Evidence Act
---------------------- ●● Banking Secrecy Act
---------------------- ●● Negotiable Instruments Act, 1881

---------------------- d) Acts governing Individual Institutions

●● State Bank of India Act, 1954
----------------------
●● he Industrial Development Bank (Transfer of Undertaking and
T
---------------------- Repeal) Act, 2003

128 Corporate Governance

 ●● he Industrial Finance Corporation (Transfer of Undertaking and
T Notes
Repeal) Act, 1993
●● National Bank for Agriculture and Rural Development Act ----------------------
●● National Housing Bank Act ----------------------
●● Deposit Insurance and Credit Guarantee Corporation Act ----------------------
Main Functions
----------------------
a) Monetary Authority: Formulates, implements and monitors the monetary
policy to maintain price stability and ensuring adequate flow of credit to ----------------------
productive sectors.
----------------------
b) Regulator and supervisor of the financial system: Banks are
fundamental to the nation’s financial system. The central bank has a ----------------------
critical role to play in ensuring the safety and soundness of the banking
system—and in maintaining financial stability and public confidence in ----------------------
this system. As the regulator and supervisor of the banking system, the
Reserve Bank protects the interests of depositors, ensures a framework ----------------------
for orderly development and conduct of banking operations conducive ----------------------
to customer interests and maintains overall financial stability through
preventive and corrective measures. ----------------------
c) Manager of Foreign Exchange: Manages the Foreign Exchange ----------------------
Management Act, 1999 to facilitate external trade and payment and
promote orderly development and maintenance of foreign exchange market ----------------------
in India. With the transition to a market-based system for determining
the external value of the Indian rupee and increasing integration of the ----------------------
Indian economy with the global economy arising from greater trade and
----------------------
capital flows, the foreign exchange market in India gained importance in
the Indian financial market. ----------------------
d) Issuer of currency: Issues and exchanges or destroys currency and coins
----------------------
not fit for circulation to give the public adequate quantity of supplies of
currency notes and coins and in good quality. ----------------------
e) Developmental role: Performs a wide range of promotional functions to
----------------------
support national objectives. This includes ensuring that credit is available
to the productive sectors of the economy, establishing institutions ----------------------
designed to build the country’s financial infrastructure, expanding access
to affordable financial services and promoting financial education and ----------------------
literacy.
----------------------
f) Banker to the Government: Performs merchant banking function for the
central and the state governments; also acts as their banker. It undertakes ----------------------
banking transactions for the central and state governments to facilitate
receipts and payments and maintaining their accounts. It manages the ----------------------
governments’ domestic debt with the objective of raising the required ----------------------
amount of public debt in a cost-effective and timely manner. It also
develops the market for government securities to enable the government ----------------------
to raise debt at a reasonable cost, provide benchmarks for raising resources
by other entities and facilitate transmission of monetary policy actions. ----------------------

Corporate Governance and Regulatory Bodies 129

 Notes g) Banker to banks: Maintains banking accounts of all scheduled banks.
The RBI has six training establishments:
----------------------
a) Three, namely, College of Agricultural Banking, Bankers Training
---------------------- College and Reserve Bank of India Staff College are part of the Reserve
Bank.
----------------------
b) Others are autonomous, such as, National Institute for Bank Management,
---------------------- Indira Gandhi Institute for Development Research (IGIDR), Institute for
Development and Research in Banking Technology (IDRBT).
----------------------
Subsidiaries
----------------------
a) Fully owned: National Housing Bank (NHB), Deposit Insurance and
---------------------- Credit Guarantee Corporation of India (DICGC), Bharatiya Reserve Bank
Note Mudran Private Limited (BRBNMPL).
----------------------
b) Majority stake: National Bank for Agriculture and Rural Development
---------------------- (NABARD)
---------------------- c) The Reserve Bank of India has recently divested its stake in State Bank of
India to the Government of India.
----------------------

---------------------- 7.5 PFRDA

---------------------- Pension Fund Regulatory and Development Authority was established

by the Government of India on 23rd August 2003 to promote old age income
---------------------- security by establishing, developing and regulating pension funds, to protect the
interests of subscribers to schemes of pension funds and for matters connected
---------------------- therewith or incidental thereto.
---------------------- The Authority consists of a Chairperson and not more than five members,
of whom atleast three shall be whole-time members, to be appointed by the
----------------------
Central Government.
---------------------- National Pension System (NPS) is an initiative of Pension Fund
Regulatory and Development Authority (PFRDA), the apex body established
----------------------
by Government of India to regulate and develop the pension sector in India.
---------------------- NPS has been extended to all citizens of India with effect from 1st May 2009.

---------------------- To extend the coverage of NPS to the weaker and economically

disadvantaged sections of the society with their limited investment potential,
---------------------- PFRDA has launched NPS-Lite which specifically targets the marginal investors
and promotes small savings during their productive life. It aims at building up
---------------------- a corpus sufficient enough to buy an annuity for their old age.
---------------------- It is designed to ensure ultra-low administrative and transactional costs,
so as to make such small investments viable. NPS-Lite works on a “group”
---------------------- model. It also aims at harnessing the outreach and capacity of the Government
---------------------- operated schemes, NGOs, MFIs, NBFCs, etc. in targeting and servicing the old
age savings needs of low income workers. Distinguishing Features of NPS Lite:
----------------------

130 Corporate Governance

a) Focused - For economically disadvantaged sections of the society and Notes
marginal investors
----------------------
b) Voluntary - Open to eligible citizens of India, in the age group of 18–60
years. Subscriber is free to choose the amount he/she wants to invest ----------------------
every year.
----------------------
c) Simple - Eligible individuals in the unorganized work force can open an
account through their Aggregator and get an Individual subscriber (NPS ----------------------
– Lite) Account.
----------------------
d) Safe - Regulated by PFRDA, with transparent investment norms and
regular monitoring and performance review of fund managers by NPS ----------------------
Trust.
----------------------
e) Economical - Ultra-low cost structure with no minimum amount required
per annum or per contribution. ----------------------
f) Portable - Subscriber can operate account from anywhere in the country, ----------------------
even with change of location, employment or Aggregator.
----------------------
7.6 ROLE OF MINISTRY OF CORPORATE GOVERNANCE
----------------------
Ministry of Corporate Affairs, earlier known as Department of Corporate ----------------------
Affairs under Ministry of Finance, is primarily concerned with the administration
of the Companies Act, 1956, and other allied Acts, etc. framed there-under for ----------------------
regulating the functioning of the corporate sector in accordance with the law. It
is also responsible for administering the Competition Act, 2002 and exercises ----------------------
supervision over the three professional bodies, namely, Institute of Chartered
----------------------
Accountants of India (ICAI), Institute of Company Secretaries of India (ICSI)
and Institute of Cost and Works Accountants of India (ICWAI), which have ----------------------
been constituted for proper and orderly growth of the professions concerned.
It also has the responsibility of carrying out the functions of the Central ----------------------
Government relating to administration of Partnership Act, 1932, the Companies ----------------------
(Donations to National Funds) Act, 1951 and Societies Registration Act, 1980.
Ministry of Corporate Affairs has set up a National Foundation for ----------------------
Corporate Governance (NFCG) in association with CII, ICAI and ICSI, as a ----------------------
not-for-profit trust. It provides a platform
a) to deliberate on issues relating to good corporate governance, ----------------------

b) to sensitize corporate leaders on importance of good corporate governance ----------------------

practices as well as,
----------------------
c) to facilitate exchange of experiences and ideas amongst corporate leaders,
policy makers, regulators, law enforcing agencies and non-government ----------------------
organizations.
----------------------
The NFCG has a three-tier structure for its management, i.e., the
Governing Council under the Chairmanship of Minister of Corporate Affairs, ----------------------
the Board of Trustees and the Executive Directorate. The foundation has been
set up with the mission to: ----------------------

Corporate Governance and Regulatory Bodies 131

 Notes a) foster a culture for promoting good governance, voluntary compliance
and facilitate effective participation of different stakeholders;
----------------------
b) create a framework of best practices, structure, processes and ethics;
---------------------- c) make significant difference to Indian corporate sector by raising the
standard of corporate governance in India towards achieving stability and
----------------------
growth.
---------------------- NFCG’s action plan includes development of good corporate governance
principles on identified themes i.e. (i) corporate governance norms for
----------------------
institutional investors, (ii) corporate governance norms for independent
---------------------- directors, and (iii) corporate governance norms for audit.

---------------------- Check your Progress 2

----------------------
Fill in the blanks.
---------------------- 1. The IRDA was incorporated as a statutory body in April, ______.
---------------------- 2. IRDA has the duty to regulate, promote and ensure orderly growth of the
insurance business and ______________ business.
----------------------
3. Pension Fund Regulatory and Development Authority was established
---------------------- by the Government of India on 23rd August _____.
---------------------- 4. The board members of RBI are appointed/nominated in keeping with the
Reserve Bank of India Act for a period of ______ years.
----------------------
State True or False.
---------------------- 1. The board of RBI is appointed/nominated by the Government of India in
keeping with the Reserve Bank of India Act.
----------------------

----------------------
Activity 2
----------------------
Check the website of PFRDA for NPS Swavalamban scheme. List down its
----------------------
main features.
----------------------

---------------------- 7.7 CONCLUSION

---------------------- Transparent, vibrant and efficient secondary market is necessary to
provide avenue for deployment of savings and also to prop up the primary
---------------------- market, to mobilize savings for investments needed for economic growth. The
regulatory authorities’ approach of managing the financial sector should be
----------------------
innovating products and framing legislations to benefit the common investor,
---------------------- and to enhance informed and healthy participation in the investing arena. The
crucial role of governance in this cannot be over-emphasized.
----------------------

----------------------

132 Corporate Governance

 Summary Notes

●● There are four primary financial regulators - Reserve Bank of India, ----------------------
Insurance Regulatory and Development Authority, Securities Exchange ----------------------
Board of India and Pension Fund Regulatory Development Authority in
the Indian Financial System. ----------------------

●● The regulatory bodies in India have advocated comprehensive and ----------------------

rigorous corporate governance reforms which emphasize the importance
----------------------
of the credibility and integrity of the listed companies, the responsibilities
of minority shareholders, and the necessity for information disclosure. ----------------------
●● SEBI was established by the Government of India with the objectives ----------------------
towards protecting the interest of the investors in securities; to promote the
development of, and regulate the securities market and matters connected ----------------------
therewith or incidental to. ----------------------
●● The IRDA was incorporated as a statutory body in April, 2000. The key
----------------------
objectives of the IRDA include promotion of competition so as to enhance
customer satisfaction through increased consumer choice and lower ----------------------
premiums, while ensuring the financial security of the insurance market.
----------------------
●● The Preamble of the Reserve Bank of India describes the basic functions
of the Reserve Bank as: “...to regulate the issue of Bank Notes and ----------------------
keeping of reserves with a view to securing monetary stability in India ----------------------
and generally to operate the currency and credit system of the country to
its advantage.” ----------------------

●● Pension Fund Regulatory and Development Authority was established ----------------------

by the Government of India to promote old age income security by
----------------------
establishing, developing and regulating pension funds, to protect the
interests of subscribers to schemes of pension funds. ----------------------
●● Ministry of Corporate Affairs is primarily concerned with the administration ----------------------
of the Companies Act, 1956, Partnership Act, 1932, the Companies
(Donations to National Funds) Act, 1951 and Societies Registration Act, ----------------------
1980 and exercises supervision over the three professional bodies, namely, ----------------------
Institute of Chartered Accountants of India (ICAI), Institute of Company
Secretaries of India (ICSI) and Institute of Cost and Works Accountants ----------------------
of India (ICWAI), which have been constituted for proper and orderly
----------------------
growth of the professions concerned.
●● Ministry of Corporate Affairs has set up a National Foundation for ----------------------
Corporate Governance (NFCG) in association with CII, ICAI and ICSI,
----------------------
to deliberate on issues relating to good corporate governance, to sensitize
corporate leaders on importance of good corporate governance practices ----------------------
as well as to facilitate exchange of experiences and ideas amongst
----------------------

Corporate Governance and Regulatory Bodies 133

 Notes corporate leaders, policy makers, regulators, law enforcing agencies and
non-government organizations.
---------------------- ●● A well governed secondary market is necessary to mobilize savings for
---------------------- investments needed for economic growth.

---------------------- Keywords
---------------------- ●● Derivatives: Derivatives are financial instruments whose value changes
---------------------- in response to an underlying variable, that require little or no net initial
investment and are settled at a future date.
---------------------- ●● Stock Exchanges: A stock exchange is an entity which provides “trading”
---------------------- facilities for stock brokers and traders, to trade stocks and other securities.
●● Credit Rating Agency: A credit rating agency is a company that assigns
---------------------- credit ratings to support investors by analyzing, reporting and monitoring
---------------------- the credit risk of companies or bonds and other fixed-issue investments.
The agency formulates a relative credit rating after collecting and
---------------------- analyzing relevant credit-related information.

---------------------- ●● Counterparty Risk: The risk to each party of a contract that the
counterparty will not live up to its contractual obligations. A counter-
---------------------- party is the other party that participates in a financial transaction. Every
transaction must have a counter-party for the transaction to go through.
----------------------

---------------------- Self-Assessment Questions

---------------------- 1. Outline the role of SEBI in the financial system of the country.
---------------------- 2. Trace the growth of the insurance sector.
3. Why is the pension regulatory authority required in India?
----------------------
4. RBI secures monetary stability in India. Comment.
----------------------
5. How does the Ministry of Corporate Affairs ensure the growth of corporate
---------------------- governance?

----------------------
Answers to Check your Progress
----------------------
Check your Progress 1
---------------------- Fill in the blanks.
---------------------- 1. There are four primary financial regulators in India.
---------------------- 2. The RBI is the apex body in the system of financial regulators in India.
State True or False.
----------------------
1. True
----------------------
2. True
----------------------

134 Corporate Governance

Check your Progress 2 Notes
Fill in the blanks.
----------------------
1. The IRDA was incorporated as a statutory body in April, 1999.
----------------------
2. IRDA has the duty to regulate, promote and ensure orderly growth of the
insurance business and reinsurance business. ----------------------
3. Pension Fund Regulatory and Development Authority was established by ----------------------
the Government of India on 23rd August 2003.
4. The board members of RBI are appointed/nominated in keeping with the ----------------------
Reserve Bank of India Act for a period of four years. ----------------------
State True or False.
----------------------
1. True
----------------------
Suggested Reading ----------------------

1. Chandratre, K R and A N Navare, Corporate Governance – A Practical ----------------------

Handbook, Bharat Law House Pvt. Ltd., 2010 Edn.
----------------------
2. Das, Subhash Chandra, Corporate Governance in India: An Evaluation,
PHI Learning ----------------------
3. www.mca.gov.in/.../CG_Voluntary_Guidelines_2009_24dec2009.pdf ----------------------
4. http://www.sebi.gov.in/sebiweb/
----------------------

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Corporate Governance and Regulatory Bodies 135

 Notes

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136 Corporate Governance

Globalization and Corporate Governance
UNIT

8
Structure:
8.1 Introduction
8.2 Globalization and Corporate Governance
Case Study
Summary
Key Words
Self-Assessment Questions
Answers to Check your Progress
Suggested Reading

Globalization and Corporate Governance 137

 Notes
Objectives
----------------------

---------------------- After going through this unit, you will be able to:
• Describe the impact of globalization on corporate governance.
----------------------
• Analyze the recent cases in corporate scandals.
----------------------
• Assess the importance of good governance.
----------------------
8.1 INTRODUCTION
----------------------
From the point of view of the firm, globalization implies greater competition,
----------------------
but it also implies participation in more markets for inputs (including capital,
---------------------- intermediate goods and factors of production) and outputs. As these markets
become more integrated, there will be strong pressure to adopt strategies and
---------------------- structures that make the firm as competitive as possible. Globalization of
markets for intermediate products has had a major impact on the organization
----------------------
of firms. The opportunities for firms to engage in globally structured production
---------------------- through outsourcing, as well as multi-nationalization, induces firms to adopt new
governance structures to manage the new production structures. Responding to
---------------------- increased opportunities and threats resulting from globalization in the market
for final goods could also cause firms to consider reorganization of its corporate
----------------------
governance practices. Good corporate governance is critical for ensuring the
---------------------- efficiency of investment. It is also essential for attracting foreign investment.

---------------------- 8.2 GLOBALIZATION AND CORPORATE GOVERNANCE

---------------------- Since the early 1990s, stock markets from developed countries as well as
---------------------- from a large number of emerging countries have been open to foreign investors.
Economies have been becoming more integrated for centuries, but in the past
---------------------- half century globalization has accelerated. In particular, over the past couple
of decades, many East Asia economies, especially Korea and China, have
---------------------- been participating more in the global economy, as also the former communist
---------------------- countries of central and Eastern Europe, along with emerging and developing
countries from all parts of the globe including Latin America.
----------------------
Economic globalization through increased product market competition,
---------------------- the globalization of production and the globalization of capital markets places
significant pressures on corporate governance systems. Economic globalization
---------------------- would mean that the world economy, or atleast the globalized portion of it,
would be integrated and not merely interdependent. The difference between an
----------------------
interdependent and an integrated world is a qualitative one. Integration requires
---------------------- or presumes a government to protect, direct, and control. For reaping the full
benefits of globalization sound macroeconomic and structural policies are
---------------------- necessary, such as sound monetary and fiscal policies, labour market policies
that develop human skills and adaptability, economic policies that allow for firm
----------------------
creation and exit, an efficient regulatory framework, and good and effective

138 Corporate Governance

corporate and public governance. Fluidity of change has been an important Notes
feature of both the UK and the US corporate governance systems over time.
----------------------
The unsavoury side of globalization has also globalized a wide range
of unlawful activities, such as bribery and corruption, tax evasion, money ----------------------
laundering, counterfeiting and piracy, and human trafficking. Good corporate
governance is not simply about minimizing the risk of corporate failure and ----------------------
dealing with those guilty of fraud. It is also a fundamental prerequisite for
improving economic performance, facilitating corporate access to capital, ----------------------
decreasing volatility in retirement savings and improving the general investment ----------------------
climate. These links to investment, public savings, market confidence and
integrity make good corporate governance important to long-term economic ----------------------
growth and financial market stability. In terms of corporate governance issues,
companies which have faced crisis of various kinds suffered from ----------------------
●● Questionable ethics ----------------------
●● Behaviour of top management
----------------------
●● Aggressive earnings management
●● Weak internal control ----------------------
●● Poor risk management ----------------------
●● Shortcomings in accounting and reporting
----------------------
A business will always have two sides, it’s not necessary to gain profits
every time, but to sustain in the market integrity is vital. Some of the renowned ----------------------
collapses in corporate governance are
----------------------
Company Country What went wrong
Enron USA inflated earnings, hid debt in SPEs ----------------------
Parmalat Italy false transactions recorded ----------------------
Tyco USA looting by CEO, improper share deals, evidence of
tampering and falsifying business records ----------------------
WorldCom USA expenses booked as capital expenditure ----------------------
Xerox USA accelerated revenue recognition
----------------------
There has been increased interest in the corporate governance practices of
modern corporations since 2001, particularly due to the high-profile collapses ----------------------
of a number of large U.S. firms such as Enron Corporation and WorldCom. In
2002, the U.S. federal government passed the Sarbanes-Oxley Act, intending to ----------------------
restore public confidence in corporate governance. ----------------------

Check your Progress 1 ----------------------

State True or False. ----------------------

1. Economic globalization would mean that the world economy would be ----------------------
integrated by a government to protect, direct, and control.
----------------------
2. Globalisation has given rise to the unlawful activities of bribery and
corruption. ----------------------

Globalization and Corporate Governance 139

 Notes
Activity 1
----------------------
Visit library and find out more about the Ketan Parekh case of failure of
----------------------
corporate governance in stock exchange.
----------------------

---------------------- Case Studies

----------------------
Case Study I
----------------------
ENRON
---------------------- Enron was created in 1985 as a result of a merger between Houston
---------------------- Natural Gas and Internorth Natural Gas. In 1989, Enron started trading natural
gas commodities and eventually became the world’s largest buyer and seller
---------------------- of natural gas. Enron invested billions in its broadband unit and water and
wastewater system management unit and in assets overseas. In 2000, Enron
---------------------- reported $101 billion in revenue and a market capitalization of $63 billion.
---------------------- Enron was heavily involved in energy brokering, electronic energy trading,
global commodity and options trading, etc.
---------------------- Enron was essentially a company whose trading and risk management
---------------------- business strategy was built on assets largely owned by others. The complex
financial maneuvering and off-balance-sheet partnerships that former CEO
---------------------- Jeffrey K. Skilling and chief financial officer Andrew S. Fastow implemented
were intended to remove everything from the firm’s balance sheet and into
---------------------- partnerships. What distinguished Enron’s partnerships from those commonly
---------------------- used to share risks were their lack of independence from Enron and the use of
Enron’s stock as collateral to leverage the partnerships. Rather than limiting
---------------------- risk, Enron was assuming total risk by guaranteeing the loans with its stock.
---------------------- Enron also engaged in transactions that inflated its earnings, such as
selling time on its broadband system to a partnership at inflated prices at a
---------------------- time when the demand for broadband was plummeting. Enron then recorded
a substantial profit on such transactions. Curiously, Enron’s outside auditor,
----------------------
Arthur Andersen, had a dual role in these partnerships, collecting fees for
---------------------- helping to set them up and auditing them.
In addition to the partnerships created by Enron, a number of bad
----------------------
investments both in the United States and abroad contributed to the firm’s
---------------------- worry. Meanwhile, Enron’s core energy distribution business was deteriorating.
Enron was attempting to gain share in a maturing market by paring selling
---------------------- prices. Dynegy Corp. agreed to buy Enron for $10 billion on November 2,
2001. At the end of the month, Dynegy withdrew its offer and Enron’s credit
----------------------
rating was reduced to junk bond status. Enron was responsible for another $3.9
---------------------- billion owed by its partnerships. Enron had less than $2 billion in cash on hand.
Enron’s stock, which had reached a high of $90 per share on August 17, 2001,
---------------------- was trading at less than $1 by December 5, 2001.

140 Corporate Governance

 In addition to its angry creditors, Enron faced class-action lawsuits by Notes
shareholders and employees, whose pensions were invested heavily in Enron
stock. Enron also faced intense scrutiny from congressional committees and the ----------------------
U.S. Department of Justice. It is surprising that the audit committee of the Enron
board seems to have somehow been unaware of the firm’s highly questionable ----------------------
financial maneuvers. ----------------------
Inside Enron, the board of directors, management, and the audit function
----------------------
failed to do the job. Similarly, the firm’s outside auditors, regulators, credit
rating agencies, and Wall Street analysts also failed to alert investors. Under the ----------------------
reorganization plan, unsecured creditors received an estimated 14 cents for each
dollar of claims against Enron Corp., while those with claims against Enron ----------------------
North America received an estimated 18.3 cents on the dollar. The money
----------------------
came in cash payments and stock in two holding companies - Cross Country
containing the firm’s North American pipeline assets and Prisma Energy ----------------------
International containing the firm’s South American operations.
----------------------
In 2006, Andrew Fastow, former Enron chief financial officer, and Lea
Fastow plead guilty to several charges of conspiracy to commit fraud. Also in ----------------------
2006, Enron chairman Kenneth Lay died while awaiting sentencing and Enron
president Jeffery Skilling received a sentence of 24 years in prison. ----------------------
Citigroup agreed in early 2008 to pay $1.66 billion to Enron creditors ----------------------
who lost money following the collapse of the firm. The suit alleged that, with
the help of banks, Enron kept creditors in the dark about the firm’s financial ----------------------
problems through misleading accounting practices. Enron was able to obtain
----------------------
nearly $20 billion dollars to distribute to its creditors as a result of the mega-
claims litigation. As of December 2009, some claim and process payments were ----------------------
still being distributed.
----------------------
Case Study II ----------------------
WORLDCOM ----------------------
Mr. Bernie Ebbers first created the business concept of WorldCom in 1983.
----------------------
In June 1999 with WorldCom’s shares trading at $64, he was a billionaire, and
WorldCom was the shining star of the bourses. Two months later, WorldCom ----------------------
declared itself the largest bankruptcy in American history.
----------------------
There are three major issues in the collapse of WorldCom: the corporate
strategy of growth through acquisition, the use of loans to senior executives, ----------------------
and threats to corporate governance created by lack of arm’s-length dealing.
----------------------
WorldCom at its high point provided mission-critical communication
services for tens of thousands of businesses around the world, carried more ----------------------
international voice traffic than any other company, carried a significant amount
of the world’s Internet traffic and owned and operated a global IP (Internet ----------------------
Protocol) backbone that provided connectivity in more than 2,600 cities and in ----------------------
more than 100 countries and had 75 data centers on five continents.
----------------------

Globalization and Corporate Governance 141

 Notes WorldCom achieved its position as a significant player in the
telecommunications industry through the successful completion of 65
---------------------- acquisitions. Wall Street investment banks, analysts and brokers began to make
“strong buy recommendations” to investors on WorldCom.
----------------------
As the stock value went up, it was easier for WorldCom to use stock as the
---------------------- medium to continue to purchase additional companies. The acquisition of MFS
Communications and MCI Communications were, perhaps, the most significant
----------------------
in the long list of WorldCom acquisitions. Through generous stock options
---------------------- and purchases, Ebbers’ WorldCom holdings grew and grew, and he typically
financed these purchases with his existing holdings as collateral. This was not a
---------------------- problem until the value of WorldCom stock declined, and Ebbers faced margin
calls (a demand to put up more collateral for outstanding loans) on some of
----------------------
his purchases. Ebbers borrowed against his stock. WorldCom charged Ebbers
---------------------- slightly more than 2 percent interest, a rate considerably below than available
to other borrowers and also below the company’s marginal rate of return.
----------------------
Since the loan to Ebbers was collateralized by his equity holdings, Citigroup
---------------------- had reason to support WorldCom stock. Travelers Insurance, a Citigroup unit,
lent $134 million to a timber company that Bernie Ebbers was heavily invested
---------------------- in. Eight months later, WorldCom chose Salomon Smith Barney, Citigroup’s
brokerage unit, to be the lead underwriter of $5 billion of its bond issue.
----------------------
Jack Grubman, Salomon Smith Barney’s telecommunication analyst first
---------------------- met Bernie Ebbers in the early 1990s. The two became friends and Grubman
started hyping WorldCom. Investors were handsomely rewarded for following
----------------------
Grubman’s buy recommendations until stock reached its high. Both Ebbers and
---------------------- WorldCom CFO Scott Sullivan were also granted privileged allocations in IPO
(Initial Public Offering) auctions.
----------------------
With 65 acquisitions in six years and several of them large ones,
---------------------- WorldCom had to deal with the challenge of management integrating new
and old organizations into a single smoothly functioning business. The second
---------------------- challenge was the requirement for the complete financial integration of the
---------------------- acquired company, including an accounting of assets, debts, good will and a
host of other financially important factors through the application of generally
---------------------- accepted accounting practices (GAAP).

