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Transcript of Final Hard Copy of Corporate Governance Rating.
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PROJECT BY.
Rajani Koundal .. 29
Priyanka Punjabi
Raveena bhakru..08
Hina aswani..04
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INTRODUCTION:
CORPORATE GOVERNANCE: Every society is a structure made up on collective
institutions giving diverse interests. Inspite of diverse interests, each of the institution
pursues a common objective of attaining growth and prosperity. But the social structure
within which these institutions operate leaves much to be desired. The environment is
that of moral degradation and corruption. Obviously, individuals enjoying power and
authority often indulge in immoral and improper behavior. The end result of this is that
everybody appears to be a suspect. All this needs to be changed and what better catalyst
can one look at for bringing about this change than a Corporation.
To govern is to control or keep a check at. Corporate Governance is the system by which
companies are directed and controlled by the management in the best interest of the
shareholders and others ensuring greater transparency and better timely financial
reporting. Corporate governance is governance of affairs of a company by its
stakeholders. As public governance is peoples democracy, corporate governance is
stakeholders democracy. Corporate governance looks at the complete governance of
corporations from their very beginning in entrepreneurship, through their governance
structures, legal framework, privatizations, to market exit and insolvency. The integrity
of corporations, financial institutions and markets is particularly central to the health of
our economics and their stability. Corporate Governance is the adherence to certain
norms with the objective of maximizing shareholders value while ensuring fairness to all
shareholders. It is about creating an outperforming organization which leads to increased
customer satisfaction and shareholder value. It primarily involves transparency, full
disclosure, independent monitoring, the state of affairs and being fair to all shareholders.
It aims at creating a corporate culture of conscience and consciousness, transparency and
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accountability that not only promotes employee morale and commitment, but is also
sensitive to social concerns. It propagates a de-risking approach that recognizes measures
and mitigates risk along every dimension and encourages a corporation to take carefully
thought-out risks. A good structure of corporate governance is that encourages balanced
relationship among shareholders, executive directors and the board of directors.
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NEED FOR CORPORATE GOVERNANCE RATINGS:There is a greater need for CG ratings today than ever before. Issues of corporate
governance have been hotly debated in the United States and Europe over the last decade
or two. In India, these issues have come to the fore only in the last couple of years. In the
Indian corporate scene, there is a need to induct global standards so that at least while the
scope of scams still exists, it can be reduced to the minimum. On the other hand, only a
handful of Indian firms have been ready to voluntarily subject their corporate governance
to assessment by credit rating agencies. Of the 4,700 listed firms whose shares are traded
in India, a mere 19 have made their corporate governance ratings public.
A series of scams back home made CII to take the initiative and so a committee was
appointed under Mr.Rahul Bajaj to look into the issue of Corporate Governance.
Subsequent to this, Securities and Exchange Board of India (SEBI) appointed a
committee under the chairmanship of Kumaramangalam Birla. This committee dealt with
various issues and evolved norms for listing agreement, disclosures and transparency in
corporate governance. Good governance practices maintain the integrity of business
transactions and in so doing strengthen the rule of law and democratic governance.
In the Indian context, the need for corporate governance has been highlighted because of
the scams occurring frequently since the emergence of the concept of liberalization from
1991 such as the Harshad Mehta Scam, Ketan Parikh Scam, UTI Scam, Vanishing
Company Scam, Bhansali Scam and so on.
In India, the Securities and Exchange Board of India (SEBI) was set up as a statutoryauthority in 1992, and has taken a number of initiatives in the area of investor protection.
The SEBI is planning to come out with a corporate governance rating index. The
objective is to gauge the level of corporate governance in a company. The index will be
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based on three principles: the level of wealth creation by a corporate, the quality of
wealth management and sharing of the wealth with all stake holders. In the Indian
corporate scene, there is a need to induct global standards so that atleast while the scope
for scams may still exist, it can be atleast reduced to the minimum. THE CORPORATE
GOVERNANCE RATING index is the second attempt by the capital market regulator
to raise the standard of corporate governance in listed companies. Hence attempts were
made and some rating agencies were established to govern the functioning of corporate
governance. Some of the corporate governance rating agencies are CRISIL, CARE, and
ICRA etc.
