corporate governance theories and practices

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corporate governance theories and practices

  1. 1. by Dr.Rajesh Patel,Director, nrv05/10/12 03:38 AM 1 mba,email:1966patel@gmail.com
  2. 2. Corporate misgovernance• In new millenium several companies in USA and else where faced collapse.• Existing frame work seems inadequate with the gigantic business conglomérâtes. by Dr.Rajesh Patel,Director, nrv 05/10/12 03:39 AM 2 mba,email:1966patel@gmail.com
  3. 3. Corporate misgovernance in INDIA• Increasing corruption in the government and its various services had kept the management of country’s industrial and business organizations above accountability for their misdeeds, encouraging them to indulged in more unethical practices. by Dr.Rajesh Patel,Director, nrv 05/10/12 03:39 AM 3 mba,email:1966patel@gmail.com
  4. 4. Corporate misgovernance in INDIA• First realize during BIG BULL, harshad mehta case.• Involving lagre no’s of banks and resulting in the stock market nosediving for the first time.• Preferential allotment scam where investors loose Rs 5000 Crore.• Disappearance of companies during 1993-1994, when stock market shot up to 120 %, companies raised Rs25000 crore vanished and did not step back to their projects.• Plantation companies scam Rs 50,000 crore• Non banking finance companies scam. etc by Dr.Rajesh Patel,Director, nrv 05/10/12 03:39 AM 4 mba,email:1966patel@gmail.com
  5. 5. Corporate misgovernance in USA• Worldcom improperly booked 3.8b in expenses, thus inflating profits.• Bernie ebbers borrows $408 million from phone company to cover personal debts.• Enron created outside partnerships that helped hide poor financial condition. Executive earned millions by selling company stock. by Dr.Rajesh Patel,Director, nrv 05/10/12 03:39 AM 5 mba,email:1966patel@gmail.com
  6. 6. Reasons for misgovernance• A closed economy.• Sheltered market.• Limited need and access to global business.• Lack of competitive spirit.• Inefficient regulatory authority framework. by Dr.Rajesh Patel,Director, nrv 05/10/12 03:39 AM 6 mba,email:1966patel@gmail.com
  7. 7. Corporate Governance• Problems that results from the separation of leadership.• Focus upon: internal structure, rules of the board of directors, audit committees, discloser of information rules to shareholders and creditors, control of management. by Dr.Rajesh Patel,Director, nrv 05/10/12 03:39 AM 7 mba,email:1966patel@gmail.com
  8. 8. Corporate Governance• Definition by corporate and academic point.• Academic point. Shareholders Board Management Employees by Dr.Rajesh Patel,Director, nrv05/10/12 03:39 AM 8 mba,email:1966patel@gmail.com
  9. 9. Corporate Governance• Corporate point of view• Corporate governance deals with ways in which suppliers of finance to corporation assure themselves of getting a return on their investment. How do the suppliers of finance get management to return some of the profits to them?• How do they make sure that managers do not steal the capital they supply or invest it in bad projects?• How do suppliers of finance control managers? by Dr.Rajesh Patel,Director, nrv 05/10/12 03:39 AM 9 mba,email:1966patel@gmail.com
  10. 10. Corporate Governance MODEL • Mc kinsey model. • The Market model. • Efficient, well developed equity markets and dispersed ownership. • Developed nations. • US, UK, CANADA and AUSTRALIA. by Dr.Rajesh Patel,Director, nrv05/10/12 03:39 AM 10 mba,email:1966patel@gmail.com
  11. 11. SHAREHOLDERS INVIRONMENT INDEPENDENCE AND PERFORMANCE Non-executive Dispersed Majority CORPORATE CONTEXTINSTITUTIONAL CONTEXT ownership boards Sophisticated Aligned Institutional incentives ownership Active High Equity discloser market Active Takeover Shareholder market equity by Dr.Rajesh Patel,Director, nrv 05/10/12 03:39 AM TRANSPARENCY AND ACCOUNTABILITY CAPITAL MARKET LIQUIDITYmba,email:1966patel@gmail.com 11
  12. 12. Corporate Governance MODEL• Second version of Mc Kinsey model.• The control model• Underdeveloped equity markets, concentrated (family) ownership, less share holder transparency and inadequate protection of minority and foreign shareholders• ASIA, LATIN AMERICA, EAST EROPEAN NATIONS by Dr.Rajesh Patel,Director, nrv 05/10/12 03:39 AM 12 mba,email:1966patel@gmail.com
  13. 13. SHAREHOLDERS INVIRONMENT INDEPENDENCE AND PERFORMANCE Concentrated Insider boards CORPORATE CONTEXTINSTITUTIONAL CONTEXT ownership Reliance on Incentive family, Aligned with bank, Core public shareholders finance Underdeveloped Limited New issue Discloser market Limited takeover Inadequate market minority protection by Dr.Rajesh Patel,Director, nrv 05/10/12 03:39 AM TRANSPARENCY AND ACCOUNTABILITY CAPITAL MARKET LIQUIDITYmba,email:1966patel@gmail.com 13
  14. 14. Corporate Governance• Sir adrian cadbury, chairman of cadbury committee.• Experts at the organisation of economic co- operation and development OECD.• All these definitions which are shareholder centric captures some of the most important concerns of government for society in general. by Dr.Rajesh Patel,Director, nrv05/10/12 03:39 AM 14 mba,email:1966patel@gmail.com
