Corporate Governance

Corporate Governance-the Kumar Mangalam Birla Committee Report
CORPORATE GOVERNANCE
The Kumar Mangalam Birla Committee Report
INDEX
SR No 1. 2 3. 4. 5. 6. 7. 8. 9. 10.
Contents Introduction Corporate Governance Indian Scenario Kumar Mangalam Birla Report Recent Developments Satyam Case Other examples Conclusion Bibliography Appendix
Page No 3 3 6 8 20 21 24 25 26 27
1. Introduction
Corporate governance has been an essential issue in developing countries much before the recent spate of corporate scandals in advanced economies made headlines. Indeed corporate governance and economic development are inherently linked. Effective corporate governance systems promote the development of strong financial systems irrespective of whether they are largely bank-based or market-based which, in turn, have an unmistakably positive effect on economic growth and poverty reduction. There are several channels through which the causality works. Effective corporate governance enhances entrance to external financing by firms, leading to greater investment, as well as higher growth and employment. The proportion of private credit to GDP in countries in the highest quartile of creditor right enactment and enforcement is more than double that in the countries in the lowest quartile.
2. What is Corporate Governance?

Corporate Governance may be defined as a set of systems, processes and principles which ensure that a company is governed in the best interest of all stakeholders. It is the system by which companies are directed and controlled. Under corporate governance, the management needs to understand and accept the inalienable rights of shareholders as the true owners of the corporation and of their own role as trustees on behalf of the shareholders. It deals with conducting the affairs of a company such that there is fairness to all stakeholders and that its actions benefit the greatest number of stakeholders. In this regard, the management needs to prevent asymmetry of benefits between various sections of shareholders, especially between the owner-managers and the rest of the shareholders. It is about commitment to values, about ethical business conduct and about making a distinction between personal and corporate funds in the management of a company. Ethical dilemmas arise from conflicting interests of the parties involved. In this regard, managers make decisions based on a set of principles influenced by the values, context and culture of the organization. Ethical leadership is good for business as the organization is seen to conduct its business in line with the expectations of all stakeholders.
In other words, 'good corporate governance' is simply 'good business'.
2.1 Aims and Objectives

The aim of "Good Corporate Governance" is to ensure commitment of the board in managing the company in a transparent manner for maximizing long-term value of the company for its shareholders and all other partners. The fundamental objective of corporate governance is to enhance shareholders' value and protect the interests of other stakeholders by improving the corporate performance and accountability. Hence it harmonizes the need for a company to strike a balance at all times between the need to enhance shareholders' wealth whilst not in any way being detrimental to the interests of the other stakeholders in the company. Further, its objective is to generate an environment of trust and confidence amongst those having competing and conflicting interests. It is integral to the very existence of a company and strengthens investor's confidence by ensuring company's commitment to higher growth and profits.
2.2 Underlying Principle

According to OECD (ORGANIZATION FOR ECONOMIC CORPORATION AND DEVELOPMENT) 1998, good corporate governance can best be achieved through a combination of regulatory and voluntary private action.
The underlying principles FOR THE REGULATORY SIDE of corporate governance revolve around three basic inter-related segments. These are:

Integrity and Fairness Transparency and Disclosures Accountability and Responsibility
Thus corporate governance is all about promoting corporate fairness, transparency and accountability.
2.3 Some Considerations Codes of conduct and whistle blower policies are vital, but more imperative are how they are communicated and practiced. It is vital for board members and senior management to lead by example The concept of having independent directors is a good one in theory but more important is the process underlying selection of independent directors is this process rigorous, transparent and objective and is it aligned to the companys needs? It is important to focus on not just earnings but on the sustainability of business models. Focus on not just How much? but on How?, At what cost? and At whose expense? Rating agencies need to develop criteria that focus on substance rather than the form of governance Compensation of executive directors should flow from an objective performance evaluation process conducted by the board Greater transparency and disclosure of executive performance criteria are required which should include financial and non-financial measures Regulators should send clear signals that they shall be proactive in imposing substantial penalties for non-compliance, so that compliance is strictly adhered to
2.4 The Need of Corporate Governance in todays Business Environment.
Today, Corporations are prominent players in the global markets. They are mainly responsible for generating majority of economic activities in the world, ranging from goods and services to capital and resources.
