Corporate Government and Investor Protection

Dr. Dewashish Mukherjee Principal Mahant Laxmi Narayan Das College Raipur (C.G.) Khushboo Dubey Asstt. Professor (Commerce) Mahant Laxmi Narayan Das College Raipur (C.G.)

Abstract
Corporate Governance has emerged as an important academic discipline in its own right, bringing together contributions form accounting, finance, law and management Corporate governance now offers a comprehensive, interdisciplinary approach to the management and control of companies Corporate professionals of today and tomorrow must imbibe in themselves the evolving principles of good corporate governance across the globe on a continual basis. Excellence can be bettered only through continuous study, research and academic and professional interaction of the highest quality in the theory and practice of good corporate governance. Anybody who invests in company shares in normally called as investor. A strong investor protection is associated with effective corporate governance. According to Fernando AC when an investor invests his hard earned money in the securities of the organization he does so with certain expectation of its performance the corporate benefits that may accure to him and above all prospects of income and possibilities of capital growth of securities he holds in the organization. This research study confirms that an essential feature of good governance is strong investor protection.

Introduction : The root of the word Governance is from gubernate which means to steer . Corporate governance would mean to steer an organization in the desired direction. The responsibility to steer lies with the board of director s and governing board. Governance is concerned with the intrinsic nature, purpose, instability and identity of an organization with primary fouls on the entitys relevance, continuity and fiduciary aspects. Anybody who invests in company shares is normally called as investor. A strong investor protection is associated with effective corporate governance. As the investors finance the [1]

companies, they take the risk that could put them in a situation in which the returns on their investments may not be forthcoming due to the managers or those whom they have appointed them to represent them in board may covertly or overtly betray them Good governance in integral to the very existence of company. It inspires and strengthens investors confidence by ensuring companys commitment to higher growth and profits. Corporate Governance extends beyond corporate law. Its fundamental objective is not mere fulfillment of the requirements of law but in ensuring commitment of the Board in ensuring commitment of the Board in managing the company in a transparent manner for maximizing stakeholder value. The real onus of achieving desired levels of corporate governance lies with corporate themselves and not in external measures.

Need for Investors protections : Corporate scams and accounting scandals Insider Treading Non Disclosure of material facts. Vanishing Companies Talking investors money and Terrorists finding. Money Laundering.

Modern Day Principles of corporate Governance :

Solid foundations for management and oversight. Structure the Board to add value. Promote ethical and responsible decisions making. Safeguard integrity in financial reporting. Timely and balanced disclosures.

Objectives of Corporate Governance :

Good governance is integral to the very existence of a company. It inspires and strengthens investors confidence by ensuring companys commitment to higher growth and profits. It seeks to active the following objectives :(i) A properly structured Board capable of talking independent and objective decisions is in place at the helm of affairs. [2]

(ii)

The Board is balanced as regards the representation of adequate number of nonexecutive and independent directors who will take care of the interests and well being of all the stakeholders.

(iii)

The Board adopts transparent procedures and practices and arrives at decisions on the strength of adequate information.

(iv) (v)

The Board has an effective machinery to subserve the concerns of stakeholders. The Board keeps the shareholders informed of relevant developments impacting the company.

(vi)

The Board effectively and regularly monitors the functioning of the management team, and

(vii)

The Board remains in effective control of the affairs of the company at all times.

Elements of good corporate Governance :

Transparency Disclosures Accountability Equity Compliance Eithics Shareholders value

Institutional Investors :
Institutional investors are organization which pool large sums of money and invest those sums in companies. Their role in the economy is to act as highly specialized investors on behalf of others. In India, there are broadly the following types of institutional investors (see also Table 1 : Major Investors with in each Institutional Investor Group). Development oriented financial institutions such as IFCI, IDBI and State Financial Corporations. Insurance Companies LIC, GIC and other subsidiaries Banks All Mutual funds and including UTI Pension Funds [3]

Institutional Investor Type Foreign Institutional Investors

Top 5 Investors Aberdeen asset Managers HSBC Global Investments Templeton Global Advisors Morgan Stanley Goldman Sachs Investments

Mutual Fund

Public Sector UTI SBI Mutual

Private Sector Insurance Company Source : Capital Line Database For instance, an ordinary person will have a pension from his employer. The employer gives that persons pension contributions to a fund. the fund will buy shares in a company, or some other financial product. Funds are useful because they will hold a board portfolio of investments in many companies. this spreads risk, so if one company fails, it will be only a small part of the whole funds investment. HDFC Mutual Fund Reliance Capital Mutual Fund ICICI Prudential Mutual Fund Templetion Mutual Fund HSBC Mutual Fund IDBI IFCI ICICI Bank HDFC State Bank of India LIC GIC and Subsidiaries

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Role of Institutional Investors in Good Corporate Governance

