Corporate Governance Practices in India

International Journal of All Research Education and Scientific Methods (IJARESM), ISSN: 2455-6211
Volume 8, Issue 11, November-2020, Impact Factor: 7.429, Available online at: www.ijaresm.com
Corporate Governance Practices in India: Issues and

Challenges
Ishwaree Rajiah-Bennett
Management Accountant, Kent (UK)
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ABSTRACT
Good governance encompasses all actions aimed at providing its citizens, a good quality of life. With the rapid change in
the business environment and emergence of new regulations by world bodies like EEC, WTO, OECD, World Bank etc.
the concept of Corporate Governance (CG) is introduced and also been impetus. Corporate governance provides the
fundamental value framework for the culture of an organization, which ensures efficient functioning of enterprise on
sound ethical values and principle. It focuses on appropriate management and control structure of a company.
It defines and confines the rights and responsibilities of the constituents of the corporate like boards, managers,
shareholders and other stakeholders. Corporate governance mainly
(a) Long-term relationship, which has to deal with checks and balances, incentives of managers and communications
between management and investors
(b) Transactional relationship involving matters relating to disclosure and authority.
Most of the definitions of Corporate Governance cited above focuses on laying down minimum standards and defining
the role of the various players involved in Corporate Governance.
Key Words: OECD, Whistle Blowing, Audit Committee, Auditors
CORPORATE GOVERNANCE
Corporate governance is a concept rather than an instrument. It focuses on appropriate management and control structure of
a company. Most definitions related to control of a company or managerial conduct. The Cadbury report (UK) states;
“corporate Governance is the system by which businesses are directed and controlled”. OECD Definition says, “Corporate
Governance provides the structure through which the objectives of the company are set, and the means of attaining those
objectives and monitoring performances are determined.” “Corporate Governance is not just corporate management; it is
something much broader to include a fair, efficient and transparent administration to meet some well defined objectives.
To state simple terms, corporate governance relates to a code of conduct, the management of a company observes while
exercising its powers. Quality Corporate Governance not only serves the desired corporate interest, but is also a key
requirement in the best interests of the corporate themselves.
Though the terms governance, good governance and corporate governance is increasingly used in development literature
since recent times, the concept of governance is not new (49,50).
However people in the west stated feeling the need for good corporate governance in early 80s as the corporate
misdemeanors increased. Business failure, limited role of auditors, weak accounting standards culminated in loss of control
(51,52,53).
The Cadbury committee was set up by the London Stock Exchange to address the dreary financial aspect of corporate
performance. The two other committees came afterwards – the King Committee, and the Hampel Committee to diagnose
the issues of corporate governance. The Asian financial crisis, recent scandals in US, Italy, India have triggered fresh
initiatives of thinking towards good governance. Corporate governance has been much talked in India particularly after
1993.
SEBI in India has taken the initiative in framing new rules and laws to strengthen corporate governance. Committees like
Kumar Mangalam Birla committee (2000), Naresh Chandra Committee (2002) brought out reports on corporate
governance. SEBI has also constituted a committee on corporate governance under the chairmanship of Shri N R Narayana
Murthy.
IJARESM Publication, India >>>> www.ijaresm.com Page 259

Presently corporate India is going through a great churning phase, as companies are doing business with global ambition,
placing a lot of emphasis on governance and transparency (54,55,56). Recent corporate failures and scandals involving mis-
governance and unethical behavior on the part of corporate rocked the corporate sector all over the world, shook the
investor confidence in stock markets, and caused regulators and others to question the assumption that most companies do
the right thing most of the time (57,58.59). Globally the objective of corporate governance is to maximize long term
shareholders value. With the assumption that capital and financial markets are working properly, anything that maximizes
shareholder value will necessarily maximize corporate prosperity.
For sound governance, managers need to act as trustee of shareholders, prevent asymmetry of benefits between sections of
shareholders, especially between owner-managers and the rest of shareholders. Investment analyst recommends a company
based on strength or weakness of a companies governance infrastructure.
Various Committees’ Recommendations

Shri N. R. Narayana Murthy to review existing code of corporate governance
Recommendations:
1) Strengthening the responsibilities of audit committee
2) Improving quality of financial disclosures
3) Utilization of proceeds from IPO
4) To assess & disclose business risks
5) Formal code of conduct for board
6) Whistle blower policy to be place in a company providing freedom to approach the audit committee
7) Subsidiaries to be reviewed by audit committee of holding company
Shri Naresh Chandra constituted in august 2002 to examine corporate audit, role of auditors, relationship of
company & auditor
Recommendation of Naresh Chandra Committee:

1) Recommended a list of disqualifications for audit assignments like direct relationship with company, any business
relationship with client, personal relationship with director
2) Audit firms not to provide services such as accounting, internal audit assignments etc. to audit clients
3) Auditor to disclose contingent liabilities & highlight significant accounting policies
4) Audit committee to be first point of reference for appointment of auditors\
5) CEO & CFO of listed company to certify on fairness, correctness of annual audited accounts
6) Redefinition of independent directors – does not have any material, pecuniary relationship or transaction with the
company
7) Composition of board of directors
8) Statutory limit on the sitting fee to non-executive directors to be reviewed
The Godbole Committee was set up by Former Union Home Secretary Madhav Godbole in 2001 to provide guidelines on
good governance for the government. The Committee prepared a report consisting of 190 recommendations which includes
1) compulsory retirement of Govt. Officials,
2) enacting a law on fiscal responsibility
3) budget management,
4) review of subsidies and
5) The simplification of laws
The Kumar Mangalam Committee (KBC) under the chairmanship of Mr. Kumar Mangalam Birla was constituted by
Security & Exchange Board of India (SEBI) in May 1999 to promote investors‟ interests and to raise the standards of
corporate governance is the “enhancement of shareholder value, keeping in view the interests of other stakeholders.” This
definition emphasizes the need for a company to enhance shareholder wealth without being detrimental to the interests of
the other stakeholders in the company such as suppliers, customers, creditors, employees, the government and the society at
large. The committee has identified the three key constituents of corporate governance.
Firstly, „The Shareholders‟ who have trusted the company and consequently invested their capital, either through an Initial
Public Offering or through the secondary market. Secondly, „The Board of Directors‟; who in turn are answerable to the
shareholders and thirdly „The Management‟; that runs the company and is accountable to the directors. The committee has

