Corp Govern Projects

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ASIA-PACIFIC INSTITUTE OF MANAGEMENT2009-11 PGDM PROGRAMS

CORPORATE GOVERNACNE AND BUSINESS ETHICS

PROF. ARUN DRAVIAM

GROUP PROJECTS IN TERM V

Group Size and Composition: Not more than 10 students per group. Not more than 4students should be from the same group that participated in the group projects in Term IVGroup Leader should be rotated in such a manner that every student gets a chance to lead.

Date of submission of Synopsis to professor & exchange among groups: 20.10. 2010

Date for suggestions from other groups/ sections to the presenter groups: 10 days prior to

presentation date. (Bonus mark for acknowledged suggestions, as accepted by Professor.)

Date of presentation and Evaluating Group: To be decided in class room discussions.

Group No./Leader

Project Title PresentationDate

Evaluationby Group:

SECTION BFSCoord. CR

....

1.GL- JHA

Family Business in India vs. DevelopedNations- Standard of Business Ethics

2.GL- RAVIKANT

Corporate Governance Genesis inIndia-

Company law Provisions as amended at

various stages including the Bill of 2009.

3.GL- HARMANDEEP

Importance of Independence of the Board the true level of independence in Indiain Public and Private Sector Enterprises.

4.GL- MADHUR

Leading scams in India, since SEBI era.Decision of the SAT and higher Courts insuch cases.

5.

GL-NEHARATHOR

Corporate Governance Report A dull

reporting routine. Suggested changes forPSU and Private sector Indian Companies

6.GL-PRIYAVIR

Governance of the Governor: SEBIsAccountability. Overlapping/ conflictingjurisdictions of Regulators in India.


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CORPORATE GOVERNACNE ANDBUSINESS ETHICS (contd.)GROUP PROJECTS IN TERM V

SECTION 2Coord. CR

....

1.GL

Ethics in Promoter Family controlledbusiness v. Professionally Managed firms

2.GL

Corporate GovernanceGenesis in the UK

3.GL

Independence of the Board of Directors asdemonstrated in the UK Companies

4.GL

Leading scams in the UK and the role ofthe Regulator/ Judiciary

5.

GL

Cultural misfit of UK Governance Code

for India.6.GL

Governance of the Governor: Disclosuresto be made by Regulators in the UK

SECTION 3Coord. CR

....

1.GL

Standard of Ethics in Tata Group of firmsvs. GD Goenka Group of firms

2.GL

Corporate GovernanceGenesis in USA

3.

GL

Independence of the Board of Directors as

demonstrated in the US Companies4.GL

Leading scams in the USA and the role ofthe Regulator/ Judiciary

5.GL

Corporate Social Responsibility: A maskfor corporate misconduct/ breach of ethics

6.GL

Governance of the Governor: Disclosuresto be made by Regulators in the USA

Exercise to be done and confirmed to me by the CRs by e-mail by the 11.10.2010.a. Fill in the name of your program and your name as the coordinating Class Rep.

b. Appoint Group Leaders, as per instructions above, against topics of their choice.c. Finalize the list of students in each group as per instructions above.

I have requested the Registrar to countersign and display this notice on the Notice Board.

Arun Draviam A.K. Sinha


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Professor Registrar 7.10.2010

Corporate governance in India: past, present, and suggestions for the

future.Iowa Law Review

ABSTRACT: While corporate governance may not dictate the economic prospectsof developing countries, it certainly plays an integral role in shaping them. This Notecontains a detailed analysis of the corporate-governance architecture of one suchdeveloping country, India, from its independence in 1947 to the present. The results aresurprising: India's corporate-governance framework is sophisticated for a developingcountry. However, considerable room remains for improvement. This Note presents aseries of suggestions designed to improve corporate governance in India. Most notably,India must reform how its boards of directors function, improve its enforcement

mechanisms, redefine its corporate laws, and embrace corporate governance as aphilosophy.

