Corporate governance


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Workshop on Corporate Governance @ Xcellon Institute - Ahmedabad

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Corporate governance

  1. 1. 4/25/2012 Corporate Governance By, Kaushal Mandalia Learning Objective To gain experiential perspective of the emergingconcepts of Corporate Governance To know recent happening In Indian CorporateSector. Few Practical Examples 1
  2. 2. 4/25/2012Knowledge and Skill without Integrity is a Lethal CombinationMarket Share IntegrityProfit HonestyMarket Cap TransparencyExpansion, Growth Ethics, Values Corporate Governance 2
  3. 3. 4/25/2012 3
  4. 4. 4/25/2012Is it Required for India?Is it really important? 4
  5. 5. 4/25/2012 Other StatisticsThe National Skill Mission will train 500 million Indians invarious skills by 2022.Over the last two years, Indian engineering and project exportcompanies have executed 2488 projects across 104 countries.Indorama started manufacturing polyester in Indonesia in 1991.It has emerged as the largest producer of polyester in theASEAN region.India’s automobile exports grew 33% in FY2010, with ‘Made inIndia’ vehicle being exported to over 90 Countries.Around 540 million people are under the age of 25. This figureis 4 times bigger than Japan, 25 times bigger than Australia. Atthis growth rate, it will surpass the population of Europe by2020. Do we really need Corporate Governance? Corpor Sustain ateQuality able Govern Growth ance 5
  6. 6. 4/25/2012Stakeholders of Corporate Governance 6
  7. 7. 4/25/2012Low Level ofCorporateGovernance Unethical Practices – Resulting in High Risk BusinessHigh Levelof GREED 7
  8. 8. 4/25/2012Absence of Corporate Governance Cases of Serious Malpractice. 8
  9. 9. 4/25/2012 9
  10. 10. 4/25/2012Angels V/S Demons The Biggest IT SCAMSTAR 10
  11. 11. 4/25/2012 Case of Satyam T he biggest corporate scam in India has come from one of the mostrespected businessmen. Satyam founder Byrraju Ramalinga Rajuresigned as its chairman after admitting to cooking up the accountbooks. His efforts to fill the "fictitious assets with real ones" through Maytasacquisition failed, after which he decided to confess the crime. A fraud involving about Rs 8,000 crore (Rs 80 billion), Following the confession, Indias fourth largest IT company lost astaggering Rs 10,000 crore (Rs 100 billion) in market capitalisation asinvestors reacted sharply and dumped shares, pushing down the scripby 78 per cent to Rs 39.95 on the Bombay Stock Exchange. US. The Confession "I am now prepared to subject myself to the laws of the land and faceconsequences thereof," Raju said in a letter to SEBI and the Board ofDirectors, while giving details of how the profits were inflated over theyears and his failed attempts to "fill the fictitious assets with real ones.“ Raju said the companys balance sheet as of September 30 carries"inflated (non-existent) cash and bank balances of Rs 5,040 crore (Rs50.40 billion) as against Rs 5,361 crore (Rs 53.61 billion) reflected in thebooks." 11
  12. 12. 4/25/2012 The Big BullThe Pied Piper of Stock Market 12
  13. 13. 4/25/2012 Big Bull : Harshad Mehta He was known as the ‘Big bull’ He triggered a rise in the BSE in year 1992 by trading in shares ata premium across many segments Taking advantages of the loopholes in the banking system,Harshad and his associates triggered a securities scam divertingfunds to the tune of Rs 4000 crore (Rs 40 billion) from the banksto stockbrokers between April 1991 to May 1992 . Big Scam Harshad Mehta worked with the New India Assurance Company beforehe moved ahead to try his luck in the stock markets. Mehta soon mastered the tricks of the trade and set out on dangerousgame plan. Mehta has siphoned off huge sums of money from severalbanks and millions of investors were conned in the process. His scam was exposed, the markets crashed and he was arrested andbanned for life from trading in the stock markets 13
