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Corporate Governance: Indian Banking Sector
Executive summary
"No one pretends that democracy is perfect or all-wise, indeed it has been said that
democracy is the worst form of government except all those other forms that have been
tried from time to time."
WINSTON CHURCHILL to the house of `commons'
This is an interesting & thoroughly worthwhile project. Its basic messages are relevant
to any organization & any manager. This project is not encyclopedic (as Corporate
Governance itself is a very large issue), although it is hoped that answers to meet
question will be found, or that at least a pointer may be given as to where the answers are
to be found.
This project is prepared for those who are either involved in Corporate Governance or
interested in its principles & practice, & who are concerned with the human side of it.
This project is based on mechanism of corporate governance, dimensions of corporate
governance, and mastering corporate governance.
Corporate Governance brings power; and power corrupts. The antidotes to that power are
transparency, objectivity and accountability. All three requires a stead fort and clear
appreciation of oneself as seen by others. The pay -offs for conducting in the way this
project recommends can be enormous. This is more easily perceived by those who have
jumped in & learnt to swim after their own fashion than by those who have avoided the
plunge. There are always admirable reasons for avoiding the plunge, off course. But this
project is not one of them.
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Introduction to Corporate Governance

Corporate governance while not a new concept, has, in the 1990's, become an issue of
global importance. Corporate governance is the set of processes, customs, policies, laws
and institutions affecting the way a corporation is directed, administered or controlled.
Corporate governance also includes the relationships among the many players involved (the
stakeholders) and the goals for which the corporation is governed. The principal players are
the shareholders, management and the board of directors. Other stakeholders include
employees, suppliers, customers, banks and other lenders, regulators, the environment and
the community at large.
Corporate Governance is typically perceived by academic literature as dealing with
“problems that results from the separation of ownership and control”. From this
perspective, corporate governance would focus on: The internal structure and rules of the
board of directors; the creation of independent audit committee‘s rules for disclosure of
information to shareholders and creditors; and control of the management. The following
illustration explains how a corporation is structured:
Shareholders
Board
Management
Employees
Corporate governance is a multi-faceted subject. An important part of corporate

governance deals with accountability, fiduciary duty and mechanisms of auditing and
control. In this sense, corporate governance players should comply with codes to the overall
good of all constituents. Another important focus is economic efficiency, both within the
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corporation (such as the best practice guidelines) as well as externally (national institutional
frameworks). In this "economic view", the corporate governance system should be designed
in such a way as to optimize results. Some argue that the firm should act not only in the
interest of shareholders, but also of all the other stakeholders.
Corporate Governance is a set of methods or practices by which business is carried
on, directed and controlled in a corporate form of business organization. Board of Directors
is primarily responsible for governance. Quality of governance determines the growth and
future of the business.
History of Corporate Governance

In the 19th century, state corporation law enhanced the rights of corporate boards to
govern without unanimous consent of shareholders in exchange for statutory benefits like
appraisal rights, in order to make corporate governance more efficient. Since that time, and
because most large publicly traded corporations in America are incorporated under corporate
administration friendly Delaware law, and because America's wealth has been increasingly
securitized into various corporate entities and institutions, the rights of individual owners and
shareholders have become increasingly derivative and dissipated. The concerns of
shareholders over administration pay and stock losses periodically has led to more frequent
calls for Corporate Governance reforms.
How did India get here?

Many years ago, worldwide, buyers and sellers of corporation stocks were individual
investors, such as wealthy businessmen. Over time, markets have become more
institutionalized; buyers and sellers are largely institutions (e.g., pension funds, insurance
companies, mutual funds, hedge funds, investor groups, and banks). The rise of the
institutional investor has brought with it some increase of professional diligence which has
tended to improved regulation of the stock market (but not necessarily in the interest of the
small investor or even of the naïve institutions, of which there are many).
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Unfortunately, there has been a concurrent lapse in the oversight of large

corporations, which are now almost all owned by large institutions. The Board of Directors
of large corporations used to be chosen by the principal shareholders, who usually had an
emotional as well as monetary investment in the company (think Ford), and the Board
diligently (thoroughly) kept an eye on the company and its principal executives (they usually
hired and fired the President, or Chief executive officer— CEO). Nowadays, if the owning
institutions don't like what the President/CEO is doing and they feel that firing him will be
costly (think "golden handshake") and/or time consuming, they will simply sell out their
interest. Also, nowadays, the Board is mostly chosen by the President/CEO, and may be
made up primarily of his cronies (or, at least, officers of the corporation, who owe their jobs
to him or fellow CEOs from other corporations). Since the (institutional) shareholders rarely
object, the President/CEO generally takes the Chairman of the Board position for himself
(which makes it much more difficult for the institutional owners to "fire" him).
Since the marked rise in the use of Internet transactions in the 1990s, both individual
and professional stock investors around the world have emerged as a potential new kind of
major (short term) force in the ownership of corporations and in the markets: the casual
participant. Even as the purchase of individual shares in any one corporation by individual
investors diminishes, the sale of derivatives (e.g., exchange-traded funds (ETFs), Stock
market ) has soared. So, the interests of most investors are now increasingly rarely tied to the
fortunes of individual corporations.
But, the ownership of stocks in markets around the world varies; for example, the
majority of the shares in the Japanese market are held by financial companies and industrial
corporations (there is a large amount of cross-holding among Japanese keiretsu corporations
and within S. Korean chaebol 'groups'), whereas stock in the USA or the UK and Europe are
much more broadly owned, often still by large individual investors.
In the later half of the 1990's, during the Asian financial crisis, a lot of the attention
fell upon the corporate governance systems of the developing world, which tend to be
heavily into cronyism and nepotism.]
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In the first half of the 1990's, the issue of corporate governance in the U.S. received
considerable press attention due to the wave of (belated?) CEO dismissals (e.g.: IBM,
Kodak, Honeywell) by their boards. CALPERS led a wave of institutional shareholder
activism (something only very rarely seen before), as a way of ensuring that corporate value
would not be destroyed by the now traditionally cozy relationships between the CEO and the
board of directors. In the early 2000s, the massive bankruptcies (and criminal malfeasance)
of Enron and WorldCom, as well as lesser corporate debacles, such as Adelphia
Communications, AOL, Arthur Andersen, Global Crossing, Tyco, and, more recently,
Freddie Mac and Fannie Mae, led to increased shareholder and governmental interest in
corporate governance, culminating in the passage of the Sarbanes-Oxley Act in 2002. Since
then, the stock market has greatly recovered, and shareholder zeal has waned accordingly.
Definition of Corporate Governance

The concept of corporate governance sounds simple and unambiguous (decided),
but when one attempts to define it and scan available literature to look for precedence
(priority), one comes across a bewildering (confusing) variety of perceptions behind
available definitions. The definition varies according to the sensitivity of the analyst, the
context of varying degrees of development and from the standpoint of academics versus
corporate managements. However, there is an underlying uniformity in the thinking of all
analysts that there is definite need to eradicate corporate misgovernance and promote
corporate governance at all costs. It is not only the stakeholders who are keenly interested in
ensuring adoption of best governance practices by corporates, but all societies and countries
worldwide.
"Corporate governance is a field in economics that investigates how to secure/motivate
efficient management of corporations by the use of incentive mechanisms, such as contracts,
organizational designs and legislation. This is often limited to the question of improving
financial performance, for example, how the corporate owners can secure/motivate that the
corporate managers will deliver a competitive rate of return",
www.encycogov.com, Mathiesen [2002].
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“Corporate governance deals with the ways in which suppliers of finance to corporations
assure themselves of getting a return on their investment”,
The Journal of Finance, Shleifer and Vishny [1997, page 737].
"Corporate governance - which can be defined narrowly as the relationship of a company to

its shareholders or, more broadly, as its relationship to society -….”
From an article in Financial Times [1997].
“Some commentators take too narrow a view, and say it (corporate governance) is the fancy
term for the way in which directors and auditors handle their responsibilities towards
shareholders. Others use the expression as if it were synonymous with shareholder
democracy. Corporate governance is a topic recently conceived, as yet ill-defined, and
consequently blurred (unclear) at the edges…corporate governance as a subject, as an
objective, or as a regime to be followed for the good of shareholders, employees, customers,
bankers and indeed for the reputation and standing of our nation and its economy‖ Maw et al.
Principles of Corporate Governance