  15. 15. Corporate Governance• Management accountability.• Providing adequate investment to management.• Disciplining and replacement of bad management.• Enhancing corporate performance.• Transparency.• Shareholder activism.• Investor protection.• Improving access to capital markets.• Promoting long terms investments.• Encouraging innovations. by Dr.Rajesh Patel,Director, nrv05/10/12 03:39 AM 15 mba,email:1966patel@gmail.com
  16. 16. Governance Is More Than Just Board Processes And Procedures• It involves full set of relationship between company’s management, its board, its shareholders and its other stakeholders, such as its employees and the community in which it is located.• Poor governance ripples Russia and Asian markets.• Cadbury code and CII code.• World bank, OECD, APEC-Asia pacific economic co- operation. by Dr.Rajesh Patel,Director, nrv 05/10/12 03:39 AM 16 mba,email:1966patel@gmail.com
  17. 17. OECD emphasis • Rights of shareholders. • Equitable treatment of shareholders. • Role of stakeholders in corporate governance. • Discloser and transparency. • Responsibility of board. by Dr.Rajesh Patel,Director, nrv05/10/12 03:39 AM 17 mba,email:1966patel@gmail.com
  18. 18. HOME WORK -1RESPONSIBILITY: KARANBIR by Dr.Rajesh Patel,Director, nrv05/10/12 03:39 AM 18 mba,email:1966patel@gmail.com
  19. 19. CG In Banking Sector • Bank failure in west. • Weakness in banking sector leads to financial instability. • Lyon G-7 summit in june 1996. • IMF and world bank. • Basel committee on banking supervision. by Dr.Rajesh Patel,Director, nrv05/10/12 03:39 AM 19 mba,email:1966patel@gmail.com
  20. 20. Issues in corporate governance 1.Distinguishing the roles of board and management • By or under the direction of board. • Board occupies key position between shareholders (owners) and company’s management ( day 2 day managers) by Dr.Rajesh Patel,Director, nrv05/10/12 03:39 AM 20 mba,email:1966patel@gmail.com
  21. 21. Issues in corporate governance• Select, decide the remuneration and evaluate on a regular basis, when necessary the CEO.• Oversee the conduct of company business.• Review and where necessary, approve the company financial objectives and major corporate plan and objectives.• Render advice and counsel.• Identify and recommend candidates for board of directors.• Comply with laws and regulations.• All other functions required by law to be performed. by Dr.Rajesh Patel,Director, nrv 05/10/12 03:39 AM 21 mba,email:1966patel@gmail.com
  22. 22. Issues in corporate governance 2.Composition of the board and related issues No. of directors of diff kinds. BORAD OF DIRECTORS EXECUTIVE DIRECTORS NON EXECUTIVE DIRECTOS AFFILATED DIRECTORS INDEPENDENT DIRECTORS NOMINEE by Dr.Rajesh Patel,Director, nrv05/10/12 03:39 AM 22 mba,email:1966patel@gmail.com
  23. 23. Issues in corporate governance 3. Separation of the roles of the CEO and chairperson 4. Should the board of directors have committees. Appointment of special committees Nomination Remuneration auditing by Dr.Rajesh Patel,Director, nrv05/10/12 03:39 AM 23 mba,email:1966patel@gmail.com
  24. 24. Issues in corporate governance5. Appointment of the board and director’s re-election.6. Directors and executive’s remuneration.7. Discloser and audit.8. Protection of shareholder rights and their expectation.9. Dialog with institutional shareholders.10.Should investor have a say in making a company “socially responsible corporate citizen”?. by Dr.Rajesh Patel,Director, nrv 05/10/12 03:39 AM 24 mba,email:1966patel@gmail.com
  25. 25. Benefits Of Good Corporate Governance To A Corporation • Creation and enhancement of a corporation’s competitive advantage • Enabling a corporation perform efficiently by preventing fraud and malpractices. • Providing protection to shareholders interest. • Enhancing the valuation of an enterprise. • Ensuring compliance with laws and regulations. by Dr.Rajesh Patel,Director, nrv 05/10/12 03:39 AM 25 mba,email:1966patel@gmail.com
  26. 26. Theory In Corporate Governance AGENCY THEORY • Adam smith who identified an agency problem(managerial negligence and profusion). • Shareholders (owners)- principals-they define objective of the company. • Agents-management who pursue such objectives. • Chief executive desire and shareholders long term investment. • Mismatch objective leads to agency problem. • Cost inflicted by such dissonance is the agency cost. by Dr.Rajesh Patel,Director, nrv05/10/12 03:39 AM 26 mba,email:1966patel@gmail.com
  27. 27. Theory In Corporate GovernanceAGENCY THEORYTwo broad mechanism that reduce agency cost and improve performance are:• Fair and accurate financial disclosures• Efficient and independent board of directors by Dr.Rajesh Patel,Director, nrv05/10/12 03:39 AM 27 mba,email:1966patel@gmail.com
  28. 28. Theory In Corporate GovernanceStewardship theory:• Managers are trustworthy and attach significant value to their personal reputation• Managers are steward whose motives are aligned with the objectives of principles.• Steward behavior will not depart from the interests of his/her organization.• Control can be counterproductive, because it undermines the pro-organisational behavior of the steward by lowering his/her motivation. by Dr.Rajesh Patel,Director, nrv 05/10/12 03:39 AM 28 mba,email:1966patel@gmail.com