  14. 14. 4/25/2012 Big Scam He was later charged with 72 criminal offences. A Special Court alsosentenced Sudhir Mehta, Harshad Mehtas brother, and six others,including four bank officials, to rigorous imprisonment (RI) ranging from1 year to 10 years on the charge of duping State Bank of India to thetune of Rs 600 crore (Rs 6 billion) in connection with the securities scamthat rocked the financial markets in 1992. He died in 2002 with manylitigations still pending against him. Follower of Big Bull 14
  15. 15. 4/25/2012 Scam : Ketan Parekh Ketan Parekh followed Harshad Mehtas footsteps to swindlecrores of rupees from banks. A chartered accountant he used torun a family business, NH Securities.Ketan however had bigger plans in mind. He targeted smallerexchanges like the Allahabad Stock Exchange and the CalcuttaStock Exchange, and bought shares in fictitious names. Scam : Ketan ParekhHis dealings revolved around shares of ten companies like HimachalFuturistic, Global Tele-Systems, SSI Ltd, DSQ Software, Zee Telefilms,Silverline, Pentamedia Graphics and Satyam Computer (K-10 scrips).Ketan borrowed Rs 250 crore from Global Trust Bank to fuel his ambitions.Ketan alongwith his associates also managed to get Rs 1,000 crore from theMadhavpura Mercantile Co-operative Bank.According to RBI regulations, a broker is allowed a loan of only Rs 15 crore(Rs 150 million). There was evidence of price rigging in the scrips of GlobalTrust Bank, Zee Telefilms, HFCL, Lupin Laboratories, Aftek Infosys andPadmini Polymer . 15
  16. 16. 4/25/2012 C R Bhansali Scam C R Bhansali ScamThe Bhansali scam resulted in a loss of over Rs 1,200 crore (Rs 12 billion).He first launched the finance company CRB Capital Markets, followed byCRB Mutual Fund and CRB Share Custodial Services. He ruled like afinancial wizard 1992 to 1996 collecting money from the public throughfixed deposits, bonds and debentures. The money was transferred tocompanies that never existed .CRB Capital Markets raised a whopping Rs 176 crore in three years. In1994 CRB Mutual Funds raised Rs 230 crore and Rs 180 crore came viafixed deposits. Bhansali also succeeded to to raise about Rs 900 crorefrom the markets. 16
  17. 17. 4/25/2012 C R Bhansali ScamHowever, his good days did not last long, after 1995 he receivedseveral jolts. Bhansali tried borrowing more money from themarket. This led to a financial crisis.It became difficult for Bhansali to sustain himself. The ReserveBank of India (RBI) refused banking status to CRB and he was in thedock. SBI was one of the banks to be hit by his huge defaults. The Cobbler’s Scam – Sohin Daya 17
  18. 18. 4/25/2012 The Cobbler’s Scam – Sohin DayaSohin Daya, son of a former Sheriff of Mumbai, was the mainaccused in the multi-crore shoes scam. Daya of Dawood Shoes,Rafique Tejani of Metro Shoes, and Kishore Signapurkar of MilanoShoes were arrested for creating several leather co-operativesocieties which did not exist.They availed loans of crores of rupees on behalf of these fictitioussocieties The Cobbler’s Scam – Sohin DayaThe scam was exposed in 1995. The accused created a fictitiouscooperative society of cobblers to take advantage of governmentloans through various schemes.Officials of the Maharashtra State Finance Corporation, Citibank,Bank of Oman, Dena Development Credit Bank, Saraswat Co-operative Bank, and Bank of Bahrain and Kuwait were also chargesheeted. 18
  19. 19. 4/25/2012 Dinesh Dalmiya’s Stock Scam Dinesh Dalmiya’s Stock ScamDinesh Dalmia was the managing director of DSQ Software Limitedwhen the Central Bureau of Investigation arrested him for hisinvolvement in a stocks scam of Rs 595 crore (Rs 5.95 billion).Dalmias group included DSQ Holdings Ltd, Hulda Properties andTrades Ltd, and Powerflow Holding and Trading Pvt Ltd. Dalmiaresorted to illegal ways to make money through the partly paidshares of DSQ Software Ltd, in the name of New Vision InvestmentLtd, UK, and unallotted shares in the name of Dinesh DalmiaTechnology Trust.Investigation showed that 1.30 crore (13 million) shares of DSQSoftware Ltd had not been listed on any stock exchange. 19
