Professional Documents
Culture Documents
2236, Business Environment
2236, Business Environment
Submitted by:
Nidhi Prakriti
Submitted to:
Dr. Kirti,
SEMESTER: 4th
ACKNOWLEDGEMENT
I give all the honour and glory to God Almighty, who gave me the grace to complete this
project. I acknowledge with great appreciation, my professor, Dr. Kirti, for her guidance and
commitment to the success of this work, despite the large workload on her table. I am
grateful, ma’am.
I also appreciate with great joy my parents, the best parent on the face of the planet, who
ensures my success academically. Thank you for your support spiritually, financially and
morally.
I owe the present accomplishment of my project to our CNLU librarians, who helped me
immensely with materials throughout the project and without whom I couldn’t have
completed it in the present way.
I would also like to extend my gratitude to my friends and all those unseen hands that helped
me out at every stage of my project and for accommodating my trouble during the writing
period of this project. God bless you all.
THANK YOU,
NIDHI PRAKRITI
SEMESTER- 4th
CNLU, Patna
INDEX
ACKNOWLEDGEMENT....................................................................................3
INTRODUCTION................................................................................................5
HYPOTHESIS...................................................................................................6
RESERCH METHODOLOGY.........................................................................6
LITERATURE REVIEW.....................................................................................8
HISTORICAL BACKGROUND....................................................................11
INDIAN SCENARIO......................................................................................15
INTERNATIONAL SCENARIO....................................................................15
LEGAL FRAMEWORK....................................................................................17
COMPANIES LAWS......................................................................................17
SEBI LAWS....................................................................................................20
CONCLUSION...................................................................................................29
BIBLIOGRAPHY...............................................................................................30
INTRODUCTION
Companies pool capital from a large investor base both in the domestic and in the
international capital markets. In this context, investment is ultimately an act of faith in the
ability of a company’s management. In order to manage the affairs of a company and to act in
the best interests of all at all times, there must be a system whereby the directors are entrusted
with responsibilities and duties in relation to the direction of the company affairs.
Corporate governance is also concerned with the morals, ethics, values, parameters, conduct
and behaviour of the company and its management.
The underlying principles of corporate governance revolve around three basic inter- related
segments. These are:
According to the Confederation of Indian Industry (CII), corporate governance deals with
laws, procedures, practices and implicit rules that determine the ability of the company to
make managerial decisions vis- à-vis its claimants – in particular, its shareholders, creditors,
customers, the State and employees.
Corporate governance mainly consists of two elements i.e., A long-term relationship, which
has to deal with checks and balances, incentives of managers and communications between
Management and investors. The second element is a transactional relationship involving
matters relating to disclosure and authority. In other words, 'good corporate governance' is
simply 'good business'.
This project is an attempt of delve deep into the concept of corporate governance and analyse
the intermingling of judiciary with it.
AIM AND OBJECTIVE OF THE STUDY
HYPOTHESIS
The researcher has formulated the hypothesis that corporate governance improves the
performance of any company.
RESERCH METHODOLOGY
The researcher will do doctrinal type of research in which he will go through both the
primary and secondary sources. The researcher through this methodology will be able to get
an exact picture of the problem in question. The doctrinal method helps in doing a
comparative study of the topic. This methodology helps in going through not only the work
of one eminent person but of many other too. This helps in getting the bird’s eye view of the
subject.
The researcher will collect data from primary as well as secondary sources.
1. Legislations
2. Case Laws
Since the researcher is a student of law and management, she has access to a limited area.
The researcher having read the legislations, commentary, and reports itself could understand
the problem clearly but it would have been clearer if she would have access to read
commentary of more writers. The researcher has limited time for the project. But still
researcher with her hard work will manage to take out the best possible work.
LITERATURE REVIEW
The term “corporate governance” is a relatively new one both in the public and academic
debates, although the issues it addresses have been around for much longer, at least since
Berle and Means (1932) and the even earlier Smith (1776).
Zingales (1998) expresses the view that “allocation of ownership, capital structure,
managerial incentive schemes, takeovers, board of directors, pressure from institutional
investors, product market competition, labour market competition, organisational structure,
etc., can all be thought of as institutions that affect the process through which quasi-rents are
distributed (p. 4)”. He therefore defines “corporate governance” as “the complex set of
constraints that shape the ex-post bargaining over the quasi-rents generated by a firm (p. 4)”.