Key elements of good corporate governance principles include honesty, trust and
integrity, openness, performance orientation, responsibility and accountability, mutual
respect, and commitment to the organisation.
Of importance is how directors and management develop a model of governance that

aligns the values of the corporate participants and then evaluate this model periodically for its
effectiveness. In particular, senior executives should conduct themselves honestly and
ethically, especially concerning actual or apparent conflicts of interest, and disclosure in
financial reports.
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 Commonly accepted principles of Corporate Governance include:

1. Rights and equitable treatment of shareholders:
Organisations should respect the rights of shareholders and help shareholders to
exercise those rights. They can help shareholders exercise their rights by effectively
communicating information that is understandable and accessible and encouraging
shareholders to participate in general meetings.
2. Interests of other stakeholders:
Organisations should recognise that they have legal and other obligations to all
legitimate stakeholders.
3. Role and responsibilities of the board:
The board needs a range of skills and understanding to be able to deal with various
business issues and have the ability to review and challenge management performance. It
needs to be of sufficient size and have an appropriate level of commitment to fulfill its
responsibilities and duties. There are issues about the appropriate mix of executive and non-
executive directors. The key roles of chairperson and CEO should not be held by the same
person.
4. Integrity and ethical behaviour:
Organisations should develop a code of conduct for their directors and executives
that promotes ethical and responsible decision making. It is important to understand, though,
that systemic reliance on integrity and ethics is bound to eventual failure.
5. Disclosure and transparency:
Organisations should clarify and make publicly known the roles and responsibilities
of board and management to provide shareholders with a level of accountability. They
should also implement procedures to independently verify and safeguard the integrity of the
company's financial reporting. Disclosure of material matters concerning the organisation
should be timely and balanced to ensure that all investors have access to clear, factual
information.
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Importance of Corporate Governance

Corporate governance is now a topic of considerable interest to a large and
expanding cross-section of the community. It is obviously of fundamental importance to this
audience, given that most of you are company directors. It is also of interest to the serve
Bank, in its capacity as supervisor of the banking system. In this speech, I will discuss a
number of themes relating to corporate governance, with particular emphasis on the
important role it plays in promoting a sound financial system.
Until fairly recently, corporate governance was not a topic that attracted much
public attention. It was a topic reserved for discussion in the Board room or in academic
environments. However, recent events, such as the Enron scandal and other corporate
governance failures, have put corporate governance on the front pages of our main
newspapers. Although none of us welcomes this kind of adverse publicity, it has nonetheless
had beneficial effects. In particular, it has highlighted the important role that corporate
governance plays in a modern economy and the consequences of getting it wrong. And it has
strengthened the incentives for directors and policy-makers alike to reassess the structures
needed to produce high quality corporate governance.
Elements for effective Corporate Governance

The ownership and control of corporation has been the focus of struggle for
the determination of effective corporate governance. However, the way in which the
struggle is carried on to achieve effective corporate governance is set on the
differences of political framework, social and enterprise history and attitude.
For example, in the United Kingdom where the shareholder model is practiced,
the primary way of ensuring effective corporate governance is through the promotion of
shareholders‘ participation in general meetings, and the board carrying on the daily
affairs of the corporation primarily in the long run for the economic interest of the share
holders.
It means, then, that one basic element of effective corporate governance is the
participation of shareholders and the transparency and accountability of the Board of
Directors for the maximization of shareholders values.
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In contrast, effective corporate governance in France is measured by the ability,

personality and disposition of the president director-general to direct the affairs of the
company. Shareholder participation is not of primary importance, at least not more
than state participation, as the bearer share procedure does not give access to a defined
individual share ownership.
Likewise in Germany, notable for its concentration of corporation ownership,
effective corporate governance is measured by the extent to which the inside
commercial enterprise performance of the corporation is monitored and or participated
in by all interested stakeholders-managers, employees, creditors, suppliers, and customers.
By marriage of the above differences on the procedure of attaining effective corporate
governance it is suggested (without claiming to be all exhaustive) that the elements of
effective corporate governance will include the following:
The board and management of companies should, as a mark of good corporate
management, take into account the realities of the contemporary multilateral
governance relationships between firms, state and civil society and as such, pilot the
affairs of the company within the legal corporate framework prevalent in any particular
state and promote accountability to the shareholders but ―properly address the
concerns of other legitimate stakeholders‖.
By so doing, companies will avert (prevent) the destructive campaigns and
demonstrations of a civil society. However, it is not intended to suggest that companies will
engage in all social and political responsibilities, but since their products are directed at
civil society (customers), companies should engage in legitimate social responsibilities,
such as ensuring that the health and safety of their employees and customers are
―respected and not recklessly jeopardized‖.
It is in this direction that the OECD principles (1999) of corporate governance
provide that good corporate governance is a matter of concern of and for the people. It is vital
to the well being and the welfare of not only the ‗owners‘ and ‗shareholders‘ of the
companies, but the workers and the people of the society as a whole.
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Secondly, transparency, effective communication and accountability should be the

underlying value within the strategies of corporate governance. Board and management
should ensure the confidence of investors without which the reputation of the corporation
will soil, and promote external takeover bidders.
As Sheriden T and Kendall N succinctly describe, that ―effective governance for
Mr.… involves him improving communications between himself, the investors, and the
managers, so to gain a better understanding of management‘s strategy and business
aims…[thereby] making a better fist of building long-term shareholder value than the
bidding company.
It is therefore suggested that good corporate governance should be that which
the management structure is designed to run in a transparent way to enhance the trust of the
stakeholders. There should be an open and equitable relationship between the
management, the board and the shareholders. All shareholders of the same share-weight must
be accorded the same treatment.
Much as well, as emphasized by the OECD principle, the corporation should be run
to support society; it must be geared toward the heart and mind of society. So the system
whereby the shareholders‘ interest and profit maximization are the primary concern of the
company and keeps everybody else out, cannot, it is considered, withstand the present
global civil society volatility.
There should be a way of enhancing good corporate practice, ensuring moderation
between the company corporate objectives with the ‗necessary‘ social realities of
the community. This has been the bane of social unrest of civil society against most
companies of developed countries‘ origin, operating in developing countries.
Corporate Governance should not be run to exploit the community.
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Advantages of Corporate Governance

‗Corporate Governance‘ is only a small part of ‗Governance‘. In 2001, Indian listed
companies on our stock exchanges embraced the culture, practice and accountability of
„Corporate Governance‟, which covers about, 7% of India‟s GDP and 100% of our market
capitalization.
Good Governance of India should be an A1 priority, as it affects all the 1090 million
people and 100% of India‘s GDP! It covers all activities of the Nation, that is, the public
sector, private sector, unorganized sector and even NGOs. and its members have mailed and
distributed about 6,00,000 booklets, about the advantages of good governance, and loss to the
citizens and the nation, in the absence of good governance and effective administration. We
have received positive responses from Indian citizens in politics, government, business,
management, teaching and the youth of India. We are therefore very positive about INDIA.
 Corporate Governance – Benefits:

With corporate responsibility and the need for governance high in the public and
medias eye there has been much discussion regarding how the management of the corporate
resource and skills pool needs to reflect, accurately, contemporary business needs and to
deliver the services required supporting line of business activities including key projects.
With this in mind business need to credibly provide evidence that their management of
resources, business capability, programs and projects is inline with regulatory and corporate
governance requirements.
A good corporate governance framework has the potential for these benefits:
 Enhancing overall company performance.
 Preparing a small enterprise for growth, and so helping to secure new business
opportunities when they arise.
 Increasing attractiveness to investors and lenders, which enables faster growth. Increasing
the company's ability to identify and mitigate risks, manage crises and respond to
changing market trends.
 Increasing market confidence as a whole. All companies suffer from corporate scandals,
which scare potential investors away from the market.
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Issues in Corporate Governance