I. INTRODUCTION

II. WHY CORPORATE GOVERNANCE?

III. HISTORY OF CORPORATE GOVERNANCE IN INDIAA. PRE-LIBERALIZATIONB. POST-LIBERALIZATION

IV. THE CURRENT STATE OF CORPORATE GOVERNANCE IN INDIA

V. How TO IMPROVE CORPORATE GOVERNANCE IN INDIAA. REFORMS OF THE BOARDS OF DIRECTORS

1. Board Compositiona. Increasing the Independence Requirementb. Limiting the Number of Directorships an Individual May

Hold2. Mandatory Director Training3. Increasing Director Liability

B. ENFORCEMENT ISSUES

1. Eliminating "Regulatory Arbitrage".2. Revamping India's Judicial System3. Ensuring Compliance by PSUs

C. REDEFINING INDIA'S CORPORATE LAWS1. Liberalizing India's Capital Markets2. Implementing More-Robust Bankruptcy Laws3. Expanding the Legal Rights of Whistleblowers

D. EMBRACING CORPORATE GOVERNANCE AS A PHILOSOPHY


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1. Increasing Shareholder Activism2. Infusing India's Business Culture with a "Spirit of

Corporate Governance".

VI. CONCLUSION

I. INTRODUCTIONFormer World Bank President James Wolfensohn "has equated the importance of thegovernance of corporations to that of the governance of countries." According to theOrganisation for Economic Co-operation and Development ("OECD"), "Corporategovernance deals with the rights and responsibilities of a company's management,

its board, shareholders and various stakeholders." The spectacular collapses of Enronand WorldCom in the United States, where shareholders lost a combined $245 billion,and the collapse of Italian dairy giant Parmalat in Europe, have transformed corporategovernance from an afterthought to the cornerstone of any firm's or country's long-termsuccess.Corporate governance in a developing-country setting takes on additional importance.

Good corporate governance is vital because of its role in attracting foreign investment.The extent of foreign investment, in turn, shapes the prospects for economic growth formany developing countries. This Note presents an in-depth inquiry into corporategovernance in one such developing country, India. While India's corporate-governanceframework is advanced for a developing country, it still can be significantly improved.Part II discusses the importance of corporate governance for developing countries.Part III provides a brief history of corporate governance in India. Part IV examines thecurrent standards of corporate governance in India. Finally, Part V recommendsimprovements to India's corporate-governance framework.

II. WHY CORPORATE GOVERNANCE?

Investors primarily consider two variables before making investment decisions:a) the rate of return on invested capital andb) the risk associated with the investment.

In recent years, the "attractiveness of developing nations" as a destination for foreigncapital has increased, partly because of the high likelihood of obtaining robust returns andpartly because of the decreasing "attractiveness of developed nations." The lure ofachieving a high rate of return, however, does not, by itself, guarantee foreigninvestment; the attendant risk weighs equally in an investor's decision-making calculus.Good corporate-governance practices reduce this risk by ensuring transparency,accountability, and enforceability in the marketplace.While strong corporate-governance systems help ensure a country's long-term success,weak systems often lead to serious problems. For example, weak institutions caused, atleast in part, the debilitating 1997 East Asian economic crisis. The crisis wascharacterized by plummeting stock and real-estate prices, as well as a severe erosion ofinvestor confidence. The total indebtedness of the countries affected by the crisisexceeded one-hundred billion dollars.While the presence of a good corporate-governance framework ensures neither

stability nor success, it is widely believed that corporate governance can "raise


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efficiency and growth," especially for countries that rely heavily on stock markets to

raise capital. In fact, some contend that the "Asian financial crisis gave developingcountries ... a lesson on the importance of a sound corporate governance system."In an open market, investors choose from a variety of investment vehicles. The existenceof a corporate-governance system is likely a part of this decision-making process. In such

a scenario, firms that are "more open and transparent," and thus well governed, are morelikely to raise capital successfully because investors will have "the information andconfidence necessary for them to lend funds directly" to such firms.Moreover, well-governed firms likely will obtain capital more cheaply than firms thathave poor corporate-governance practices because investors will require a smaller "riskpremium" for investing in well-governed firms.Also, sound corporate-governance practices enable management to allocate resourcesmore efficiently, which increases the likelihood that investors will obtain a higher rate ofreturn on their investment. Finally, leading indices show that developing countries thathave good governance structures consistently outperform developing countries with poorcorporate-governance structures.

