final - ppps-code of cg,101208

8/7/2019 Final - PPPs-CODE of CG,101208

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CODE OF CORPORATE GOVERNANCE INCODE OF CORPORATE GOVERNANCE INEMERGING ECONOMIESEMERGING ECONOMIES A CASE OF INDIAA CASE OF INDIACODE OF CORPORATE GOVERNANCE INCODE OF CORPORATE GOVERNANCE IN

EMERGING ECONOMIESEMERGING ECONOMIES A CASE OF INDIAA CASE OF INDIA

ByHIMACHALAM DASARAJU

Sri Venkateswara UniversityTirupati, Andhra Pradesh, India(Commonwealth Fellow- visiting University of Essex)

10th December, 2008.

ByHIMACHALAM DASARAJU

Sri Venkateswara UniversityTirupati, Andhra Pradesh, India(Commonwealth Fellow- visiting University of Essex)

10th December, 2008.

Address for correspondence:Professor Himachalam DasarajuProfessor of Commerce & ManagementSri Venkateswara UniversityTirupati 517502Andhra Pradesh, India.e-mail: [email protected]/ [email protected]


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FOCUSS:FOCUSS:

The main focus of the Paper is:The main focus of the Paper is: Corporate GovernanceCorporate Governance World ScenarioWorld Scenario

Developments in USADevelopments in USA

Developments in UKDevelopments in UK

Corporate Governance GuidelinesCorporate Governance Guidelines

Corporate GovernanceCorporate Governance Indian ScenarioIndian Scenario

Corporate Governance Issues in IndiaCorporate Governance Issues in India

Driving Forces of Corporate GovernanceDriving Forces of Corporate Governance

Corporate Governance in IndiaCorporate Governance in India A brief SketchA brief Sketch

Corporate Governance Reforms in IndiaCorporate Governance Reforms in India

Governance Standards in IndiaGovernance Standards in India Recommendations of various CommitteesRecommendations of various Committees

Case Study on Infosys TechnologiesCase Study on Infosys Technologies


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AIM OF THE PAPERAIM OF THE PAPER

To review the CG Mechanism in the WorldTo review the CG Mechanism in the World

To analyse the rationale for CG reformsTo analyse the rationale for CG reforms

To study the CG developments in IndiaTo study the CG developments in India

To review various Committees on CGTo review various Committees on CG

To analyse the Codes of CG in IndiaTo analyse the Codes of CG in India

Case analysis on InfosysCase analysis on Infosys

To stimulate academic debate on the issue.To stimulate academic debate on the issue.


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Corporate Governance Background: World ScenarioCorporate Governance Background: World Scenario

CG has been gaining momentum world over due toCG has been gaining momentum world over due to Miserable corporate failures like Enron, Maxwell etc.,Miserable corporate failures like Enron, Maxwell etc., Unethical business practicesUnethical business practices Insufficient disclosure and transparencyInsufficient disclosure and transparency Inefficient Management BoardsInefficient Management Boards Social concernSocial concern

CG has been emerged as means of Corporate Excellence due toCG has been emerged as means of Corporate Excellence due toA) To improve overall profitabilityA) To improve overall profitabilityB) Stakeholder value creationB) Stakeholder value creationC) Building up of Investor ConfidenceC) Building up of Investor ConfidenceD) Ethics in Business Practices, Accounting, Auditing and DisclosureD) Ethics in Business Practices, Accounting, Auditing and Disclosure

E) TransparencyE) Transparency


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World Scenario of CG Reforms.World Scenario of CG Reforms.

1992 United Kingdom

1994 South Africa, Canada

1995 Australia, France, Pan-Europe

1996 Spain

1997 USA, Japan, The Netherlands

1998 India, Belgium, Germany, Italy, Thailand

1999 Brazil, Greece, Hong Kong, Ireland, Mexico, Portugal, South Korea, OECD, ICGN, Commonwealth

2000 Denmark, Indonesia, Kenya, Malaysia, Romania, Philippines

2001 China, Czech Republic, Malta, Peru, Singapore, Sweden

2002 Austria, Cyprus, Hungary, Kenya, Pakistan, Poland, Russia, Solvakia, Switzerland, Taiwan

2003 Finland, Lithuania, Macedonia, New zealand,Turkey,Ukraine,Latin America

2004 Argentina, Bangladesh, Iceland, Norway, Solvania, OECD

2005 Jamaika, ICGN, Latvia, Lithuania

2006 Estonia, Labanon, Lexemburg, Nigeria, Sri Lanka, Thailand

2007 Balgaria


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Corporate Governance GuidelinesCorporate Governance Guidelines A ComparisonA Comparison