attempted to the committee identify each of the constituents for their roles and responsibilities as also their rights in the
context of good corporate governance. The mandatory recommendations of the committee are
1) Meetings of the Board should be conducted at least four times in a year

2) Out of total board size, 50 percent of the directors should be Non-Executives
3) Presence of Audit Committee
4) There should be minimum three members of Audit Committee
5) Audit Committee Chairman should be Non-Executive
6) Members of Audit Committee should be Non-Executives
7) Audit Committee meetings should be held at least three times in a year
8) Board of Directors should decide the remuneration of Non-Executive Directors
9) Disclosures of Consolidate Accounts of Subsidiary
10) Disclosures of Environmental Reporting
11) Disclosures of related party transactions
12) Disclosures of social reporting
13) Disclosures of environmental reporting
14) Sending quarterly financial results to stakeholders
15) Presence of Investor Grievances Committee
16) Solving all complaints received by Investor Grievances Committee.
The desirable recommendations are

1) The board should set-up a Remuneration Committee to determine the company‟s policy on specific remuneration
packages for executive directors,
2) Half-yearly declaration of financial performance including summary of the significant events in the last six months
should be sent to the each shareholder.
3) Non-executive chairman should be entitled to maintain a chairman‟s office at the company expense.
The Hample Committee was set up under the chairmanship of Sir Ronald Hample in 1998 in U.K to review the Cadbury
Code. The Committee suggested that the companies should organize their own governance arrangements and disclose them
to the shareholders. The Committee has issued a list of governance principles related to the role of directors, role of
shareholders, accountability and audit.
The Confederation of Indian Industry (CII) was the first business association to come out with a code of corporate
governance. CII had evolved a code of corporate governance in 1998 for transparent corporate disclosure norms. It has
suggested the number of measures in respect of corporate disclosure, namely
1) Companies with a paid up capital of Rs. 20 crore or more the quality and quantity of disclosure that accompanies a
Global Depository Receipt issue should be the norm for any domestic issue because it is not credible to present
separate set of accounts to overseas investors and to domestic investors,
2) with the country entering an era of fully convertible capital account aspiring to be major player in the global
financial markets, it is essential for domestic companies to move on to Generally Accepted Accounting Principles
(GAAP) and to adopt transparent accounting norms,
3) high and low monthly averages of share prices at all the Stock Exchanges where the company is listed for the
reporting year and
4) Statement on value-added
5) Apart from above, in its Draft Code for desirable corporate governance, CII mentioned that the audit is one of
cornerstone of corporate governance and suggested that the
1) Audit committee should assist the board in fulfilling its role relating to corporate accounting controls.
2) For audit committees discharge their functional responsibilities with due diligence,
3) Also they must have the full access to financial data of It‟s subsidiary and associated companies including data on
contingent liabilities, debts, expenses, current liabilities, loans and investment.
The Organization for Economic Cooperation and Development (OECD) Code

In its principles of good governance has identified the requisite that the majority of directors should come from outside the
company and has no personal ties to it. The other conditions are that the board should protect the rights of shareholders.
The Green Bury Committee Report –

was set up under the chairmanship of Sir Richard Green Bury in July 1995. The Committee has given its recommendations
specifically related to Director‟s Remuneration by forming a Remuneration Committee in each Company. Also the report
has focused on the formation of a Board Remuneration Sub-Committee to settle the remuneration of their executive
colleagues etc.
King Committee –
The King Committee was set up in 1994 in South Africa at the instance of Institute of Directors of South Africa with
support from the South African Chamber of Business and the Chartered Institute of Secretaries and administrators. The
Committee recommended that
1) The boards should be balanced between executive and non executive directors
2) Roles of chairperson and the chief executive officer should be split
3) The Directors report should incorporate statements of their responsibilities in respect of financial statements ,
accounting records, accounting standards, internal audit, adherence to the code of corporate practice and conduct
along with the details of non-adherence
4) Shareholders should be asking questions on the accounts for which forms should be provided in the annual reports in
the meetings
5) Corporate should have an effective internal audit function and establish an audit committee with written terms of
reference from the board.
The Cadbury Committee Report was set up under the chairmanship of Sir Adrain Cadbury in May 1992 by the Financial
Reporting Council of London Stock Exchange and Accounting Association. The Cadbury Code of best practices had 19
recommendations. The guidelines specifically referred to the various components of the boards as Non-Executive directors,
Executive Directors and independent directors.
The Blue Ribbon Committee was jointly sponsored by the New York Stock Exchange and National Association of
Security Dealers for improving the working of corporate audit committees. The committee recommended that
(a) The members of the audit committee should be independent directors and financial literate
(b) External auditors being the representatives of shareholders should periodically discuss the quality of Company‟s
accounting principles in relation to the GAAP.
(c) Statutory auditors should maintain their independence in discharging their professional responsibilities
Latest Developments in Corporate Governance
Self-Regulatory Developments: Self-regulation has played a significant role to improve the corporate practices. The
companies, shareholders, rating agencies and professional bodies themselves have tried or trying to induce some important
measures that lead to increase the level of corporate governance. The following are the efforts done under the self-
regulatory mode.
Corporate Initiatives: The organizations are taking initiatives to enhance the quality of corporate governance at their own
level. Some of the initiatives taken:
1. Controlling the Position of Chief Executive Officer

