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by Dr.Rajesh Patel,Director, nrv
05/10/12 03:38 AM                                       1
                    mba,email:1966patel@gmail.com
Corporate misgovernance
• In new millenium several companies in USA and
  else where faced collapse.

• Existing frame work seems inadequate with the
  gigantic business conglomérâtes.




                       by Dr.Rajesh Patel,Director, nrv
  05/10/12 03:39 AM                                       2
                      mba,email:1966patel@gmail.com
Corporate misgovernance in INDIA
• Increasing corruption in the government and
  its various services had kept the management
  of country’s industrial and business
  organizations above accountability for their
  misdeeds, encouraging them to indulged in
  more unethical practices.



                      by Dr.Rajesh Patel,Director, nrv
 05/10/12 03:39 AM                                       3
                     mba,email:1966patel@gmail.com
Corporate misgovernance in INDIA
• First realize during BIG BULL, harshad mehta case.
• Involving lagre no’s of banks and resulting in the stock
  market nosediving for the first time.
• Preferential allotment scam where investors loose Rs
  5000 Crore.
• Disappearance of companies during 1993-1994, when
  stock market shot up to 120 %, companies raised Rs25000
  crore vanished and did not step back to their projects.
• Plantation companies scam Rs 50,000 crore
• Non banking finance companies scam. etc
                      by Dr.Rajesh Patel,Director, nrv
 05/10/12 03:39 AM                                       4
                     mba,email:1966patel@gmail.com
Corporate misgovernance in USA
• Worldcom improperly booked 3.8b in expenses,
  thus inflating profits.
• Bernie ebbers borrows $408 million from phone
  company to cover personal debts.
• Enron created outside partnerships that helped
  hide poor financial condition. Executive earned
  millions by selling company stock.


                      by Dr.Rajesh Patel,Director, nrv
 05/10/12 03:39 AM                                       5
                     mba,email:1966patel@gmail.com
Reasons for misgovernance
•   A closed economy.
•   Sheltered market.
•   Limited need and access to global business.
•   Lack of competitive spirit.
•   Inefficient regulatory authority framework.




                         by Dr.Rajesh Patel,Director, nrv
    05/10/12 03:39 AM                                       6
                        mba,email:1966patel@gmail.com
Corporate Governance
• Problems that results from the separation of
  leadership.
• Focus upon: internal structure, rules of the board
  of directors, audit committees, discloser of
  information rules to shareholders and creditors,
  control of management.



                       by Dr.Rajesh Patel,Director, nrv
  05/10/12 03:39 AM                                       7
                      mba,email:1966patel@gmail.com
Corporate Governance
• Definition by corporate and academic
  point.
• Academic point.
                                 Shareholders


                                       Board


                                    Management


                                    Employees



                     by Dr.Rajesh Patel,Director, nrv
05/10/12 03:39 AM                                       8
                    mba,email:1966patel@gmail.com
Corporate Governance
• Corporate point of view
• Corporate governance deals with ways in which
  suppliers of finance to corporation assure
  themselves of getting a return on their
  investment. How do the suppliers of finance get
  management to return some of the profits to
  them?
• How do they make sure that managers do not
  steal the capital they supply or invest it in bad
  projects?
• How do suppliers of finance control managers?
                       by Dr.Rajesh Patel,Director, nrv
  05/10/12 03:39 AM                                       9
                      mba,email:1966patel@gmail.com
Corporate Governance MODEL
  • Mc kinsey model.
  • The Market model.
  • Efficient, well developed equity markets and
    dispersed ownership.
  • Developed nations.
  • US, UK, CANADA and AUSTRALIA.



                          by Dr.Rajesh Patel,Director, nrv
05/10/12 03:39 AM                                            10
                         mba,email:1966patel@gmail.com
SHAREHOLDERS INVIRONMENT                  INDEPENDENCE AND PERFORMANCE



                                                       Non-executive
                                         Dispersed       Majority




                                                                                CORPORATE CONTEXT
INSTITUTIONAL CONTEXT




                                         ownership        boards

                        Sophisticated
                                                                 Aligned
                         Institutional
                                                                incentives
                          ownership



                           Active                                    High
                           Equity                                  discloser
                           market            Active
                                            Takeover    Shareholder
                                             market       equity


                               by Dr.Rajesh Patel,Director, nrv
        05/10/12 03:39 AM                     TRANSPARENCY AND ACCOUNTABILITY
      CAPITAL MARKET LIQUIDITYmba,email:1966patel@gmail.com             11
Corporate Governance MODEL
• Second version of Mc Kinsey model.
• The control model
• Underdeveloped equity markets, concentrated
  (family) ownership, less share holder transparency
  and inadequate protection of minority and foreign
  shareholders
• ASIA, LATIN AMERICA, EAST EROPEAN NATIONS


                       by Dr.Rajesh Patel,Director, nrv
  05/10/12 03:39 AM                                       12
                      mba,email:1966patel@gmail.com
SHAREHOLDERS INVIRONMENT               INDEPENDENCE AND PERFORMANCE




                                   Concentrated       Insider
                                                      boards




                                                                               CORPORATE CONTEXT
INSTITUTIONAL CONTEXT




                                    ownership

                         Reliance on
                                                             Incentive
                           family,
                                                           Aligned with
                            bank,
                                                               Core
                           public
                                                           shareholders
                           finance


                        Underdeveloped                              Limited
                          New issue                                Discloser
                            market        Limited
                                         takeover    Inadequate
                                          market       minority
                                                      protection

                               by Dr.Rajesh Patel,Director, nrv
        05/10/12 03:39 AM                     TRANSPARENCY AND ACCOUNTABILITY
      CAPITAL MARKET LIQUIDITYmba,email:1966patel@gmail.com             13
Corporate Governance
• Sir adrian cadbury, chairman of cadbury
  committee.
• Experts at the organisation of economic co-
  operation and development OECD.
• All these definitions which are shareholder
  centric captures some of the most important
  concerns of government for society in general.


                       by Dr.Rajesh Patel,Director, nrv
05/10/12 03:39 AM                                         14
                      mba,email:1966patel@gmail.com
Corporate Governance
•   Management accountability.
•   Providing adequate investment to management.
•   Disciplining and replacement of bad management.
•   Enhancing corporate performance.
•   Transparency.
•   Shareholder activism.
•   Investor protection.
•   Improving access to capital markets.
•   Promoting long terms investments.
•   Encouraging innovations.



                        by Dr.Rajesh Patel,Director, nrv
05/10/12 03:39 AM                                          15
                       mba,email:1966patel@gmail.com
Governance Is More Than Just Board Processes
               And Procedures
• It involves full set of relationship between company’s
  management, its board, its shareholders and its other
  stakeholders, such as its employees and the community in
  which it is located.
• Poor governance ripples Russia and Asian markets.
• Cadbury code and CII code.
• World bank, OECD, APEC-Asia pacific economic co-
  operation.



                       by Dr.Rajesh Patel,Director, nrv
  05/10/12 03:39 AM                                       16
                      mba,email:1966patel@gmail.com
OECD emphasis
  • Rights of shareholders.
  • Equitable treatment of shareholders.
  • Role of stakeholders in corporate
    governance.
  • Discloser and transparency.
  • Responsibility of board.



                       by Dr.Rajesh Patel,Director, nrv
05/10/12 03:39 AM                                         17
                      mba,email:1966patel@gmail.com
HOME WORK -1
RESPONSIBILITY: KARANBIR

                     by Dr.Rajesh Patel,Director, nrv
05/10/12 03:39 AM                                       18
                    mba,email:1966patel@gmail.com
CG In Banking Sector
 • Bank failure in west.
 • Weakness in banking sector leads to financial
   instability.
 • Lyon G-7 summit in june 1996.
 • IMF and world bank.
 • Basel committee on banking supervision.



                           by Dr.Rajesh Patel,Director, nrv
05/10/12 03:39 AM                                             19
                          mba,email:1966patel@gmail.com
Issues in corporate governance
  1.Distinguishing the roles of board and
    management
  • By or under the direction of board.
  • Board occupies key position between
    shareholders (owners) and company’s
    management ( day 2 day managers)




                           by Dr.Rajesh Patel,Director, nrv
05/10/12 03:39 AM                                             20
                          mba,email:1966patel@gmail.com
Issues in corporate governance
• Select, decide the remuneration and evaluate on a regular basis,
  when necessary the CEO.
• Oversee the conduct of company business.
• Review and where necessary, approve the company financial
  objectives and major corporate plan and objectives.
• Render advice and counsel.
• Identify and recommend candidates for board of directors.
• Comply with laws and regulations.
• All other functions required by law to be performed.




                         by Dr.Rajesh Patel,Director, nrv
   05/10/12 03:39 AM                                         21
                        mba,email:1966patel@gmail.com
Issues in corporate governance
                    2.Composition of the board and
                      related issues
                    No. of directors of diff kinds.
                             BORAD OF DIRECTORS




        EXECUTIVE DIRECTORS                              NON EXECUTIVE DIRECTOS




                                                              AFFILATED DIRECTORS
   INDEPENDENT DIRECTORS
                                                                    NOMINEE
                           by Dr.Rajesh Patel,Director, nrv
05/10/12 03:39 AM                                                               22
                          mba,email:1966patel@gmail.com
Issues in corporate governance
  3. Separation of the roles of the CEO and
    chairperson
  4. Should the board of directors have
    committees.
  Appointment of special committees
  Nomination
  Remuneration
  auditing
                     by Dr.Rajesh Patel,Director, nrv
05/10/12 03:39 AM                                       23
                    mba,email:1966patel@gmail.com
Issues in corporate governance
5. Appointment of the board and director’s re-election.
6. Directors and executive’s remuneration.
7. Discloser and audit.
8. Protection of shareholder rights and their expectation.
9. Dialog with institutional shareholders.
10.Should investor have a say in making a company
   “socially responsible corporate citizen”?.




                      by Dr.Rajesh Patel,Director, nrv
 05/10/12 03:39 AM                                       24
                     mba,email:1966patel@gmail.com
Benefits Of Good Corporate Governance
            To A Corporation
  • Creation and enhancement of a corporation’s
    competitive advantage
  • Enabling a corporation perform efficiently by
    preventing fraud and malpractices.
  • Providing protection to shareholders interest.
  • Enhancing the valuation of an enterprise.
  • Ensuring compliance with laws and regulations.




                      by Dr.Rajesh Patel,Director, nrv
 05/10/12 03:39 AM                                       25
                     mba,email:1966patel@gmail.com
Theory In Corporate Governance
 AGENCY THEORY
 • Adam smith who identified an agency
   problem(managerial negligence and profusion).
 • Shareholders (owners)- principals-they define
   objective of the company.
 • Agents-management who pursue such objectives.
 • Chief executive desire and shareholders long term
   investment.
 • Mismatch objective leads to agency problem.
 • Cost inflicted by such dissonance is the agency cost.
                     by Dr.Rajesh Patel,Director, nrv
05/10/12 03:39 AM                                          26
                    mba,email:1966patel@gmail.com
Theory In Corporate Governance


AGENCY THEORY
Two broad mechanism that reduce agency cost
  and improve performance are:
• Fair and accurate financial disclosures
• Efficient and independent board of directors


                     by Dr.Rajesh Patel,Director, nrv
05/10/12 03:39 AM                                       27
                    mba,email:1966patel@gmail.com
Theory In Corporate Governance
Stewardship theory:
• Managers are trustworthy and attach significant value to
  their personal reputation
• Managers are steward whose motives are aligned with the
  objectives of principles.
• Steward behavior will not depart from the interests of
  his/her organization.
• Control can be counterproductive, because it undermines
  the pro-organisational behavior of the steward by lowering
  his/her motivation.