  29. 29. Theory In Corporate GovernanceBehavioral difference between agency and stewardship theories• Agent and steward• Agency- sociological and psychological• Steward- individualistic, opportunistic and self servingWith regard to psychological mechanismsAgency theory states that motivation resolves around lower order and extrinsic needsSteward theory states it resolves around higher order and intrinsic needs by Dr.Rajesh Patel,Director, nrv05/10/12 03:39 AM 29 mba,email:1966patel@gmail.com
  30. 30. Theory In Corporate GovernanceStakeholder theory:• Interest of all groups- employees, customers, dealers, government and society.• Ethics of cares• Ethics of fiduciary relationship• Theory of property rights• Criticised mainly because not applicable in practice by corporations by Dr.Rajesh Patel,Director, nrv05/10/12 03:39 AM 30 mba,email:1966patel@gmail.com
  31. 31. Theory In Corporate GovernanceSociological theory• Focus on board composition• Implication of power and wealth distribution• Financial reporting• Problems of interlocking dictatorship and concentration in privilege class to equity and social progress• Socio-economic objective of corporations by Dr.Rajesh Patel,Director, nrv05/10/12 03:39 AM 31 mba,email:1966patel@gmail.com
  32. 32. Corporate GovernanceThe role of the management is to run the enterprise while the role of the board is to see that it is being run well and in the right direction. Corporate governance system vary around the world. Scholars suggest 3 broad versions. by Dr.Rajesh Patel,Director, nrv05/10/12 03:39 AM 32 mba,email:1966patel@gmail.com
  33. 33. Anglo American ModelUnitary board model/ Anglo-SaxonCorporate governance in America, Britain, Canada, Australia Board of directors stakeholders Shareholder supervisors elect Appoints and supervise Officers(managers) Regulation/legal Monitor system manage & Lien on Creditors Stake in regulates by Dr.Rajesh Patel,Director, nrv05/10/12 03:39 AM 33 company mba,email:1966patel@gmail.com
  34. 34. Anglo American Model• Ownership is equally divided between individual and institutional shareholders.• Directors are rarely independent of management.• Run by professional managers who have negligible ownership stake.• Most institution investors are reluctant activists.• Discloser norms. by Dr.Rajesh Patel,Director, nrv05/10/12 03:39 AM 34 mba,email:1966patel@gmail.com
  35. 35. German Model • Two tier boar model • Upper boards supervises the executive board on behalf of stakeholders and it is typically social oriented. • Shareholders do not dictate the governance mechanism. • Shareholder elects 50% of members of supervisory board and rest is by labor unions, ensuring they enjoy share in governance. • Supervisory board appoints and monitors the management board by Dr.Rajesh Patel,Director, nrv05/10/12 03:39 AM 35 mba,email:1966patel@gmail.com
  36. 36. German ModelAppoint 50% Supervisory board Appoint 50% Appoint 50% Appoint & supervise Management boardEmployees and (including shareholder Labor unions labor relation officer) manage Own Company by Dr.Rajesh Patel,Director, nrv05/10/12 03:39 AM 36 mba,email:1966patel@gmail.com
  37. 37. Japanese Model• Business network model• Boards tends to be large• Predominantly executive and often ritualistic.• President who consult both supervisory board and the executive management.• Importance of lending bank.• Shareholders and lending bank together appoints the board of directors and president. by Dr.Rajesh Patel,Director, nrv05/10/12 03:39 AM 37 mba,email:1966patel@gmail.com
  38. 38. Japanese Model Appoint Provides managers, Supervisory board monitor, act in emergencies Ratifies president Provides decisions managers President Consult Main bankShareholders Executive management Primarily board of directors Manages Provides loans Own Company by Dr.Rajesh Patel,Director, nrv05/10/12 03:39 AM 38 mba,email:1966patel@gmail.com Own
  39. 39. Indian Model• Governed by the company’s Act of 1965• Which follow UK model• Private companies is mostly held or dominated by a founder, his family and associates.• India has adopted the key tenets of the Anglo American external and internal control mechanism after economic liberlisation. by Dr.Rajesh Patel,Director, nrv05/10/12 03:39 AM 39 mba,email:1966patel@gmail.com
  40. 40. Indian ModelHOMEWORK:Draw Indian model on your notebooks in next class. by Dr.Rajesh Patel,Director, nrv05/10/12 03:39 AM 40 mba,email:1966patel@gmail.com
  41. 41. Obligation To Society• National interest • Competition• Political non-alignment • Trusteeship• Legal compliance • Accountability• Rule of law • Effectiveness and efficiency• Honest and ethical • Timely responsiveness• Corporate citizen • Corporation should uphold the fair• Ethical behavior name of the country• Social concerns• CSR• Environment- friendliness• Healthy and safe working environment by Dr.Rajesh Patel,Director, nrv 05/10/12 03:39 AM 41 mba,email:1966patel@gmail.com
