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CORPORATE GOVERNANCE
INTRODUCTION
Corporate governance to the system by which operations are directed and controlled. The
governance structure specifies the distribution of rights and responsibities among different
participants in the corporation (such as the board of directors, managers, shareholders,
creditors, auditors, regulators and other stakeholders) and specifies the rules and procedures
for making decisions in corporate affairs. Governance provides the structure through which
corporations set and pursue their objectives, while reflecting the context of the social,
regulatory and market environment. Governance is a mechanism for monitoring the actions,
policies and decisions of corporations. Governance involves the alignment of interests
among the stakeholders.
Corporate governance has also been defined as a system of law and sound approaches by
which corporations are directed and controlled focusing on the internal and external
corporate structures with the intention of monitoring the actions of management and
directions and thereby agency risks which may stem from the misdeeds of corporate
shareholders,
debt
holders,
trade creditors,
suppliers,
customers
and
Definition
Corporate Governance as 'an internal system encompassing policies, processes
and people, which serves the needs of shareholders and other stakeholders, by
directing and controlling management activities with good business savvy,
objectivity, accountability and integrity. Sound corporate governance is reliant
on external market place commitment and legislation, plus a healthy board
culture, which safeguards policies and processes'
CHAPTER 2.
WHAT IS CORPORATE GOVERNANCE?
CHAPTER 3.
CORPORATE GOVERNANCE IN INDIA
The history of the development of Indian corporate laws has been marked by
interesting contrasts. At independence, India inherited one of the worlds
poorest economies but one which had a factory sector accounting for a tenth of
the national product: four functioning stock markets (predating the Tokyo Stock
Exchange) with clearly defined rules governing listing, trading and settlements;
a well-developed lending norms and recovery procedures. Interims of corporate
laws and financial system, therefore, India emerged far better endowed than
most other colonies. The 1956 Companies Act as well as other laws governing
the functioning of joint-stock companies and protecting the laws governing the
functioning of joint-stock companies and protecting the investors rights built on
this foundation.
This sordid but increasingly familiar process usually continued till the
companys net worth was completely eroded. This stage would come after the
company has defaulted on its loan obligations for a while, but this would be the
stage where Indias bankruptcy reorganization system driven by the 1985 Sick
Industrial Companies Act (SICA) would consider it sick and refer it to the
Board for Industrial and Financial Reconstruction (BIFR). As soon as a
company is registered with the BIFR it wins immediate protection from the
creditors claims for at least four years. Between 1987and 1992 BIFR took well
over two years on an average to reach a decision, after which period the delay
has roughly doubled. Very few needed to be liquidated, the legal process takes
over 10years on average, by which time the assets of the company are
practically worthless. Protection of creditors rights has therefore existed only
on paper in India. Given this situation, it is hardly surprising that banks flush
with depositors funds routinely decide to lend only to blue chip companies and
park their funds in government securities.
While the Companies Act provides clear instructions for maintaining and
updating share registers, in reality minority shareholders have often suffered
For most of the post-Independence era the Indian equity markets were not liquid
or sophisticated enough to exert effective control over the companies. Listing
requirements of exchanges enforced some transparency, but non-compliance
was neither rare nor acted upon. All in all therefore, minority shareholders and
creditors in India remained effectively unprotected in spite of a plethora of laws
in the books.
CHAPTER 4.
CHAPTER 5.
PRINCIPLES OF CORPORATE GOVERNANCE
The corporate governance practice in the Company is built in conformity with
the best international standards and recommendations set in the Code of
Corporate Behavior of the Federal Financial Markets Service, as well as the
provisions of the Code of Corporate Governance of PJSC Enel Russia ratified
by the company in 2006.
(employees)
and
externally
(clients,
communities,
political/regulatory agents).
CHAPTER 8.
MECHANISM AND CONTROLS
Corporate governance mechanisms and controls are designed to reduce
the inefficiencies that arise from hazard and adverse selection. There are both
internal monitoring system and external monitoring systems. Internal monitoring
can be done, for example, by one (or a few) large shareholder(s) in the case of
privately held companies or a firm belonging to a business group. Furthermore
the various board mechanisms provide for internal monitoring. External
monitoring of managers behavior occurs when an independent third party (e.g.
the external auditor) attests the accuracy of information provided by management
to investors. Stock analysis and debt holders may also conduct such external
monitoring. An ideal monitoring and control system should regulate both
motivation and ability, while providing incentive alignment toward corporate
goals and objectives. Care should be taken that incentives are not so strong that
some individuals are tempted top cross lines of ethical behavior, for example by
manipulating revenue and profit figures to drive the share price of the company
up. It can be further controlled with the help of two methods:
1. Internal corporate governance controls
2. External corporate governance controls
financial statements)
Government regulations
Managerial labor market
Media pressure
Takeovers
CHAPTER 9.