Williamson (1985) suggests a similar definition.
Viewing the corporation as a nexus of explicit and implicit contracts, Garvey and Swan
(1994) assert that “governance determines how the firm’s top decision makers (executives)
actually administer such contracts (p. 139)”. They also observe that governance only matters
when such contracts are incomplete, and that a consequence 4 is that executives “no longer
resemble the Marshallian entrepreneur (p. 140)”.
Shleifer and Vishny (1997) define corporate governance by stating that it “deals with the
ways in which suppliers of finance to corporations assure themselves of getting a return on
their investment (p.737)”. A similar concept is suggested by CaramanolisCötelli (1995), who
regards corporate governance as being determined by the equity allocation among insiders
(including executives, CEOs, directors or other individual, corporate or institutional investors
who are affiliated with management) and outside investors.
John and Senbet (1998) propose the more comprehensive definition that “corporate
governance deals with mechanisms by which stakeholders of a corporation exercise control
over corporate insiders and management such that their interests are protected (p. 372)”. They
include as stakeholders not just shareholders, but also debtholders and even non-financial
stakeholders such as employees, suppliers, customers, and other interested parties. Hart
(1995) closely shares this view as he suggests that “corporate governance issues arise in an
organisation whenever two conditions are present. First, there is an agency problem, or
conflict of interest, involving members of the organisation – these might be owners,
managers, workers or consumers. Second, transaction costs are such that this agency problem
cannot be dealt with through a contract (p. 678)”.
These numerous definitions all share, explicitly or implicitly, some common elements. They
all refer to the existence of conflicts of interest between insiders and outsiders, with an
emphasis on those arising from the separation of ownership and control (Jensen and
Meckling, 1976) over the partition of wealth generated by a company. A degree of consensus
also exists regarding an acknowledgement that such corporate governance problem cannot be
satisfactorily resolved by complete contracting because of significant uncertainty,
information asymmetries and contracting costs in the relationship between capital providers
and insiders1 (Grossman and Hart, 1986, Hart and Moore, 1990, Hart, 1995). And finally, one
can be led to the inference that, if such a corporate governance problem exists, some
mechanisms are needed to control the resulting conflicts. The precise way in which those
monitoring devices are set up and fulfil their role in a particular firm (or organisation) defines
the nature and characteristics of that firm’s corporate governance. As the following sections
show, such mechanisms can be external or internal to the company.
There are several basic reasons for the growing interest in corporate governance. In the first
place, the efficiency of the prevailing governance mechanisms has been questioned (see for
instance, Jensen, 1993, Miller, 1997 and Porter, 1997). Secondly, this debate has intensified
following reports about spectacular, high-profile financial scandals and business failures (e.g.
Polly Peck, BCCI), media allegations of excessive executive pay (see for example, Byrne,
Grover and Vogel, 19892), the adoption of anti-takeover devices by managers of publicly-
owned companies and, more recently, a number of high visibility accounting frauds allegedly
perpetrated by managers (Enron, Worldcom). Thirdly, there has been a surge of antitakeover
legislation (particularly in the US) which has limited the potential disciplining role of
takeovers on managers (see Bittlingmayer, 2000, for a description of this regulation). And,
finally, there has been a considerable amount of debate over comparative corporate
governance structures, especially between the US, Germany and Japan models (see Shleifer
and Vishny, 1997, for a survey of this debate) and a number of initiatives taken by stock
market and other authorities with recommendations and disclosure requirements on corporate
governance issues.
1
As Fama and Jensen (1983) observe, “agency problems arise because contracts are not costlessly written and
enforced (p. 327)”
2
See Byrne (1992) for manager’s counter-arguments over such allegations of excessive pay.
CORPORATE GOVERNANCE: MEANING AND DEFINITION
Meaning: Corporate governance refers to the structures and processes for the direction and
control of companies. Corporate governance concerns the relationships among the
management, Board of Directors, controlling shareholders, minority shareholders and other
stakeholders. Good corporate governance contributes to sustainable economic development
by enhancing the performance of companies and increasing their access to outside capital.