Table Corporate governance guidelines a comparative study

No. Key parameterselucidated by theOECD

Organisation for EconomicCo-operation and Development(OECD) guidelines

International Corporate Network(ICGN) global governanceprinciples

Asia-PacificEconomic Co-operation (APEC)Principles

1. Rights of

shareholders

Their rights to attend and participate in

AGMs, to elect Board members, to receivedividends, and to avail relevant, timely,regular and accurate information. Right to transfer shares. To know capital structures andarrangements that confers on somemembers, disproportionate controllingrights. Corporate control mechanism shouldfunction efficiently and transparently Transparent transactions; accountable

management.

Major organisational changes

require their prior approval They have the opportunity toexercise their voting rights, Right to have timely disclosureof the result of resolutions Adherence to one-share, one-vote standard. Institutionalinvestors have proxyresponsibilities to exercise votingrights.

Establishment of

rights andresponsibilities ofall shareholders.

2. Equitabletreatment ofshareholders

All shareholders including minority andforeign shareholders receive equitabletreatment. Effective redressal for rights violations. Change in voting rights subject to theirvote. Prohibition of insider-trading and self-dealing. Directors to avoid decisions concerningtheir own interests.

One-share, one-vote. Protection of the rights ofminority and foreign share holders.

Equitable treatmentof all shareholders.


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3. Role ofstakeholders

Recognition of their rights as established bylaw. Encourage their active cooperation increating sustain- able enterprises, Permit performance enhancing mechanisms. Access to relevant information.

Directors should build good andproductive relationship withstakeholders. Directors are responsible forproviding accountability toshareholders.

Establishment ofeffective andenforceableaccount- abilitystandards.

4. Disclosure andtrans- parency

Accurate and timely disclosure on companyobjective; major share ownership and votingrights; financial and operating results; directorsand key executives and their remuneration;significant, foreseeable risk factors; governance

structures and practices; material issuesregarding employees and other stakeholders.

Timely and full disclosure of allinformation, Disclosure of share-holding andthe status of voting rights, Disclosure of Directors

compensation policies, Annual audits by externalstatutory auditors.

Timely and accuratedisclosure offinancial and non-financial informationwith regard to

companyperformance.

5. Responsibilities ofthe Board ofDirectors

Specify key responsibilities of the Board-overseeing the process of disclosure andcommunication, monitoring the effectiveness ofgovern- Nance practices and change them, ifnecessary.

Judgement of Directors,independent of managementoperation. Establishment and nomination ofcommittees for audit,compensation and outsidedirectors.

Formation of Boardof Directors anddeciding theirremuneration.


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CG Reforms in USA & UKCG Reforms in USA & UK

Major Failures in USAMajor Failures in USA Enron, WorldCom etc.,Enron, WorldCom etc.,

The Tread way Commission (1987)The Tread way Commission (1987)

SarbanesSarbanes -- Oxley Act (2002)Oxley Act (2002)

Major Failures in UKMajor Failures in UK

Bank of Credit and Commercial International (BCCI)Bank of Credit and Commercial International (BCCI)

Bearings Bank (1995)Bearings Bank (1995) British Gas (1995)British Gas (1995)

Maxwell etc.,Maxwell etc.,

Prominent Committees in UKProminent Committees in UK

The Cadbury Committee ( 1992)The Cadbury Committee ( 1992)

The Greenbury Committee (1995)The Greenbury Committee (1995)

The Hampel Committee (1998)The Hampel Committee (1998)

The Turnbull Committee (1999)The Turnbull Committee (1999)

The Higgs Committee (2003)The Higgs Committee (2003)

The Tyson Committee ( 2003)The Tyson Committee ( 2003)

The Smith Committee (2003)The Smith Committee (2003)


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Corporate GovernanceCorporate Governance -- Indian ScenarioIndian Scenario

Structure of Indian Industry:Structure of Indian Industry:

PrePre--liberalisation eraliberalisation era

Mixed Economy: Public, Private & Cooperative Sectors Public SectorMixed Economy: Public, Private & Cooperative Sectors Public SectorUndertakings (PSUs)Undertakings (PSUs) under Governament control.under Governament control.