Corporate Governance has been defined in different ways by different writers and
organizations. Some define it in a narrow perspective to include on it only the shareholders,
while others want it to address the concerns of all stake holders. Some talk about corporate
governance being an important instrument for a country to achieve sustainable economic
development, while some others consider it as corporate strategy to achieve ling tenure and a
healthy image. Thus, corporate governance has different meaning to different people. But
to all corporate governance is a means to an end, the end being long term shareholder, and
more importantly stakeholder value. They identify some governance issues being crucial
and critical to achieve these objectives. These are:
1. Distinguishing the roles of board and management:
Constitutions of more and more companies stress and underline that the business is to
be managed “by or under the direction of the board”. In such a practice, the responsibility
fir managing the business is delegated by the board to the CEO, who in turn delegates the
responsibility to other senior executives. Thus, the board occupies a key position between
the shareholders (owners) and the company‟s management (day-to-day managers of the
company‘s resources).
2. Composition of the board and related issues:
A board of directors is a “committee elected by the shareholders of a limited
company to be responsible for the company”. Sometimes, full-time functional directors are
appointed, each being responsible for some particular branch of the firm‘s work.
The composition of board of directors refers to the number of directors of different
kinds that participate in the work of the board. Over a period of time there has been a change
as to the number and proportion of different types of directors in the board in recent times in
most of the countries.
E.g.: The SEBI appointed Kumar Mangalam Birla‘s Committee Report defined the
composition of Board thus: ―the BOD‘s of the company shall have an optimum
combination of the executives and non-executives directors with not less than 50% of
the BOD‘s to be non-executive directors. In case of executive‘s chairman, at least half
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of the board should be independent directors and in case of non-executive chairman,

at least one-third of the board should compromise independent directors.
3. Separation of the roles of the CEO and chairperson:
The composition of the board is a major issue in corporate governance as the board
acts as a link between the shareholders and the management and it decisions affect the
performance of the company. It is now increasingly being realized that the practice of
combining the role of the chairperson and with that of the CEO as is done in countries like
US and India leads to conflicts in decision-making and too much concentration of power in
one person resulting in unsavory consequences. The role of CEO is to lead the senior
management team in managing the enterprise, while the role of the chairperson is to lead the
board.
4. Should the board have committees:
Many committees on corporate governance have recommended in one voice the
appointment of special committees for nomination; remuneration and for auditing. These
committees would lessen the burden of the board and enhance its effectiveness. When these
committees are peopled with independent directors selected for their competence,
professional expertise in their chosen fields and long years of work experience would help
the respective committees decide issues objectively and in a manner that would promote the
long term interests of the organization.
5. Appointments the board and directors re-election:
As per the Indian company law, shareholders elect directors to the board. However,
shareholders are a legion in large companies and also scattered and to have them together to
elect the directors will be expensive and time-consuming. Therefore, in actual practice, in
most cases, the board or its specially constituted committees selects and appoints the
prospective director and get the person formally “elected” by the shareholders at the
ensuring Annual General body Meeting. Shareholders in fact only endorse the board‘s
nominees and it is only in rarest of rare cases that shareholders refuse to ratify the board‘s
nominees for directorship.
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6. Directors and executives remuneration:

This is one of the mixed and vexed issues of corporate governance that came to the
center stage during the massive corporate failures in the US between 2000 and 2002.
Executive compensation has also in recent times become the most visible and politically
sensitive issue relating to corporate governance.
According to Cadbury Report: ―the over-hiding principle in respect of board
remuneration is that shareholders are entitled to a full and clear statement of directors
present and future benefits, and how they have been determined‖. Other committees on
corporate governance have also laid emphasis on other related issues such as “pay-for
performance”, heavy severance payments, pension for non-executive directors, appointment
of remuneration committee and so on…
7. Disclosure and audit:
The OECD (Organization for Economic Corporation and Development) lays down a
number of provisions for the disclosure and communication of key facts about the company
to its shareholders. The Cadbury Report termed the annual audit as “one of the cornerstones
of corporate governance”. Audit also provides a basis for reassurance for everyone who
has a financial stake in the company. Both the Cadbury Report and the Bosch Report stressed
that the stake in the BOD‘s has a bounden responsibility to present the shareholders a lucid
and balanced assessment of the company‘s financial position through audited financial
statements.
8. Protection of shareholders right and their expectation:
This is an important governance issue which has considerable impact on the rights
and expectations of shareholders. Corporate practices and policies vary from country to
country. There are a number of questions relating to the issue such as:
 Should companies always adhere to one-share-one-vote principle?
 Should companies retain voting‘s by show of hands or by a poll?
 Can shareholders resolution be ―bundled‖? i.e.; to place together before shareholders for
approval a resolution that contains more than one discrete issue.
These questions have elicited answers with different emphasis from various committees
that have addressed these issues. This has been covered in later part of this project.
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Ethics and Corporate Governance

 Corporate Governance Ethics:
Though the concept of Corporate Governance may sound a novelty in the Indian
business context and may be linked to the era of liberalisation, it should not be ignored that
the ancient Indian texts are the true originators of good business governance as one important
sloka from the Rugveda says: "A businessman should benefit from business like a honey-
bee which suckles honey from the flower without affecting its charm and beauty."
As a public company, it is of critical importance that companies' information
reporting with the regulators be accurate and timely. The chief executive officer and the
senior leadership of the finance department bear a special responsibility for prompting
integrity throughout the organisation, with responsibilities to stakeholders both inside and
outside of companies.
1.Act with honesty and integrity, avoiding actual or apparent conflict of interest in personal
and professional relationships.
2.Provide information that is accurate, complete, objective, relevant, timely and
understandable to ensure full, fair, accurate, timely, understandable disclosure in reports
and documents that companies file with, or submit to, the regulators.
3.Comply with applicable laws, rules and regulations of federal, state, and local
governments, and other appropriate public and private regulatory agencies in all material
respects.
4.Act in good faith, responsibility, with due care, competence and diligence, without
misrepresenting material facts or allowing one's independent judgment to be
subordinated.
5.Respect the confidentiality of information acquired in the place of one's work except
when authorised or otherwise legally obligated to disclose. Confidential information
required in the course of one‘s work will not be used for personal advantage.
6.Share knowledge and maintain skills important and relevant to stakeholders' needs.
Proactively promote and be an example of ethical behaviour as a responsible partner
among peers, in the work environment and the community.
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 Benefits from Managing Ethics in Workplace:

(a) Attention to business ethics has substantially improved society:
Establishment of anti-trust laws, unions, and other regulatory bodies has
contributed to the development of the society. There was a time when discriminations and
exploitation of employees were high, the fight for equality and fairness at workplace ended
up in establishing certain laws which benefited the society.
(b) Ethical practice has contributed towards high productivity and strong team works:
Organisations being a collection of individuals, the values reflected will be different
from that of the organisation. Constant check and dialogue will ensure that the employee
matches to the values of the organisation which will in turn result in better co-operation
and increased productivity.
(c) Changing situations require ethical education:

During turbulent times, where chaos becomes the order of the day, one must have
clear ethical guidelines to take right decisions. Ethical training will be of great help in
those situations.
(d) Ethical practices create strong public image:

Organisations with strong ethical practices will possess a strong image among the
public. This image would lead to strong and continued loyalty. Conscious implementation
of ethics in organisations becomes the cornerstone for the success and image of the
organisation. It is because of this ethical perception that the employees of TISCO and the
general public protested in 1977 when the then Minister for Industries in the Janata
Government, attempted to nationalise the company.
(e) Strong ethical practices act as insurance & strong ethical practices of the organisation
are an added advantage for the future function of the business. In the long run, it would
benefit if the organisation is equipped to withstand the competition.
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How Ethics Can Make Corporate Governance more Meaningful?

(a) Corporate governance is meant to run companies ethically in a manner such that all
stakeholders, creditors, distributors, customers, employees, the society at large and
governments are dealt in a fair manner.
(b) Good corporate governance should look at all stakeholders and not just shareholders
alone. Otherwise, a chemical company, for example, can maximize the profit of
shareholders, but completely violate all environment laws and make it impossible for the
people around the area to lead a normal life. Ship-breaking in Valinokkam, near
Arantangi in Tamil Nadu, leather tanneries in South, Arco and hosiery units in Tirupur,
have brought about too much of environmental degradation that has unleashed untold
miseries to people in and around their locations.
(c) Corporate governance is not something which regulators have impose on a

management, it should come from within. There is no point in making statutory
provisions for enforcing ethical conduct.
(d) There is a lot of provisions in the Companies Act, for example,

(i) disclosing the interest of directors in contracts in which they are interested;
(ii) abstaining from exercising voting rights in matters they are interested; and
(iii) statutory protection to auditors who are supposed to go into the details of the
financial management of the company and report the same to the shareholders of the
company. But most of these may be observed in letter, but not in spirit. Members of
the board and top management should ensure that these are followed both in letter and
spirit.
(e) There are a number of grey areas where the law is silent or where regulatory framework
is weak, which are manipulated by unscrupulous persons like Ketan Parikh and Harshad
Mehta. In the US, for instance, the courts recognise that new forms of fraud may arise,
which may not be covered technically under any existing law and cannot be interpreted as
violating any of the existing laws. For example, a clever conman can try to sell a piece of
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the blue sky. In order to check such crooks, there is the concept of the "blue sky" law.
However, such wide-ranging processes are not available to courts in developing
countries.
(f) The Securities and Exchange Board of India (SEBI) has jurisdiction only in cases of
limited and listed companies and are concerned only with their protection. What about
the shareholders and others of other unlisted Limited companies?
(g) The Serious Fraud Investigation Office (SIFO) in the Department of Company Affairs
(DCA) has been investigating several "Vanishing Companies". By 2003, SEBI has
identified 229 as "vanishing companies"— which tapped the capital market, collected
more than Rs. 800 crores from the public and subsequently became untraceable.
However, thousands of investors have lost their hard-earned money and no agency has
come to their rescue so far.
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Corporate Governance in India