A means whereby society can be sure that large corporations are well-run institutions to
which investors and lenders can confidently commit their funds.
It is a term that refers broadly to the rules, processes, or laws by which businesses are
operated, regulated, and controlled. The term can refer to internal factors defined by the
officers, stockholders or constitution of a corporation, as well as to external forces such as
customer groups, clients and government regulations.
Considering the ethical failures in the last several years and the resulting crisis in
confidence...A sincere commitment to creating and sustaining an ethical business culture in
public and private sectors (has never been so important).
Definition: Definition of Corporate Governance has been given from time to time by the
various authorities.
As per ICSI: Corporate Governance is the best Management practices compliance of law in
true letter and adherence to ethical standards for effective management and distribution of
wealth and discharge of social responsibility for sustainable development of all stakeholders3
The above definition also reflects that a proper definition of corporate governance should not
just describe directors’ obligations towards shareholders. Different countries have different
ideas as to what constitutes good corporate governance. Therefore any satisfactory definition,
to be applicable to a modern, global company, must synthesize best practice from the biggest
3
https://searchcompliance.techtarget.com/definition/corporate-governance#:~:text=Corporate%20governance
%20is%20the%20combination,suppliers%2C%20government%20regulators%20and%20management.
economic powers into something which can be applied across all major countries. In essence
we believe that good corporate governance consists of a system of structuring, operating and
controlling a company such as to achieve the following:
• fulfilling the long-term strategic goal of the owners while taking into account the
expectations of all the key stakeholders, and in particular:
o consider and care for the interests of employees, past, present and future o work to
maintain excellent relations with both customers and suppliers
o take account of the needs of the environment and the local community
• Maintaining proper compliance with all the applicable legal and regulatory requirements
under which the company is carrying out its activities.
We believe that a well-run organization must be structured in such a way that all the above
requirements are catered for and can be seen to be operating effectively by all the interest
groups concerned. We develop this further in our section on best corporate governance
practice. Here we have set out our assessment of how corporate governance is usually
discussed and introduced our own, which we hope you have found useful. This page serves as
a hub to link to a range of issues related to the definition of corporate governance. For
example we define business ethics and Corporate Social Responsibility, different country
models and Codes of Conduct.4
HISTORICAL BACKGROUND
The principles of governance have been in existence for centuries. History reveals that
Kautilya also called Chanakya or Vishnu Gupta who was Mahaamatya (equivalent to Prime
Minister) in Maurya Empire in 300 BC propounded principles of good governance. In his
celebrated treatise on statecraft “Arthashastra”, he provided principles of governance. He
states the fourfold duty of a king as:
Duties of a King
Corporate governance …
And economic developments are intrinsically 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 reduction5.
5
Afsharipour, Afra, "The Promise and Challenges of India's Corporate Governance Reforms, Indian Journal of
Law & Economics, Vol. 1, UC Davis Legal Studies Research Paper No. 223, 2010.
CORPORATE GOVERNANCE: NORMS AND
CONSTITUENTS
Primarily it is about managing top management, building in checks and balances to ensure
that the senior executives pursue strategies that are in accordance with the corporate mission.
It consists of a set of processes, customs, policies, laws and institutions affecting the way of a
corporation is directed, administered or controlled. Corporate governance governs the
relationship among the many players involved (the stakeholders) and the goals for which the
corporation is governed.
• Composition of Board
• Legislation
• Code of Conduct
• Board Independence
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• Board Skills
• Board Appointments
• Board Meetings
• Audit Committee
Much attention to corporate governance issues in emerging markets among policymakers and
academics has focused on the role governance can play in improving access for emerging
market companies to global portfolio equity. An increasing volume of empirical evidence
indicates that well-governed companies receive higher market valuations.* However,
improving corporate governance will also increase all other capital flows to companies in
developing countries: from domestic and global capital; equity and debt; and from public
securities markets and private capital sources.
Improving performance
Equally important and, irrespective of the need to access capital, good corporate governance
brings better performance for IFC clients. Improved governance structures and processes help
ensure quality decision-making, encourage effective succession planning for senior
management and enhance the long-term prosperity of companies, independent of the type of
company and its sources of finance.