                        by Dr.Rajesh Patel,Director, nrv
   05/10/12 03:39 AM                                       28
                       mba,email:1966patel@gmail.com
Theory In Corporate Governance

Behavioral difference between agency and stewardship
   theories
• Agent and steward
• Agency- sociological and psychological
• Steward- individualistic, opportunistic and self serving
With regard to psychological mechanisms
Agency theory states that motivation resolves around lower
   order and extrinsic needs
Steward theory states it resolves around higher order and
   intrinsic needs

                       by Dr.Rajesh Patel,Director, nrv
05/10/12 03:39 AM                                            29
                      mba,email:1966patel@gmail.com
Theory In Corporate Governance

Stakeholder theory:
• Interest of all groups- employees, customers,
  dealers, government and society.
• Ethics of cares
• Ethics of fiduciary relationship
• Theory of property rights
• Criticised mainly because not applicable in
  practice by corporations
                     by Dr.Rajesh Patel,Director, nrv
05/10/12 03:39 AM                                       30
                    mba,email:1966patel@gmail.com
Theory In Corporate Governance

Sociological theory
• Focus on board composition
• Implication of power and wealth distribution
• Financial reporting
• Problems of interlocking dictatorship and
  concentration in privilege class to equity and
  social progress
• Socio-economic objective of corporations
                     by Dr.Rajesh Patel,Director, nrv
05/10/12 03:39 AM                                       31
                    mba,email:1966patel@gmail.com
Corporate Governance

The role of the management is to run the
  enterprise while the role of the board is to see
  that it is being run well and in the right
  direction. Corporate governance system vary
  around the world. Scholars suggest 3 broad
  versions.



                          by Dr.Rajesh Patel,Director, nrv
05/10/12 03:39 AM                                            32
                         mba,email:1966patel@gmail.com
Anglo American Model
Unitary board model/ Anglo-Saxon
Corporate governance in America, Britain,
  Canada, Australia
                               Board of directors                       stakeholders
  Shareholder
                                 supervisors
                     elect         Appoints and supervise



                              Officers(managers)                      Regulation/legal
                                                          Monitor         system
                                     manage               &
                    Lien on
  Creditors                                                              Stake in
                                                          regulates
                               by Dr.Rajesh Patel,Director, nrv
05/10/12 03:39 AM                                                                        33
                                     company
                              mba,email:1966patel@gmail.com
Anglo American Model
• Ownership is equally divided between
  individual and institutional shareholders.
• Directors are rarely independent of
  management.
• Run by professional managers who have
  negligible ownership stake.
• Most institution investors are reluctant
  activists.
• Discloser norms.
                          by Dr.Rajesh Patel,Director, nrv
05/10/12 03:39 AM                                            34
                         mba,email:1966patel@gmail.com
German Model
 • Two tier boar model
 • Upper boards supervises the executive board on
   behalf of stakeholders and it is typically social
   oriented.
 • Shareholders do not dictate the governance
   mechanism.
 • Shareholder elects 50% of members of supervisory
   board and rest is by labor unions, ensuring they
   enjoy share in governance.
 • Supervisory board appoints and monitors the
   management board

                       by Dr.Rajesh Patel,Director, nrv
05/10/12 03:39 AM                                         35
                      mba,email:1966patel@gmail.com
German Model
Appoint 50%
                               Supervisory board
                                                                Appoint 50%
            Appoint 50%
                                           Appoint
                                           & supervise


                              Management board
Employees and
                                   (including                                 shareholder
 Labor unions
                              labor relation officer)


                                          manage


                                                                  Own
                                      Company
                             by Dr.Rajesh Patel,Director, nrv
05/10/12 03:39 AM                                                                           36
                            mba,email:1966patel@gmail.com
Japanese Model

• Business network model
• Boards tends to be large
• Predominantly executive and often ritualistic.
• President who consult both supervisory board
  and the executive management.
• Importance of lending bank.
• Shareholders and lending bank together
  appoints the board of directors and president.
                       by Dr.Rajesh Patel,Director, nrv
05/10/12 03:39 AM                                         37
                      mba,email:1966patel@gmail.com
Japanese Model
            Appoint                                          Provides managers,
                              Supervisory board              monitor, act in emergencies

                        Ratifies president                   Provides
                        decisions                            managers
                                  President

                                          Consult
                                                                         Main bank
Shareholders
                         Executive management
                        Primarily board of directors


                                         Manages
                                                               Provides loans
                Own                    Company
                          by Dr.Rajesh Patel,Director, nrv
05/10/12 03:39 AM                                                                    38
                         mba,email:1966patel@gmail.com            Own
Indian Model

• Governed by the company’s Act of 1965
• Which follow UK model
• Private companies is mostly held or
  dominated by a founder, his family and
  associates.
• India has adopted the key tenets of the Anglo
  American external and internal control
  mechanism after economic liberlisation.
                      by Dr.Rajesh Patel,Director, nrv
05/10/12 03:39 AM                                        39
                     mba,email:1966patel@gmail.com
Indian Model

HOMEWORK:
Draw Indian model on your notebooks in next
  class.




                      by Dr.Rajesh Patel,Director, nrv
05/10/12 03:39 AM                                        40
                     mba,email:1966patel@gmail.com
Obligation To Society

•   National interest              • Competition
•   Political non-alignment        • Trusteeship
•   Legal compliance               • Accountability
•   Rule of law                    • Effectiveness and efficiency
•   Honest and ethical             • Timely responsiveness
•   Corporate citizen              • Corporation should uphold the fair
•   Ethical behavior                    name of the country
•   Social concerns
•   CSR
•   Environment- friendliness
•   Healthy and safe working
    environment             by Dr.Rajesh Patel,Director, nrv
    05/10/12 03:39 AM                                               41
                             mba,email:1966patel@gmail.com
Obligation To Investors

• Towards shareholders
• Measures promoting transparency and
  informed shareholder participation
• Transparency
• Financial reporting and records



                       by Dr.Rajesh Patel,Director, nrv
05/10/12 03:39 AM                                         42
                      mba,email:1966patel@gmail.com
Obligation To Employees

•   Fair employment practices
•   Equal opportunities employer
•   Encouraging whistle blowing
•   Humane treatment
•   Participation
•   Empowerment
•   Equity and inclusiveness
•   Participative and collaborative environment
                     by Dr.Rajesh Patel,Director, nrv
05/10/12 03:39 AM                                       43
                    mba,email:1966patel@gmail.com
Obligation To Customers

• Quality of products and services
• Products at affordable prices
• Unwavering commitment to customer
  satisfaction




                      by Dr.Rajesh Patel,Director, nrv
05/10/12 03:39 AM                                        44
                     mba,email:1966patel@gmail.com
Managerial Obligation

• Protecting company’s assets
• Behavior towards government agencies
• Control
• Consensus oriented
• Gifts and donations
• Role and responsibility of corporate board and
  directors
• Direction and management must be distinguished
• Managing and whole time directions
                          by Dr.Rajesh Patel,Director, nrv
05/10/12 03:39 AM                                            45
                         mba,email:1966patel@gmail.com
Cadbury Committee On Corporate
                  Governance
• Objective “to help raise the standards of
  corporate governance and level of confidence
  in financial reporting and auditing by setting
  out clearly what it sees as the perspective
  responsibilities of those involved and what it
  believes is expected of them”.



                     by Dr.Rajesh Patel,Director, nrv
05/10/12 03:39 AM                                       46
                    mba,email:1966patel@gmail.com
Cadbury Committee On Corporate
                              Governance
                     •   Code of best practices
                     •   Listed on London stock exchange
                     •   19 recommendations
                     •   Relating to board of directors, non
                         executive directors, executive
                         directors, reporting and controlling



                              by Dr.Rajesh Patel,Director, nrv
05/10/12 03:39 AM                                                47
                             mba,email:1966patel@gmail.com
Cadbury Committee On Corporate Governance
  Relating to board of directors
  • Board should meet regularly, retain full control and monitor
  • Division of responsibility, balance of power.
  • Non executive directors should have skill and knowledge and
    in right numbers
  • Formal schedule of matters
  • Take independent professional advice at the company’s
    expense
  • All directors should have access to the advice and services of
    the company secretary, removal also.


                         by Dr.Rajesh Patel,Director, nrv
 05/10/12 03:39 AM                                               48
                        mba,email:1966patel@gmail.com
Cadbury Committee On Corporate Governance
Relating to non executive directors
• Non executive members should bring an independent
  judgment to bear on issues of strategy, performance,
  resources, key appointments and standard of conduct.
• Independent of the management and any other business
  and relationship, fee reflect the time they commit to the
  work they are assigned.
• Appointment and reappointment.
• Selection through formal procedure.