Thus, in an efficient capital market, investors will invest in firms with better corporate-governance frameworks because of the lower risks and the likelihood of higher returns.At a macro level, if firms in developing countries attract investment, they will stimulategrowth in the local economy. If they "cannot attract equity capital, they are doomed toremain on a small, inefficient scale," and they will be unable to stimulate growth in theirhost country.Good corporate governance benefits developing countries in a number of ways.According to at least one scholar, good corporate-governance practices can decreasethe "likelihood of a domestic financial crisis" and the severity if such a crisis does

occur. Additionally, scholars have found strong "evidence linking corporate governanceto corporate efficiency" and have shown that "corporate governance creates moreefficient corporate management." Finally, research shows that well-governed firms arevalued significantly higher than firms with imperfect corporate-governance practices. Ithas been estimated that, by the end of this century, "funds seeking trustworthy,productive companies in today's developing countries are likely to top $500,000 billion."The policy challenge that exists for governments in developing countries is to provide ahospitable environment for such funds; a sound corporate-governance framework canplay a decisive role in creating this hospitable environment.Strong corporate governance has beneficial consequences even for countries that chooseto follow a development strategy that does not focus on attracting foreign investment.Many developing countries are home to strong distribution cartels that waste scarceresources. Good corporate governance can reduce this wasteful behavior and, thus,"overcome the obstacles to productivity growth." Moreover, corporate governance canplay a role in reducing corruption, and decreased corruption significantly enhances acountry's developmental prospects. (47) Ultimately, corporate governance "is not just oneof those imported western luxuries; it is a vital imperative." (48)III. HISTORY OF CORPORATE GOVERNANCE IN INDIAA. PRE-LIBERALIZATIONWhen India attained independence from British rule in 1947, the country was poor, withan average per-capita annual income under thirty dollars. (49) However, it still possessed


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sophisticated laws regarding "listing, trading, and settlements." (50) It even had four fullyoperational stock exchanges. (51) Subsequent laws, such as the 1956 Companies Act,further solidified the rights of investors. (52)In the decades following India's independence from Great Britain, the country turnedaway from its capitalist past and embraced socialism. (53) The 1951 Industries Act (54)

was a step in this direction, requiring "that all industrial units obtain licenses from thecentral government." The 1956 Industrial Policy Resolution "stipulated that the publicsector would dominate the economy." To put this plan into effect, the Indian governmentcreated enormous state-owned enterprises, and India steadily moved toward a culture of"corruption, nepotism and inefficiency." As the government took over floundering privateenterprises and rejuvenated them, it essentially "convert[ed] private bankruptcy to high-cost public debt." One scholar referred to India's economic history as "theinstitutionalization of inefficiency."The absence of a corporate-governance framework exacerbated the situation.Government accountability was minimal, and the few private companies that remained onIndia's business landscape enjoyed free reign with respect to most laws; the government

rarely initiated punitive action, even for nonconformity with basic governance laws.Boards of directors invariably were staffed by friends or relatives of management, andabuses by dominant shareholders and management were commonplace. India's equitymarkets "were not liquid or sophisticated enough" to punish these abuses.Scholars believe that "takeover threats act as [a] disciplining mechanism to poorlyperforming companies" because as the stock price of poorly governed firms decreases(because disgruntled investors discard stock), the firms become susceptible to hostile-takeover attempts. Thus, "the fear of a takeover ... is supposed to keep the managementhonest." However, until recently, hostile takeovers were almost entirely non-existent inIndia, and therefore, the poorly governed Indian firms had little to worry about in termsof following corporate laws once they had raised capital through their initial publicoffering. Thus, corporate governance in India was in a dismal condition by the early1990s.

B. POST-LIBERALIZATIONIn 1999, in a defining moment in India's corporate-governance history, the IndianParliament created the Securities and Exchange Board of India ("SEBI") to "protect theinterests of investors in securities and to promote the development of, and to regulate[,]the securities market." In the years leading up to 2000, as Indian enterprises turned to thestock market for capital, it became important to ensure good corporate governanceindustry-wide. Additionally, a plethora of scams rocked the Indian business scene, andcorporate governance emerged as a solution to the problem of unscrupulous corporatebehavior.