2. Changes in the Composition of the Board
3. Improvements in the Disclosure of Financial and Non-Financial Operations
4. Reporting on Corporate Governance Practices
5. Linking Managerial Compensation to Performance
6. Employee Stock Option Plans (ESOP)
7. Changing Face of Audit Committee
8. Setting up of National Foundation for Corporate Governance (NFCG)
Ministry of Company Affairs has recently of set up National Foundation for Corporate Governance (NFCG) in
partnership with Confederation of Indian Industry (CII), Institute of Company Secretaries of India (ICSI) and
Institute of Chartered Accountants of India (ICAI).
Functions of NFCG
a. Creating awareness regarding benefits of implementation of good corporate governance practices.

b. Encouraging research capability in the area of corporate governance.

c. Providing key inputs for developing laws and regulations.
d. Coordinating with the various regulatory authorities for proper implementation and enforcement of various laws
related to corporate governance.
e. Cultivation of international linkages and maintaining the evolution towards convergence with international
standards.
f. Setting up of “National Centers for Corporate Governance” across the country to provide quality training to
Directors and also to produce quality research with the aim to receive global recognition.
9. SEBI initiatives for strengthening Corporate Governance

SEBI has initiated several measures through amendments in listing agreement. Some of these are:
a. Strengthening of disclosure norms for Initial Public Offering as per the Malegam Committee.
b. Providing information in the director‟s report for utilization/end use of funds and variation in use of
funds.
c. Declaration of un audited quarterly results.
d. Mandatory appointment of Compliance Officer
e. Dispatch of a copy of complete balance sheet to every investor household and arbitrage copy of balance
sheet to all shareholders.
f. Under the SEBI Act, 1992, SEBI has extensive powers to issue directions to market participants on a
wide range of subjects, many of which relate to corporate governance.
10. Governance by Financial Institutions:

The Financial Institutions have also taken responsibility enforcing corporate governance in companies where they
have substantial stakes. They insists the companies on following:
a. Making adequate disclosures,
b. Moving towards internationally accepted accounting standards,
c. Maintaining distinction between the CEO and Chairman,
d. Holding regular meetings with proper recording and dissemination of proceedings(37).
Financial Institutions have also implemented new norms for appointment of nominee directors which have
drastically cut down the total number of such directors on company‟s board.
11. Role played by Credit Rating Agencies:

Two of the leading credit rating agencies – Credit Rating Information Services of India Limited (CRISIL) and
Investment Information and Credit Rating Agency (ICRA) have prepared a comprehensive instrument for rating
the good corporate governance practices of listed companies(40).
Issues and Challenges

People are concerned how companies are being managed; after all it's the public money/investment which is at stake in
most of these companies. International organizations like IMF, WTO and World Bank are also insisting on transparency.
New standards for corporate governance have now emerged and companies will have to change their behavior and values in
accordance with these standards. The new standards include Independent directors, external auditors, rotation of auditors,
proper succession planning among others. Availability of foreign funds will lower the cost of capital. All companies will
like this to happen, but the international lenders will be careful that the companies they lend to follow international norms
and good corporate governance. Companies need to take steps to prevent harm to their reputation and also pacify these
activist groups. The companies should take basic steps like meeting all corporate norms and regulations. Eg: a chemical
company can include a leading environmentalist(44).
The recent growth in corporate governance literature has focused on ways that corporations work. The modern day uproar
over corporate governance problems of insider trading, excessive executive compensation, managerial expropriation of
shareholders' wealth, false reporting, non-disclosure of certain accounting and governance malpractices and self-dealing
among others, are assumed to be related to the theory of separation of ownership and control(25).
Theoretical interest in corporate governance in India is a recent phenomenon. Obscure companies quickly listed on the
exchanges during the stock market boom of 1993-94 only to disappear after siphoning off public funds and leaving the
retail investors with illiquid stock. The sudden appearance of fly-by-night operators during the period coupled with the
emergence of a new breed of shareholders like the foreign investors, institutional investors, mutual funds and private equity