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https://www.forbes.com/sites/betsyatkins/2021/04/12/why-startups-are-increasingly-prioritizing-corporate-
governance-as-their-businesses-scale/
INDIAN SCENARIO
INTERNATIONAL SCENARIO
An effective regulatory and legal framework is indispensable for the proper and sustained
growth of the company. In rapidly changing national and global business environment, it has
become necessary that regulation of corporate entities is in tune with the emerging economic
trends, encourage good corporate governance and enable protection of the interests of the
investors and other stakeholders. Further, due to continuous increase in the complexities of
business operation, the forms of corporate organizations are constantly changing. As a result,
there is a need for the law to take into account the requirements of different kinds of
companies that may exist and seek to provide common principles to which all kinds of
companies may refer while devising their corporate governance structure.8
The important legislations for regulating the entire corporate structure and for dealing with
various aspects of governance in companies are Companies Act, 1956 and Companies Bill,
2004. These laws have been introduced and amended, from time to time, to bring more
transparency and accountability in the provisions of corporate governance. That is, corporate
laws have been simplified so that they are amenable to clear interpretation and provide a
framework that would facilitate faster economic growth.
Secondly, the Securities Contracts (Regulation) Act, 1956, Securities and Exchange Board of
India Act, 1992 and Depositories Act, 1996 have been introduced by Securities and Exchange
Board of India (SEBI), with a view to protect the interests of investors in the securities
markets as well as to maintain the standards of corporate governance in the country.
COMPANIES LAWS
The Ministry of Corporate Affairs (MCA) is the main authority for regulating and promoting
efficient, transparent and accountable form of corporate governance in the Indian corporate
sector. It is constantly working towards improvement in the legislative framework and
administrative set up, so as to enable easy incorporation and exit of the companies, as well as
8
Berger, P., and E. Ofek, 1995, “Diversification’s Effect on Firm Value”, Journal of Financial Economics 37,
39-65
convenient compliance of regulations with transparency and accountability in corporate
governance. It is primarily concerned with administration of the Companies Act, 1956 9 and
related legislations.
1. The Companies Act, 1956 is the central legislation in India that empowers the Central
Government to regulate the formation, financing, functioning and winding up of companies.
It applies to whole of India and to all types of companies, whether registered under this Act
or an earlier Act. It provides for the powers and responsibilities of the directors and
managers, raising of capital, holding of company meetings, maintenance and audit of
company accounts, powers of inspection, etc.
The main objectives with which this Act has been introduced are to:- (i) help in the
development of companies on healthy lines; (ii) maintain a minimum standard of good
behaviour and business honesty in company promotion and management; (iii) protect the
interests of the shareholders as well as the creditors; (iv) ensure fair and true disclosure of the
affairs of companies in their annual published balance sheet and profit and loss accounts; (v)
ensure proper standard of accounting and auditing; (vi) provide fair remuneration to
management and Board of Directors as well as to company's employees; etc. 10
The Companies Act, 1956 has elaborate provisions relating to the Governance of Companies,
which deals with management and administration of companies. It contains special provisions
with respect to the accounts and audit, directors’ remuneration, other financial and
nonfinancial disclosures, corporate democracy, prevention of mismanagement, etc.
Every company shall in each year, hold in addition to any other meetings, a general meeting
as its annual general meeting and shall specify the meeting as such in the notices calling it;
and not more than fifteen months shall elapse between the date of one annual general meeting
of a company and that of the next. At each annual general meeting, every company shall
appoint an auditor or auditors to hold office from the conclusion of that meeting until the
conclusion of the next annual general meeting and shall, within seven days of the
appointment, give intimation thereof to every auditor so appointed.
Every auditor of a company shall have a right of access at all times to the books and accounts
and vouchers of the company, whether kept at the head office of the company or elsewhere,
9
The Companies Act, 1956
10
Kumar, Anna D. and Suvarna S., Independent Directors in Listed Companies," 2005
and shall be entitled to require from the officers of the company such information and
explanations as the auditor may think necessary for the performance of his duties as auditor.