---------------------- ●● Senior management did not develop a cooperative approach among the
various units of WorldCom.
---------------------- ●● Poor integration of acquired companies resulted in organizational
---------------------- problems.
●● Service delivery network was weakened by inter-unit rivalry.
----------------------
●● WorldCom closed three important MCI technical service centers that
---------------------- contributed to network maintenance only to open twelve different centers
that were duplicate and inefficient.
----------------------
In July 2002, WorldCom filed for bankruptcy protection after several
---------------------- disclosures regarding accounting irregularities. Among them was the admission

142 Corporate Governance

of improperly accounting for operating expenses as capital expenses in violation Notes
of generally accepted accounting practices (GAAP). Originally assigned
responsibilities in operational auditing, auditor Cynthia Cooper and her ----------------------
colleagues grew suspicious of a number of peculiar financial transactions and
went outside their assigned responsibilities to investigate. What they found was a ----------------------
series of clever manipulations intended to bury almost $4 billion in misallocated ----------------------
expenses and phony accounting entries. The thing that first aroused Ms. Cooper’s
curiosity came in March 2002 when a senior line manager complained to her ----------------------
that her boss, CFO Scott Sullivan, had usurped a $400 million reserve account
he had set aside as a hedge against anticipated revenue losses. Cynthia Cooper’s ----------------------
careful detective work in secret, often late at night as an internal auditor at ----------------------
WorldCom exposed some of the accounting irregularities apparently intended to
deceive investors. Cooper also inquired of WorldCom’s accounting firm, Arthur ----------------------
Andersen. To gather further evidence, Cynthia’s team began an unauthorized
search through WorldCom’s computerized accounting information system. ----------------------
Ultimately, she and her team uncovered a $2 billion accounting entry for capital ----------------------
expenditures that had never been authorized. It appeared that the company was
attempting to represent operating costs as capital expenditures in order to make ----------------------
the company look more profitable. What Ms. Cooper had discovered was the
largest accounting fraud in U.S. history. ----------------------

In December 2005, Verizon Communications acquired MCI/WorldCom. ----------------------

Between July 2002 when WorldCom declared bankruptcy and April 2004 when
----------------------
it emerged from bankruptcy as MCI, the post-bankruptcy audit found that
WorldCom had overvalued several acquisitions and, instead of a $10 billion ----------------------
profit for the years 2000 and 2001, WorldCom had a combined loss for the years
2000 through 2002 (the year it declared bankruptcy) of $73.7 billion. ----------------------
To sum up, the downfall of WorldCom was brought about by senior ----------------------
management with poor judgement, lack of post merger integration, unethical
accounting practices, industry conditions which did not match with forecasts ----------------------
and a lax regulatory environment.
----------------------
Case Study III ----------------------

THE XEROX CORPORATION ----------------------

Xerox Corporation is a global document management company which ----------------------
manufactures and sells a range of colour and black-and-white printers,
multifunction systems, photo copiers, digital production printing presses, and ----------------------
related consulting services and supplies. Xerox is headquartered in Norwalk,
----------------------
Connecticut. Xerox was founded in 1906 in Rochester, New York as “The
Haloid Company”. ----------------------
In 1959, Chester Carlson developed the Xerox 914 which was so popular
----------------------
that by the end of 1961, Xerox had almost $60 million in revenue. By 1965,
revenues leaped to over $500 million. In 1961, the company changed its name to ----------------------
“Xerox Corporation” and its stock was listed on the New York Stock Exchange
in 1961 and on the Chicago Stock Exchange in 1990. ----------------------

Globalization and Corporate Governance 143

 Notes For fifteen years, from 1975 to 1992, Xerox Corporation’s stock traded
between about $5 and $14 per share. Xerox’s stock continued to trade in the
---------------------- same range until around 1994, at which time the price began to rise along
with the general rise in the stock market. In late 1986, Paul Allaire became a
---------------------- director and in 1990, CEO. Like most CEOs of large companies, Allaire was
---------------------- well respected. The stock reached a high of $63.69 on May 3, 1999. This was
just one month after Allaire stepped aside as CEO and became Chairman, and
---------------------- G. Richard Thoman, with the support of Allaire, became CEO.
---------------------- Just one week prior to the shareholder meeting in May 1999, Xerox
officials told Wall Street analysts that Xerox shares were undervalued given the
---------------------- company’s consistent earnings growth. By July, the stock had fallen more than
10 percent when Xerox reported that revenue had grown at only 2.5 percent
----------------------
and that predicted earnings per share growth would be hard to achieve for the
---------------------- balance of the year and the stock traded just below $51. The company tried to
emphasize future opportunities, noting that it was transforming itself from a
---------------------- copier company to a copier services company. Research analysts supported the
company story.
----------------------
In October 1999, the company warned that third-quarter earnings would
---------------------- not meet expectations and that they would, in fact, decline more than 18 percent.
The stock promptly traded to $30. The company again blamed weakness in
----------------------
foreign sales. Two months later, the company warned it would miss fourth-
---------------------- quarter earnings expectations by 40 percent, and CEO Thoman declined to give
guidance for 2000. The stock traded down to under $25. With the stock trading
---------------------- at about one-third the price of its high, some analysts lowered their ratings to
a “hold,” while one retained the “strong buy” rating. The stock continued to
----------------------
decline throughout 2000 and closed at $4.69 on December 5, 2000, at which
---------------------- time there were ten “hold” recommendations and one “sell” recommendation
on the stock.
----------------------
Xerox Corp. did have an Audit committee, and the company’s independent
---------------------- auditors were at the time of the scandal KPMG, LLP. In early 2000, the company
announced a joint investigation with their auditors, KPMG, into accounting
---------------------- irregularities in Mexico. The investigation was headed by Thomas Theobald,
chairman of the audit committee. In May, Thoman retired as CEO, and Allaire
----------------------
was reappointed to replace him. At the same time, the Board appointed Anne
---------------------- Mulcahy as President and COO.

---------------------- The 1999 Proxy Statement disclosed that Allaire had realized approximately
$8.3 million on sales of stock from options in 1998. It also disclosed that he still
---------------------- owned approximately $57 million of exercisable options and $21 million of not
yet exercisable options.
----------------------
The company acknowledged that certain accounting errors and
---------------------- irregularities had occurred, and that GAAP had been misapplied. The blame
was assigned to several senior managers in Mexico who had collaborated to
---------------------- circumvent Xerox’s accounting policies and procedures. Thoman, by virtue of
---------------------- his being replaced, was indirectly accused, and the board fired KPMG, which
absorbed blame.
144 Corporate Governance
 In April 2002, the Securities and Exchange Commission (SEC) filed suit Notes
against Xerox in US District Court for the Southern District of New York. The
complaint alleged that Xerox, using a host of undisclosed accounting “actions,” ----------------------
which were often referred to as “accounting opportunities” and “one-offs,”
distorted earnings and misled investors. In an official release to the press, the ----------------------
SEC explains these “accounting actions” were employed by Xerox to “close the ----------------------
gap” between the market’s expectations and actual operating results from 1997
to 2000. The company was fined $10 million, paid, of course, with shareholders’ ----------------------
money.
----------------------
The SEC settlement with Xerox occurred about six months after Enron
went bankrupt. Although the Xerox case received several days of press ----------------------
coverage, the case was largely ignored by the media. When the settlement was
----------------------
announced, the stock was down 89 percent and was trading at $6.97, down
from $63.69 at its high. After the scandal, KPMG was dismissed from the ----------------------
position of “Independent” Auditor for Xerox Corporation and was replaced
with PricewaterhouseCoopers, LLP. ----------------------
Management at Xerox Corporation when faced with strategic mistakes ----------------------
and a tough economic environment, including Japanese competition resorted
to creative accounting practices to meet financial targets and Wall Street ----------------------
expectations. Xerox’s story also demonstrates the desperate need for moral
----------------------
values in a business. Xerox’s recent success story is due to Mulcahy’s creation
of an organizational culture built on a foundation of ethics and accountability, ----------------------
precisely the kind of culture that Xerox lacked under Allaire.
----------------------
Case Study IV ----------------------
LEHMAN BROTHERS ----------------------
Lehman Brothers had humble origins, tracing its roots back to 1850
----------------------
when Henry Lehman and his brothers, Emanuel and Mayer, founded Lehman
Brothers. In 2003 and 2004, with the U.S. housing boom under way, Lehman ----------------------
acquired five mortgage lenders, including subprime lender BNC Mortgage and
Aurora Loan Services, which specialized in Alt-A loans (made to borrowers ----------------------
without full documentation). Lehman’s real estate businesses grew from 2004
----------------------
to 2006 at a faster rate of growth than other businesses in investment banking
or asset management. The firm securitized $146 billion of mortgages in 2006, a ----------------------
10% increase from 2005. Lehman reported record profits every year from 2005
to 2007. ----------------------
In February 2007, the stock reached a record $86.18, giving Lehman a ----------------------
market capitalization of close to $60 billion. In March 2007, the firm reported
record revenues and profit for its fiscal first quarter. Lehman’s chief financial ----------------------
officer (CFO) said that the risks posed by rising home delinquencies were well
----------------------
contained and would have little impact on the firm’s earnings.
As the credit crisis erupted in August 2007 with the failure of two Bear ----------------------
Stearns hedge funds, Lehman’s stock fell sharply. During that month, the company ----------------------
eliminated 2,500 mortgage-related jobs and shut down its BNC unit. Even as the

Globalization and Corporate Governance 145

 Notes correction in the U.S. housing market gained momentum, Lehman continued to
be a major player in the mortgage market. In 2007, Lehman underwrote more
---------------------- mortgage-backed securities than any other firm, accumulating a $85-billion
portfolio, or four times its shareholders’ equity. In the fourth quarter of 2007,
---------------------- Lehman’s stock rebounded, as global equity markets reached new highs and
---------------------- prices for fixed-income assets staged a temporary rebound. However, the firm
did not take the opportunity to trim its massive mortgage portfolio.
----------------------
Lehman’s high degree of leverage - the ratio of total assets to shareholders
---------------------- equity - was 31 in 2007, and its huge portfolio of mortgage securities made it
increasingly vulnerable to deteriorating market conditions. On March 17, 2008,
---------------------- following the near-collapse of Bear Stearns - the second-largest underwriter of
mortgage-backed securities - Lehman shares fell as much as 48%. On concern
----------------------
it would be the next Wall Street firm to fail.
---------------------- On June 9, Lehman announced a second-quarter loss of $2.8 billion,
and reported that it had raised another $6 billion from investors. The firm also
----------------------
said that it had boosted its liquidity pool to an estimated $45 billion, decreased
---------------------- gross assets by $147 billion, reduced its exposure to residential and commercial
mortgages by 20%, and cut down leverage from a factor of 32 to about 25.
----------------------
However, these measures were too late. The stock plunged 77% in the
---------------------- first week of September 2008. Hopes that the Korea Development Bank would
take a stake in Lehman were dashed on September 9, as the state-owned South
---------------------- Korean bank put talks on hold. The news was a blow to Lehman, leading to
a 45% plunge in the stock and a 66% spike in credit-default swaps on the
----------------------
company’s debt. The company’s hedge fund clients began pulling out, while its
---------------------- short-term creditors cut credit lines. On September 10, Lehman pre-announced
dismal fiscal third-quarter results that underscored the fragility of its financial
---------------------- position. The same day, Moody’s Investor Service announced that it was
reviewing Lehman’s credit ratings, and also said that Lehman would have to
----------------------
sell a majority stake to a strategic partner in order to avoid a rating downgrade.
---------------------- These developments led to a 42% plunge in the stock on September 11. Last-
ditch efforts over the weekend of September 13 between Lehman, Barclays
---------------------- PLC and Bank of America, aimed at facilitating a takeover of Lehman, were
unsuccessful.
----------------------
On September 15, 2008, Lehman Brothers filed for bankruptcy. With $639
---------------------- billion in assets and $619 billion in debt, Lehman’s bankruptcy filing was the
---------------------- largest in history, as its assets far surpassed those of previous bankrupt giants
such as WorldCom and Enron. Lehman was the fourth-largest U.S. investment
---------------------- bank at the time of its collapse, with 25,000 employees worldwide. Lehman’s
demise also made it the largest victim, of the U.S. subprime mortgage-induced
---------------------- financial crisis that swept through global financial markets in 2008. Lehman’s
---------------------- collapse was a seminal event that greatly intensified the 2008 crisis and
contributed to the erosion of close to $10 trillion in market capitalization from
---------------------- global equity markets in October 2008, the biggest monthly decline on record
at the time. When Lehman declared bankruptcy, the stock plunged 93% from
---------------------- its previous close on September 12. Lehman’s bankruptcy led to more than $46

146 Corporate Governance

billion of its market value being wiped out. Lehman’s collapse shattered global Notes
financial markets for weeks, given the size of the company and its status as a
major player in the U.S. and internationally. ----------------------
The following day, Barclays announced its agreement to purchase, ----------------------
subject to regulatory approval, Lehman’s North American investment-banking
and trading divisions along with its New York headquarters building. During ----------------------
the week of September 22, 2008, Nomura Holdings announced that it would
----------------------
acquire Lehman Brothers’ franchise in the Asia Pacific region, including Japan,
Hong Kong and Australia as well as, Lehman Brothers’ investment banking and ----------------------
equities businesses in Europe and the Middle East. The deal became effective
on 13 October 2008. ----------------------
Lehman Brothers’ investment management business, including Neuberger ----------------------
Berman, was sold to its management on December 3, 2008. Creditors of Lehman
Brothers Holdings Inc. retain a 49% common equity interest in the firm, now ----------------------
known as Neuberger Berman Group LLC. It is the fourth largest private employee-
----------------------
controlled asset management firm globally, behind Fidelity Investments, The
Capital Group Companies and Wellington Management Company. ----------------------
A March 2010 report by the court-appointed examiner indicated that
----------------------
Lehman executives regularly used cosmetic accounting gimmicks at the end
of each quarter to make its finances appear less shaky than they really were. ----------------------
This practice was a type of repurchase agreement that temporarily removed
securities from the company’s balance sheet. However, unlike typical repurchase ----------------------
agreements, these deals were described by Lehman as the outright sale of
----------------------
securities and created “a materially misleading picture of the firm’s financial
condition in late 2007 and 2008.” ----------------------

Case Study V ----------------------

----------------------
SATYAM
On the face of it, New York-listed Satyam did everything by the ----------------------
rulebook, with an international firm auditing its books, declaration of accounts
----------------------
in accordance with Indian and US standards, and the requisite number of
independent directors with excellent credentials, including a Harvard business ----------------------
school professor and a former federal cabinet secretary.
----------------------
Raju, in his now famous 5-page letter outlining the deception, said no
other board member - past or present - was aware of the financial irregularities. ----------------------
Regulators were blindsided, and analysts and experts say there are “systemic
flaws” in accounting and audit practices. ----------------------
About $1 billion or 94 per cent of the cash, on the company’s books was ----------------------
fictitious, Raju said, and manipulation of the cash flow may be a reason why the
fraud was undetected. “Auditors generally assume if there is cash, things are ----------------------
OK. But there are plenty of accounting and governance loopholes.” India also
----------------------
lacks a culture of dissent, with shareholders and independent directors reluctant
to question company founders. ----------------------

Globalization and Corporate Governance 147

 Notes India’s $50-billion information technology industry - the forerunner for
India’s economic liberalization and rapid growth — expanded at a rapid pace
---------------------- on the back of outsourcing demand from Western firms. At the height of the
boom, top software firms Tata Consultancy Services, Infosys Technologies,
---------------------- Wipro and Satyam consistently reported annual 50-per cent increase in profits
every quarter. Pressure to maintain this pace of growth, please investors and
----------------------
shareholders and justify inflated P/E multiples during a six-year bull run on the
---------------------- stock market have all been cited as reasons why Satyam cooked the books.
Some news reports say Raju was an aggressive investor in failed dotcoms,
----------------------
and the family also put money in real estate. Raju, in his letter, said he had “not
---------------------- benefited in financial terms” as a result of the inflated accounts. The entirety of
the Satyam story cannot be completed without looking into its sister company
---------------------- Maytas.
---------------------- It will take time before the entire truth comes out. The ex-chairman
of Satyam, B. Ramalinga Raju continues to be seen as the main culprit. Just
---------------------- over four months after the massive accounting scandal was made public, Tech
Mahindra Ltd. placed the highest bid to acquire Satyam Computer Services
---------------------- Ltd. From the time Mahindra Group acquired scam-hit Satyam Computers till
---------------------- March 2010, Satyam Mahindra has managed to rope in 44 new clients across
sectors, with major chunk coming from the BFSI segment. Mahindra Satyam,
---------------------- then Satyam Computers, had about 500 active clients before the scam broke out
in 2009. Currently, it has 350 active clients.
----------------------
The restoration of confidence in any enterprise is a long drawn process.
---------------------- For the people in charge of the Satyam situation, the restoration of confidence
is priority number one. The Satyam fiasco has taught India Inc. a few lessons
---------------------- namely, under corporate governance laws we need to ensure no listed company
has the chairman and CEO rolled into one. Each company must have a properly
----------------------
well-defined process of recruitment of independent directors and should not
---------------------- bank on their name but evidence of independent mind.

---------------------- A panel set up by the Institute of Chartered Accountants of India (ICAI) has
recommended that sub-contracting of audit work be more strictly regulated, the
---------------------- names of errant accountants be made public and a corporate governance code be
defined for independent directors, audit committees and chief financial officers
---------------------- of publicly listed companies. According to the report submitted to the ministry,
---------------------- there had been a failure of corporate governance at Satyam. Investigations thus
far reveal that resolutions submitted to banks for loans were not even entered
---------------------- in the minutes of board meetings and that the audit committee was unaware
of these transactions. The reports also suggested that sub-contracting of audit
---------------------- work be more rigorous. The report also wants the government to encourage
---------------------- whistle-blowers on issues relating to corporate governance of listed companies.
The final truth about Satyam is still awaited.
----------------------

----------------------

----------------------

148 Corporate Governance

 Summary Notes

●● All the above cases demonstrate a human phenomenon which is pervasive ----------------------
i.e., greed. This has led to creative accounting which is the application of
----------------------
variability in the accounting principles, practices and procedures to modify
the books of accounts so that the organization objectives are fulfilled. The ----------------------
term as generally understood refers to systematic misrepresentation of
the true income and assets by corporations. It’s the operation on financial ----------------------
data, usually within the purview of the law and accounting standards but
----------------------
not providing a “true and fair” value. It is characterized by excessive
complication and the use of novel ways of characterizing income, assets, ----------------------
or liabilities and the intent to influence readers towards the interpretations
desired by the organizations. It is also known as aggressive and sometimes ----------------------
innovative accounting.
----------------------
●● The importance of CG became dramatically clear in 2002, as a series
of corporate meltdowns, frauds and other catastrophes led to the ----------------------
destruction of shareholder’s wealth worth billions of dollars, job losses
----------------------
in thousands, criminal investigations on dozens of executives and record
breaking bankruptcy filings. All of a sudden, everyone was interested in ----------------------
corporate governance. Massive new legislation, Sarbanes-Oxley Act and
SEC also had tightened their regulations. NASDAQ has proposed new ----------------------
listing standards that would require companies to improve their corporate
----------------------
governance to restore public confidence in corporate governance.
●● There are 11 components to the Sarbanes-Oxley Act of 2002 and they are ----------------------
as follows along with a brief idea of the issues they address, as described
----------------------
by Price Waterhouse Coopers:
●● Public Company Accounting - Registrations with board, auditing ----------------------
procedures, public accounting firms, accounting standards, funding, etc.
----------------------
●● Auditor Independence - Conflict of interest, audit partner rotation,
commission authority, etc. ----------------------
●● Corporate Responsibility - Fair funding for investors, audit committees, ----------------------
financial reports, conduction of audits, etc.
●● Enhanced Financial Disclosures - Periodic reporting, transactions ----------------------
involving management and principal stockholders, code of ethics, ----------------------
exemptions, etc.
●● Analyst Conflict of Interest - Treatment and appointment of security ----------------------
analyst. ----------------------
●● Commission Resources and Authority - Authorization of appropriations,
appearance and practice before the commission, etc. ----------------------
●● Studies and Reports - Study of investment banks, violators and violations, ----------------------
enforcement actions, etc.
----------------------
●● Corporate and Criminal Fraud Accountability - Criminal penalties,
protection of employees, security fraud, etc. ----------------------

Globalization and Corporate Governance 149

 Notes ●● White Collar Crime Penalty - Criminal fraud offenses, corporate
responsibility, criminal penalties, etc.
---------------------- ●● Corporate Tax Return - Signing of corporate tax return by chief executives.
---------------------- ●● Corporate Fraud and Accountability - Tampering with records, persons
serving as officers or directors, increased criminal penalties, etc.
----------------------
●● Corporate Governance principles and codes have also been developed
---------------------- in different countries and issued from stock exchanges, corporations,
institutional investors with the support of governments and international
---------------------- organizations. Corporate financial reporting and financial audit support
---------------------- the corporate governance system. Corporate governance mechanisms
differ between countries. The governance mechanism of each country
---------------------- is shaped by its political, economic and social history as also by its
legal framework. The mechanism could also vary depending on the
---------------------- organization structure and the size of the organization but Corporate
---------------------- Governance philosophy must be based on the principles of openness,
trust, integrity and accountability. However, for Corporate Governance
---------------------- to be sustainable and ethics to be embedded in the fiber of all corporates,
the three most significant players in the corporate governance process:
---------------------- shareholders, managers and directors must all be aware and accountable
---------------------- to the stakeholders in the firm. All parties to corporate governance have
an interest, whether direct or indirect, in the effective performance of the
---------------------- organization.

----------------------
Keywords
----------------------
●● Globalization: Globalization describes an ongoing process by which
---------------------- regional economies, societies, and cultures have become integrated
through communication and trade.
----------------------
●● Monetary Policy: Monetary policy is the process a government, central
---------------------- bank, or monetary authority of a country uses to control (i) the supply of
money, (ii) availability of money, and (iii) cost of money or rate of interest
---------------------- to attain a set of objectives oriented towards the growth and stability of
---------------------- the economy.
●● Fiscal Policy: Fiscal policy is a government policy for dealing with the
---------------------- budget (especially with taxation and borrowing) and use of government
expenditure and revenue collection to influence the levels of economic
----------------------
activity.
---------------------- ●● Leverage: In finance, leverage (also known as gearing or levering) refers
to the use of debt to supplement investment. It is a measure of the ability
----------------------
of a firm to service its debts.
---------------------- ●● Bankruptcy: Bankruptcy is a legally declared inability of an individual
or organization to pay its creditors.
----------------------

----------------------

150 Corporate Governance

 Notes
Self-Assessment Questions
----------------------
1. Growth-through-acquisition strategy is an accepted method to grow a
business. What went wrong at WorldCom? ----------------------
2. What are the ethical considerations involved in a company’s decision to
----------------------
loan executives money to purchase shares of company stock?
3. Had there been more independent directors and a strong audit committee, ----------------------
would the Enron story have been different? ----------------------
4. Which aspects of corporate governance were lacking in Enron?
----------------------
5. Analyze the factors that enticed Lehman Brothers to enter into the
subprime mortgage business and ultimately into the US financial crisis. ----------------------
6. Critically evaluate the role of the accounting profession in corporate ----------------------
scandals such as Enron, Xerox and WorldCom.
----------------------
7. The Satyam saga is only the tip of the iceberg of governance issues in
India. Comment. ----------------------
8. Can we say that globalization of business leads to better governance ----------------------
models?
----------------------
Answers to Check your Progress
----------------------
Check your Progress 1
----------------------
State True or False.
----------------------
1. True
2. True ----------------------

----------------------
Suggested Reading
----------------------
1. Cadbury, Adrian. 2003. Corporate Governance and Chairmanship: a ----------------------
personal view. Oxford University Press.
2. Chandratre, K R and A N Navare. 2010. Corporate Governance – A ----------------------
Practical Handbook. Bharat Law House Pvt. Ltd. ----------------------
3. Gupta, L.C. 1989. Corporate Boards and Nominee Directors. Oxford
University Press. ----------------------

4. Gupta, L.C. 1974. Corporate management and Accountability. Chennai: ----------------------

McMillan Institute for FM and Research.
----------------------
5. Mallin. Corporate Governance2/e. OUP.
----------------------

----------------------

----------------------

Globalization and Corporate Governance 151

 Notes

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------
----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

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152 Corporate Governance

Regulatory Framework and Investor Protection - An
Overview of existing Measures for Investor Protection UNIT

Structure:
9.1 Introduction
9
9.2 Existing Regulatory Framework
9.3 Need for Investor Protection
9.4 Role of Corporate Governance in Investor Protection
9.5 A Critical Appraisal of the Extent of Protection Given to the Investors
9.6 Areas that Need Improvement
9.7 Conclusion
Summary
Key Words
Self-Assessment Questions
Answers to Check your Progress
Suggested Reading
Annexure

153
Regulatory Framework and Investor Protection - An Overview of existing
Measures for Investor Protection
 Notes
Objectives
----------------------

---------------------- After going through this unit, you will be able to:
• State the need and essence of investor protection.
----------------------
• Explain the role of corporate governance in investor protection.
----------------------
• Discuss the measures taken to address investor concerns.
---------------------- • Identify areas that need attention in the process of investor protection.
---------------------- • Describe some best practices in protecting investors against market
irregularities.
----------------------

---------------------- 9.1 INTRODUCTION

---------------------- Investors are the main stake holders in a company. As shareholders, they
are the ultimate owners of the company. An incorporated association operates
---------------------- on the principle of separation of ownership and management where the Board
---------------------- of Directors have to run the company keeping in view the shareholder’s
interests. While the term shareholders is limited to people holding shares of
---------------------- the company, the term investors is broad taking into the purview all classes of
investors. The company starts its business on the basis of investments made by
---------------------- different investors and as agents of the company, the board of directors should
---------------------- try to maximise shareholders wealth. When corporates fail to follow ethical
practices, the people who suffer directly are the investors. Investor protection
---------------------- is the foundation of a healthy capital market. There are different categories of
investors; small or retail investors, institutional investors and high net worth
---------------------- individuals. Not all of them need the same degree of protection. It is generally
---------------------- the small investors who considering his lack of financial literacy and lack of
information need greater protection.
---------------------- The Joint Parliamentary Committee (JPC) set up to investigate the
---------------------- securities market scam of 1999-2001 involving the Ketan Parekh, some other
brokers and bankers, observed as follows: Investors confidence in the market -
---------------------- “investor protection is a continues exercise and not a one-time effort. A recent
survey done by National Council of Applied Economic Research for SEBI
---------------------- reveals that only a nominal portion of household savings flows into the capital
---------------------- market. The main reason for such insignificant flow can be attributed to lack
of confidence of the retail investors in the capital market. It has been observed
---------------------- that poor disclosures at the time of public issue and manipulative pricing of
the ‘issues’ by the companies often result in robbing the uninformed investor.
---------------------- In order, therefore, to ensure that the investors are’ well informed, it is not
---------------------- only very important to have full disclosures but also to ensure that these are
authentic.” (Para 14.52 of the Report). The J.J. Irani committee working on the
---------------------- Draft Companies Bill has recommended that effective measures be initiated for
protecting the interests of stakeholders and investors, including small investors,
---------------------- through legal basis for sound corporate governance practices.

