corp governance 1

8/2/2019 Corp Governance 1

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What is the Role of Government in Ensuring CorporateGovernance?

Hardcore advocates of capitalism often argue that Govt. should not

intervene in the functioning of market

Govt. role is very necessary

The rules and structures of the market economy are framed by Govt.

These are necessary for establishment of trust

Too much freedom for economic forces may result in anarchy of

production and instabilityof economy


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The Regulatory Role

Govt. may decide when persons or corporations to enter into certain

lines of business by way of granting license

Govt may regulate the speed of a business activity once they are

under way

Govt. may control the relationship between various segments of

economy to minimize regional imbalances


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Promotional Role

When the infrastructural facilities are inadequate or entrepreneurialactivities are scarce, Govt. has to assume the promotional role

When there is an economic crisis faced by the private corporate,

Govt. may act as a banker or takeover it even at a loss

Govt. also helps it in crisis by becoming a trustee of the firm

Government Intervention

Market forces alone cannot ensure high rate of investment andgrowth in output

And hence Govt. intervention is necessary to remove economic

rigidity and structural disequilibrium


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In the initial phase of development, when huge investment is

necessary, Govt. support is required

In a poor or developing country, private entrepreneurs are less, Govt.

mobilizes fund by taxation, borrowing and deficit financing

Govt. intervention is needed to integrate various sectors of economy

Govt. intervention also is needed to protect the interest of investors

and instilling confidence in them

One corporate scandal will cause eroding the faith of shareholders

even on honest firms

If companies do not adhere to the rules and regulations, Govt. should

penalise such companies


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Forms of Government Regulation

Regulation of investment, location and expansion of firms by planning

and industrial licensing policy

Regulation of prices of industrial goods by systematic investigation

and analysis of cost

Regulation of monopolies and unfair trade practices through legislation

Regulation of wages of employees in private firms to minimize

exploitation

Example for Govt. regulators

SEBI, RBI, TRAI, etc.


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Corporate Governance in India

In order to improve the transparency and efficiency of corporate

governance, Govt. of India had constituted many committee in the past

Some of them are

The committee headed by Dr. Y V Reddy which recommended

The Companies Amendment Act in 2000

Naresh Chandra Committee in 2002 which emphasized the need to have

more transparency in auditing and accounting

Narayana Murthy Committee in 2003 which also proposed certain

measures to promote corporate governance in India


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But the breakthrough was made by the committee headed by

Kumaramangalam Birla

Which had proposed the Clause 49 in the Listing Agreement

The Provisions and Requirements of Clause 49

Composition of Board

non-executive and executive directors must be in 1:1 ratio

(50% each)

Constitution of the Audit CommitteeThe audit committee should have 3 independent directors

The chairman should have sound financial background

A minimum of three meetings should be convened every year


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The audit committee

Responsible for review of financial performance regularly

for appointment of auditors

for fixing of remuneration of auditors

Remuneration of Directors

Remuneration of non-executive directors is to be fixed by the board

Procedures of Board

Board should meet at least 4 times in a year

The discussion and analysis report should contain the following

Structure of industry and developments

Opportunities and threats


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Segment wise performance

Risks and concerns and

Discussion on financial performance

Shareholders information

Quarterly results should be publishedA report on corporate governance

A certificate from auditors on compliance of provisions

A minimum of 2 meetings per year of the shareholders grievance

committeeApart from all these acts and regulations from Govt. side, RBI also isputting its own efforts to ensure good governance in the corporate sectorby way of demanding transparency in financial transactions, sharetransfer, etc.


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Corporate Initiatives

India has evolved a system and structure of corporate

governance

It is one of the best among the developing countries

The corporate activities like administration of companies,

disclosures, shareholders rights, dividend announcements, etc.

have been followed properly

Major surveys on corporate excellence revealed that

Infosys, Hindustan Unilever Ltd. and Wipro are among Asias top10 corporations

Other corporates which are well governed are

ICICI, Ranbaxy, HDFC, Tata group, etc.


