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SUBMITTED BY:
SHWETA RAUT
(PG-07)
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CORPORATE GOVERNANCE
The last few years have seen some major scams and corporate collapse across
the globe. In India, the major example is Satyam which is one of the largest IT
companies in India. All these events have caused the pendulum of public faith to shift
away from free market to a more closely regulated one. However "corporate
governance," in spite of being the new object of interest and inquisitiveness from
various quarters, remains an ambiguous and often misunderstood phrase. So before
delving further on the subject it is important to define the concept of corporate
governance.
Ever since the first writings on the subject appeared there have been many
debates as to whom should corporate governance really represent: the interest of the
shareholders or that of all stakeholders. The shareholder primacy is embodied in the
finance view of corporate governance, i.e., the primary justification for the existence
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While regulations are necessary, there are however, a few issues that need to be
considered. The first relates to policing and punishment. The SEBI envisages that all
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So after careful weighing of all pros and cons it is not tough to conclude that
good Corporate Governance makes for good business sense. It increases confidence of
shareholders in the company leading to better stock prices. Research has shown that
the good Corporate Governance brings down the cost of capital for the company.
Good disclosure practices lead to a more liquid market for the company. This lowers
cost of debt. Thus for the CEOs of today, there is a clear business case for complying
with principles of good Corporate Governance.
Corporate Governance in India
The 1956 Companies Act as well as other laws governing the functioning of
joint-stock companies and protecting the investors rights built on this foundation. The
beginning of corporate developments in India were marked by the managing agency
system that contributed to the birth of dispersed equity ownership but also gave rise to
the practice of management enjoying control rights disproportionately greater than
their stock ownership. The turn towards socialism in the decades after independence
marked by the 1951 Industries (Development and Regulation) Act as well as the 1956
Industrial Policy Resolution put in place a regime and culture of licensing, protection
and widespread red-tape that bred corruption and stilted the growth of the corporate
sector.
The situation grew from bad to worse in the following decades and corruption,
nepotism and inefficiency became the hallmarks of the Indian corporate sector.
Exorbitant tax rates encouraged creative accounting practices and complicated
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emolument structures to beat the system. In the absence of a developed stock market,
the three all-India development finance institutions (DFIs) the Industrial Finance
Corporation of India, the Industrial Development Bank of India and the Industrial
Credit and Investment Corporation of India together with the state financial
corporations became the main providers of long-term credit to companies. Along with
the government owned mutual fund, the Unit Trust of India, they also held large
blocks of shares in the companies they lent to and invariably had representations in
their boards
The situation grew from bad to worse in the following decades and corruption,
nepotism and inefficiency became the hallmarks of the Indian corporate sector.
Exorbitant tax rates encouraged creative accounting practices and complicated
emolument structures to beat the system. In the absence of a developed stock market,
the three all-India development finance institutions (DFIs) the Industrial Finance
Corporation of India, the Industrial Development Bank of India and the Industrial
Credit and Investment Corporation of India together with the state financial
corporations became the main providers of long-term credit to companies. Along with
the government owned mutual fund, the Unit Trust of India, they also held large
blocks of shares in the companies they lent to and invariably had representations in
their boards
This sordid but increasingly familiar process usually continued till the
companys net worth was completely eroded. This stage would come after the
company has defaulted on its loan obligations for a while, but this would be the stage
where Indias bankruptcy reorganization system driven by the 1985 Sick Industrial
Companies Act (SICA) would consider it sick and refer it to the Board for Industrial
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While the Companies Act provides clear instructions for maintaining and
updating share registers, in reality minority shareholders have often suffered from
irregularities in share transfers and registrations deliberate or unintentional.
Sometimes non-voting preferential shares have been used by promoters to channel
funds and deprive minority shareholders of their dues have sometimes been defrauded
by the management undertaking clandestine side deals with the acquirers in the
relatively scarce event of corporate takeovers and mergers.