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CORPORATE GOVERNANCE RATING AND CORPORATEGOVERNANCE RATING AGENCIES:Corporate governance ratings were first undertaken by Crisil Ltd, an associate of global
ratings agency Standard and Poors, in 2003. Two other ratings agencies, ICRA Ltd and
Credit Analysis and Research Ltd, or CARE, followed. The trio has rated around 50
firms, but only 19 have disclosed their ratings to the public. The others have preferred to
keep them secret. Eg: Infosys Technologies Ltd has been rated by both Icra and Crisil and
received the highest ratings from both the agencies.
So far only a limited number of companies have approached for corporate governance
ratings, Companies approach for ratings and also for corporate governance assessment.
Opinions are given on the governance practices and the perceived strengths and
weaknesses from a governance perspective,
Since it is voluntary, according to the rating agencies, only those firms that have a strong
urge to improve their corporate governance or are sure about their governance standards
approach the rating agencies. Firms dont like to make public their ratings when the
ratings do not match their expectations. Apart from corporate governance ratings, the
three agencies also offer company assessments and diagnostic services to firms to help
them improve their governance.
According to the agencies, most companies serious about improving governance
standards generally opt for assessment and diagnostic tools rather than a rating. The
agencies suggest various measures to improve governance standards and some companies
come back to the agencies working on their recommendations, based on which the ratings
are sometimes revised.
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The rating process includes a review of both public and confidential information, as well
as interviews with senior company representatives, including directors.
The survey generally covers four key areas:
-Ownership structure and external influence,
-Shareholder rights and stakeholder relations,
-Transparency, disclosure and audit,
-Board structure and effectiveness.
The corporate governance rating agency will produce a score, which reflects the extent
to which a companys corporate governance practices and policies serve the interests of
investors, shareholders and other stakeholders.
However, corporate frauds is not their job and it a jobbest done by the auditors. Rating
agencies give ratings based on available information. A listed entity has to follow the
corporate governance standards, based on listing agreements.
Even though the rating agencies are not sure whether corporate governance ratings will
be made mandatory, as credit ratings are, they believe shareholders will increasingly
demand corporate governance ratings for the companies they have invested in.Two rating
organisations in India ICRA and CRISIL have developed well thought out criteria for
measuring corporate governance practices and value creation for all stakeholders. These
take into account ratings on wealth creation, wealth management and wealth sharing, and
are based not only on data published in the public domain, but also detailed interviews
with management and stakeholders.
Corporate governance rating is one such opinion, about the level of corporate
governance (practiced by an entity). It takes into consideration aspects like ownership
structure, management style, including board-level issues, quality of financial reporting
and disclosure practices, and sensitivity to the interests of different financial stakeholders.
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I firmly believe that all the stakeholders should have the right to obtain the benefit of an
independent opinion on all the specific areas.
Rating agencies carry out not only a rating, but also monitoring of such ratings, which
will discourage deterioration in the standard of corporate governance. This will be of
great benefit to the different groups of financial stakeholders.
Corporate governance is about commitment to values and ethical business conduct. Good
corporate governance is reflected in fair, transparent and responsible interactions between
a company's management, its board of directors, shareholders and other stakeholders.
This is why it is essential to have a corporate governance rating by a ratings agencyin India.
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ICRAs CORPORATE GOVERNANCE RATING
ICRAs Corporate Governance Rating (CGR) is meant to indicate the relative level to
which an organization accepts and follows the codes and guidelines of corporate
governance practices. The corporate governance practices prevalent in a company reflect
the distribution of rights and responsibilities among different participants in the
organization such as the Board, management, shareholders and other financial
stakeholders, and the rules and procedures laid down and followed for making decisions
on corporate affairs. The emphasis of ICRAs CGR is on a corporates business practices
and quality of disclosure standards that address the requirements of the regulators and are
fair and transparent for its financial stakeholders. The emphasis of ICRAs Stakeholder
Value and Governance (SVG) Rating, on the other hand, is on value creation and value
management for all stakeholders of a company, besides the companys corporate
governance practices. An SVG Rating considers a companys actual performance and the
accrual of the benefits of such performance among all its stakeholders, apart from the
quality of the companys corporate governance practices. It is the combined assessment
of stakeholder value creation and management and the quality of corporate governance
practices that determines the SVG Rating. ICRAs CGR and SVG Ratings may help the
Rated corporate entity in raising funds; listing on the stock exchange; dealing with third
parties like creditors; providing comfort to regulators; improving image, credibility,
improving valuation, and bettering corporate governance practices throughbenchmarking.