Most of the reports on corporate governance have emphasized the role which the institutional investors play in corporate governance. The Cadbury Committee (1992) states : Because of their collective stake we look to the institutional in particular, with the backing of the Institutional Share holders Committee to use their influence as owners to ensure that companies in which they have invested comply with the code. A similar view was expressed in Green Bury Report (1995) as one of the main action point is : the investor institution should use their power and influence to ensure that the implementation of the best practices set out in the code. Similarly Hampel Report (1998) stated that : It is clear. that a discussion of the role of shareholders in corporate governace will mainly concern the institutions. Kumara Mangalam Birla Committee on Institutional investors observed that : (a) Institutional shareholders have acquired a large stake in equity share capital of listed companies. In some of the listed companies they are the major shareholders and own shares largely on behalf of the retial shareholders. (b) They have a special responsibility given the weightage of their vaotes and have a bigger role to play in corporate governance as retail investors look upon them for positive use of their voting rights. (c) The report recommends that Institutional investors maintain an arms length relation with the management. Institutional investors will have a lot of influence in the management of corporations because they will be entitled to exercise the voting rights in a company. They can engage in active role in corporate governance. Furthermore, because institutional investors have the freedom to buy and sell shares, they can play a large part in which companies stay solvent and which go under. Influencing the conduct of listed companies, and providing them with capital are all part of the job of investment management.

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Tools Used by Institutional Investors :

The Institutional Investors use different tools to assess the health of Company before investing resources in it. Some of the important tools are discussed as under : (i) One- to one meetings The Meetings between institutional investors and companies are extremely important as a means of communication between the two parties. This is one clear example of the way that individual investors are at a disadvantage to institutional investors as corporate management will usually only arrange such meetings with large investor who are overwhelmingly institutional investors. A company will usually arrange to meet with its largest institutional investors on a one-to-one basis during the course of the year. (ii) Voting The right to vote which is attached to voting shares (as opposed to non-voting shares) is a basic prerogative of share ownership, and is particularly important given the division of ownership (shareholders) and control (directors) in the modern corporation. the right to vote can be seen as fundamental tools for some element of control by shareholders. The institutional investors can register their views by postal voting, or vote electronically where this facility is available. Most of the large institutional investors now have a policy of trying to vote on all issues which may be raised at their investee companys AGM. Some may vote directly on all resolutions, others may appoint a proxy (which may be a board member).

(iii)

Focus lists A number of institutional investors have established focus lists whereby they target underperforming companies and include them on a list of companies which have underperformed a main index, such as Standard and Poors. Underperforming the index would be a first point of identification, other factors would include not responding appropriately to the institutional investors enquiries regarding underperformance, and not taking account of the institutional investors news. After being put on the focus list, the companies often receive unwanted, attention of the institutional investors who may seek to change various directors on this board. [6]

(iv)

Corporate Governance rating system With the increasing emphasis on corporate governance across the globe, it is perhaps not surprising that a number of corporate governance rating systems have been developed. Examples of such firms which have developed corporate governance rating systems are Deminor. Standard and Poors and Governance Metrics International (GMI). The rating system cover several markets, for examples , Deminor has tended to concentrate on European companies whilst Standard and poors have used their corporate governance rating system in quite different markets, for example, Russia,. GMI ratings cover a range of countries including the US, various countries in the Asia-pacific region and Europe. These corporate governance rating systems should be of benefit to investors, both potential and those presently invested, and to the companies themselves.

In turn, the ratings will also be useful to governments in identifying perceived levels of corporate governance in their country compared to other countries in their region, or outside it, whose companies may be competing for limited foreign investment. In emerging market countries in particular, those companies with a corporate governance infrastructure will ceteris paribus be less subject to cronyism and its attendant effects on accountable , and hence more attractive to foreign investors. 1. Investor Protection Securities and Exchange Board of India (SEBI) is the capital market regulator and nodal agency in India who regulates the security market. One of the objectives of the SEBI is to provide a degree to protection to the investors and to safeguard their rights, steady flow of savings into market and to promote the development of and regulate the securities market. The prospective investors get information through various modes of communication by the organizations. Some of the means are : Prospectus of Offer documents Advertisement through various media Market quotes in case of listed companies News items and articles in financial dailies such as Economic Times, Business Lines and journals [7]

Research Reports Advice from share brokers, friends and gossips Corporate filling with Stock Exchange, ROC etc.

Investors should be safeguarded not only against frauds and cheating but also against the losses arising out of unfair practices . Such practices may include. Deliberate misstatement in offer statements to investors Price Manipulations Insider trading

Keeping in view of the above facts, SEBI has focused on the following main areas : Issue of securities by companies Primary Market Intermediaries Secondary Market Intermediaries Investors

SEBI has issued many guidelines and regulations to regulate the capital market and to protect the investors. Some of the guidelines are : SEBI (Disclosure and Investor Protection) guideline 2000, SEBI (Ombudsman) Regulation 2003- designed to redress the investors grievance against listed companies or intermediaries or both for amicable settlement, SEBI (Prohibition of fraudulent and unfair Trade Practices relating to securities market) Regulations 2003- to prohibit any fraudulent and unfair Trade Practices relating to securities market. SEBI (Prohibition of Insider Trading) Regulations 1992 and amended in 2002. The basic objective is to prohibit persons who have more access to companys information which can be used to benefit the individual or group of individual or agency. In addition to the above, SEBI has set up a separate cell to address the grievances of investors. To support further, the government of India has also enacted Right to Information (RTI) Act 2005 to provide right to information to citizen to secure access to information under the control of public authority in order to promote transparency and accountability.