                        by Dr.Rajesh Patel,Director, nrv
   05/10/12 03:39 AM                                       49
                       mba,email:1966patel@gmail.com
Cadbury Committee On Corporate Governance

Relating to executive directors
• Directors service should not exceeds 3 years
  without shareholders approval.
• Clear and full discloser of their salary and other
  incomes.
• Pay should be according to remuneration
  committee inclusive of non executive directors.


                       by Dr.Rajesh Patel,Director, nrv
  05/10/12 03:39 AM                                       50
                      mba,email:1966patel@gmail.com
Cadbury Committee On Corporate
                    Governance
Reporting and controls
• Boards duty to present a balanced and understandable assessment
  of the company.
• Board should insure that an objective and professional relationship is
  maintained with the auditors.
• Board should established an audit committee with at least 3 non
  executive directors.
• Directors should explain their responsibilities.
• Should report on the effectiveness of the company’s system to
  internal control
• Should report that the business is going concern

                            by Dr.Rajesh Patel,Director, nrv
   05/10/12 03:39 AM                                               51
                           mba,email:1966patel@gmail.com
Paul Ruthman Committee
• Controversial point of cadbury committee.
• Practicality
• The effectiveness of company’s system of
  internal control
• Extensions of directors responsibility




                       by Dr.Rajesh Patel,Director, nrv
  05/10/12 03:39 AM                                       52
                      mba,email:1966patel@gmail.com
THE GRRENBURY COMMITTEE 1995
• Established to identify good practices of confederation of British
   industry CBI
• Directors remuneration and prepare code of such practices used
   in public limited company
• Accountability and level of directors pay
• Proper allocations of responsibility, directors remuneration,
   proper reporting to shareholders, greater transparency
4 sections
• Remuneration committee
• Disclosures
• Remuneration policy
• Service contracts and compensation

                            by Dr.Rajesh Patel,Director, nrv
   05/10/12 03:39 AM                                                   53
                           mba,email:1966patel@gmail.com
The Hampel Committee 1995
• To promote high standards of CG both to protect
  investors and Enhance the standing of companies in LSE
• Developed further cadbury committee report
• Auditors should report privately to directors
• Directors maintain and review all controls
• Internal audit function importance
• Introduced combined code of cadbury and greenbury




                        by Dr.Rajesh Patel,Director, nrv
   05/10/12 03:39 AM                                       54
                       mba,email:1966patel@gmail.com
The Turnbull Committee 1999
• Established by the institute of chartered accountants in
  England and Wales ICAEW
• Stress put on combined code on internal control
• Provide guidance to implement combined codes
• Annual internal audit importance
• Board of directors confirm the existence of procedures
  for evaluating and managing key risk function




                        by Dr.Rajesh Patel,Director, nrv
   05/10/12 03:39 AM                                         55
                       mba,email:1966patel@gmail.com
World Bank on CG
• Earliest international organization to study and suggest
  the guidelines for CG
• Their report on CG recognize the complexity of the
  concept
Focuses on
• Transparency
• Accountability
• Fairness
• Responsibility
That are universal in application

                           by Dr.Rajesh Patel,Director, nrv
   05/10/12 03:39 AM                                          56
                          mba,email:1966patel@gmail.com
OECD Principles
• One of the earliest non government organization to
  work on and spell out principle and practices of CG
  and their goal to attain long term shareholder Value.
Major elements
• The right of shareholders
• Equitable treatment to shareholders
• The role of stakeholder in CG
• Discloser and transparency
• The responsibility of board


                        by Dr.Rajesh Patel,Director, nrv
 05/10/12 03:39 AM                                         57
                       mba,email:1966patel@gmail.com
Mc Kinsey Survey On CG
• International management consultant
  organization.
• Conducted a survey with a sample size of 188
  companies from 6 countries.
• INDIA , MALAYSIA, MEXICO, SOUTH KOREA ,
  TAIWAN AND TURKEY
• To determine the correlation between good CG
  and valuation of the company

                            by Dr.Rajesh Patel,Director, nrv
  05/10/12 03:39 AM                                            58
                           mba,email:1966patel@gmail.com
Mc Kinsey Survey On CG
• Increase financial performance
• Transparency of dealing
• Increasing investors confidence
Parameters for CG
• Accountability: transparent ownership, board size,
  board accountability
• Discloser and transparency
• Shareholders equity: one share on vote

                            by Dr.Rajesh Patel,Director, nrv
   05/10/12 03:39 AM                                           59
                           mba,email:1966patel@gmail.com
Sarbanes Oxley act 2002
• Scandals
• The Act calls for protection to those who have the
  courage to bring frauds to the attention of those who
  have to handle frauds.
• It ensures that such things are not left to the
  individuals who may or may not choose to reveal
  them.
• The SOX Act is a sincere attempt to address all the
  issues associated with corporate failure to achieve
  quality governance and to restore investors
  confidence

                           by Dr.Rajesh Patel,Director, nrv
 05/10/12 03:40 AM                                            60
                          mba,email:1966patel@gmail.com
Sarbanes Oxley act 2002
Provisions :
• Establishment of public company accounting oversight board
  PCAOB
• Audit committee
• Conflict of interest- 1 year after preceding
• Audit partner rotation- once after 5 years
• Improve influence on conduct of audits
• Prohibition of non audit services
• CEOs and CFOs required to affirm financials
• Loans to directors
• Attorneys
• Securities analysis
• penalities               by Dr.Rajesh Patel,Director, nrv
 05/10/12 03:40 AM                                             61
                         mba,email:1966patel@gmail.com
Indian Committees And Guidelines

• Developments all over the world
• Influence from UK
• After Cadbury Committee report it was studied
  by CII, Associated chambers of commerce, SEBI




                             by Dr.Rajesh Patel,Director, nrv
  05/10/12 03:40 AM                                             62
                            mba,email:1966patel@gmail.com
Working Group On the Companies Act, 1996

•   Review the Act in light of modern requirements
•   Aspiration of investors
•   Globalization of economy
•   Liberalisation
•   Bill was introduced in rajya sabha on 14th august
    1997


                         by Dr.Rajesh Patel,Director, nrv
    05/10/12 03:40 AM                                       63
                        mba,email:1966patel@gmail.com
Working Group On the Companies Act, 1996
Financial disclosers recommended by the group
• Directors remuneration and commission should be a part of directors report
• Cost incurred in using the services of other group companies
• Listed co. must give report
A review on operation yearly
Share in total turnover
Market condition
Future aspects
• Use of each funds generated from shares and debentures
• Debt exposure disclosure
• Foreign exchange outflow
• Financial statements pertaining fixed and current assets and long term liabilities
• Leased assets
• Any inappropriate treatment in balance sheet in directors report



                                     by Dr.Rajesh Patel,Director, nrv
    05/10/12 03:40 AM                                                                  64
                                    mba,email:1966patel@gmail.com
Working Group On the Companies Act, 1996

    Non Financial disclosers recommended by the group
•     Comprehensive report on directors relatives-either employee or directors
•     Register maintenance for directors interest
•     AGM members inspection at any time
•     Loans to directors details
•     Secretarial compliance certificate in concern to returns file
•     According to companies Act




                                   by Dr.Rajesh Patel,Director, nrv
       05/10/12 03:40 AM                                                         65
                                  mba,email:1966patel@gmail.com
Narayana Murthy Committee Report ,2003

• Disclosure of contingent liabilities
• Certifications by CEOs and CFOs
• Definition of independent directors
• Independence of audit committees
homework




                       by Dr.Rajesh Patel,Director, nrv
  05/10/12 03:40 AM                                       66
                      mba,email:1966patel@gmail.com
Rights To Share Holders
•   Right to obtain Copies of MOA & AOA
•   Right to have certificate of shares held by him within 3 years of allotment
•   Right to transfer his share or interests in the company(AOA)
•   Right to appeal company law board if refuses
•   He has the preferential right to purchase shares on pro rata basis
•   Right to apply to the company law board
•   For the rectification of register of members
•   He has the right to apply to the court to have variation or abrogation to his right
    set aside by the court
•   Right to inspect the registers, index of members, annual returns, etc.
•   He is entitled to receive notice of general meeting and to attend and vote in the
    meeting either in person or by proxy
•   He is entitled to receive a copy of the statutory report
•   He is entitled to receive a copy of the annual report of directors, annual accounts
    and auditors reports.



                                by Dr.Rajesh Patel,Director, nrv
05/10/12 03:40 AM                                                                    67
                               mba,email:1966patel@gmail.com
Rights To Share Holders
•   He has the right to participate in the appointment of auditors and elections of
    directors at the AGM.
•   He has the right to AGM by writing letter to company law board
•   He can make application to company law board to convene an extraordinary
    general meeting of the company where it is impractical to call such meeting
•   He is entitled to have copies of minutes of general meetings.
•   He has the right to participate in declaration of dividend and receive on duly date.
•   He has the right to demand poll
•   He has the right to apply to the company law board for investigation of affairs of
    the company.
•   He has the right to remove a director even before the expiry of the terms of
    director office
•   He has the right to make an application to company law board for any oppression
    and mismanagement.
•   He can make a petition to the high court for winding up of factory.
•   He has the right towards any surplus assets of the company


                                by Dr.Rajesh Patel,Director, nrv
05/10/12 03:40 AM                                                                     68
                               mba,email:1966patel@gmail.com
Investors Problems And
                            Protection
• Investor protection is associated with effective
  corporate governance.
• He invested hard earn money and have expectation
• Capital growth
• Mismatch occurs with expectation and final outcome of
  company
• Reasons of such outcome of company



                        by Dr.Rajesh Patel,Director, nrv
  05/10/12 03:40 AM                                        69
                       mba,email:1966patel@gmail.com
Relationship Between Investor Protection
                  And Cg
• CG lies in designing and putting in place
  mechanisms such as
Disclosures
Monitoring
Oversight
Corrective system
To align the objective of two as closely as possible
  and minimise agency problems

                       by Dr.Rajesh Patel,Director, nrv
  05/10/12 03:40 AM                                       70
                      mba,email:1966patel@gmail.com
CG Through Legal Protection Of Investors

• Impact of investors protection on ownership and
  control of firms
• Impact of investors protection on the
  development of financial markets
• Banks and corporate governance




                       by Dr.Rajesh Patel,Director, nrv
  05/10/12 03:40 AM                                       71
                      mba,email:1966patel@gmail.com
Investor Protection In India
• Scandals of 1990’s
• Ketan parekh scam 2001
• UTI crisis 1998 and 2001
• Computer technology
House holds investors survey of society for capital market research
  and development SCMRD,
• Report unsatisfactory experience with equity markets
• 80% say no confidence on companies management
• 55% shows little or no confidence on the market regulator or SEBI
• Most preferred savings are….
•


                           by Dr.Rajesh Patel,Director, nrv
   05/10/12 03:40 AM                                             72
                          mba,email:1966patel@gmail.com
NK mittal committees on investor
                       protection
• Specific demand for an Act to protect investors.
• Establishment of judicial forum
• Investor education and protection fund in under
  companies Act Should shift to SEBI.
• SEBI should be the only regulator
• SEBI should require all IPO’s to be insured under third
  party
• SEBI Act 1992 should be amended
• The securities contracts Act 1956 should be amended.