154 Corporate Governance

9.2 EXISTING REGULATORY FRAMEWORK Notes

The capital market in India has time and again been monitored with ----------------------
regulatory machinery including the Ministry of Corporate Affairs, the Securities
Exchange Board of India and Securities Contract Regulation Act, 1956. Inspite ----------------------
of legislative measures, there are fraudulent companies which are cheating the ----------------------
investors. Whenever any investor faces an institutional failure, he does not get
help from any quarter and has to accept it as a bad luck. The scams remain ----------------------
under investigation with no concrete steps taken against default companies. The
investors are protected to a certain extent under the Companies Act, 1956, The ----------------------
Securities Contract (Regulation) Act 1956 and the Securities Exchange Board ----------------------
of India (SEBI). The primary functions of the Securities and Exchange Board
of India (SEBI) are to protect the interests of investors in the security markets ----------------------
in India and to regulate the securities market to ensure its orderly operation.
With this objective, SEBI issued the SEBI (Disclosure and Investor Protection) ----------------------
Guidelines, 2000. SEBI uses these guidelines as a yardstick to ensure that ----------------------
investor interests are protected.
The SEBI issues guidelines to issuing companies, stock exchanges, ----------------------
stock brokers and other intermediaries, etc. Among other guidelines, the SEBI ----------------------
is of the view that the guidelines for Disclosure of Information for Investor
Protection are expected to protect the interest of the investors. It is based on ----------------------
the logic that the disclosure of information by the issuing companies as per the
law may enable the investors to take a right investment decision and thereby ----------------------
the investors would protect themselves. If at all, there is any grievance to any ----------------------
of the investors over the information disclosed or procedure to be followed, the
investors can redress their grievance as per the grievance redressal mechanism ----------------------
of the SEBI.
----------------------
9.3 NEED FOR INVESTOR PROTECTION ----------------------
The investor base in India is huge and investors are a heterogeneous ----------------------
group. They may be institutional investors, high net worth individuals, small
or retail investors or corporate entities. Not all investors need equal degree ----------------------
of protection. It is the small investor or the minority shareholder who needs ----------------------
maximum protection. The reason being he is gullible, easily swayed by the
promises of post listing gains or quick market appreciation. An investor has ----------------------
three objectives while investing his money, namely safety, liquidity and return
on investment. Protection of investors is of utmost importance as it is his faith ----------------------
in the stock market that is the foundation stone for its future growth. Normally, ----------------------
an investor is a blind person who does not know about the internal management
of the company. An investor cannot guide the fate or destiny of the money ----------------------
invested. Many investors do not have adequate knowledge to take informed
investment decisions. They are not aware of the complete risk-return profile ----------------------
of the different investment options. Some investors may not be fully aware ----------------------
of the precautions they should take while dealing with market intermediaries
and dealing in different securities. They may not be familiar with the market ----------------------

155
Regulatory Framework and Investor Protection - An Overview of existing
Measures for Investor Protection
 Notes mechanism and the practices as well as their rights and obligations. An investor
to that extent is quite fragile and is exposed to certain risks because the utiliser
---------------------- of his money can commit mistakes. Normally they are contributing to the
funds for productive purpose of the company, and they are exposing him to the
---------------------- business decisions that the company has taken or will be taking. There are no
---------------------- doubt laws some of which are adequate but some are not. “Investor protection”
is a very popular phrase which everyone concerned with regulation of the
---------------------- capital markets uses these days, be they the Securities and Exchange Board
of India, Stock Exchanges, Investor’s Associations or for that matter of fact
---------------------- the companies themselves. It is a wide term encompassing various measures
---------------------- designed to protect the investors from malpractices of companies, merchant
bankers, depository participants and other intermediaries. A protected capital
---------------------- market would help investors take well informed financial decisions besides
protecting their interests and ensuring orderly conditions in markets.
----------------------
In the 2009-10 economic survey presented in the parliament, the
---------------------- government said the recent global financial turmoil raised many issues about
governance of financial intermediaries and awareness of investors.
----------------------
”Investor awareness is a pre-requisite for investor protection. In fact,
---------------------- investor protection and education are two sides of the same coin,” the economic
survey said. “Neither will have the desired impact in isolation.” The economic
----------------------
survey also pointed out that the interdependence between companies and mutual
---------------------- funds has recently raised concerns relating to volatility in financial markets.

---------------------- Check your Progress 1

----------------------
State True or False.
---------------------- 1. The term shareholders mean only the people holding shares of the
company.
----------------------
2. The SEBI guidelines for Disclosure of Information for Investor Protection
---------------------- are based on the logic that the disclosure of information by companies
will enable the investors protect themselves.
----------------------
Fill in the blanks.
----------------------
1. The small investors need protection due to their lack of financial literacy
---------------------- and lack of ___________.
---------------------- 2. Investor protection and _________ needs to be done together for it to
have any beneficial effect.
----------------------

---------------------- Activity 1
----------------------
Search the library for the securities scam case of Ketan Parikh. Search for
---------------------- the punishment given to Ketan Parikh by the courts. Find out how it was
different from Harshad Mehta case.
----------------------

156 Corporate Governance

9.4 ROLE OF CORPORATE GOVERNANCE IN INVESTOR Notes
PROTECTION
----------------------
In the wake of corporate scandals and malfeasance, millions of investors ----------------------
have lost their hard earned savings. The high cost of corporate litigation, wide-
spread shareholders’ base and the manipulative practices adopted by promoters ----------------------
make it difficult for shareholder’s activists to survive. One of the important
tools of ensuring investor protection is through corporate governance. Investor ----------------------
protection and corporate governance go hand in hand. Corporate governance ----------------------
simply put is good governance. In the Report of Committee of Securities
Exchange Board of India on Corporate Governance, it has been defined “as ----------------------
the acceptance by management of the inalienable rights of shareholders as
the true owners of the corporation and of their own role as trustees on behalf ----------------------
of the shareholders. It is about commitment to values, about ethical business ----------------------
conduct and about making a distinction between personal & corporate funds in
the management of a company.” This definition is inspired from the Gandhian ----------------------
principle of trusteeship. Corporate governance empowers the shareholder and
fuels’ shareholders activism. It ensures that ethical practices of business are ----------------------
practiced where timely disclosures are made to the stake holders to enable them ----------------------
take an informed decision. Transmission of information is important because an
informed investor is a protected investor and shareholders respond positively to ----------------------
companies with such practices.
----------------------
The link between corporate and investor protection is that the former
enables to take care of the conflict between the interest of investors to get the ----------------------
good return on their invested funds and the interest of management to exert
control over the use of those funds with as little interference from investors as ----------------------
possible. ----------------------
Corporate Governance and Investor Protection go hand in hand as good
governance enhances investor confidence, increases investor participation in ----------------------
capital market and results in overall health of the Indian economy. It ensures ----------------------
that investors are informed about the affairs of the company on regular basis
and therefore are able to take an informed decision. ----------------------

----------------------
9.5 A CRITICAL APPRAISAL OF THE EXTENT OF
PROTECTION GIVEN TO THE INVESTORS ----------------------

SEBI has been instrumental in regulating the market with a plethora of ----------------------
regulations, rules and notification for greater disclosure and accountability on ----------------------
the part of board of directors. By checking and preventing corporate malpractices
like fraud, insider trading and market manipulations, SEBI has acted as a ----------------------
watchdog of the securities market. The following are some of the measures
initiated by the Ministry of Corporate affairs and SEBI for better protection of ----------------------
Investors. ----------------------
1. Voluntary Guidelines on Corporate Governance 2009 have been released
----------------------
by the Ministry of Corporate affairs. These provide for a set of good

157
Regulatory Framework and Investor Protection - An Overview of existing
Measures for Investor Protection
 Notes practices which may be voluntarily adopted by the public companies
and private companies. The guidelines are not intended to be a substitute
---------------------- for or addition to the existing laws but are recommendatory in nature.
They have recommendations for the composition of the Board, role of
---------------------- Independent Director, audit committee, risk management, role of auditors
---------------------- and whistle blower policy.
2. The role of independent directors is paramount to protect Investors.
----------------------
Independent Directors as the name suggests, are independent of any bias
---------------------- towards the company and the Board. Their primary duty is to provide an
unbiased, independent, and experienced third party perspective to the
---------------------- board. Clause 49 of the listing agreements defines independent directors as
“directors who apart from receiving director’s remuneration, do not have any
----------------------
other material pecuniary relationship or transactions with the company, its
---------------------- promoters, its management or its subsidiaries, which in judgment of the board
may affect independence of judgment of the directors.” Among the many
---------------------- shortcomings of the Satyam episode was the inefficiency of independent
directors who were supposed to safeguard the interests of all stakeholders.
----------------------
The new guidelines provide for the attributes, tenure, remuneration and
---------------------- autonomy of these directors. Attributes for independent directors such as
integrity, experience and expertise, foresight, managerial qualities and
---------------------- ability to read and understand financial statements, as well as procurement
of a Certificate of Independence from such independent directors at the time
----------------------
of their appointment are the highlights of these guidelines.
---------------------- 3. Shareholders in general are quite passive and non assertive about their
rights. In big companies, as the shareholders are a disorganised body,
----------------------
they are not in a position to closely monitor the company, given the
---------------------- expenses-return trade off of such monitoring. This may result in managers
pursuing their own goals that may be in partial or complete disregard of
---------------------- shareholders’ objectives. Another reason for low level of participation is
the lack of financial literacy. Investor Education and Protection Fund has
----------------------
been playing a significant role in creating awareness education programme
---------------------- through media, organizing seminars and symposia and financing research
projects pertaining to investor education, awareness.
----------------------
4. The legal provision for appointment of small shareholders’ director
---------------------- is a welcome step for shareholders to promote the cause of corporate
democracy by encouraging their participation in board level decision
---------------------- making. However, the requirement being optional, companies are reluctant
to appoint shareholders’ directors. There is no case where small investors
----------------------
could compel boards or Chief Executive Officers of companies showing
---------------------- losses year after year to improve performance or quit. It is, therefore,
suggested that the appointment of small shareholders’ director be made
---------------------- mandatory rather than optional.
---------------------- 5. Amendments have been made in the SEBI (Disclosure and Investor
Protection) Guidelines. The following are some of them:
----------------------

158 Corporate Governance

 ●● I PO grading has been made mandatory for all primary issues of Notes
unlisted companies. It is the grade assigned by a Credit Rating
Agency registered with SEBI, to the initial public offering/follow ----------------------
on public offering (IPO) of equity shares or any other security which
may be converted into or exchanged with equity shares at a later ----------------------
date. The grade represents a relative assessment of the fundamentals ----------------------
of that issue in relation to the other listed equity securities in India.
Such grading is generally assigned on a five-point scale with a ----------------------
higher score indicating stronger fundamentals and vice versa.
----------------------
●● ompulsory listing of IPO on atleast one stock exchange with
C
nationwide trading terminals. Earlier there was no regulatory ----------------------
stipulation on an unlisted company making an IPO to compulsorily
list the securities being issued through the IPO on stock exchanges ----------------------
having nationwide trading terminals. Listing of securities on ----------------------
stock exchanges having nationwide trading terminals provides an
active trading platform to investors, from all across the country, in ----------------------
securities of the company.
----------------------
●● “ Application Supported by Blocked Amount (ASBA)” an
application for subscribing to a public issue or rights issue, along ----------------------
with an authorisation to Self Certified Syndicate Bank to block the
application money in a bank account has been introduced. ----------------------
●● nhancing the limit on a retail investor from the existing 1 lac to
E ----------------------
2 lac and creating a level playing field between an institutional
investor and retail investors are some of the measures enhancing ----------------------
investor participation in the capital market. ----------------------
●● lass action suits as tool in the hands of the minority shareholder:
C
Minority shareholders individually may be a minority but ----------------------
collectively can be a majority. This can happen only when they
----------------------
initiate a representative action in the form of a class action suit.
Class action suits are popular in the United States and are now ----------------------
being preferred as a vehicle for investor justice. They provide an
edge to small shareholders to come together and claim damages ----------------------
for the corporate frauds. They also reduce multiplicity of suits and
----------------------
lessen the burden on courts.
----------------------
9.6 AREAS THAT NEED IMPROVEMENT
----------------------
1. The judicial system takes too long to deliver justice. Justice delayed is
justice denied. Courts in most cases follow detailed procedure and call ----------------------
for evidence rather going by the spirit of law for protecting the rights ----------------------
of investors. So far no effective action has been against hundreds of
companies, their promoters and directors that have vanished after raising ----------------------
money from the public.
----------------------
2. Most of the institutional investors are quasi-government entities and tend
to toe the government line. The sole concern of institutional investors ----------------------

159
Regulatory Framework and Investor Protection - An Overview of existing
Measures for Investor Protection
 Notes and mutual funds on the board of financially assisted companies is to
safeguard their interest rather than protecting interest of small investors.
---------------------- They uphold the decision of dominant promoters and management, when
acting against the interest of small shareholders.
----------------------
3. The Satyam debacle has exposed the lacuna in Indian corporate governance
---------------------- mechanism and the regulatory framework. It has raised many questions
about corporate governance in India—the role of boards, of independent
----------------------
directors, of the auditors, of investors and of analysts. Unanimously it
---------------------- has been a gross failure of corporate governance standards in India and
protection of rights of minority investors.
----------------------
4. Therefore the issue in Indian corporate governance is not a ‘conflict
---------------------- between management and owners’ as elsewhere, but ‘a conflict between
the dominant shareholders and the minority shareholders’. In India, it
---------------------- is still family-controlled, owner-driven paradigm. CEOs do not matter
much in the management of the company.
----------------------
5. In terms of investor protection, the following are the key elements that aid
---------------------- in this protection.
---------------------- i. Creating financial literacy - An investor even though investing in
the securities of the company will not be able to take an informed
---------------------- decision unless he/she is able to interpret the essence of financial
---------------------- statements. With greater awareness, there are fewer chances that
these investors will put their money in a fraudulent company. This
---------------------- will be possible with an active campaigning educating the investors
about the nuances of investment in securities.
----------------------
ii. Central agency for investor protection - There is often a discussion
---------------------- of a need for a central agency to manage investor protection. This
central agency can then consolidate all the current efforts of various
---------------------- intermediary institutions to create a governing and regulatory body
---------------------- where investors can seek assistance and information. This central
agency will go a long way in building the trust of the investors.
---------------------- iii. Other measures: In the recent CEO Forum hosted by NASSCOM,
---------------------- Mr. Karnik spoke about how governance deals with risk that
management takes and how the company can do crisis management.
---------------------- He quoted that “Well managed is good governance.” In his view,
independent directors play a pivotal role in the board of directors
---------------------- and hence it is preferred that independent director should not be
---------------------- from the same industry or fraternity as familiarity would dilute his/
her independency. He has suggested the following procedures:
----------------------
●● Rotation of independent directors on the board of the company.
---------------------- ●● Convening a formal separate meeting of the independent
directors.
----------------------
●● Limit the number of boards that an independent director can
---------------------- be on.

160 Corporate Governance

 ●● Setting up different subcommittees for audit, nominations Notes
and compensation.
●● Training the companies on how to manage for independent ----------------------
directors. ----------------------
If implemented, all these measures will enhance the level of transparency
in the dealings of the company, protect the small investor against corporate ----------------------
frauds and restore investor confidence in the securities market. The Narayana ----------------------
Murthy Committee report on corporate governance in 2003 emphasized on the
formal code of conduct for the board. In 2004, clause 49 of the listing agreement ----------------------
was made mandatory to all listed companies to comply with the clause which
laid the definition of independent directors and their constitution on the board. ----------------------
Keeping in view the objective of encouraging the use of better practices ----------------------
through voluntary adoption, the Ministry of Corporate Affairs has drafted a
set of voluntary guidelines in 2009 which not only serve as a benchmark for ----------------------
the corporate sector but also help them in achieving the highest standards of
corporate governance. ----------------------

These guidelines recommend giving formal letters of appointment to ----------------------

Independent Directors. This would define with clarity the job description
of these directors and what is expected out of them. The appointment of ----------------------
Non-Executive Directors and Independent Directors should be through a ----------------------
nomination committee, comprising of majority of Independent Directors
including its Chairman. The Independent Directors should be appointed for a ----------------------
maximum period of six years and there has to be an interval of three years
before their reappointment in similar or other capacity. The guidelines provide ----------------------
that the number of directorships a person can hold as an independent director ----------------------
cannot be more than three tenures in a company and the maximum number
of pubic companies in which an individual may serve as a Non-Executive ----------------------
Directors/Independent Directors should be restricted to seven. Independent
Directors should be allowed to have the option and freedom to meet company ----------------------
management periodically to enable them to study and analyze various ----------------------
information and data provided by the company management.
----------------------
The Guidelines also suggest that a policy of rotation of auditors should
be adopted where an Audit partner should be rotated once every three years, ----------------------
whereas an Audit firm may be rotated once every five years. A period of three or
five years should elapse before a partner or audit firm respectively, can resume ----------------------
the audit of the same company.
----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

161
Regulatory Framework and Investor Protection - An Overview of existing
Measures for Investor Protection
 Notes
Check your Progress 2
----------------------
Fill in the blanks.
----------------------
1. Directors, who, apart from receiving director’s remuneration, do not
---------------------- have any other material pecuniary relationship or transactions with the
company, are called __________ directors.
----------------------
2. Indian corporate governance is a conflict between the dominant
---------------------- shareholders and the ____________ shareholders’.

---------------------- Multiple Choice Single Response.

1. Independent directors are appointed by
----------------------
i. Chairman of the board
----------------------
ii. Government
---------------------- iii. Financial institutions
---------------------- iv. Nomination committee

---------------------- 2. As per the in the SEBI (Disclosure and Investor Protection) Guidelines,
the retail investor limit is
----------------------
i. 1 lacs
---------------------- ii. 2 lacs
---------------------- iii. 3 lacs

---------------------- iv. 4 lacs

----------------------
Activity 2
----------------------
Check the SEBI website for the regulations on Insider trading. Check the
---------------------- latest amendments issued on it.
----------------------
9.7 CONCLUSION
----------------------

---------------------- Investors have emerged as an empowered lot in the recent times. A lot
of factors have contributed to that. Due to deregulation and institutionalization
---------------------- of the capital market, a lot of emphasis is now on investor protection. Opening
of international markets have also enhanced the standards of disclosure
---------------------- requirements and corporate governance. At this juncture, companies need to
---------------------- pay attention to the simple fact that compliance of laws and ethical practices
are enablers for organisational excellence. A healthy capital market functioning
---------------------- on the core principles, transparency, ethics and responsible governance will be
a protective shield for any investor big or small.
----------------------

----------------------

162 Corporate Governance

 Summary Notes

●● An incorporated association operates on the principle of separation of ----------------------

ownership and management where the Board of Directors have to run
----------------------
the company keeping in view the shareholders interests. While the term
‘shareholders’ is limited to people holding shares of the company, the ----------------------
term investors is broad taking into the purview all classes of investors.
----------------------
●● There are different categories of investors. Small or retail investors,
institutional investors and high net worth individuals. Not all of them ----------------------
need the same degree of protection. It is generally the small investors who
considering his lack of financial literacy and lack of information need ----------------------
greater protection. Inspite of legislative measures, there are fraudulent
----------------------
companies which are cheating the investors.
●● Whenever any investor faces an institutional failure, he does not get help ----------------------
from any quarter and has to accept it as a bad luck. The scams remain under
----------------------
investigation with no concrete steps taken against default companies.
●● The investors are protected to a certain extent under the Companies Act, ----------------------
1956, The Securities Contract (Regulation) Act 1956 and the Securities
Exchange Board of India (SEBI). These are some of the measures initiated ----------------------
by the Ministry of Corporate Affairs and SEBI for better protection of ----------------------
Investors.
●● Investor Education and Protection Fund has been playing a significant role ----------------------
in creating awareness education programme through media, organizing ----------------------
seminars and symposia and financing research projects pertaining to
investor education, awareness; IPO grading has been made mandatory ----------------------
for all primary issues of unlisted companies. It is the grade assigned by a
Credit Rating Agency registered with SEBI, to the initial public offering/ ----------------------
follow on public offering (IPO) of equity shares or any other security ----------------------
which may be converted into or exchanged with equity shares at a later
date. Application Supported by Blocked Amount (ASBA), an application ----------------------
for Subscribing to a public issue or rights issue, along with an authorisation
to Self Certified Syndicate Bank to block the application money in a bank ----------------------
account has been introduced. ----------------------
●● Enhancing the limit on a retail investor from the existing 1 lac to 2 lac and
creating a level playing field between an institutional investor and retail ----------------------
investors are some of the measures enhancing investor participation in the ----------------------
capital market.
●● Investors have emerged as an empowered lot in the recent times. A lot of ----------------------
factors have contributed to that. Due to deregulation and institutionalization ----------------------
of the capital market, a lot of emphasis is now on investor protection.
Opening of international markets have also enhanced the standards of ----------------------
disclosure requirements and corporate governance.
----------------------

----------------------

163
Regulatory Framework and Investor Protection - An Overview of existing
Measures for Investor Protection
 Notes Keywords
----------------------
●● Retail Investor: An investor who is an individual as opposed to an
---------------------- institutional investor. As they are gullible and are easily swayed by
fluctuations in the capital market, they need more protection.
---------------------- ●● Application Supported by Blocked Amount (ASBA): It is an application
---------------------- for subscribing to a public issue or rights issue, along with an authorisation
to Self Certified Syndicate Bank to block the application money in a bank
---------------------- account has been introduced.
---------------------- ●● Class Action Suits: They are popular in the United States and are now
being preferred as a vehicle for investor justice. They provide an edge to
---------------------- small shareholders to come together and claim damages for the corporate
frauds. They also reduce multiplicity of suits and lessen the burden on
---------------------- courts.
----------------------
Self-Assessment Questions
----------------------
1. Throw light on the existing regulatory framework for the purpose of
----------------------
securing investor protection.
---------------------- 2. What measures have been initiated to enhance the protection given to the
investors?
----------------------
3. Enumerate on the role of Corporate Governance in Investor Protection
----------------------
4. Suggest steps to tackle some of the irregularities in the capital market.
----------------------
Answers to Check your Progress
----------------------

---------------------- Check your Progress 1

State True or False.
----------------------
1. True
----------------------
2. True
---------------------- Fill in the blanks.
---------------------- 1. The small investors need protection due to their lack of financial literacy
and lack of information.
----------------------
2. Investor protection and education needs to be done together for it to have
---------------------- any beneficial effect.

----------------------

----------------------

----------------------

----------------------

164 Corporate Governance

Check your Progress 2 Notes
Fill in the blanks.
----------------------
1. Directors, who, apart from receiving director’s remuneration, do not
have any other material pecuniary relationship or transactions with the ----------------------
company, are called independent directors.
----------------------
2. Indian corporate governance is a conflict between the dominant
shareholders and the minority shareholders’. ----------------------
Multiple Choice Single Response. ----------------------
1. Independent directors are appointed by ----------------------
iv. Nomination committee
----------------------
2. As per the in the SEBI (Disclosure and Investor Protection) Guidelines,
the retail investor limit is ----------------------
ii. 2 lacs ----------------------
----------------------
Suggested Reading
----------------------
1. www.mca.gov.in/.../CG_Voluntary_Guidelines_2009_24dec2009.pdf
----------------------
2. http://www.sebi.gov.in/sebiweb/
3. Chandratre, K R and A N Navare. 2010. Corporate Governance – A ----------------------
Practical Handbook. Bharat Law House Pvt. Ltd.
----------------------
4. Das, Subhash Chandra. Corporate Governance in India: An Evaluation.
PHI Learning. ----------------------
5. Gupta, L.C. 1974. Corporate management and Accountability. Chennai: ----------------------
McMillan Institute for FM and Research.
----------------------
6. Mallin. Corporate Governance2/e. OUP.
----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

165
Regulatory Framework and Investor Protection - An Overview of existing
Measures for Investor Protection
 Notes ANNEXURE
---------------------- MINISTRY OF CORPORATE AFFAIRS

---------------------- CORPORATE GOVERNANCE - VOLUNTARY GUIDELINES

2009
----------------------
I. BOARD OF DIRECTORS
----------------------
A. APPOINTMENT OF DIRECTORS
---------------------- A.1 Appointments to the Board
---------------------- i. Companies should issue formal letters of appointment to Non-Executive
Directors (NEDs) and Independent Directors - as is done by them while
---------------------- appointing employees and Executive Directors. The letter should specify:
---------------------- ●● The term of the appointment;
---------------------- ●● The expectation of the Board from the appointed director; the
Board-level committee(s) in which the director is expected to serve
---------------------- and its tasks;

---------------------- ●● The fiduciary duties that come with such an appointment along with
accompanying liabilities;
---------------------- ●● Provision for Directors and Officers (D&O) insurance, if any,;
---------------------- ●● The Code of Business Ethics that the company expects its directors
and employees to follow;
----------------------
●● The list of actions that a director should not do while functioning as
---------------------- such in the company; and
●● The remuneration, including sitting fees and stock options etc, if
----------------------
any.
---------------------- ii. Such formal letter should form a part of the disclosure to shareholders at
the time of the ratification of his/her appointment or re-appointment to the
---------------------- Board. This letter should also be placed by the company on its website, if
---------------------- any, and in case the company is a listed company, also on the website of
the stock exchange where the securities of the company are listed.
----------------------
A.2 Separation of Offices of Chairman & Chief Executive Officer
---------------------- To prevent unfettered decision making power with a single individual, there
should be a clear demarcation of the roles and responsibilities of Chairman of
----------------------
the Board and that of the Managing Director/Chief Executive Officer (CEO).
---------------------- The roles and offices of Chairman and CEO should be separated, as far as
possible, to promote balance of power.
----------------------
A.3 Nomination Committee
---------------------- i. The companies may have a Nomination Committee comprising of majority
---------------------- of Independent Directors, including its Chairman. This Committee should
consider:
----------------------

166 Corporate Governance

 ●● proposals for searching, evaluating, and recommending appropriate Notes
Independent Directors and Non-Executive Directors [NEDs], based
on an objective and transparent set of guidelines which should be ----------------------
disclosed and should, inter-alia, include the criteria for determining
qualifications, positive attributes, independence of a director and ----------------------
availability of time with him or her to devote to the job; ----------------------
●● determining processes for evaluating the skill, knowledge,
experience and effectiveness of individual directors as well as the ----------------------
Board as a whole. ----------------------
ii. With a view to enable Board to take proper and reasoned decisions,
Nomination Committee should ensure that the Board comprises of ----------------------
a balanced combination of Executive Directors and Non-Executive ----------------------
Directors.
iii. The Nomination Committee should also evaluate and recommend the ----------------------
appointment of Executive Directors. ----------------------
iv. A separate section in the Annual Report should outline the guidelines
----------------------
being followed by the Nomination Committee and the role and work done
by it during the year under consideration. ----------------------
A.4 Number of Companies in which an Individual may become a Director
----------------------
i. For reckoning the maximum limit of directorships, the following
categories of companies should be included: ----------------------
●● public limited companies, ----------------------
●● private companies that are either holding or subsidiary companies
----------------------
of public companies.
ii. In case an individual is a Managing Director or Whole-time Director in ----------------------
a public company, the maximum number of companies in which such an
----------------------
individual can serve as a Non-Executive Director or Independent Director
should be restricted to seven. ----------------------
B. INDEPENDENT DIRECTORS ----------------------
B.1 Attributes for Independent Directors
----------------------
i. The Board should put in place a policy for specifying positive attributes
of Independent Directors such as integrity, experience and expertise, ----------------------
foresight, managerial qualities and ability to read and understand financial
statements. Disclosure about such policy should be made by the Board in ----------------------
its report to the shareholders. Such a policy may be subject to approval by ----------------------
shareholders.
----------------------
ii. All Independent Directors should provide a detailed Certificate of
Independence at the time of their appointment, and thereafter annually. ----------------------
This certificate should be placed by the company on its website, if any,
and in case the company is a listed company, also on the website of the ----------------------
stock exchange where the securities of the company are listed.
----------------------

167
Regulatory Framework and Investor Protection - An Overview of existing
Measures for Investor Protection
 Notes B.2 Tenure for Independent Director
i. An individual may not remain as an Independent Director in a company
----------------------
for more than six years.
---------------------- ii. A period of three years should elapse before such an individual is inducted
in the same company in any capacity.
----------------------
iii. No individual may be allowed to have more than three tenures as
---------------------- Independent Director in the manner suggested in ‘i’ and ‘ii’ above.
---------------------- iv. The maximum number of pubic companies in which an individual may
serve as an Independent Director should be restricted to seven.
----------------------
B.3 Independent Directors to have the Option and Freedom to meet
---------------------- Company Management periodically

---------------------- i. In order to enable Independent Directors to perform their functions

effectively, they should have the option and freedom to interact with the
---------------------- company management periodically.
---------------------- ii. Independent Directors should be provided with adequate independent
office space and other resources and support by the companies including
---------------------- the power to have access to additional information to enable them to
study and analyze various information and data provided by the company
----------------------
management.
---------------------- C. REMUNERATION OF DIRECTORS
---------------------- C.1 Remuneration

---------------------- C.1.1. Guiding Principles-Linking Corporate and Individual Performance

i. The companies should ensure that the level and composition of
---------------------- remuneration is reasonable and sufficient to attract, retain and motivate
---------------------- directors of the quality required to run the company successfully.
ii. It should also be ensured that relationship of remuneration to performance
----------------------
is clear. Incentive schemes should be designed around appropriate
---------------------- performance benchmarks and provide rewards for materially improved
company performance. Benchmarks for performance laid down by the
---------------------- company should be disclosed to the members annually.
---------------------- iii. Remuneration Policy for the members of the Board and Key Executives
should be clearly laid down and disclosed. Remuneration packages
---------------------- should involve a balance between fixed and incentive pay, reflecting
short and long term performance objectives appropriate to the company’s
----------------------
circumstances and goal.
---------------------- iv. The performance-related elements of remuneration should form a
significant proportion of the total remuneration package of Executive
----------------------
Directors and should be designed to align their interests with those of
---------------------- shareholders and to give these Directors keen incentives to perform at the
highest levels.
----------------------

168 Corporate Governance

C.1.2. Remuneration of Non-Executive Directors (NEDs) Notes
i. The companies should have the option of giving a fixed contractual
----------------------
remuneration, not linked to profits, to NEDs. The companies should have
the option to: ----------------------
(a) Pay a fixed contractual remuneration to its NEDs, subject to an
----------------------
appropriate ceiling depending on the size of the company; or
(b) Pay up to an appropriate percent of the net profits of the company. ----------------------
ii. The choice should be uniform for all NEDs, i.e. some should not be paid ----------------------
a commission on profits while others are paid a fixed amount.
----------------------
iii. If the option chosen is ‘i(a)’ above, then the NEDs should not be eligible
for any commission on profits. ----------------------
iv. If stock options are granted as a form of payment to NEDs, then these ----------------------
should be held by the concerned director until three years of his exit from
the Board. ----------------------
C.1.3. Structure of Compensation to NEDs ----------------------
i. The companies may use the following manner in structuring remuneration
----------------------
to NEDs:
●● Fixed component: This should be relatively low, so as to align ----------------------
NEDs to a greater share of variable pay. These should not be more
----------------------
than one-third of the total remuneration package.
●● Variable component: Based on attendance of Board and Committee ----------------------
meetings (atleast 75% of all meetings should be an eligibility pre-
----------------------
condition)
●● Additional variable payment(s) for being: ----------------------
The Chairman of the Board, especially if he/she is a non-executive ----------------------
chairman
----------------------
The Chairman of the Audit Committee and/or other committees
Members of Board committees. ----------------------
ii. If such a structure (or any similar structure) of remuneration is adopted by ----------------------
the Board, it should be disclosed to the shareholders in the Annual Report
of the company. ----------------------

C.1.4. Remuneration of Independent Directors (IDs) ----------------------

i. In order to attract, retain and motivate Independent Directors of quality ----------------------
to contribute to the company, they should be paid adequate sitting fees
which may depend upon the twin criteria of Net Worth and Turnover of ----------------------
companies.
----------------------
ii. The IDs may not be allowed to be paid stock options or profit based
commissions, so that their independence is not compromised. ----------------------

----------------------

169
Regulatory Framework and Investor Protection - An Overview of existing
Measures for Investor Protection
 Notes C.2 Remuneration Committee
i. Companies should have Remuneration Committee of the Board. This
----------------------
Committee should comprise of atleast three members, majority of whom
---------------------- should be non-executive directors with atleast one being an Independent
Director.
----------------------
ii. This Committee should have responsibility for determining the
---------------------- remuneration for all executive directors and the executive chairman,
including any compensation payments, such as retirement benefits or
---------------------- stock options. It should be ensured that no director is involved in deciding
his or her own remuneration.
----------------------
iii. This Committee should also determine principles, criteria and the basis
---------------------- of remuneration policy of the company which should be disclosed to
shareholders and their comments, if any, considered suitably. Whenever,
----------------------
there is any deviation from such policy, the justification/reasons should
---------------------- also be indicated/disclosed adequately.