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Table :- Nature of complaints against companies under various Acts and relief provided. Source Fernando AC Corporate Governance- Principles, Policies and Practices, Pearson Publications, Second impression, 2008 p.p. 154. Sl.No. 1. Complaints Legislative provisions 73 of Relief Provided

Delay in refund of excess Section application money

the Payment of interest for the period beyond 70 days from the clause of subscription list @ 15 percent.

or Companies Act, 1956

allotment letters.

2.

Delay Shares

in

Transfer

of Section

133

of

the A time limit of 60 days provided transfer. for As per effective listing

Companies Act, 1956

agreement it is 30 days. 3. Refusal of transfer of Section 22 (A) of the Transfer can be refused only shares Securities Counteracts for specific and valid

(Regulation) Act 4. Problems of odd lots

reasons.

Listing agreement provides Need for consolidation of for issue of certificates in odd lots and ensure the issue marketable lots and of shares only in marketable lots through conversion of debentures or right issues. provision of odd lot trading and listing out broker

avoidable odd lots

willing to trade. 5. Take Over bids New Clauses 40A and 40B Purchase or acquisition of of listing agreement & shares beyond 5% to be SEBI (Substantial notified to Stock exchange.

Acquisition of Shares and Purchase or acquisition of Takeovers) 1997 Regulations, shares beyond 10% puts the obligation on the transferor and intermediary to notify to [9] stock exchange and

Sl.No.

Complaints

Legislative provisions

Relief Provided public, and offer to other share holders of the

company to buy at offer price or highest market price during the last six month. 6. Insider Trading, rigging SEBI and other mal practices Insider Regulations, 1992 (Prohibition) of The Investors have to guard

Trading) themselves regarding the price and their investment besides marking complaint to SEBI.

7.

Delay and non-payment of Section

58

(B)

of Appeal to Company Law Board.

interest / fixed deposits by Companies Act, 1956 companies 8.

Delay in non-payment of Rules and bylaws of stock Complaint to grievance Cell dues and non delivery of exchange shares by brokers of SEBI

9.

Non Supply of debenture Sections 163, 196, 219, Appeal to company law trust deed and refusal to 304 of Companies Act, Board inspection. 1956 and lodge a

complaint to trustee.

Future of investors :Frauds such as that happened with Satyam may increase investor nervousness about weak corporate governance and oversight in emerging markets, which are still reeling from the global financial crisis. Besides that it is a big shock to IT industry as well as to all the investors who are relying on such IT companies. All these situations caused bad impact for the capital market in India. Corporate frauds are not new to India or to the world. At every corner of the world unscrupulous individuals and institutions are involved in committing fraud. Fraudsters knowing them to be so commit frauds corporate frauds do not happen in isolation but happens in organized form. Satyam was the biggest ever in the list with huge [10]

amount of accounting fraud committed. One of the earliest cases of serious corporate fraud where the promotes was convicted was that of Ramakrishna Dalmia in 1956. After that an important conviction made was on Harshad Mehta in 1992 and Ketan Parikh in 2001.

Conclusion :Over the last decade, corporate governance has risen in prominence as the sole of the private sector has increased around the world, and greater integration of financial markets has led to greater competition for capital flows and increased the risk arising from internationally mobile capital flows. While governments play a central role in shaping the legal , institutional and regulatory climate within which individual corporate governance system are developed, the main responsibility lies with the private sector. More corporate controls are necessary to check frauds committed by management. The listed companies constitute the major pool of capitalization and the important segment the economy namely, capital market in India. Despite the regulatory efforts of SEBI [ Stock exchange Board of India] and CLB (Company Law Board) to discipline the corporate, yet we are still in the journey towards the quality in management of companies. On one track reforms take place for tuning of corporate and on the other many scams are unearthed despite many regulations. Corporate Governance should not be followed just as set of rules and procedures. It is the key to corporate excellence. so companies should never make a negligence in good corporate governance it really makes true sense to achieve corporate excellence.

Reference:
1. Ashok k. Nandani Business Ethics and Business communication. 2. Neeraj Dewedi The road ahead for corporate reform. 3. Sanjeev Ageawal Corporate Governance concept and dimensions . 4. Corporate governance ICSI and Taxmann publication. 5. Governance Ethics and business sustainability issued by ICSI. 6. Hindusthantimes 7. Company secretary bulletin. 8. Magzine Economic times. 9. Economic summry of india. [11]

10. Pratiyogita Darpan 11. Corporate

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