February 2010Anne E Molyneux

Director – CS International

Prime Minister, Dr. Manmohan Singh on CG

“Unless Indian firms come to be recognized world wide for good corporate governance, they will not be able to compete globally in an increasingly inter-dependent integrated world”.

“In the era of protectionism few bothered about corporate governance and transparency in accounting and in management. Such laxity, however, is no longer possible”.

At ICAI Diamond Jubilee Celebrations - 1 July 2008

CPSE scorecard

242 CPSEs, 41 listed, 22 sectors41= 20% of market cap of BSEDominate in utilities, transportation, coal, oil,

gasSignificant in steel, fertilizer, aluminium,

copper and electricity machineryProduce 8% of GDP on value added basis25% of GDP in gross sales2% of GDP in profit termsSignificant control in significant sectorsEmploys 1.57 million

CPSE scorecard

Top 10 CPSEs2006-2007 increased income by 15.2%2007-2008 increased income by 12.2%Net profits fell slightlyMost profitable predominantly in extractivesBottom 10 -least profitable in deregulated

industries, making losses for a number of yearsOther CPSEs

140 profitable, 53 loss making, others marginal

What good CG seeks to achieve?

Part of broader economic reforms – apply market discipline as far as possible and show public sector leadership

Performance increase value for India and Indiansimprove performance, competitiveness and

efficiency of public sectorachieve strategies and manage risk

Conformance - transparent, accountable decision making in compliance with laws and regulations

Strong oversight and review of decision making (financial and non-financial), reporting, internal control systems, and mechanism for investor grievance attention.

Limitations

No perfect structure or modelHow to achieve independence of boards – role of

controlling shareholders (government or family)

“Independence” of independent directors

Capable directors : supply issue

Checklist approach to compliance (vs. spirit)To what extent, can regulators regulate greed,

dishonesty and unethical behavior…

Evolution in private sector 1998 - Desirable CG Code for listed companies by CII 2000 – Recommendations of Kumar Mangalam Birla

Committee implemented - Clause 49 introduced 2002 – Naresh Chandra Committee Report and banks ( Dr

Ashok Ganguly) 2003 - Recommendations made by Narayan Murthy

Committee (implemented in 2004) 2005: Irani Committee Report on Company Law constituted

by MCA Various Committees factor in international practices and

developments - Narayan Murthy Committee was set up in the aftermath of major corporate developments in US (Enron/WorldCom / SOX)

NFCG set up by MCA – interact with national and international agencies

Comprehensive self assessment in 2007-08

Evolution in public sector

Phase 1 - 1991 New Industrial Policy – greater role for private sector – more competition, partial sale of shares (on BSE , then in large lost), disinvestment, deregulation, liberalisation

Phase 2 - Mid 1990s – more decision making to CPSEs, esp. Navratnas (originally 9 now 18); 1997 DPE Guidelines – special status for some cos.

Phase 3 – to 2004, disinvestment and privatisation, esp listing on SX, therefore requirement cos comply with listing rules and CG requirements

Phase 4 – 2004 to today, National Common Minimum Program, reaffirmed commitment to state-owned sector; 2007 DPE CG for all CPSEs

Framework for CPSEs LegalThe Companies Act, 1956, s. 617, ‘govt companies’ – 51%

o’shipListing Agreement (Clause 49) – SEBI Act, 1992

Mandatory Voluntary provisions

For listed companies - other SEBI Regs. (not just clause 49)

Other DPE guidelines Guidelines on CG for SOEs Other:

Right to information Labor Insolvency Other acts and regulations – competition, environmental,

banking/securities, insurance/sector regs

Institutional – shareholder role is complex; oversight and regulation also complex

Structure

Main features of Clause 49: Composition of Board Compensation / Remuneration of non-

executive directors Constitution of Committees Disclosure norms CEO / CFO Certification Reporting requirements Risk management framework Whistle blower mechanism – non

mandatory

Main Report RecommendationsCG reforms - seen as part of the broader reform programFocus efforts on the profitable companies - navratnas and

miniratnasDeepening CG reforms requires:

Strengthening the state’s ownership role; Professionalising CPSE boards; Enhancing transparency and disclosure.