Private SectorPrivate Sector -- Mostly Family Owned and controlled BusinessMostly Family Owned and controlled BusinessEx: Tata group, Birla group, Reliance groupEx: Tata group, Birla group, Reliance group --------------

PostPost--liberalisation eraliberalisation era

Public Sector ( Privatisation ProcessPublic Sector ( Privatisation Process disinvestment)disinvestment)Private SectorPrivate Sector -- Multinational (Foreign)andMultinational (Foreign)and DomesticDomesticCooperative SectorCooperative Sector -- Poor state of affairPoor state of affair


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Driving Forces of CG in IndiaDriving Forces of CG in India

1) Unethical Business Practices1) Unethical Business Practices Security ScamsSecurity Scams ------Harshad Mehtha Security ScamHarshad Mehtha Security Scam

Equity allotments at discount rates to the controlling groupsEquity allotments at discount rates to the controlling groups

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

companies with 25,000 crores with out starting businesscompanies with 25,000 crores with out starting business

Misdeed of CompaniesMisdeed of Companies

Plantation, Sheep rearing, etc.,Plantation, Sheep rearing, etc.,

2) Impact of Globalization2) Impact of Globalization

Integration with Foreign MarketIntegration with Foreign Market

Foreign Investors expectationsForeign Investors expectations

New Business OpportunitiesNew Business Opportunities ------ IT & ITES, BPO etc.,IT & ITES, BPO etc., New Capital formationNew Capital formation FII, FDIFII, FDI

3) Impact of Privatisation3) Impact of Privatisation

New structure of ownershipNew structure of ownership

Multinational CompaniesMultinational Companies


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CG Reforms in IndiaCG Reforms in India

CG initiatives in India was in the background of unethical business Practices,CG initiatives in India was in the background of unethical business Practices,Security scams, global changes and so onSecurity scams, global changes and so on

But not due to Corporate, Banking and Financial collapses as in case of Asia, US, UKBut not due to Corporate, Banking and Financial collapses as in case of Asia, US, UKetc.,etc.,

Initiated by Industry Association (CII), not by the Governament.Initiated by Industry Association (CII), not by the Governament.

CII set a task force to design a voluntary Code of Governance in 1995CII set a task force to design a voluntary Code of Governance in 1995

The draft of the Code was circulated for comments in 1997The draft of the Code was circulated for comments in 1997

Desirable Corporate Governance: A Code was released in 1998Desirable Corporate Governance: A Code was released in 1998

Around 25 leading companies followed the Code voluntarily (1998Around 25 leading companies followed the Code voluntarily (1998--2000)2000)


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The Securities and Exchange Board of India (SEBI) set up a committeeThe Securities and Exchange Board of India (SEBI) set up a committeeunder Kuma Mangalam Birla to design mandatoryunder Kuma Mangalam Birla to design mandatory--cumcum--recommendatoryrecommendatoryCode for listed companie in 1999 and approved in 2000.Code for listed companie in 1999 and approved in 2000.

Mandatory for Listed companies through listing agreement andMandatory for Listed companies through listing agreement andimplemented according to a rollout plan.implemented according to a rollout plan.

20002000--01: All Group A companies of BSE or those in the S&P CNX Nifty01: All Group A companies of BSE or those in the S&P CNX Niftyindex. 80% of market cap.index. 80% of market cap.

20012001--02: All companies with paid up capital of Rs. 100 million or more or02: All companies with paid up capital of Rs. 100 million or more ornet worth of Rs. 250 million or more.net worth of Rs. 250 million or more.

20022002--03: All companies with paid up capital of Rs. 30 million or more.03: All companies with paid up capital of Rs. 30 million or more.


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The Department of Corporate Affairs modified the Companies Act 1956 toThe Department of Corporate Affairs modified the Companies Act 1956 toincorporate specific CG provisions regarding independent directors andincorporate specific CG provisions regarding independent directors andaudit committees.audit committees.