The auditor shall inquire: - (i) whether loans and advances made by the company on the basis
of security have been properly secured and whether the terms on which they have been made
are not prejudicial to the interests of the company or its members; (ii) whether transactions of
the company which are represented merely by book entries are not prejudicial to the interests
of the company; etc.
In the case of every company, a meeting of its Board of directors shall be held at least once in
every three months and at least four such meetings shall be held in every year. Every director
of a company, who is in any way, whether directly or indirectly, concerned or interested in a
contract or arrangement, or proposed contract or arrangement, entered into or to be entered
into, by or on behalf of the company, shall disclose the nature of his concern or interest at a
meeting of the Board of directors.
No director of a company shall, as a director, take any part in the discussion of, or vote on,
any contract or arrangement entered into, or to be entered into, by or on behalf of the
company, if he is in any way, whether directly or indirectly, concerned or interested in the
contract or arrangement; nor shall his presence count for the purpose of forming a quorum at
the time of any such discussion or vote; and if he does vote, his vote shall be void11.
Every company shall keep one or more registers in which shall be entered separately
particulars of all contracts or arrangements, including the following particulars to the extent
they are applicable in each case, namely:- (i) the date of the contract or arrangement; (ii) the
names of the parties thereto; (iii) the principal terms and conditions thereof; (iv) in the case of
a contract or arrangement to which this Act applies, the date on which it was placed before
the Board; (v) the names of the directors voting for and against the contract or arrangement
and the names of those remaining neutral. Further, every company shall keep at its registered
office a register of its directors, managing director, managing agent, secretaries and
treasurers, manager and secretary12.
The remuneration payable to the directors of a company, including any managing or whole-
time director, shall be determined, either by the articles of the company, or by a resolution or,
11
Agrawal, A., and C. Knoeber, 1998, "Managerial Compensation and the Threat of Takeover”, Journal of
Financial Economics 47, 219-239
12
Lintner, J., 1956, "Distribution of Incomes of Corporations Among Dividends, Retained Earnings and Taxes",
American Economic Review, May, 97-113
if the articles so require, by a special resolution, passed by the company in general meeting;
and the remuneration payable to any such director determined as aforesaid shall be inclusive
of the remuneration payable to such director for services rendered by him in any other
capacity. However, any remuneration for services rendered by any such director in any other
capacity shall not be so included if:- (i) the services rendered are of a professional nature; and
(ii) in the opinion of the Central Government, the director possesses the requisite
qualifications for the practice of the profession.
SEBI LAWS
An improved corporate governance is the key objective of the regulatory framework in the
securities market. Accordingly, Securities and Exchange Board of India (SEBI) has made
several efforts with a view to evaluate the adequacy of existing corporate governance
practices in the country and further improve these practices. It is implementing and
maintaining the standards of corporate governance through the use of its legal and regulatory
framework, namely:-
This Act was enacted to prevent undesirable transactions and to check speculation in the
securities by regulating the business of dealing therein. Any stock exchange, which is
desirous of being recognised, may make an application in the prescribed manner to the
Central Government. Every application shall contain such particulars as may be prescribed,
and shall be accompanied by a copy of the bye-laws of the stock exchange for the regulation
and control of contracts as well as a copy of the rules relating in general to the constitution of
the stock exchange, and in particular to:- (i) the governing body of such stock exchange, its
constitution and powers of management and the manner in which its business is to be
transacted; (ii) the powers and duties of the office bearers of the stock exchange; (iii) the
admission into the stock exchange of various classes of members, the qualifications for
membership, and the exclusion, suspension, expulsion and re-admission of members there
from or there into; (iv) the procedure for the registration of partnerships as members of the
stock exchange, in cases where the rules provide for such membership; and the nomination
and appointment of authorised representatives and clerks.
13
Securities Contracts (Regulation) Act, 1956
Every recognised stock exchange shall furnish the Central Government with a copy of the
annual report, and such annual report shall contain such particulars as may be prescribed. It
may make rules or amend any rules made by it to provide for all or any of the following
matters, namely:- (i) the restriction of voting rights to members only in respect of any matter
placed before the stock exchange at any meeting; (ii) the regulation of voting rights in respect
of any matter placed before the stock exchange at any meeting so that each member may be
entitled to have one vote only, irrespective of his share of the paid-up equity capital of the
stock exchange; (iii) the restriction on the right of a member to appoint another person as his
proxy to attend and vote at a meeting of the stock exchange; etc.