Therefore, today adoption of good Corporate Governance practices has become a pre requisite for companies to face the intense competition for sustainable growth in the emerging global market scenario.
In addition Business ethics and corporate awareness of the environmental and societal interest of the communities, within which companies operate, can have an impact on the reputation and long-term performance of these companies.
Further, good corporate governance is needed to generate an environment of trust and confidence amongst those having competing and conflicting interests.
Corporate governance is thus required for promoting and maintaining integrity, transparency and accountability in the management of the company as well as in manifestation of the values, principles and policies of a corporation.
Apart from all this, corporate governance also:
Shapes the growth and future of capital market & economy. It serves as an Instrument for investors protection. It Protects the interest of Shareholders and all other stakeholder It contributes to the efficiency of the business enterprise. It Helps in Creation of wealth for all the shareholders. Keeps an eye on the issues of insider trading
3.
The Indian Scenario
Till the late nineties, the concepts and principles of good governance were still not clearly known to the Indian business set up. Many efforts were being made, both at the Centre and the State level, to promote the awareness and adoption of good corporate governance practices, which are the integral element for doing and managing business. Hence, there was a greater need to increase awareness among entrepreneurs about the various aspects of corporate governance. There were some of the areas that needed special attention, namely:
Quality of audit, which is at the root of effective corporate governance Role of Board of Directors as well as accountability of the CEOs and CFOs Quality and effectiveness of the legal, administrative and regulatory framework etc.
It was necessary to provide the Indian corporate world with the desired level of comfort in compliance with the code, principles and requirements of corporate governance as well as provide relevant information to all stakeholders regarding the performance, policies and procedures of the company in a transparent manner.
An efficient
system to provide both financial and non-financial disclosures by Indian
companies, such as information about remuneration package, financial reporting, auditing, internal controls, etc was also the need of the hour.
3.1 How was Corporate Governance Imposed In India?

It was the belief of the Securities and Exchange Board of India (SEBI) that efforts to improve corporate governance standards in India must continue. This is because these standards themselves were evolving in keeping with market dynamics. Accordingly, the Committee on Corporate Governance (the Committee) was constituted by SEBI, to evaluate the adequacy of existing corporate governance practices and further improve these practices. The Committee comprised members from various walks of public and professional life. This includes captains of industry, academicians, public accountants and people from financial press and from industry forums. The issues discussed by the Committee primarily related to Audit committees, Audit reports, Independent directors, Related parties, Risk management, Directorships and director compensation, Codes of conduct and financial disclosures.
The Committees recommendations in the final report were selected based on parameters including their relative importance, fairness, accountability, transparency, ease of implementation, verifiability and enforceability. The Committee believes that these recommendations codify certain standards of good governance into specific requirements, since certain corporate responsibilities are too important to be left to loose concepts of fiduciary responsibility. When implemented through SEBIs regulatory framework, they will strengthen existing governance practices and also provide a strong incentive to avoid corporate failures
4. THE KUMAR MANGALAM BIRLA COMMITTEE REPORT ON CORPORATE

GOVERNANCE
In early 1999, Securities and Exchange Board of India (SEBI) had set up a committee under Shri Kumar Mangalam Birla, member SEBI Board, to promote and raise the standards of good corporate governance. The report submitted by the committee is the first formal and comprehensive attempt to evolve a Code of Corporate Governance', in the context of prevailing conditions of governance in Indian companies, as well as the state of capital markets.
4.1 The Terms of Reference of this committee
Suggest suitable amendments to the listing agreement executed by the stock exchanges with the companies and any other measures to improve the standards of corporate governance in the listed companies, in areas such as continuous disclosure of material information, both financial and non-financial, manner and frequency of such disclosures, responsibilities of independent and outside directors
Draft a code of corporate best practices and Suggest safeguards to be instituted within the companies to deal with insider information and insider trading.