In 2001In 2001--2002 certain accounting standards were modified to increase2002 certain accounting standards were modified to increasefinancial disclosures.financial disclosures. Disclosure of related party transactionsDisclosure of related party transactions Disclosure of segment incomeDisclosure of segment income-- revenues profits and capital employedrevenues profits and capital employed Deffered tax liabilities or assetsDeffered tax liabilities or assets Consolidated accountsConsolidated accounts

The Department of Corporate Affairs (DCA) appointed a task force onThe Department of Corporate Affairs (DCA) appointed a task force oncorporate excellence in 2000corporate excellence in 2000

DCA constituted High level committee under Naresh C handra in 2002 toDCA constituted High level committee under Naresh C handra in 2002 toexamine corporate auditing and independent directors following theexamine corporate auditing and independent directors following thecollapse of Enron in 2001 and enactment of Sarbanescollapse of Enron in 2001 and enactment of Sarbanes--Oxely Act in 2002.Oxely Act in 2002.

SEBI formed a new committee in 2003 under N.R. Narayana Murthy toSEBI formed a new committee in 2003 under N.R. Narayana Murthy tostudy the adequacy of existing CG practices and to improve these further.study the adequacy of existing CG practices and to improve these further.

Government of India constituted a committee on Company Law underGovernment of India constituted a committee on Company Law underJ.J.Irani in 2005.J.J.Irani in 2005.


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Recommendations of Committee Reports on CorporateRecommendations of Committee Reports on CorporateGovernance in IndiaGovernance in India

CII Code recommendations (1997) Birla Committee (SEBI)

recommendations (2000)

Narayana Murthy committee (SEBI)

Recommendations (2003)

Board of Directors

a) No need for German style two-tieredboardb) For a listed company with turnoverexceeding Rs.100 crores, if the Chairman isalso the MD, at least half of the boardshould be Independent directors,else at least 30% .

c) No single person should hold directorshipsin more than 10 listed companies.d) Non-executive directors should becompetent and active and have clearlydefined responsibilities like in the AuditCommittee.e) Directors should be paid a commissionnot exceeding 1% (3%) of net profits for acompanyWith (out) an MD over and above sittingfees. Stock options may be considered too.

f) Attendance record of directors should bemade explicit at the time of re-appointment. Those with less than 50%attendance should not be reappointed.g) Key information that must be presentedto the board is listed in the code.h) Audit Committee: Listed companies withturnover over

a) At least 50% non-executive membersb) For a company with an executiveChairman, at least half of the board shouldbe independentdirectors , else at least one-third.c) Non-executive Chairman should have anoffice and be paid for job related expenses.

d) Maximum of 10 directorships and 5chairmanshipsper person.e) Audit Committee: A board must have anqualified and independent audit committee,ofminimum 3 members, all non-executive,majority and chair independent with atleast one having financial and accountingKnowledge. Its chairman should attend AGMto answer shareholder queries. Thecommittee should confer with key

executives as necessaryand the company secretary should be hesecretary of the committee. The committeeshould meet at least thrice a year -- onebefore finalization of annual accounts andonenecessarily every six months with thequorum being the higher of two members orone-third

a) Training of board members suggested.b) There shall be no nominee directors. Alldirectors to be elected by shareholders withsame responsibilities and accountabilities.c) Non-executive director compensation tobe fixed by board and ratified byshareholders and reported. Stock options

should be vested atleast a year after their retirement.Independent directors should be treatedthe same way asnon-executive directors.d) The board should be informed everyquarter of business risk and riskmanagement strategies.e) Audit Committee: Should compriseentirely of financially literate non-executive members with at least one

member havingaccounting or related financial managementexpertise. It should review a mandatory listofdocuments including information relating tosubsidiary companies. Whistle blowersshould have direct access to it and all


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Other issues

Creditors Rights

a) FIs should rewrite loan covenantseliminating nominee directors except in caseof serious and systematic debt default orprovisionof insufficient information.b) In case of multiple credit ratings, theyshould all be reported in a format showingrelative position of the company.c) Same disclosure norms for foreign anddomestic creditors.d) Companies defaulting on fixed depositsshould not be permitted to accept furtherdeposits and make inter-corporate loans orinvestments or declare dividends until thedefault is made good.

Shareholders Rights

a) Quarterly results, presentation to analystsetc. should be communicated to investors,Possibly over the Internet.b) Half-yearly financial results and significantevents reports be mailed to shareholders.c) A board committee headed by anonexclusive director look into shareholdercomplaints/grievances.d) Company should delegate share transferpower to anofficer/committee/registrar/sharetransfer agents. The delegated authorityshould attend to share transfer formalities atleast once in a fortnight.

Special Disclosure for IPOs

a) Companies making Initial Public Offering(IPO) should inform the Audit Committee ofCategory-wise uses of funds every quarter. Itshould get non-pre-specified uses approvedbyauditors on an annual basis. The auditcommittee should advise the Board for actionin this matter.


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Case Study : Infosys TechnologiesCase Study : Infosys TechnologiesInfosys Technologies: The Best among Indian CorporatesInfosys Technologies: The Best among Indian Corporates

As per the Credit Lyonnais Securities Analysis (CLSA), the corporateAs per the Credit Lyonnais Securities Analysis (CLSA), the corporate

governance ratings of the Software firms are higher than those of othergovernance ratings of the Software firms are higher than those of other

Indian firms.Indian firms.

Software firms are on average, more exposed to global competition thanSoftware firms are on average, more exposed to global competition than

other Indian firms.other Indian firms.

It is an interesting success story with good spirit of entrepreneurship.It is an interesting success story with good spirit of entrepreneurship.

Started as a small unit in 1981 by Mr. Narayana Murthy with his sixStarted as a small unit in 1981 by Mr. Narayana Murthy with his six

colleagues in Bombay in a single room.colleagues in Bombay in a single room.

with a small amount of investment of Rs. 10,000 (US 250) as capital.with a small amount of investment of Rs. 10,000 (US 250) as capital.

91,187 employees in 63 cities across 26 countries91,187 employees in 63 cities across 26 countries

Net income of US 1,155 million and revenue of US 4,176 million.Net income of US 1,155 million and revenue of US 4,176 million.

At present having US 20.4 billion market capitalisationAt present having US 20.4 billion market capitalisation


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Vision and Mission of InfosysVision and Mission of Infosys

The vision of Infosys is to be a globally respected corporation that provides bestThe vision of Infosys is to be a globally respected corporation that provides best--ofof--

breed business solutions, leveraging technology, delivered by bestbreed business solutions, leveraging technology, delivered by best-- inin--class people. Itsclass people. Its

mission is to achieve our objectives in an environment of fairness, honesty andmission is to achieve our objectives in an environment of fairness, honesty and

courtesy towards our clients, employees vendors and society at large.courtesy towards our clients, employees vendors and society at large.


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Corporate Governance PhilosophyCorporate Governance Philosophy

The philosophy of corporate governance is based on the following principles.The philosophy of corporate governance is based on the following principles.

1.Satisfy the spirit of the law1.Satisfy the spirit of the law

2. Transparent and high degree of disclosure levels2. Transparent and high degree of disclosure levels

3. Distinction between personal conveniences and corporate resources3. Distinction between personal conveniences and corporate resources

4. Truthful external communication4. Truthful external communication

5. Comply with laws of all countries in which the company operates5. Comply with laws of all countries in which the company operates

6. Simple and transparent corporate structure driven solely by business needs6. Simple and transparent corporate structure driven solely by business needs

7. Management is the trustee of the shareholders capital and not the owner.7. Management is the trustee of the shareholders capital and not the owner.


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Concluding ObservationsConcluding Observations

Code of CG should be redesigned to reflect international best practicesCode of CG should be redesigned to reflect international best practices

Stringent enforcement of LawStringent enforcement of Law

More effective coordination and cooperation between SEBI, DCA and SEsMore effective coordination and cooperation between SEBI, DCA and SEs

CG mechanism should be flexible and suitableCG mechanism should be flexible and suitable

Overall ethical values in all segments should be promoted for effectiveOverall ethical values in all segments should be promoted for effective

accounting, auditing, disclosure and transparent system.accounting, auditing, disclosure and transparent system.


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final - ppps-code of cg,101208

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