If, in the opinion of the Central Government, an emergency has arisen and for the purpose of
meeting the emergency, the Central Government considers it expedient so to do, it may, by
notification in the Official Gazette, for reasons to be set out therein, direct a recognised stock
exchange to suspend such of its business for such period not exceeding seven days and
subject to such conditions as may be specified in the notification, and, if, in the opinion of the
Central Government, the interest of the trade or the public interest requires that the period
should be extended, it may, by like notification extend the said period from time to time.
Securities Contracts (Regulation) Amendment Act, 2007 has been enacted in order to further
amend the Securities Contracts (Regulation) Act, 1956, with a view to include securitisation
instruments under the definition of 'securities' and provide for disclosure based regulation for
issue of the securitised instruments and the procedure thereof. This has been done keeping in
view that there is considerable potential in the securities market for the certificates or
instruments under securitisation transactions. Further, replication of the securities markets
framework for these instruments would facilitate trading on stock exchanges and, in turn,
help development of the market in terms of depth and liquidity.
This Act was enacted to protect the interests of investors in securities and to promote the
development of, and to regulate, the securities market and for matters connected therewith or
incidental thereto. For this purpose, the SEBI (the Board), by regulation, specify:- (i) the
matters relating to issue of capital, transfer of securities and other matters incidental thereto;
and (b) the manner in which such matters shall be disclosed by the companies.
14
Securities and Exchange Board of India Act, 1992
No stock-broker, sub-broker, share transfer agent, banker to an issue, trustee of trust deed,
registrar to an issue, merchant banker, underwriter, portfolio manager, investment adviser and
such other intermediary who may be associated with securities market shall buy, sell or deal
in securities except under, and in accordance with, the conditions of a certificate of
registration obtained from the Board in accordance with the regulations made under this Act.
This Act was enacted to provide for regulation of depositories in securities and for matters
connected therewith or incidental thereto. It provides for the introduction of scripless trading
system and settlement, which is considered necessary for the effective functioning of the
securities markets. As per the Act, the term 'depository' means "a company formed and
registered under the Companies Act, 1956 and which has been granted a certificate of
registration under sub-section (1A) of section 12 of the Securities and Exchange Board of
India Act, 1992".
A depository shall enter into an agreement with one or more participants as its agent, in such
form as may be specified by the bye-laws. Any person, through a participant, may enter into
an agreement, in such form as may be specified by the bye-laws, with any depository for
availing its services. Any such person shall surrender the certificate of security, for which he
seeks to avail the services of a depository, to the issuer in such manner as may be specified
by the regulations. The issuer, on receipt of certificate of security, shall cancel the certificate
of security and substitute in its records the name of the depository as a registered owner in
15
Depositories Act, 1996
respect of that security and inform the depository accordingly. A depository shall, on receipt
of information, enter the name of the person referred in its records, as the beneficial owner.
I. Board of Directors
i. The Board of directors of the company shall have an optimum combination of executive
and non-executive directors with not less than fifty percent of the board of directors
comprising of nonexecutive directors.
ii. Where the Chairman of the Board is a non-executive director, at least one-third of the
Board should comprise of independent directors and in case he is an executive director, at
least half of the Board should comprise of independent directors.
Provided that where the non-executive Chairman is a promoter of the company or is related
to any promoter or person occupying management positions at the Board level or at one level
below the Board, at least one-half of the Board of the company shall consist of independent
directors.