placement companies and their demands for better governance practices has compelled the policy makers to think of the
governance anomalies in corporate India. Before the onset of liberalization the Indian organized sector dominated by
public and private enterprises did not meet the expected norms and standards of governance. Moreover, with increasing
foreign investment in Indian industries, accountability to foreign shareholders had become an increasing necessity.
Since the structure of corporate finance in India is highly dependent on bank's financial resources, some authors argue that
the legal structure should be so developed that banks are freed from excessive portfolio restrictions and governance
mechanisms be so devised that bank representations on boards become a reality. This would enable banks to maintain
proper checks and balances apropos of, expropriation of shareholder value by the managers.
The code was prepared with the view that Indian companies had to adopt the best of corporate practices if they were to
access domestic as well as foreign capital at competitive rates. The code agreed that there was no unique way of
understanding corporate governance.
With increased exposure to global markets it became imperative on corporations to focus on transparency and adopt full
disclosure mechanisms apart from consistently directing themselves towards amelioration of shareholder value. The code
initially focused on the public listed companies.
Corporate governance practices have gained a greater impetus after the adoption of the much-celebrated Securities and
Exchange Board of India (SEBI) appointed Kumar Mangalam Birla Committee (KMBC) Report on Corporate Governance.
The acceptance and ratification by SEBI in early 2000 of the KMBC report on corporate governance has paved the way to
rationalize and restructure governance practices in corporate India. The recommendations are supposed to be enforced
through provisions in listing agreements by local stock exchanges where the companies are listed(27).
The new recommendations have forced a dramatic alteration in the disclosure norms for closely-held firms or family-
dominated firms. Demands made by the report of certain disclosures and the mandatory setting up of the recommended
sub-committees will strike a hard blow on majority of the listed firms.
The practical difficulties of adopting transparent mechanisms that would remove the veil of accounting practices that firms
have so far adopted has led to the slow acceptance of corporate governance norms(29).
Practices of Indian MNCs

ONGC REPORT ON CORPORATE GOVERNANCE
 The meetings are convened by giving appropriate advance notice after obtaining approval of the chairman of the
board/committee.
 The agenda papers are prepared by the concerned officials, sponsored by the concerned functional directors and
submitted for obtaining approval of the chairman and Managing Directors, well in advance.
 The meetings of the board/committees are generally held at the company‟s registered office in New Delhi.
 The Board/Committee have given presentation covering Finance, production, operations, major Business
segments, Human Resources, Marketing, joint venture operations etc. of the company and for taking on record
quarterly / annual financial statements at the pre-scheduled Board/committee, as and when necessary.
 The members of the Board/Committee have completed access to all information of the company.
 Minutes of the proceedings of each Board/Committee meeting are recorded. Draft minutes are circulated amongst
all members of the Board/Committee for their critical appreciations and comments.
 The guideline for the Board/Committee meeting facilitate and effective post meeting follow-up, review and
reporting process for the action taken on decision of the board and committee by the follow up action taken.
 Every functional director while preparing the agenda notes is responsible for and is required to ensure adherence to
all the applicable provisions of law, rules, guidelines etc.
 The company is managed by the board of directors, which formulates strategies, policies and reviews its
performance periodically. The Chairman & Managing Directors and six whole time directors manage the business
of the company under the overall supervision, control and guidance of the board.
 The board of directors has an adequate combination of executive and non-executive directors. The board has 14
members, comprising of 7 functional directors including the chairman & managing director(31).
 With a view to institutionalize all corporate affairs and setting up systems and procedures for advance planning
for maters requiring discussion/ decisions by the board, the company has defined guidelines for the meetings of the
boards of directors and committees thereof.

GTL CORPORATE GOVERNANCE REPORT

Disclosure:
 The Board
Has a non executive chairman. No policy has been laid down on tenure of independent Directors.
 Remuneration committee
The company has constituted a Nomination and Remuneration committee and the full details of the same is
available elsewhere in this report(33).
 Shareholders’ Right
the company has giled its application for listing. On listing it shall publish the half yearly financial results in the
newspapers and shall also display it on the company‟s website www, gtlinfra.com, apart from the display it on the
company‟s website.
 Training of Board Members
Prior to the appointment of the Directors, an invitation letter giving the background of the company is sent to the
Directors. The directors shall also be invited for the business conference of the middle and senior management to
enable the company to get their input on the strategy, risk and working of the operations of the company.
 Mechanism for evaluating Non Executive Board Members
No policy has been laid down by the company
 Whistle blower policy
The company does not have any whistle blower policy.
FINDINGS
 With respect to the ideal composition of board, it has been agreed that company‟s board must include nominee
directors so that independent and unbiased decisions about company matters could be taken(35).
 Nominee directors add value to the organization by their active participation and guidance.
 Non-executive directors have basic knowledge of business, professional background, experience and do not have any
economic relationship with the company except sitting fee.
 Non-executive directors are appointed from the list proposed and approved by shareholders.
 Position of chairman and chief executive officer held by separate individuals.
 Chairman brings a balanced approach to board matters, act as a friend, philosopher and guide to chief executive officer.
 Remuneration committee performs various activities but to “make a credible and transparent policy for the
remuneration of the directors” is its most important activity.
 To ensure maximum participation of shareholders in meetings very few companies have implemented postal ballot
system for voting purpose.
 Institutional investors evaluate the performance of the company in terms of governance practices to ensure that
shareholders value is maximized.
 With respect to the role of company secretaries, we favored that company secretaries have a vital role to play in
ensuring food corporate governance and should actively participate in evolving the best corporate practices to bring
about greater degree of accountability and transparency of operations.
 It has been found that governance of the companies can be improved when the position of company secretary is
strengthened by enlarging the area of certification and introducing the standards related to secretarial work.
 It has been found that the chartered accountants are focusing on net profit figures while studying annual reports of
companies.
 It has been obtained from the survey that to judge the economic performance of the company, balance sheet, profit and
loss account and directors‟ report respectively are given priority.
 It is agreed that it is the duty of managing directors to get prepare true financial statement to be distributed among
shareholders.
 It is stated that companies are providing information about quarterly results, mergers and takeovers etc.
 It is of the opinion that boards of the company as catalyst can bring the perceptible changes in corporate governance.
CONCLUSIONS
 Controlling the position of the Chief Executive Officer: It has always been a major responsibility of board directors to
monitor CEO performance and to get though if the situation dictates(37).
 Changes in the Composition of the Board: Good corporate governance depends upon the quality of the board members.
In addition to a move toward independent outside directors companies have created boards with diversity of
background.