4.2 Objectives
The primary objective of this committee was to view corporate governance from the perspective of the investors and shareholders and to prepare a Code' to suit the Indian corporate environment.
Corporate governance has several claimants which include the shareholders and other stakeholders i.e. includes the suppliers, customers, creditors, and the bankers, the employees of the company, the government and the society at large.
This Report on Corporate Governance has been prepared by the BIRLA Committee for SEBI, keeping in view primarily the interests of a particular class of stakeholders namely, the shareholders, who together with the investors form the principal constituency and at the same time not ignoring the needs of other stakeholders.
The Committee therefore agreed that the fundamental objective of corporate governance in India would be the enhancement of shareholder value, keeping in view the interests of other stakeholder".
4.3 Key constituents of Corporate Governance under this committee
The committee indentified three key constituents of corporate governance and attempted to establish the roles, responsibilities and rights of each of them in the context of good corporate governance. The 3 key constituents of good corporate governance identified by the Birla committee Report were as follows: Board of Directors The Shareholders and The Management.
THE ROLES AND RESPONSIBILITIES of each of them are as follows:Board of directors:-The pivotal role in any system of corporate governance is performed by the board of directors. It is accountable to the stakeholders and directs and controls the management. It stewards the company, sets its strategic aim and financial goals and oversees their implementation, puts in place adequate internal controls and periodically reports the activities and progress of the company in the company in a transparent manner to all the stakeholders.
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Shareholders:-The shareholders' role in corporate governance is to appoint the directors and the auditors and to hold the board accountable for the proper governance of the company by requiring the board to provide them periodically with the requisite information in a transparent fashion, of the activities and progress of the company. Management: - the management is to undertake the management of the company in terms of the direction provided by the board, to put in place adequate control systems and to ensure their operation and to provide information to the board on a timely basis and in a transparent manner
4.4 RECOMMENDATIONS OF THE BIRLA COMMITTEE REPORT At the heart of the Committee's report is the set of recommendations which distinguish responsibilities and obligations of the boards and the management in instituting the systems good corporate governance and emphasises the rights of shareholders in demanding corporate governance.
Mandatory and non-mandatory recommendations The committee divided the recommendations into two categories, namely, mandatory and non- mandatory. The recommendations which are absolutely essential for corporate governance can be defined with precision and which can be enforced through the amendment of the listing agreement could be classified as mandatory. Others, which are either desirable or which may require change of laws, may for the time being, be classified as non-mandatory. Mandatory Recommendations are as follows:

Applies To Listed Companies With Paid Up Capital Of Rs. 3 Crore And Above Composition Of Board Of Directors Optimum Combination Of Executive & NonExecutive Directors Audit Committee With 3 Independent Directors with One Having Financial And Accounting Knowledge.
Remuneration Committee
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Board Procedures At least 4 Meetings of the Board in a Year with Maximum Gap of 4 Months between 2 Meetings. To Review Operational Plans, Capital Budgets, Quarterly Results, Minutes Of Committee's Meeting. Director Shall Not Be A Member Of More Than 10 Committee And Shall Not Act As Chairman Of More Than 5 Committees Across All Companies
Management Discussion And Analysis Report Covering Industry Structure, Opportunities, Threats, Risks, Outlook, Internal Control System
Information Sharing With Shareholders
Non-Mandatory Recommendations are as follows: Role Of Chairman Remuneration Committee Of Board Shareholders' Right For Receiving Half Yearly Financial Performance Postal Ballot Covering Critical Matters Like Alteration In Memorandum Etc Sale Of Whole Or Substantial Part Of The Undertaking Corporate Restructuring Further Issue Of Capital Venturing Into New Businesses
MANDATORY RECOMMENDATIONS BOARD OF DIRECTORS
Functions of the board o The board directs the company, by formulating and reviewing companys policies, strategy making, major plans of action, risk policy, annual budgets and business plans, setting performance objectives, monitoring implementation and corporate
performance, and overseeing major expenditures, acquisitions and divestitures,
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change in financial control and compliance with applicable laws, taking into account the interests of stakeholders. o It controls the company management by laying down the code of conduct, overseeing the process of disclosure a communications, ensuring that appropriate systems for financial control and reporting and monitoring risk are in place, evaluating the performance of management etc o It is accountable to the shareholders for creating, protecting and enhancing wealth and resources for the company. However, it is involved in day-to-day management of the company, which is the responsibility of the management.