---------------------- iv. This Committee should also recommend and monitor the level and
structure of pay for senior management, i.e. one level below the Board.
---------------------- v. This Committee should make available its terms of reference, its role, the
---------------------- authority delegated to it by the Board, and what it has done for the year
under review to the shareholders in the Annual Report.
---------------------- II. RESPONSIBILITIES OF THE BOARD
---------------------- A. Training of Directors
---------------------- i. The companies should ensure that directors are inducted through a suitable
familiarization process covering, inter-alia, their roles, responsibilities
---------------------- and liabilities. Efforts should be made to ensure that every director has
the ability to understand basic financial statements and information and
----------------------
related documents/papers. There should be a statement to this effect by
---------------------- the Board in the Annual Report.
ii. Besides this, the Board should also adopt suitable methods to enrich the
----------------------
skills of directors from time to time.
---------------------- B. Enabling Quality Decision Making
---------------------- The Board should ensure that there are systems, procedures and resources
available to ensure that every Director is supplied, in a timely manner, with
---------------------- precise and concise information in a form and of a quality appropriate to
---------------------- effectively enable/discharge his duties. The Directors should be given substantial
time to study the data and contribute effectively to Board discussions.
----------------------
C. Risk Management
---------------------- i. The Board, its Audit Committee and its executive management should
collectively identify the risks impacting the company’s business and
----------------------
document their process of risk identification, risk minimization, risk
---------------------- optimization as a part of a risk management policy or strategy.

170 Corporate Governance

ii. The Board should also affirm and disclose in its report to members that it Notes
has put in place critical risk management framework across the company,
which is overseen once every six months by the Board. The disclosure ----------------------
should also include a statement of those elements of risk, that the Board
feels, may threaten the existence of the company. ----------------------

D. Evaluation of Performance of Board of Directors, Committees thereof ----------------------

and of Individual Directors
----------------------
The Board should undertake a formal and rigorous annual evaluation of its own
performance and that of its committees and individual directors. The Board ----------------------
should state in the Annual Report how performance evaluation of the Board, its
----------------------
committees and its individual directors has been conducted.
E. Board to place Systems to ensure Compliance with Laws ----------------------
i. In order to safeguard shareholders’ investment and the company’s assets, ----------------------
the Board should, atleast annually, conduct a review of the effectiveness
of the company’s system of internal controls and should report to ----------------------
shareholders that they have done so. The review should cover all material ----------------------
controls, including financial, operational and compliance controls and
risk management systems. ----------------------
ii. The Directors’ Responsibility Statement should also include a statement ----------------------
that proper systems are in place to ensure compliance of all laws applicable
to the company. It should follow the “comply or explain” principle. ----------------------
iii. For every agenda item at the Board meeting, there should be attached an ----------------------
“Impact Analysis on Minority Shareholders” proactively stating if the
agenda item has any impact on the rights of minority shareholders. The ----------------------
Independent Directors should discuss such Impact Analysis and offer
their comments which should be suitably recorded. ----------------------

III. AUDIT COMMITTEE OF BOARD ----------------------

A. Audit Committee – Constitution ----------------------
The companies should have atleast a three-member Audit Committee, with ----------------------
Independent Directors constituting the majority. The Chairman of such
Committee should be an Independent Director. All the members of audit ----------------------
committee should have knowledge of financial management, audit or accounts.
----------------------
B. Audit Committee – Enabling Powers
i. The Audit Committee should have the power to – ----------------------

●● have independent back office support and other resources from the ----------------------
company;
----------------------
●● have access to information contained in the records of the company;
and ----------------------
●● obtain professional advice from external sources. ----------------------
ii. The Audit Committee should also have the facility of separate discussions
with both internal and external auditors as well as the management. ----------------------

171
Regulatory Framework and Investor Protection - An Overview of existing
Measures for Investor Protection
 Notes C. Audit Committee - Role and Responsibilities

---------------------- i. The Audit Committee should have the responsibility to -

---------------------- ●● monitor the integrity of the financial statements of the company;

●● review the company’s internal financial controls, internal audit
---------------------- function and risk management systems;
---------------------- ●● make recommendations in relation to the appointment,
reappointment and removal of the external auditor and to approve
---------------------- the remuneration and terms of engagement of the external auditor;
---------------------- ●● review and monitor the external auditor’s independence and
objectivity and the effectiveness of the audit process.
----------------------
ii. The Audit Committee should also monitor and approve all Related
---------------------- Party Transactions including any modification/amendment in any such
transaction.
----------------------
iii. A statement in a prescribed/structured format giving details about all
---------------------- related party transactions taken place in a particular year should be
included in the Board’s report for that year for disclosure to various
---------------------- stakeholders.
---------------------- IV. AUDITORS

---------------------- A. Appointment of Auditors

i. The Audit Committee of the Board should be the first point of reference
----------------------
regarding the appointment of auditors.
---------------------- ii. The Audit Committee should have regard to the profile of the audit firm,
qualifications and experience of audit partners, strengths and weaknesses,
----------------------
if any, of the audit firm and other related aspects.
---------------------- iii. To discharge its duty, the Audit Committee should:
---------------------- ●● discuss the annual work programme and the depth and detailing of
the audit plan to be undertaken by the auditor, with the auditor;
----------------------
●● examine and review the documentation and the certificate for proof
---------------------- of independence of the audit firm, and
●● recommend to the Board, with reasons, either the appointment/
----------------------
re-appointment or removal of the statutory auditor, along with the
---------------------- annual audit remuneration.
B. Certificate of Independence
----------------------
i. Every company should obtain a certificate from the auditor certifying his/
---------------------- its independence and arm’s length relationship with the client company.
---------------------- ii. The Certificate of Independence should certify that the auditor together
with its consulting and specialized services affiliates, subsidiaries and
---------------------- associated companies or network or group entities has not/have not
----------------------

172 Corporate Governance

 undertaken any prohibited non-audit assignments for the company and Notes
are independent vis-à-vis the client company.
----------------------
C. Rotation of Audit Partners and Firms
i. In order to maintain independence of auditors with a view to look at an ----------------------
issue (financial or non-financial) from a different perspective and to carry
----------------------
out the audit exercise with a fresh outlook, the company may adopt a
policy of rotation of auditors which may be as under: ----------------------
●● Audit partner - to be rotated once every three years
----------------------
●● Audit firm - to be rotated once every five years
----------------------
ii. A cooling off period of three years should elapse before a partner can
resume the same audit assignment. This period should be five years for ----------------------
the firm.
----------------------
D. Need for clarity on information to be sought by auditor and/or
provided by the company to him/it ----------------------
i. With a view to ensure proper and accountable audit, there should be clarity ----------------------
between company management and auditors on the nature and amount of
information/documents/records etc. and periodicity/frequency for supply/ ----------------------
obtaining such information/documents/records, etc.
----------------------
ii. In any case the auditor concerned should be under an obligation to certify
whether he had obtained all the information he sought from the company ----------------------
or not. In the latter case, he should specifically indicate the effect of such
non-receipt of information on the financial statements. ----------------------

E. Appointment of Internal Auditor ----------------------

In order to ensure the independence and credibility of the internal audit process, ----------------------
the Board may appoint an internal auditor and such auditor, where appointed,
should not be an employee of the company. ----------------------
V. SECRETARIAL AUDIT ----------------------
Since the Board has the overarching responsibility of ensuring transparent,
----------------------
ethical and responsible governance of the company, it is important that the Board
processes and compliance mechanisms of the company are robust. To ensure ----------------------
this, the companies may get the Secretarial Audit conducted by a competent
professional. The Board should give its comments on the Secretarial Audit in ----------------------
its report to the shareholders.
----------------------
VI. INSTITUTION OF MECHANISM FOR WHISTLE BLOWING
----------------------
Since the Board has the overarching responsibility of ensuring transparent,
ethical and responsible governance of the company, it is important that the Board ----------------------
processes and compliance mechanisms of the company are robust. To ensure
this, the companies may get the Secretarial Audit conducted by a competent ----------------------
professional. The Board should give its comments on the Secretarial Audit in ----------------------
its report to the shareholders.
----------------------

173
Regulatory Framework and Investor Protection - An Overview of existing
Measures for Investor Protection
 Notes i. The companies should ensure the institution of a mechanism for employees
to report concerns about unethical behavior, actual or suspected fraud, or
---------------------- violation of the company’s code of conduct or ethics policy.
---------------------- ii. The companies should also provide for adequate safeguards against
victimization of employees who avail of the mechanism, and also allow
---------------------- direct access to the Chairperson of the Audit Committee in exceptional
cases.
----------------------

----------------------

----------------------

----------------------

----------------------

----------------------
----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

174 Corporate Governance

Corporate Social Responsibility and Corporate
Governance UNIT

Structure:
10.1 Introduction
10
10.2 Meaning of Corporate Social Responsibility
10.3 Diverse Views on Corporate Social Responsibility
10.4 Corporate Social Responsible Practices in India
10.5 Business Ethics and Corporate Social Responsibility
10.6 Corporate Social Responsibility and Corporate Governance
10.7 Areas to Focus for Corporate Social Responsibility
10.8 CSR Activities of Some Companies
10.9 Corporate Social Responsibility - Voluntary Guidelines 2009
Summary
Key Words
Self-Assessment Questions
Answers to Check your Progress
Suggested Reading

Corporate Social Responsibility and Corporate Governance 175

 Notes
Objectives
----------------------

---------------------- After going through this unit, you will be able to:
• Discuss the need and essence of corporate social responsibility.
----------------------
• Appreciate and appreciate diverse views on CSR.
----------------------
• Describe the corporate social responsibility initiatives in India.
---------------------- • Explain the motives behind CSR initiatives.
----------------------
10.1 INTRODUCTION
----------------------
Every business has to incur a private cost and a social cost. Any business
---------------------- activity would involve the use of resources which are scarce and which have
an opportunity cost. Rapid industrialisation and urbanization has apart from
----------------------
bringing out economic development has also caused a lot of damage to the
---------------------- environment. The cost that the society has to bear in terms of pollution,
deforestation, exploitation of resources is the social cost. While the private
---------------------- cost restricted to the firm, the social cost is borne by the society at large
Sustainability in consumption pattern is essential if we are looking at long time
----------------------
existence and well being of the human race and that of the earth’s resources.
---------------------- Ever increasing population coupled with excessive greed and unscrupulous
consumption is putting a pressure on the environment and disturbing the
---------------------- ecological balance. Changing lifestyles, greater disposal incomes, influence of
aggressive advertisements and conspicuous consumption have accelerated the
----------------------
consumption levels across nations. The life cycle of a product starts from its
---------------------- manufacture, packaging use and disposal all of which will have an ecological
impact. A nation is considered developed on the basis of its capacity to spend or
---------------------- the propensity to consume. The gross domestic product (GDP) is one which the
primary indicators used to gauge the health of a country’s economy. However,
----------------------
it is argued that it is not a correct measure as it encourages development at the
---------------------- cost of sustainability. This defies the basic rule of survival of the human race
that is, to live in harmony with nature.
----------------------

---------------------- 10.2 MEANING OF CORPORATE SOCIAL RESPONSIBILITY

---------------------- Adam Smith, a eighteenth century Scottish moral philosopher and a

pioneer of political economics, in “An Inquiry into the Nature and Causes of the
---------------------- Wealth of Nations,” expressed that the needs and desires of society could best be
met by the free interaction of individuals and organizations in the marketplace.”
----------------------
The Wealth of Nations further noted that, “It is not from the benevolence
---------------------- of the butcher, the brewer, or the baker that we expect our dinner, but from
their regard for their own interest.” This laid the foundation of corporate social
----------------------
responsibility, where consumers were aware about the social benefits of creating
---------------------- the wealth of nations and of financing actions to “advance the interest of society.”

176 Corporate Governance

 A term widely in use in the corporate world, corporate social responsibility Notes
is about how companies manage the business processes to produce an overall
positive impact on society. The European Commission defines CSR as “A ----------------------
concept whereby companies decide voluntarily to contribute to a better society
and a cleaner environment. It is a process whereby companies integrate social ----------------------
and environmental concerns in their business operations and in their interaction ----------------------
with their stakeholders on a voluntary basis”. In the business dictionary, the
term ‘corporate social responsibility’ means that the managers of a company ----------------------
try to make sure that the daily operations of the firm are in line with the social,
economic and environmental philosophies of stakeholders. ----------------------

Corporations are also members of the country where they are formed ----------------------
and like other members, they have social responsibilities. A business needs a
----------------------
healthy, educated workforce, sustainable resources and adept government to
compete effectively. For society to thrive, profitable and competitive businesses ----------------------
must be developed and supported to create income, wealth, tax revenues, and
opportunities for philanthropy. In good corporate governance, the management ----------------------
should be able to meet their social responsibilities. These include making
----------------------
sure that their products are not hazardous to people and to the environment,
sharing their profits for the good of the community as a natural person or human ----------------------
being would do, donating to social causes, organizing activities to benefit the
community. Other good corporate governance practices that overlapped with ----------------------
social responsibility is complying with applicable laws, setting good labour
----------------------
conditions for employees, providing good products to the community, helping
the economy through fair trade practices, paying taxes and other obligations ----------------------
due to the government, making sure that it is meeting commitments to other
persons, natural and juridical alike. Good corporate governance will also ensure ----------------------
that the entity will continue on a going concern existence so that it will be able
----------------------
to pay its employees, pay taxes and give a return for stockholders.
Corporate governance aims to make the corporation a good citizen by ----------------------
being socially responsible. Companies worldwide are increasingly worried
----------------------
about the impact of their business activities on society. Many have created so
called corporate social responsibility (CSR) programmes that aim to balance ----------------------
their operations with the concerns of external stakeholders such as customers,
unions, local communities, NGOs and governments. Social and environmental ----------------------
consequences are weighed against economic gains. Many large, international
----------------------
companies have, in recent years, stepped into line with the new expectations of
how a major business fits into society. There are four dimensions of corporate ----------------------
responsibility.
----------------------
1. Economic - responsibility to earn profit for owners
2. Legal - Compliance of law and conformance to standards. ----------------------

3. Ethical - not acting just for profit but doing what is right, just and fair ----------------------
4. Voluntary and philanthropic - promoting human welfare and goodwill ----------------------

----------------------

Corporate Social Responsibility and Corporate Governance 177

 Notes 10.3 DIVERSE VIEWS ON CORPORATE SOCIAL
RESPONSIBILITY
----------------------

---------------------- There is a debate as to whether the corporations are obligated towards the
society? In the words of Milton Friedman, American economist “There is one
---------------------- and only one social responsibility of business - to use its resources and engage
in activities designed to increase its profit so long as it stays will the rules of the
---------------------- game, which is to say, engages in open and free competition, without deception
---------------------- or fraud.” There are two schools of thought on this issue. One is the free market
view which propagates that the job of business is to create wealth by providing
---------------------- goods and services with the interests of the shareholders as the guiding principle.
The only social responsibility of business is to create shareholder wealth and
---------------------- the pursuit of social goals dilutes business’ primary purpose. According to this
---------------------- theory, drifting into social obligations reduces economic efficiency and profit as
it will impose additional costs.
---------------------- The corporate social responsibility view is that business organisation
---------------------- should be concerned with social issues as corporations are dependent on the
society. Corporations survive on the resources from the society in terms of
---------------------- materials, men and money. Companies whose objectives include commitment
to social cause create a positive image amongst the public. Be it in the nature
---------------------- of tree plantation drives, labour welfare measures training courses, funding
---------------------- hospitals and schools, etc. companies are making their footprints in the social
arena. Companies with a track record of socially responsible initiatives are
---------------------- preferred by prospective employees. The stakeholders including customers,
shareholders, financial institutions and the government also respond positively
---------------------- to such companies. These companies will have an access to finance from
---------------------- investors as investors base their investment decisions not only on financial but
also on social and environmental performance criteria.
----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

---------------------- Fig. 10.1 : The CSR Pyramid

178 Corporate Governance

 Notes
Check your Progress 1
----------------------
Fill in the blanks.
----------------------
1. Corporate social responsibility is about how companies manage the
business processes to produce an overall _______ impact on society ----------------------
Multiple Choice Single Response. ----------------------
1. CSR is a process whereby companies integrate their business operations
with social concerns and ----------------------

i. Political concerns ----------------------

ii. Business concerns ----------------------
iii. Profit concerns
----------------------
iv. Environmental concerns
----------------------
State True or False.
1. According to some authors, social obligation reduces economic efficiency ----------------------
and profit, as it will impose additional costs on the company. ----------------------
2. Companies with a track record of socially responsible initiatives are
----------------------
preferred by prospective employees.
----------------------
Activity 1 ----------------------

Check the website of Reliance Industries and check the corporate governance ----------------------
report. Compare that with the report of BP global. List the common points. ----------------------

----------------------
10.4 CORPORATE SOCIAL RESPONSIBLE PRACTICES IN INDIA
----------------------
CSR is not new to India, as many companies have always catered for social
good in their operations for decades long before CSR gained momentum. India ----------------------
has one of the world’s richest traditions of CSR. The concept of ‘good karma’ or
----------------------
‘giving’ is embedded in our spiritual scriptures. Corporate India is no exception.
The Birlas and the Tatas are known to uphold the ideals of nation-building ----------------------
and trusteeship in their day-to-day operations. Many of the Corporations in
India have taken a lead in following high principled policies relating to business ----------------------
ethics, child labour, minimizing garbage creation, environmental protection
----------------------
and helping the needy. Some of the conspicuous examples of proactive
leadership in this field are the Tatas in Jamshedpur who run a township that ----------------------
other public municipalities can learn from. Infosys is known for its massive
efforts at transparency and comprehensiveness in financial reporting. Wipro has ----------------------
a reputation for its ethical business culture. Titan has an inclusive workforce
----------------------
that facilitates employment of the disadvantaged and encourages women’s
self-help groups. Boards and corporate affairs departments no longer view ----------------------

Corporate Social Responsibility and Corporate Governance 179

 Notes corporate social responsibility (CSR) merely as a PR programme or community
fundraising project. Socially responsible organizations aim to make a profit in
---------------------- a way that sustains the environment. CSR can go even further than this: it can
sometimes involve a ‘giving’ policy. Some organizations will make substantial
---------------------- financial contributions to a community or charity, or encourage their employees
---------------------- to participate in voluntary community work, or even donate products to a
particular cause. There are many arguments towards a socially responsible
---------------------- management. It is ethical to do so. Socially responsible actions can be profitable
and improved social environment will be beneficial to the firm. Companies
---------------------- undertaking CSR activities are backed by many motives.
---------------------- Some of them are as follows:
---------------------- 1. To correct some of the social problems caused by business especially
in case of polluting industries: By planning to minimize its carbon
---------------------- footprint, a company will be looking at ways of minimizing fuel
consumption to take care of the environment. This is mutually benefiting.
----------------------
Although this may involve initial investment in more energy efficient
---------------------- alternatives, in the long run it will bring down the operating costs. If a
company is using less energy, then its energy bills will be lower. If a
---------------------- company is minimizing water usage, then its water bills will be lower.
The same is true for maximizing the use of recycled materials.
----------------------
2. To enhance the goodwill of the Company: An important benefit of CSR
---------------------- is the positive effect it can have on brand image and customer loyalty.
Organisations which are known to be socially responsible and ethical will
----------------------
be well positioned in a competitive market. Consumer’s perception has
---------------------- undergone a lot of change. They are weary of ruthless commercialization.
Recent trends have shown that consumers are becoming more and more
---------------------- interested in supporting companies who are seen to be following ethical
and sustainable practices.
----------------------
3. To make the organisation attractive to investors and financial
---------------------- institutions: Investors look out for appreciation in the value of the
---------------------- investment and are becoming more and more interested in the CSR
policies of the companies they invest in, particularly in issues relating
---------------------- to the environment and human rights. A good CSR policy will attract
investors who will on principle no longer invest in companies who do
---------------------- not have a good reputation for CSR. This means that socially responsible
---------------------- companies will have access to a larger capital base. Looking at the long
term prospects of the company, financial institutions will be willing to
---------------------- finance the projects of such companies.

---------------------- 4. To increase employee motivation: Potential employees take an interest

in the CSR policies of a potential employer. A company with a good record
---------------------- for social responsibility will therefore attract and retain the best employees
with the increase in the social consciousness of the people. Employees
---------------------- who work for socially responsible companies tend to be highly motivated
---------------------- in their jobs as they derive a lot of satisfaction in knowing that they are

180 Corporate Governance

 working for an organization that has the greater good of society and the Notes
preservation of natural resources in its mission. A socially responsible
organization will treat its employees fairly well. They will consider the ----------------------
human factor and treat its employees as its assets that appreciate in value
with the passage of time than depreciate. If an employee is motivated, ----------------------
then they will be more productive. ----------------------
5. Risk management: Risks are inherent in business and managing risk is an
----------------------
essential part of corporate planning. A company might build its goodwill
over years but it can be ruined because of frauds or environmental ----------------------
accidents. Companies who do not want to draw undesired attention from
regulators, governments and media ensure that they practice socially ----------------------
responsible activities. Corporations are keen to avoid interference in their
----------------------
business through taxation or regulations. By taking substantive voluntary
steps, they can persuade governments and the wider public that they are ----------------------
taking issues such as health and safety, diversity, or the environment
seriously as good corporate citizens with respect to labour standards and ----------------------
impacts on the environment.
----------------------
6. To get a sense of fulfilment as a result of contributing to the community:
Over everything else, acknowledging that one has an obligation towards ----------------------
the society and hence in the welfare of the society lies the future of the
----------------------
business is the reason why the corporate world is responding to the social
needs. ----------------------
In a nut shell, the key principles of CSR are to treat employees fairly and
----------------------
equitably, operate ethically and with integrity; to respect basic human rights and
to sustain the environment for future generations. ----------------------
CSR behaviour can benefit the firm in several ways: ----------------------
1. It aids the attraction and retention of staff and developing motivated and
committed employees. ----------------------

2. It attracts green and ethical investment. ----------------------

3. It attracts ethically conscious customers. ----------------------
4. Winning and retaining consumers and business customers.
----------------------
5. Improving business reputation and positive publicity.
----------------------
6. Cost and efficiency savings.
7. Networking and speaking opportunities. ----------------------

8. Anticipating future legislation and protecting yourself. ----------------------

9. It can lead to a reduction in costs through re-cycling. ----------------------
10. It differentiates the firm from its competitor and can be a source of
----------------------
competitive advantage and can lead to increased profitability in the long
run. ----------------------

----------------------

Corporate Social Responsibility and Corporate Governance 181

 Notes 10.5 BUSINESS ETHICS AND CORPORATE SOCIAL
RESPONSIBILITY
----------------------

---------------------- There is clearly an overlap between CSR and business ethics. Both
concepts concern values, objectives and decisions based on something than the
---------------------- pursuit of profits. The difference is that ethics concern individual actions which
can be assessed as right or wrong by reference to moral principles. CSR is about
---------------------- the organizations’ obligations to all stakeholders – and not just shareholders.
---------------------- Apart from shareholders, there are other stakeholders in an organisation to
whom the organisation remains accountable. The basic premise is that business
---------------------- organisations have responsibility to various groups in society (the internal
and external stakeholders) and not just the owners/shareholders. Although
---------------------- maximizing shareholder’s wealth is the basic objective of the management
---------------------- of the company, however decisions should be taken in the wider interest and
not just the narrow shareholder interest. Although some big industrial houses
---------------------- have successfully had such life size successful examples, CSR in India is in
a very nascent stage. It is still one of the least understood initiatives in the
---------------------- Indian development sector. It is followed by a handful of public companies as
---------------------- dictated by the very basis of their existence, and by a few private companies,
with international shareholding as this is the practice followed by them in their
---------------------- respective foreign country. Thus the situation is far from perfect as the emphasis
is not on social good but rather on a policy that needs to be implemented.
----------------------

---------------------- Check your Progress 2

---------------------- State True or False.