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Individual Initiatives

In India, veterans like J R D Tata, Mahindra, N R NarayanaMurthy, Kumar Mangalam Birla, etc. have shown what is good

corporate governace

Initiatives from the side of Dept. of Company Affairs

It has made some recommendations to enhance corporateexcellence

Provide greater role for non-executive and independentdirectors

Punishment for executive directors who do not complywith listing requirements

Proper disclosures to shareholders

Meaningful and transparent accounting and reporting


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Corporate Governing Rating

Dept. of company affairs has set up an institute withInformation and Credit Rating(ICRA) as the apex body torate corporate excellence.The institute will be funded from the penalties paid bycompanies for violating provisions in companies act.

In order to evaluate the standard of corporate governance, Thefollowing aspects will be considered

Shareholding structure

Governance structure

This focus on how effectively the information such ascorporate loans, capital expenditure,diversification, etc. arepresented to a companys board


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Board Structure and processBoard size, Proportion of independent directorsExpertise they have, Compensation of directorsFrequency of board meetings

Relations to stakeholdersTransparency and DisclosuresFinancial discipline

Some of the Indian companies that received awards for excellence are

Asea Brown Boveri Ltd.

Asian Paints Ltd.

Bajaj Auto Ltd.

Bharat Forge Ltd., etc.


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Some Drawbacks that are visible in the CorporateGovernance in India

Inadequate sanction and enforcementPower of imposing fines on erring corporate by concerned

authorities is not adequate

Dept. of company affairs, SEBI and other stock

exchanges

Lack of Professionalism among the Directors

Directors lack motivation in upgrading their knowledge

and skillsThey become rubber stamp of the promoters or

management


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Independent directors are not acting independently

Independence remains only in paper

They become puppet in the hands of management

They keep mum when mismanagement of funds take place

Unlisted investment companies

Promotors of many companies started their own unlisted

subsidieries

Main company gives loan to these subsidiaries

And they wont pay back

These subsidiaries hold major chunk of shares of the maincompany

Malpractice in the Account

Show cooked-up accounts


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Lack of interest from shareholders side

No dynamism from the shareholders

They wont take part in the discussion

They are scattered and unorganised

Voices of dissent are few and rarely recorded

Nexus with Auditors

Auditors are too obliged

They help the management to manipulate accounts

Things started improved after taking some firm steps by Institution

of Chartered Accountant


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Some Signs of Growth for Corporate Governance in India

Competition-driven

Due to advent of liberalisation, more companies arecoming and competition increases

More FDIs are coming

Professionalism is dominating

Old companies are disappearing from scene

New companies are giving importance to professionalism

Strong Media

Financial Institutions are demanding

They prefer companies with better corporate governance


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Corporate Governance and Globalisation

During 20th century, developing countries adopted protectionistpolicies

Put huge tariff barriers

Communication facilities were poor

Poor transportation facility

Factors Contributing Globalisation

Falling trade barriers

Free trade agreements

Support of WTO, IMF and WorldBank


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Political reforms

Communist block has been dismantled

New countries are coming up for trades

Transport and communications facilities have been developed

More developing nations started engaging in business

Development of technology provides avenues for newproducts

Development of new production process


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More Developing nations joining Global Business

Countries like India, China, Singapore, Malaysia, etc. have started

global business

Developments in Technology

Developments in technologies such as computer hardware,software, pharmaceuticals, etc. have brought about

tremendous transformation in world trade

Transport and Communications

Due to the open air policies, distances have been reduced

Movement of people and products has become fasterFaster transport and communication quickened the processes ofproduction


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Public Awareness and Scrutiny

Due to the revolution in communication, People have immediate

access to informationSophisticated media presentation focuses issues which threaten thepublic interest or power being abused

Demands for better transparency and public accountability in theactivities of corporations increased

Technological Challenges and Opportunities

An explosive growth in technology happened in a short span of time

Technological innovations have brought in changes in various fields

of production, communication and transport

Corporations were forced to adopt successful survival strategies


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Social Environment

In order to meet the challenges and opportunities posed by thetechnological development, the government started allocatingmore resources for education and training

Corporates were forced to adopt a policy of creating job opportunities

To sustain economic growth, private sector employment is to beincreased

Corporates now understand the importance of keeping trust, honestyand transparency which are essential for surviving in a globalmarket


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Thanks.

corp governance 1

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