                        by Dr.Rajesh Patel,Director, nrv
   05/10/12 03:40 AM                                        73
                       mba,email:1966patel@gmail.com
Problems Of Investors In India
• Against member broker of stock exchange
• Against companies listed for trading on stock
  exchange
• Complaints against financial intermediaries




                           by Dr.Rajesh Patel,Director, nrv
05/10/12 03:40 AM                                             74
                          mba,email:1966patel@gmail.com
Law Enforcement For Investors Protection
                    • Company’s level
                    • Stock broker level
                    • Stock exchanges
                    • Regulatory agencies
                    Investor grievances and guidance division
                      SEBI
                    Department of company affairs
                    Department of economic affairs
                    RBI
                    Consumer courts and court of Law

                            by Dr.Rajesh Patel,Director, nrv
05/10/12 03:40 AM                                               75
                           mba,email:1966patel@gmail.com
Nature of complaints
• Complaints regarding delay in refund
• Complaints regarding delay in transfer of shares
• Complaints regarding refusal of transfer of shares
• Complaints regarding problems of odd lots
• Complaints regarding take over bid
• Complaints regarding insider trading, rigging, and other
  malpractices
• Complaints regarding delay and non payments of interest/ fixed
  deposits of companies
• Complaints regarding delay and non payment of dues or non
  delivery of shares by brokers
• Complaints regarding non supply of debenture trust deed,
  Refusal to inspection
                              by Dr.Rajesh Patel,Director, nrv
    05/10/12 03:40 AM                                              76
                             mba,email:1966patel@gmail.com
Concept of CG and Stakeholder
                     • Stake holders as human being in
                       business                    Government



                                                                   Society
                       Investor

                      Financial
                      Resources

                                                        Employee    Value addition

                                             Goods and services
                      Lender
                                               Fixed assets
                                by Dr.Rajesh Patel,Director, nrv
05/10/12 03:40 AM                        Supplier
                               mba,email:1966patel@gmail.com
                                                                         Customer 77
3 A’s to make life for everyone
                     • Acceptability
                     • Availability
                     • Affordability




                            by Dr.Rajesh Patel,Director, nrv
05/10/12 03:40 AM                                              78
                           mba,email:1966patel@gmail.com
CG Mechanism And Overview
                    4 P’s of corporate governance:
                    People
                    Purpose
                    Process
                    Performance




                           by Dr.Rajesh Patel,Director, nrv
05/10/12 03:40 AM                                             79
                          mba,email:1966patel@gmail.com
CG Mechanism And Overview

                                Wealth
    Wealth                    Management                          Wealth
    creation                                                      distribution


•Gross value added                                  •Dividend to investors
                          •Functional performance
•Economic value added                               •Timely payments to vendors
                          Improvement               •Employee benefits and security
•Earning per share        •Insurance and risks
•Market price per share                             •Fair price for customers
                           management               •Payments of Govt Dues
•Return on investment     •Technology up gradation
                                                    •Investment in corporation social
                          •Optimum utilization of
                                                    responsibility
                          Installed capacity
                          •Research and development
                          •HRM

                               by Dr.Rajesh Patel,Director, nrv
    05/10/12 03:40 AM                                                            80
                              mba,email:1966patel@gmail.com
Bankruptcy in INDIA
Bankruptcy is legally declared in ability or impairment
  ability of an individual or organization to pay their
  creditors or is a legal proceeding in which a person who
  cannot pay his or her bills can get a fresh financial start.
Purpose of bankruptcy :
• To give an honest start to debtors life, by reliving him
  from most of the debts
• To repay creditors in an orderly manner to the extent
  that the debtor has the mean available for payment



                            by Dr.Rajesh Patel,Director, nrv
   05/10/12 03:40 AM                                           81
                           mba,email:1966patel@gmail.com
Insolvency
• Insolvency is a financial condition experienced by
  a person or business entity when their assets no
  longer exceeds their liabilities, commonly
  referred to as balance sheet insolvency or when
  person or entity can no longer meet its debt
  obligation when they come due, commonly
  referred as to cash flow insolvency



                       by Dr.Rajesh Patel,Director, nrv
  05/10/12 03:40 AM                                       82
                      mba,email:1966patel@gmail.com
Corporate bankruptcy in INDIA
Indian post independence industrial policies
• Import substitution
• Industrial licensing
• Limited private ownership
• Deregulation
• Foreign competition
• Existing legal, political, social system



                        by Dr.Rajesh Patel,Director, nrv
   05/10/12 03:40 AM                                       83
                       mba,email:1966patel@gmail.com
Bankruptcy system
• High courts
• The company law board
• The board for industrial and financial
  reconstruction BIFR
• Debt recovery tribunals DRT’s




                           by Dr.Rajesh Patel,Director, nrv
  05/10/12 03:40 AM                                           84
                          mba,email:1966patel@gmail.com
Companies Act 1956
•   High court
•   Company law Board
•   Department of company affairs
•   Voluntary liquidation by creditors
•   Involuntary liquidation by court




                             by Dr.Rajesh Patel,Director, nrv
    05/10/12 03:40 AM                                           85
                            mba,email:1966patel@gmail.com
Sick Industrial Companies Act,
                                   1985
• BIFR
• The process is applicable only for industrial
  companies that have been registered for more
  then five years and have accumulated losses at
  the end of any year greater then their net worth.
• Board of directors have to fill application within
  60 days with BIFR



                            by Dr.Rajesh Patel,Director, nrv
  05/10/12 03:40 AM                                            86
                           mba,email:1966patel@gmail.com
Time Bound Restructuring Or Liquidation
                Guidelines
Step 1.
Company can refer to the tribunal within 180 days of coming to know of the
    relevant facts giving to rise to cause of such references or within 60 days of
    final adoption of accounts
Step 2.
Tribunal appoints an operating agency to conduct as initial exploration of whether
    the sick industry should be reconstructed or if so how.
Tribunal will appoint a director
Step3.
Director report to tribunal
Step 4.
Operating agency will prepare a restructuring plan
Step 5.
Modification and changes as suggestion and objection receives from relevant
    parties

                                 by Dr.Rajesh Patel,Director, nrv
    05/10/12 03:40 AM                                                           87
                                mba,email:1966patel@gmail.com
Role Of Auditors
• Lack of truthfulness of reports
• Transparency
• Window dressing
• Manipulation of profits and losses
• Unexplainable expenditures
• Poor performance etc
Role of auditor who are expected to certify the veracity of accounts
  maintained by company for the benefits of all stakeholders of
  the company including fair and transparent governance leaves to
  be a desired.


                            by Dr.Rajesh Patel,Director, nrv
   05/10/12 03:40 AM                                               88
                           mba,email:1966patel@gmail.com
Audit
• Objective Of Audit
• Types of audit
Financial statement audits
Compliance audits
Operational audits
An auditor is a representative of the shareholders, forming a
  link between government agencies, stockholders, investors
  and creditors.


                        by Dr.Rajesh Patel,Director, nrv
   05/10/12 03:40 AM                                       89
                       mba,email:1966patel@gmail.com
Types Of Auditor
                    • Internal auditors
                    • Independent auditors
                    • Government auditors




                          by Dr.Rajesh Patel,Director, nrv
05/10/12 03:40 AM                                            90
                         mba,email:1966patel@gmail.com
Duties Of An Auditor
Defined under section 227(1A) of the companies Act 1956

•   Whether loans and advances made by the company on the basis of security
    have been properly secured.

•   Whether transaction of the company which are represented merely by book
    entries are not prejudicial to the interest of the company

•   Where the company is not an investment company within the meaning of
    section 372 or a banking company, whether so much of the assets of the
    company as consist of shares, debentures, and other securities have been sold
    at a price less than that at which they were purchased by the company

•   Whether loans and advances made by the company have been shown as
    deposits.

                                 by Dr.Rajesh Patel,Director, nrv
     05/10/12 03:40 AM                                                          91
                                mba,email:1966patel@gmail.com
Duties Of An Auditor
Defined under section 227(1A) of the companies Act 1956
• Whether personal expenses have been charge to revenue account
In other words auditor is responsible for
• Verifying that the statement of accounts are drawn up on the basis of the
    books of business
• Verifying that the statement of accounts are drawn up on the basis of the
    books exhibit a true and fair state of affairs of the business
• Confirming that the management has not exceeded the financial/
    administrative powers vested in it by the articles of association of the
    company and /or resolution of shareholders




                                 by Dr.Rajesh Patel,Director, nrv
    05/10/12 03:40 AM                                                          92
                                mba,email:1966patel@gmail.com
Responsibilities Of Auditors
As per standard auditing practices (2),
• He is responsible for forming and expressing his opinion on the
   financial statements.
• He determine whether the relevant information is properly
   disclosed in the financial statements by comparing the financial
   statements with the underlying accounting records and others
   source data.
• He has to insure that his work involves exercise of judgment
• He is not expected to perform duties which fall outside the
   scope of his competence.