Explanation-For the purpose of the expression “related to any promoter” referred to in sub-
clause (ii): a. If the promoter is a listed entity, its directors other than the independent
directors, its employees or its nominees shall be deemed to be related to it; b. If the promoter
is an unlisted entity, its directors, its employees or its nominees shall be deemed to be related
to it.”
iii. For the purpose of the sub-clause (ii), the expression ‘independent director’ shall mean a
non-executive director of the company who:
a. apart from receiving director’s remuneration, does not have any material pecuniary
relationships or transactions with the company, its promoters, its directors, its senior
management or its holding company, its subsidiaries and associates which may affect
independence of the director;\ b. is not related to promoters or persons occupying
management positions at the board level or at one level below the board; c. has not been an
executive of the company in the immediately preceding three financial years; d. is not a
partner or an executive or was not partner or an executive during the preceding three years, of
any of the following: i. the statutory audit firm or the internal audit firm that is associated
with the company, and
ii. the legal firm(s) and consulting firm(s) that have a material association with the company.
e. is not a material supplier, service provider or customer or a lessor or lessee of the company,
which may affect independence of the director; 16
f. is not a substantial shareholder of the company i.e. owning two percent or more of the
block of voting shares.
i. The board shall meet at least four times a year, with a maximum time gap of four months
between any two meetings. The minimum information to be made available to the board is
given in Annexure– I A. ii. A director shall not be a member in more than 10 committees or
act as Chairman of more than five committees across all companies in which he is a director.
Furthermore it should be a mandatory annual requirement for every director to inform the
company about the committee positions he occupies in other companies and notify changes
as and when they take place.
i. The Board shall lay down a code of conduct for all Board members and senior management
of the company. The code of conduct shall be posted on the website of the company.
ii. All Board members and senior management personnel shall affirm compliance with the
code on an annual basis. The Annual Report of the company shall contain a declaration to
this effect signed by the CEO.
CASE STUDY: SATYAM COMPUTERS
Raju's departure was followed by the resignation of Srinivas Vadlamani, Satyam's chief
financial officer, and the appointment of Ram Mynampati as the interim CEO. In a press
conference held in Hyderabad on January 8, Mynampati told reporters that the company's
cash position was "not encouraging" and that "our only aim at this time is to ensure that the
business continues." A day later, media reports noted that Raju and his brother Rama (also a
Satyam co-founder) had been arrested -- and the government of India disbanded Satyam's
board. Though control of the company will pass into the hands of a new board, the
government stopped short of a bailout -- it has not offered Satyam any funds. Meanwhile, a
team of auditors from the Securities and Exchange Board of India (SEBI), which regulates
Indian public companies, has begun an investigation into the fraud. Since Satyam's stocks or
American Depository Receipts (ADRs) are listed on the Bombay Stock Exchange as well as
the New York Stock Exchange, international regulators could swing into action if they
believe U.S. laws have been broken. At least two U.S. law firms have filed class action
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lawsuits against Satyam, but given the company's precarious finances, it is unclear how much
money investors will be able to recover18.
'Riding a Tiger'
Raju was compelled to admit to the fraud following an aborted attempt to have Satyam invest
$1.6 billion in Maytas Properties and Maytas Infrastructure ("Maytas" is Satyam spelled
backwards) -- two firms promoted and controlled by his family members. On December 16,
Satyam's board cleared the investment, sparking a negative reaction by investors, who
pummeled its stock on the New York Stock Exchange and Nasdaq. The board hurriedly
reconvened the same day and called off the proposed investment.
The matter didn't die there, as Raju may have hoped. In the next 48 hours, resignations
streamed in from Satyam's non-executive director and Harvard professor of business
administration Krishna Palepu and three independent directors -- Mangalam Srinivasan, a
management consultant and advisor to Harvard's Kennedy School of Government; Vinod
Dham, called the "father of the Pentium chip" and now executive managing director of NEA
Indo-US Ventures in Santa Clara, Calif.; and M. Rammohan Rao, the dean of the Indian
School of Business in Hyderabad (ISB). Rao had chaired both December 16 board meetings.
On January 8, he resigned his position as the ISB dean. In a letter to the ISB community, he
explained: "Unfortunately yesterday's shocking revelations, of which I had absolutely no
prior knowledge, mean that we are far from seeing the end of the controversy surrounding
Satyam Computers. My continued concern and preoccupation with the evolving situation are
impacting my role as dean of ISB at a critical time for the school. Given that my term with
ISB anyway ends in a few months, I think that this is an appropriate time for me to step
down."