In 1998, the Confederation of Indian Industry ("CII"), "India's premier businessassociation," unveiled India's first code of corporate governance. However, since theCode's adoption was voluntary, few firms embraced it.Soon after, SEBI appointed the Birla Committee to fashion a code of corporate

governance. In 2000, SEBI accepted the recommendations of the Birla Committee

and introduced Clause 49 into the Listing Agreement of Stock Exchanges. Clause 49

outlines requirements vis-a-vis corporate governance in exchange-traded

companies.


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In 2003, SEBI instituted the Murthy Committee to scrutinize India's corporate-

governance framework further and to make additional recommendations to

enhance its effectiveness. SEBI has since incorporated the recommendations of the

Murthy Committee, and the latest revisions to Clause 49 became law on January 1,

2006.

IV. THE CURRENT STATE OF CORPORATE GOVERNANCE IN

INDIA

Corporate governance reform in India has focused primarily on the "role and compositionof the board of directors." Each of the three sets of recommendations (the CII Coderecommendations from 1997, the Kumar Mangalam Birla Committee recommendationsfrom 2000, and the Murthy Committee recommendations from 2003) has advanced amore nuanced and sophisticated understanding of corporate governance in this respect.For example, while the CII Code was silent on the financial-literacy levels expected ofdirectors, (84) the Murthy Committee recommended that companies train their "Board

members ... in the business model of the company as well as the risk profile of thebusiness parameters of the company." (85) Another notable recommendation of theMurthy Committee was that the Audit Committee be comprised entirely of "financiallyliterate non-executive members with at least one member having accounting or relatedfinancial

The Companies Bill, 2009 (the Bill)was introduced by the Government in the Lok Sabha on August 03, 2009 to replace theexisting Companies Act, 1956 (the Act). The Bill is the result of the

recommendations of the Expert Committee on Company Law under theChairmanship of Dr. J.J. Irani and detailed consultations with various Ministries,

Departments and government regulators. The Bill is being re-introduced as the earlierversion had lapsed because of dissolution of the previous Lok Sabha. It is divided into 28chapters with 426 clauses.

The Minister for Corporate Affairs stated that the main objectives of the Bill were to:(i) to revise and modify company law in consonance with changes in the national

and international economy;(ii) to bring about compactness by deleting redundant provisions and regrouping

scattered provisions;

(iii) to rewrite various provisions of the Act to enable easy interpretation;(iv) to delink procedural aspects from substantive law and provide greater

flexibility in rule making to enable adaptation to the changing economic andtechnical environment.

The Bill makes significant new and amended provisions with an emphasis onenhancing corporate governance standards. Certain major issues of enhancingcorporate governance could be summarised as follows.


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Shareholder Democracy

The Bill intends for less government intervention in the private sector and propagatesletting shareholders decide what they want to do, as this will reinforce shareholderdemocracy. The Bill does not prescribe any limit on overall maximum managerial

remuneration, in contrast to the ceiling of 11% on total managerial remunerationunder existing company law; it also dispenses with the requirement ofCentral Government approval in certain cases. Further, companies having paid-upcapital as may be prescribed, or transactions of prescribed limits, can enter intorelated party transactions if approved by shareholders by way of special resolution,unless the transaction is in the ordinary course of business and at arms length. This isa departure from the existing Act, which requires approval from the CentralGovernment.

The Bill recognises voting by shareholders at a general meeting through electronicmeans in such a manner as may be prescribed. This will ensure wider participation in

the affairs of the company and will lead to greater shareholder democracy. It alsopermits investors to claim unpaid dividends and interest from the Investor Educationand Protection Fund, which is not permitted under the provisions of existing companylaw after seven years.

Listed companies for the first time would be required to submit a report to theRegistrar of Companies on each annual general meeting in the manner as may beprescribed and to confirm that the meeting was convened, held and conducted as perthe legal requirements.

Independent Director

The Act remained silent on the provision of independent directors, which so farremains the exclusive domain of the Securities Exchange Board of India. The Bill hasat last taken the long waited step of making provisions for appointment ofindependent directors. Every listed public company is required to have at least one-third of its directors as independent directors. The Bill empowers the CentralGovernment to prescribe the share capital of listed company and to prescribe theminimum number of independent directors in other categories of public companiesand subsidiaries of public company.