 Improvements in the Disclosure of Financial and Non-Financial Operations: In order to contribute towards high
standards of corporate governance a number of Asian companies are now adopting the best practices of proper
accounting, reporting and disclosure prescribed by International Accounting Standards Commission. Some Indian
companies viz. Eicher Motors Ltd., HUL, HDFC and Infosys Technologies have gone beyond the statutory
requirements, to give important information in their annual reports.
 Reporting on Corporate Governance Practices: different stakeholders have wider interests in companies. Their interests
are not only in profit and loss Account and Balance Sheet but also in knowing company in better way on governance
part viz. the company‟s philosophy towards stakeholders, composition of board committees, executive compensation
etc. Therefore to disclose the information about corporate governance practices and to make companies more
responsible towards stakeholders, Securities and Exchange Board of India has taken initiatives and made compulsory
for all group „A‟ companies to submit their corporate governance report in their annual report.
 Linking Managerial Compensation to Performance: To make these interests more congruent, companies are linking a
significant portion of managerial compensation to the value created by management.
 Introducing Employees Stock Option Plans (ESOP): To ensure the maximum participation of employees in the
organization, companies are providing stock options to employees.
 Changing Face of Audit Committee: Earlier the audit committees were required to undertake primarily three functions:
o Review annual accounts and audited statements

o Review the findings/reports of the internal auditors and
o Maintain an appropriate interface with the management.
But today because of increasing complexity of business situations, regulatory requirements and public pressure on
disclosure and transparency requirements the face of audit committee has been changed. Thus the new face of audit
committee states that the company is ensuring more transparency, fairness and disclosures in their operations.
Shareholder Initiatives
Today shareholders are also bringing perceptible changes in the business practices by forming up activist groups. With the
set up of shareholder activism Council of Institutional Investor (CII) in mid 1990, the role of activists has been totally
changed.
Rating Agency initiatives

With corporate governance gaining popularity and importance as a tool for investors, various credit rating agencies have
announced to rate Indian companies for their corporate governance compliance.
Professional Bodies Initiatives

„Quality Standards‟ of best Practices: One of the important requirements of corporate governance is the sharing of quality
information with stakeholders. Both the Institute of Chartered Accountants of India (ICAI) Institute of Company secretaries
of India (ICSI) have played major role in meeting this requirement. While ICAI has bought out 28 „Accounting Standards‟
and 25 „Auditing Standards‟ known as „Standards on Auditing Practices‟.
 National Award for Excellence in Corporate Governance: Another important development is awarding the
companies which are following good corporate governance practices. The Institute of Company Secretaries of
India (ICSI) is awarding the companies each year on the basis of their excellence, contribution and achievements
in the area of corporate governance.
Securities and Exchange Board of India Initiatives

 Promoting Investor Education: Only about 34 percent of the investor households obtain information from
prospectus of companies.
 Investigation Taken up by the SEBI: To gather evidence of alleged violations by companies about insider trading,
public issue related irregularities, behind these irregularities and violations and other misconducts investigations
are carried out by the SEBI.
 Grievances Redressal: SEBI has a comprehensive investor grievances redressal mechanism.
 Code of Ethics for Stock Exchanges: In an effort to improve the transparency of stock market operations, the
Securities and Exchange Board of India (SEBI) has come up with a code of ethics for the directors and senior
officials of the respective stock exchange in the country.

 Non-compliance of Corporate Governance code: SEBI is taking strict actions against those companies which are
not following the code of corporate governance. In this direction SEBI has suspended the trading in such company,
cancellation of registration, monetary penalties and warnings to such companies.
 Committees on Corporate Governance: To strengthen the composition and effectiveness of the regulatory
framework for good corporate governance two committees viz. Naresh Chandra Committee in December 2002 and
Narayan Murti Committee have been constituted. The committee highlighted that in Indian companies needs to
follow very stringent guidelines on corporate governance and that there is a wide gap between prescription and
practice.
 The Narayan Murti committee has recommended that it should be made mandatory for companies raising funds
through initial public offerings to disclose on a quarterly basis to the audit committee, the uses/applications of such
funds. Moreover, such a statement has to be certified by the auditors of the company.
Department of Company Affairs Initiatives
 New Formant of Annual Report: As important initiatives to improve the practices of companies, DCA has
introduced a new format devised in consultation with the National Statistical Commission for the annual report of
companies.
Stock Exchange Initiatives

A live example is of New York Stock Exchange (NYSE) board, which has put a step head and adopted 10
recommendations made by a special committee on governance in order to bring the exchange‟s own practice in line with
what it requires of more than 2500 companies it lists. NYSE has also prohibited its directors from serving on the board of
public companies as a part of board initiatives to improve its corporate governance practices.
Government Initiatives
Moreover as a central bank, Reserve Bank of India is playing significant role in improving the governance of the banking
sector through better incentives, transparency, accountability and supervision.
International Developments: Many efforts at international level are in progress where many agencies, research corporations
and forums are giving their contribution to enhance the level of corporate governance in the world.
 Centre for Corporate Governance Research: Such centre has been established at the Birmingham Business School
UK. The centre conducts and encourages high quality research in corporate governance.
 Global Corporate Governance Forum: In a major step in this direction, the World Bank Group and the OECD have
jointly set up the Global corporate governance forum.
 Disclosure of the List of Shameful Auditors: Securities and Exchange Commission (SEC) has disclosed the list of
those auditors who were indulging in unethical activities i.e. not audited the results transparently and put the
companies into shameful situation. The purpose of disclosing such list is to prevent other companies from such
particular „bad‟ auditors and to stop corporate failures and scams in the future.
The list of these auditors and the name of companies to which they have audited the result is given in table
List of Shameful Auditors
Auditors Companies
Arthur Andersen Enron, WorldCom, Quest, Global, Crossing, Dynergy,
CMS, Energy, Hallibutron, Peregrine, Merck
Pricewaterhouse Coopers Tyco
KPMG Xerox
Deloitte and Touche EL Paso Corp., Adelphia
Ernst and Young AOL, Williams Cos.
(Source: Chartered Financial Analyst, September-2002, pp.19-28)
Creation of Super Regulator: In order to strengthen corporate governance practices in United Kingdom, the government has
created a “super regulator” by merging the Accountancy Foundation (AF) with the Financial Reporting committee (FRC).
The new watchdog is overseeing the Auditing Practices Board, the Accounting Standards Board, the Financial Reporting
and Review Panel, the Investigative Disciplinary Board and the Professional Oversight board.