India ranked as one of the top most countries in Corporate Governance as per the
recent study.
Study by Grant Thornton – The International Business Owner Survey conducted in 16
countries in January 2003.
 More then 71% of the loosely held companies tightened up internal control computed to
66% globally.
 25% of Indian businesses have got Independent Directors in place and 46% have
formed Audit Committees.
 Many Indian Independent businesses have pre-empted the imposition of legal corporate
governance by taking steps to reduce the risk of corporate or financial malpractice.
 Indian businesses along with Mexico, Singapore and US are in the forefront in forming
Audit Committees.
 How can we change the present practice and improve the Corporate
Governance in India?
To bring the change in the present practice and improve the Corporate Governance in
India we have to follow the following points:
1. Number of non-executive directors should be increased.
2. They should be encouraged to assert their right. Today they are not passive and inactive,
nor they have time.
3. Non-executive directors should be made accountable for the decisions taken by board
and for the affairs of the company.
4. Board should meet at least once a month to be effective and Directors should attend
most of the meetings.
5. There should be structured performance appraisal of MD and other executive directors
by a committee of the board.
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6. In India shareholders never make the board accountable for the performance of the
company. Both executive and non-executive directors should pay for the failure to meet
the goals of the company.
7. No law can imbibe (absorb) ethics in unwilling board. Law cannot be sustained for code
of best practices, it can only supplement and support as it is sought to be done by
Companies Act.
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Recommendations of Various Committees on Corporate

Governance in India
CII Code Birla Committee (SEBI) Narayana Murthy Committee
Recommendation Recommendations (SEBI) Recommendations
(1997) (2000) (2003)
No need for German style At least 50% non-executive Training of board members
two-tiered board. members. suggested.
For a listed company with For a company with an executive There shall be no nominee
turnover exceeding Rs. 100 chairman, at least half of the board directors. All directors to be
Crores, if the chairman is should be independent directors, elected by shareholders with
also the MD, at least half of else at least one-third. same responsibilities and
the board should be accountabilities.
independent directors, else at
least 30%.
No single person should hold Non-executive Chairman should Non-executive director
directorships in more than have an office and should be paid compensation to be fixed by
ten listed companies. for job related expenses. board and ratified by
shareholders and reported. Stock
options should be vested at least
a year after their retirement.
Independent directors* should be
treated the same way as non-
executive directors.
Non-executive directors Maximum ten directorships and The board should be informed
should be competent and five chairmanships per person. every quarter of the business risk
active and have clearly management strategies.
defined responsibilities like
in the Audit committee.
Directors should be paid a A board must have a qualified and Audit committee should
commission not exceeding independent audit committee, of comprise entirely of ―financial
1% (3%) of net profits for a minimum three members, all non- literate‖ non-executive members
company with (out) an MD executive, majority and chair with at least one member having
over and above sitting fees. independent with at least one accounting or related financial
Stock options may be having financial and accounting management expertise. It should
considered too. knowledge. Its chairman should review a mandatory list of
attend AGM to answer documents including information
shareholders queries. relating to subsidiary companies.
Attendance record of The remuneration committee Board of subsidiaries should

directors should be made should decide remuneration follow similar composition rules
explicit (open) at the time of packages for executive directors. It as that parent and should have at
reappointment. Those with should have at least three least one independent director‘s
less than 50% attendance directors, all non-executive and be parent of the company.
- 26 -
should no be reappointed. chaired by an independent

directors.
Key information that must be The board should decide on the The board report of a parent
presented to the board listed remuneration of non-executive company should have access to
in the code. directors and all remuneration minutes of board meeting in
information should be disclosed in subsidiaries and should affirm
annual report. reviewing its affairs.
Listed companies with At least four board meetings a year Performance evaluation of non-
turnover over Rs. 100crores with a maximum gap of four executive directors by all his
or paid-up capital of Rs. months between any two meetings. fellow board members should
20crores should have an Minimum information available inform a reappointment decision.
audit committee of at least boards stipulated.
three members, all non-
executive, competent and
willing to work more than
other non-executive
directors.
-------------------- -------------------- While independent and non-
executive directors should enjoy
some protection from civil and
criminal litigation, they may be
held responsible of the legal
compliance in the company‘s
affairs.
-------------------- -------------------- Code of conduct for board
members and annual affirmation
of compliance to it.
Disclosure and Transparency
Companies should inform Companies should provide Management should explain and
their shareholders about the consolidated accounts for justify any deviation from
high and low monthly subsidiaries where they have accounting standards in financial
averages of their share prices majority shareholding. statements.
and about share, performance
and prospects of major
business segments
(exceeding 10% of turnover).
If a company consolidates, Disclosure list pertaining to Companies should move towards
no need to annex subsidiary ―related party‖ transactions a regime of unqualified financial
accounts but the definition of provided by committee till ICAI‘s statements.
―GROUP‖ should include norm is established.
parent and subsidiaries.
Stock exchanges should A mandatory management Management should provide a
require compliance discussion and analysis of annual clear description, followed by
certificate from CEOs and report that includes discussion of auditor‘s comments, of each
CFOs on company accounts. industry structure and material contingent liability and
- 27 -
development, opportunities, its risks.

threats, outlooks etc…as well as
financial and operational
performance in HR front.
For companies with paid-up Management should inform board CEO/CFO certification of
capital exceeding Rs. 20 of all potential conflict of interest knowledge, veracity (reality) and
crores, disclosure norms for situations. comprehensiveness of financial
domestic issues should be statements and director‘s reports
same as those for GDR and affirmation of maintaining
issues. proper internal control.
Security analysts must disclose
the relationship of their
employees with the client
company as wall as their actual
or intended shareholding in the
client company.
Other issues
Creditor‘s Rights Shareholder‘s Rights Special disclosure for IPO‘s
FIs should rewrite loan Quarterly results, presentation to Companies making Initial Public
covenants eliminating analysts etc.., should be Offering (―IPO‖) should inform
nominee directors except in communicated to investors, the audit committee of category-
case of serious and possibly over the internet. wise uses of funds every quarter.
systematic debt default or It should get non-pre-specified
provision of insufficient uses approved by auditors on an
information. annual basis. The audit
committee should advise the
board for action in this matter.
In case of multiple credit Half yearly financial results and
ratings, they should all be significant event reports be mailed
reported in a format showing to shareholders.
relative position of the
company.
Same disclosure norms for A board committee headed by
foreign and domestic non-executive director look into
creditors. shareholder complaints and
grievances.
Companies defaulting on Company should delegate share
fixed deposits should not be transfer power to an
permitted to accept further officer/committees/registrar/share
deposits and make inter- transfer agents. The delegated
corporate loans or authority should attend to share
investments or declare transfer formalities at least once in
dividends until the default is a fortnight.
made good.
Source: The ICFAI Journal of Corporate Governance. (Oct.2005) Vol. IV
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Indian Model of Corporate Governance