  20. 20. 4/25/2012 The Fake Stamp Racket The Fake Stamp RacketH e paid for his own education at Sarvodaya Vidyalaya by sellingfruits and vegetables on trains.He is famous (or infamous) for being he man behind one of The bigscam that rocked India.The fake stamp racket involving Abdul Karim Telgi was exposed in2000. The loss is estimated to be Rs 171.33 crore (Rs 1.71 billion),it was initially pegged to be Rs 30,000 crore (Rs 300 bilion), whichwas later clarified by the CBI as an exaggerated figure. 20
  21. 21. 4/25/2012 The Fake Stamp RacketIn 1994, Abdul Karim Telgi acquired a stamp paper license from theIndian government and began printing fake stamp papers.Telgi bribed to get into the government security press in Nashikand bought special machines to print fake stamp papers.Telgis networked spread across 13 states involving 176 offices,1,000 employees and 123 bank accounts in 18 cities. The Money Market Fraud 21
  22. 22. 4/25/2012 The Money Market FraudVirendra Rastogi chief executive of RBG Resources was chargedwith for deceiving banks worldwide of an estimated $1 billion.He was also involved in the duty-drawback scam to the tune of Rs43 crore (Rs 430 milion) in India.The CBI said that five companies, whose directors were the fourRastogi brothers -- Subash, Virender, Ravinde and Narinder --exported bicycle parts during 1995-96 to Russia and Hong Kong byheavily over invoicing the value of goods for claiming excess dutydraw back from customs. UTI Scam 22
  23. 23. 4/25/2012 UTI ScamFormer UTI chairman P S Subramanyam and two executivedirectors -- M M Kapur and S K Basu -- and a stockbroker Rakesh GMehta, were arrested in connection with the UTI scam.UTI had purchased 40,000 shares of Cyberspace On September 25,2000, for about Rs 3.33 crore (Rs 33.3 million) from Rakesh Mehtawhen there were no buyers for the scrip. The market price wasaround Rs 830. The CBI said it was the conspiracy of these fourpeople which resulted in the loss of Rs 32 crore (Rs 320 million) . UTI ScamSubramanyam, Kapur and Basu had changed their stance on aninvestment advice of the equities research cell of UTI. Thepromoter of Cyberspace Infosys, Arvind Johari was arrested inconnection with the case. The officals were paid Rs 50 lakh (Rs 5million) by Cyberspace to promote its shares.He also received Rs 1.18 crore (Rs 11.8 million) from the companythrough a circuitous route for possible rigging the Cyberspacecounter. 23
  24. 24. 4/25/2012 Home Trade Home TradeHome Trade had created waves with celebrity endorsements. ButSanjay Agarwals finance portal was just a veil to cover up hisshady deals. He swindled a whopping Rs 600 crore (Rs 6 billion)from more than 25 cooperative banks.The government securities (gilt) scam of 2001 was exposed whenthe Reserve Bank of India checked the acounts of somecooperative banks following unusual activities in the gilt market. 24
  25. 25. 4/25/2012 Home TradeCo-operative banks and brokers acted in collusion in abid to makeeasy money at the cost of the hard earned savings of millions ofIndians. In this case, even the Public Provident Fund (PPF) wasaffected.A sum of about Rs 92 crore (Rs 920 million) was missing from theSeamens Provident Fund. Sanjay Agarwal, Ketan Sheth (a broker),Nandkishore Trivedi and Baluchan Rai (a Hong Kong-based Non-Resident Indian) were behind the Home Trade scam. Home Trade•Gilt funds, as they are conveniently called, are mutual fund schemesfloated by asset management companies with exclusive investments ingovernment securities.•The schemes are also referred to as mutual funds dedicated exclusivelyto investments in government securities. Government securities mean andinclude central government dated securities, state government securitiesand treasury bills.•The gilt funds provide to the investors the safety of investments made ingovernment securities and better returns than direct investments in thesesecurities through investing in a variety of government securities yieldingvarying rate of returns gilt funds, however, do run the risk.. The first giltfund in India was set up in December 1998. . 25