Attendance record of directors should be made explicit at the time of reappointment. Those with less than 50% attendance shouldnt be re-appointed.
Key information that must be presented to the board is listed in the code.
Audit Committee: Listed companies with turnover over Rs. 100 crores or paid-up
capital of Rs. 20 crores should have an audit committee of at least three members, all
non-executive, competent and willing to work more than other non-executive
directors, with clear terms of reference and access to all financial information in the
company and should periodically
interact with statutory auditors and internal auditors and assist the board in
corporate accounting and reporting.
Reduction in number of nominee directors. FIs should withdraw nominee
directors from companies with individual FI shareholding below 5% or total FI
holding below 10%.
Birla Committee (SEBI) recommendations (2000)
At least 50% non-executive members.
For a company with an executive Chairman, at least half of the board should be
independent directors, else at least one-third.
Non-executive Chairman should have an office and be paid for job related
expenses.
Maximum of 10 directorships and 5 chairmanships per person.
Audit Committee: A board must have a qualified and independent audit committee,
of minimum 3 members, all non-executive, majority and chair independent with at
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least one having financial and accounting knowledge. Its chairman should attend
AGM to answer shareholder queries. The committee should confer with key
executives as necessary and the company secretary should be he secretary of the
committee. The committee should meet at least thrice a year -- one before
finalization of annual accounts and one necessarily every six months with the quorum
being the higher of two members or one-third of members with at least two
independent directors. It should have access to information from any employee and
can investigate any matter within its TOR, can seek outside legal/professional service
as well as secure attendance of outside experts in meetings. It should act as the bridge
between the board, statutory auditors and internal auditors with arranging powers and
responsibilities.
Remuneration Committee: The remuneration committee should decide
remuneration packages for executive directors. It should have at least 3 directors, all
Nonexecutive and be chaired by an independent director.
The board should decide on the remuneration of non-executive directors and
all remuneration information should be disclosed in annual report.
At least 4 board meetings a year with a maximum gap of 4 months between
any 2 meetings. Minimum information available to boards stipulated.
Narayana Murthy committee (SEBI) recommendations (2003)
Training of board members suggested.
There shall be no nominee directors. All directors to be elected by shareholders
with same responsibilities and accountabilities.
Non-executive director compensation to be fixed by board and ratified by
shareholders and reported. Stock options should be vested at least a year after
their retirement. Independent directors should be treated the same way as nonexecutive directors.
The board should be informed every quarter of business risk and risk
management strategies.
Boards of subsidiaries should follow similar composition rules as that of parent
and should have at least one independent directors of the parent company.
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The Board report of a parent company should have access to minutes of board
meeting in subsidiaries and should affirm reviewing its affairs.
Performance evaluation of non-executive directors by all his fellow Board
members should inform a re-appointment decision.
While independent and non-executive directors should enjoy some protection
from civil and criminal litigation, they may be held responsible of the legal
compliance in the companys affairs.
Code of conduct for Board members and senior management and annual
affirmation of compliance to
Weaknesses of Corporate Governance In India
The Satyam debacle has exposed the chinks in Indian corporate governance
mechanism and the monitoring authorities. It has raised many questions about
corporate governance in Indiathe 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.
The board of directors is central to good governance, and the role of the board
has featured prominently in discussions about Satyam. The board is the body
charged with having oversight of the operations of the firm and setting its
strategy. It should ensure that the company is upholding high standards of
probity and conduct, and provide a probing analysis of the activities of
management. In particular, non-executive directors are supposed to give an
independent assessment of the quality of management. But time and time
again, failures of corporate governance suggest that they do not. The
infractions of law have arisen despite independent directors which were
stopped by external forces. There are several reasons pointing to these
anomalies First, it is difficult to appoint truly independent directors. This is particularly
hard to achieve in countries such as India where family ownership is
widespread and there is a close-knit group of corporate leaders. It is difficult
for non-executive directors to perform a scrutiny objective at the best of times,
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In contrast, the issues in India are entirely distinct - primarily due to our overall
social-economic conditions. 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'. And Professor Verma rightly concludes, "The board cannot even
in theory resolve this conflict" and that "some of the most glaring abuses of
corporate governance in India have been defended on the principle of
shareholder democracy since they have been sanctioned by resolutions of the
general body of shareholders."