Resigning as Satyam's chairman and CEO, Raju said in a letter addressed to his board, the
stock exchanges and the market regulator Securities & Exchange Board of India (SEBI) that
Satyam's profits were inflated over several years to "unmanageable proportions" and that it
was forced to carry more assets and resources than its real operations justified. He took sole
responsibility for those acts. "It was like riding a tiger, not knowing how to get off without
http://www.nja.nic.in/P-948_Reading_Material/P-948_Audit_of_Fraud_in_economic_crimes/ACCOUNTING
18
%20FRAUD.pdf
being eaten," he said. "The aborted Maytas acquisition was the last attempt to fill the
fictitious assets with real ones."
Specifically, Raju acknowledged that Satyam's balance sheet included Rs. 7,136 crore (nearly
$1.5 billion) in non-existent cash and bank balances, accrued interest and misstatements. It
had also inflated its 2008 second quarter revenues by Rs. 588 crore ($122 million) to Rs.
2,700 crore ($563 million), and actual operating margins were less than a tenth of the stated
Rs. 649 crore ($135 million).
The outrage over Raju's admission of systematic accounting fraud has broadened to wider
concern about the potential damage to India's appeal for foreign investors and the IT services
industry in particular. Immediately following Raju's confession, Satyam's shareholders took a
direct hit as the company's share price crashed 77% to Rs. 30 (approximately 60 cents), a far
cry from its 52-week high of Rs. 544 ($11.35) last May.
"If there were one or two more such accounting scandals in the next six months, it would
make international investors more wary," says Wharton management professor Michael
Useem. "One example would put people on guard; several examples would be enough to tell
big investment money managers that they have to be especially careful working in that
environment."
Truth in Numbers
Notwithstanding Raju's confession, the Satyam episode has brought into sharp relief the role
and efficacy of independent directors. SEBI requires Indian publicly held companies to
ensure that independent directors make up at least half their board strength. 20
The knowledge available to independent directors and even audit committee members is
inherently limited to prevent wilful withholding of crucial information, Singh notes. "The
reality is, at the end of the day, even as an audit committee member or as an independent
director, I would have to rely on what the management was presenting to me," he says,
drawing upon his experience as an independent director and audit committee member at
Fedders, a publicly held company in the U.S. that filed for bankruptcy last year. "It is the
auditors' job to see if the numbers presented are accurate."
19
https://www.hindustantimes.com/business/satyam-scam-all-you-need-to-know-about-india-s-biggest-
accounting-fraud/story-YTfHTZy9K6NvsW8PxIEEYL.html
20
https://lexforti.com/legal-news/satyam-computers/
CONCLUSION
The concept of corporate governance has been attracting public attention for quite some time.
It has been finding wide acceptance for its relevance and importance to the industry and
economy. It contributes not only to the efficiency of a business enterprise, but also, to the
growth and progress of a country's economy. Progressively, firms have voluntarily put in
place systems of good corporate governance for the following reasons:
Several studies in India and abroad have indicated that markets and investors take
notice of well managed companies and respond positively to them. Such companies
have a system of good corporate governance in place, which allows sufficient
freedom to the board and management to take decisions towards the progress of their
companies and to innovate, while remaining within the framework of effective
accountability.
In today's globalised world, corporations need to access global pools of capital as well
as attract and retain the best human capital from various parts of the world. Under
such a scenario, unless a corporation embraces and demonstrates ethical conduct, it
will not be able to succeed.
The credibility offered by good corporate governance procedures also helps maintain
the confidence of investors – both foreign and domestic – to attract more long-term
capital. This will ultimately induce more stable sources of financing.
A corporation is a congregation of various stakeholders, like customers, employees,
investors, vendor partners, government and society. Its growth requires the
cooperation of all the stakeholders. Hence it imperative for a corporation to be fair
and transparent to all its stakeholders in all its transactions by adhering to the best
corporate governance practices.
Good Corporate Governance standards add considerable value to the operational performance
of a company by- improving strategic thinking at the top through induction of independent
directors who bring in experience and new ideas; rationalizing the management and constant
monitoring of risk that a firm faces globally; limiting the liability of top management and
directors by carefully articulating the decision making process; assuring the integrity of
financial reports, etc.
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