  26. 26. 4/25/2012 Being hurt is something you cant stopfrom happening. But being miserable is always your choice. 26
  27. 27. 4/25/2012 Board of DirectorsSTATUTORY DUTIES To file return of allotment: Section 75 . Not to issue irredeemable preference share or shares or share redeemable after 20 years To disclose interest (Section 299-300) To disclose receipt of compensation from transferee of shares (Sec.320) Duty to attend Board meetings To convene statutory, Annual General meeting (AGM) and also extraordinary general meetings [ Section 165,166 &169] Board of Directors To prepare and place at the AGM along with the balance sheet and profit & loss account a report on the company’s affairs including the report of the Board of Directors (Section 173, 210 & 217). To authenticate and approve annual financial statement (Section 215). To appoint first auditor of the company (Section 224). To appoint cost auditor of the company (Section 233B). To make a declaration of solvency in the case of Members’ voluntary winding up (Section 488) 27
  28. 28. 4/25/2012 Board of Directors GENERAL DUTIES 1. Duty of good faith 2. Duty of Care 3. Duty Not to Delegate LIABILITIES A. Liabilities to the Company Breach of fiduciary duty • Negligence • Mala fide Acts Board of Directors1. Liabilities to third parties 1. Liabilities under Companies Act 1. Prospectus 2. With regard to allotment 3. Unlimited Liability 4. Fraudulent Trading 2. Liability for breach of Statutory Duties 3. Liability for acts of co-directors 4. Criminal Liability 28
  29. 29. 4/25/2012 Corporate Governance “CORPORATE GOVERNANCE is the system by which companies aredirected and controlled by the management in the best interest of theshareholders and others ensuring greater transparency and better and timelyfinancial reporting. The Board of Directors are responsible for governance oftheir companies.” “CORPORATE GOVERNANCE is needed to create a corporate culture ofconsciousness, transparency and openness. It refers to combination of laws,rules, regulations, procedures and voluntary practices to enable the companiesto maximize the shareholders long-term value. It should lead to increasingcustomer satisfaction, shareholder value and wealth.” 29
  30. 30. 4/25/2012 Corporate Governance in India Indian Corporate Scenario was more or less stagnant till 90s The position and goal of the Indian corporate sector has changed a lotafter the liberalization. India’s reform program make a steady progress since 1994. India with its 20 million shareholders , is one of the largest emergingmarket in terms of market capitalization.Good Corporate Governance Initiatives CII came up with first Voluntary code of conduct in 1998 SEBI – incorporation of Clause 49 SCOPE Awards for Excellence and Outstanding Contribution to thePublic Sector Management launched in 1996-97 In 2002, a SCOPE Centre for Excellence in Corporate Governance wasestablished Aim to promote and inculcate good corporate governance practicesamong public enterprises as a means of enhancing their competitiveness 30
  31. 31. 4/25/2012 Clause 49Clause 49 lays down guidelines for composition of the boardincluding the number and qualities of independent directors,remuneration of board members, code of conduct, and theconstitution of various committees (including audit),disclosures, and suggested contents of annual reports.These changes are aimed at moving Indian companies rapidlyup the evolutionary path towards business processes andmanagement oversight techniques. Insurance Industry – Ethical ConcernsCases related to Mis-Representation of the Information Pressurising Underwriters to clear the case Inflating the Profits, to show them as ready for IPO Audit Issues : Change in the policy terms after issuingthe policies, 31