The Indian corporates are governed by the Company‟s Act of 1956 that follows
more or less the UK model. The pattern of private companies is mostly that of closely held or
dominated by a founder, his family and associates. The figure drawn below indicates how the
corporate governance system works in India.
Indian Corporate governance Model
External environment
Government Corporate culture,
regulations, policies, structure, characteristics,
guidelines etc. influences
Internal environment
Company vision; mission,

policies, norms
Depositors, borrowers,
Company Act customers and other
SEBI Internal Auditors BOD‘s
external stakeholders
Stock exchanges stakeholders
CORPORATE
GOVERNANCE
SYSTEM
Proper governance Shareholder value
Corporate governance outcomes/ Benefits to society
Transparency
Investor position Concern for customer
Healthy corporate sector development
Available literature on corporate governance and the way companies structured and
run indicate that India shares many features of the German/ Japanese model, but recent
recommendations of various committees and consequent legislative measures are driving the
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country to adopt increasingly the Anglo-American model. In terms of the legislative

mechanisms, Indian government and industry constituted three committees to study
corporate governance practices in the country and suggest measures for improvement based
on what has globally recognized as best practices. Significantly, most of the
recommendations of the three committees- the SEBI –appointed Kumar Mangalam Birla
Committee (2000), the government-appointed Naresh Chandra Committee (2003) and the
SEBI‘s Narayana Murthy Committee are remarkably similar to those of England‘s Cadbury
Committee and America‘s Sarbanes-Oxley Act, in terms of their approaches and
recommendations.
The thrust of legislative reforms suggested by these committees and subsequent

legislative actions adopted, centre around the strengthening of external governance
mechanisms. “A key area here includes grater transparency and independent scrutiny of
corporate accounts that are made available to investors. This is in line with the Anglo-
American model where shareholders influence through the exit option which is contingent
upon reliable and accurate information provided by companies. Institutional reforms,
including a strengthening of oversight committees and the development of serious fraud
office, are further evidence of the drive to seek for external monitoring of corporate
affairs. In terms of reforms to internal mechanisms such as board of directors, it is notable
that again the recommendations are centered on Anglo-American practice, namely, a
greater role for Non-executive directors (NED‟s) and the curtailment of interlocking
directorates”.
Further experts point out that India has adopted the key-tenants of the Anglo-
American external and internal control mechanisms, in the wake of economic liberalization
and its integration into the global economy. ―This is evident especially in the realm
(kingdom, land) of the legislative framework where Indian policy-makers have taken their
cue from UK and US committees and their recommendations.”
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These various governance systems form a package of overall corporate control in

each company law jurisdiction. It is vital to see the package as a whole. There has to be an
integrated harmony between state legislation and regulatory infrastructure, stock market
regulation and corporate self-regulation. Moreover, the overall corporate governance
package has to be consistent with the way the business is done and the reality of
relationship in that culture.
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Corporate Governance practices- An International comparison

Sr. Features Anglo-American German CG. Japanese CG. Indian CG.
no. CG.
1. Corporate Shareholder Long-term Long-term Shareholder
objective. value. corporate value. corporate value. value.
2. Government Capital Market. Corporate body. Keriestu or Maximize
focus. business surplus.
network.
3. Shareholding. Diffused Banks, promoter Financial, non- Directors and
institutional families, other financial relatives. Other
investors, corporates. corporates. corporates,
significant block foreign
holders. investors.
4. Measure of Return on Return on human Return on Return on
success. financial capital. capital. social capital. financial
capital.
5. Decision Checks and Within the network Within the Management,
making. balances between of stakeholders network- outside
voice and exit including includes stakeholders
options. employees local business excluded.
community. associates and
banks as
stakeholders.
6. Control of Separated from Linked with Linked with Linked with
corporates. ownership. ownership. ownership. ownership.
7. Orientation. Short-term driven Long term. Long term. Short-term
by market prices. gains.
8. Long-term Physical capital, Plant and R&D, Physical
investment in R&D human equipment, employee capital.
capital. employee training. training.
9. Capital Liquid. Less important, due Less important, Less important
market to close ties with due to close ties due o
(primary). banks. with banks. institutional
funding.
10. Capital Important, Not important, Not important, Not important,

market frequent hostile hostile takeovers hostile hostile
(secondary). takeovers rare. takeovers rare. takeovers rare.
possible.
11. Investor Low. High, important in High, important Low.
commitment. difficult times. in difficult
times.
12. Major Institutional Banks, Government, Directors and

investors. shareholders, Government, individual relatives other
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individual individual shareholders corporates,

shareholders, shareholders and and Institutional foreign
business network, Institutional shareholders, investors,
employees. shareholders. main bank. Institutional
investors
(UTI).
13. Board Executive and Two-tier boards Executive and Executive and
composition. non-executive (supervisory board non-executive non-executive
directors. and management directors directors.
board). (representing
outside finance
institutions).
14. Goal of the To promote To promote long To promote Shot0term
board. shareholder tem organizational long tem gains.
wealth. health. organizational
health.
15. Board Little. High. Little formally, Little.
independence more formally.
over
management.
16. Executive High. Moderate. Low. Moderate,
composition. (government
approval).
17. Dividend. High. Low. Low. Low,
uncertain.
18. Strength. Dynamic, Long-term Long-term Recent
market-based, industrial strategy, industrial government
liquid capital, stable capital, strategy, stable and
internalization strong overseas capital. organizational
non-problematic. investment. activism (CII)
towards
corporate
governance
practices.
19. Weakness. Instability, short- Internationalization Secretive, Lack of proper
termism. difficult; vulnerable corrupt disclosure;
to global capital practices, secretive
market. growth in corrupt
institutional practices;
activism and instabilities.
financial
speculation in
recent times.
Source: Corporate Governance, The Indian Scenario by Vasudha Joshi.
Pg. No.124 and 125.
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- 36 -
G-cube model of Corporate Governance
ACCOUNTING
QUALITY
FAIR
VALUE POLICY
CREATION &
ACTIONS
COMMUNICA-
RELIABILITY TION
EFFECTIVE
GOVERNING
BOARD
The model measures 6 parameters of corporate governance. Accounting Quality,

Value Creation, Fair Policies and Actions, Communication, Effective Governing Board and
Reliability.
- 37 -
For Accounting Quality the fund managers look at all or any of the following
variables: company accounting policies, disclosure standards, proactive adoption of
accounting policy improvements, internal audit and control mechanisms for addressing
auditor‘s queries. The top companies were ranked accordingly. Similarly, for “Value
Creation Focus” business strategy (driven by value creation focus), effective use of cash
surplus, capital structure, usage of IPO funds, shareholder friendliness are among the key
variables. For „Fair policies among actions”, the fund managers take the cue from fair
treatment of minority shareholders, transparency of trades by top management and ethical
behavior with customers, suppliers, tax authorities and government. Similar variables were
used for ranking companies based on other parameters.
- 38 -
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Corporate Governance Rating

The Department of Company Affairs has set up an institute to rate corporate
excellence similar to credit rating agencies such as CRISIL. This institute will undertake
research in the area of corporate governance to be able to improve the overall legal
framework and to advise companies and directors on how they can take corporate excellence
forward. Individual corporate excellence ratings will be made available to investors,
lenders and the public. The institute will be funded from the penalties paid by companies for
violating the provisions of the Companies Act.
The Securities and Exchange Board of India has sought the services of two of the
leading credit rating agencies in the country—Credit Rating Information Services of India
Ltd. (CRISIL) and Investment Information and Credit Rating Agency (ICRA) to prepare a
comprehensive instrument for rating the good corporate governance practices of listed
companies. Besides these two, there are two other credit rating agencies (CRAs). These are
CARE and FITCH India. According to the former SEBI Chairman, Mr. G. N. Bajpai, CRAs
would enable the securities market regulator judge the compliance status of corporates on
parameters such as effective creation, management and distribution of investors' wealth.
CRAs are normally expected to carry out periodic reviews of the ratings given.
 ICRA’s Rating Methodology:

Corporate governance rating is being done by ICRA, where assigning it is still very much a
learning process.
In order to evaluate corporate governance, ICRA has decided to look at the following:
1.) Shareholding structure:
A transparent shareholding structures where the key shareholders are clearly
identifiable and where an absence of opaque cross holdings is considered positive feature.
2.) Governance structure and management process:
This focuses on the internal decision making process and the quality and nature of
information presented to a company's board. In looking at the decision making process,
how responsibility is delegated and how accountability is ensured, a view is taken of not just
what is laid down in procedures but what is actually practiced. As to the quality of
- 40 -
information submitted to the board, what is examined is whether it is told enough to know
what is going on and whether its quality is satisfactory, are important. Emphasis is laid on
matters such as inter-corporate loans, "related-party" transactions, large capital expenditure,
diversification, and of course, mergers and acquisitions.
3.) Board structure and process:
The board structure and process of decision making is all very important. The
bottom line is whether a company is board-managed or its board is a rubber stamping body
whose members hold their positions at the pleasure of the effective owner. For this, the size
of the board, selection criteria for directors, proportion of independent directors and the
expertise they can command, compensation policy for (directors, number and nature of board
committees, attendance record of the directors and frequency of board meetings are all taken
into consideration.
4.) Examine stakeholder relations:
ICRA's methodology on this matter relates almost wholly to the rights of shareholders
and the duty of the company to service them well. There is a passing reference to other
financial stakeholders such as banks, financial institutions and fixed-deposit holders. But the
whole idea of stakeholder is that it goes far beyond the shareholder and includes the workers,
a company's customers and the society at large.
5.) Transparency and disclosures:
It is found that better-run companies disclose more than they are required by the law.
But in assessing a company's performance in this regard, emphasis is laid on how
materialistic the disclosures are and whether they really shed any light or hide more than they
reveal.
6.) Financial discipline:
Considerations under this criterion would broadly overlap with the determinants
governing financial rating. But it is emphasized that a financial rating says nothing about
the nature of corporate governance prevailing in a company and similarly, a governance
rating says nothing about the financial position of a company. The risk of governance
failure will not be apparent from the financial rating of a company, but from its corporate
governance rating. Here again, the conceptual scope of corporate governance and the way
ICRA sees the idea may be a little divergent. While discussing financial discipline, it says
- 41 -
that the ultimate objective of corporate governance is to maximize shareholder value to the
extent that if the company goes down in its governance record, no matter how excellent
otherwise, will mean nothing. But what if a company's shareholders are happy with it but its
workers or society at large are not, then the conflict of interest needs to be dealt with and a
mutually beneficial situation needs to be arrived at, but one should remember that
shareholders are also members of the society.
Credit ratings for debt paper, which did not start off very well, later picked up thanks
to the pressures of the market which forced issuers of debt to get them rated in order to raise
money. Similarly, market pressures will force more and more corporates in India to go in for
corporate governance ratings. Eventually, SEBI, which can legitimately take credit for
spearheading the movement for corporate governance ratings in India, must make such
ratings mandatory for issuers of equity, so that investors have a comprehensive
understanding of the companies where they are putting their money.
- 42 -
- 43 -
Parties to Corporate Governance