                            by Dr.Rajesh Patel,Director, nrv
 05/10/12 03:40 AM                                               93
                           mba,email:1966patel@gmail.com
Banks And Corporate Governance
• Merchant banking
• NBFC
• NABARD
• IDBI
• EXIM bank
Protecting the interest of depositors becomes a matter of
  paramount importance to banks
Managerial misadventures in banks
Regulating banks more tightly


                              by Dr.Rajesh Patel,Director, nrv
   05/10/12 03:40 AM                                             94
                             mba,email:1966patel@gmail.com
CG in Banks
• Banking become more complex and diversified
• Even regulated set up is there, countries had
  faced a lot mis governance over a period of time
• Protecting the interest of depositors
• Large number of depositors in India




                       by Dr.Rajesh Patel,Director, nrv
  05/10/12 03:40 AM                                       95
                      mba,email:1966patel@gmail.com
Sound Corporate Governance Practices
•  Establishing strategic objectives and a set of corporate values that are communicated
   throughout the banking organization
• Setting and enforcing clear lines of responsibility and accountability Through out the
   organization
• Ensuring that board members are qualified for their positions, have a clear
   understanding of their role in corporate governance and are not subject to undue
   influence from management or outside concerns
• Ensuring that there is a appropriate oversight by senior management
• Effectively utilising the work conducted by internal and external auditors, in recognition
   of the important control function they provide
• Ensuring that compensation approaches are consistent with the banks ethical values,
   objectives, strategy and control environment
• Conducting corporate governance in a transparent manner
IASC- international accounting standards committee




                                     by Dr.Rajesh Patel,Director, nrv
     05/10/12 03:40 AM                                                                    96
                                    mba,email:1966patel@gmail.com
Ganguly Committee Recommendations
Working group of directors of banks financial institutions, known as the ganguly
  committee
• Board should be more contemporarily professional by inducting technical and
  specially qualified personnel
• Directors should fulfill certain “fit and proper” norms
• Certain criteria adopted for public sector banks such as the age of director
  being between 35 and 65, that he/she should not be a member of parliament,
  state legislature etc and may adopted for private bank also
• Selection of directors could be by a nomination committee of the board. RBI
  also might compile a list of eligible candidate
• The banks may enter into a “deed of covenant” with every non executive
  director, delineating his /her responsibilities and making him/her abide by
  them
• Need based training should be imparted to the directors to equip them
  govern the banks properly


                                by Dr.Rajesh Patel,Director, nrv
    05/10/12 03:40 AM                                                         97
                               mba,email:1966patel@gmail.com
Ganguly Committee Recommendations

Ganguly committee has suggested the formation of
  committees of the board
Nomination committee
Audit committee
Shareholder redressal committee
Supervisory committee
Risk management committee

                       by Dr.Rajesh Patel,Director, nrv
  05/10/12 03:40 AM                                       98
                      mba,email:1966patel@gmail.com

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corporate governance theories and practices

