CorporateGovernance in India

Subhash Chandra Das

An Evaluation

Third Edition

Corporate Governance in India

Corporate Governancein India

An Evaluation

Third Edition

Subhash Chandra DasManagement ConsultantFormer Visiting Faculty

Indian Institute of Social Welfare and Business ManagementUniversity of Calcutta

andFormer Director (Finance), HPC Ltd.

New Delhi-1100012012

vii

Contents

Foreword xiii

Preface xv

Preface to the First Edition xvii

List of Abbreviations xix

1 Introduction 1–61.1 Nature of the Study 11.2 Objectives of the Study 21.3 Issues Examined 31.4 Methodology 51.5 Design of the Study 6

2 Evolution of Corporate Governance in India 7–332.1 Systems of Corporate Governance in India 7

2.1.1 The Managing Agency System (1850–1955) 82.1.2 The Promoter System (1956–1991) 132.1.3 The Anglo-American System (1992 and Onwards) 19

2.2 Reform Processes 222.2.1 Reforms of the Managing Agency System 222.2.2 Reforms of the Promoter System 232.2.3 Reforms of the Anglo-American System 24

viii Contents

3 Corporate Governance: The Conceptual Issues 34–673.1 Introduction 343.2 Philosophy, Objectives and Purposes of Corporate

Governance 353.3 Concept of Corporate Governance and Its Factors 36

3.3.1 Cornerstones/Principles of Corporate Governance 393.3.2 Theories of Corporate Governance 403.3.3 Underlying Conflicts 41

3.4 Corporate Governance and Value Creation 443.5 Governance, Performance and Development at Macro and

Micro Levels 453.6 Business Ethics and Corporate Governance 473.7 Corporate Social Responsibility (CSR) and

Corporate Governance 483.8 Environmental Issues and Corporate Governance 493.9 Structures and Processes for Corporate Governance 50

3.9.1 Directors—Board of Directors (BOD) 503.9.2 Board Committees 583.9.3 Shareholders 613.9.4 Institutional Investors (IIs)/Large Shareholders 633.9.5 Other Stakeholders 643.9.6 Auditors 653.9.7 Banks 66

3.10 Concluding Remarks 67

4 Corporate Governance Code The World Over—Various Committees’ Reports, A ComparativeStudy 68–94

4.1 Introduction 684.2 Constitution of Some Renowned Committees and Salient

Features of Their Reports/Recommendations on CorporateGovernance 704.2.1 The Cadbury Committee Report (1992) 704.2.2 The Greenbury Committee Report (1995) 724.2.3 The Hampel Committee on Corporate

Governance (1998) 734.2.4 The Combined Code, Principles of Good Governance and

Code of Best Practice, London Stock Exchange (1998) 754.2.5 The Organization for Economic Co-operation and

Development (OECD) Principles on CorporateGovernance (1999) 79

4.2.6 The Blue Ribbon Committee Report on Effectiveness ofCorporate Audit Committees (1999) 82

4.3 A Comparative Study and Analysis of the Various Committees’Reports/Codes of Best Practices 87

Contents xi

7.9 Best Practices and Governance Norms for CSR 2187.10 Concluding Observation 218

8 Suggestions and Conclusions 219–2558.1 Introduction 2198.2 Suggestions and Recommendations 220

8.2.1 Section A: Structural Changes 2208.2.2 Section B: Towards a Comprehensive and Standard Code of

Corporate Governance and Disclosure Norms 2228.2.3 Section C: A Standard Code of Governance Practices and

Disclosure Norms on (a) Social Responsibility of Business,(b) Business Ethics, and (c) Environmental Issues 250

8.3 A Policy for Customization and Code Servicing for CorporateGovernance 2548.3.1 Customization 2548.3.2 Code Servicing 254

8.4 Conclusion 255

Appendices

1 List of Important SEBI Regulations 257–258

2 Corporate Governance Systems: The USA,The UK, Germany and Japan 259–263

3 Impact of International Committees’ Recommendationson National Committees’ Recommendations andEnactments in India on Corporate Governance 264–266

4 A Snapshot of Clause 49 of SEBI ListingAgreement 267–269

5 Information to be Placed Before Board of Directors(Annexure IA of Clause 49 of SEBI Listing Agreement) 270–271

6 Format of Quarterly Compliance Report on CorporateGovernance (Annexure IB of Clause 49 of SEBIListing Agreement) 272–273

7 Suggested List of Items to be Included in the Report onCorporate Governance in the Annual Report ofCompanies (Annexure IC of Clause 49) 274–276

8 Board Structure of Selected Companies in2004–2005—Industrywise (Listed under BSESensex and NSE Nifty) 277–282

1

1.1 NATURE OF THE STUDY

Corporate governance is a system of structuring, operating, and controllinga company with a view to achieving long-term strategic goals to satisfy itsshareholders, creditors, employees, customers and suppliers. It aims tocomply with the legal and regulatory requirements, besides meeting theenvironmental and local community needs. It includes the policies andprocedures adopted by a company to achieve its objectives in relation to itsshareholders, employees, customers suppliers, regulatory authorities andthe community at large. It prescribes a Code of Corporate Conduct inrelation to all the stakeholders. Therefore, a framework of effectiveaccountability to the stakeholders is the essence of corporate governance.