Implementation of reform requires careful management Future steps

Strategy for CPSE reform Revision of the CG Guidelines Monitor compliance with CG Guidelines Company level reforms Enhance DPE capacities to do all this

Transparency issues re government obligations, relationsMove to more centralised ownership model–

to arm’s length ownership/shareholder perspective

Ensure clarity and cost of non-commercial obligations

Apply, as far as possible, private sector CG norms to public sector commercial enterprises.

Transparency IssuesBoard appointment process – an independent process, yes but.......

Minimize political interferenceCMDIndependent

directorsFunctional directors

Nomination committee role

Focus on competence and commitment – search criteria

Pilot in few navratnas and transfer to rest

Reduce ACC/PESB role

Reduce focus on appointment of civil servants

Remove preference for functional directors to be internal candidates

Audit committees and independent directorsClause 49 – min 3 dirs (2

independent dirs)CA requirements in unlisted

cos - min 3 dirs (2 independent dirs)

VIP role in getting oversight and compliance right, inc internal controls and risk management

Need: More independents from

private sector Board and A/C evaluation

process Make it mandatory for all

statutory companies to form audit committees

Non-compliant composition re independent directors

No audit c’tee formed, not meet number of 3, not 2/3 independents

Transparency re board/director/committee evaluations

Clause 49 – non-mandatory recommends evaluation of non-executive directors, by peer group of rest of board excluding the persons to be evaluated (rarely done)

Need: Systematic board, board

committee and individual director evaluations

Related to performance targets, committee activities and relations with board and management, and

Relate to board/director development programs for CIP

Only requirement is that administrative ministries review performance of directors at end of first year , prior to confirmation of rest of tenure

Clause 49 no evaluation of full-time directors or of independent directors

Transparency – enhance disclosures

Regulations re disclosure are well established but...

Limited monitoringNeed to improve:

Submit quality accounts presented according to international accounting standards in a timely manner (not late and require restatements)

Improve disclosures re related party transactions, non-commercial objectives, social obligations, ministerial requests/directions, MOU targets and target areas

DPE and ministry monitoring of disclosures including public reports on this

Transparency – strengthen audits and controlQuality statutory audits to international standards

by independent firms appointed by CAGCAG audits: compliance audit, test audit of

statutory audit, performance auditWeakness in audit committee oversight of and

implementation of internal controls, internal audit risk management and disclosure processes

Need in each CPSE:Independent directors on mandatory audit

committeesStronger risk governance and systemsLikely to need improved capacity and guidance in

this area

Transparency and disclosure - conclusionsForward plan for reform - DPE, CAG

Clarity re govt obligations, disclosure requirements and requirements re related party transactions

Rationalise supplementary audits and performance audits

Support for CPSEsDirector appointment and development programs,

especially re evaluations and audit committee activitiesIncreased understanding and implementation re risk,

control and internal audit and quality disclosure and reporting practices

Increased monitoring by ministries, DPE and CAG and public reporting on this.

Transparency and Disclosure - Discussion

ActionsHow do we achieve these goals? What

changes will be easiest to tackle?

BarriersWhat obstacles may we meet? What are the

issues?

SolutionsHow do we overcome the obstacles?

Discussion- specific questions1. Do CPSEs have too much reporting and audit

requirements? How can these be made more cost effective without reducing disclosure?

2. How can CPSEs more effectively disclose non-commercial obligations, including those mandated by GOI? Similarly, how should CPSEs disclose transactions with each other and their administrative ministries?

3. How can DPE and the ministries help CPSEs to implement disclosure requirements?

4. How can DPE and the ministries better monitor CPSE disclosure?

5. How can CPSEs introduce and improve performance of audit committees, and internal audit and control systems?