By now it is increasingly obvious that the very concept of corporate
governance modelled on the Western system is un-workable in a country like
India. These efforts are akin to taking a hair of an elephant, transplanting it on
the head of a bald man and making him look like a bear. In the West the focus
is on ownerless, CEO-driven paradigm. In India, it is still family-controlled,
owner-driven paradigm. CEOs do not matter much in the management of the
company. Yet, the general discussion centres on a standard, global prescription
to manage diverse situations. Needless to emphasise, the solution to these
problems in India lies not within the company, but outside. This is precisely
what happened in the Satyam case where outsiders of the company took the lid
off the fraud.
In spite of numerous suggestions by the Securities and Exchange Board of
India (SEBI), for peer reviews of audits among the companies listed in the
Nifty and Sensex indices they have fallen flat on the industry fraternity.
Presumably, SEBI will allocate the audits to firms that are part of a panel of
reputed auditors. The simple solution would be for the regulator to make this
course of action mandatoryauditors could be allotted audits by the regulator.
To avoid the allegations of overregulation, companies can submit a list of their
preferred auditors, from which the regulator will have to choose. Audits could
also be rotated annually, keeping them on their toes. And these same rules
could also be applied to rating agencies, internal auditors, independent
directors etc. From time to time these mechanisms can be fine-tuned and made
more practical.
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The moot question is why these reformative suggestions have not been
implemented? The answer is that it depends on whos got more lobbying
power. In the US, the large pension funds that have been instrumental in
getting more transparency from company managements. India, on the other
hand, has no tradition of shareholder activism, despite organisations such as
the Life Insurance Corporation of India having substantial stakes in companies.
The dependence of political parties on business interests to fund elections also
doesnt help. The failure of governments and regulators to pass what seems
like very basic safeguards preventing conflicts of interest, not only in India, but
across the world, clearly establishes the clout that corporate interests have.
Corporate governance is thus a charade, a cosmetic exercise rather than an
attempt to get to the root of the problem.
Of course, too rigid a focus on the stock market also has its own set of
problems. As Satyam Computer Services Ltds founder B. Ramalinga Raju
said in his confession, the apparent reason why he inflated earnings was
because he feared that bad results would lead to a fall in the stock and a
takeover attempt. We neednt take Rajus word for it, but the fact remains that
too much of a focus on quarterly earnings and the linking of executive
compensation with the stock market via stock options could act as powerful
incentives for inflating earnings.
Recommendations to Implement Corporate Governance
After a slew of scandals, politicians and regulators, executives and
shareholders are all preaching the governance gospel. Corporate governance
has come to dominate the political and business agenda.
There is a growing concern among executives that hasty regulation and overly
strict internal procedures may impair their ability to run their business
effectively. CEOs have to bear in mind the potential trade-off between
polishing the corporate reputation and delivering growthfor all the headlines
on corporate responsibility, are investors prepared consistently to sacrifice
earnings for the sake of ethics?
Regulations are only one part of the answer to improved governance.
Corporate governance is about how companies are directed and controlled. The
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range of specialist skills. The board should discuss annually how well it has
performed.
Broadening and deepening disclosure on corporate websites and in annual
reports. Websites should have a corporate governance section containing
information such as procedures for getting a motion into a proxy ballot. The
level of detail should ideally include the attendance record of non-executives at
board meetings.