  • 1. by Dr.Rajesh Patel,Director, nrv 05/10/12 03:38 AM 1 mba,email:1966patel@gmail.com
  • 2. Corporate misgovernance • In new millenium several companies in USA and else where faced collapse. • Existing frame work seems inadequate with the gigantic business conglomérâtes. by Dr.Rajesh Patel,Director, nrv 05/10/12 03:39 AM 2 mba,email:1966patel@gmail.com
  • 3. Corporate misgovernance in INDIA • Increasing corruption in the government and its various services had kept the management of country’s industrial and business organizations above accountability for their misdeeds, encouraging them to indulged in more unethical practices. by Dr.Rajesh Patel,Director, nrv 05/10/12 03:39 AM 3 mba,email:1966patel@gmail.com
  • 4. Corporate misgovernance in INDIA • First realize during BIG BULL, harshad mehta case. • Involving lagre no’s of banks and resulting in the stock market nosediving for the first time. • Preferential allotment scam where investors loose Rs 5000 Crore. • Disappearance of companies during 1993-1994, when stock market shot up to 120 %, companies raised Rs25000 crore vanished and did not step back to their projects. • Plantation companies scam Rs 50,000 crore • Non banking finance companies scam. etc by Dr.Rajesh Patel,Director, nrv 05/10/12 03:39 AM 4 mba,email:1966patel@gmail.com
  • 5. Corporate misgovernance in USA • Worldcom improperly booked 3.8b in expenses, thus inflating profits. • Bernie ebbers borrows $408 million from phone company to cover personal debts. • Enron created outside partnerships that helped hide poor financial condition. Executive earned millions by selling company stock. by Dr.Rajesh Patel,Director, nrv 05/10/12 03:39 AM 5 mba,email:1966patel@gmail.com
  • 6. Reasons for misgovernance • A closed economy. • Sheltered market. • Limited need and access to global business. • Lack of competitive spirit. • Inefficient regulatory authority framework. by Dr.Rajesh Patel,Director, nrv 05/10/12 03:39 AM 6 mba,email:1966patel@gmail.com
  • 7. Corporate Governance • Problems that results from the separation of leadership. • Focus upon: internal structure, rules of the board of directors, audit committees, discloser of information rules to shareholders and creditors, control of management. by Dr.Rajesh Patel,Director, nrv 05/10/12 03:39 AM 7 mba,email:1966patel@gmail.com
  • 8. Corporate Governance • Definition by corporate and academic point. • Academic point. Shareholders Board Management Employees by Dr.Rajesh Patel,Director, nrv 05/10/12 03:39 AM 8 mba,email:1966patel@gmail.com
  • 9. Corporate Governance • Corporate point of view • Corporate governance deals with ways in which suppliers of finance to corporation assure themselves of getting a return on their investment. How do the suppliers of finance get management to return some of the profits to them? • How do they make sure that managers do not steal the capital they supply or invest it in bad projects? • How do suppliers of finance control managers? by Dr.Rajesh Patel,Director, nrv 05/10/12 03:39 AM 9 mba,email:1966patel@gmail.com
  • 10. Corporate Governance MODEL • Mc kinsey model. • The Market model. • Efficient, well developed equity markets and dispersed ownership. • Developed nations. • US, UK, CANADA and AUSTRALIA. by Dr.Rajesh Patel,Director, nrv 05/10/12 03:39 AM 10 mba,email:1966patel@gmail.com
  • 11. SHAREHOLDERS INVIRONMENT INDEPENDENCE AND PERFORMANCE Non-executive Dispersed Majority CORPORATE CONTEXT INSTITUTIONAL CONTEXT ownership boards Sophisticated Aligned Institutional incentives ownership Active High Equity discloser market Active Takeover Shareholder market equity by Dr.Rajesh Patel,Director, nrv 05/10/12 03:39 AM TRANSPARENCY AND ACCOUNTABILITY CAPITAL MARKET LIQUIDITYmba,email:1966patel@gmail.com 11
  • 12. Corporate Governance MODEL • Second version of Mc Kinsey model. • The control model • Underdeveloped equity markets, concentrated (family) ownership, less share holder transparency and inadequate protection of minority and foreign shareholders • ASIA, LATIN AMERICA, EAST EROPEAN NATIONS by Dr.Rajesh Patel,Director, nrv 05/10/12 03:39 AM 12 mba,email:1966patel@gmail.com
  • 13. SHAREHOLDERS INVIRONMENT INDEPENDENCE AND PERFORMANCE Concentrated Insider boards CORPORATE CONTEXT INSTITUTIONAL CONTEXT ownership Reliance on Incentive family, Aligned with bank, Core public shareholders finance Underdeveloped Limited New issue Discloser market Limited takeover Inadequate market minority protection by Dr.Rajesh Patel,Director, nrv 05/10/12 03:39 AM TRANSPARENCY AND ACCOUNTABILITY CAPITAL MARKET LIQUIDITYmba,email:1966patel@gmail.com 13
  • 14. Corporate Governance • Sir adrian cadbury, chairman of cadbury committee. • Experts at the organisation of economic co- operation and development OECD. • All these definitions which are shareholder centric captures some of the most important concerns of government for society in general. by Dr.Rajesh Patel,Director, nrv 05/10/12 03:39 AM 14 mba,email:1966patel@gmail.com
  • 15. Corporate Governance • Management accountability. • Providing adequate investment to management. • Disciplining and replacement of bad management. • Enhancing corporate performance. • Transparency. • Shareholder activism. • Investor protection. • Improving access to capital markets. • Promoting long terms investments. • Encouraging innovations. by Dr.Rajesh Patel,Director, nrv 05/10/12 03:39 AM 15 mba,email:1966patel@gmail.com
  • 16. Governance Is More Than Just Board Processes And Procedures • It involves full set of relationship between company’s management, its board, its shareholders and its other stakeholders, such as its employees and the community in which it is located. • Poor governance ripples Russia and Asian markets. • Cadbury code and CII code. • World bank, OECD, APEC-Asia pacific economic co- operation. by Dr.Rajesh Patel,Director, nrv 05/10/12 03:39 AM 16 mba,email:1966patel@gmail.com
  • 17. OECD emphasis • Rights of shareholders. • Equitable treatment of shareholders. • Role of stakeholders in corporate governance. • Discloser and transparency. • Responsibility of board. by Dr.Rajesh Patel,Director, nrv 05/10/12 03:39 AM 17 mba,email:1966patel@gmail.com
  • 18. HOME WORK -1 RESPONSIBILITY: KARANBIR by Dr.Rajesh Patel,Director, nrv 05/10/12 03:39 AM 18 mba,email:1966patel@gmail.com
  • 19. CG In Banking Sector • Bank failure in west. • Weakness in banking sector leads to financial instability. • Lyon G-7 summit in june 1996. • IMF and world bank. • Basel committee on banking supervision. by Dr.Rajesh Patel,Director, nrv 05/10/12 03:39 AM 19 mba,email:1966patel@gmail.com
  • 20. Issues in corporate governance 1.Distinguishing the roles of board and management • By or under the direction of board. • Board occupies key position between shareholders (owners) and company’s management ( day 2 day managers) by Dr.Rajesh Patel,Director, nrv 05/10/12 03:39 AM 20 mba,email:1966patel@gmail.com
  • 21. Issues in corporate governance • Select, decide the remuneration and evaluate on a regular basis, when necessary the CEO. • Oversee the conduct of company business. • Review and where necessary, approve the company financial objectives and major corporate plan and objectives. • Render advice and counsel. • Identify and recommend candidates for board of directors. • Comply with laws and regulations. • All other functions required by law to be performed. by Dr.Rajesh Patel,Director, nrv 05/10/12 03:39 AM 21 mba,email:1966patel@gmail.com
  • 22. Issues in corporate governance 2.Composition of the board and related issues No. of directors of diff kinds. BORAD OF DIRECTORS EXECUTIVE DIRECTORS NON EXECUTIVE DIRECTOS AFFILATED DIRECTORS INDEPENDENT DIRECTORS NOMINEE by Dr.Rajesh Patel,Director, nrv 05/10/12 03:39 AM 22 mba,email:1966patel@gmail.com
  • 23. Issues in corporate governance 3. Separation of the roles of the CEO and chairperson 4. Should the board of directors have committees. Appointment of special committees Nomination Remuneration auditing by Dr.Rajesh Patel,Director, nrv 05/10/12 03:39 AM 23 mba,email:1966patel@gmail.com
  • 24. Issues in corporate governance 5. Appointment of the board and director’s re-election. 6. Directors and executive’s remuneration. 7. Discloser and audit. 8. Protection of shareholder rights and their expectation. 9. Dialog with institutional shareholders. 10.Should investor have a say in making a company “socially responsible corporate citizen”?. by Dr.Rajesh Patel,Director, nrv 05/10/12 03:39 AM 24 mba,email:1966patel@gmail.com
  • 25. Benefits Of Good Corporate Governance To A Corporation • Creation and enhancement of a corporation’s competitive advantage • Enabling a corporation perform efficiently by preventing fraud and malpractices. • Providing protection to shareholders interest. • Enhancing the valuation of an enterprise. • Ensuring compliance with laws and regulations. by Dr.Rajesh Patel,Director, nrv 05/10/12 03:39 AM 25 mba,email:1966patel@gmail.com
  • 26. Theory In Corporate Governance AGENCY THEORY • Adam smith who identified an agency problem(managerial negligence and profusion). • Shareholders (owners)- principals-they define objective of the company. • Agents-management who pursue such objectives. • Chief executive desire and shareholders long term investment. • Mismatch objective leads to agency problem. • Cost inflicted by such dissonance is the agency cost. by Dr.Rajesh Patel,Director, nrv 05/10/12 03:39 AM 26 mba,email:1966patel@gmail.com
  • 27. Theory In Corporate Governance AGENCY THEORY Two broad mechanism that reduce agency cost and improve performance are: • Fair and accurate financial disclosures • Efficient and independent board of directors by Dr.Rajesh Patel,Director, nrv 05/10/12 03:39 AM 27 mba,email:1966patel@gmail.com
  • 28. Theory In Corporate Governance Stewardship theory: • Managers are trustworthy and attach significant value to their personal reputation • Managers are steward whose motives are aligned with the objectives of principles. • Steward behavior will not depart from the interests of his/her organization. • Control can be counterproductive, because it undermines the pro-organisational behavior of the steward by lowering his/her motivation. by Dr.Rajesh Patel,Director, nrv 05/10/12 03:39 AM 28 mba,email:1966patel@gmail.com
  • 29. Theory In Corporate Governance Behavioral difference between agency and stewardship theories • Agent and steward • Agency- sociological and psychological • Steward- individualistic, opportunistic and self serving With regard to psychological mechanisms Agency theory states that motivation resolves around lower order and extrinsic needs Steward theory states it resolves around higher order and intrinsic needs by Dr.Rajesh Patel,Director, nrv 05/10/12 03:39 AM 29 mba,email:1966patel@gmail.com
  • 30. Theory In Corporate Governance Stakeholder theory: • Interest of all groups- employees, customers, dealers, government and society. • Ethics of cares • Ethics of fiduciary relationship • Theory of property rights • Criticised mainly because not applicable in practice by corporations by Dr.Rajesh Patel,Director, nrv 05/10/12 03:39 AM 30 mba,email:1966patel@gmail.com
  • 31. Theory In Corporate Governance Sociological theory • Focus on board composition • Implication of power and wealth distribution • Financial reporting • Problems of interlocking dictatorship and concentration in privilege class to equity and social progress • Socio-economic objective of corporations by Dr.Rajesh Patel,Director, nrv 05/10/12 03:39 AM 31 mba,email:1966patel@gmail.com
  • 32. Corporate Governance The role of the management is to run the enterprise while the role of the board is to see that it is being run well and in the right direction. Corporate governance system vary around the world. Scholars suggest 3 broad versions. by Dr.Rajesh Patel,Director, nrv 05/10/12 03:39 AM 32 mba,email:1966patel@gmail.com
  • 33. Anglo American Model Unitary board model/ Anglo-Saxon Corporate governance in America, Britain, Canada, Australia Board of directors stakeholders Shareholder supervisors elect Appoints and supervise Officers(managers) Regulation/legal Monitor system manage & Lien on Creditors Stake in regulates by Dr.Rajesh Patel,Director, nrv 05/10/12 03:39 AM 33 company mba,email:1966patel@gmail.com
  • 34. Anglo American Model • Ownership is equally divided between individual and institutional shareholders. • Directors are rarely independent of management. • Run by professional managers who have negligible ownership stake. • Most institution investors are reluctant activists. • Discloser norms. by Dr.Rajesh Patel,Director, nrv 05/10/12 03:39 AM 34 mba,email:1966patel@gmail.com
  • 35. German Model • Two tier boar model • Upper boards supervises the executive board on behalf of stakeholders and it is typically social oriented. • Shareholders do not dictate the governance mechanism. • Shareholder elects 50% of members of supervisory board and rest is by labor unions, ensuring they enjoy share in governance. • Supervisory board appoints and monitors the management board by Dr.Rajesh Patel,Director, nrv 05/10/12 03:39 AM 35 mba,email:1966patel@gmail.com
  • 36. German Model Appoint 50% Supervisory board Appoint 50% Appoint 50% Appoint & supervise Management board Employees and (including shareholder Labor unions labor relation officer) manage Own Company by Dr.Rajesh Patel,Director, nrv 05/10/12 03:39 AM 36 mba,email:1966patel@gmail.com
  • 37. Japanese Model • Business network model • Boards tends to be large • Predominantly executive and often ritualistic. • President who consult both supervisory board and the executive management. • Importance of lending bank. • Shareholders and lending bank together appoints the board of directors and president. by Dr.Rajesh Patel,Director, nrv 05/10/12 03:39 AM 37 mba,email:1966patel@gmail.com