PROBLEMS OF CORPORATE GOVERNANCE
CHAPTER 10.
LEGAL FRAMEWORK
Corporate governance has been a buzzword in India since 1998. But the need to
have a good mechanism started since the beginning of 1990s when the Indian
stock market rocked with many scams. On account of the interest generated by
Cadbury Committee Report (1992) in UK, the Confederation of Indian
Industries (CII), the Associated Chambers of Commerce and Industry
(ASSOCHAM) and the Securities and Exchange Board of India (SEBI)
constituted Committees to recommend initiatives in Corporate Governance. The
recommendations of the Kumar Mangalam Birla Committee, constituted by
SEBI, led to the addition of Clause 49 in the Listing Agreement. These
recommendations, aimed at
Governance, are divided
improving
into
the standards
mandatory
and
of Corporate
non-mandatory
49 of
the listing
agreement on
the basis
of
trading in its shares. This penalty hurts the investor community more than the
management of the company that violates the listing agreement.
Regional stock exchanges where a large number of companies are listed lack
effective organization and skills to monitor effective compliance with corporate
governance norms.
A vast majority of companies that are not listed remain outside the purview of
SEBIs measures.
The financial institutions that have large shareholdings in most of the listed
companies have been passive observers in the area of corporate governance and
do not effectively exercise their rights as shareholders.
The autonomy of the Boards of Public Sector Units and public sector banks
has been seriously eroded due to special legislative provisions or notifications
and day to day interference by the concerned administrative ministries. It is
In addition small investors have lost their hard earned money in the stock
markets for the following reasons:
Lack of ethics, selfish conscience, and breach of trust on the part of the
promoters.
Lack of adequate compliance mechanism, supervision, proper inspection,
effective regulation and preventive action by regulators like Department
of Company Affairs, Registrar of Companies, Board of Stock Exchanges
as well as SEBI.
Lack of professional ethics on the part of professionals, like Chartered
Accountants, Company Secretaries etc, who are holding onerous
positions in companies. It all establish that no matter that most of the
companies may be fully complying with the corporate governance norms
laid down by clause 49, but absence of good conscience on the part of the
promoters to observe ethical practices have created little impact in
practice. A number of proposals have been made to improve corporate
governance.
CHAPTER 11.
MEASURES CONSTITUTED BY RBI FOR CORPORATE
GOVERNANCE
Reserve Bank of India has taken various steps furthering corporate governance
in the Indian Banking System. These can broadly be classified into the
following three categories: a) Transparency b) Off-site surveillance c) Prompt
corrective action Transparency and disclosure standards are also important
constituents of a sound corporate governance mechanism. Transparency and
accounting standards in India have been enhanced to align with international
best practices. However, there are many gaps in the disclosures in India vis-vis the international standards, particularly in the area of risk management
strategies and risk parameters, risk concentrations, performance measures,
component of capital structure, etc.
CONCLUSION
Corporate Governance has become the latest buzzword today. Almost every country
has institutionalized a set of Corporate Governance codes, spelt out best practices
and has sought to impose appropriate board structures. Despite the Corporate
Governance revolution there exists to universal benchmark for effective levels of
disclosure and transparency. 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. Corporate governance extends beyond corporate law.
Its fundamental objective is not the mere fulfillment 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. Effectiveness of corporate
governance system cannot merely be legislated by law. As competition increases,
technology pronounces the death of distance and speeds up communication. The
environment in which companies operate in India also changes. In the dynamic
environment the systems of corporate governance also need to evolve.
The recommendations made by different expert committees will go a long way in
raising the standards of corporate governance in Indian companies and make them
attractive destinations for local 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.
BIBLIOGRAPHY
www. wikipedia.org
www.scibd.com
www.sebi.gov.in
www.mca.gov.in
www.nseindia.com
www.bseindia.com
www.tatasteel.com