Leading by example, reining in a company culture that excuses cheating. If the
company culture has been compromised, or if one is in an industry where loose
practices on booking revenues and expenditure are sometimes tolerated, take a
few high-profile decisions that signal change
Finding a place for the grey and cautious employee alongside the youthful and
visionary one. Hiring thrusting graduates will skew the culture towards an
aggressive, individualist outlook. Balance this with some wiser, if duller heads
people who have seen booms and busts before, value probity and are not in
so much of a hurry. Making compensation committees independent. Corporate
bosses should be prevented from selling shares in their firms while they head
them. Share options should be expensed in established companiescashstarved start-ups may need to be more flexible.
Corporate governance is not just a box ticking exercise, companies need an
exchange of practical guidance in order to conceive and implement successful
governance mechanism. Instead of a menu of corporate governance options it
would be more appropriate to present best practice guidelines applicable to
businesses. These will serve as a benchmark for appropriate customization in
different companies. Corporate governance should be considered as an
obligation not a luxury. Its spirit is going to expand further and deeper in the
future.
KINGFISHER CRISIS
The current crisis going inside the kingfisher Airlines which can be realized by
the press statement from KFA, on 12 March 2012, highlights the challenges:
The flight loads have reduced because of our limited distribution ability
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I S
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Kingfishers net worth has been completely eroded, while its auditors had
raised several questions about its accounting practices in its annual report.
Kingfisher Airlines Ltds loan funds stand at Rs7, 543 crore (debt-to-equity
ratio of about 3.2) & that of Jet Airways (India) Ltds is Rs14, 123 crore (debtto-equity about 4.2). Spice jet Ltd, on the other hand, has lowest debt at
Rs712 crore (debt-to-equity about 0.7). Kingfishers fixed assets stand at Rs2,
286 crore, but it has a negative net working capital (excluding cash and bank
balance) of Rs1, 970 crore. Jet Airways has a much stronger asset base with the
value of its fixed assets at Rs14,417 crore; its negative net working capital
(excluding cash and bank balances) is relatively much lower at Rs560 crore.
Spice Jet has a total fixed asset base of Rs1, 115 crore.
Kingfisher could not deliver on profitability even last year when the going was
considered to be good. According to analysts, the sector experienced its best
returns in the quarter ended December 2010. Even during such times,
Kingfishers net loss for fiscal 2011 stood at Rs1, 027 crore. Thats when Jet
had managed a net profit of Rs9.69 croreon a stand-alone basisand Spice
Jet posted a net profit of Rs101 crore. Spice Jets net profitability, of course,
was also supported by relatively lower interest expenses.
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O P RAT IO N A L
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S T RATAG IC R ISK
IN V E S TM E N T IN
P L AN ES
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MESSED UP MERGERS
All the full-service boys messed up their mergers. Coincidentally, all three
Jet, Kingfisher and Air India went in for acquisitions and mergers in 200708. While Jet bought Sahara, Kingfisher bought Air Deccan and Air India
merged with Indian Airlines. The traditional logic of mergers is cost savings
and synergy, where two and two equals five. The management ignored the
warning signs of stormy weather and failed to navigate the company into
safety.
THE CBI ON TRACK NOW:
CONCLUSION: Running an airline in India is a mugs game. Once defined as the
simple business of getting bums on seats more bums means better bottom line
the way the Indian industry is being run, one wonders if the bums are paying
enough for the seats they sit on. Almost paradoxically despite their continual
shrinkage in the domestic market, Kingfisher has continued to post solid, if
unspectacular operating figures in the domestic market. Kingfisher plans to increase
revenues through more efficient operations, while simultaneously controlling costs by
shedding some realty assets (including its Mumbai corporate office), entering sale
and leasebacks for some Airbus aircraft, and switching some high-cost rupee loans
into low-cost foreign currency loans. There has also been speculation the carrier will
permanently reduce its fleet of 66 aircraft (the same level as Jun-2010) to 35 aircraft.