Parties involved in corporate governance include the governing or regulatory body
(e.g. the Securities and Exchange Commission in the United States), the Chief Executive
Officer, the board of directors, management and shareholders. Other stakeholders who
take part include suppliers, employees, creditors, customers and the community at large.
In corporations, the principal (shareholder) delegates decision rights to the agent
(manager) to act in the principal's best interests. This separation of ownership from control
implies a loss of effective control by shareholders over managerial decisions. Partly as a
result of this separation between the main two parties, a system of corporate governance
controls is implemented to assist in aligning the incentives of managers with those of
shareholders, in order to limit the self-satisfying opportunities for managers. With the
significant increase in equity holdings of institutional investors, there has been an
opportunity for a reversal of the separation of ownership and control problems because
ownership is not so diffuse.
A board of directors often plays a key role in corporate governance. It is their
responsibility to endorse the organisation's strategy, develop directional policy, appoint,
supervise and remunerate senior executives and to ensure accountability of the organisation
to its owners and authorities.
All parties to corporate governance have an interest, whether direct or indirect, in
the effective performance of the organisation. Directors, workers and management receive
salaries, benefits and reputation; whilst shareholders receive capital return. Customers
receive goods and services; suppliers receive compensation for their goods or services. In
return these individuals provide value in the form of natural, human, social and other forms
of capital.
A key factor in an individual's decision to participate in an organisation (e.g.
through providing financial capital or expertise or labor) is trust that they will receive a fair
share of the organisational returns. If some parties are receiving more than their fair return
(e.g. exorbitant executive remuneration), then participants may choose to not continue
participating. Corporate governance is the key mechanism through which this trust is
maintained across all stakeholders.
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Board of Directors and Corporate Governance

There is an increasing awareness that corporates owe their existence to shareholders and
the long-term sustainability of companies depends upon winning their confidence through
disclosures and transparency in accountability for their actions to them. This is achieved
through voluntary actions on the part of board of directors and through regulatory
framework such as stock exchanges, securities and exchange board and other regulatory
bodies. These principles are codifies as principles of corporate governance. The following
diagram clearly illustrates how board of directors and top management are placed in the
structure of corporates to interface, interact and intervene, when necessary, to carry on the
running of the company efficiently.
 Role of the board in the dynamics of Corporate Governance:
Market forces and competition Depositors, borrowers

Shareholders and other customers
Accountability Customer
Disclosures service and
satisfaction
Board of Director‘s
Comp- Continuing relationship

Policy, liance
Direct- and
ors and Account-
Organization‘s Welfare tability Providers of supplies
and services
Top managements
Career Transparency and

advancement fairness in
dealings
and job Environmental
satisfaction preservation
Employees Social Responsibility All other stakeholders
Regulatory compliance Compliance of business ethics
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Banks and Corporate Governance

Banks, in a broad sense, are institutions whose business is handling other people‟s
money. A joint stock bank, also known as commercial bank, is a company whose business is
banking. These are more particularly institutions that deal directly with the general public, an
opposed to the merchant banks and other institutions more concerned with trade and industry.
These banks specialize in business connected with bills of exchange, especially the
acceptance of foreign bills. A merchant banker is thus a financial intermediary who helps in
transferring capital from those who posses it to from those who need it. Merchant banking
includes a wide range of activities management of customer‘s securities, portfolio
management, project counseling and appraisal, underwriting of shares and debentures, acting
as banker for refund orders, handling interest and dividend warrants, etc. Thus, a merchant
banker renders a host of services to corporates and promotes industrial development in the
country.
Sometimes banks are setup to handled specialized functions for particular industries
such as the IDBI (Industrial Development bank of India), NABARD (National Bank for
Agriculture and Rural Development), and (EXIM bank) Export-Import bank.
There has been a great deal of attention given recently to the issue of corporate
governance in various national and international forums. In particular, the OECD has issued
a set of corporate governance standards and guidelines to help governments “in their efforts
to evaluate and improve the legal, institutional and regulatory framework for corporate
governance in their countries, and to provide guidance and suggestions for stock
exchanges, investors, corporations, and other parties that have a role in the process of
developing good corporate governance.”
 Why Corporate Governance in banks?

If we examine the need for improving corporate governance in banks, two reasons
stand out:
(I) Banks exist because they are willing to take on and manage risks. Besides, with the
rapid pace of financial innovation and globalization, the face of banking business is
undergoing a sea-change. Banking business is becoming more complex and diversified.
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Risk taking and management in a less regulated competitive market will have to be done
in such a way that investors' confidence is not eroded,
(II) Even in a regulated set-up, as it was in India prior to 1991, some big banks in the
public sector and a few in the private sector had incurred substantial losses. This, along
with the massive failures of non-banking financial Companies (NBFCs), had adversely
impacted investors' confidence.
Moreover, protecting the interests of depositors becomes a matter of paramount
importance to banks. In other corporates, this is not and need not be so for two reasons:
1. The depositors collectively entrust a very large sum of their hard-earned money to the
care of banks. It is found that in India, the depositor's Contribution was well over 15.5
times the shareholders' stake in banks as early as in March 2001. This is bound to be
much more now.
2. The depositors are very large in number and are scattered and have little say in the
administration of banks. In other corporates, big lenders do exercise the right to direct the
management. In any case, the lenders' stake in them might not exceed 2 or 3 times the
owners' stake.
Banks deal in people's funds and should, therefore, act as trustees of the depositors.
Regulators the world over has recognised the vulnerability of depositors to the whims of
managerial misadventures in banks and, therefore, has been regulating banks more tightly
than other corporates.
To sum up, the objective of governance in banks should first be protection of
depositors' interests and then be to "optimise" the shareholders' interests. All other
considerations would fall in place once these two are achieved.
Banking supervision cannot function effectively if sound corporate governance is
not in place and, consequently, banking supervisors have a strong interest in ensuring that
there is effective corporate governance at every banking organisation. Supervisory
experience underscores the necessity of having the appropriate levels of accountability and
checks and balances within each bank. Put plainly, sound, corporate governance makes the
work of supervisors infinitely easier. Sound corporate governance can contribute to a
collaborative working relationship between bank management and bank supervisors.
- 49 -
 Corporate Governance and the World Bank:

The World Bank report on corporate governance is a landmark in the evolution of
the theory and its application of this concept of best corporate behaviour. Governance in
relation to a business organisation concerns with the intrinsic nature, purpose, integrity and
identity of the organisation and focuses primarily on the relevance, continuity and fiduciary
aspects of the organisation. It involves monitoring and overseeing strategic direction, socio-
economic and cultural context, externalities and constituencies of the organisation. Hence,
corporate governance may be called as an umbrella term encompassing specific issues
arising from interactions among senior management personnel, shareholders, board of
directors, depositors, borrowers, other constituencies and the society at large. It deals with
the exercise of power over the directions of enterprise, the supervision of executive actions,
acceptance of a duty to be accountable and regulation of the affairs of the corporation.
The World Bank report on corporate governance recognises the complexity of the
very concept of corporate governance and, therefore, focuses on the principles on which it
is based. These principles such as transparency, accountability, fairness and responsibility are
universal in their application. The way they are put into practice has to be determined by
those with the responsibility for implementing them.
The stronger the partnership between the public and private sectors, the more
soundly based will be their governance structures. Equally, as the report emphasizes,
governance initiatives win most support when driven from the bottom up rather than from the
top down.
Corporate governance is concerned with holding the balance between economic
and social goals and between individual and community goals. The governance framework
is there to encourage the efficient use of resources and equally to require accountability for
the stewardship of those resources. The aim is to align as nearly as possible the interests of
individuals, corporations and society.
The World Bank report points the way to the establishment of trust and the encouragement
of enterprise. It marks an important milestone in the development of corporate governances.
- 50 -
 Corporate Governance in Indian Banks:

Although the subject of corporate governance has received a lot of attention in recent
times in India, corporate governance issues and practices by Indian banks have received only
a scanty notice. The question of corporate governance in banks is important for several
reasons. First, banks have an overwhelmingly dominant position in developing the
economy's financial system, and are extremely important engines of growth. Second, as the
country's financial markets are underdeveloped, banks in India are the most significant
source of finance for a majority of firms in Indian industry. Third, banks are also the
channels through which the country's savings are collected and used for investments.
Fourth, India has recently liberalised its banking system through privatisation,
disinvestments and has reduced the role of economic regulation and consequently managers
of banks have obtained greater autonomy and freedom with regard to running of banks.
This would necessitate their observing best corporate practices to regain the
investors' confidence now that the government authority does not protect them anymore.
Corporate governance in banks has assumed importance in India post-1991 reforms because
competition compelled banks to improve their performance. Even the majority of banks and
financial institutions, owned, managed and influenced by the government with neither high
quality management nor any exemplary record of practicing corporate governance have
realised the importance of adopting better practices to protect their depositors and the
banking public.
When questioned about unethical practices, many companies claim that the
conditions in India are not conducive to allow them the luxury of being completely ethical.
Thousands of underhand deals are struck everyday and go unreported. There is hardly a
company which has not at sometime or the other been either involved or suspected of some
foul play. Even companies that started off with intentions to do business in an ethical manner
have had to compromise their principles due to the highly politicised and bureaucratic
business environment in the country.
 Indian companies face two types of corrupt practices:

1. Political corruption in which money is paid for favours done, and
2. Administrative corruption. In the early days of Independence, companies had to grease
the palms of bureaucrats to make them do things they were not supposed to do, but now
- 51 -
corruption has graduated to such an extent that companies have to bribe bureaucrats to
make them do things they are supposed to do. Examples of this sort of corruption include
"gifts" to the Factory Inspector, Boiler Inspector, Pollution Control Board Inspectors, and
assessors for customs, excise, income tax, sales tax and Octroi. It is the administrative
corruption, which most companies find unavoidable most of the times.
A study on the ethical attitudes of Indian managers conducted by Arun Monappa
(1977) reported that business executives listed three major obstacles to ethical behaviour,
namely:
(i) Company policies,
(ii) Unethical industry climate and
(iv) Corruption in government. Company policies tend to be unethical due to socio-cultural
environment, and get reinforced because of the sense of frustration and helplessness that
comes from the prevalent and all pervading unethical environment.
 SEBI and Corporate Governance

 SEBI's Role in Promoting Corporate Governance:
G. N. Bajpai, former Chairman, Securities and Exchance Board of India, claimed in
an international conference in 2003: "With the objective of improving market efficiency,
enhancing transparency, preventing unfair trade practices and bringing the Indian market up
to international standards, a package of reforms consisting of measures to liberalise, regulate
and develop the securities market was introduced in the 1990s. The practice of allocation of
resources among different competing entities as well as its terms by a central authority was
discontinued. The issuers complying with the eligibility criteria now have freedom to issue
the securities at market-determined rates. The secondary market overcame the geographical
barriers by moving to screen-based trading, which made trading system accessible to
everybody anywhere in the Indian sub-continent. Trades enjoy counter-party guarantee. The
trading cycle shortened to a day and trades settled within two working days while all deferral
products are banned.Today, the Indian securities market stands shoulder to shoulder with
most developed markets in North America, Western Europe and Far East." According
to SEBl's former chairman, The Securities and Exchange Board of India have been focusing
on the following areas to improve corporate governance:
- 52 -
 Ensuring timely disclosure of relevant information.

 Providing an efficient and effective market system.
 Demonstrating reliable and effective enforcement.
 Enabling the highest standards of governance.
1. Disclosure standards:
The erstwhile (previous) SEBI Chairman, G. N. Bajpai, claims quoting academicians
and researchers that disclosure standard in the Indian regulatory jurisdiction are at par
with the best in the world. According to him this is a feedback from several global
organisations, both regulatory and market participants.
SEBI has ensured that a company is required to make specified disclosures at the
time of issue and make continuous disclosures as long as its securities are listed on
exchanges. The standards for these disclosures including the content, medium and time of
disclosures have been specified in the Companies Act, Disclosure and Investor Protection
Guidelines, Listing Agreement Regulations relating to insider trading and takeover etc. These
disclosures are made through various documents such as prospectus, quarterly statements,
annual reports etc.
2. Efficient and effective market system:
In the opinion of the Chairman of SEBI, the Indian securities market has a large
infrastructure to meet the demands of a sub-continental market. Presently, there are 25 stock
exchanges and about 10,000 brokers, 15,000 sub-brokers, more than 10,000 listed
companies, 500 foreign institutional investors, 400 depository participants, 150 merchant
bankers, 40 mutual funds offering over 450 schemes, and 20 million investors. Yet, there is
only one regulator. Not only the numbers are gigantic (huge) but also the systems and
infrastructure are equally atlantean and sophisticated. All stock exchanges in India offer on
line, fully automated, nation- wide anonymous, order-driven screen based trading system. It
has a comprehensive risk management system. The depository‘s legislation ensures free
transferability of securities with speed, accuracy and security. The securities are transferred
electronically in demat form. Further, Indian accounting standards follow international
accounting standards (principle based) and are by and large aligned. In addition to creating
- 53 -
an efficient trading platform and settlement mechanism, SEBI's focus is substantially

directed towards the following:
(a) Provision of timely availability of high quality price sensitive information to the market
participants to enable them to take informed decision and ensure efficient price
discovery.
(b) Maintenance of high quality of services and fair conduct for market participants. The
regulations specify high standards to become market intermediaries and require them to
abide by a code of conduct.
(c) Ensuring that the market is fair, transparent and safe so that issuers and investors are at
ease to carry out transactions.
3. Reliable and Effective Enforcement:
SEBI aims at ensuring that no misconduct goes unnoticed or unpunished. It keeps
an eye on the happenings in the market and identifies anything unusual or undesirable which
may adversely affect the efficacy of the market. Every market participant, irrespective of his
size and influence in the market or in the policy, is held accountable for his misdeeds. The
proactive approach of the regulator in enforcement can be gauged from the fact that during
the financial year 2002-2003, SEBI passed 561 orders, out of which over 350 were
punitive.
4. Highest Standards of Governance:
SEBI has avowed (stated) that its regulation and guidance of the country's securities
market would spell success in the area of corporate governance. The Kumar Mangalam Birla
Committee of the Indian jurisdiction outlined a code of good corporate governance, which
compared very well with the recommendations of the Cadbury Committee and the OECD
codes. The code was operationalised by inserting a new clause (Clause 49) to the Listing
Agreement (LA) and has been made applicable to all the listed companies in India in a
phased manner. Following the implementation of the Birla Committee recommendations,
substantial developments took place in the corporate world and securities market, which
required revisit of the issue.
The Narayana Murthy Committee has refined the corporate governance norms,
which are proposed to be implemented through modification in the listing agreement.
- 54 -
Government also appointed few committees. Based on their recommendations, government is

trying to provide statutory backup to corporate governance standards.
The initiatives for improvement in corporate governance, according to G. N. Bajpai,
come mainly from three sources, namely, the market, regulator and the legislature. The most
important initiative comes from market forces and mechanisms, which encourage and insist
on the management's improving the quality of corporate governance. Indian market has
formalized such forces in the form of a rating called "Corporate Governance, and Value
Creation Rating", which according to SEBI chairman is quite unique in the world and is
sought after voluntarily by companies.
- 55 -
- 56 -
Future of Corporate Governance