---------------------- 1. CSR and business ethics both concepts concern values, objectives and
decisions based on something more than the pursuit of profits.
---------------------- 2. Infosys is known for its massive efforts at transparency and
---------------------- comprehensiveness in financial reporting.
3. CSR can create a differentiator for the firms and can be a source of
---------------------- competitive advantage.
---------------------- 4. CSR as a part of organisational culture is fully developed in India.
----------------------

---------------------- Activity 2

---------------------- Check the library for the order of government of India on compulsory
contribution to corporate social responsibility by Companies.
----------------------

----------------------

----------------------

----------------------

182 Corporate Governance

10.6 CORPORATE SOCIAL RESPONSIBILITY AND Notes
CORPORATE GOVERNANCE
----------------------
From the idea of Corporate Governance and business ethics flows the
----------------------
concept of Corporate Social Responsibility (CSR). As a famous saying goes
- ‘With great power comes great responsibility. The real meaning of social ----------------------
responsibility with reference to business enterprise has to be understood
firstly by understanding the correlation of business with social responsibility. ----------------------
Corporate governance and corporate social responsibility are both extremely
important to a company. But it is not a natural thing to separate them.’ ----------------------

----------------------
10.7 AREAS TO FOCUS FOR CORPORATE SOCIAL
----------------------
RESPONSIBILITY
----------------------
1. Framing of the Policy: An organisation which proposes to imbibe social
responsibility into its functioning has to first incorporate principles of CSR ----------------------
in its policy. The vision should clearly spell out the organisation’s purpose,
its vision and mission. A systematic and well thought out strategy should ----------------------
be in place. A socially responsible approach to business would involve
----------------------
attention to social and environmental concerns which should reflect in
the vision of the company. In addition to economic goals, the objectives ----------------------
of the company should balance between financial profits, economic value
addition and social good. This would clearly demonstrate a Company’s ----------------------
CSR commitment and allow shareholders to compare programmes.
----------------------
2. Implementation: Doing good is good to the company. Organisations
need to actively practice socially responsible policies by taking good ----------------------
care of its human resources by creating a good ethical work culture and
providing health and safety. They need to manage resources judiciously ----------------------
by minimizing waste. The voluntary guidelines for corporate social ----------------------
responsibility suggest creation of a separate fund for their CSR activities
in the interests of greater transparency. The Ministry has suggested that a ----------------------
specific amount should be set aside in the annual budget that is linked to
CSR activities. ----------------------
3. Success of the programme: The success of any CSR activity will ----------------------
depend on a number of critical factors. Some of them will be ways of
implementing the project, finding resources physical as well as financial ----------------------
and their allocation to specific purposes. It is absolutely essential for ----------------------
companies which engage in corporate citizenship to be able to measure
the value generated and conduct a cost-benefit analysis on their CSR ----------------------
expenditure. Some of the tools to measure could be key performance
indicators (KPIs) and the scorecard. To sustain the competition, the ----------------------
company has to benchmark the business against other similar companies ----------------------
in the wider industry spectrum. The spirit of social responsibility should
be as mere compliance for getting a tax exemption. CSR should not ----------------------
be seen as a window dressing activity. On the other hand, it should
be a sustainable programme involving a positive social transition. ----------------------

Corporate Social Responsibility and Corporate Governance 183

 Notes
Check your Progress 3
----------------------
State True or False.
----------------------
1. CSR and corporate governance are different from each other.
---------------------- 2. CSR is a functional tool and is practiced only at operational level in the
---------------------- organisation.
3. Government in India has issued guidelines to allocate a certain percentage
---------------------- of profits for CSR by companies.
----------------------

---------------------- Activity 3
---------------------- Search the Web and check the activities of Sir Dorabji Tata foundation in
corporate social responsibility area.
----------------------
----------------------
10.8 CSR ACTIVITIES OF SOME COMPANIES
----------------------
Infosys Technologies Limited
---------------------- Infosys is actively involved in various community development programs.
---------------------- Infosys promoted, in 1996, the Infosys Foundation as a not-for-profit trust to
which it contributes up to 1% PAT every year. Additionally, the Education and
---------------------- Research Department (E&R) at Infosys also works with employee volunteers
on community development projects. Infosys leadership has set examples
---------------------- in the area of corporate citizenship and has involved itself actively in key
---------------------- national bodies. They have taken initiatives to work in the areas of Research
and Education, Community Service, Rural Reach Programme, Employment,
---------------------- Welfare activities undertaken by the Infosys Foundation, Healthcare for the
poor, Education and Arts & Culture.
----------------------
ITC Limited
----------------------
ITC partnered the Indian farmer for close to a century. ITC is now engaged
---------------------- in elevating this partnership to a new paradigm by leveraging information
technology through its trailblazing ‘e-Choupal’ initiative. ITC is significantly
---------------------- widening its farmer partnerships to embrace a host of value-adding activities:
creating livelihoods by helping poor tribals make their wastelands productive;
----------------------
investing in rainwater harvesting to bring much-needed irrigation to parched
---------------------- drylands; empowering rural women by helping them evolve into entrepreneurs;
and providing infrastructural support to make schools exciting for village
---------------------- children. Through these rural partnerships, ITC touches the lives of nearly 3
million villagers across India.
----------------------
Mahindra & Mahindra
----------------------
The K. C. Mahindra Education Trust was established in 1953 by late Mr.
---------------------- K. C. Mahindra with an objective to promote education. Its vision is to transform

184 Corporate Governance

the lives of people in India through education, financial recognition to them, Notes
across age groups and across income strata. The K. C. Mahindra Education
Trust undertakes a number of education initiatives, which make a difference to ----------------------
the lives of deserving students. The Trust has provided more than Rs. 7.5 Crore
in the form of grants, scholarships and loans. It promotes education mainly by ----------------------
the way of scholarships. The Nanhi Kali project has over 3,300 children under ----------------------
it. We aim to increase the number of Nanhi Kalis (children) to 10,000 in the
next 2 years, by reaching out to the underprivileged children especially in the ----------------------
rural areas.
----------------------
Tata Consultancy Services
----------------------
The Adult Literacy Program (ALP) was conceived and set up by Dr. F C
Kohli along with Prof. P N Murthy and Prof. Kesav Nori of Tata Consultancy ----------------------
Services in May 2000 to address the problem of illiteracy. ALP believes illiteracy
is a major social concern affecting one third of the Indian population comprising ----------------------
old and young adults. To accelerate the rate of learning, it uses a TCS-designed
----------------------
Computer-Based Functional Literacy Method (CBFL), an innovative teaching
strategy that uses multimedia software to teach adults to read within about 40 ----------------------
learning hours.
----------------------
DCM Shriram Consolidated Limited
Shriram Fertilisers and Chemicals, is a unit of DSCL, located at Kota, 475 ----------------------
kms. Over the last 3 decades, various initiatives have been undertaken by the ----------------------
unit, in the Hadoti region (Kota, Bundi, Jhalawar districts) in ICU, ambulances,
family planning, medical assistance; schools, scholarships, emphasis on girl ----------------------
child education; water to people and infrastructure.
----------------------
Goodearth Education Foundation (GEF)
Work of GEF was initiated in 1996 with a project in the Rai Bareilly ----------------------
district in Uttar Pradesh. The four-year project covered 63 government schools ----------------------
and benefited 15,000 children. GEF is currently implementing projects in Thane
district, Maharashtra (in 56 schools & balwadis), Alwar District, Rajasthan ----------------------
(this Project is being implemented in partnership with the NGO Bodh Shiksha
Samiti, covering 71 schools & balwadis) and Solan district, Himachal Pradesh ----------------------
(10 Balwadis). GEF Objectives include providing equal opportunities in pre- ----------------------
primary & primary education to all children, and quality of education by
ensuring that it is relevant, effective and activity based. ----------------------
Hindustan Construction Company (HCC) ----------------------
HCC plays an active role in CSR initiatives in the fields of Health,
----------------------
Education, Disaster Management, and Environment. Disaster Resource
Network (DRN) is a worldwide initiative, promoted by the World Economic ----------------------
Forum (WEF). Trained volunteers and equipment resources from Engineering
Construction & Logistics companies will complement the existing efforts of ----------------------
Government, NGO’s and International Organizations in disaster management.
----------------------
It was during the WEF annual meet that the massive earthquake struck Gujarat
in January 2001. The need for a trained and effective participation from industry ----------------------

Corporate Social Responsibility and Corporate Governance 185

 Notes was first felt there. The members of Engineering and Logistics segment of WEF
came together to establish this network. The idea was further strengthened
---------------------- during the 9/11 incident where again the industry participated in the relief
operations. DRN Worldwide was formally launched in New York in January
---------------------- 2002. And shortly thereafter, DRN - India Initiative was launched.
---------------------- India Aluminum Company Limited
---------------------- The Women’s Empowerment Project was initiated by Indal-Muri in
Jharkhand where the Company operates an alumina refining plant. It was
---------------------- implemented in collaboration with an NGO, CARE-Jharkhand. The central
problem this project has attempted to address is the very low socio-economic
---------------------- condition of the rural and tribal population of Silli block caused by low
---------------------- agricultural productivity, lack of or low cash income, unresponsive health/
Integrated Child Development Services (ICDS) schemes. The Project has helped
---------------------- set up around 100 Self Help Groups so far, which are running successfully with
members trained in various vocational income–generating skills, agricultural
---------------------- methods for better yields and health care initiatives. About 2000 women have
been brought into the fold of this activity helping to improve not just their own
----------------------
lives but the quality of life of their children and families as well.
---------------------- JCB India Ltd.
---------------------- JCB India adopted a Government school, in the vicinity of the company
premises as its social responsibility. They strongly believe that children are the
---------------------- foundation of our nation and they could be helped, we could build a better
community and society tomorrow. The reason for adopting this particular
----------------------
school was the poor management of the school in terms of infrastructure,
---------------------- resources and quality of education. The company’s commitment to the school
goes much beyond just providing monetary support towards infrastructure and
---------------------- maintenance of school building.
---------------------- Larsen & Toubro (L & T) Limited
Considering that construction industry is the second largest employer in
---------------------- India after agriculture, employing about 32 million strong workforce, L&T set
---------------------- out to regulate and promote Construction Vocational Training (CVT) in India by
establishing a Construction Skills Training Institute (CSTI) on a 5.5 acre land,
---------------------- close to its Construction Division Headquarters at Manapakkam, Chennai. CSTI
imparts, totally free of cost, basic training in formwork, carpentry, masonry,
---------------------- bar-bending, plumbing and sanitary, scaffolder and electrical wireman trades to
a wide spectrum of the rural poor.
----------------------
As a result of the good response it received in Chennai, CSTI set up a
---------------------- branch at Panvel, Mumbai, initially offering training in formwork, carpentry and
masonry trades. The Manapakkam and Panvel facilities together provide training
----------------------
to about 300 candidates annually who are inducted after a process of selection,
---------------------- the minimum qualification being tenth standard. Since inception, these two units
have produced about 2,000 skilled workmen in various trades, with about sixty
---------------------- percent of them being deployed to L&T’s jobsites spread across the country.
---------------------- (Source: Karmayog)

186 Corporate Governance

10.9 CORPORATE SOCIAL RESPONSIBILITY - Notes
VOLUNTARY GUIDELINES 2009
----------------------
Fundamental Principle ----------------------
Core Elements:
----------------------
Each business entity should formulate a CSR policy to guide its strategic
planning and provide a roadmap for its CSR initiatives, which should be an ----------------------
integral part of overall business policy and aligned with its business goals. The
policy should be framed with the participation of various level executives and ----------------------
should be approved by the Board. ----------------------
The CSR Policy should normally cover the following core elements:
----------------------
1. Care for all Stakeholders
----------------------
The companies should respect the interests of, and be responsive towards
all stakeholders, including shareholders, employees, customers, suppliers, ----------------------
project affected people, society at large, etc. and create value for all of them.
They should develop mechanism to actively engage with all stakeholders, ----------------------
inform them of inherent risks and mitigate them where they occur.
----------------------
2. Ethical functioning
----------------------
Their governance systems should be underpinned by Ethics, Transparency
and Accountability. They should not engage in business practices that are ----------------------
abusive, unfair, corrupt or anti-competitive.
----------------------
3. Respect for Workers’ Rights and Welfare
----------------------
Companies should provide a workplace environment that is safe, hygienic
and humane and which upholds the dignity of employees. They should provide ----------------------
all employees with access to training and development of necessary skills for
career advancement, on an equal and non-discriminatory basis. They should ----------------------
uphold the freedom of association and the effective recognition of the right to
----------------------
collective bargaining of labour, have an effective grievance redressal system,
should not employ child or forced labour and provide and maintain equality of ----------------------
opportunities without any discrimination on any grounds in recruitment and
during employment. ----------------------
4. Respect for Human Rights ----------------------
Companies should respect human rights for all and avoid complicity with ----------------------
human rights abuses by them or by third party.
5. Respect for Environment ----------------------

Companies should take measures to check and prevent pollution; recycle, ----------------------
manage and reduce waste, should manage natural resources in a sustainable
manner and ensure optimal use of resources like land and water, should ----------------------
proactively respond to the challenges of climate change by adopting cleaner ----------------------
production methods, promoting efficient use of energy and environment friendly
technologies. ----------------------

Corporate Social Responsibility and Corporate Governance 187

 Notes 6. Activities for Social and Inclusive Development
Depending upon their core competency and business interest, companies
----------------------
should undertake activities for economic and social development of communities
---------------------- and geographical areas, particularly in the vicinity of their operations. These
could include: education, skill building for livelihood of people, health, cultural
---------------------- and social welfare, etc. particularly targeting at disadvantaged sections of
society.
----------------------
Implementation Guidance
----------------------
1. The CSR policy of the business entity should provide for an implementation
---------------------- strategy which should include identification of projects/activities, setting
measurable physical targets with timeframe, organizational mechanism
---------------------- and responsibilities, time schedules and monitoring. Companies may
partner with local authorities, business associations and civil society/
----------------------
non-government organizations. They may influence the supply chain
---------------------- for CSR initiative and motivate employees for voluntary effort for
social development. They may evolve a system of need assessment and
---------------------- impact assessment while undertaking CSR activities in a particular area.
Independent evaluation may also be undertaken for selected projects/
----------------------
activities from time to time.
---------------------- 2. Companies should allocate specific amount in their budgets for CSR
---------------------- activities. This amount may be related to profits after tax, cost of planned
CSR activities or any other suitable parameter.
---------------------- 3. To share experiences and network with other organizations, the company
---------------------- should engage with well established and recognized programmes/
platforms which encourage responsible business practices and CSR
---------------------- activities. This would help companies to improve on their CSR strategies
and effectively project the image of being socially responsible.
----------------------
4. The companies should disseminate information on CSR policy, activities
---------------------- and progress in a structured manner to all their stakeholders and the public
at large through their website, annual reports, and other communication
---------------------- media.
----------------------
Summary
----------------------
●● Rapid industrialisation and urbanization has apart from bringing out
---------------------- economic development has also caused a lot of damage to the environment.
---------------------- The cost that the society has to bear in terms of pollution, deforestation,
exploitation of resources is the social cost.
---------------------- ●● Corporations are also members of the country where they are formed
---------------------- and like other members, they have social responsibilities. A business
needs a healthy, educated workforce, sustainable resources and adept
---------------------- government to compete effectively. For society to thrive, profitable
and competitive businesses must be developed and supported to create
---------------------- income, wealth, tax revenues, and opportunities for philanthropy. In good

188 Corporate Governance

 corporate governance, the management should be able to meet their social Notes
responsibilities.
●● There are two schools of thought on the issue of CSR. One is the free ----------------------
market view which propagates that the job of business is to create wealth ----------------------
by providing goods and services with the interests of the shareholders
as the guiding principle. The only social responsibility of business is to ----------------------
create shareholder wealth and the pursuit of social goals dilutes businesses’
primary purpose. ----------------------
●● The four dimensions of corporate responsibility are economic focus ----------------------
on earning profits, legal-compliance of law, ethical voluntary and
philanthropic – promoting human welfare and goodwill. ----------------------
●● Organisations need to actively practice socially responsible policies by ----------------------
taking good care of its human resources by creating a good ethical work
culture and providing health and safety. They need to manage resources ----------------------
judiciously by minimizing waste. ----------------------
●● An organisation which proposes to imbibe social responsibility into its
functioning has to first incorporate principles of CSR in its policy. The ----------------------
vision should clearly spell out the organisation’s purpose, its vision and
----------------------
mission. A systematic and well thought out strategy should be in place.
●● The success of any CSR activity will depend on a number of critical factors. ----------------------
Some of them will be ways of implementing the project, finding resources
----------------------
physical as well as financial and their allocation to specific purposes. It is
absolutely essential for companies which engage in corporate citizenship ----------------------
to be able to measure the value generated and conduct a cost-benefit
analysis on their CSR expenditure. ----------------------

----------------------
Keywords
----------------------
●● Corporate Social Responsibility: A concept whereby companies decide
voluntarily to contribute to a better society and a cleaner environment. ----------------------
It is a process whereby companies integrate social and environmental
----------------------
concerns in their business operations and in their interaction with their
stakeholders on a voluntary basis. ----------------------
●● Business Ethics: Ethics concern individual actions which can be assessed
----------------------
as right or wrong by reference to moral principles. The examination of the
variety of problems that can arise from the business environment, and how ----------------------
employees, management, and the corporation can deal with them ethically.
Problems such as fiduciary responsibility, corporate social responsibility, ----------------------
corporate governance, shareholder relations, insider trading, bribery and
----------------------
discrimination are examined in business ethics.
●● Social Accountability: Social responsibility is the performance of ----------------------
activities by a private enterprise without the expectation of direct
----------------------
economic gain or loss, for the purpose of improving the social well-being
of the community or one of its constituent groups - Steven Dilley ----------------------

Corporate Social Responsibility and Corporate Governance 189

 Notes
Self-Assessment Questions
----------------------
1. “Being good is good for business”. In light of the above statement,
---------------------- elaborate on the advantages of corporate social responsible measures for
a business.
----------------------
2. Corporate Social Responsibility should not be a window dressing exercise.
---------------------- Comment.

---------------------- 3. Discuss the core elements of CSR Policy as enumerated in the voluntary
guidelines of corporate social responsibility.
----------------------
Answers to Check your Progress
----------------------
Check your Progress 1
----------------------
Fill in the blanks.
----------------------
1. Corporate social responsibility is about how companies manage the
---------------------- business processes to produce an overall positive impact on society
---------------------- Multiple Choice Single Response.
1. CSR is a process whereby companies integrate their business operations
----------------------
with social concerns and
---------------------- iv. Environmental concerns
---------------------- State True or False.

---------------------- 1. True
2. True
----------------------

----------------------
Check your Progress 2
---------------------- State True or False.
---------------------- 1. True

---------------------- 2. True
3. True
----------------------
4. False
----------------------

---------------------- Check your Progress 3

---------------------- State True or False.

---------------------- 1. False
2. False
----------------------
3. True
----------------------

190 Corporate Governance

 Notes
Suggested Reading
----------------------
1. www.mca.gov.in/.../CG_Voluntary_Guidelines_2009_24dec2009.pdf
2. http://www.sebi.gov.in/sebiweb/ ----------------------
3. Chandratre, K R and A N Navare. 2010. Corporate Governance – A ----------------------
Practical Handbook. Bharat Law House Pvt. Ltd.
----------------------
4. Das, Subhash Chandra. Corporate Governance in India: An Evaluation.
PHI Learning. ----------------------
5. Gupta, L.C. 1974. Corporate management and Accountability. Chennai: ----------------------
McMillan Institute for FM and Research.
----------------------
6. McGregor, Lynn. The human face of Corporate Governance. Palgrave
Publishers. ----------------------
7. Mallin. Corporate Governance2/e. OUP.
----------------------
----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

Corporate Social Responsibility and Corporate Governance 191

 Notes

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------
----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

192 Corporate Governance

Majority Rule and Minority Protection - Prevention of
Oppression and Mismanagement UNIT

Structure:
11.1 Introduction
11
11.2 Shareholder Democracy
11.3 Factors Contributing to the Empowerment of the Minority
11.4 Safeguards for Minority Shareholders’ Protection
11.5 Related Party Transactions
11.6 SEBI (ICDR) Guidelines 2009
Summary
Key Words
Self-Assessment Questions
Answers to Check your Progress
Suggested Reading

Majority Rule and Minority Protection - Prevention of Oppression and Mismanagement 193
 Notes
Objectives
----------------------

---------------------- After going through this unit, you will be able to:
• Discuss the concept of shareholder democracy.
----------------------
• Explain the need for minority shareholder protection.
----------------------
• Elaborate on the essence of oppression and mismanagement.
---------------------- • Describe the safeguards provided to minority shareholders.
---------------------- • Explain related party transactions in light of corporate governance.
----------------------
11.1 INTRODUCTION
----------------------
Doing business as an incorporated association is preferred vehicle over
---------------------- other forms of business organisation because of some definite advantages.
There is tremendous scope for expansion and growth owning to easy access
----------------------
to finance. The advantage of incorporating a company and doing business is
---------------------- its liability factor. The liability of a shareholder for the losses incurred by the
company is limited to the extent of unpaid amount on his shareholding. The
---------------------- relation between the company and its shareholders and the relation between the
shareholders inter-se is primarily contractual in nature. The memorandum and
----------------------
articles of association of the company constitute the core of this contract and the
---------------------- corporate law provides the framework within which the contracts operate. The
essence of this contractual relationship is that each shareholder is entitled to a
---------------------- share in the profits and assets of the company in proportion to his shareholding.
Arising from this is the principle that the Board and the management of the
----------------------
company have a fiduciary responsibility towards each and every shareholder
---------------------- and not just towards the majority or dominant shareholder.
The ownership pattern of corporate enterprises can be classified into (1)
----------------------
widely dispersed ownership (2) promoter dominated shareholding pattern where
---------------------- promoters continue to control the business through majority shareholding and
(3) a dispersed ownership pattern where banks, financial institutions and foreign
---------------------- institutional investors are also owners in the company. In the case of widely
dispersed ownership, as the capital is jointly owned by all the shareholders
----------------------
together, it is in the nature of a diffused shareholding. Under diffused
---------------------- shareholding, each person’s shareholding is so small that it is too costly for such
shareholder to monitor the company’s activities closely by way of exercising
---------------------- voting rights, appointing the board of Directors.
---------------------- Most of the businesses in India are family owned where the control
is in the hands of a close group of people which are also called as closely
---------------------- held companies. However; there is concentrated shareholding even in listed
companies. Corporate decisions are guided by majority.
----------------------
Majority can do many things in a company through resolutions passed in
---------------------- general meetings and the decision of the majority is binding on the minority.

194 Corporate Governance

But, the majority are not supposed to misuse their position and authority in the Notes
company in order to oppress the minority or a group.
----------------------
There is a need for balance of power between the controlling shareholders
or promoters and the minority shareholders. This is also referred to as the agency ----------------------
problem where the majority are in a fiduciary capacity towards the minority
who are the principal. Most of the governance norms as embodied in Clause 49 ----------------------
of the listing agreement have been inspired from the U.K. (Cadbury Committee
----------------------
Report) and the U.S. (Sarbanes-Oxley Act) have not been able to give sufficient
protection to minority shareholders. ----------------------

11.2 SHAREHOLDER DEMOCRACY ----------------------

The rule of the majority has been established in the landmark case of ----------------------
Foss vs. Harbottle where action was brought by two shareholders in a company ----------------------
against the Directors charging them with concerting and effecting various
fraudulent and illegal transactions whereby the property of the company was ----------------------
misapplied and wasted. It was held by the court that in the case of wrong done
to the company, it is the company as represented by the majority that can bring ----------------------
action but not minority. Action cannot be brought by minority shareholders as ----------------------
it could be ratified by the majority shareholders. The rule in Foss vs. Harbottle
has the following advantages: ----------------------
1. It recognised the legal personality of the company. ----------------------
2. It established the supremacy of the majority.
----------------------
However, for the protection of the right of the minority there are certain
exceptions: ----------------------
1. Illegal act of the Directors, which is ultra vires. ----------------------
2. Breach of fiduciary duties by the Directors. ----------------------
3. Oppression and mismanagement.
----------------------
Shareholders’ democracy means that the rule of majority shall prevail.
But shareholder democracy should not mean dominance of the majority and ----------------------
the complete exclusion of the minority. When the powers of the majority are
----------------------
placed within unreasonable bounds, it results in oppression of the minority and
mis-management of the company. During the course of business, oppression of ----------------------
minority shareholders may take place by the majority shareholders who are in
control of the company. Similarly, mismanagement of business is also a common ----------------------
practice. Mismanagement is understood to mean misuse of corporate funds and
----------------------
resources. Oppression involves a conduct which is unfair, harsh and prejudicial
towards a section of shareholders. To be termed as oppression, it should involve ----------------------
a visible departure from the standards of fair dealing, and a violation of the
conditions of fair play on which every shareholder, who entrusts his money ----------------------
to the company is entitled to rely. Oppression involves a lack of fair dealing
----------------------
to the member of his propriety right as shareholder. Persons concerned with
management of the company affairs must, in connection therewith, be guilty ----------------------

Majority Rule and Minority Protection - Prevention of Oppression and Mismanagement 195
 Notes of fraud, misfeasance or misconduct towards the members. Isolated acts do not
amount to oppression as it is a continuous process. ‘Mismanagement’ could
---------------------- mean misuse. Instances of mismanagement are misallocation or diversification
of funds, causing losses due to negligent decisions, not maintaining proper
---------------------- records, not calling requisite meetings or non-compliance of provisions or
---------------------- procedures. Mismanagement could arise where the management does not
handle a business situation with ordinary diligence leading to downfall of
---------------------- business. Unlike Oppression, mismanagement does not essentially cover
the violation of legal rights. It covers issues of proprietary, transparency and
---------------------- financial uprightness. It can be noticed sometimes that wherever there is a case
---------------------- of oppression it will also involve mismanagement.
The essence of oppression can be best understood by knowing the acts
----------------------
which are oppressive in nature.
---------------------- They are as follows:
---------------------- 1. Usurpation of the office of Director or Managing Director.

---------------------- 2. Majority group of Directors/Shareholders carrying on competing business

resulting in diversion of corporate opportunities away from the Company.
---------------------- 3. Issue/Allotment of shares - majority reduced to minority.
---------------------- 4. Minority converted to majority by way of new issues, the same is liable
to be set aside on grounds that it is unfair, manipulative and oppressive.
----------------------
5. Transfer of shares in violation of pre-emptive rights.
----------------------
Some of the acts amounting to mismanagement are as follows:
---------------------- 1. Conduct of affairs to the Company’s prejudice.
---------------------- 2. Continuation in office by a Director after expiry of his term.

---------------------- 3. Absence of records required to be maintained by the Company.

4. Sale of Assets of the Company at low price and without compliance with
----------------------
the Act.
---------------------- 5. Misuse of funds of the Company.
---------------------- 6. Infighting among the Directors resulting in serious prejudice to the
Company.
----------------------

---------------------- 11.3 FACTORS CONTRIBUTING TO THE EMPOWERMENT

OF THE MINORITY
----------------------
Over the years, the dormant shareholder is emerging as an empowered
----------------------
shareholder due to many changes that have taken place in the corporate world.
---------------------- The following are some of the factors that have contributed to the protection of
minority shareholders.
----------------------
1. Reforms in the economy: With liberalisation and deregulation, the
---------------------- economy has become highly competitive. This meant that in order to

196 Corporate Governance

 survive, companies need to deliver to all the stakeholders. Financial Notes
sector reforms have made it necessary for firms to rely on capital markets
to a greater degree for their needs of additional capital. The capital market ----------------------
has undergone lot of reforms stressing on transparency and disclosure
of information. The increasing institutionalization of the capital markets ----------------------
has tremendously enhanced the disciplining power of the market. With ----------------------
globalization of financial markets companies, investors and intermediaries
are exposed to the higher standards of disclosure and corporate governance ----------------------
that prevail in more developed capital markets.
----------------------
2. Equitable treatment of the minority: The principles of corporate
governance ensure the equitable treatment of all shareholders, including ----------------------
minority shareholders. Adopting a shareholders’ perspective when making
----------------------
decisions and ensuring minority shareholders’ interests are protected.
The following are some of the rights granted under the Companies Act, ----------------------
1956.
----------------------
●● Right to receive Notice of General Meetings (the AGM or the
EGM). ----------------------
●● Rights to receive annual report and audited accounts. ----------------------
●● Right to receive quarterly and annual accounts.
----------------------
●● Right to inspect the Minutes of General Meetings.
●● Right to be kept fully informed of what is happening in the company. ----------------------

●● Right to attend general meetings. ----------------------

●● Right to requisition for a general meeting. ----------------------
●● Right to get the court to direct the company to call a general meeting.
----------------------
●● Right to appoint proxies to attend and vote at a general meeting.
●● Right to be heard and make proposals at shareholders’ meeting. ----------------------
●● Right to vote and elect Directors and fix their remuneration. ----------------------
●● Right to inspect the Register of Members, Directors, Charges,
----------------------
Debenture Holders, etc. and get copy thereof.
●● Right to nominate Director. ----------------------
●● Right to appoint auditors and fix their remuneration. ----------------------
●● Right to receive dividends, if declared.
----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

Majority Rule and Minority Protection - Prevention of Oppression and Mismanagement 197
 Notes
Check your Progress 1
----------------------
State True or False.
----------------------
1. In most of the companies in India the majority of the shareholding is
---------------------- concentrated to a few shareholders.