INDEPENDENT DIRECTORS AND THE DEFINITION OF INDEPENDENCE
Independence of the board is critical to ensuring that the board fulfils its oversight role objectively and holds the management accountable to the shareholders. The Committee has therefore, suggested the following definition of independence, and the following structure and composition of the board and of the committees of the board.
"Independent directors are directors who apart from directors remuneration do not have any other material pecuniary relationship or transactions of the company, its promoters, its management or its subsidiaries, which in the judgement of board may affect their independence of judgement.
Further, all pecuniary relationships or transactions of the non-executive directors should be disclosed in the annual report. The Committee recommends that the board of a company have an optimum combination of executive and non-executive directors with not less than fifty percent of the board comprising non-executive directors. The number of independent directors would depend on the nature of the chairman of the board. In case company has a non-executive chairman, at least one-third of board should comprise of independent directors and in case a company has an executive chairman, at least half of board should be independent.
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NOMINEE DIRECTORS
There is another set of directors in Indian companies who are the nominees of the financial or investment institutions to safeguard their interest. Nominees of the institutions are often chosen from among the present or retired employee institutions or from outside. The Committee would therefore recommend that institutions should appoint nominees on the boards of companies only on selective basis where such appointment is pursuant to a right under loan agreements or when such appointment is considered necessary to protect the interest of the institution. The Committee also recommends that when a nominee of the institutions is appointed director of the company, he should have the same responsibility, be subject to the same duties and be accountable to the shareholders in the same manner as any other director of the company. In particular, if he reports to any department of the institutions on the affairs of the company, institution should ensure that there exist Chinese walls between such department and other departments which may be dealing in the shares of the company in the stock market.
AUDIT COMMITTEE
It acts as a catalyst for effective financial reporting. A proper and well functioning system exists therefore, when the three main groups responsible for financial reporting the board, the internal auditor and the outside auditors form the three legged stool that supports responsible financial disclosure The audit committee has an important role to play in this process. The Committee therefore recommends that a qualified and independent audit committee should be set up by the board of a company. This would go a long way in enhancing the efficiency of the financial disclosures of a company and promoting transparency.
o Frequency of meetings and quorum-audit committee
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The Committee recommends that to begin with the audit committee should meet at least twice a year. One meeting must be held before finalisation of annual accounts and one necessary after six months. The quorum should be either two members or one-third of the members of the audit committee, whichever is higher and there should be a minimum of two independent directors o Powers of the audit committee Being a committee of the board, the audit committee derives its powers from the authority of the board. The Committee recommends that such powers should include powers: To investigate any activity within its terms of reference. To seek information from any employee. To obtain outside legal or other professional advice. To secure attendance of outsiders with relevant expertise, if it considers necessary.
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Functions of the Audit Committee
As the audit committee acts as the bridge between the board, the statutory auditors and the internal auditors, the Committee recommends that its role should include the following functions: Oversight of the companys financial reporting process and the disclosure of its financial information to ensure that the financial statement is correct, sufficient and credible. Recommending the appointment and removal of external auditor, fixation of audit fees also approval for payment for any other services. Reviewing with management the annual financial statements before submission to the board, focussing primarily on: Any changes in accounting policies and practices. Major accounting entries based on exercise of judgement by management statements.
ACCOUNTING STANDARDS AND FINANCIAL REPORTING Over time the financial reporting and accounting standards in India have been upgraded however an ongoing process is and we have to move speedily towards the adoption of
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international standards. This is particularly important from the angle of corporate governance. The Committee took note of the discussions of the SEBI Committee on Accounting Standards referred to and makes the following recommendations: Consolidation of Accounts of subsidiaries The companies should be required to give consolidated accounts in respect of all its subsidiaries which they hold 51 % or more of the share capital. The Committee was informed that SEBI already in dialogue with the Institute of Chartered Accountants of India to bring about the change. in the Accounting Standard on consolidated financial statements. The Institute of Chartered Accountants of India should be requested to issue the Accounting Standards for consolidation expeditiously.