Kingfisher Airlines is also working aggressively with a consortium of banks, which
hold a 23% stake in the company, to further reduce interest costs and raise working
capital
The Central Bureau of Investigation (CBI) is investigating a loan made by
state-run
IDBI
Bank
Ltd(IDBI.NS)
to
debt-laden
Kingfisher
Airlines(KING.NS) worth 9.5 billion rupees ($155.38 million), a police
spokeswoman said on Saturday.
The crime fighting agency is looking into why the loan was approved when the
airline has a negative net worth and a negative credit rating
The CBI has registered a preliminary inquiry to inquire into the role of IDBI
and Kingfisher Airlines .
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"There was no need for the bank to take the exposure outside the consortium
when already other banks' loans were getting stressed."
A preliminary inquiry is usually the first step before a formal case is filed.
Kingfisher Airlines, controlled by liquor baron Vijay Mallya, has not flown in
almost two years and owes about $1 billion to a consortium of mostly state-run
banks, and hundreds of millions of dollars more to airports, tax authorities and
others.
CORPORATE FRAUDS AND CBI
According to more than three-fourths of the respondents, the incidence of fraud
has increased in the country in this last one year. But the fact that around twothirds of the respondents said that scams and corporate frauds were unearthed
because of legislations such as the Right to Information Act (RTI) and Public
Interest Litigation (PIL) speaks volumes about public awareness in India.
Two-thirds of India's bank assets are controlled by state-run banks, which in
turn account for three-quarters of the sector's bad loans.
Last week, CBI arrested Sudhir Kumar Jain, the chairman of state-run
Syndicate Bank Ltd (SBNK.NS) over allegations that he was seeking bribes to
favour debtors.
(1 US dollar = 61.1400 Indian rupee)
GUIDELINES FOR REPORTING FRAUDS TO POLICE/CBI
6.1 Private sector banks (including foreign banks operating in India) should
follow the following guidelines for reporting of frauds such as unauthorised
credit facilities extended by the bank for illegal gratification, negligence and
cash shortages, cheating, forgery, etc. to the State Police authorities:
In dealing with cases of fraud/embezzlement, banks should not merely be
actuated by the necessity of recovering expeditiously the amount involved, but
should also be motivated by public interest and the need for ensuring that the
guilty persons do not go unpunished.
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The General Manager, Reserve Bank of India, Central Fraud Monitoring Cell,
Department of Banking Supervision, 10/3/8, Nruputhunga Road, P.B. No. 5467
Bengaluru 560001.
Regional Office of the Department of Banking Supervision, Reserve Bank of
India under whose jurisdiction the Head Office of the bank falls.
Financial Conglomerate Monitoring Division (FCMD) in respect of 12 large
banks in the country under whose jurisdiction the Head Office of the bank
falls. The names of which are given in Annex.
Regional Office of Reserve Bank of India, Department of Banking
Supervision, Reserve Bank of India, under whose jurisdiction the affected bank
branch is located to enable the Regional Office to take up the issues regarding
security arrangements in affected branch/es during the State Level Security
Meetings with the concerned authorities (endorsements).
The Security Adviser, Central Security Cell, Reserve Bank of India, Central
Office Building, Mumbai 400001.
Ministry of Finance, Department of Financial Services Government of India,
Jeevan Deep, Parliament Street, New Delhi.-110001.
The report should include details of modus operandi and other information as
at columns 1 to 11 of FMR 4.
7.2 Banks should also submit to the Reserve Bank, Department of Banking
Supervision, Central Fraud Monitoring Cell at Bengaluru as well as the
concerned Regional Office of the Reserve Bank/FCMD under whose
jurisdiction the banks Head Office is situated a quarterly consolidated
statement in the format given in FMR 4 (soft copy) covering all cases
pertaining to the quarter. This may be submitted within 15 days of the end of
the quarter to which it relates.
7.3 Banks which do not have any instances of theft, burglary, dacoity and / or
robbery to report during the quarter, may submit a nil report.
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