In India, the question of corporate governance has come up mainly inthe wake of economic liberalization and deregulation of industry and businessas well as the demand for a new corporate ethos and stricter compliancewith the legislation. In this context, where the financial institutions holdsubstantial stakes in companies, the accountability of all the directors,including ex-officios/independent and nominees, has come into sharp focus.Therefore, a good governance demands that a company must have aresponsibility to set exemplary standards of ethical behaviour, both within

Introduction

7

2.1 SYSTEMS OF CORPORATE GOVERNANCE IN INDIA

Looking at the history, it can be said that a good corporate governancehas always been an issue since the companies started using stock marketto meet their financing needs. The history of East India Company (EIC)suggests how the first publicly listed company’s indulgence in trade andaccounting malpractices led to the widespread public protests and demandfor reform. A unique similarity of such corruptive practices has beenobserved even after 400 years and repeated in modern corporates likeEnron and WorldCom.

Executive greed, rampant corruption, insider trading and appallingcorporate governance practices were all there. It is sheer irony that EastIndia Company, where the seeds of the modern-day board were firstsown, faired miserably on corporate governance front. Even then, theimportance of practicing corporate governance principles was not playeddown.

In India, every segment attached to the corporates has unanimouslyaccepted the proposition that there is a need for practicing the corporategovernance principles. Let us now look through various systems ofcorporate governance in India.

Evolution of CorporateGovernance in India

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Third Edition

Corporate Governance in IndiaAn Evaluation

Subhash Chandra DasThis compact and concise text, now in its third edition, continues to give a clear analysis of the principles and practices of corporate governance—the corporate governance practices prevalent in India as well as in other industrialized countries around the globe.

The book begins with an introduction to corporate governance, and then moves on to describe the evolution of corporate governance system. It gives a detailed description of the principles, philosophy, structure and the process of corporate governance. The text also contains sample study analyses of some listed Indian companies underBSE Sensex and NSE Nifty. Besides, it provides recommendations of various national committees on corporate governance reforms.

In this edition, a new chapter on Corporate Social Responsibility and Sustainability has been added.

Primarily intended for the students of management, law and commerce, the book can also be used by professionals, regulatory authorities and policy-makers.

Outlines a road map for Indian companies to achieve international standards of corporate governance. Provides an explorative and evaluative study on the standards and practices of corporate governance in India.Includes figures and tables to give a better understanding of the concepts discussed.

SUBHASH CHANDRA DAS [MCom, FICWA, MWSOM (UK), PhD], a Management Consultant, is Former Director (Finance), Hindustan Paper Corporation (HPC) Limited, and a visiting faculty in many universities and B-Schools.He has over three decades of professional experience as a Financial and Organization & Methods (O&M) expert in Tata Steel, Greaves Cotton, Steel Authority of India Limited (SAIL), Hindustan Cables Limited (HCL), and Hindustan Paper Corporation (HPC) Limited. He has contributed more than twenty articles on management topics to journals and research bulletins of various professional and management institutes of the country. He has authoredthree books, Corporate Governance—Codes, Systems, Standards and Practices, Management Control Systems— Principles and Practices, and Project Management and Control, all published by PHI Learning, New Delhi.

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CORPORATE GOVERNANCE IN INDIA : AN EVALUATION

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Description:

This compact and concise text, now in its third edition, continues to give a clear analysis of the principles and practices of corporate governance—the corporate governance practices prevalent in India as well as in other industrialized countries around the globe.

The book begins with an introduction to corporate governance, and then moves on to describe the evolution of corporate governance system. It gives a detailed description of the principles, philosophy, structure and the process of corporate governance. The text also contains sample study analyses of some listed Indian companies under BSE Sensex and NSE Nifty. Besides, it provides recommendations of various national committees on corporate governance reforms.

In this edition, a new chapter on Corporate Social Responsibility and Sustainability has been added.

Primarily intended for the students of management, law and commerce, the book can also be used by professionals, regulatory authorities and policy-makers.

KEY FEATURES :

Outlines a road map for Indian companies to achieve international standards of corporate governance.

Provides an explorative and evaluative study on the standards and practices of corporate governance in India.

Includes figures and tables to give a better understanding of the concepts discussed.

Contents:

Foreword • Preface • Preface to the First Edition • List of Abbreviations 1. Introduction 2. Evolution of Corporate Governance in India 3. Corporate Governance—The Conceptual Issues 4. Corporate Governance Code The World Over—Various Committees’ Reports, A Comparative Study 5. Corporate Governance in India—Various Committees’ Recommendations—A Critical Analysis of Various Regulations and Enactments and Suggestions for Improvement 6. Corporate Governance Practice in India—A Case Study of Selected Listed Companies for the Financial Year 2004–2005 7. Corporate Social Responsibility (CSR) and Sustainability 8. Suggestions and Conclusions Appendices 1. List of Important SEBI Regulations 2. Corporate Governance Systems: The USA, The UK, Germany and Japan 3. Impact of International Committees’ Recommendations on National Committees’ Recommendations and Enactments in India on Corporate Governance 4. A Snapshot of Clause 49 of SEBI Listing Agreement 5. Information to be placed Before Board of Directors (Annexure 1A of Clause 49 of SEBI Listing Agreement) 6. Format of Quarterly Compliance Report on Corporate Governance (Annexure IB of Clause 49 of SEBI Listing Agreement 7. Suggested list of items to be included in the Report on Corporate Governance in the Annual Report of Companies (Annexure IC of Clause 49) 8. Board Structure of Selected Companies in 2004–2005—Industrywise (Listed under BSE Sensex and NSE Nifty) 9. Board Strength of Executive Directors, Non-Executive Directors and Independent Directors of Selected Companies in 2004–2005 (Listed under BSE Sensex and NSE Nifty) Bibliography • Index