---------------------- Multiple Choice Single Response.

1. Most of the governance norms, as embodied in Clause 49 of the listing
---------------------- agreement, have been inspired from the Cadbury Committee Report UK
---------------------- and the _____ ______ _____.
i. Indian Companies act
----------------------
ii. Indian Penal code
----------------------
iii. Sarbanes-Oxley Act
---------------------- iv. The SEBI act
---------------------- 2. Mismanagement as per the corporate governance is understood to mean
misuse of corporate ______.
----------------------
i. Policies
----------------------
ii. Power
---------------------- iii. Funds
---------------------- iv. Law

----------------------
Activity 1
----------------------
Visit the website of SEBI and list down the steps to be followed for registering
----------------------
a complaint with SEBI.
----------------------

---------------------- 11.4 SAFEGUARDS FOR MINORITY SHAREHOLDERS

PROTECTION
----------------------

---------------------- 1. Relief in case of oppression and mismanagement

One of the main objectives of the Companies Act has been to ensure
---------------------- good governance with a view to creating to shareholders’ wealth without
---------------------- any discrimination to minority shareholders. Sections 397 to 409 of the
Companies Act, 1956 contain provisions for the protection of minority
---------------------- against oppression and mismanagement. Section 397(2) of the Companies
Act defines Oppression as conducting the company’s affairs in a manner
---------------------- prejudicial to public interest or in a manner oppressive to any member
---------------------- or members. Mis-management has been defined in section 398(1) of the
Act, as conducting the affairs of the company in a manner prejudicial to
---------------------- public interest or in a manner prejudicial to the interests of the company.

198 Corporate Governance

 At present, in case of a company having share capital, not less than 100 Notes
members or not less than 1/10th of total number of members, whichever
is less or any member or members holding not less than 1/10th of issued ----------------------
share capital have the right to apply to CLB/NCLT in case of oppression
and mismanagement. In case of companies not having share capital, ----------------------
not less than 1/5th of total numbers of members have the right to apply. ----------------------
Company law provides that a company can be wound up if the Court is of
the opinion that it is just and equitable to do so in the last resort. ----------------------
However, it is argued that it is not a meaningful remedy as the break-up ----------------------
value of a company when it is wound up is far less than its value as a
“going concern”. Also the procedure of winding up will only result in the ----------------------
enrichment of the lawyers and other intermediaries involved. The remedy
----------------------
is available u/s 397 only if following conditions are satisfied.
It must be established that the affairs of the company are being conducted in a ----------------------
manner oppressive to any member or in a manner prejudicial to public interest.
----------------------
Previously the powers were vested with Company Law Board for
entertaining the Petition under section 397 & 398 of the Companies Act, ----------------------
1956. However by the Companies Amendment Act, 2002, the powers are
being delegated to National Company Law Tribunal (NCLT). ----------------------
2. Effective voting through postal ballot ----------------------
The process of conducting shareholder meetings has to be conducive to ----------------------
broader participation by a large section of the shareholding public. Effective
participation by small shareholders is possible only if there is a cost ----------------------
effective way of waging a proxy campaign. This would enable dissenting
shareholders to collect proxies from others and prevent measures which ----------------------
are prejudicial to the minority shareholders. The requirement that certain ----------------------
major decisions have to be approved by a special majority of 75% or
90% of the shareholders by value is yet another safeguard to ensure that ----------------------
minority shareholders are consulted for decisions regarding the company.
But it has not been an effective safeguard as majority shareholders holding ----------------------
a large majority of the shares had to get the approval of only a small ----------------------
portion of minority shareholders to acquire 75% majority.
It is not always possible for the entire body of shareholders to attend ----------------------
general body meetings to decide important issues. In order to ensure the ----------------------
widest participation of shareholders in the key decision making process
of the company, the facility of passing resolutions through postal ballots ----------------------
was introduced in 2001. It was under Section 192 A introduced through
Companies (Amendment) Act 2000. ----------------------

List of business in which resolutions can be passed through postal ballots ----------------------
include:
----------------------
(a) Alteration in the Object Clause of Memorandum.
----------------------
(b) Alteration of Articles of Associations in relation to deletion or
insertion of provisions defining a private company. ----------------------

Majority Rule and Minority Protection - Prevention of Oppression and Mismanagement 199
 Notes (c) Buy-back of own shares by the company.
(d) Issue of shares with differential voting rights as to voting or dividend
----------------------
or otherwise.
---------------------- (e) Change in place of Registered Office outside local limits of any
city, town or village.
----------------------
(f) Sale of whole or substantially the whole of undertaking of a
---------------------- company.
---------------------- (g) Giving loans or extending guarantee or providing security in excess
of the limit.
----------------------
(h) Election of a small shareholders’ Director.
---------------------- (i) Power to compromise or make arrangements with creditors and
---------------------- members.
(j) Variation in the rights attached to a class of shares or debentures or
----------------------
other securities.
---------------------- 3. Information disclosure
---------------------- Sharing of information is the key towards better governance. The principle
of good governance requires that whenever shareholder approval is
---------------------- sought for various decisions, the company must provide all material facts
---------------------- relating to these resolutions including the interest of Directors and their
relatives in the matter. Disclosure does not by itself discipline the majority
---------------------- shareholders, but it is a prerequisite for the minority shareholders to be able
to exercise any of the other means available to them. Disclosure is also an
---------------------- essential element to regulate the capital market. The risks of investors can
---------------------- be reduced through adequate transparency and disclosures. At the same
time, it is equally important that the financial information and disclosures
---------------------- to be provided to shareholders should not be in excessively technical
format which goes beyond their comprehension. This will enhance the
---------------------- credibility of the company and will help the shareholders to take an
---------------------- informed and conscious decision in respect of their investments. The
ownership structure of an enterprise is of great importance in an investment
---------------------- decision, in order that there is equitable treatment of shareholders. In
order to make an informed decision about the company, investors need
---------------------- access to information regarding its ownership structure. Disclosure of
---------------------- the concentration of shareholdings will help check oppressive actions.
Differential voting rights, appointment of Directors or other mechanisms,
---------------------- should be disclosed. Any specific structures or procedures which are in
place to protect the interests of minority shareholders should be disclosed.
----------------------
4. Minority Representation on the Board
---------------------- The Board should reflect the interest of minority shareholders. The
---------------------- Companies Act, 1956 has provided for a small Shareholder Director on
the Board. Under the Corporate governance norms, Independent Directors
---------------------- have an important role to play in ensuring minority shareholders’ interests

200 Corporate Governance

 are protected. By being proactive in addressing minority shareholder Notes
concerns, Independent Directors help in safeguarding the small
shareholders’ concerns. ----------------------
5. Insider trading ----------------------
When people who have access to price sensitive information trade in
----------------------
securities with the aid of such information, it amounts to insider trading.
As it gives them an unfair advantage over the rest, it defies fair play in the ----------------------
market and erodes the confidence of the investors. The effect of insider
trading on the small investor is negative both from the point of view of ----------------------
their financial interest and also their confidence in the markets. Insider
----------------------
trading creates information asymmetry. It is extremely detrimental to the
growth of a healthy capital market where all participants, big and small, ----------------------
can step in with confidence of a fair play. In an efficient market, even one
share traded on insider trading violates the integrity of the markets. ----------------------
Efficient markets are those which are perfectly competitive as far as ----------------------
access to information is concerned. This means that the share price already
reflects all known information and is unbiased. It reflects the collective ----------------------
beliefs of all investors about future prospects.
----------------------
Securities regulators have framed various regulations to deal with the
problem of insider trading. Crucial to good corporate governance are the ----------------------
existence and enforceability of regulations relating to insider information ----------------------
and insider trading. The SEBI Takeover and Insider Trading Regulations,
the Listing Agreement, all endeavour to provide transparency to protect ----------------------
shareholder interest and ensure minority protection. SEBI’s (Prohibition
of Insider Trading) Regulations of 1992 have comprehensive provisions ----------------------
relating to insider trading and it also lays down the Code of Conduct for ----------------------
listed companies and other entities. An Integrated Market Surveillance
System has been placed to detect instances of Insider trading and front ----------------------
running. Implementation of the Unique Client Code (UCC) and Know
Your Client norms has facilitated tracing the identity of persons dealing in ----------------------
shares. SEBI’s (Prohibition of Insider Trading) Regulations of 1992 and ----------------------
SEBI’s (Substantial Acquisition of Shares and Takeovers) Regulations and
the Listing Agreement lay down the disclosure requirements pertaining to ----------------------
transactions in the company’s shares by board members, senior managers
or controlling shareholders, which are then disseminated to the market ----------------------
and displayed on the website of the Exchange. ----------------------
6. Financial Institutions
----------------------
Financial institutions can play an active role as large minority shareholders
and as potential gatekeepers. By placing their nominees on the board, ----------------------
they can act as the watchdogs of the minority shareholders. Long term
institutional shareholders, pension funds or infrastructure funds with ----------------------
significant holdings in securities of listed companies can be powerful ----------------------
players in shaping corporate governance norms. Foreign Institutional
Investors are equally concerned with observance of corporate governance ----------------------

Majority Rule and Minority Protection - Prevention of Oppression and Mismanagement 201
 Notes norms and the protection of capital markets. In view of the disbursed
shareholding, shareholders have neither resources nor incentive to
---------------------- investigate into the affairs of the company.
---------------------- 7. Well Functioning Capital Market
In a regulated capital market, there is a strong incentive for corporate
----------------------
managements themselves to voluntarily adopt transparent processes and
---------------------- subject themselves to external monitoring to reassure potential investors.
The strength of the capital market decides the economic progress. If the
---------------------- market operates on the principles of fair play, it will encourage small
investors to channelize savings into the market. Finance Minister, Shri
----------------------
Pranab Mukherjee on the SEBI foundation day on 12th April 2010 said
---------------------- “Given the income disparity, in addition to the large institutional and
individual investors we have small retail investors in the Indian securities
---------------------- market. It becomes incumbent not only for the Government but also for the
regulator to safeguard the interests of these retail investors who typically
----------------------
invest their hard earned savings. Besides, this is required to encourage
---------------------- retail participation for ensuring greater depth of the market and promote
the inclusive growth strategy of the Government.”
----------------------
8. International Accounting Standards
---------------------- In the last few years, we have seen Indian companies voluntarily accepting
---------------------- international accounting standards though they are not legally binding.
They have voluntarily gone for greater disclosures and more transparent
---------------------- governance practices than are mandated by law. They have sought to
cultivate an image of being honest with their investors and of being
---------------------- concerned about shareholder value.
---------------------- 9. Mergers amalgamations and takeovers
---------------------- Under the existing provisions of the Act, approval of High Court/Tribunal
is required in case of corporate restructuring (which, inter-alia, includes,
---------------------- mergers/amalgamations etc.) by a company. The scheme is also required
to be approved by shareholders, before it is filed with the High Court.
---------------------- The scheme is circulated to all shareholders along with statutory notice of
---------------------- the court convened meeting and the explanatory statement for approving
the scheme by shareholders. The Courts, while approving the scheme,
---------------------- follow judicious approach by mandating publicity about the proposed
scheme in newspaper to seek objections, if any, against the scheme from
---------------------- the shareholders. Any interested person including a minority shareholder
---------------------- may appear before the Court.
10. Derivative suits
----------------------
Derivative actions are an effective guard against oppressive decisions.
---------------------- Such derivative actions are brought out by shareholder on behalf of the
company, and not in their personal capacity in respect of wrong done to
----------------------
the company. Similarly, the principle of “Class/Representative Action”
---------------------- by one shareholder on behalf of one or more of the shareholders of the

202 Corporate Governance

 same kind have been allowed by courts on the grounds of persons having Notes
same locus standi or common compliant.
----------------------
11.5 RELATED PARTY TRANSACTIONS ----------------------
Family controlled businesses represent almost 80% of the listed ----------------------
companies. These companies carry on their business through subsidiaries,
associates and acquire interest in other enterprises. Related party transactions ----------------------
are transactions that involve dealings between group companies, companies
involved in joint ventures or between a holding company and subsidiaries. These ----------------------
transactions as they are between interested may not always be a market value ----------------------
and in the interests of the shareholders. Related party transactions (RPTs) tend
to pose a significant risk where there are controlling shareholders. To protect ----------------------
the interest of the investors, transparency in the books of account is essential.
Indian companies have been viewed by the outside world as family controlled ----------------------
and not professionally managed. The transactions between these entities play ----------------------
very important role in analyzing the investment feasibility of an entity. If these
transactions are unchecked, companies will use this opportunity for tax evasion ----------------------
and cheat the investor. Instances of related party transactions include Directors
entering into transactions with the company and gain personal benefit. To avoid ----------------------
these types of transactions and to bring transparency, stringent provisions are ----------------------
introduced in various laws.
To have control on all these activities, the Companies Act imposes certain ----------------------
conditions through various sections, when a company is entering into any ----------------------
transaction in which Directors are interested. Section 297 of the Companies Act
1956 requires board approval for entering into any contract or arrangement with ----------------------
the related parties. However, this section will cover only transactions relating to
sale, purchase or supply of any goods, materials and services or for underwriting ----------------------
the subscription of any shares in, or debentures of the company. Further, there ----------------------
is a requirement to take Central Government approval if the company has more
than one crore paid-up capital. Exemptions are given if the transactions are at ----------------------
an arm’s length at market price or the value of goods and services are less than
5,000. In the case of a banking or insurance company, any transaction in the ----------------------
ordinary course of business of such company is exempted. ----------------------
Section 299 mandates Directors to disclose their interest in other
----------------------
concerns to the Board of Directors before entering into any contract with the
related parties. Sec 299 covers any contract or arrangement with entities in ----------------------
which Director is concerned or interested. Only exception is where Directors
of one company taken together have less than 2% of paid-up capital of another ----------------------
company.
----------------------
Section 300 disallows the Director to participate in voting when the board
resolution is passed relating to any business in which he is interested. The main ----------------------
intentions behind these sections are to avoid personal gain by the interested
----------------------
Director.
----------------------

Majority Rule and Minority Protection - Prevention of Oppression and Mismanagement 203
 Notes 11.6 SEBI (ICDR) GUIDELINES 2009
---------------------- SEBI recently published regulations in the Issue of Capital and Disclosure
Requirements, 2009, which replaced the Disclosure and Investor Protection
---------------------- Guidelines, 2000. Related party transactions have been dealt effectively in these
guidelines. If more than 50 percent of business transactions by a company are
----------------------
with related parties, then the balance sheet should be scrutinized and adequate
---------------------- explanations should be sought from its officers. ICDR ensures comprehensive
regulation of related-party transactions, including giving independent
---------------------- shareholders the powers to approve large transactions above a certain limit
and enhancing disclosure requirements on other material transactions. Such
----------------------
regulation could be provided for in both the Listing Agreement and new SEBI
---------------------- regulations or guidelines. An independent financial advisor and an independent
board committee should be appointed to determine whether material transactions
---------------------- are fair and reasonable to all shareholders. Independent Directors are required
to exercise their duties more diligently and protect the interests of minority
----------------------
shareholders, especially in cases where the majority shareholder is also the
---------------------- manager of the company. Listed companies with numerous related transactions
should set up a related-party transaction committee of their board. This would
---------------------- scrutinize such transactions, recommend to the board if shareholder approval
should be sought, advise on disclosure and judge the fairness of transactions.
----------------------
Conclusion
----------------------
When business practices are guided by ethics and fair play, then there
---------------------- will be no disparity between majority and minority. The principles of good
governance will aid companies to do a self-appraisal of their policies to assess
---------------------- whether or not they are directed towards common good of all the shareholders.
----------------------
Check your Progress 2
----------------------
Fill in the blanks.
----------------------
1. The facility of passing resolutions through postal ballots was introduced
---------------------- in ______ under Section 192 A of Companies (Amendment) Act 2000.
---------------------- 2. As per the latest SEBI guidelines, if more than ___ percent of business
transactions by a company are with related parties, then the balance sheet
---------------------- should be scrutinized and adequate explanations should be sought from
its officers.
----------------------
State True or False.
----------------------
1. Insider trading is when people who have access to price sensitive
---------------------- information trade in securities with the aid of such information.

---------------------- 2. Under the existing provisions of the Act, the approval of High Court/
Tribunal is required in case of corporate restructuring by a company.
----------------------

----------------------

204 Corporate Governance

 Notes
Activity 2
----------------------
Visit the website of SEBI and download and study the documents regarding
----------------------
how to read an offer document and how to trade in securities/guide to
investors. ----------------------

----------------------
Summary ----------------------
●● The advantage of incorporating a company and doing business is its ----------------------
liability factor. The liability of a shareholder for the losses incurred by the
Company is limited to the extent of unpaid amount on his shareholding. ----------------------
●● Arising from this is the principle that the Board and the management ----------------------
of the company have a fiduciary responsibility towards each and every
shareholder and not just towards the majority or dominant shareholder. ----------------------
●● In the case of widely dispersed ownership as the capital is jointly owned by ----------------------
all the shareholders together, it is in the nature of a diffused shareholding.
Under diffused shareholding, each person’s shareholding is so small that ----------------------
it is too costly for such shareholder to monitor the company’s activities
closely by way of exercising voting rights, appointing the board of ----------------------
Directors. ----------------------
●● Shareholders’ democracy means that the rule of majority shall prevail.
But shareholder democracy should not mean dominance of the majority ----------------------
and the complete exclusion of the minority. When the powers of the ----------------------
majority are placed within unreasonable bounds, it results in oppression
of the minority and mis-management of the company. ----------------------
●● Oppression involves a conduct which is unfair, harsh and prejudicial
----------------------
towards a section of shareholders. To be termed as oppression, it should
involve a visible departure from the standards of fair dealing, and a ----------------------
violation of the conditions of fair play on which every shareholder, who
entrusts his money to the company is entitled to rely. ----------------------
●● The capital market has undergone lot of reforms stressing on transparency ----------------------
and disclosure of information. The increasing institutionalization of the
capital markets has tremendously enhanced the disciplining power of ----------------------
the market. With globalization of financial markets companies, investors
----------------------
and intermediaries are exposed to the higher standards of disclosure and
corporate governance prevails in more developed capital markets. ----------------------
●● One of the main objectives of the Companies Act has been to ensure
----------------------
good governance with a view to creating to shareholders’ wealth without
any discrimination to minority shareholders. Sections 397 to 409 of the ----------------------
Companies Act, 1956.
----------------------
●● The principle of good governance requires that whenever shareholder
approval is sought for various decisions, the company must provide ----------------------

Majority Rule and Minority Protection - Prevention of Oppression and Mismanagement 205
 Notes all material facts relating to these resolutions including the interest of
Directors and their relatives in the matter.
---------------------- ●● When people who have access to price sensitive information trade in
---------------------- securities with the aid of such information, it amounts to insider trading.
As it gives them an unfair advantage over the rest, it defies fair play in the
---------------------- market and erodes the confidence of the investors. Securities regulators
have framed various regulations to deal with the problem of insider
---------------------- trading. Crucial to good corporate governance are the existence and
---------------------- enforceability of regulations relating to insider information and insider
trading. The SEBI Takeover and Insider Trading Regulations, the Listing
---------------------- Agreement, all endeavour to provide transparency to protect shareholder
interest and ensure minority protection.
----------------------
●● Related party transactions are transactions that involve dealings between
---------------------- group companies, companies involved in joint ventures or between a
holding company and subsidiaries. These transactions as they are between
---------------------- those interested may not always be at market value and in the interests of the
---------------------- shareholders. Related party transactions (RPTs) tend to pose a significant
risk where there are controlling shareholders. SEBI recently published
---------------------- regulations in the Issue of Capital and Disclosure Requirements, 2009,
which replaced the Disclosure and Investor Protection Guidelines, 2000.
----------------------

---------------------- Keywords
---------------------- ●● Rule of Majority: The rule of the majority has been established in the
landmark case of Foss v. Harbottle where action was brought by two
---------------------- shareholders in a company against the Directors charging them with
---------------------- concerting and effecting various fraudulent and illegal transactions. It
was held by the court that in the case of wrong done to the company;
---------------------- action cannot be brought by minority shareholders as it could be ratified
by the majority shareholders.
----------------------
●● Insider Trading: Dealing in securities on the basis of price sensitive
---------------------- information amounts to insider trading. As it gives them an unfair
advantage over the rest, it defies fair play in the market and erodes the
---------------------- confidence of the investors. Securities regulators have framed various
---------------------- regulations to deal with the problem of insider trading.
●● Related Party Transactions: Related party transactions are transactions
---------------------- that involve dealings between group companies, companies involved in
---------------------- joint ventures or between a holding company and subsidiaries. These
transactions as they are between interested parties may not always be
---------------------- at market value and in the interests of the shareholders. Related party
transactions (RPTs) tend to pose a significant risk where there are
---------------------- controlling shareholders.
---------------------- ●● Oppression: Oppression involves a conduct which is unfair, harsh and
prejudicial towards a section of shareholders. To be termed as oppression,
---------------------- it should involve a visible departure from the standards of fair dealing, and

206 Corporate Governance

 a violation of the conditions of fair play on which every shareholder, who Notes
entrusts his money to the company is entitled to rely. Oppression involves
lack of fair dealing to the member of his propriety right as shareholder. ----------------------
●● Mismanagement: Mismanagement is understood to mean misuse of ----------------------
corporate funds and resources. ‘Mismanagement’ could mean misuse.
Instances of mismanagement are misallocation or diversification of ----------------------
funds, causing losses due to negligent decisions, not maintaining proper
records, not calling requisite meetings or non-compliance of provisions or ----------------------
procedures. Mismanagement could arise where the management does not ----------------------
handle a business situation with ordinary diligence leading to downfall of
business. Unlike Oppression, mismanagement does not essentially cover ----------------------
the violation of legal rights. It covers issues of proprietary, transparency
and financial uprightness. ----------------------

----------------------
Self-Assessment Questions
----------------------
1. Discuss the Rule of Majority as established in the case of Foss vs.
----------------------
Harbottle. What are the exceptions to the rule?
2. Enumerate the factors contributing to the empowerment of Minority ----------------------
shareholders. Discuss the safeguards that have contributed to minority
----------------------
shareholder protection.
3. Throw light on Insider trading and related party transactions. In what way ----------------------
do they erode into shareholders’ wealth and confidence.
----------------------
4. What are related party transactions and how do they affect the interests of
the shareholders? ----------------------

----------------------
Answers to Check your Progress
----------------------
Check your Progress 1
----------------------
State True or False.
1. True ----------------------

----------------------
Multiple Choice Single Response. ----------------------
1. Most of the governance norms, as embodied in Clause 49 of the listing
----------------------
agreement, have been inspired from the Cadbury Committee Report UK
and the _______________. ----------------------
iii. Sarbanes-Oxley Act ----------------------
2. Mismanagement as per the corporate governance is understood to mean
misuse of corporate ______. ----------------------

iii. Funds ----------------------

----------------------

Majority Rule and Minority Protection - Prevention of Oppression and Mismanagement 207
 Notes Check your Progress 2
Fill in the blanks.
----------------------
1. The facility of passing resolutions through postal ballots was introduced
---------------------- in 2001 under Section 192 A of Companies (Amendment) Act 2000.
---------------------- 2. As per the latest SEBI guidelines, if more than 50 percent of business
transactions by a company are with related parties, then the balance sheet
---------------------- should be scrutinized and adequate explanations should be sought from
its officers.
----------------------
State True or False.
----------------------
1. True
---------------------- 2. True
----------------------
Suggested Reading
----------------------
---------------------- 1. www.mca.gov.in/.../CG_Voluntary_Guidelines_2009_24dec2009.pdf
2. Chandratre, K R and A N Navare. 2010. Corporate Governance – A
---------------------- Practical Handbook. Bharat Law House Pvt. Ltd.
---------------------- 3. Das, Subhash Chandra. Corporate Governance in India: An Evaluation.
PHI Learning.
----------------------
4. Gupta, L.C. 1974. Corporate management and Accountability. Chennai:
---------------------- McMillan Institute for FM and Research.
---------------------- 5. McGregor, Lynn. The human face of Corporate Governance. Palgrave
Publishers.
----------------------
6. Mallin. Corporate Governance2/e. OUP.
----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

208 Corporate Governance

ANNEXURE Notes
Corporate Governance in listed entities - Amendments to Clauses 35B and 49 ----------------------
of the Equity Listing Agreement
----------------------
Part-A: Clause 35B of the Equity Listing Agreement
Part-B: Clause 49 of the Equity Listing Agreement ----------------------

Part-A: Clause 35B of the Equity Listing Agreement ----------------------

Clause 35B 35B. ----------------------
(i) The issuer agrees to provide e-voting facility to its shareholders, in
----------------------
respect of all shareholders' resolutions, to be passed at General Meetings
or through postal ballot. Such e-voting facility shall be kept open for such ----------------------
period specified under the Companies (Management and Administration)
Rules, 2014 for shareholders to send their assent or dissent. ----------------------
(ii) Issuer shall continue to enable those shareholders, who do not have ----------------------
access to evoting facility, to send their assent or dissent in writing on a
postal ballot as per the provisions of the Companies (Management and ----------------------
Administration) Rules, 2014 or amendments made thereto. ----------------------
(iii) Issuer shall utilize the service of any one of the agencies providing
e-voting platform, which is in compliance with conditions specified by ----------------------
the Ministry of Corporate Affairs, Government of India, from time to ----------------------
time.
(iv) Issuer shall mention the Internet link of such e-voting platform in the ----------------------
notice to their shareholders ----------------------
Part-B: Clause 49 of the Equity Listing Agreement
----------------------
49. Corporate Governance
----------------------
I. The company agrees to comply with the provisions of Clause 49 which shall
be implemented in a manner so as to achieve the objectives of the principles ----------------------
as mentioned below. In case of any ambiguity, the said provisions shall be
interpreted and applied in alignment with the principles. ----------------------
A. The Rights of Shareholders ----------------------
1. The company should seek to protect and facilitate the exercise of ----------------------
shareholders’ rights
----------------------
a. Shareholders should have the right to participate in, and to be
sufficiently informed on, decisions concerning fundamental ----------------------
corporate changes.
----------------------
b. Shareholders should have the opportunity to participate
effectively and vote in general shareholder meetings. ----------------------
c. Shareholders should be informed of the rules, including
----------------------
voting procedures that govern general shareholder meetings.
----------------------

Majority Rule and Minority Protection - Prevention of Oppression and Mismanagement 209
 Notes d. Shareholders should have the opportunity to ask questions to
the board, to place items on the agenda of general meetings,
---------------------- and to propose resolutions, subject to reasonable limitations.
---------------------- e. Effective shareholder participation in key Corporate
Governance decisions, such as the nomination and election of
---------------------- board members, should be facilitated.
---------------------- f. The exercise of ownership rights by all shareholders, including
institutional investors, should be facilitated.
----------------------
g. The Company should have an adequate mechanism to address
---------------------- the grievances of the shareholders.

---------------------- h. Minority shareholders should be protected from abusive

actions by, or in the interest of, controlling shareholders
---------------------- acting either directly or indirectly, and should have effective
means of redress.
----------------------
2. The company should provide adequate and timely information to
---------------------- shareholders.
---------------------- a. Shareholders should be furnished with sufficient and timely
information concerning the date, location and agenda of
---------------------- general meetings, as well as full and timely information
regarding the issues to be discussed at the meeting.
----------------------
b. Capital structures and arrangements that enable certain
---------------------- shareholders to obtain a degree of control disproportionate to
their equity ownership should be disclosed.
----------------------
c. All investors should be able to obtain information about the
---------------------- rights attached to all series and classes of shares before they
purchase.
----------------------
3. The company should ensure equitable treatment of all shareholders,
---------------------- including minority and foreign shareholders.
---------------------- a. All shareholders of the same series of a class should be treated
equally.
----------------------
b. Effective shareholder participation in key Corporate
---------------------- Governance decisions, such as the nomination and election of
board members, should be facilitated.
----------------------
c. Exercise of voting rights by foreign shareholders should be
---------------------- facilitated.
---------------------- d. The company should devise a framework to avoid Insider
trading and abusive self-dealing. e. Processes and procedures
---------------------- for general shareholder meetings should allow for equitable
treatment of all shareholders.
----------------------
f. Company procedures should not make it unduly difficult or
---------------------- expensive to cast votes

210 Corporate Governance

B. Role of stakeholders in Corporate Governance Notes
1. The company should recognise the rights of stakeholders and
----------------------
encourage cooperation between company and the stakeholders.
a. The rights of stakeholders that are established by law or ----------------------
through mutual agreements are to be respected.
----------------------
b. Stakeholders should have the opportunity to obtain effective
redress for violation of their rights ----------------------
c. Company should encourage mechanisms for employee ----------------------
participation.
----------------------
d. Stakeholders should have access to relevant, sufficient and
reliable information on a timely and regular basis to enable ----------------------
them to participate in Corporate Governance process
----------------------
e. The company should devise an effective whistle blower
mechanism enabling stakeholders, including individual ----------------------
employees and their representative bodies, to freely
communicate their concerns about illegal or unethical ----------------------
practices ----------------------
C. Disclosure and transparency
----------------------
1. The company should ensure timely and accurate disclosure on all
material matters including the financial situation, performance, ----------------------
ownership, and governance of the company.
----------------------
a. Information should be prepared and disclosed in accordance
with the prescribed standards of accounting, financial and ----------------------
non-financial disclosure.
----------------------
b. Channels for disseminating information should provide for
equal, timely and cost efficient access to relevant information ----------------------
by users. ----------------------
c. The company should maintain minutes of the meeting
explicitly recording dissenting opinions, if any. ----------------------

d. The company should implement the prescribed accounting ----------------------

standards in letter and spirit in the preparation of financial
----------------------
statements taking into consideration the interest of all
stakeholders and should also ensure that the annual audit ----------------------
is conducted by an independent, competent and qualified
auditor. ----------------------
D. Responsibilities of the Board ----------------------
1. Disclosure of Information
----------------------
a. Members of the Board and key executives should be required
to disclose to the board whether they, directly, indirectly ----------------------
or on behalf of third parties, have a material interest in any ----------------------
transaction or matter directly affecting the company.

Majority Rule and Minority Protection - Prevention of Oppression and Mismanagement 211
 Notes b. The Board and top management should conduct themselves
so as to meet the expectations of operational transparency to
---------------------- stakeholders while at the same time maintaining confidentiality
of information in order to foster a culture for good decision-
---------------------- making
---------------------- 2. Key functions of the Board
---------------------- The board should fulfill certain key functions, including:
a. Reviewing and guiding corporate strategy, major plans
----------------------
of action, risk policy, annual budgets and business plans;
---------------------- setting performance objectives; monitoring implementation
and corporate performance; and overseeing major capital
---------------------- expenditures, acquisitions and divestments.
---------------------- b. Monitoring the effectiveness of the company’s governance
practices and making changes as needed.
----------------------
c. Selecting, compensating, monitoring and, when necessary,
---------------------- replacing key executives and overseeing succession planning.
---------------------- d. Aligning key executive and board remuneration with the
longer term interests of the company and its shareholders.
----------------------
e. Ensuring a transparent board nomination process with the
---------------------- diversity of thought, experience, knowledge, perspective and
gender in the Board.
----------------------
f. Monitoring and managing potential conflicts of interest of
---------------------- management, board members and shareholders, including
misuse of corporate assets and abuse in related party
---------------------- transactions.
---------------------- g. Ensuring the integrity of the company’s accounting and
financial reporting systems, including the independent
---------------------- audit, and that appropriate systems of control are in place,
---------------------- in particular, systems for risk management, financial and
operational control, and compliance with the law and relevant
---------------------- standards.

---------------------- h. Overseeing the process of disclosure and communications.

i. Monitoring and reviewing Board Evaluation framework.
----------------------
3. Other responsibilities
----------------------
a. The Board should provide the strategic guidance to the
---------------------- company, ensure effective monitoring of the management and
should be accountable to the company and the shareholders.
----------------------
b. The Board should set a corporate culture and the values by
---------------------- which executives throughout a group will behave.

---------------------- c. Board members should act on a fully informed basis, in good

212 Corporate Governance

 faith, with due diligence and care, and in the best interest of Notes
the company and the shareholders.
----------------------
d. The Board should encourage continuing directors training to
ensure that the Board members are kept up to date. ----------------------
e. Where Board decisions may affect different shareholder
----------------------
groups differently, the Board should treat all shareholders
fairly. ----------------------
f. The Board should apply high ethical standards. It should take
----------------------
into account the interests of stakeholders.
g. The Board should be able to exercise objective independent ----------------------
judgement on corporate affairs. ----------------------
h. Boards should consider assigning a sufficient number of non-
executive Board members capable of exercising independent ----------------------
judgement to tasks where there is a potential for conflict of ----------------------
interest.
i. The Board should ensure that, while rightly encouraging ----------------------
positive thinking, these do not result in over-optimism that ----------------------
either leads to significant risks not being recognised or
exposes the company to excessive risk. ----------------------
j. The Board should have ability to ‘step back’ to assist executive ----------------------
management by challenging the assumptions underlying:
strategy, strategic initiatives (such as acquisitions), risk ----------------------
appetite, exposures and the key areas of the company's focus.
----------------------
k. When committees of the board are established, their mandate,
composition and working procedures should be well defined ----------------------
and disclosed by the board.
----------------------
l. Board members should be able to commit themselves
effectively to their responsibilities. ----------------------
m. In order to fulfil their responsibilities, board members should ----------------------
have access to accurate, relevant and timely information.
----------------------
n. The Board and senior management should facilitate the
Independent Directors to perform their role effectively as a ----------------------
Board member and also a member of a committee.
----------------------
II. Board of Directors
----------------------
A. Composition of Board
1. The Board of Directors of the company shall have an optimum combination ----------------------
of executive and non-executive directors with at least one woman director
----------------------
and not less than fifty percent of the Board of Directors comprising non-
executive directors. ----------------------
2. Where the Chairman of the Board is a non-executive director, at least one- ----------------------

Majority Rule and Minority Protection - Prevention of Oppression and Mismanagement 213
 Notes third of the Board should comprise independent directors and in case the
company does not have a regular non-executive Chairman, at least half
---------------------- of the Board should comprise independent directors. Provided that where
the regular non-executive Chairman is a promoter of the company or is
---------------------- related to any promoter or person occupying management positions at the
---------------------- Board level or at one level below the Board, at least one-half of the Board
of the company shall consist of independent directors. Explanation: For
---------------------- the purpose of the expression “related to any promoter” referred to in
sub-clause (2): i. If the promoter is a listed entity, its directors other than
---------------------- the independent directors, its employees or its nominees shall be deemed
---------------------- to be related to it; ii. If the promoter is an unlisted entity, its directors, its
employees or its nominees shall be deemed to be related to it.”
----------------------
B. Independent Directors
---------------------- 1. For the purpose of the clause
---------------------- A, the expression ‘independent director’ shall mean a non-executive
director, other than a nominee director of the company:
----------------------
a. who, in the opinion of the Board, is a person of integrity and
---------------------- possesses relevant expertise and experience;

---------------------- b. (i) who is or was not a promoter of the company or its holding,
subsidiary or associate company; (ii) who is not related to promoters
---------------------- or directors in the company, its holding, subsidiary or associate
company;
----------------------
c. apart from receiving director's remuneration, has or had no
---------------------- pecuniary relationship with the company, its holding, subsidiary
or associate company, or their promoters, or directors, during the
---------------------- two immediately preceding financial years or during the current
---------------------- financial year;
d. none of whose relatives has or had pecuniary relationship or
----------------------
transaction with the company, its holding, subsidiary or associate
---------------------- company, or their promoters, or directors, amounting to two per
cent. or more of its gross turnover or total income or fifty lakh rupees
---------------------- or such higher amount as may be prescribed, whichever is lower,
during the two immediately preceding financial years or during the
----------------------
current financial year;
---------------------- e. who, neither himself nor any of his relatives —
---------------------- (i) holds or has held the position of a key managerial personnel
or is or has been employee of the company or its holding,
---------------------- subsidiary or associate company in any of the three financial
---------------------- years immediately preceding the financial year in which he is
proposed to be appointed;
---------------------- (ii) is or has been an employee or proprietor or a partner, in any of
---------------------- the three financial years immediately preceding the financial
year in which he is proposed to be appointed, of —
214 Corporate Governance
 a firm of auditors or company secretaries in practice or cost
(A) Notes
auditors of the company or its holding, subsidiary or associate
company; or ----------------------
(B) any legal or a consulting firm that has or had any transaction ----------------------
with the company, its holding, subsidiary or associate
company amounting to ten per cent or more of the gross ----------------------
turnover of such firm;
----------------------
(iii) holds together with his relatives two per cent or more of the
total voting power of the company; or ----------------------
(iv) is a Chief Executive or director, by whatever name called, of ----------------------
any non-profit organisation that receives twenty-five per cent
or more of its receipts from the company, any of its promoters, ----------------------
directors or its holding, subsidiary or associate company or ----------------------
that holds two per cent or more of the total voting power of
the company; ----------------------
(v) is a material supplier, service provider or customer or a lessor ----------------------
or lessee of the company;
f. who is not less than 21 years of age ----------------------

Explanation For the purposes of the sub-clause (1): ----------------------

i. "Associate" shall mean a company which is an “associate” as defined ----------------------
in Accounting Standard (AS) 23, “Accounting for Investments in
Associates in Consolidated Financial Statements”, issued by the ----------------------
Institute of Chartered Accountants of India.
----------------------
ii. “Key Managerial Personnel" shall mean “Key Managerial
Personnel” as defined in section 2(51) of the Companies Act, 2013. ----------------------
iii. “Relative” shall mean “relative” as defined in section 2(77) of the ----------------------
Companies Act, 2013 and rules prescribed there under.
----------------------
2. Limit on number of directorships
----------------------
a. A person shall not serve as an independent director in more
than seven listed companies. ----------------------
b. Further, any person who is serving as a whole time director in
----------------------
any listed company shall serve as an independent director in
not more than three listed companies. ----------------------
3. Maximum tenure of Independent Directors
----------------------
a. An independent director shall hold office for a term up to
five consecutive years on the Board of a company and shall ----------------------
be eligible for reappointment for another term of up to five ----------------------
consecutive years on passing of a special resolution by the
company. Provided that a person who has already served as ----------------------
an independent director for five years or more in a company
as on October 1, 2014 shall be eligible for appointment, on ----------------------

Majority Rule and Minority Protection - Prevention of Oppression and Mismanagement 215
 Notes completion of his present term, for one more term of up to
five years only. Provided further that an independent director,
---------------------- who completes his above mentioned term shall be eligible
for appointment as independent director in the company
---------------------- only after the expiration of three years of ceasing to be an
---------------------- independent director in the company.
4. Formal letter of appointment to Independent Directors
----------------------
a. The company shall issue a formal letter of appointment to
---------------------- independent directors in the manner as provided in the
Companies Act, 2013.
----------------------
b. The letter of appointment along with the detailed profile of
---------------------- independent director shall be disclosed on the websites of the
company and the Stock Exchanges not later than one working
----------------------
day from the date of such appointment.
---------------------- 5. Performance evaluation of Independent Directors
---------------------- a. The Nomination Committee shall lay down the evaluation
criteria for performance evaluation of independent directors.
----------------------
b. The company shall disclose the criteria for performance
---------------------- evaluation, as laid down by the Nomination Committee, in its
Annual Report.
----------------------
c. The performance evaluation of independent directors shall be
---------------------- done by the entire Board of Directors (excluding the director
being evaluated).
----------------------
d. On the basis of the report of performance evaluation, it shall
---------------------- be determined whether to extend or continue the term of
appointment of the independent director.
----------------------
Provided further that independent directors shall not be entitled to any
---------------------- stock option.
---------------------- D. Other provisions as to Board and Committees

---------------------- 1. The Board shall meet at least four times a year, with a maximum
time gap of one hundred and twenty days between any two meetings.
---------------------- The minimum information to be made available to the Board is
given in Annexure - X to the Listing Agreement.
----------------------
2. A director shall not be a member in more than ten committees or
---------------------- act as Chairman of more than five committees across all companies
in which he is a director. Furthermore, every director shall inform
----------------------
the company about the committee positions he occupies in other
---------------------- companies and notify changes as and when they take place.

----------------------

----------------------

216 Corporate Governance

Explanation: Notes
i. For the purpose of considering the limit of the committees on which a
----------------------
director can serve, all public limited companies, whether listed or not, shall
be included and all other companies including private limited companies, ----------------------
foreign companies and companies under Section 8 of the Companies Act,
2013 shall be excluded. ----------------------
ii. For the purpose of reckoning the limit under this sub-clause, Chairmanship ----------------------
/ membership of the Audit Committee and the Stakeholders' Relationship
Committee alone shall be considered. ----------------------
3. The Board shall periodically review compliance reports of all laws ----------------------
applicable to the company, prepared by the company as well as steps
taken by the company to rectify instances of non-compliances. ----------------------
4. An independent director who resigns or is removed from the Board ----------------------
of the Company shall be replaced by a new independent director at
the earliest but not later than the immediate next Board meeting or ----------------------
three months from the date of such vacancy, whichever is later. ----------------------
5. Provided that where the company fulfils the requirement of
independent directors in its Board even without filling the vacancy ----------------------
created by such resignation or removal, as the case may be, the ----------------------
requirement of replacement by a new independent director shall not
apply. ----------------------
6. The Board of the company shall satisfy itself that plans are in place ----------------------
for orderly succession for appointments to the Board and to senior
management. ----------------------
E. Code of Conduct ----------------------
1. The Board shall lay down a code of conduct for all Board members
----------------------
and senior management of the company. The code of conduct shall
be posted on the website of the company. ----------------------
2. All Board members and senior management personnel shall affirm ----------------------
compliance with the code on an annual basis. The Annual Report of
the company shall contain a declaration to this effect signed by the ----------------------
CEO.
----------------------
3. The Code of Conduct shall suitably incorporate the duties of
Independent Directors as laid down in the Companies Act, 2013. ----------------------
4. An independent director shall be held liable, only in respect of such ----------------------
acts of omission or commission by a company which had occurred
with his knowledge, attributable through Board processes, and with ----------------------
his consent or connivance or where he had not acted diligently
with respect of the provisions contained in the Listing Agreement. ----------------------
Explanation: For this purpose, the term “senior management” ----------------------
shall mean personnel of the company who are members of its core
management team excluding Board of Directors. Normally, this ----------------------

Majority Rule and Minority Protection - Prevention of Oppression and Mismanagement 217
 Notes would comprise all members of management one level below the
executive directors, including all functional heads.
----------------------
F. Whistle Blower Policy
---------------------- 1. The company shall establish a vigil mechanism for directors and
employees to report concerns about unethical behaviour, actual or
----------------------
suspected fraud or violation of the company’s code of conduct or
---------------------- ethics policy.
2. This mechanism should also provide for adequate safeguards
----------------------
against victimization of director(s) / employee(s) who avail of the
---------------------- mechanism and also provide for direct access to the Chairman of
the Audit Committee in exceptional cases.
----------------------
3. The details of establishment of such mechanism shall be disclosed
---------------------- by the company on its website and in the Board’s report

---------------------- III. Audit Committee

A. Qualified and Independent Audit Committee A qualified and
---------------------- independent audit committee shall be set up, giving the terms of reference
---------------------- subject to the following:
1. The audit committee shall have minimum three directors as
----------------------
members. Two-thirds of the members of audit committee shall be
---------------------- independent directors.
2. All members of audit committee shall be financially literate and
----------------------
at least one member shall have accounting or related financial
---------------------- management expertise.

---------------------- Explanation (i): The term “financially literate” means the ability to
read and understand basic financial statements i.e. balance sheet,
---------------------- profit and loss account, and statement of cash flows. Explanation
(ii): A member will be considered to have accounting or related
---------------------- financial management expertise if he or she possesses experience
---------------------- in finance or accounting, or requisite professional certification in
accounting, or any other comparable experience or background
---------------------- which results in the individual’s financial sophistication, including
being or having been a chief executive officer, chief financial officer
---------------------- or other senior officer with financial oversight responsibilities.
---------------------- 3. The Chairman of the Audit Committee shall be an independent
director;
----------------------
4. The Chairman of the Audit Committee shall be present at Annual
---------------------- General Meeting to answer shareholder queries;
---------------------- 5. The Audit Committee may invite such of the executives, as it
considers appropriate (and particularly the head of the finance
---------------------- function) to be present at the meetings of the committee, but on
occasions it may also meet without the presence of any executives
----------------------

218 Corporate Governance

 of the company. The finance director, head of internal audit and a Notes
representative of the statutory auditor may be present as invitees for
the meetings of the audit committee; ----------------------
6. The Company Secretary shall act as the secretary to the committee. ----------------------
B. Meeting of Audit Committee
----------------------
The Audit Committee should meet at least four times in a year and not
more than four months shall elapse between two meetings. The quorum ----------------------
shall be either two membersor one third of the members of the audit
----------------------
committee whichever is greater, but there should be a minimum of two
independent members present. ----------------------
C. Powers of Audit Committee ----------------------
The Audit Committee shall have powers, which should include the
following: ----------------------

1. To investigate any activity within its terms of reference. ----------------------

2. To seek information from any employee. ----------------------
3. To obtain outside legal or other professional advice.
----------------------
4. To secure attendance of outsiders with relevant expertise, if it
considers necessary. ----------------------
D. Role of Audit Committee The role of the Audit Committee shall include ----------------------
the following:
----------------------
1. Oversight of the company’s financial reporting process and the
disclosure of its financial information to ensure that the financial ----------------------
statement is correct, sufficient and credible;
----------------------
2. Recommendation for appointment, remuneration and terms of
appointment of auditors of the company; ----------------------
3. Approval of payment to statutory auditors for any other services ----------------------
rendered by the statutory auditors;
----------------------
4. Reviewing, with the management, the annual financial statements
and auditor's report thereon before submission to the board for ----------------------
approval, with particular reference to:
----------------------
a. Matters required to be included in the Director’s Responsibility
Statement to be included in the Board’s report in terms of ----------------------
clause (c) of sub-section 3 of section 134 of the Companies
Act, 2013 ----------------------

b. Changes, if any, in accounting policies and practices and ----------------------

reasons for the same .
----------------------
c. Major accounting entries involving estimates based on the
exercise of judgment by management ----------------------

----------------------

Majority Rule and Minority Protection - Prevention of Oppression and Mismanagement 219
 Notes d. Significant adjustments made in the financial statements
arising out of audit findings
----------------------
e. Compliance with listing and other legal requirements relating
---------------------- to financial statements
f. Disclosure of any related party transactions g. Qualifications
----------------------
in the draft audit report
---------------------- 5. Reviewing, with the management, the quarterly financial statements
before submission to the board for approval;
----------------------
6. Reviewing, with the management, the statement of uses / application
---------------------- of funds raised through an issue (public issue, rights issue,
---------------------- preferential issue, etc.), the statement of funds utilized for purposes
other than those stated in the offer document / prospectus / notice
---------------------- and the report submitted by the monitoring agency monitoring
the utilisation of proceeds of a public or rights issue, and making
---------------------- appropriate recommendations to the Board to take up steps in this
---------------------- matter;
7. Review and monitor the auditor’s independence and performance,
---------------------- and effectiveness of audit process;
---------------------- 8. Approval or any subsequent modification of transactions of the
company with related parties;
----------------------
9. Scrutiny of inter-corporate loans and investments;
----------------------
10. Valuation of undertakings or assets of the company, wherever it is
---------------------- necessary;

---------------------- 11. Evaluation of internal financial controls and risk management

systems;
---------------------- 12. Reviewing, with the management, performance of statutory and
---------------------- internal auditors, adequacy of the internal control systems;
13. Reviewing the adequacy of internal audit function, if any, including
---------------------- the structure of the internal audit department, staffing and seniority
---------------------- of the official heading the department, reporting structure coverage
and frequency of internal audit;
----------------------
14. Discussion with internal auditors of any significant findings and
---------------------- follow up there on;
15. Reviewing the findings of any internal investigations by the internal
----------------------
auditors into matters where there is suspected fraud or irregularity
---------------------- or a failure of internal control systems of a material nature and
reporting the matter to the board;
----------------------
16. Discussion with statutory auditors before the audit commences,
---------------------- about the nature and scope of audit as well as post-audit discussion
to ascertain any area of concern;
----------------------

220 Corporate Governance

17. To look into the reasons for substantial defaults in the payment to the Notes
depositors, debenture holders, shareholders (in case of non-payment
of declared dividends) and creditors; ----------------------
18. To review the functioning of the Whistle Blower mechanism; ----------------------
19. Approval of appointment of CFO (i.e., the whole-time Finance Director
----------------------
or any other person heading the finance function or discharging
that function) after assessing the qualifications, experience and ----------------------
background, etc. of the candidate;
----------------------
20. Carrying out any other function as is mentioned in the terms of reference
of the Audit Committee. ----------------------
Explanation (i): The term "related party transactions" shall have the same ----------------------
meaning as provided in Clause 49(VII) of the Listing Agreement.
E. Review of information by Audit Committee ----------------------

The Audit Committee shall mandatorily review the following information: ----------------------
1. Management discussion and analysis of financial condition and results of ----------------------
operations;
----------------------
2. Statement of significant related party transactions (as defined by the Audit
Committee), submitted by management; ----------------------
3. Management letters / letters of internal control weaknesses issued by the ----------------------
statutory auditors;
4. Internal audit reports relating to internal control weaknesses; and ----------------------

5. The appointment, removal and terms of remuneration of the Chief internal ----------------------
auditor shall be subject to review by the Audit Committee.
----------------------
IV. Nomination and Remuneration Committee
----------------------
A. The company shall set up a nomination and remuneration committee which
shall comprise at least three directors, all of whom shall be non-executive ----------------------
directors and at least half shall be Independent. Chairman of the committee
shall be an independent director. B. The role of the committee shall, inter-alia, ----------------------
include the following:
----------------------
1. Formulation of the criteria for determining qualifications, positive
attributes and independence of a director and recommend to the Board ----------------------
a policy, relating to the remuneration of the directors, key managerial
----------------------
personnel and other employees;
2. Formulation of criteria for evaluation of Independent Directors and the ----------------------
Board; ----------------------
3. Devising a policy on Board diversity;
----------------------
4. Identifying persons who are qualified to become directors and who may
be appointed in senior management in accordance with the criteria laid ----------------------
down, and recommend to the Board their appointment and removal. The
----------------------

Majority Rule and Minority Protection - Prevention of Oppression and Mismanagement 221
 Notes company shall disclose the remuneration policy and the evaluation criteria
in its Annual Report.
----------------------
C. The Chairman of the nomination and remuneration committee
---------------------- could be present at the Annual General Meeting, to answer the
shareholders' queries. However, it would be up to the Chairman to
---------------------- decide who should answer the queries.
---------------------- V. Subsidiary Companies
A. At least one independent director on the Board of Directors of the holding
----------------------
company shall be a director on the Board of Directors of a material non-
---------------------- listed Indian subsidiary company.

---------------------- B. The Audit Committee of the listed holding company shall also review the
financial statements, in particular, the investments made by the unlisted
---------------------- subsidiary company.

---------------------- C. The minutes of the Board meetings of the unlisted subsidiary company
shall be placed at the Board meeting of the listed holding company. The
---------------------- management should periodically bring to the attention of the Board of
Directors of the listed holding company, a statement of all significant
---------------------- transactions and arrangements entered into by the unlisted subsidiary
---------------------- company.
D. The company shall formulate a policy for determining ‘material’
---------------------- subsidiaries and such policy shall be disclosed to Stock Exchanges and in
---------------------- the Annual Report.
E. For the purpose of this clause, a subsidiary shall be considered as material
----------------------
if the investment of the company in the subsidiary exceeds twenty per
---------------------- cent of its consolidated net worth as per the audited balance sheet of the
previous financial year or if the subsidiary has generated twenty per cent
---------------------- of the consolidated income of the company during the previous financial
year.
----------------------
F. No company shall dispose of shares in its material subsidiary which
---------------------- would reduce its shareholding (either on its own or together with other
subsidiaries) to less than 50% or cease the exercise of control over the
----------------------
subsidiary without passing a special resolution in its General Meeting.
---------------------- G. Selling, disposing and leasing of assets amounting to more than twenty
---------------------- percent of the assets of the material subsidiary shall require prior approval
of shareholders by way of special resolution
---------------------- Explanation (i): The term “material non-listed Indian subsidiary” shall mean
---------------------- an unlisted subsidiary, incorporated in India, whose income or net worth (i.e.
paid up capital and free reserves) exceeds 20% of the consolidated income or
---------------------- net worth respectively, of the listed holding company and its subsidiaries in the
immediately preceding accounting year. Explanation
----------------------
(ii): The term “significant transaction or arrangement” shall mean any individual
---------------------- transaction or arrangement that exceeds or is likely to exceed 10% of the total

222 Corporate Governance

revenues or total expenses or total assets or total liabilities, as the case may be, Notes
of the material unlisted subsidiary for the immediately preceding accounting
year. ----------------------
Explanation (iii): Where a listed holding company has a listed subsidiary ----------------------
which is itself a holding company, the above provisions shall apply to the listed
subsidiary insofar as its subsidiaries are concerned. ----------------------
Risk Management ----------------------
A. The company shall lay down procedures to inform Board members about
----------------------
the risk assessment and minimization procedures.
B. The Board shall be responsible for framing, implementing and monitoring ----------------------
the risk management plan for the company. ----------------------
C. The company shall also constitute a Risk Management Committee. The
Board shall define the roles and responsibilities of the Risk Management ----------------------
Committee and may delegate monitoring and reviewing of the risk ----------------------
management plan to the committee and such other functions as it may
deem fit. ----------------------
VII. Related Party Transactions ----------------------
A. A related party transaction is a transfer of resources, services or obligations
----------------------
between a company and a related party, regardless of whether a price is
charged. ----------------------
B. A ‘related party' is a person or entity that is related to the company. Parties
----------------------
are considered to be related if one party has the ability to control the other
party or exercise significant influence over the other party, directly or ----------------------
indirectly, in making financial and/or operating decisions and includes the
following: ----------------------
1. A person or a close member of that person’s family is related to a ----------------------
company if that person: a. is a related party under Section 2(76)
of the Companies Act, 2013;or b. has control or joint control or ----------------------
significant influence over the company; or c. is a key management ----------------------
personnel of the company or of a parent of the company; or
2. An entity is related to a company if any of the following conditions ----------------------
applies: ----------------------
a. The entity is a related party under Section 2(76) of the
Companies Act, 2013; or ----------------------

b. The entity and the company are members of the same ----------------------
group (which means that each parent, subsidiary and fellow
----------------------
subsidiary is related to the others); or
c. One entity is an associate or joint venture of the other entity ----------------------
(or an associate or joint venture of a member of a group of
----------------------
which the other entity is a member); or
d. Both entities are joint ventures of the same third party; ----------------------

Majority Rule and Minority Protection - Prevention of Oppression and Mismanagement 223
 Notes or
e. One entity is a joint venture of a third entity and the other entity is
----------------------
an associate of the third entity; or
---------------------- f. The entity is a post-employment benefit plan for the benefit of
employees of either the company or an entity related to the company.
----------------------
If the company is itself such a plan, the sponsoring employers are
---------------------- also related to the company; or
g. The entity is controlled or jointly controlled by a person identified in
----------------------
(1). h. A person identified in (1)(b) has significant influence over the
---------------------- entity (or of a parent of the entity); or Explanation: For the purpose
of Clause 49(V) and Clause VII(B), the term “control” shall have
---------------------- the same meaning as defined in SEBI (Substantial Acquisition of
Shares and Takeovers) Regulations, 2011.
----------------------
C. The company shall formulate a policy on materiality of related party
---------------------- transactions and also on dealing with Related Party Transactions. Provided
---------------------- that a transaction with a related party shall be considered material if the
transaction / transactions to be entered into individually or taken together
---------------------- with previous transactions during a financial year, exceeds five percent
of the annual turnover or twenty percent of the net worth of the company
---------------------- as per the last audited financial statements of the company, whichever is
---------------------- higher.
D. All Related Party Transactions shall require prior approval of the Audit
---------------------- Committee.
---------------------- E. All material Related Party Transactions shall require approval of the
shareholders through special resolution and the related parties shall
---------------------- abstain from voting on such resolutions.
---------------------- VIII. Disclosures
---------------------- A. Related Party Transactions

---------------------- 1. Details of all material transactions with related parties shall be

disclosed quarterly along with the compliance report on corporate
---------------------- governance.