Sarabanes-Oxely Act calls for the CEO and CFO of a listed company to certify that financial information provided in
annual or quarterly reports of the company field with the Securities and Exchange Commission fairly present in all material
respects the financial conditions and the results of operations of the company.
Other Developments: It includes all those indirect efforts which have been adopted to enhance the quality of corporate
governance are discussed below:
Emergence of Reputation Agents: Reputation agents refers to the private sector agents, self-regulating bodies, media,
investment and corporate governance analyst and civic society groups that reduce information asymmetry, improve the
monitoring of firms and shed light on opportunistic behavior.
 Initiatives of IBRD and IFC: The World bank has addressed many issues central to corporate governance: creating
competitive markets, establishing regulatory and supervisory capability in banking and capital markets, introducing
greater transparency, adopting international accounting and auditing standards and strengthening the competence and
independence of board of directors.
 Initiatives by Institutional Investors: As providers of capital, investor have been a driving force behind corporate
governance reform around the world. Since the financial crisis in emerging markets they have assigned even greater
weight to corporate governance in their investment decision-making.
 Initiatives by Investment Analyst and Research and Consulting firms: These firms provide research and
recommendations for their clients by summarizing issues, regulations and recommending voting strategies. Since the
East Asian crisis, research analyst has increased their coverage of corporate governance reforms in their investment
recommendations.
 Legislators Adopt Behavior Code: Presiding officers of legislative bodies and elected representatives from across the
political spectrum have enforced behavioral code by changing the Rules of Procedure of all legislators, constituting
ethics committees and punishing mis-conduct with reprimand, censure, withdrawal from the House or suspension for a
specific period.
Suggestions for Corporate Governance

Although changes in company law; corporate accounting; disclosure norms; setting YP of audit committees; responsibilities
and powers of the board of directors etc. have been recommended for improving corporate governance in India yet some
more efforts are required in this direction.
1. Awarding of contracts: While public sector companies have to go in GOR an open tender system, the level of
discretion available with senior managers in the private sector too needs re-examination. However increasing market
competition will also help in automatically weeding out the inefficient companies. A greater role of the board of
director is required in examination of contracts entered on a random basis. The role of cost audit in detecting these can
be highlighted.
2. Use of company resources: a large issue in corporate governance is the use of company resources and funds for
personnel use. There are few companies where persona and company usage of resources is separate and the same may
not be true in other organizations.
3. Presence shareholders in annual general meeting: for implementing good governance requirements, the
shareholders must participate in meetings.
4. Improving corporate reputation: Rao and Ruckert1 observed that reputation serve as credible signals because firms
that fail to fulfill the expectations created by their reputation may expect to receive negative monetary consequences as
consumer punish dishonest behavior.
5. Formation of additional board committees: the Kumar Mangalam Birla committee on corporate governance as its
mandatory recommendations has stated that companies should set up audit and investor grievance committees.
6. Introduce the cumulative voting system: one of the effective ways to improve corporate governance is to introduce
the option of cumulative voting for the election of board members so that minority shareholders have a chance of being
represented on the board. Cumulative voting allows minority shareholders to cast all their votes on one single
candidate.
7. Strong interface between industry and academia: there is a need to evolve a sound theoretical framework on
corporate governance through joint research between academia and the industry.
8. Training for directors: another important area that requires attention is the lack of training and the limited
understanding that directors have of corporate governance issues. Training must be made compulsory for directors of
Indian companies.

9. Business judgment rule: for improving corporate governance the concept of business judgment rule should be
adopted.
10. Whistle blower policy: in order to improve corporate governance the whistle blower policy should be encouraged.
Generally, the first person to be aware of a wrong doing in a company would invariably be some of that company.
11. Suggested measures for financial institutions:
a. Financial institutions must ensure that companies in which they have sizeable stake, either in terms of equity
or loans remain independent and not dominated by directors.
b. Financial institutions should nominate professionally qualified persons preferably company secretaries as their
representatives on the companies‟ boards who can act independently and oppose the incumbent management,
if necessary.
c. The nominated members of the board of directors should be made accountable for any corporate mis -
governance.
d. Institutional investors should see themselves as owners and not just investors of companies.
e. Institutional investors should make positive use if their voting rights.
12. Suggestion for professionals and professional bodies: with respect to the professional bodies given measures have
been suggested:
Audit Firm Rotation: under the company act 1956, shareholders formally appoint the auditors and audit should be
carried out in their interests. It is suggested that audit firms many be changed periodically.
13. Separate body for regulating corporate governance: presently in India the functions and principles of corporate
governance are being taken of by several statutory and self regulatory bodies. As statutory bodies securities and
exchange board of India is discharging its duty as a regulator of capital market and department of company affairs is
working as a regulator of company law administration. The self-regulatory bodies‟ viz. industry associations are
working as a investor protection mechanisms.
14. Change in company act: In India it is felt that there is needed to strengthen the companies act as it did no have
enough provisions to initiate desired levels of action against erring managements.
Alternative Corporate Governance Mechanisms

