CONTEMPORARY ISSUE IN MANAGEMENT ON

CORPORATE GOVERNANCEPresented By:

Pankaj Gorasiya (12)

CORPORATE GOVERNANCE

“Corporate governance is about owners and the managers operating

as the trustees on behalf of every shareholder – large or small.”

EMERGENCE OF CORPORATE GOVERNANCE IN INDIA Scams are integral to the corporate history of India, as well as in the

rest of the world.

inevitable that in the mad race for growth, one or the other corporation might be indulging in unfair and unethical practices.  

These developments have brought corporate governance and shareholder activism to the full attention of both policymakers and researchers.

There has been a surge in policy initiatives to strengthen corporate governance frameworks and in research output related to corporate governance issues.

ISSUES IN CORPORATE GOVERNANCE

Ethical Issues: Concerned with the problem of fraud Form cartels to exert tremendous pressure on the

government to formulate public policy,

Efficiency Issues:  Concerned with the performance of management. Management is responsible for ensuring reasonable returns

on investment made by shareholders.

Accountability Issues: Stakeholders' need for transparency of management in the

conduct of business. Accountability issues are concerned with the social

responsibility that a corporation must shoulder.

Structural Issues : CG consists of internal and external mechanisms for

managing, directing, and monitoring corporate activities to create and increase shareholder value.

Organizations that strive to develop effective CG systems

CORPORATE GOVERNANCE IN INDIA: PAST, PRESENT AND FUTURE

Name of Committee/Body Areas/Aspects Covered

Confederation of Indian Industry

(CII)

Desirable Corporate Governance – A

Code

Kumar Mangalam Birla Committee Corporate Governance

Naresh Chandra Committee Corporate Audit & Governance

N. R. Narayana Murthy Committee Corporate Governance

J.J. Irani Committee Suggestions for improvement in CG

The objectives of the above committees

o Strengthening the management oversight functions and accountability

o Balancing skills, experience and independence of the board appropriate to the nature and extent of company operations

o Establishing a code to ensure integrityo Safeguarding the integrity of company reportingo Risk management and internal controlo Disclosing all relevant and substantial matterso Recognition and preservation of needs of shareholders

CURRENT SCENARIO IN INDIA:

India has shown most of its improvement in the last five years in terms of ease of doing business, among South Asian countries, but still ranks very low at 134th, and the second fastest growing economy in the world.

Even among the nine South Asian countries that appear in the report, India again ranks low at the 7th position.

Trends Of Corporate Frauds In India:

o Weak internal control systems, corroding ethical values and a reluctance on the part of the line managers to take vital action against the perpetrators are cited as the most vibrant underlying reasons for frauds being on the rise.

o It is on the rise in India and internal controls are unable to prevent such abuses

o New technologies, new inventions and expansions into new markets have opened the door to various forms of fraud, while the threat has increased mainly because of high rate of attrition. Particularly in industries like IT & BPO.

Parekh scandal in 2001 The stock market scandal (Harshad Mehta) in

1992. Ketan Tata Finance scandal (Serious financial

irregularities). Vanishing companies scam. Satyam Scam. 3G Scam. Radia’s political lobbying scam. Citi Banks Rs. 400 Cr fraud.

How can we improve CG in India:

85% of the respondents think that the remuneration of CEO should be significantly linked to company performance.

Most respondents believe that while steps at introducing the code of conduct and whistle blower policy have been introduced, there exists a significant need to enhance integrity and ethical values in the larger eco-system.

72% of the respondents believe that it is necessary for an independent and transparent process to evaluate performance of board members.

66% believe that exclusive sessions of independent directors are essential.

47% feel that the effectiveness of corporate governance should be monitored through audits by CG specialists.

REGULATORS OF CG IN INDIA:

o Indian Companies Act, 1956o SEBI Act, 1992o Stock Exchanges-Listing Agreemento ICAI Act, 1949 (Institute Of Chartered Accountants Of India)o ICSI (The Institute Of Company Secretaries Of India)o ICWAI (The Institute Of Cost & Works Accountants Of India)o Awards for fair CG: Some companies that got awards for good

governance are listed below:o ITC Ltd and Abhishek Industries Ltd. have received the ICSI’s

National Award for Excellence in Corporate Governance in the year 2006.

o ITC Ltd has won the ‘Golden Peacock Award for Excellence in Corporate Governance 2005’, instituted by the Institute of Directors, New Delhi.

CASE

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Introduction: Sahara India Pariwar Sahara India Pariwar an Indian conglomerate company

headquartered in Lucknow Diversified business in finance, infrastructure & housing, media &

entertainment, consumer merchandise retail venture etc. Started by Mr. Subrata Roy Sahara in 1978 Peak of success in very short period, such a success motivating

but suspicious Main sponsor of the Indian Cricket Team (apparently withdrawn)

and Hockey Team. They own an IPL Team and 42.5% stake in Formula One's Force India F1

The Brand Trust Report published by Trust Research Advisory, listed Sahara in the top 100 most trusted brands of India.

Timeline of Case

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SAHARA V/S SEBI: Facts Sahara India Real Estate Corporation Limited (SIRECL) and

Sahara Housing Investment Corporation Limited (SHIC) issued Optionally Fully Convertible Debentures (OFCDS) through subscriptions from investors with effect from 25th April 2008 up to 13th April 2011.

Raised around Rs.20,000 crores from investors The purpose of issue was to carry out infrastructural activities

namely, constructing the bridges, modernizing or setting up of airports, rail system or any other projects which may be allotted  to the company

Filed RHPs to the concerned ROC and specified intention of company not wanting to list the shares on any stock exchanges.

As per Sahara issue of OFCDS was private placement.

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SAHARA V/S SEBI: Facts (Cont’d)

However, amount was collected from about 30 million investors in the guise of a "Private Placement"

The requirements applicable to the public offerings of securities were not complied with.

Later, Sahara Prime City Limited intended to raise funds through listing of its shares filed Prospectus to SEBI

While processing the prospectus, SEBI received complaint from one of the investor and “Professional Group of Investors Protections” on 25.12.09 and 4.01.10

Complaint alleged Sahara group for issuing Housing Bonds without complying with relevant regulations prompting SEBI to look into matter

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SAHARA V/S SEBI: Facts (Cont’d) The Whole Time Member of SEBI passed an order dated 23rd

June, 2011 directing the two companies to refund the money so collected to the investors

Also restrained the promoters of the two companies including Mr. Subrata Roy from accessing the securities market till further orders.

Sahara then preferred an appeal before Securities Appellate Tribunal (SAT) against the order. SAT confirmed and maintained the order of the Whole Time Member by an order dated 18th October, 2011.

Subsequently Sahara filed an appeal before the Supreme Court of India against the SAT order.

To SAHARA To SEBI

We are unconvinced with your logic that OFCD schemes don’t come under the scope of  SEBI.

Mostly rural people have Invested money in your schemes and they’re not aware of OFCD.

At the end of day, they would come and say that they were cheated. You know Harshad Mehta’s case, same modus operandi was there. Investors were not aware of the scheme.

It seems you have no intention of returning the investors’ money. Your intentions are shady.

We order you to refund the money.

If those two companies of SAHARA donot refund money, you’re free to attach their properties and freeze their bank accounts.

Also conduct a probe against those two Sahara companies to find out their actual subscriber base. (to make sure some funny game or money laundering isnot going on.)

Check the genuineness of the investors and if the investors are not traceable, the amount will go to the government.

Order of Supreme Court

The new corporate governance code would require listed companies to justify high executive salaries, put in place an orderly succession plan, adopt a whistle-blower policy for employees and limit the number of directorship a person can hold on company boards

proposed norms on insider trading many new categories of persons, including public servants, regulatory officials, judiciary and government officials, dealing with unpublished price-sensitive information, are being brought under the purview of insider trading

new norms would also seek to clearly differentiate between 'innocent mistakes' and genuine transactions of company executives from the unlawful and serious trading offences.

Steps taken by SEBI to improve CG

Key findings

Landmark Judgment is milestone in India’s corporate Landscape

SEBI has myriad powers to investigate listed and unlisted companies into matters relating to the interest of investors

Removes grey areas relating to issue by so called unlisted companies

Forbids them from companies advantages of legislative loopholes

Jurisdictional gap is removed between MCA and SEBI in matters of public interest

Conclusion

Infosys-A Benchmark for Corporate Governance

◦ Infosys' corporate governance practices offered many lessons to

corporate India.

◦ Infosys' founders had set very high standards, in a country

where malpractices by founders were rampant.

◦ The founders only took salaries and dividends and derived no

other financial benefits from the company.

◦ Nandan M Nilekani- The strengths are that we have been very

successful in creating a value based system with a very strong

focus on ethics, and strong division between personal and

professional funds.

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THANK YOU