The board has been given the responsibility of ensuring, while appointing anindependent director, that such independent director is a person of integrity, possessesrelevant expertise and experience, and is not disqualified to act as an independentdirector. The board needs to submits a report in the general meeting that, in itsopinion, an independent director proposed for appointment fulfils the conditionsspecified in the Bill for such an appointment.

The proposed company law attempts to lay down the duties of a director. A director isrequired to act: (i) in accordance with the articles of association, (ii) in good faith to


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promote the objectives of the company for the benefit of members; and (iii) in thebest interest of the company. A director also has to exercise his duties with due andreasonable care, skill and diligence and is prohibited from achieving or attempting toachieve any undue advantage either to himself or to his relatives, partners orassociates.

Key Managerial Person (KMP)

The Bill categories the managing director, chief executive officer, manager and, inthe absence of a managing director, chief executive officer or manager, the full-timedirectors and directors, along with the company secretary and the chief financialofficer, as KMP and authorises the Central Government to prescribe the class ordescription of companies which shall appoint KMP. In case of any vacancy in theoffice of a KMP, the same is required to be filled by the board at its meeting within aperiod of six months from the date of such vacancy. KMP are considered at par withdirectors with regard to accountability in number of provisions, including treating

KMP as officer in default; requirements to submit information and remunerationdetails to the registrar in annual returns; requirements to submit details of theirinterest, if any, in explanatory statement for special businesses; requirements todisclose interest in contracts; and prohibition of forward dealings, etc.

Additional Board Matters

The Bill also proposes to expand matters that shall be decided only by way ofresolutions passed at board meetings. Such additional matters are; approval offinancial statements, directors report, any scheme of arrangement / reconstructions /takeover of a company, diversifications of the business of the company, andacquisitions of a controlling stake in another company.

Additional Disclosures

The Bill provides for additional disclosures under the directors report, such asshareholding pattern, number of board meetings held, disclosure relating tomanagerial remuneration, particulars of inter-corporate loans / investments beyondpermitted ceilings, and particulars of related party contracts along with thejustification for entering into such contract or arrangement. Some of these disclosuresare part of the listing agreement applicable to listed company only. Further, additionaldisclosures needs to be made in the annual return, such as particulars of holding /subsidiary / associate companies, details of promoters and changes thereto, meetingsof members, board and committee meetings and attendance, remuneration of directorsand key managerial personnel, penalties imposed on company, its directors andofficers, and details of compounding of offences.

In relation to special business, disclosure of interest is required to be given in theexplanatory statement in relation to key managerial personnel in addition to that ofdirectors and managers. Also, the threshold shareholding of directors, managers and


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key managerial personnel in any other company affected by the special business issought to be lowered to 2% from the current 20%. Any benefit accruing to suchpersons owing to non-disclosure or insufficient disclosure is required to be held intrust for the company and such persons are liable to compensate the company to theextent of the benefit.

Framework for Fair Valuations

The Bill proposes to introduce a new concept of valuation through registered valuersfor certain major corporate actions, namely: (i) allotment of shares on preferentialbasis; (ii) non cash transactions involving directors; (iii) arrangement with creditorsand members; (iv) purchase of minority shareholding; and (v) valuation of assets incase of winding up, etc. The framework would ensure a uniform basis of valuation forcorporate actions, which is totally unregulated under the provisions of the existingAct. Such valuers will be professionals, such as chartered accountants, companysecretaries, etc., and they are required to be registered with the Central Government.

The valuer would be appointed by the company for the valuation of any property,stocks, shares, debentures, securities or goodwill, or the net worth of the assets of thecompany. A valuer would be required to be appointed by the audit committee or in itsabsence by the board of directors of that company.

Class Action Suits

For the first time in India, the Bill introduces the right of one or more members, orclass of members or creditors, to file a class suit. This will empower any one or moremembers to take legal action in case of any fraudulent action on the part of companyand to take part in investor protection activities. It recognises submission of classaction suites in tribunal cases when shareholders or creditors are of the opinion thatthe management or control of the affairs are conducted in a manner prejudicial to theinterest of the company or its members or creditors, including acts which are ultravires to the articles or memorandum, passing of a resolution by suppression ofmaterial facts or misstatement, or any act which is contrary to provisions of thecompany law or other laws.