While corporate governance mechanisms differ from the country to country, there are two broad categories of financial
systems which differ in their very basic structure.
The market-based system or the Anglo-Saxon system, marked with effective distancing of ownership and control, trusts
financial markets with the ultimate role of corporate governance. The market for management control and the concomitant
takeover threat then works to make sure that management does not lower shareholder interests. Banks have practically no
control over management.
Management is carried out by another board, the Vorstand, appointed by and answerable to the supervisory board. The
Indian situation may be thought of as combination of these two conflicting models. Though the basic corporate legal
structure in Anglo-Saxon, share ownership is far less dispersed and financial institutions play a much bigger role in
financing corporate activity. Share ownership and board representation of financial institutions give these bodies the
abilities to serve as important monitors of management activities through the relationship.
Annaxure I
Recent Practices all over the Globe- reports and recommendations of various committees
Table 1.2 Corporate Governance - A Global

Contrast
Sr Countries
. → Hong
U.K U.S.A India France Germany Japan Pakistan
N Concept Kong
o. ↓
Two Tier
Board Single Executive
1 Unitary Unitary Unitary Unitary Unitary Unitary
Tiers and Two Survive
lance

Remunerat
Remunera Remunerat
ion Audit
Committe tion Audit ion Audit
2 Sharehold _ _ _ Audit N.A.
es Nominati Nominatio
er
on n
Grievance
Same
family
not to
have
Members Majority Majority Executive
Executive and more
of of Non- of Non- and Non-
3 N.A. Non- _ than _
Committe executive executive executive
executive 50%
es Directors Directors Directors
members
of Board
of
Directors
System
I PDG
picks up
Outsider the board Board
(No and proposes
Financial ratified and
Non- Elected
Compositi Institution by Bank sharehol
executive by
4 on of Outsider al sharehold _ control, ders
and sharehold
Board nominatio er Insider ratify
Executive ers
n unless System appointm
default of II 1/3rd ent of
loan) insiders directors
and
2/3rd
outsiders
Protection
of current
Business and
Prosperity Stakehold potential Protectio Stakehol
Sharehold
and Investors' ers' Stakeholders' investors n of ders'
5 Objectives ers'
Sharehold Protection Protectio Protection and sharehol Protectio
Protection
ers' n creditors ders n
Protection and
stakehold
ers
Law
Minimum Law prescribes 3 to
and prescribes minimum 122/3rd
Maximum minimum 2 in Non-
Large
6 No. of 2 with no _ private executive _ N.A. _
Size
Directors maximum company and 1/3rd
on the number and 3 in executive
board specified public directors
company
Dual
Board Board
Board and System
and and
shareholde 1. Board to Board to
Accounta sharehold sharehold
7 _ rs as Tax purpose Commerc sharehol sharehold
bility ers as ers as
stewardshi ial Code ders ers
stewardsh stewardsh
p 2.
ip ip
Securities

and
Exchange
Law
Annual,
Quarterly,
Quarterly, Quarterly, Financial
Half Annual, Interim,
Annual, Annual, and
Yearly, Financial Annual, Annual,
Consolida Consolidat operating,
Annual, and Financial and Report
8 Disclosure ted and ed and social Annual
and Report operating operating on
Report on Accountab responsibi
on performa performance Governa
Governan ility lity
Governanc nce nce
ce Report performa
e
nce
Financial
Institution'
9 s Yes Yes Yes No Banks Banks Yes Yes
Participati
on
Vostand: CEO
Sharehold Nominate Executive, nominate
By board PDG CEO
ers d by board Aufsichatsrat: s, board
Director's and picks up nominates
ratifying and Non- ratifies
10 Appointm elected by the board and N.A.
board elected by executive and
ent sharehold of sharehold
nominatio shareholde except one sharehol
ers directors ers ratify
ns rs nominated by ders
Vorstand elect
Controlli
Selection
CEO is Family or PDG is Family/G
ng
of CEO selects Controlli
11 Board member of Board of elected roup family/gr
Director directors ng Group
board Directors by board Boardoup
by CEO
board
Source: Maheshwari, Girish C., " Corporate Governance: The Search for India Inc.
for New Mantra",
Metamosphosis, Vol. I, No.I, January-2002, pp.33-
34.)
Annxure II
Difference between New and Old Format of Annual Report is attached as
1 Companies are classifying under the separate heads In the old format it was in the mix form. No
the nature of operations and industrial activity. classification was there.
2 Providing a breakup of the total revenue. Earlier companies were declaring their revenue details
on the annually basis.
3 Companies are now disclosing the total expense In the old format companies were presenting their
incurred on Research and Development either it details about the R and D only if they exceed one
may be more than one percent of the turnover or percent of the turnover. Below one percent was not
less than one percent. considered.
4 A breakup of the employment details are also In the old format of the annual report employment
provided by the companies. This is being in terms details of the employee was there but that was limited
of the functional breakup- production, marketing, not in comprehensive form.
administration, finance and Research and
Development.
5 Under the new format companies are now In the old form of the company‟s annual report Insider
disclosing the trade and other transactions with the Trading details were absent.

parent companies.
7 Foreign capital raised including external Deficiency of the providing of such information in the
commercial borrowings, American Depository old report was there.
Receipts/Global Depository Receipts, foreign
institutional and direct investments in the company
in total as well as changes in the accounting year
made public.
8 Acquisition of other companies, the proportion of In the old format acquisition details were not provided
ownership acquired and total holding in the by the companies.
acquired company after the deal. Now the
companies are disclosing in their new format.
NOTES AND REFERENCES
[1] Thomas, M., “Board Games”, Time, 8 February 1993, p.54.