  • 38. Japanese Model Appoint Provides managers, Supervisory board monitor, act in emergencies Ratifies president Provides decisions managers President Consult Main bank Shareholders Executive management Primarily board of directors Manages Provides loans Own Company by Dr.Rajesh Patel,Director, nrv 05/10/12 03:39 AM 38 mba,email:1966patel@gmail.com Own
  • 39. Indian Model • Governed by the company’s Act of 1965 • Which follow UK model • Private companies is mostly held or dominated by a founder, his family and associates. • India has adopted the key tenets of the Anglo American external and internal control mechanism after economic liberlisation. by Dr.Rajesh Patel,Director, nrv 05/10/12 03:39 AM 39 mba,email:1966patel@gmail.com
  • 40. Indian Model HOMEWORK: Draw Indian model on your notebooks in next class. by Dr.Rajesh Patel,Director, nrv 05/10/12 03:39 AM 40 mba,email:1966patel@gmail.com
  • 41. Obligation To Society • National interest • Competition • Political non-alignment • Trusteeship • Legal compliance • Accountability • Rule of law • Effectiveness and efficiency • Honest and ethical • Timely responsiveness • Corporate citizen • Corporation should uphold the fair • Ethical behavior name of the country • Social concerns • CSR • Environment- friendliness • Healthy and safe working environment by Dr.Rajesh Patel,Director, nrv 05/10/12 03:39 AM 41 mba,email:1966patel@gmail.com
  • 42. Obligation To Investors • Towards shareholders • Measures promoting transparency and informed shareholder participation • Transparency • Financial reporting and records by Dr.Rajesh Patel,Director, nrv 05/10/12 03:39 AM 42 mba,email:1966patel@gmail.com
  • 43. Obligation To Employees • Fair employment practices • Equal opportunities employer • Encouraging whistle blowing • Humane treatment • Participation • Empowerment • Equity and inclusiveness • Participative and collaborative environment by Dr.Rajesh Patel,Director, nrv 05/10/12 03:39 AM 43 mba,email:1966patel@gmail.com
  • 44. Obligation To Customers • Quality of products and services • Products at affordable prices • Unwavering commitment to customer satisfaction by Dr.Rajesh Patel,Director, nrv 05/10/12 03:39 AM 44 mba,email:1966patel@gmail.com
  • 45. Managerial Obligation • Protecting company’s assets • Behavior towards government agencies • Control • Consensus oriented • Gifts and donations • Role and responsibility of corporate board and directors • Direction and management must be distinguished • Managing and whole time directions by Dr.Rajesh Patel,Director, nrv 05/10/12 03:39 AM 45 mba,email:1966patel@gmail.com
  • 46. Cadbury Committee On Corporate Governance • Objective “to help raise the standards of corporate governance and level of confidence in financial reporting and auditing by setting out clearly what it sees as the perspective responsibilities of those involved and what it believes is expected of them”. by Dr.Rajesh Patel,Director, nrv 05/10/12 03:39 AM 46 mba,email:1966patel@gmail.com
  • 47. Cadbury Committee On Corporate Governance • Code of best practices • Listed on London stock exchange • 19 recommendations • Relating to board of directors, non executive directors, executive directors, reporting and controlling by Dr.Rajesh Patel,Director, nrv 05/10/12 03:39 AM 47 mba,email:1966patel@gmail.com
  • 48. Cadbury Committee On Corporate Governance Relating to board of directors • Board should meet regularly, retain full control and monitor • Division of responsibility, balance of power. • Non executive directors should have skill and knowledge and in right numbers • Formal schedule of matters • Take independent professional advice at the company’s expense • All directors should have access to the advice and services of the company secretary, removal also. by Dr.Rajesh Patel,Director, nrv 05/10/12 03:39 AM 48 mba,email:1966patel@gmail.com
  • 49. Cadbury Committee On Corporate Governance Relating to non executive directors • Non executive members should bring an independent judgment to bear on issues of strategy, performance, resources, key appointments and standard of conduct. • Independent of the management and any other business and relationship, fee reflect the time they commit to the work they are assigned. • Appointment and reappointment. • Selection through formal procedure. by Dr.Rajesh Patel,Director, nrv 05/10/12 03:39 AM 49 mba,email:1966patel@gmail.com
  • 50. Cadbury Committee On Corporate Governance Relating to executive directors • Directors service should not exceeds 3 years without shareholders approval. • Clear and full discloser of their salary and other incomes. • Pay should be according to remuneration committee inclusive of non executive directors. by Dr.Rajesh Patel,Director, nrv 05/10/12 03:39 AM 50 mba,email:1966patel@gmail.com
  • 51. Cadbury Committee On Corporate Governance Reporting and controls • Boards duty to present a balanced and understandable assessment of the company. • Board should insure that an objective and professional relationship is maintained with the auditors. • Board should established an audit committee with at least 3 non executive directors. • Directors should explain their responsibilities. • Should report on the effectiveness of the company’s system to internal control • Should report that the business is going concern by Dr.Rajesh Patel,Director, nrv 05/10/12 03:39 AM 51 mba,email:1966patel@gmail.com
  • 52. Paul Ruthman Committee • Controversial point of cadbury committee. • Practicality • The effectiveness of company’s system of internal control • Extensions of directors responsibility by Dr.Rajesh Patel,Director, nrv 05/10/12 03:39 AM 52 mba,email:1966patel@gmail.com
  • 53. THE GRRENBURY COMMITTEE 1995 • Established to identify good practices of confederation of British industry CBI • Directors remuneration and prepare code of such practices used in public limited company • Accountability and level of directors pay • Proper allocations of responsibility, directors remuneration, proper reporting to shareholders, greater transparency 4 sections • Remuneration committee • Disclosures • Remuneration policy • Service contracts and compensation by Dr.Rajesh Patel,Director, nrv 05/10/12 03:39 AM 53 mba,email:1966patel@gmail.com
  • 54. The Hampel Committee 1995 • To promote high standards of CG both to protect investors and Enhance the standing of companies in LSE • Developed further cadbury committee report • Auditors should report privately to directors • Directors maintain and review all controls • Internal audit function importance • Introduced combined code of cadbury and greenbury by Dr.Rajesh Patel,Director, nrv 05/10/12 03:39 AM 54 mba,email:1966patel@gmail.com
  • 55. The Turnbull Committee 1999 • Established by the institute of chartered accountants in England and Wales ICAEW • Stress put on combined code on internal control • Provide guidance to implement combined codes • Annual internal audit importance • Board of directors confirm the existence of procedures for evaluating and managing key risk function by Dr.Rajesh Patel,Director, nrv 05/10/12 03:39 AM 55 mba,email:1966patel@gmail.com
  • 56. World Bank on CG • Earliest international organization to study and suggest the guidelines for CG • Their report on CG recognize the complexity of the concept Focuses on • Transparency • Accountability • Fairness • Responsibility That are universal in application by Dr.Rajesh Patel,Director, nrv 05/10/12 03:39 AM 56 mba,email:1966patel@gmail.com
  • 57. OECD Principles • One of the earliest non government organization to work on and spell out principle and practices of CG and their goal to attain long term shareholder Value. Major elements • The right of shareholders • Equitable treatment to shareholders • The role of stakeholder in CG • Discloser and transparency • The responsibility of board by Dr.Rajesh Patel,Director, nrv 05/10/12 03:39 AM 57 mba,email:1966patel@gmail.com
  • 58. Mc Kinsey Survey On CG • International management consultant organization. • Conducted a survey with a sample size of 188 companies from 6 countries. • INDIA , MALAYSIA, MEXICO, SOUTH KOREA , TAIWAN AND TURKEY • To determine the correlation between good CG and valuation of the company by Dr.Rajesh Patel,Director, nrv 05/10/12 03:39 AM 58 mba,email:1966patel@gmail.com
  • 59. Mc Kinsey Survey On CG • Increase financial performance • Transparency of dealing • Increasing investors confidence Parameters for CG • Accountability: transparent ownership, board size, board accountability • Discloser and transparency • Shareholders equity: one share on vote by Dr.Rajesh Patel,Director, nrv 05/10/12 03:39 AM 59 mba,email:1966patel@gmail.com
  • 60. Sarbanes Oxley act 2002 • Scandals • The Act calls for protection to those who have the courage to bring frauds to the attention of those who have to handle frauds. • It ensures that such things are not left to the individuals who may or may not choose to reveal them. • The SOX Act is a sincere attempt to address all the issues associated with corporate failure to achieve quality governance and to restore investors confidence by Dr.Rajesh Patel,Director, nrv 05/10/12 03:40 AM 60 mba,email:1966patel@gmail.com
  • 61. Sarbanes Oxley act 2002 Provisions : • Establishment of public company accounting oversight board PCAOB • Audit committee • Conflict of interest- 1 year after preceding • Audit partner rotation- once after 5 years • Improve influence on conduct of audits • Prohibition of non audit services • CEOs and CFOs required to affirm financials • Loans to directors • Attorneys • Securities analysis • penalities by Dr.Rajesh Patel,Director, nrv 05/10/12 03:40 AM 61 mba,email:1966patel@gmail.com
  • 62. Indian Committees And Guidelines • Developments all over the world • Influence from UK • After Cadbury Committee report it was studied by CII, Associated chambers of commerce, SEBI by Dr.Rajesh Patel,Director, nrv 05/10/12 03:40 AM 62 mba,email:1966patel@gmail.com
  • 63. Working Group On the Companies Act, 1996 • Review the Act in light of modern requirements • Aspiration of investors • Globalization of economy • Liberalisation • Bill was introduced in rajya sabha on 14th august 1997 by Dr.Rajesh Patel,Director, nrv 05/10/12 03:40 AM 63 mba,email:1966patel@gmail.com
  • 64. Working Group On the Companies Act, 1996 Financial disclosers recommended by the group • Directors remuneration and commission should be a part of directors report • Cost incurred in using the services of other group companies • Listed co. must give report A review on operation yearly Share in total turnover Market condition Future aspects • Use of each funds generated from shares and debentures • Debt exposure disclosure • Foreign exchange outflow • Financial statements pertaining fixed and current assets and long term liabilities • Leased assets • Any inappropriate treatment in balance sheet in directors report by Dr.Rajesh Patel,Director, nrv 05/10/12 03:40 AM 64 mba,email:1966patel@gmail.com
  • 65. Working Group On the Companies Act, 1996 Non Financial disclosers recommended by the group • Comprehensive report on directors relatives-either employee or directors • Register maintenance for directors interest • AGM members inspection at any time • Loans to directors details • Secretarial compliance certificate in concern to returns file • According to companies Act by Dr.Rajesh Patel,Director, nrv 05/10/12 03:40 AM 65 mba,email:1966patel@gmail.com
  • 66. Narayana Murthy Committee Report ,2003 • Disclosure of contingent liabilities • Certifications by CEOs and CFOs • Definition of independent directors • Independence of audit committees homework by Dr.Rajesh Patel,Director, nrv 05/10/12 03:40 AM 66 mba,email:1966patel@gmail.com
  • 67. Rights To Share Holders • Right to obtain Copies of MOA & AOA • Right to have certificate of shares held by him within 3 years of allotment • Right to transfer his share or interests in the company(AOA) • Right to appeal company law board if refuses • He has the preferential right to purchase shares on pro rata basis • Right to apply to the company law board • For the rectification of register of members • He has the right to apply to the court to have variation or abrogation to his right set aside by the court • Right to inspect the registers, index of members, annual returns, etc. • He is entitled to receive notice of general meeting and to attend and vote in the meeting either in person or by proxy • He is entitled to receive a copy of the statutory report • He is entitled to receive a copy of the annual report of directors, annual accounts and auditors reports. by Dr.Rajesh Patel,Director, nrv 05/10/12 03:40 AM 67 mba,email:1966patel@gmail.com
  • 68. Rights To Share Holders • He has the right to participate in the appointment of auditors and elections of directors at the AGM. • He has the right to AGM by writing letter to company law board • He can make application to company law board to convene an extraordinary general meeting of the company where it is impractical to call such meeting • He is entitled to have copies of minutes of general meetings. • He has the right to participate in declaration of dividend and receive on duly date. • He has the right to demand poll • He has the right to apply to the company law board for investigation of affairs of the company. • He has the right to remove a director even before the expiry of the terms of director office • He has the right to make an application to company law board for any oppression and mismanagement. • He can make a petition to the high court for winding up of factory. • He has the right towards any surplus assets of the company by Dr.Rajesh Patel,Director, nrv 05/10/12 03:40 AM 68 mba,email:1966patel@gmail.com
  • 69. Investors Problems And Protection • Investor protection is associated with effective corporate governance. • He invested hard earn money and have expectation • Capital growth • Mismatch occurs with expectation and final outcome of company • Reasons of such outcome of company by Dr.Rajesh Patel,Director, nrv 05/10/12 03:40 AM 69 mba,email:1966patel@gmail.com
  • 70. Relationship Between Investor Protection And Cg • CG lies in designing and putting in place mechanisms such as Disclosures Monitoring Oversight Corrective system To align the objective of two as closely as possible and minimise agency problems by Dr.Rajesh Patel,Director, nrv 05/10/12 03:40 AM 70 mba,email:1966patel@gmail.com
  • 71. CG Through Legal Protection Of Investors • Impact of investors protection on ownership and control of firms • Impact of investors protection on the development of financial markets • Banks and corporate governance by Dr.Rajesh Patel,Director, nrv 05/10/12 03:40 AM 71 mba,email:1966patel@gmail.com
  • 72. Investor Protection In India • Scandals of 1990’s • Ketan parekh scam 2001 • UTI crisis 1998 and 2001 • Computer technology House holds investors survey of society for capital market research and development SCMRD, • Report unsatisfactory experience with equity markets • 80% say no confidence on companies management • 55% shows little or no confidence on the market regulator or SEBI • Most preferred savings are…. • by Dr.Rajesh Patel,Director, nrv 05/10/12 03:40 AM 72 mba,email:1966patel@gmail.com
  • 73. NK mittal committees on investor protection • Specific demand for an Act to protect investors. • Establishment of judicial forum • Investor education and protection fund in under companies Act Should shift to SEBI. • SEBI should be the only regulator • SEBI should require all IPO’s to be insured under third party • SEBI Act 1992 should be amended • The securities contracts Act 1956 should be amended. by Dr.Rajesh Patel,Director, nrv 05/10/12 03:40 AM 73 mba,email:1966patel@gmail.com
  • 74. Problems Of Investors In India • Against member broker of stock exchange • Against companies listed for trading on stock exchange • Complaints against financial intermediaries by Dr.Rajesh Patel,Director, nrv 05/10/12 03:40 AM 74 mba,email:1966patel@gmail.com
  • 75. Law Enforcement For Investors Protection • Company’s level • Stock broker level • Stock exchanges • Regulatory agencies Investor grievances and guidance division SEBI Department of company affairs Department of economic affairs RBI Consumer courts and court of Law by Dr.Rajesh Patel,Director, nrv 05/10/12 03:40 AM 75 mba,email:1966patel@gmail.com
  • 76. Nature of complaints • Complaints regarding delay in refund • Complaints regarding delay in transfer of shares • Complaints regarding refusal of transfer of shares • Complaints regarding problems of odd lots • Complaints regarding take over bid • Complaints regarding insider trading, rigging, and other malpractices • Complaints regarding delay and non payments of interest/ fixed deposits of companies • Complaints regarding delay and non payment of dues or non delivery of shares by brokers • Complaints regarding non supply of debenture trust deed, Refusal to inspection by Dr.Rajesh Patel,Director, nrv 05/10/12 03:40 AM 76 mba,email:1966patel@gmail.com
  • 77. Concept of CG and Stakeholder • Stake holders as human being in business Government Society Investor Financial Resources Employee Value addition Goods and services Lender Fixed assets by Dr.Rajesh Patel,Director, nrv 05/10/12 03:40 AM Supplier mba,email:1966patel@gmail.com Customer 77
  • 78. 3 A’s to make life for everyone • Acceptability • Availability • Affordability by Dr.Rajesh Patel,Director, nrv 05/10/12 03:40 AM 78 mba,email:1966patel@gmail.com
  • 79. CG Mechanism And Overview 4 P’s of corporate governance: People Purpose Process Performance by Dr.Rajesh Patel,Director, nrv 05/10/12 03:40 AM 79 mba,email:1966patel@gmail.com
  • 80. CG Mechanism And Overview Wealth Wealth Management Wealth creation distribution •Gross value added •Dividend to investors •Functional performance •Economic value added •Timely payments to vendors Improvement •Employee benefits and security •Earning per share •Insurance and risks •Market price per share •Fair price for customers management •Payments of Govt Dues •Return on investment •Technology up gradation •Investment in corporation social •Optimum utilization of responsibility Installed capacity •Research and development •HRM by Dr.Rajesh Patel,Director, nrv 05/10/12 03:40 AM 80 mba,email:1966patel@gmail.com
  • 81. Bankruptcy in INDIA Bankruptcy is legally declared in ability or impairment ability of an individual or organization to pay their creditors or is a legal proceeding in which a person who cannot pay his or her bills can get a fresh financial start. Purpose of bankruptcy : • To give an honest start to debtors life, by reliving him from most of the debts • To repay creditors in an orderly manner to the extent that the debtor has the mean available for payment by Dr.Rajesh Patel,Director, nrv 05/10/12 03:40 AM 81 mba,email:1966patel@gmail.com
  • 82. Insolvency • Insolvency is a financial condition experienced by a person or business entity when their assets no longer exceeds their liabilities, commonly referred to as balance sheet insolvency or when person or entity can no longer meet its debt obligation when they come due, commonly referred as to cash flow insolvency by Dr.Rajesh Patel,Director, nrv 05/10/12 03:40 AM 82 mba,email:1966patel@gmail.com
  • 83. Corporate bankruptcy in INDIA Indian post independence industrial policies • Import substitution • Industrial licensing • Limited private ownership • Deregulation • Foreign competition • Existing legal, political, social system by Dr.Rajesh Patel,Director, nrv 05/10/12 03:40 AM 83 mba,email:1966patel@gmail.com
  • 84. Bankruptcy system • High courts • The company law board • The board for industrial and financial reconstruction BIFR • Debt recovery tribunals DRT’s by Dr.Rajesh Patel,Director, nrv 05/10/12 03:40 AM 84 mba,email:1966patel@gmail.com
  • 85. Companies Act 1956 • High court • Company law Board • Department of company affairs • Voluntary liquidation by creditors • Involuntary liquidation by court by Dr.Rajesh Patel,Director, nrv 05/10/12 03:40 AM 85 mba,email:1966patel@gmail.com
  • 86. Sick Industrial Companies Act, 1985 • BIFR • The process is applicable only for industrial companies that have been registered for more then five years and have accumulated losses at the end of any year greater then their net worth. • Board of directors have to fill application within 60 days with BIFR by Dr.Rajesh Patel,Director, nrv 05/10/12 03:40 AM 86 mba,email:1966patel@gmail.com
  • 87. Time Bound Restructuring Or Liquidation Guidelines Step 1. Company can refer to the tribunal within 180 days of coming to know of the relevant facts giving to rise to cause of such references or within 60 days of final adoption of accounts Step 2. Tribunal appoints an operating agency to conduct as initial exploration of whether the sick industry should be reconstructed or if so how. Tribunal will appoint a director Step3. Director report to tribunal Step 4. Operating agency will prepare a restructuring plan Step 5. Modification and changes as suggestion and objection receives from relevant parties by Dr.Rajesh Patel,Director, nrv 05/10/12 03:40 AM 87 mba,email:1966patel@gmail.com
  • 88. Role Of Auditors • Lack of truthfulness of reports • Transparency • Window dressing • Manipulation of profits and losses • Unexplainable expenditures • Poor performance etc Role of auditor who are expected to certify the veracity of accounts maintained by company for the benefits of all stakeholders of the company including fair and transparent governance leaves to be a desired. by Dr.Rajesh Patel,Director, nrv 05/10/12 03:40 AM 88 mba,email:1966patel@gmail.com
  • 89. Audit • Objective Of Audit • Types of audit Financial statement audits Compliance audits Operational audits An auditor is a representative of the shareholders, forming a link between government agencies, stockholders, investors and creditors. by Dr.Rajesh Patel,Director, nrv 05/10/12 03:40 AM 89 mba,email:1966patel@gmail.com
  • 90. Types Of Auditor • Internal auditors • Independent auditors • Government auditors by Dr.Rajesh Patel,Director, nrv 05/10/12 03:40 AM 90 mba,email:1966patel@gmail.com
  • 91. Duties Of An Auditor Defined under section 227(1A) of the companies Act 1956 • Whether loans and advances made by the company on the basis of security have been properly secured. • Whether transaction of the company which are represented merely by book entries are not prejudicial to the interest of the company • Where the company is not an investment company within the meaning of section 372 or a banking company, whether so much of the assets of the company as consist of shares, debentures, and other securities have been sold at a price less than that at which they were purchased by the company • Whether loans and advances made by the company have been shown as deposits. by Dr.Rajesh Patel,Director, nrv 05/10/12 03:40 AM 91 mba,email:1966patel@gmail.com
  • 92. Duties Of An Auditor Defined under section 227(1A) of the companies Act 1956 • Whether personal expenses have been charge to revenue account In other words auditor is responsible for • Verifying that the statement of accounts are drawn up on the basis of the books of business • Verifying that the statement of accounts are drawn up on the basis of the books exhibit a true and fair state of affairs of the business • Confirming that the management has not exceeded the financial/ administrative powers vested in it by the articles of association of the company and /or resolution of shareholders by Dr.Rajesh Patel,Director, nrv 05/10/12 03:40 AM 92 mba,email:1966patel@gmail.com
  • 93. Responsibilities Of Auditors As per standard auditing practices (2), • He is responsible for forming and expressing his opinion on the financial statements. • He determine whether the relevant information is properly disclosed in the financial statements by comparing the financial statements with the underlying accounting records and others source data. • He has to insure that his work involves exercise of judgment • He is not expected to perform duties which fall outside the scope of his competence. by Dr.Rajesh Patel,Director, nrv 05/10/12 03:40 AM 93 mba,email:1966patel@gmail.com
  • 94. Banks And Corporate Governance • Merchant banking • NBFC • NABARD • IDBI • EXIM bank Protecting the interest of depositors becomes a matter of paramount importance to banks Managerial misadventures in banks Regulating banks more tightly by Dr.Rajesh Patel,Director, nrv 05/10/12 03:40 AM 94 mba,email:1966patel@gmail.com
  • 95. CG in Banks • Banking become more complex and diversified • Even regulated set up is there, countries had faced a lot mis governance over a period of time • Protecting the interest of depositors • Large number of depositors in India by Dr.Rajesh Patel,Director, nrv 05/10/12 03:40 AM 95 mba,email:1966patel@gmail.com
  • 96. Sound Corporate Governance Practices • Establishing strategic objectives and a set of corporate values that are communicated throughout the banking organization • Setting and enforcing clear lines of responsibility and accountability Through out the organization • Ensuring that board members are qualified for their positions, have a clear understanding of their role in corporate governance and are not subject to undue influence from management or outside concerns • Ensuring that there is a appropriate oversight by senior management • Effectively utilising the work conducted by internal and external auditors, in recognition of the important control function they provide • Ensuring that compensation approaches are consistent with the banks ethical values, objectives, strategy and control environment • Conducting corporate governance in a transparent manner IASC- international accounting standards committee by Dr.Rajesh Patel,Director, nrv 05/10/12 03:40 AM 96 mba,email:1966patel@gmail.com
  • 97. Ganguly Committee Recommendations Working group of directors of banks financial institutions, known as the ganguly committee • Board should be more contemporarily professional by inducting technical and specially qualified personnel • Directors should fulfill certain “fit and proper” norms • Certain criteria adopted for public sector banks such as the age of director being between 35 and 65, that he/she should not be a member of parliament, state legislature etc and may adopted for private bank also • Selection of directors could be by a nomination committee of the board. RBI also might compile a list of eligible candidate • The banks may enter into a “deed of covenant” with every non executive director, delineating his /her responsibilities and making him/her abide by them • Need based training should be imparted to the directors to equip them govern the banks properly by Dr.Rajesh Patel,Director, nrv 05/10/12 03:40 AM 97 mba,email:1966patel@gmail.com
  • 98. Ganguly Committee Recommendations Ganguly committee has suggested the formation of committees of the board Nomination committee Audit committee Shareholder redressal committee Supervisory committee Risk management committee by Dr.Rajesh Patel,Director, nrv 05/10/12 03:40 AM 98 mba,email:1966patel@gmail.com