Taking personal responsibility for economic and ethical performance of corporations
- Corporate governance and business ethics articles by Dr Patrick Dixon, ranked as one of the
50 most influential business thinkers alive today (Thinkers50). More than 8.5 million
different people have visited his site.
Failure in Corporate Governance is a real threat to the future of every corporation.
Corporate governance as a business ethics issue is a hundred times more powerful
than the internet or globalization and can destroy your business in a week. To make matters
worse, standards of corporate governance are changing rapidly in response to random events
which capture public imagination. In business ethics, what was good is becoming bad and
what was considered bad is now good. Standards for corporate governance that have worked
for decades are looking old fashioned or immoral while other practices that raised questions
are becoming totally acceptable.
 So what is going to happen next in corporate governance?
 How can corporations use corporate governance to restore confidence and protect
themselves against tomorrow’s headlines?
 What will be the new “Gold Standard” for corporate governance and business
ethics?
 How much further than legal minimum requirements for corporate governance
should corporations go to ensure sustainable success?
 When corporate governance goes wrong who gets blamed?
 Impact of media allegations of dishonesty, fraud or corruption of senior executives or
directors – and how to protect business ethics reputation using robust corporate
governance?
 Why goalposts for corporate governance will go on changing, and how to get ready?
 Urgent need for all corporate governance to be whiter than white, with unquestionable
business ethics and risk management?
 Ensuring corporate governance compliance - board duties of care and responsibility in the
future?
- 57 -
 Defining clear areas of corporate governance responsibility of boards and directors?

 Using corporate governance to balancing interests of different constituencies and
stakeholders?
 Why we have to separate board scrutiny role from management power?
 Ethical / society responsibilities of directors and large investor ―owners‖?
 Independence of audit, nomination and remuneration committees?
 ―Duty of curiosity‖ by directors to ask very awkward and sensitive questions?
 Improving quality and flow of information within a corporation‘s governing structure?
 Why India got in such a mess?

Free market ideology was that corporations were kept responsible to customers,
shareholders, workers and society by customer and investor behavior, seen in share price.
Millions of individual “voters” in the market place ensured they behaved. “Bad”
corporations were punished by selling. “Good” corporations” were rewarded by buying.
“Market forces will sort it all out”. This ideology weakened the idea of corporate
governance and accountability.
 Why we still can’t trust the numbers?

Conflicts of interest remain in all audits even where consulting links are abolished:
 Concerns that some auditors are looking for jobs in the companies they audit.
 Auditors under pressure to get next year‘s audit business.
 Old accounting standards do not always give fullest picture.
 Globalization and e-technology are making reliable audits extremely difficult.
- 58 -
 Expect more conflicts of interest among global auditors:

Consolidation at top end of professional service organizations means global players
are running out of firms to approach to provide independent advice over large complex deals.
Conflicts of interest are growing rapidly – made worse by the collapse of Arthur
Andersen, with companies in danger of representing the interests of more than one party.
Expect future accusations of breaks in ―Chinese walls‖.
 Trust takes years to win and hours to lose:

System of corporate governance must win trust of the international community and the steps
to rebuilding trust in the corporation are:
 Transparent – totally open, going beyond current requirements or expectations.
 Responsible – clearly acting in the broader and longer term interests of all.
 Uncompromising – total commitment to highest moral positions.
 Successful – great results combining excellence in all areas with strong values.
 Temperate – taking care to avoid major risks, wild decisions and extravagance.
 CEO conflicts of interest must be deal with:

 Making decisions that benefit the CEO at expense of the future of the company, made
worse by the large stock options given and other triggered incentives,
Hiding how much the CEO takes - non-recording of stock options as an expense, overly-
complex complex reporting.
 Accountability conflicts for staff:

The fundamental issue at the heart of many recent scandals
 ―I did what I was told‖
 So who do you serve? Your boss? The boss of the boss? CEO? Board? Shareholders?
Customer‘s interests? General public? Courts of law? Your own conscience?
 Extreme pressures on employees to toe the official line
 Harassment and threats by people representing huge power
- 59 -
 How consultants and advisers get compromised?

 Who is the consultant or adviser accountable to if things are discovered?
 To the individual who set up the arrangement and is asking for the advice (who may be
part of the problem)? His or her boss? The CEO? The board? The shareholders? The
government? Consumers? The public? Who do you tell and when?
 What are the limits of confidentiality in consultancy?
 How the media can be compromised?

Media investigation should be a powerful corrective force, exposing wrong-doing, but
media depends on advertising. Dangers of alienating big funders of media companies.
Media is also sensitive to news manipulation and lobbying, including benefits for journalists
writing stories.
Need for transparency – declaring interests of journalists and editorial team including
those of the owner(s).
 How government can be compromised?

 Lobbying budget in US greater than GDP of 57 nations.
 Over 100 lobbyists per Member of Congress.
 $5bn a year industry designed to create new laws or regulations, change existing ones,
limit corporate liability, create barriers to entry for competitors, change who gets elected.
 Potential for corrupting the democratic purpose.
 US Government shell-outs to business are worth more than $300bn a year.
 Selective tax breaks, trade policies and spending programmers are all sensitive areas.
 Risk of corruption and danger of distorting free market.
 How corporations can out-gun government lawyers?
 Government will increasingly target corporations as well as individuals with legal action.
 Large corporations have deeper pockets than legal budgets of government.
 They often get better quality representation from huge heavy-weight teams.
- 60 -
 “SUCCESS PLUS” – Doing great things in the right ways:

Success itself is being redefined – fundamental rethink about the purpose of
corporations. Corporate responsibility will be far more widely interpreted. REAL SUCCESS
will be everything we have previously taken for granted in high performing companies PLUS
the highest ethical standards in all areas.
Corporations will be expected in future to “build a better future” – not only for their
shareholders but also for their customers, workers, business partners, community, nation and
the wider world. Those with effective corporate governance based on this core value will
have an added competitive advantage: attracting and retaining talent and generating positive
reactions in the marketplace.
- 61 -
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Corporate Governance: Indian Banking Sector

WINSTON CHURCHILL to the house of `commons'

Introduction to Corporate Governance

Corporate governance is a multi-faceted subject. An important part of corporate

History of Corporate Governance

How did India get here?

Unfortunately, there has been a concurrent lapse in the oversight of large

Definition of Corporate Governance

"Corporate governance - which can be defined narrowly as the relationship of a company to

Principles of Corporate Governance

Of importance is how directors and management develop a model of governance that

 Commonly accepted principles of Corporate Governance include:

Importance of Corporate Governance

Elements for effective Corporate Governance

In contrast, effective corporate governance in France is measured by the ability,

Secondly, transparency, effective communication and accountability should be the

Corporate Governance should not be run to exploit the community.

Advantages of Corporate Governance

 Corporate Governance – Benefits:

Issues in Corporate Governance

of the board should be independent directors and in case of non-executive chairman,

6. Directors and executives remuneration:

Ethics and Corporate Governance

 Benefits from Managing Ethics in Workplace:

(c) Changing situations require ethical education:

(d) Ethical practices create strong public image:

How Ethics Can Make Corporate Governance more Meaningful?

(c) Corporate governance is not something which regulators have impose on a

(d) There is a lot of provisions in the Companies Act, for example,

Corporate Governance in India

Recommendations of Various Committees on Corporate

Attendance record of The remuneration committee Board of subsidiaries should

should no be reappointed. chaired by an independent

development, opportunities, its risks.

Indian Model of Corporate Governance

Company vision; mission,

Corporate governance outcomes/ Benefits to society

Investor position Concern for customer

Healthy corporate sector development

country to adopt increasingly the Anglo-American model. In terms of the legislative

The thrust of legislative reforms suggested by these committees and subsequent

These various governance systems form a package of overall corporate control in

Corporate Governance practices- An International comparison

10. Capital Important, Not important, Not important, Not important,

12. Major Institutional Banks, Government, Directors and

individual individual shareholders corporates,

G-cube model of Corporate Governance

The model measures 6 parameters of corporate governance. Accounting Quality,

Corporate Governance Rating

 ICRA’s Rating Methodology:

Parties to Corporate Governance

Board of Directors and Corporate Governance

 Role of the board in the dynamics of Corporate Governance:

Market forces and competition Depositors, borrowers

Comp- Continuing relationship

Career Transparency and

Employees Social Responsibility All other stakeholders

Regulatory compliance Compliance of business ethics

Banks and Corporate Governance

 Why Corporate Governance in banks?

 Corporate Governance and the World Bank:

 Corporate Governance in Indian Banks:

 Indian companies face two types of corrupt practices: