Titelmasterformat durch Klicken bearbeitenCorporate Governance in India

18.04.23

Ahsan Khan, Marvin Secker, Md. Obaidullah Al Kabir

Universität Hamburg

Titelmasterformat durch Klicken bearbeiten

18.04.23

1. Introduction to India's socio-economic landscape

2. History of CG in India

3. Present Corporate Governance In India

4. Key Issues in Indian Corporate Governance

5. Case Study: The Satyam Scandal

6. Future Corporate Governance in India

7. Recommendations

Introduction to India's socio-economic landscape

• Independent from UK in 1947

• Population: 1.2 Billion (2011 census)

• Economic system: Market economy with a

high proportion of state-owned companies

• GDP(PPP) per capita: 3,627 $ (126th of 180)

(2011 estimate)

• Total GDP(PPP): 4.5 Trillion $ (3rd largest

in the world; 2011 estimate)

• Unemployment rate: 9.8 % (2011 estimate)

Introduction to India's socio-economic landscape

• Political system: Federal Republic (28 states

and 7 union territories)

• Human Development Index: 0.55 (Medium)

(2011)

• Largest concentration of people living

below poverty line of 1.25 $ per day (42% in

2005)

• Corruption Index: 36 (94th of 176)(2012)

Introduction to India's socio-economic landscapeIndian Market Overview

History of CG in India

• 1956 Companies Act: Limited governance and disclosure standards

• 1992 Formation of SEBI (Securities and Exchange Board of India)

• 1998 CII (Confederation of Indian Industry), India‘s largest industry and

business association comes up with the first voluntary code of

corporate governance

• 1999 SEBI sets up a commitee for good corporate governance under

Kumar Mangalam Birla

• 2000 SEBI ratifies the commitees key recommendation and integrates

them in clause 49 of the Listing Agreement

• 2002 Establishment of the Narash Chandra commitee to examine

various governance issues

• 2006 Revision of clause 49

• 2008 Introduction of the Companies bill

• 2011 Reintroduction of revised Companies bill after Satyam scandal

• In general India is following the Anglo-saxon model

Legal system Common law

Investor protection Medium

Ownership concentration High

Typical owners Families and business groups

Board system One tier

Managers on board Yes

Chair = CEO Yes

Employees on Board No

Bank influence Medium to high

Performance pay Medium

Current CG System

Present Corporate Governance In India

Inclusion of Clause 49

SEBI (Securities and Exchange Board of India) added Clause 49 to the Listing

Agreement in 2000 on the recomendations of the Kumara Mangalam Birla

Committee:

• Minimum number of Independent Directors on their boards

• Institution of Audit, Shareholders’ Grievance Committees etc.

• Annual reports to include Management’s Discussion and Analysis

(MD&A) section and Corporate Governance report

• Fees paid to non-executive directors to be disclosed

• Limited the number of committees on which a director could serve

Present Corporate Governance In India

Clause 49 revised in 2006 to bring it in line with Sarbanes-Oxley Act

by Narayana Murthy Committee

• Major changes and clarifications in the definition of Independent Directors

• Responsibilities of audit committees strengthened

• Financial disclosures to be more comprehensive and include those relating

to party transactions and proceeds from public/rights/preferential issues

• Boards to adopt formal codes of conduct

• CEO/CFO to certify financial statements

• Disclosures to shareholders to include more comprehensive information

Present Corporate Governance In India

Why Clause 49?

• Clause 49, which has recently been revised by the SEBI, of the listing

agreement between listed companies and the stock exchanges is all set to

enhance the corporate governance (CG) requirements, primarily through

increasing the responsibilities of the Board, consolidating the role of the

Audit Committee and making management more accountable

• These changes are aimed at moving Indian companies rapidly up the

evolutionary path towards business processes and management oversight

techniques.

Present Corporate Governance In India

Clause 49 - Provisions

Board of Directors:

• Should be an optimum combination of Executive and Non-executive

directors.

• In case of Non-executive Chairman, at least one third of the board should

compromise of Directors.

• In case of Executive Chairman, at least half of the board compromise of

Independent Directors.

Present Corporate Governance In India

Clause 49 - Provisions

Audit Committee:

• An Audit Committee shall have minimum 3 members, all being Non-executive

Directors, mejority of them being Independent.

• The Committee shall meet at least thrice a year. The qourum shall be either

two members or one third of the members whichever is higher.

• The Committee has power to-

- investigate any activity within its terms of reference

- Seek information from any employee

- Obtain outside leagal or professonal advice

- Secure attendence of outsiders with relevent expertise, if necessary

Present Corporate Governance In India

Clause 49- Provisions

Remunerations of Directors:

The following disclosures about Directors Remunerations should be made in

the annual report.

- All elements of remunerations package (Salary, benefits, bonuses,

stock option pention etc)

- Details of fixed component and performance linked incentives

- Service contracts, notice periods etc.

- Stock options details

Present Corporate Governance In India

Clause 49- Provisions

Board Procedure:

• The board meeting should be held at least four times in a year, with a

maximum time gap four months between any two meetings.

• The directors should not be a member in more than ten committees or act as

a chairman of more than five committees across all companies in which he is a

Director.

Present Corporate Governance In India

Clause 49- Provisions

Management:

• A management discussion and analysis report should form part of annual

report.

• The discussion includes details on following matters.

- Industry structure and developments

- Opportunities and threats

- Segment wise or product wise performance

- Internal control systems and their adequacy

- Risks and concerns

- Outlook

Present Corporate Governance In India

Clause 49- Provisions

Shareholders:

• All details of appointment of a new director or reappointment of a director

should be shared with the shareholders.

• Quarterly results should be put up on company‘s website or should be sent

to the Stock Exchange to put up on its own website.

• Redressal of shareholder and investor compains should be undertakenby a

Board Committee under the chairmanship of a Non-executive Director.

• The board of the company shall delegate the power of share transfer to an

officer/ committee or to the register and share transfer agents.

Present Corporate Governance In India

Clause 49- Provisions

Report on Corporate Governance:

• There should be a seperate section on Corporate governance in annual

reports of the company.

• Non compliance of any mandatory requirments shouldbe specifically

highlighted.

Compliance:

• Certificate from auditors of the company.

Present Corporate Governance In India

Industrial Policy and Foreign Investment:

• Industrial policy introduced in July 1991 achieved dramatic overhaul of

regulations governing foreign investment

• Automatic government approval for equity investments of up to 51 percent in

35 industries

• Requests to increase equity stakes beyond 51 percent still require approval

from the Government's Foreign Investment Promotion Board

• All sectors of the Indian economy are now open to foreign investors except

those with security concerns such as defense, railways, and atomic energy

Present Corporate Governance In India

Present Corporate Governance In India

Key Issues in Indian Corporate Governance Managing Dominant Shareholders

• In India the agency gap is actually between the majority shareholders and other stakeholders

• The will of the majority shareholder prevails

• This applies across the spectum of Indian companies with dominant shareholders

• In addition to the corporate governance issues arising from the dominant family holding in

the Indian business companies, there exists an additional complexity on account of

`promoter control` in Indian companies.

A promoter has been defined as:

“...a person or persons who are in overall control of the company or persons, who are

instrumental in the formulation of a plan or program pursuant to which securities are offered

to the public.”

• Promoters may be in control of the company`s resources even though they might not be

the dominant shareholders and because of their position, they have superior information

about the company affairs.

• In an organization, promoters and non promoters constitute two distinct groups which may

have different interests which leads to organizational and managerial issues.

Key Issues in Indian Corporate Governance Promoters

• Satyam was established in 1987.

• 4th largest IT company in India.

• 9% market share

• 53,000 employees

• Revenue $2.1billion

• First Indian company to be listed in three International Exchanges :NYSE, DOW and EURONEXT and boasted 185 Fortune 500 companies on its client list

• Satyam share price was Rs. 139.15

The Satyam Scandal

• Overstated assets on Satyam's balance sheet by $1.47

billion

• Satyam overstated income nearly every quarter over the

course of several years.

• The results announced on October 17, 2009 overstated

quarterly revenues by 75 percent and profits by 97

percent.

• The global head of internal audit also forged board

resolutions and illegally obtained loans for the company.

• 13000 fake salary accounts

• The company's global head of internal audit created fake

customer identities and generated fake invoices against

their names to inflate revenue

The Satyam Scandal The Game Plan

• Maytas Infra Ltd., Company owned by Two sons of Raju were investing in the real estate business and recently their real estate business was not in good shape.

• Raju started using the manpower and other resources for the Satyam Company for the welfare of his sons’ real estate business.

• Four main shareholders of Satyam Company were horrified by the changing behavior of Raju.

• With Sat yam's management focused elsewhere, business suffered. Clients complained about lack of attention, and many professional managers began to leave.