Segment reporting where a company has multiple lines of business. Equally in cases of companies with several businesses, it is important that financial report respect of each product segment should be available to shareholders and the market to complete financial picture of the company. The Committee was informed that SEBI was already in dialogue with the Institute of Chartered Accountants of India to introduce the Accounting Standards on segment reporting
. Disclosure and treatment of related party transactions. This again is an important disclosure. The Committee was informed that the Institute of Chartered Accountants of India had already issued an Exposure Draft on the subject. Treatment of deferred taxation The treatment of deferred taxation and its appropriate disclosure has an important bearing true and fair view of the financial status of the company. The Committee recommends that Institute of Chartered Accountants of India be requested to issue a standard on deferred tax at an early date.
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DISCLOSURES OF REMUNERATION PACKAGE
It is for the shareholders to be informed of the remuneration of the director company. The Committee therefore recommends that the following disclosures should be the section on corporate governance of the annual report: All elements of remuneration package of all the directors i.e. salary, benefits, bonuses, stock options, pension etc. Details of fixed component and performance linked incentives, along with the performance criteria. Service contracts, notice period, severance fees. Stock option details, if any and whether issued at a discount as well as the period over which accrued and over which exercisable.
FUNCTIONS OF THE MANAGEMENT
The management comprises the Chief Executive, Executive-directors and the key managers of the company, involved in day-to-day activities of the company. The Committee believes that the management should carry out the following function Assisting the board in its decision making process in respect of the companys strategy policies, code of conduct and performance targets, by providing necessary inputs. Implementing the policies and code of conduct of the board. Managing the day to day affairs of the company to best achieve the targets and goals of the board, to maximize the shareholder value. Providing timely, accurate, substantive and material information, including financial and exceptions, to the board, board-committees and the shareholders. Ensuring timely and efficient service to the shareholders and to protect shareholder and interests.
As a part of the disclosure related to Management, the Committee recommends that the directors report or as an addition there to, a Management Discussion and Analysis rep should form part of the annual report to the shareholders. This Management Discussion & should include discussion on the following matters within the limits set by the companys competitive position: Industry structure and developments.
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Opportunities and Threats Segment-wise or product-wise performance. Outlook. Risks and concerns Internal control systems and their adequacy.
MANDATORY RECOMMENDATIONS FOR THE SHAREHOLDERS
The Committee believes that the General Body Meetings provide an opportunity to the shareholders to address their concerns to the board of directors and comment on and demand explanations on the annual report or on the overall functioning of the company. The Committee therefore recommends that as shareholders have a right to participate and be sufficiently informed on decisions concerning fundamental corporate changes, they should only be provided information as under the Companies Act, but also in respect of other decisions relating to material changes such as takeovers, sale of assets or divisions of the company changes in capital structure which will lead to change in control or may result in certain shareholders obtaining control disproportionate to the equity ownership. o The Committee recommends that information like quarterly results, presentation made companies to analysts may be put on companys web-site or may be sent in such a form that will enable the stock exchange on which the company is listed to put it on its own web-site. o The Committee recommends that a board committee under the chairmanship of a nonexecutive director should be formed to specifically look into the redressing of shareholder complaints like transfer of shares, non-receipt of balance sheet, nonreceipt of declared dividends etc. o The Committee further recommends that to expedite the process of share transfers board of the company should delegate the power of share transfer to an officer. The delegated authority should attend to share formalities at least once in a fortnight.
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NON MANDATORY RECOMMENDATIONS
REMUNERATION COMMITTEE OF THE BOARD
o The Committee was of the view that a company must have a credible and be transparent in determining and accounting for the remuneration of the directors. The policy should avoid potential conflicts of interest between the shareholders, the directors, and the management overriding principle in respect of directors remuneration is that of openness and shareholders entitled to a full and clear statement of benefits available to the directors. o For this purpose the Committee recommends that the board should set up a remuneration committee to determine on their behalf and on behalf of the shareholders with agreed term reference, the companys policy on specific remuneration packages for executive directors including pension rights and any compensation payment.