Each of these variables is evaluated with respect to a set of attributes and a composite
score is computed using a proprietary model developed by ICRA.
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The rating process also looks at compliance with statutory regulations. The
ICRA opinion, is, however not a certificate of statutory compliance but a comment on
companys future financial performance, credit rating or stock price.
ICRAs RATING MethodologyCorporate governance rating is being done by ICRA, where assigning it is still very
much a learning process. In order to evaluate corporate governance, ICRA has decided tolook at the following:
Shareholding Structure:
A transparent shareholding structures where the key shareholders are clearly identifiable
and where an absence of opaque cross holdings is considered positive feature.
Governance structure and management process:
This focuses on the internal decision making process and the quality and nature of
information presented to a companys board. In looking at the decision making process,
how responsibility is delegated and how accountability is ensured, a view is taken of not
just what is laid down in procedures but what is actually practiced. As to the quality of
information submitted to the board, what is examined whether it is told enough to know
what is going on and whether its quality is satisfactory, are important. Emphasis is laid on
matters such as inter-corporate loans, related-party transactions, large capital
expenditure, diversification and of course, mergers and acquisitions.
Board Structure and Process:
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The board structure and process of decision making is all very important. The bottom line
in whether a company is board-managed or its board is a rubber stamping body whose
members hold their positions at the pleasure of the effective owner. For this, the size of
the board, selection criteria for directors, proportion of independent directors and the
expertise they can command, compensation policy for (directors, number and nature of
board committees, attendance record of t directors and frequency of board meetings are
all taken into consideration.)
Examine Stakeholder Relations:
ICRAs methodology on this matter relates almost wholly to the rights of shareholders
and the duty of the company to service them well. There is a passing reference to other
financial stakeholders such as banks, financial institutions and fixed-deposit holders. But
the whole idea of stakeholder is that it goes far beyond the shareholder and includes the
workers, a companys customers and the society at large.
Transparency and disclosures:
It is found that better-run companies disclose more than they are required by the law. But
in assessing a companys performance in this regard, emphasis is laid on how
materialistic the disclosures are and whether they really shed any light or hide more than
they reveal.
FinancialDiscipline:
Considerations under the criterion would broadly overlap with the determinants
governing financial rating. But it is emphasized that a financial rating says nothing about
the nature of corporate governance prevailing in a company and similarly, a governance
rating says nothing about the financial position of a company. The risk of governance
failure will not be apparent from the financial rating of a company, but from its corporate
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governance rating. Here again, the conceptual scope of corporate governance and the way
ICRA sees the idea may be a little divergent. While discussing financial discipline, it says
that the ultimate objective of corporate governance is to maximize shareholder value to
the extent that if the company goes down in its governance record, no matter how
excellent otherwise, will mean nothing. But what if a companys shareholders are happy
with it but its workers or society at large is not, then the conflict of interest needs to be
arrived at, but one should remember that shareholders are also members of the society.
Credit ratings for debt paper, which did not start off very well, later picked up
thanks to the pressures of the market which forced issuers of debt to get them rated in
order to raise money. Similarly, market pressures will force more and more corporate in
India to go in for corporate governance ratings. Eventually, SEBI, which can legitimately
take credit for spearheading the movement for corporate governance ratings in India,
must make such ratings mandatory for issuers of equity, so that investors have a
comprehensive understanding of the companies where they are putting their money.
ICRAs Corporate Governance Rating (CGR) is meant to indicate the relative level to
which an organization accepts and follows the codes and guidelines of corporate
governance practices. Corporate Governance practices prevalent in a company reflect the
distribution of rights and responsibilities among different participants in the organization
such as the Board, management, shareholders and other financial stakeholders and the
rules and corporate affairs. The emphasis of ICRA rating is on corporate business
practices and quality of disclosure standards that addresses the requirements of the
regulators and is fair and transparent for its financial stakeholders. The variables, whichare analysed for arriving at the rating, are the shareholding structure, executive
management processes, board structure and processes, stakeholder relationship,
transparency and disclosures and financial discipline. Each of these variables is evaluated
with respect to a set of attributes and a composite score is computed using a proprietary
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model developed by ICRA. The rating processes also looks at compliance with statutory
agreement. The focus, however, is on substance over form and compliance with
regulations in only the starting point. The ICRA opinion, is, however not a certificate of
statutory compliance or a comment on companys future financial performance, credit
rating or stock price.