Accounting / Secretarial Standards and Auditor

The Bill has given free reign to corporates on the number of subsidiaries they canhave, but preparation of a consolidated statement and presentation at the annualgeneral meeting has been made mandatory, along with its financial statements. TheCentral Government is proposed to assume power in consultation with the NationalAdvisory Committee on Accounting Standard to issue accounting standards. Thecompany will not only be required to adhere to accounting standards but also has tocomply with auditing standards. The Bill also recognises secretarial standards for firsttime and makes it mandatory for companies to comply with respect to board andgeneral meetings.


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The statutory auditor can render only such services as approved by board or auditcommittee. The Bill has notified a list of services as prohibited services that anauditor of a company can provide, such as, internal audit functions, investmentadvisor, management services, actuarial services, accounting and book keeping etc.This is will ensure independence of auditors.

Cross Border Restructuring and Simplified Mergers

The Bill envisages and provides for cross border amalgamation by mutual consent ofa foreign company with a company registered under the Bill or vice versa, andauthorises the Central Government to make detailed provisions and rules in thisregard.

Further, the Bill also provides that the merger of two small companies having suchshare capital not exceeding Rs. 50 million or turnover not exceeding Rs. 200 millionas may be prescribed by the Central Government would not require approval of the

Court. Similarly, merger of a holding company with its wholly owned subsidiarycompany would not require approval of the Court.

Offence and Penal Provisions

The Bill has substantially increased the amount of penalties. For example, for nonsubmission of an annual return, the company will be punishable with fine which shallnot be less than 50,000 rupees but which may extend to five lakhs rupees, and everyofficer of the company who is in default shall be punishable with imprisonment forsix months or with fines not less than 50,000 rupees but which may extend to fivelakh rupees, or with both. Similarly, in cases where the company fails to comply withany provisions with regard to charges, the minimum penalty would be Rs. 1 lac whichcan go up to Rs. 10 lac and any officer of the company who is in default shall bepunishable with imprisonment for a term which may extend to six months or withfines not less than Rs. 10,000 and which may extend up to Rs. 1 lacs, or with both.Accordingly, the Bill indentifies a company as a separate entity for imposition ofmonetary penalties from the officers in default.

Further, the statutory filing to the Registrar would be required to be submitted withina specified time period. In case of delay, such statutory filing can be made within aperiod of 270 days upon payment of an additional fee. However, in the case of defaultin submitting the document even after 270 days, the company and its officers indefault, shall, without prejudice to the liability for payment of the fee and for anadditional fee, shall also be liable for action or liability for such failure or default.

A more effective regime for inspections and investigations of companies is proposed,which lays down a maximum as well as minimum quantum of penalty for eachoffence, with suitable deterrence for repeat offences. In case of fraudulent activities oractions, provisions for recovery and disgorgement have been included.


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Special Courts would be established to deal specifically with offences. The SpecialCourt will deal with matters such as mergers and amalgamations. Reduction ofcapital, insolvency including rehabilitation, liquidations and winding up, are proposedto be addressed by the National Company Law Tribunal / National Company LawAppellate Tribunal.

ConclusionThe present Bill is an extract of corporate developments over the past five decades,lessons learned from previous failures, and an attempt to plug the loopholes ofexisting company law. The Bill proposes some far-reaching changes in the statutoryframework to address the business and investor communitys desire for a morecontemporary framework. The Ministry of Corporate Affairs (MCA) with support ofvarious forums has taken an initiative on public debate and seeking recommendationon the proposed Bill. Accordingly, recommendations of earlier committees oncompany law and various other recommendations such as inclusion of specificgoverning provisions for joint ventures companies, providing threshold limit for class

action suits, minimum level of disclosures in explanatory business for specialbusiness to shareholders, inclusion of specific provisions on issuance of differentialvoting shares by the company, free transferability of shares of public company, etc. have been made to the MCA for its consideration for inclusion into the Bill. Further,upon legislature as law, corporates would see number of regulations which would benotified on procedural aspects and would then bring more clarity on its actual impacton corporate functioning and maintaining corporate governance.

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