COMPOSITION, QUORUM ETC. OF THE REMUNERATION COMMITTEE
The Committee recommends that to avoid conflicts of interest, the remuneration committee which would determine the remuneration packages of the executive directors should comprise of at least three directors, all of whom should be non-executive directors, the chairman of committee being an independent director. The Committee deliberated on the quorum for the meeting and was of the view that remuneration is mostly fixed annually or after specified periods. It would not be necessary committee to meet very often. The Committee also recommends that the Chairman of the remuneration committee be present at the Annual General Meeting, to answer the shareholder queries. However, it should be up to the Chairman to decide who should answer the queries.
CHAIRMAN OF THE BOARD
The Committee is of the view that the Chairmans role should in principle be derived from that of the chief executive, though the same individual may perform both roles. Given the importance of Chairmans role, the Committee recommends that a nonexecutive
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Chairman should be entitled to maintain a Chairmans office at the companys expense an allowed reimbursement of expenses incurred in performance of his duties. This will enable discharge the responsibilities effectively.
NON MANDATORY RECOMMENDATIONS FOR THE SHAREHOLDERS
The Committee recommends that the half-yearly declaration of financial performance including summary of the significant events in last six-months, should be sent to each housing shareholders.
4.5 Implementation
Based on the recommendations of this Committee, a new clause 49 was incorporated in the Stock Exchange Listing Agreements through which these recommendations were implemented in a phased manner by SEBI.
They were made applicable to all companies in the BSE 200 and S&P C&X Nifty indices, and all newly listed companies, as of March 31, 2001. The applicability of the Recommendations was extended to companies with a paid up capital of Rs. 100 million or with a net worth of Rs. 250 million at any time in the past five years, as of March 31, 2002. In respect of other listed companies with a paid up capital of over Rs. 30 million, the requirements were made applicable as of March 31, 2003.
The accounting standards issued by the ICAI (international institute of chartered accountancy), which are applicable to all companies under sub-section 3A of Section 211 of the Companies Act, 1956, were specifically made applicable to all listed companies for the financial year ended March 31, 2002,under the Listing Agreements
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5. Other Recent Developments In India

Naresh Chand Committee Report, 2002: The committee was appointed by SEBI to make recommendation on the representation of independent directors on company boards and the composition of audit committees. The major highlight and recommendations are as follows: It makes no distinction between a board within executive chairman and non executive chairman. It is sufficient to have compulsory rotation of audit partners in every five years. Independent directors should play a larger role to ensure the corporate governance practices are improved and that the interests of stock holders other than promoters are protected.
Narayana Murthy committee, 2003
This committee was constituted by SEBI, under the chairmanship of Narayana Murthy to suggest how best to further improve corporate governance practice. The committee included representatives from stock exchanges, chambers of commerce and industry , investors association and professional bodies and debated on key issues and made recommendation.