  42. 42. Obligation To Investors• Towards shareholders• Measures promoting transparency and informed shareholder participation• Transparency• Financial reporting and records by Dr.Rajesh Patel,Director, nrv05/10/12 03:39 AM 42 mba,email:1966patel@gmail.com
  43. 43. Obligation To Employees• Fair employment practices• Equal opportunities employer• Encouraging whistle blowing• Humane treatment• Participation• Empowerment• Equity and inclusiveness• Participative and collaborative environment by Dr.Rajesh Patel,Director, nrv05/10/12 03:39 AM 43 mba,email:1966patel@gmail.com
  44. 44. Obligation To Customers• Quality of products and services• Products at affordable prices• Unwavering commitment to customer satisfaction by Dr.Rajesh Patel,Director, nrv05/10/12 03:39 AM 44 mba,email:1966patel@gmail.com
  45. 45. Managerial Obligation• Protecting company’s assets• Behavior towards government agencies• Control• Consensus oriented• Gifts and donations• Role and responsibility of corporate board and directors• Direction and management must be distinguished• Managing and whole time directions by Dr.Rajesh Patel,Director, nrv05/10/12 03:39 AM 45 mba,email:1966patel@gmail.com
  46. 46. Cadbury Committee On Corporate Governance• Objective “to help raise the standards of corporate governance and level of confidence in financial reporting and auditing by setting out clearly what it sees as the perspective responsibilities of those involved and what it believes is expected of them”. by Dr.Rajesh Patel,Director, nrv05/10/12 03:39 AM 46 mba,email:1966patel@gmail.com
  47. 47. Cadbury Committee On Corporate Governance • Code of best practices • Listed on London stock exchange • 19 recommendations • Relating to board of directors, non executive directors, executive directors, reporting and controlling by Dr.Rajesh Patel,Director, nrv05/10/12 03:39 AM 47 mba,email:1966patel@gmail.com
  48. 48. Cadbury Committee On Corporate Governance Relating to board of directors • Board should meet regularly, retain full control and monitor • Division of responsibility, balance of power. • Non executive directors should have skill and knowledge and in right numbers • Formal schedule of matters • Take independent professional advice at the company’s expense • All directors should have access to the advice and services of the company secretary, removal also. by Dr.Rajesh Patel,Director, nrv 05/10/12 03:39 AM 48 mba,email:1966patel@gmail.com
  49. 49. Cadbury Committee On Corporate GovernanceRelating to non executive directors• Non executive members should bring an independent judgment to bear on issues of strategy, performance, resources, key appointments and standard of conduct.• Independent of the management and any other business and relationship, fee reflect the time they commit to the work they are assigned.• Appointment and reappointment.• Selection through formal procedure. by Dr.Rajesh Patel,Director, nrv 05/10/12 03:39 AM 49 mba,email:1966patel@gmail.com
  50. 50. Cadbury Committee On Corporate GovernanceRelating to executive directors• Directors service should not exceeds 3 years without shareholders approval.• Clear and full discloser of their salary and other incomes.• Pay should be according to remuneration committee inclusive of non executive directors. by Dr.Rajesh Patel,Director, nrv 05/10/12 03:39 AM 50 mba,email:1966patel@gmail.com
  51. 51. Cadbury Committee On Corporate GovernanceReporting and controls• Boards duty to present a balanced and understandable assessment of the company.• Board should insure that an objective and professional relationship is maintained with the auditors.• Board should established an audit committee with at least 3 non executive directors.• Directors should explain their responsibilities.• Should report on the effectiveness of the company’s system to internal control• Should report that the business is going concern by Dr.Rajesh Patel,Director, nrv 05/10/12 03:39 AM 51 mba,email:1966patel@gmail.com
  52. 52. Paul Ruthman Committee• Controversial point of cadbury committee.• Practicality• The effectiveness of company’s system of internal control• Extensions of directors responsibility by Dr.Rajesh Patel,Director, nrv 05/10/12 03:39 AM 52 mba,email:1966patel@gmail.com
  53. 53. THE GRRENBURY COMMITTEE 1995• Established to identify good practices of confederation of British industry CBI• Directors remuneration and prepare code of such practices used in public limited company• Accountability and level of directors pay• Proper allocations of responsibility, directors remuneration, proper reporting to shareholders, greater transparency4 sections• Remuneration committee• Disclosures• Remuneration policy• Service contracts and compensation by Dr.Rajesh Patel,Director, nrv 05/10/12 03:39 AM 53 mba,email:1966patel@gmail.com
  54. 54. The Hampel Committee 1995• To promote high standards of CG both to protect investors and Enhance the standing of companies in LSE• Developed further cadbury committee report• Auditors should report privately to directors• Directors maintain and review all controls• Internal audit function importance• Introduced combined code of cadbury and greenbury by Dr.Rajesh Patel,Director, nrv 05/10/12 03:39 AM 54 mba,email:1966patel@gmail.com
  55. 55. The Turnbull Committee 1999• Established by the institute of chartered accountants in England and Wales ICAEW• Stress put on combined code on internal control• Provide guidance to implement combined codes• Annual internal audit importance• Board of directors confirm the existence of procedures for evaluating and managing key risk function by Dr.Rajesh Patel,Director, nrv 05/10/12 03:39 AM 55 mba,email:1966patel@gmail.com
  56. 56. World Bank on CG• Earliest international organization to study and suggest the guidelines for CG• Their report on CG recognize the complexity of the conceptFocuses on• Transparency• Accountability• Fairness• ResponsibilityThat are universal in application by Dr.Rajesh Patel,Director, nrv 05/10/12 03:39 AM 56 mba,email:1966patel@gmail.com
  57. 57. OECD Principles• One of the earliest non government organization to work on and spell out principle and practices of CG and their goal to attain long term shareholder Value.Major elements• The right of shareholders• Equitable treatment to shareholders• The role of stakeholder in CG• Discloser and transparency• The responsibility of board by Dr.Rajesh Patel,Director, nrv 05/10/12 03:39 AM 57 mba,email:1966patel@gmail.com
  58. 58. Mc Kinsey Survey On CG• International management consultant organization.• Conducted a survey with a sample size of 188 companies from 6 countries.• INDIA , MALAYSIA, MEXICO, SOUTH KOREA , TAIWAN AND TURKEY• To determine the correlation between good CG and valuation of the company by Dr.Rajesh Patel,Director, nrv 05/10/12 03:39 AM 58 mba,email:1966patel@gmail.com
  59. 59. Mc Kinsey Survey On CG• Increase financial performance• Transparency of dealing• Increasing investors confidenceParameters for CG• Accountability: transparent ownership, board size, board accountability• Discloser and transparency• Shareholders equity: one share on vote by Dr.Rajesh Patel,Director, nrv 05/10/12 03:39 AM 59 mba,email:1966patel@gmail.com
  60. 60. Sarbanes Oxley act 2002• Scandals• The Act calls for protection to those who have the courage to bring frauds to the attention of those who have to handle frauds.• It ensures that such things are not left to the individuals who may or may not choose to reveal them.• The SOX Act is a sincere attempt to address all the issues associated with corporate failure to achieve quality governance and to restore investors confidence by Dr.Rajesh Patel,Director, nrv 05/10/12 03:40 AM 60 mba,email:1966patel@gmail.com
  61. 61. Sarbanes Oxley act 2002Provisions :• Establishment of public company accounting oversight board PCAOB• Audit committee• Conflict of interest- 1 year after preceding• Audit partner rotation- once after 5 years• Improve influence on conduct of audits• Prohibition of non audit services• CEOs and CFOs required to affirm financials• Loans to directors• Attorneys• Securities analysis• penalities by Dr.Rajesh Patel,Director, nrv 05/10/12 03:40 AM 61 mba,email:1966patel@gmail.com
  62. 62. Indian Committees And Guidelines• Developments all over the world• Influence from UK• After Cadbury Committee report it was studied by CII, Associated chambers of commerce, SEBI by Dr.Rajesh Patel,Director, nrv 05/10/12 03:40 AM 62 mba,email:1966patel@gmail.com
  63. 63. Working Group On the Companies Act, 1996• Review the Act in light of modern requirements• Aspiration of investors• Globalization of economy• Liberalisation• Bill was introduced in rajya sabha on 14th august 1997 by Dr.Rajesh Patel,Director, nrv 05/10/12 03:40 AM 63 mba,email:1966patel@gmail.com
  64. 64. Working Group On the Companies Act, 1996Financial disclosers recommended by the group• Directors remuneration and commission should be a part of directors report• Cost incurred in using the services of other group companies• Listed co. must give reportA review on operation yearlyShare in total turnoverMarket conditionFuture aspects• Use of each funds generated from shares and debentures• Debt exposure disclosure• Foreign exchange outflow• Financial statements pertaining fixed and current assets and long term liabilities• Leased assets• Any inappropriate treatment in balance sheet in directors report by Dr.Rajesh Patel,Director, nrv 05/10/12 03:40 AM 64 mba,email:1966patel@gmail.com
  65. 65. Working Group On the Companies Act, 1996 Non Financial disclosers recommended by the group• Comprehensive report on directors relatives-either employee or directors• Register maintenance for directors interest• AGM members inspection at any time• Loans to directors details• Secretarial compliance certificate in concern to returns file• According to companies Act by Dr.Rajesh Patel,Director, nrv 05/10/12 03:40 AM 65 mba,email:1966patel@gmail.com
  66. 66. Narayana Murthy Committee Report ,2003• Disclosure of contingent liabilities• Certifications by CEOs and CFOs• Definition of independent directors• Independence of audit committeeshomework by Dr.Rajesh Patel,Director, nrv 05/10/12 03:40 AM 66 mba,email:1966patel@gmail.com
  67. 67. Rights To Share Holders• Right to obtain Copies of MOA & AOA• Right to have certificate of shares held by him within 3 years of allotment• Right to transfer his share or interests in the company(AOA)• Right to appeal company law board if refuses• He has the preferential right to purchase shares on pro rata basis• Right to apply to the company law board• For the rectification of register of members• He has the right to apply to the court to have variation or abrogation to his right set aside by the court• Right to inspect the registers, index of members, annual returns, etc.• He is entitled to receive notice of general meeting and to attend and vote in the meeting either in person or by proxy• He is entitled to receive a copy of the statutory report• He is entitled to receive a copy of the annual report of directors, annual accounts and auditors reports. by Dr.Rajesh Patel,Director, nrv05/10/12 03:40 AM 67 mba,email:1966patel@gmail.com
  68. 68. Rights To Share Holders• He has the right to participate in the appointment of auditors and elections of directors at the AGM.• He has the right to AGM by writing letter to company law board• He can make application to company law board to convene an extraordinary general meeting of the company where it is impractical to call such meeting• He is entitled to have copies of minutes of general meetings.• He has the right to participate in declaration of dividend and receive on duly date.• He has the right to demand poll• He has the right to apply to the company law board for investigation of affairs of the company.• He has the right to remove a director even before the expiry of the terms of director office• He has the right to make an application to company law board for any oppression and mismanagement.• He can make a petition to the high court for winding up of factory.• He has the right towards any surplus assets of the company by Dr.Rajesh Patel,Director, nrv05/10/12 03:40 AM 68 mba,email:1966patel@gmail.com
  69. 69. Investors Problems And Protection• Investor protection is associated with effective corporate governance.• He invested hard earn money and have expectation• Capital growth• Mismatch occurs with expectation and final outcome of company• Reasons of such outcome of company by Dr.Rajesh Patel,Director, nrv 05/10/12 03:40 AM 69 mba,email:1966patel@gmail.com
  70. 70. Relationship Between Investor Protection And Cg• CG lies in designing and putting in place mechanisms such asDisclosuresMonitoringOversightCorrective systemTo align the objective of two as closely as possible and minimise agency problems by Dr.Rajesh Patel,Director, nrv 05/10/12 03:40 AM 70 mba,email:1966patel@gmail.com
  71. 71. CG Through Legal Protection Of Investors• Impact of investors protection on ownership and control of firms• Impact of investors protection on the development of financial markets• Banks and corporate governance by Dr.Rajesh Patel,Director, nrv 05/10/12 03:40 AM 71 mba,email:1966patel@gmail.com
  72. 72. Investor Protection In India• Scandals of 1990’s• Ketan parekh scam 2001• UTI crisis 1998 and 2001• Computer technologyHouse holds investors survey of society for capital market research and development SCMRD,• Report unsatisfactory experience with equity markets• 80% say no confidence on companies management• 55% shows little or no confidence on the market regulator or SEBI• Most preferred savings are….• by Dr.Rajesh Patel,Director, nrv 05/10/12 03:40 AM 72 mba,email:1966patel@gmail.com
  73. 73. NK mittal committees on investor protection• Specific demand for an Act to protect investors.• Establishment of judicial forum• Investor education and protection fund in under companies Act Should shift to SEBI.• SEBI should be the only regulator• SEBI should require all IPO’s to be insured under third party• SEBI Act 1992 should be amended• The securities contracts Act 1956 should be amended. by Dr.Rajesh Patel,Director, nrv 05/10/12 03:40 AM 73 mba,email:1966patel@gmail.com
  74. 74. Problems Of Investors In India• Against member broker of stock exchange• Against companies listed for trading on stock exchange• Complaints against financial intermediaries by Dr.Rajesh Patel,Director, nrv05/10/12 03:40 AM 74 mba,email:1966patel@gmail.com
  75. 75. Law Enforcement For Investors Protection • Company’s level • Stock broker level • Stock exchanges • Regulatory agencies Investor grievances and guidance division SEBI Department of company affairs Department of economic affairs RBI Consumer courts and court of Law by Dr.Rajesh Patel,Director, nrv05/10/12 03:40 AM 75 mba,email:1966patel@gmail.com
  76. 76. Nature of complaints• Complaints regarding delay in refund• Complaints regarding delay in transfer of shares• Complaints regarding refusal of transfer of shares• Complaints regarding problems of odd lots• Complaints regarding take over bid• Complaints regarding insider trading, rigging, and other malpractices• Complaints regarding delay and non payments of interest/ fixed deposits of companies• Complaints regarding delay and non payment of dues or non delivery of shares by brokers• Complaints regarding non supply of debenture trust deed, Refusal to inspection by Dr.Rajesh Patel,Director, nrv 05/10/12 03:40 AM 76 mba,email:1966patel@gmail.com
  77. 77. Concept of CG and Stakeholder • Stake holders as human being in business Government Society Investor Financial Resources Employee Value addition Goods and services Lender Fixed assets by Dr.Rajesh Patel,Director, nrv05/10/12 03:40 AM Supplier mba,email:1966patel@gmail.com Customer 77
  78. 78. 3 A’s to make life for everyone • Acceptability • Availability • Affordability by Dr.Rajesh Patel,Director, nrv05/10/12 03:40 AM 78 mba,email:1966patel@gmail.com
  79. 79. CG Mechanism And Overview 4 P’s of corporate governance: People Purpose Process Performance by Dr.Rajesh Patel,Director, nrv05/10/12 03:40 AM 79 mba,email:1966patel@gmail.com
  80. 80. CG Mechanism And Overview Wealth Wealth Management Wealth creation distribution•Gross value added •Dividend to investors •Functional performance•Economic value added •Timely payments to vendors Improvement •Employee benefits and security•Earning per share •Insurance and risks•Market price per share •Fair price for customers management •Payments of Govt Dues•Return on investment •Technology up gradation •Investment in corporation social •Optimum utilization of responsibility Installed capacity •Research and development •HRM by Dr.Rajesh Patel,Director, nrv 05/10/12 03:40 AM 80 mba,email:1966patel@gmail.com
  81. 81. Bankruptcy in INDIABankruptcy is legally declared in ability or impairment ability of an individual or organization to pay their creditors or is a legal proceeding in which a person who cannot pay his or her bills can get a fresh financial start.Purpose of bankruptcy :• To give an honest start to debtors life, by reliving him from most of the debts• To repay creditors in an orderly manner to the extent that the debtor has the mean available for payment by Dr.Rajesh Patel,Director, nrv 05/10/12 03:40 AM 81 mba,email:1966patel@gmail.com
  82. 82. Insolvency• Insolvency is a financial condition experienced by a person or business entity when their assets no longer exceeds their liabilities, commonly referred to as balance sheet insolvency or when person or entity can no longer meet its debt obligation when they come due, commonly referred as to cash flow insolvency by Dr.Rajesh Patel,Director, nrv 05/10/12 03:40 AM 82 mba,email:1966patel@gmail.com
  83. 83. Corporate bankruptcy in INDIAIndian post independence industrial policies• Import substitution• Industrial licensing• Limited private ownership• Deregulation• Foreign competition• Existing legal, political, social system by Dr.Rajesh Patel,Director, nrv 05/10/12 03:40 AM 83 mba,email:1966patel@gmail.com
  84. 84. Bankruptcy system• High courts• The company law board• The board for industrial and financial reconstruction BIFR• Debt recovery tribunals DRT’s by Dr.Rajesh Patel,Director, nrv 05/10/12 03:40 AM 84 mba,email:1966patel@gmail.com
  85. 85. Companies Act 1956• High court• Company law Board• Department of company affairs• Voluntary liquidation by creditors• Involuntary liquidation by court by Dr.Rajesh Patel,Director, nrv 05/10/12 03:40 AM 85 mba,email:1966patel@gmail.com
  86. 86. Sick Industrial Companies Act, 1985• BIFR• The process is applicable only for industrial companies that have been registered for more then five years and have accumulated losses at the end of any year greater then their net worth.• Board of directors have to fill application within 60 days with BIFR by Dr.Rajesh Patel,Director, nrv 05/10/12 03:40 AM 86 mba,email:1966patel@gmail.com
  87. 87. Time Bound Restructuring Or Liquidation GuidelinesStep 1.Company can refer to the tribunal within 180 days of coming to know of the relevant facts giving to rise to cause of such references or within 60 days of final adoption of accountsStep 2.Tribunal appoints an operating agency to conduct as initial exploration of whether the sick industry should be reconstructed or if so how.Tribunal will appoint a directorStep3.Director report to tribunalStep 4.Operating agency will prepare a restructuring planStep 5.Modification and changes as suggestion and objection receives from relevant parties by Dr.Rajesh Patel,Director, nrv 05/10/12 03:40 AM 87 mba,email:1966patel@gmail.com
  88. 88. Role Of Auditors• Lack of truthfulness of reports• Transparency• Window dressing• Manipulation of profits and losses• Unexplainable expenditures• Poor performance etcRole of auditor who are expected to certify the veracity of accounts maintained by company for the benefits of all stakeholders of the company including fair and transparent governance leaves to be a desired. by Dr.Rajesh Patel,Director, nrv 05/10/12 03:40 AM 88 mba,email:1966patel@gmail.com
  89. 89. Audit• Objective Of Audit• Types of auditFinancial statement auditsCompliance auditsOperational auditsAn auditor is a representative of the shareholders, forming a link between government agencies, stockholders, investors and creditors. by Dr.Rajesh Patel,Director, nrv 05/10/12 03:40 AM 89 mba,email:1966patel@gmail.com
  90. 90. Types Of Auditor • Internal auditors • Independent auditors • Government auditors by Dr.Rajesh Patel,Director, nrv05/10/12 03:40 AM 90 mba,email:1966patel@gmail.com
  91. 91. Duties Of An AuditorDefined under section 227(1A) of the companies Act 1956• Whether loans and advances made by the company on the basis of security have been properly secured.• Whether transaction of the company which are represented merely by book entries are not prejudicial to the interest of the company• Where the company is not an investment company within the meaning of section 372 or a banking company, whether so much of the assets of the company as consist of shares, debentures, and other securities have been sold at a price less than that at which they were purchased by the company• Whether loans and advances made by the company have been shown as deposits. by Dr.Rajesh Patel,Director, nrv 05/10/12 03:40 AM 91 mba,email:1966patel@gmail.com
  92. 92. Duties Of An AuditorDefined under section 227(1A) of the companies Act 1956• Whether personal expenses have been charge to revenue accountIn other words auditor is responsible for• Verifying that the statement of accounts are drawn up on the basis of the books of business• Verifying that the statement of accounts are drawn up on the basis of the books exhibit a true and fair state of affairs of the business• Confirming that the management has not exceeded the financial/ administrative powers vested in it by the articles of association of the company and /or resolution of shareholders by Dr.Rajesh Patel,Director, nrv 05/10/12 03:40 AM 92 mba,email:1966patel@gmail.com
  93. 93. Responsibilities Of AuditorsAs per standard auditing practices (2),• He is responsible for forming and expressing his opinion on the financial statements.• He determine whether the relevant information is properly disclosed in the financial statements by comparing the financial statements with the underlying accounting records and others source data.• He has to insure that his work involves exercise of judgment• He is not expected to perform duties which fall outside the scope of his competence. by Dr.Rajesh Patel,Director, nrv 05/10/12 03:40 AM 93 mba,email:1966patel@gmail.com
  94. 94. Banks And Corporate Governance• Merchant banking• NBFC• NABARD• IDBI• EXIM bankProtecting the interest of depositors becomes a matter of paramount importance to banksManagerial misadventures in banksRegulating banks more tightly by Dr.Rajesh Patel,Director, nrv 05/10/12 03:40 AM 94 mba,email:1966patel@gmail.com
  95. 95. CG in Banks• Banking become more complex and diversified• Even regulated set up is there, countries had faced a lot mis governance over a period of time• Protecting the interest of depositors• Large number of depositors in India by Dr.Rajesh Patel,Director, nrv 05/10/12 03:40 AM 95 mba,email:1966patel@gmail.com
  96. 96. Sound Corporate Governance Practices• Establishing strategic objectives and a set of corporate values that are communicated throughout the banking organization• Setting and enforcing clear lines of responsibility and accountability Through out the organization• Ensuring that board members are qualified for their positions, have a clear understanding of their role in corporate governance and are not subject to undue influence from management or outside concerns• Ensuring that there is a appropriate oversight by senior management• Effectively utilising the work conducted by internal and external auditors, in recognition of the important control function they provide• Ensuring that compensation approaches are consistent with the banks ethical values, objectives, strategy and control environment• Conducting corporate governance in a transparent mannerIASC- international accounting standards committee by Dr.Rajesh Patel,Director, nrv 05/10/12 03:40 AM 96 mba,email:1966patel@gmail.com
  97. 97. Ganguly Committee RecommendationsWorking group of directors of banks financial institutions, known as the ganguly committee• Board should be more contemporarily professional by inducting technical and specially qualified personnel• Directors should fulfill certain “fit and proper” norms• Certain criteria adopted for public sector banks such as the age of director being between 35 and 65, that he/she should not be a member of parliament, state legislature etc and may adopted for private bank also• Selection of directors could be by a nomination committee of the board. RBI also might compile a list of eligible candidate• The banks may enter into a “deed of covenant” with every non executive director, delineating his /her responsibilities and making him/her abide by them• Need based training should be imparted to the directors to equip them govern the banks properly by Dr.Rajesh Patel,Director, nrv 05/10/12 03:40 AM 97 mba,email:1966patel@gmail.com
  98. 98. Ganguly Committee RecommendationsGanguly committee has suggested the formation of committees of the boardNomination committeeAudit committeeShareholder redressal committeeSupervisory committeeRisk management committee by Dr.Rajesh Patel,Director, nrv 05/10/12 03:40 AM 98 mba,email:1966patel@gmail.com

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