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CRISILCRISIL is a global analytical company providing ratings, research, and risk and policy
advisory services. It is the Indias leading ratings agency and also the foremost provider
of high-end research to the world's largest banks and leading corporations. With
sustainable competitive advantage arising from our strong brand, unmatched credibility,
and market leadership across businesses, and large customer base, it delivers analysis,
opinions, and solutions that make markets function better. CRISIL is the largest credit
rating agency in India.
CRISIL pioneered ratings in India more than 20 years ago, and is today the undisputed
business leader, with the largest number of rated entities and rating products. CRISIL's
rating experience covers more than 45,676 entities, including 23,500 small and medium
enterprises (SMEs). As on September 30, 2011, and had more than 15,643 ratings
(including over 8000 SMEs).
RATING PROCESSCRISIL's ratings process is designed to ensure that all ratings are based on the highest
standards of independence and analytical rigour. From the initial meeting with the
management to the assignment of the rating, the rating process normally takes three to
four weeks. However, CRISIL has sometimes arrived at rating decisions in shorter
timeframes, to meet urgent requirements. The process of rating starts with a rating
request from the issuer, and the signing of a rating agreement. CRISIL employs a multi-
layered, decision-making process in assigning a rating. A detailed flow chart of CRISIL's
rating process is as below:
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CORPORATE GOVERNANCE RATING IN INDIAThe beginning of corporate developments in India were marked by the managing agency
system that contributed to the birth of dispersed equity ownership but also gave rise to the
practice of management enjoying control rights disproportionately greater than their stock
ownership.
India has one of the best corporate governance laws but poor implementation together
with socialistic policies of the pre-reform era has affected corporate governance. Recent
high-profile corporate governance failures in developed countries have brought the
subject to media attention, the issue has always been central to finance and economics.
The issue is particularly important for developing countries since it is central to financial
and economic development.
Sustainable growth and success of any country or society depend upon collective function
of its resources, starting from the vast use of natural resources, strategic, geographic
location, labour (people) and intellectual capital. In a society where private participants
have prominent role in utilization of all these resources, governance or public governance
plays a vital role in sustainable development of the society. Governance, as it is said
relates to decisions that define expectations, grant power or verify performance. It
consists either of a separate process or of a specific part of management or leadership
processes. Good governance creates a strong future for an organization by continuously
steering towards a vision and making sure that day-to-day management is always lined up
with the organization's goals.
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CONCLUSION
All the top rating agencies in the country are now working overtime on their own CG
rating initiatives. Rating services are increasingly wielding significant power in advising
investors with respect to issuers corporate governance and disclosure practices. Low
ratings can increase the companys cost of capital by reducing the share price and
encouraging shareholder activism. A proactive approach to integrating the new ratings
dynamic into shareholder relations planning and execution will go a long way toward
maintaining the highest sustainable shareholder value.
Credit ratings for debt paper, which didnt start off with a bang, later picked up thanks to
the pressures of the market which forced issuers of debt to get them rated in order to raise
money. Similarly, market pressures will force more and more corporate in India to go in
for CG ratings. Eventually, SEBI, which can legitimately take credit for spearheading the
movement for CG ratings in India, must make such ratings mandatory for issuers ofequity, so that investors have a comprehensive understanding of the companies where
they are putting their monies.
Corporate governance rating is gaining popularity not just with stakeholders; even
regulators in many countries have taken cognisance of its utility and are working out how
to make best use of such a rating to facilitate healthy development of capital market.
There is a strong emphasis on improving corporate governance practices and a lot of
these companies have gone beyond what is mandated by the prevailing laws and
instituted best practices in terms of corporate governance
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According to Raman Uberoi, senior director, corporate governance ratings, for Crisil,
though there is an improvement in corporate governance standards in India, a lot more
needs to be done, particularly in family-owned firms that went public or are planning to
go public.