Recommendations Disclosure of accounting treatment Audit qualification Risk management board disclosure Training of board members Use of proceeds of IPO (Initial public offering) Written code of conduct for executive management Nominee directors-exclusive of nominee directors from the definition of independent director Internal policy on access to audit committees
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6 The Largest Fraud in the History of Corporate India: The Satyam* Saga
Ramalinga Raju founded Satyam Computers in the year 1987. Satyam Computers offers consulting and information technology services across many sectors. It is the 4th largest IT services company in India and is listed on the National Stock Exchange (NSE), the Bombay Stock Exchange (BSE) in India & on the New York Stock Exchange(NYSE) as well. What is the scandal about? The founder, Ramalinga Raju is responsible for inflating the amount of cash on Satyams balance sheet by nearly $ 1 billion dollars, incurring a liability of $253 million on funds arranged by him personally and overstating September 2008 quarterly revenues by nearly 76% and profits by 97%. The Details of the Scam includes as Follows:The Balance Sheet carries as of September 30, 2008 Inflated (non-existent) cash and bank balances of Rs.5,040 crore (as against Rs. 5361 crore reflected in the books) An accrued interest of Rs. 376 crore which is non-existent An understated liability of Rs. 1,230 crore on account of funds arranged by me An over stated debtors position of Rs. 490 crore (as against Rs. 2651 [cr.] reflected in the books) For the September quarter (02) they reported a revenue of Rs.2,700 crore and an operating margin of Rs. 649 crore (24% Of revenues) as against the actual revenues of Rs. 2,112 crore and an actual operating margin of Rs. 61 Crore ( 3% of revenues). This has resulted in artificial, cash and bank balances going up by Rs. 588 crore in Q2 alone. The gap in the Balance Sheet has arisen purely on account of inflated profits over a period of last several years (limited only to Satyam standalone, books of subsidiaries reflecting true performance). What started as a marginal gap between actual operating profit and the one reflected in the books of accounts continued to grow over the years. It has attained unmanageable proportions as the size of company operations grew significantly (annualized revenue run rate of Rs. 11,276 crore in the September quarter, 2008 and official reserves of Rs. 8,392 crore). The differential in the real profits and the one reflected in the books was further accentuated by the fact that the company had to carry additional resources and assets to justify higher level of operations - thereby significantly increasing the costs. Every attempt made to eliminate the gap failed. As the promoters held a small percentage of equity, the concern was that poor performance would result in a take-over; thereby exposing the gap. It was like riding a tiger, not knowing how to get off without being eaten. The aborted Maytas acquisition deal was the last attempt to fill the fictitious assets with real ones. Maytas' investors were convinced that this is a good divestment opportunity and a strategic fit. Once Satyam's problem was solved, it was hoped that Maytas' payments can be delayed. But that was not to be. What followed in the last several days is common knowledge.
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When exactly was the scandal unearthed? While the scandal became public knowledge only in early January 2009, problems had already started emerging in October 2008.It started off when the World Bank issued an 8 year ban against Satyam, accusing them of stealing assets from the Bank after installing spy systems on their computers. This was roughly around the time that the effects of the recession were wrecking havoc across USA and instead of negative quarterly results Satyam was still declaring positive results with a reported net income of $132.3 million, an increase in nearly 28% from the same quarter of the previous year. And so investors continued to buy Satyam shares in hoards. However Satyams luck soon ran out when in December 2008, Satyams board approved the purchase of Maytas Properties and Maytas Infrastructure. Two companies owned by family members of Mr. Raju and whose core line of work was not information technology but rather construction projects. However the merger, instead of being met with approval from investors was met with outrage because Mr. Raju and his family now had a larger stake in Maytas than in Satyam and also because investors believed that it was an attempt to siphon money from Satyam into the hands of the Raju family. In early January 2009, 5 independent directors resigned from the company board and analysts started putting sell options on the companys shares. It was only after this that Mr. Raju finally came clean on January 7th 2009, and stated that he had been misrepresenting the companys accounting figures for many years.
What does this mean for investment in India? The scandal is likely to have scared off any new investors who were thinking about investing in the Indian Market and also numerous outsourcing clients, who will think twice before outsourcing to India. However it represents a boon to the big three (Infosys, Wipro and Tata Consultancy in the IT outsourcing sector) in India because Satyams clients will now switch over to them. What was the effect on the Indian Stock Market? Upon the news becoming public knowledge, Satyams shares fell by a record 75% and dragged down the stock market by nearly 7%. Investors lost faith in the market and it plummeted by nearly 13% in January 2009 after the scandal was unearthed. However the government of India acted quickly in this case and installed an interim board of directors while at the same time looking for other companies that were willing to buy out Satyam. Thus an asset sale of Satyam was quickly accomplished in the spring of 2009 and this restored Indian investors confidence in the market.