---------------------- 2. The company shall disclose the policy on dealing with Related
Party Transactions on its website and also in the Annual Report
---------------------- B. Disclosure of Accounting Treatment Where in the preparation of
---------------------- financial statements, a treatment different from that prescribed in an
Accounting Standard has been followed, the fact shall be disclosed in the
---------------------- financial statements, together with the management’s explanation as to
why it believes such alternative treatment is more representative of the
---------------------- true and fair view of the underlying business transaction in the Corporate
---------------------- Governance Report.

----------------------

224 Corporate Governance

C. Remuneration of Directors Notes
1. All pecuniary relationship or transactions of the non-executive directors
----------------------
vis-à- vis the company shall be disclosed in the Annual Report.
2. In addition to the disclosures required under the Companies Act, 2013, ----------------------
the following disclosures on the remuneration of directors shall be made
----------------------
in the section on the corporate governance of the Annual Report:
a. All elements of remuneration package of individual directors ----------------------
summarized under major groups, such as salary, benefits, bonuses,
----------------------
stock options, pension etc.
b. Details of fixed component and performance linked incentives, ----------------------
along with the performance criteria. ----------------------
c. Service contracts, notice period, severance fees. d. Stock option
details, if any - and whether issued at a discount as well as the ----------------------
period over which accrued and over which exercisable. ----------------------
3. The company shall publish its criteria of making payments to non-
executive directors in its annual report. Alternatively, this may be put ----------------------
up on the company’s website and reference drawn thereto in the annual ----------------------
report.
----------------------
4. The company shall disclose the number of shares and convertible
instruments held by non-executive directors in the annual report. ----------------------
5. Non-executive directors shall be required to disclose their shareholding
----------------------
(both own or held by / for other persons on a beneficial basis) in the listed
company in which they are proposed to be appointed as directors, prior to ----------------------
their appointment. These details should be disclosed in the notice to the
general meeting called for appointment of such director ----------------------
D. Management ----------------------
1. As part of the directors’ report or as an addition thereto, a Management ----------------------
Discussion and Analysis report should form part of the Annual Report
to the shareholders. This Management Discussion & Analysis should ----------------------
include discussion on the following matters within the limits set by the
company’s competitive position: ----------------------

a. Industry structure and developments. ----------------------

b. Opportunities and Threats. ----------------------
c. Segment–wise or product-wise performance.
----------------------
d. Outlook e. Risks and concerns.
----------------------
f. Internal control systems and their adequacy.
g. Discussion on financial performance with respect to operational ----------------------
performance. ----------------------
h. Material developments in Human Resources / Industrial Relations
front, including number of people employed. ----------------------

Majority Rule and Minority Protection - Prevention of Oppression and Mismanagement 225
 Notes 2. Senior management shall make disclosures to the board relating to all
material financial and commercial transactions, where they have personal
---------------------- interest, that may have a potential conflict with the interest of the company
at large (for e.g. dealing in company shares, commercial dealings with
---------------------- bodies, which have shareholding of management and their relatives etc.)
---------------------- Explanation: For this purpose, the term "senior management" shall mean
personnel of the company who are members of its core management team
---------------------- excluding the Board of Directors). This would also include all members
of management one level below the executive directors including all
---------------------- functional heads.
---------------------- 3. The Code of Conduct for the Board of Directors and the senior management
shall be disclosed on the website of the company.
----------------------
E. Shareholders
----------------------
1. In case of the appointment of a new director or re-appointment of a director
---------------------- the shareholders must be provided with the following information:

---------------------- a. A brief resume of the director;

b. Nature of his expertise in specific functional
----------------------
c. Names of companies in which the person also holds the directorship
---------------------- and the membership of Committees of the Board; and
---------------------- d. Shareholding of non-executive directors as stated in Clause 49 (IV)
(E) (v) above
----------------------
2. Disclosure of relationships between directors inter-se shall be made in the
---------------------- Annual Report, notice of appointment of a director, prospectus and letter
of offer for issuances and any related filings made to the stock exchanges
---------------------- where the company is listed.
---------------------- 3. Quarterly results and presentations made by the company to analysts shall
be put on company’s web-site, or shall be sent in such a form so as to
---------------------- enable the stock exchange on which the company is listed to put it on its
---------------------- own web-site.
4. A committee under the Chairmanship of a non-executive director and
---------------------- such other members as may be decided by the Board of the company
---------------------- shall be formed to specifically look into the redressal of grievances
of shareholders, debenture holders and other security holders. This
---------------------- Committee shall be designated as ‘Stakeholders Relationship Committee’
and shall consider and resolve the grievances of the security holders of the
---------------------- company including complaints related to transfer of shares, non-receipt
---------------------- of balance sheet, nonreceipt of declared dividends.
5. To expedite the process of share transfers, the Board of the company shall
---------------------- delegate the power of share transfer to an officer or a committee or to the
---------------------- registrar and share transfer agents. The delegated authority shall attend to
share transfer formalities at least once in a fortnight.
----------------------

226 Corporate Governance

F. Disclosure of resignation of directors Notes
1. The company shall disclose the letter of resignation along with
----------------------
the detailed reasons of resignation provided by the director of the
company on its website not later than one working day from the ----------------------
date of receipt of the letter of resignation.
----------------------
2. The company shall also forward a copy of the letter of resignation
along with the detailed reasons of resignation to the stock exchanges ----------------------
not later than one working day from the date of receipt of resignation
for dissemination through its website. ----------------------
G. Disclosure of formal letter of appointment ----------------------
1. The letter of appointment of the independent director along with the ----------------------
detailed profile shall be disclosed on the websites of the company
and the Stock Exchanges not later than one working day from the ----------------------
date of such appointment.
----------------------
H. Disclosures in Annual report
1. The details of training imparted to Independent Directors shall be ----------------------
disclosed in the Annual Report. ----------------------
2. The details of establishment of vigil mechanism shall be disclosed
----------------------
by the company on its website and in the Board’s report.
3. The company shall disclose the remuneration policy and the ----------------------
evaluation criteria in its Annual Report.
----------------------
I. Proceeds from public issues, rights issue, preferential issues, etc.
----------------------
When money is raised through an issue (public issues, rights issues,
preferential issues etc.), the company shall disclose the uses / applications ----------------------
of funds by major category (capital expenditure, sales and marketing,
working capital, etc), on a quarterly basis as a part of their quarterly ----------------------
declaration of financial results to the Audit Committee. Further, on an ----------------------
annual basis, the company shall prepare a statement of funds utilized for
purposes other than those stated in the offer document / prospectus / notice ----------------------
and place it before the audit committee. Such disclosure shall be made
only till such time that the full money raised through the issue has been ----------------------
fully spent. This statement shall be certified by the statutory auditors of the ----------------------
company. Furthermore, where the company has appointed a monitoring
agency to monitor the utilisation of proceeds of a public or rights issue, ----------------------
it shall place before the Audit Committee the monitoring report of such
agency, upon receipt, without any delay. The audit committee shall make ----------------------
appropriate recommendations to the Board to take up steps in this matter. ----------------------
IX. CEO/CFO certification
----------------------
The CEO, i.e. the Managing Director or Manager appointed in terms
of the Companies Act, 1956 and the CFO i.e. the whole-time Finance ----------------------
Director or any other person heading the finance function discharging that
----------------------
function shall certify to the Board that:

Majority Rule and Minority Protection - Prevention of Oppression and Mismanagement 227
 Notes A. They have reviewed financial statements and the cash flow statement for
the year and that to the best of their knowledge and belief
----------------------
1. these statements do not contain any materially untrue statement
---------------------- or omit any material fact or contain statements that might be
misleading;
----------------------
2. these statements together present a true and fair view of the
---------------------- company’s affairs and are in compliance with existing accounting
standards, applicable laws and regulations.
----------------------
B. There are, to the best of their knowledge and belief, no transactions
---------------------- entered into by the company during the year which are fraudulent, illegal
or violative of the company’s code of conduct.
----------------------
C. They accept responsibility for establishing and maintaining internal
---------------------- controls for financial reporting and that they have evaluated the
effectiveness of internal control systems of the company pertaining to
---------------------- financial reporting and they have disclosed to the auditors and the Audit
---------------------- Committee, deficiencies in the design or operation of such internal
controls, if any, of which they are aware and the steps they have taken or
---------------------- propose to take to rectify these deficiencies.

---------------------- D. They have indicated to the auditors and the Audit committee:
1. significant changes in internal control over financial reporting
---------------------- during the year;
---------------------- 2. significant changes in accounting policies during the year and that
the same have been disclosed in the notes to the financial statements;
----------------------
and
---------------------- 3. instances of significant fraud of which they have become aware and
the involvement therein, if any, of the management or an employee
----------------------
having a significant role in the company’s internal control system
---------------------- over financial reporting.

---------------------- X. Report on Corporate Governance

A. There shall be a separate section on Corporate Governance in the Annual
---------------------- Reports of company, with a detailed compliance report on Corporate
---------------------- Governance. Noncompliance of any mandatory requirement of this
clause with reasons thereof and the extent to which the non-mandatory
---------------------- requirements have been adopted should be specifically highlighted. The
suggested list of items to be included in this report is given in Annexure
---------------------- - XII to the Listing Agreement and list of non-mandatory requirements is
---------------------- given in Annexure - XIII to the Listing Agreement.
B. The companies shall submit a quarterly compliance report to the stock
---------------------- exchanges within 15 days from the close of quarter as per the format given
---------------------- in Annexure - XI. The report shall be signed either by the Compliance
Officer or the Chief Executive Officer of the company.
----------------------

228 Corporate Governance

XI. Compliance Notes
A. The company shall obtain a certificate from either the auditors or practicing
----------------------
company secretaries regarding compliance of conditions of corporate
governance as stipulated in this clause and annex the certificate with the ----------------------
directors’ report, which is sent annually to all the shareholders of the
company. The same certificate shall also be sent to the Stock Exchanges ----------------------
along with the annual report filed by the company.
----------------------
B. The non-mandatory requirements given in Annexure - XIII to the Listing
Agreement may be implemented as per the discretion of the company. ----------------------
However, the disclosures of the compliance with mandatory requirements
----------------------
and adoption (and compliance) / non-adoption of the non-mandatory
requirements shall be made in the section on corporate governance of the ----------------------
Annual Report.
----------------------
Annexure - X to the Listing Agreement Information to be placed before
Board of Directors ----------------------
1. Annual operating plans and budgets and any updates. ----------------------
2. Capital budgets and any updates.
----------------------
3. Quarterly results for the company and its operating divisions or business
segments. ----------------------
4. Minutes of meetings of audit committee and other committees of the ----------------------
board.
----------------------
5. The information on recruitment and remuneration of senior officers
just below the board level, including appointment or removal of Chief ----------------------
Financial Officer and the Company Secretary.
----------------------
6. Show cause, demand, prosecution notices and penalty notices which are
materially important. ----------------------
7. Fatal or serious accidents, dangerous occurrences, any material effluent ----------------------
or pollution problems.
8. Any material default in financial obligations to and by the company, or ----------------------
substantial nonpayment for goods sold by the company. ----------------------
9. Any issue, which involves possible public or product liability claims of
----------------------
substantial nature, including any judgement or order which, may have
passed strictures on the conduct of the company or taken an adverse view ----------------------
regarding another enterprise that can have negative implications on the
company. ----------------------
10. Details of any joint venture or collaboration agreement. ----------------------
11. Transactions that involve substantial payment towards goodwill, brand
----------------------
equity, or intellectual property.
12. Significant labour problems and their proposed solutions. Any significant ----------------------
development in Human Resources/ Industrial Relations front like signing ----------------------

Majority Rule and Minority Protection - Prevention of Oppression and Mismanagement 229
 Notes of wage agreement, implementation of Voluntary Retirement Scheme etc.
13. Sale of material nature, of investments, subsidiaries, assets, which is not
----------------------
in normal course of business.
---------------------- 14. Quarterly details of foreign exchange exposures and the steps taken by
management to limit the risks of adverse exchange rate movement, if
----------------------
material.
---------------------- 15. Non-compliance of any regulatory, statutory or listing requirements and
shareholders service such as non-payment of dividend, delay in share
----------------------
transfer etc.
---------------------- Suggested List of Items to Be Included In the Report on Corporate
---------------------- Governance in the Annual Report of Companies
1. A brief statement on company’s philosophy on code of governance.
----------------------
2. Board of Directors:
----------------------
a. Composition and category of directors, for example, promoter,
---------------------- executive, nonexecutive, independent non-executive, nominee
director, which institution represented as lender or as equity investor.
----------------------
b. Attendance of each director at the Board meetings and the last
---------------------- AGM.

---------------------- c. Number of other Boards or Board Committees in which he/she is a

member or Chairperson.
---------------------- d. Number of Board meetings held, dates on which held. 3. Audit
---------------------- Committee: i. Brief description of terms of reference
ii. Composition, name of members and Chairperson
----------------------
iii. Meetings and attendance during the year
----------------------
4. Nomination and Remuneration Committee:
---------------------- i. Brief description of terms of reference
---------------------- ii. Composition, name of members and Chairperson

---------------------- iii. Attendance during the year

iv. Remuneration policy
----------------------
v. Details of remuneration to all the directors, as per format in main
---------------------- report.
---------------------- 5. Stakeholders' Grievance Committee:

---------------------- i. Name of non-executive director heading the committee

ii. Name and designation of compliance officer
----------------------
iii. . Number of shareholders’ complaints received so far
----------------------
iv. Number not solved to the satisfaction of shareholders
---------------------- v. Number of pending complaints 6. General Body meetings:

230 Corporate Governance

 i. Location and time, where last three AGMs held Notes
ii. Whether any special resolutions passed in the previous 3 AGMs
----------------------
iii. Whether any special resolution passed last year through postal
ballot – details of voting pattern ----------------------
iv. Person who conducted the postal ballot exercise v. Whether any ----------------------
special resolution is proposed to be conducted through postal ballot
vi. Procedure for postal ballot ----------------------
7. Disclosures: ----------------------
i. Disclosures on materially significant related party transactions that ----------------------
may have potential conflict with the interests of company at large.
ii. Details of non-compliance by the company, penalties, strictures ----------------------
imposed on the company by Stock Exchange or SEBI or any ----------------------
statutory authority, on any matter related to capital markets, during
the last three years. ----------------------
iii. Whistle Blower policy and affirmation that no personnel has been ----------------------
denied access to the audit committee.
----------------------
iv. Details of compliance with mandatory requirements and adoption
of the nonmandatory requirements of this clause ----------------------
8. Means of communication: ----------------------
i. Quarterly results
----------------------
ii. Newspapers wherein results normally published
----------------------
iii. Any website, where displayed
iv. Whether it also displays official news releases; and ----------------------
v. The presentations made to institutional investors or to the analysts. ----------------------
9. General Shareholder information ----------------------
i. AGM: Date, time and venue
----------------------
ii. Financial year
----------------------
iii. Date of Book closure
iv. Dividend Payment Date ----------------------
v. Listing on Stock Exchanges ----------------------
vi. Stock Code ----------------------
vii. Market Price Data: High., Low during each month in last financial
year ----------------------

Performance in comparison to broad-based indices such as BSE

viii. ----------------------
Sensex, CRISIL index etc.
----------------------
ix. Registrar and Transfer Agents
----------------------

Majority Rule and Minority Protection - Prevention of Oppression and Mismanagement 231
 Notes x. Share Transfer System
xi. Distribution of shareholding
----------------------
xii. Dematerialization of shares and liquidity
----------------------
xiii. Outstanding GDRs/ADRs/Warrants or any Convertible instruments,
---------------------- conversion date and likely impact on equity

---------------------- xiv. Plant Locations

xv. Address for correspondence
----------------------
Non-Mandatory Requirements
----------------------
1. The Board The Board - A non-executive Chairman may be entitled to
---------------------- maintain a Chairman's office at the company's expense and also allowed
reimbursement of expenses incurred in performance of his duties.
----------------------
2. Shareholder Rights A half-yearly declaration of financial performance
---------------------- including summary of the significant events in last six-months, may be
sent to each household of shareholders.
----------------------
3. Audit qualifications Company may move towards a regime of unqualified
---------------------- financial statements.

---------------------- 4. Separate posts of Chairman and CEO The company may appoint
separate persons to the post of Chairman and Managing Director/CEO.
----------------------
5. Reporting of Internal Auditor the Internal auditor may report directly to
---------------------- the Audit Committee
Source: SEBI
----------------------
http://www.sebi.gov.in/7F49FD09-00AD-4052-9628-FF96ACE149C8/FinalDownload/
---------------------- DownloadId-8A3271695E69C20B3141FD597756DF96/7F49FD09-00AD-4052-9628-
FF96ACE149C8/cms/sebi_data/attachdocs/1397734478112.pdf
----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

232 Corporate Governance

References Notes
Website Links ----------------------
1. http://www.sebi.gov.in/commreport/corpgov.html
----------------------
2. http://business.gov.in/corporate_governance/index.php
3. http://www.nfcgindia.org/home.html ----------------------
4. http://www.sebi.gov.in/ ----------------------
5. http://www.mca.gov.in/
6. http://images.businessweek.com/ss/05/04/crisis/index_01.htm ----------------------
7. http://www.sebi.gov.in/commreport/corpgov.html ----------------------
8. http://business.gov.in/corporate_governance/index.php
----------------------
9. http://www.nfcgindia.org/home.html
10. http://www.sebi.gov.in/ ----------------------
11. http://www.mca.gov.in/
----------------------
12. http://www.corporatecoach.co.uk/
13. http://www.sebi.gov.in/commreport/corpgov.html ----------------------
14. http://business.gov.in/corporate_governance/index.php ----------------------
15. http://www.nfcgindia.org/home.html
16. http://www.sebi.gov.in/ ----------------------
17. http://www.mca.gov.in/ ----------------------
18. http://business.gov.in
----------------------
19. http://business.gov.in/
20. http://www.nfcgindia.org ----------------------
21. http://www.sebi.gov.in/circulars/2008/Cir-Dil32 2008
----------------------
22. http://www.sebi.gov.in/circulars/2007/dip0307
23. http://www.legalserviceindia.com/article/l272-How-SEBI-Should-Deal- ----------------------
With-Disgorged-Money.html
----------------------
24. http://www.mca.gov.in/Ministry/reportonexpertcommittee/
25. http://www.halsburys.in/corporate-crimes.html ----------------------
26. http://www.newint.org/features/2003/07/05/facts/ ----------------------
27. www.nfcgindia.org
28. http://www.irda.gov.in ----------------------
29. http://www.acga-asia.org ----------------------
30. http://www.rbi.org.in
----------------------
31. http://www.pfrda.org.in
32. http://knol.google.com/k/donald-depamphilis/case-study-the-enron-shuffle- ----------------------
a-scandal/2y7l67l8la2ns/24
----------------------
33. http://www.scu.edu/ethics/dialogue/candc/cases/worldcom.html
34. http://www.wsws.org/articles/2002/jul2002/xero-j01.shtml ----------------------
35. http://money.cnn.com/2002/04/11/technology/xerox_fraud/index.htm
----------------------
October 2003

References 233
 Notes 36. http://www.investopedia.com/articles/economics/09/lehman-brothers-
collapse.asp
---------------------- 37. http://en.wikipedia.org/wiki/Lehman_Brothers
---------------------- 38. http://www.pwc.com
39. http://www.insidesarbanesoxley.com/
---------------------- 40. http://www.financialexpress.com/news/how-satyam-pulled-off-india-incs-
---------------------- biggest-fraud/408333/
41. http://www.financialexpress.com/news/Mahindra-gets-44-clients-after-
---------------------- Satyam-takeover/690208/
---------------------- 42. http://www.tradingmarkets.com/news/stock-alert/say_icai-recommends-
stiffer-rules-after-satyam-fraud-case-a-high-power-panel-has-submitted-a-
---------------------- report-wit-1083350.html
43. www.airtel.in
----------------------
44. 10 Tips for educating your board - www.deloitte.com
---------------------- 45. Board Performance Evaluation and Director Appraisal http://www.
corporatecoach.co.uk/- Director Development Centre
----------------------
Books and Other Sources
---------------------- 46. Mark J. Roe, Restoring Trust in American Business, edited by Jay W. Lorsch,
Leslie Berlowitz, and Andy Zelleke in Business Week
----------------------
47. Corporate Governance - Global Concepts and Practices, Dr. S. Singh
---------------------- 48. Standards for the Board, Institute of Directors
49. The Independent Director, IoD /Ernst & Young
----------------------
50. Running a Limited Company, David Impney & Nicholas Montague, Jordans
---------------------- 51. Standards for the Board, Institute of Directors
---------------------- 52. Good Practice for Directors, The Institute of Directors
53. The Effective Nonprofit Board: Responsibilities & Recruitment, by Ann
---------------------- Lehman and Robert Zimmerman.
---------------------- 54. Enhancing Board Effectiveness - A Round Table Discussion; Spencer Stuart
Consulting
---------------------- 55. Kumarmangalam Birla Committee Report
---------------------- 56. CII’s Report on Corporate Governance in India
57. Naresh Chandra Committee on Corporate Governance
---------------------- 58. General Circular No: 8/2002 No.2/5/2001-CL.V Government of India,
---------------------- Ministry of Law, Justice & Company Affairs Department of Company
Affairs
---------------------- 59. Securities & Exchange Board of India (Disclosure and Investor Protection)
Guidelines, 2000.
----------------------
60. EWMI/PFS Program / Lectures on Corporate Governance - Three Models
---------------------- of Corporate Governance - December2005.doc
61. A Strategic Approach to Corporate Governance Chapter 5 / Adrian Davies/
---------------------- Gower Publishing Limited/ 1999/ ISBN 0 566 08074 5
---------------------- 62. Circular No. - SEBI/CFD/DIL/DIP/29/2007/03/12; Dated: December 03, 2007

234 Corporate Governance

63. Circular No. - MRD/DoP/SE/Cir-38/2004; Dated: October 28, 2004 Notes
64. Circular No. - Circular No. CFD/DIL/DIP/33/2008/08/12; Dated: December
8, 2008 ----------------------
65. Fombrun, Charles J., and V. Rindova (1996). “Who’s Tops and Who Decides? ----------------------
The Social Construction of Corporate Reputations,” New York University,
Stern School of Business. Working Paper. ----------------------
66. Fombrun, Charles J., and Cees B. M. Van Riel (2004). Fame & Fortune
----------------------
– How Successful Companies Build Winning Reputations, Upper Saddle
River, NJ: FT Prentice-Hall. ----------------------
67. Deephouse, David L. and Suzanne M. Carter. (2005). “An Examination
of Differences between Organizational Legitimacy and Organizational ----------------------
Reputation,” Journal of Management Studies, Vol. 42, and No. 2: pp. 329-
----------------------
360.
68. Corporate Reputation Management by John Baxter ----------------------
69. Mergers, Acquisitions, and Other Restructuring Activities, 5th Edition, 2009
----------------------
by Donald M. DePamphilis
70. Creative Accounting - Meaning, Scope and Case Study - Rajesh Gajra & ----------------------
Srikanth Srinivas
----------------------
71. Managing Globalization and the Role of the OECD - Angel Gurría,
Secretary-General of the OECD ----------------------
72. Reasons for Corporate Governance Failures - Shruti Mehta, Rachana
Srivastavaare ----------------------
73. Corporate Governance - Global Concepts and Practices - Dr. S. Singh ----------------------
74. Gurunathan K. Balanaga “An Investor’s requirements in Indian securities
market” Delhi Business Review Chartered Secretary, the Journal for ----------------------
Corporate Professionals, Vol XXXVI Oct.2009
----------------------
75. Barbara Black “Are Retail Investors Better Off Today?” BROOK. J. CORP.
FIN. & COM. L.(Vol. 2) p303 ----------------------
76. Discussion Paper for proposed changes to SEBI (Issue of Capital and Disclosure
----------------------
Requirements) Regulations, 2009 - Enhancement of limit for defining Retail
Individual Investors in public issues. http://www.sebi.gov.in/annualreport ----------------------
2007-08 part six chronology of major initiatives undertaken by SEBI.
77. Business Standard December 28, 2010 ‘Focus on higher retail investors’ ----------------------
participation’ by Ashish Rukhaiyar
----------------------
78. Moneylife Digital Team ‘Manifesto for retail investors and senior citizens’
March 10, 2011 Shareholders Activism – Healthy Trend for Corporate ----------------------
Governan By : Nirav Pankaj Shah
----------------------
79. www.sucheta Dalal.com ‘Retail Roadblocks’ April 9, 2010.
80. Aggarwal, Deepak (2008) “IPO Pricing-Book building and efficient pricing ----------------------
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----------------------
81. Satish Kumar Matta “Investing strategy of Retail Investor in Indian Capital
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82. Naresh Kumar “Shareholders Activism – Healthy Trend for Corporate
Governance” ----------------------

References 235
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---------------------- 84. Perspectives in Business Ethics Hartman
---------------------- 85. Corporate Governance: Principles,
Policies and Practices, 1/e A.C. Fernando
---------------------- 86. Creating Shareholder Value: A Guide
for Managers and Investors Rappaport, Alfred
----------------------
87. Corporate Governance and
---------------------- Social Responsibility Balachandran &
Chandrasekaran
----------------------
88. Inside the Boardroom: How Boards Really
---------------------- Work and the Coming Revolution
in Corporate Governance Richard Leblanc, James
---------------------- Gillies: B
89. Perspectives in Business Ethics Hartman
----------------------
90. Corporate Governance: Principles,
---------------------- Policies and Practices, 1/e A.C. Fernando
91. Creating Shareholder Value: A Guide
----------------------
for Managers and Investors Rappaport, Alfred,
---------------------- 92. Anchoring Points for Corporate Directors Mueller, Robert K.
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----------------------
Minow
---------------------- 94. Boards at Work: How Corporate Boards
Create Competitive Advantage Charan, Ram
---------------------- 95. Essentials of Corporate Governance Sanjay Anand
---------------------- 96. Corporate Governance - Global Concepts
and Practices Dr. S. Singh
---------------------- 97. Corporate Governance Global Concepts
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---------------------- Standards and Practices PHI Learning Private
Limited
----------------------
Business Ethics and Professional Values AB RAO, Excel Books
---------------------- Taxman’s SEBI Manual
99. Securities and Exchange Board of India
----------------------
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---------------------- Guidelines, 2000
SEBI (ICDR) Guidelines 2009
---------------------- 100. Corporate Social Responsibility in India:
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----------------------
101. Corporate Social Responsibility in India Sanjay Agarwal Sage
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Education

236 Corporate Governance