The Satyam Scandal The Background

1 Crore = 10 Mio. Rs.

• The CEO was convinced that the gap in the

balance sheets reached an unmanageable

heights and could not be filled in future by

any means.

• Satyam Computer crashed by Rs 139.15 or

77.69 per cent to close at Rs 39.95, after the

Chairman`s confession

• Bombay stock exchange fell 700 points

• The declining Sensex recorded the biggest

single-day loss in the past two months, after

Satyam Computers Services, the country's

fourth-largest software developer, plunged

around 80 per cent.

The Satyam Scandal Confession and Aftermaths

• It is surely going to be more difficult for other Indian IT service players to win business.

• Undoubtedly, this is going to hurt the prospects of foreign money flowing into India. • Global perception about Indian companies.

• Indian stock market slipped over 7% on 7th Jan., 09.

• Jobs of 40,000 people at risk, which also caused political unrest

The Satyam Scandal Impacts on IT industry

Satyam ScandalHow did it happen ?

• Ambitious growth drive

• Audit Failure

• Deceptive reporting practices: Lack of transparency

• ESOP`s issued to those who prepared fake bills

• Excessive interest in maintaining stock prices

• High risk deals that went sour

• Above all, greed and lack of ethical values

Satyam ScandalCorporate Lessons to be learnt

• Rotation of auditing firms

• Joint auditors to audit a company beyond a

certain size

• Strengthening of quality review

• Internal audit of financials by an external

firm

• Composition of Boards and quality and

qualification of independent directors

• Criteria for remuneration to key personnel

• Education on ethical values

CG Reforms After Satyam ScandalCompany Bill 2011

• The new companies bill 2011 proposes fundamental changes in the way companies

are run in India.

• Lesson has been learnt from Satyam Scam and the gaps in the governance systems

that led to this historical scam are thought to be filled.

1.Governance Reform – Independent Directors

2.Disclosure of Pledged Securities

3. Increased Financial Accounting Disclosures

4. IFRS (Adoption of International Standards)

5.Strict civil and criminal laws

The major challenges to corporate governance reforms in india are:

• Power of the dominant shareholder

• Lack of incentives for companies to implement corporate governance reforms

• Underdeveloped external monitoring systems

• Shortage of real independent directors

• Weak regulatory oversight including multiple regulators

Future Corporate Governance in India Major Challenges in the Future

Future Corporate Governance in India Importance of CG to India

Cost Factor

•India is the one of the most cost-efficient locations for many mnc’s from Europe and U.S.

•More than ½ of fortune 500 companies have outsourced to india

McKinsey Study:

•The production cost in India will be below 50% cost of Germany at least for the next 5 years

The process of mergers and takeovers in India involves:

• Approval of board of directors

• Information to the stock exchange

• Application in the high court

• Shareholders and creditors meeting

• Sanction by the high court

• Filing the court order

• Transfer of assets and liabilities

• Payment by cash and securities

Future Corporate Governance in India Mergers & Acquisitions

Company Acquired company Dealing amount

Tata Steel Corus Steel $ 12.2 Billion

Vodafone India Hutchison Essar $ 10 Billion (67% stake)

Hindalco Novellis $ 6 Billion

ONGC Imperial Energy $ 2.8 Billion

Tata Motors Jaguar Land Rover $ 2.3 Billion

Suzlon Energy RE Power $ 1.7 Billion

Future Corporate Governance in India Indians shopping abroad: International Acquisitions

Recommendations

• Good corporate governance may not be the engine of economic growth, but it is

essential for the proper functioning of the engine

• Securing foreign and national investments is crucial for the rapid development of the

Indian economy, however, this is only possible when a sound Corporate

Governance Code and Conduct is adopted

• The achievement of this goal depends strongly on a solid legal system binding the

companies

• Monitoring of companies’ actions has to be improved to avoid information problems

• This can only be done when the auditor’s professionalism is verified

• Total transparency has to be secured at all levels

• http://transparency.org/cpi2012/results accessed 10.01.13

• http://www.iica.in/images/Evolution_of_Corporate_Governance_in_India.pdf accessed 04.01.13

• http://www.indexmundi.com/india/unemployment_rate.html accessed 11.01.13

• http://www.complianceonline.com/ecommerce/control/articleDetail?contentId=12294&catId=10004 accessed

10.1.13

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07.01.13

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• http://en.wikipedia.org/wiki/India 10.01.13

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• http://en.wikipedia.org/wiki/Economy_of_India 10.01.13

• http://www.geographia.com/india/indiamap.gif 10.01.13

• http://www.mckinsey.com

References