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Corporate Governance Rating Reliance Industries Limited


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Analysis for Corporate Governance practices at Reliance industries.

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Corporate Governance Rating Reliance Industries Limited

  1. 1. Corporate Governance Rating – RELIANCE INDUSTRIES LIMITED Submitted to : Prof. Gloryson R.B. Chalil Submitted by : Section A (GMP XLRI) Gouri Khinvasra : G08016 Munish Kaushal : G08022 Sairam Iyer : G08034 Sunil Bansal : G08044 (Strictly for academic purpose only)
  2. 2. Key Parameters of Corporate Governance Rating <ul><li>Equitable treatment of Shareholders </li></ul><ul><li>Ownership Rights of Shareholders </li></ul><ul><li>Transparency and Disclosures </li></ul><ul><li>Composition of the Board </li></ul><ul><li>Functioning of the Board </li></ul><ul><li>Management Assessment </li></ul><ul><li>Value Creation for various Stakeholders </li></ul>
  3. 3. GMP XLRI Parameter 1 : Equitable treatment of Shareholders
  4. 4. Equitable Treatment of Shareholders <ul><li>Ownership structure </li></ul><ul><li>51% of the equity shareholding of RIL is owned by Ambani Family members. </li></ul><ul><li>20% is owned by FIIs </li></ul><ul><li>13% belongs to small , individual and retail investors. </li></ul><ul><li>Management and control of operations of RIL is delegated to managers under the governance of the board controlled by the family . </li></ul>
  5. 5. Equitable Treatment of Shareholders <ul><li>Code of conduct </li></ul><ul><li>Code of conducts defined for board of directors and board committees that make them accountable to the shareholders. </li></ul><ul><li>It includes </li></ul><ul><li>Statutory and Fiduciary duties – </li></ul><ul><li>Duty of loyalty to act without conflict and always put the interests of the company before those of the individual. </li></ul><ul><li>Duty to take informed decisions </li></ul><ul><li>Privacy and Confidentiality </li></ul><ul><li>Corporate Opportunities </li></ul><ul><li>Interaction Media </li></ul><ul><li>Fraudulent and unfair practices in the securities market </li></ul><ul><li>Fair dealings </li></ul><ul><li>Reporting of illegal or unethical behavior </li></ul>
  6. 6. Equitable Treatment of Shareholders <ul><li>Systems to prevent insider trading </li></ul><ul><li>Directors are required to give disclosures in terms of companies act 1956 and Reliance code of conduct of Prohibition of insider trading . </li></ul><ul><li>Secretarial Audit </li></ul><ul><li>Audit has been introduced to report to management as well as shareholders of the status of the compliance with various corporate and secretarial laws. </li></ul><ul><li>Whistle Blower Mechanism present </li></ul><ul><li>Internal Audit function </li></ul><ul><li>Examines the adequacy and compliance to policies </li></ul><ul><li>Asses and suggests improvements for effectiveness in risk management ,control and governance processes . </li></ul>
  7. 7. Equitable Treatment of Shareholders <ul><li>Investors Grievance committee </li></ul><ul><li>Quarterly review of all securities related filing with Stock Exchange and SEBI </li></ul><ul><li>Finance committee </li></ul><ul><li>Present to review company's financial policies , strategies and capital structures. </li></ul><ul><li>Health , Safety and Environment Committee (HSE) </li></ul><ul><li>Monitors and ensures maintaining highest standards of environmental, health and safety norms. </li></ul><ul><li>CGSI Committee </li></ul><ul><li>Corporate Governance and Stakeholders Interface committee present to ensure transparency and objective evaluation of new directors. </li></ul><ul><li>Assists board in determining the optimum board size </li></ul><ul><li>Considers candidates referred to by the shareholders </li></ul><ul><li>RATING : Level 3 – Firm’s Capability is ‘ High’ </li></ul>
  8. 8. Equitable Treatment of Shareholders Corporate Governance Rating Parameter Rating Capability Ownership Structure Level 3 High Presence of concentrated shareholding Level 4 Above Average Systems in place to detect and prevent insider trading Level 2 Very High Extent of disclosure of shareholding pattern Level 2 Very High Presence of any disproportionate control provision Level 2 Very High PARAMETER RATING (Average) Level 3 High
  9. 9. GMP XLRI Parameter 2 : Ownership Rights of Shareholders
  10. 10. Ownership Rights of Shareholders <ul><li>Compliance with the Law </li></ul><ul><li>RIL has complied with the conditions of clause 49 of the Listing Agreement </li></ul><ul><li>Presence of anti takeover provisions </li></ul><ul><li>Secretarial audit takes in to consideration compliance with the SEBI Act, 1992 </li></ul><ul><li>Preferential rights for any shareholders </li></ul><ul><li>Audit takes in to consideration of the issue and rights of the preferential shareholders if any . </li></ul><ul><li>Beyond laws and regulations </li></ul><ul><li>Remuneration Committee </li></ul><ul><li>Recommends / reviews the remuneration of Managing Director and Whole term directors based on their performance and defined assessment criteria </li></ul><ul><li>Voting Rights </li></ul><ul><li>Special resolutions are passed through postal ballot </li></ul>
  11. 11. Ownership Rights of Shareholders Corporate Governance Rating Parameter Rating Capability Compliance with law Level 2 Very High Beyond laws and regulations Level 2 Very High Voting Rights Level 2 Very High Presence of anti takeover provisions Level 2 Very High Preferential rights for any shareholders Level 2 Very High PARAMETER RATING (Average) Level 2 Very High
  12. 12. GMP XLRI Parameter 3 : Composition of the Board
  13. 13. Composition of Board GMP XLRI Category No. of Directors Percentage of total No. of Directors Executive Directors 4 33.33 Non Executive Independent Directors 0 - Non Executive Non Independent Directors 1 8.33 Other Non Executive Directors 7 58.33 Total 12 100
  14. 14. Composition of Board <ul><li>Compliance with the Law </li></ul><ul><li>Other Non-Executive Directors make up 58% in Reliance, indicating that the 50% requirement as per Clause 49.1 (A) of the Listing Agreement requirement is fully met. </li></ul><ul><li>Disclosure and Insider Trading Awareness </li></ul><ul><li>Reliance also circulates among the board members the disclosures/declaration to be given by board members under Sections 264, 297, 299, 305, 308 of the Companies Act 1956, as well as under Sections 13 (2) 10 (d), 10 (e) and 13 (4) regarding ‘prohibition of insider trading’ and Clause 49 of the Listing Agreement. </li></ul><ul><li>Factors affecting judgement of Independent Directors </li></ul><ul><li>The board discourages any kind of transaction, material or otherwise, with the Independent Directors. Clause 49.1 (A) of the National Stock Exchange (NSE) Listing Agreement defines ‘independence’ (in case of Independent Directors) as “absence of any material pecuniary relationship, apart from receipt of directors’ remuneration, either with the company or its promoters or its management or its subsidiaries, which in the judgment of the BOD of the company may affect the independence of judgement of the Director” </li></ul>GMP XLRI
  15. 15. Composition of Board Corporate Governance Rating Parameter Rating Capability Compliance with the law Level 2 Very High Disclosure and Insider Trading awareness Level 2 Very High Factors affecting judgement of independent directors being tackled Level 2 Very High PARAMETER RATING (Average) Level 2 Very High
  16. 16. GMP XLRI Parameter 4 : Functioning of the Board
  17. 17. Functioning of Board <ul><li>Restriction to be elected and tenure </li></ul><ul><li>The Reliance board does not believe that it has to restrict the number of times an individual may serve as a director and also believes that the Nomination Committee can take care of the requirements of reflecting and accommodating diverse views. The Reliance CG Manual also quotes from Section 317 of the Companies Act 1956 wherein a period of five years is fixed for a Managing Director who can be reappointed for further periods, each period not exceeding a span of five years. </li></ul><ul><li>Section 255 and 2/3rd retirement by rotation </li></ul><ul><li>Reliance seem to be following Section 255 in letter and spirit. In Reliance, there is a position of the Lead Independent Director who acts as the spokesperson of the Independent Directors. </li></ul><ul><li>Meetings and quorum </li></ul><ul><li>The board at Reliance meets at least six times a year. For the year ended on March 31, 2008, there were 11 meetings held and four had the full complement of 12 members. The least number was eight. CMD Mukesh Ambani attended all the 11 meetings. </li></ul>GMP XLRI
  18. 18. Functioning of Board Corporate Governance Rating Parameter Rating Capability Restriction to be elected and tenure Level 4 Above Average Retirement policy and rotation Level 2 Very High Meetings and Quorum Level 2 Very High PARAMETER RATING (Average) Level 3 High
  19. 19. GMP XLRI Parameter 6 : Management Assessment
  20. 20. Management Assessment <ul><li>Reputation and skills of Management </li></ul><ul><li>The management team of Reliance Industries Limited is highly reputed with </li></ul><ul><li>Mr. Mukesh Ambani as the face of Reliance Group. </li></ul><ul><li>Mr. Mukesh Ambani,CMD of RIL and a Chemical Engineer from Bombay University has won number of national and international accolades, latest being ‘Business Leader of the year’ 2008 award by NDTV Profit. </li></ul><ul><li>Mr. Nikhil R Meswani , whole-time director in Reliance board, is a chemical engineer and chosen as ‘Young Global Leader’ by World Economic Forum in 2005. </li></ul><ul><li>Mr. Hital R Meswani holds B.S. degree in Chemical Engineering from University of Pennsylvania and responsible for overall Petroleum business of Reliance Group. </li></ul><ul><li>Mr. H.S.Kohli , has wide experience in implementation and operation of fertilizers and petrochemical plants and has been conferred the prestigious ‘Wisitex Foundation Award’ in 1996. </li></ul><ul><li>RATING : Level 2 – Firm’s capability is ‘Very High’ </li></ul>
  21. 21. Management Assessment <ul><li>Success of Past Strategies </li></ul><ul><li>HIGHS </li></ul><ul><li>Recent success in exploration of gas in Krishna-Godavari basin </li></ul><ul><li>Large expansion in the Polyester business (Market share increased to 55%) </li></ul><ul><li>Setting up of Innovation Council which led to 19 th Ranking of RIL in the list of ‘World’s 25 most innovative companies’ from Business Week and BCG. </li></ul><ul><li>Successful acquisitions in international market e.g. – GAPCO </li></ul><ul><li>LOWS </li></ul><ul><li>Diversification into organized retail business through RRL (Reliance Retail Limited) isn’t quite a success.(Original growth targets are not met along with political impact on Reliance Fresh chain) </li></ul><ul><li>Reliance Petroleum Retail operations met with resistance and company was forced to close its petrol pumps across the country. </li></ul><ul><li>RATING : Level 3 – Firm’s Capability is ‘High’ </li></ul>
  22. 22. Management Assessment <ul><li>Proactive Management in identifying Opportunities and Threats </li></ul><ul><li>In the ‘Management discussion and Analysis section’ of the Annual Report, Company has presented a detailed analysis of major business of Reliance Industries e.g.- Exploration and Production, Petroleum and Retail business. </li></ul><ul><li>The economic conditions along with sectoral challenges and pulldown factors have been discussed in detail. E.g. – crude price movements, cost inflation in deep water exploration, shortage of rigs etc. </li></ul><ul><li>Opportunities have been identified in the respective sectors and strategies have also been laid out to capture opportunities and fight the challenges. e.g. – increasing trend of green fuel, promotion of SEZ’s. </li></ul><ul><li>RATING : Level 2 – Firm’s Capability is ‘Very High’ </li></ul>
  23. 23. Management Assessment <ul><li>Integrity and Risk Appetite of Management </li></ul><ul><li>There is the highest level of integrity reflected in the Reliance Industries senior management. </li></ul><ul><li>Mr. Mukesh Ambani leading the way with numerous leadership awards at national and international level. </li></ul><ul><li>Mr. Mukesh Ambani has been quite successful in taking Reliance group to new heights even after separation of some of group businesses to Anil Ambani. </li></ul><ul><li>A high level of risk appetite has been observed in diversification of company’s business into organized retail and investments in emerging ventures like Cricket (IPL – Mumbai Team) </li></ul><ul><li>RATING : Level 2 – Firm’s Capability is ‘Very High’ </li></ul>
  24. 24. Management Assessment Corporate Governance Rating Parameter Rating Capability Reputation of Mgmt Level 2 Very high Success of Past Strategy Level 3 High Management Proactiveness Level 2 Very High Integrity and Risk Appetite Level 2 Very High PARAMETER RATING (Average) Level 2 Very High
  25. 25. GMP XLRI Parameter 7 : Value Creation for Stakeholders
  26. 26. Value Creation for Stakeholders <ul><li>Shareholders </li></ul><ul><li>Figures suggest that Reliance has consistently created value for shareholders both in terms of returns and dividend payout. </li></ul><ul><li>RATING : Level 2 – Capability is ‘Very High’ </li></ul>Indicator 2007-08 2006-07 2005-06 RONW (%) 28.8 23.5 22.7 ROCE (%) 20.3 20.5 20.5 Dividend Payout ( $MN) 1631 1440 1393 Dividend Payout Ratio(%) 130 110 100
  27. 27. Value Creation for Stakeholders <ul><li>Debt holders </li></ul><ul><li>Debt-Equity Ratio in 2007-08 is 0.45 : 1 which is an optimum ratio. </li></ul><ul><li>Credit Ratings </li></ul><ul><ul><ul><li>CRISIL : AAA [Highest credit quality] </li></ul></ul></ul><ul><ul><ul><li>FITCH : AAA [Reliable and stable] </li></ul></ul></ul><ul><ul><ul><li>MOODY’S : Baa2 [Moderate credit risk] </li></ul></ul></ul><ul><ul><ul><li>S&P : BBB [Adequate financial security] </li></ul></ul></ul><ul><li>Current Ratio in 2007-08 is 1.1 which is slightly on lower side. </li></ul><ul><li>No credit default history is available. </li></ul><ul><li>RATING : Level 3 – Firm’s Capability is ‘High’ </li></ul>
  28. 28. Value Creation for Stakeholders <ul><li>Customers </li></ul><ul><li>Reliance has achieved Indian market share of 55% in polymer business. </li></ul><ul><li>Global market share in polyester fibre and yarn in excess of 7%. </li></ul><ul><li>Domestic market share in polyester fibre in excess of 49 %. </li></ul><ul><li>Single largest gas producer in India with market share of 50 % after the development of KG-D6 block. </li></ul><ul><li>However, Reliance Retail has still not took off as expected and hence, has a very low market share in organized retail. However, there are huge growth opportunities in retail industry which is expected to grow at 30 % per year. </li></ul><ul><li>Introduction of ‘Rishta’ – 360 degree partnership with customers through CRM initiatives has been conducted on over 75 cities. </li></ul><ul><li>Investments have been made in state of the art IT systems to improve service levels and reaching out to customers. </li></ul><ul><li>RATING : Level 2 – Firm’s Capability is ‘Very High’ </li></ul>
  29. 29. Value Creation for Stakeholders <ul><li>Employee </li></ul><ul><li>Jamnagar Refinery has been adjudged winner of ‘Golden Peacock National Training Award – 2007’ </li></ul><ul><li>CNBC TV18 has awarded ‘Employer of Choice Award’ to Reliance Industries recently. </li></ul><ul><li>Employee Stock Option Scheme has been well-received in the company. A total of 2976300 stock options have been granted. </li></ul><ul><li>Reliance has hired Hewitt Associates to focus on employee centric initiatives, which is a good move. </li></ul><ul><li>Employee turnover rate has been low at around 4-5 %. </li></ul><ul><li>Growth in salary level is consistent at around 6.5 % (inflation adjusted). </li></ul><ul><li>RATING : Level 3 – Firm’s Capability is ‘High’ </li></ul>
  30. 30. Value Creation for Stakeholders <ul><li>Society </li></ul><ul><li>Reliance has published a detailed report on Corporate Social Responsibility initiatives in its Annual Report .Focus of Reliance’s CSR activities are : </li></ul><ul><ul><ul><li>Health </li></ul></ul></ul><ul><ul><ul><li>Safety </li></ul></ul></ul><ul><ul><ul><li>Environment </li></ul></ul></ul><ul><ul><ul><li>Community Development </li></ul></ul></ul><ul><li>Dhirubhai Ambani Foundation has been the CSR vehicle for Reliance Industries under which lot of social initiatives are being taken. </li></ul><ul><li>Hazira Manufacturing division has won the ‘Golden Peacock Global award for CSR’ – 2008. </li></ul><ul><li>Reliance is one of India’s largest contributor to national exchequer. A total of 13696 crores were paid as taxes and duties to the government in the financial year 2007-08. </li></ul><ul><li>RATING : Level 1 – Firm’s Capability is ‘Highest’ </li></ul>
  31. 31. Management Assessment Corporate Governance Rating Parameter Rating Capability Shareholder Level 2 Very high Debt Holder Level 3 High Customer Level 2 Very High Employee Level 3 High Society Level 1 Highest PARAMETER RATING (Average) Level 2 Very High
  33. 33. Corporate Governance Rating Parameter Rating Capability Equitable treatment of Shareholders Ownership rights of shareholders Transparency and Disclosure Composition of Board Functioning of Board Management Assessment Level 2 Very High Value creation for stakeholders Level 2 Very High OVERALL RATING (Average)
  34. 34. References <ul><li>RELIANCE INDUSTRIES LIMITED – ANNUAL REPORT 2007-08 </li></ul><ul><li> (Clause49 of SEBI Listing Agreement) </li></ul><ul><li>ELCC Course Handout from Prof. Gloryson R.B.Chalil </li></ul><ul><li>CRISIL CORPORATE GOVERNANCE RATING CRITERIA.doc </li></ul><ul><li> (Business Leadership Award 2008) </li></ul><ul><li> (Growth of Reliance Retail) </li></ul><ul><li> (Reliance Petroleum Retail Operations) </li></ul>