[2] Leslie W., “Who‟s Playing the Board Game?” The New York Times, 9 October 1983, p.18
[3] Timothy D., “More Directors are Recruited from Outside”, The Wall Street Journal, 20 March 2001, p.1
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[5] Carroll, A. B. and Buchholz A. K., “Business and Society: Ethics and Stakeholder Management” Fourth Edition,
South-Westren college Publishing, New York, 2000, pp. 201-225
[6] Ibid
[7] Compendium on Training Program of senior Technical Assistance on “Company Law in India: Issues and
Perspectives”, issued by ICAI, DCA, Ministry of Law, Justice and Company Affairs, 2003, p73.
[8] www.sebi.org
[9] Lyengar, J., “Greater Disclosures in DCA‟s New Report”, The Economic Times, 7 December 2000, p.5.
[10] Postlnieu, A. “ NYSE Moves to Improve Governance”, Financial Times, 6 June 2003, p.7
[11] www.corpgov.net
[12] http://business.bham.ac.uk/ccgr/overview.htm
[13] Magdi R. I. and Nadderesh c., “Corporate Governance: a Framework for Implementation”, 2000, Washington, p.10.
[14] Sisodia, A.S. and Rao, N.J.,op.cit.
[15] The Hindustan Times, 7 September 2001
[16] Rao, A.R. and Ruekert, RW, “Brand alliances as signals of product quality”, sloan management review, vol. no. 1,
1994, pp.87-91.
[17] Fremond, o. and Capaul, M., “the state of Corporate Governance: Experiene from Country Assessments”, the ICFAI
journal of corporate governance, Vol.2, No.1 January-2003, p.26.
[18] Shadow directors are controlling shareholders or sharejolders with significant influence over the control of the
company, who exert influence over the board even though they are not de facto directors.
[19] Gupta, A., “ Corporate Governance Reporting by Indian Companies: A Content Analyses Study “, The ICFAI
Journal of Corporate Governance, Vol. 2, NO. 4, October-2003, p.19.
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journal of corporate Governance, vol. 2, No. 4, October-2003, p.19.
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shareholders from gaining a full and fair picture of the company‟s financial situation until it was too late.
[22] Vittal, N., “corporate governance: principles and objectives”, Vision, Vol.2, No.2, July-December 1998, pp.18-22
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[29] Neumann, R. and Voetmann, T., “CEO Turnover and Corporate Governance: Evidence from the Copenhagen Stock
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What committees were formed to address corporate governance issues?

What committees were formed to address corporate governance issues?

International Journal of All Research Education and Scientific Methods (IJARESM), ISSN: 2455-6211

Corporate Governance Practices in India: Issues and

Key Words: OECD, Whistle Blowing, Audit Committee, Auditors

IJARESM Publication, India >>>> www.ijaresm.com Page 259

Various Committees’ Recommendations

Recommendation of Naresh Chandra Committee:

IJARESM Publication, India >>>> www.ijaresm.com Page 260

1) Meetings of the Board should be conducted at least four times in a year

The desirable recommendations are

The Organization for Economic Cooperation and Development (OECD) Code

The Green Bury Committee Report –

IJARESM Publication, India >>>> www.ijaresm.com Page 261

Latest Developments in Corporate Governance

1. Controlling the Position of Chief Executive Officer

IJARESM Publication, India >>>> www.ijaresm.com Page 262

b. Encouraging research capability in the area of corporate governance.

9. SEBI initiatives for strengthening Corporate Governance

10. Governance by Financial Institutions:

11. Role played by Credit Rating Agencies:

Issues and Challenges

IJARESM Publication, India >>>> www.ijaresm.com Page 263

Practices of Indian MNCs

IJARESM Publication, India >>>> www.ijaresm.com Page 264

GTL CORPORATE GOVERNANCE REPORT

IJARESM Publication, India >>>> www.ijaresm.com Page 265

o Review annual accounts and audited statements

Rating Agency initiatives

Professional Bodies Initiatives

Securities and Exchange Board of India Initiatives

IJARESM Publication, India >>>> www.ijaresm.com Page 266

Department of Company Affairs Initiatives

Stock Exchange Initiatives

IJARESM Publication, India >>>> www.ijaresm.com Page 267

Suggestions for Corporate Governance

IJARESM Publication, India >>>> www.ijaresm.com Page 268

Alternative Corporate Governance Mechanisms

Table 1.2 Corporate Governance - A Global

IJARESM Publication, India >>>> www.ijaresm.com Page 269

IJARESM Publication, India >>>> www.ijaresm.com Page 270

IJARESM Publication, India >>>> www.ijaresm.com Page 271

NOTES AND REFERENCES

[1] Thomas, M., “Board Games”, Time, 8 February 1993, p.54.

IJARESM Publication, India >>>> www.ijaresm.com Page 272

IJARESM Publication, India >>>> www.ijaresm.com Page 273

IJARESM Publication, India >>>> www.ijaresm.com Page 274

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