  32. 32. 4/25/2012 Legal Provision under IPC No specific provisions in IPC for insurance fraud Action at best is limited to: Section 205. Cheat by personation Section 420. Cheating and dishonestly inducing delivery of property Section 464: making a false document including signs and seals andforgery Section 405. Criminal breach of trust – suited to life insurance All these legal provisions are not adequate to prosecute an individuallegally due of time and cost involvedCorporate Governance Findings / Issues by Insurance Institute of India No Fraud management policy documented Action limited to: Rejection of claims for serious fraud – all the cases Cancelation of policy – in serious fraud cases and not abuse or mis-declaration Most companies do not have an underwriting loop for cases of mis-declaration and non-declaration Action against agents limited Legal action against fraud not very common Recoveries rare 32
  33. 33. 4/25/2012 Good Corporate Governance Cases State Bank of India•Governed by act of Parliament(SBI Act 1955)•President of India is the Largest Shareholder (59.41%)•Non residents(FII,NRI,GDR) (12.33%)•Institutions (10.90%)•Resident Individuals(6.7%)•Board of Directors •3 Executive Directors and 7 non Executive Directors •Chairman, 2 MD (Executive Directors) •4 directors- elected by Shareholders •3 directors- nominated by GOI •Non EDs include Academicians, Journalists, Business Professionals 33
  34. 34. 4/25/2012 State Bank of India - Committee•9 Committees•Executive Committee•Audit Committee•Shareholders’/Investors Grievance Committee,•Risk Management Committee•Special Committee for Monitoring of Large Value Frauds(Rs.1crore and above)•Customer Service Committee•Technology Committee•Committee on Rural Sector Business•Remuneration Committee of the Board L&T•The Companys philosophy on Corporate Governance is built on arich legacy of fair and transparent governance and disclosurepractices•Larsen & Toubro (L&T) has been judged as India`s Best ManagedCompany by leading business magazine `Business Today` and itsknowledge partner `Ernst & Young` (2008)•The Company had adopted Corporate Governance and disclosurepractices much before these were mandated by legislation. 34
  35. 35. 4/25/2012 L&T – Governance Structure•The Company has four tiers of Corporate Governance structure •Strategic Supervision •Executive Management •Strategy & Operational Management •Operational Management•The four-tier governance structure besides ensuring greatermanagement accountability and credibility, facilitates increasedautonomy of businesses, performance discipline and developmentof business leaders, leading to increased public confidence Wipro•Wipro has been named amongst The Five Best Companies inCorporate Governance Practices in Asia/Pacific in 2007 by MZConsult•As on March 31, 2009,the Board comprised of 6 IndependentDirectors out of a total strength of 10 directors 35
  36. 36. 4/25/2012 Wipro• Corporate Governance philosophy is put into practice inWipro through the following four layers, namely•1. Governance by Shareholders•2. Governance by Board of Directors•3. Governance by Sub-committee of Board of Directors•4. Governance of the management process Wipro•Highlight of Wipro’s CG – TRANSPARENCY•The following are very clearly shared on the web: •Charters of the Committees •Wipros ombudsprocess for Non employees and Employees •Corporate governance guidelines •Code of ethics for principal & finance officers •Code of business conduct and ethics •NYSE Corporate Governance Report 2009 36
  37. 37. 4/25/2012 Challenges with Corporate Governance Implementation Goal Congruence Turning Corporate Governance Rules/Regulations inEveryday’s Action and Behaviour Synergy of Think – Act – Communicate Ownership 37
  38. 38. 4/25/2012 While Training is onlyShowingthe path, Walking on to it should be your Choice 38
  39. 39. 4/25/2012 By, Kaushal 39