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What happened to Satyam in the End? Once the auction process for Satyam began in early March 2009, the 4 major players in the fray were engineering giant Larsen and Toubro (L&T), software giant Tech Mahindra, private equity firm WL Ross and NASDAQ listed Cognizant Technology Solutions. The companies had to bid for a 31% stake in the firm with an additional 20% that had to be acquired via an open offer in the market. Finally in April 2009, Tech Mahindra(tech arm of the global conglomerate Mahindra & Mahindra)won the auction process and paid approximately $1.29 or Rs 58 per Satyam share valuing the entire transaction at approximately $ 647 million. And in the relatively short 4 months that the Satyam scandal was unearthed and finally put to rest in April 2009 after its acquisition by Tech Mahindra, the effects of the scandal will be long on India Inc. (a common term used by the media to refer to the formal sector India) because it not only resulted in numerous changes to SEBI(Securities and Exchange Board of India) regulatory requirements but also to tighter scrutiny of company balance sheets by auditors.
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7 Examples of failure in corporate governance

1. Failure at Enron: Enron is an excellent example where managers at the top allowed a culture to thrive in which secrecy, rule-breaking and fraudulent behaviour were tolerable. It appears that performance incentives created an environment where employees sought to generate profit at the expense of the company's stated standards of ethics and strategic goals. Enron had all the structures and mechanisms for good corporate governance. It also had a corporate social responsibility task force and a code of conduct on security, human rights, social investment and public engagement. Yet no one followed the code. The board of directors allowed the management openly to violate the code, particularly when it allowed the CFO to serve in the special purpose entities (SPEs); the audit committee allowed suspect accounting practices and made no attempt to examine the SPE transactions. The auditors failed to prevent questionable accounting which included use of outdated accounting principles and arrangements to minimise taxes. 2 Failure at Wal- Mart: Despite strong policies on paper, Wal-Mart has struggled to implement its standards across its US business. 'Weaknesses in internal controls have eroded the company's reputation as an attractive employer and are adding fuel to the fires of Wal-Mart's critics. Its failure to deliver on these policy commitments is inhibiting WalMart's ability to expand into new domestic markets. Over 'the past several years', it has become increasingly concerned by signs of failure in internal controls that have led to government investigations and class action lawsuits by employees. Allegations include requiring employees to 'work off the clock' -- during breaks and after shifts -- systematic discrimination against women, and alleged questionable tactics to prevent workers from voting for union representation. It got off to a promising start in 2005 with expectations of a dialogue with the independent directors on the audit committee. But when this simply withered on the vine, Wal-mart had little choice but to bring concerns about internal controls, labour violations and the erosion of the company's reputation to fellow shareholders.
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8 Conclusion
There are several corporate governance structures available in the developed world, but there is no one structure, which can be singled out as being better than the others. There is no one size fits all structure for corporate governance. The Committees recommendations are not, therefore, based on any one model, but, are designed for the Indian environment. Corporate governance extends beyond corporate law. Its fundamental objective is not mere fulfilment of the requirements of law, but, in ensuring commitment of the Board in managing the company in a transparent manner for maximizing long-term shareholder value. Corporate governance has as many votaries as claimants. Among the latter, the Committee has primarily focused its recommendations on investors and shareholders, as they are the prime constituencies of SEBI. Effectiveness of a system of corporate governance cannot be legislated by law nor can any system of corporate governance be static. In a dynamic environment, systems of corporate governance need to continually evolve. The Committee believes that its recommendations raise the standards of corporate governance in Indian firms and make them attractive for domestic and global capital. These recommendations will also form the base for further evolution of the structure of corporate governance in consonance with the rapidly changing economic and industrial environment of the country in the new millennium.
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9 Bibliography
http://business.gov.in/corporate_governance/suggestions_opinions.php http://www.sebi.gov.in/commreport/corpgov.jsp The Satyam Saga:- Kiran Karnik http://investeens.com/component/content/article/284.pdf http://trak.in/tags/business/2009/01/06/satyam-head-raju-admits-fraud-letter-boarddirectors/ www.mahindrasatyam.com
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APPENDIX
*THE SATYAM SAGA
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Corporate Governance

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Corporate Governance-the Kumar Mangalam Birla Committee Report