Subject Name : Corporate Governance

Module :5
Faculty Name : Dr. Raies Hamid
Welcome back CG learners!!!!
 Module 5
Corporate Governance in Indian
Scenario
 Module 5 – Syllabus
Corporate governance in Indian scenario- emergence of CG
issues in India- Implementation of Birla committee
recommendations- Need for standardization of CG rating system-
Pioneers in CG practices. Land mark cases in corporate frauds in
recent years, Enron fraud, world com fraud, AIG insurance case,
baring bank case, Lehman Brother case, Sathyam case, Tata
finance case, Sahara case.
1. Emerging Issues of
Corporate Governance
in India

2. Birla Committee
Recommendation

3. Corporate
Governance Rating
System

4. Landmark Corporate
Frauds
 Emerging CG Issues in India
1. Getting the Board Rights: Trouble in getting independent directors
on board.
• Example: Many Indian companies find it hard to attract good independent directors
because existing members don't want to share control.

2. Performance Evaluation of Directors: Not having good ways to

measure how well directors are doing.
• Example: Some companies don't regularly review how directors are performing,
which makes it hard to know if they're doing a good job.
 Emerging CG Issues in India
3. Value-based Corporate Culture: Struggle to build a company
culture based on good values.
• Example: Even though companies say they care about honesty and fairness,
sometimes they prioritize making quick money over doing what's right in the
long run.
4. Removal of BOD by the Promoters: Conflicts about removing
board members by the people who started the company.
• Example: Sometimes, the people who started the company use their power to
kick out directors who disagree with them, which isn't fair.
 Emerging CG Issues in India
5. Accountability to Shareholders: Companies not being
responsible enough to their shareholders.
• Example: Some companies don't talk enough with their shareholders or ignore
their concerns, which can make shareholders lose trust in the company.
6. Corporate Governance and HRM: Making sure that how the
company is run is also reflected in how employees are managed.
• Example: Companies should make sure that employees are rewarded for
doing the right thing and following the company's values.
 Emerging CG Issues in India
7. Different Shareholders Pattern: Dealing with lots of different types
of shareholders.
• Example: Some companies have many different kinds of shareholders, like big
investors, small investors, and the people who started the company. It can be hard
to keep everyone happy.
8. Holistic View: Looking at everything about how the company is run,
not just one part.
• Example: Companies should think about how their decisions affect the
environment, society, and their own long-term success, not just short-term profits.
 Emerging CG Issues in India
9. Role of Credit Rating Agencies: Making sure that companies that
rate how good other companies are doing are honest and fair.
• Example: Sometimes, companies that rate other companies' performance aren't
fair or honest, which can cause problems for investors.
CRISIL: Making markets function better
10.Insider Trading: Stopping people from using secret information to
make money.
• Example: Sometimes, people use information that's not supposed to be public to
make money on the stock market, which isn't fair to other investors.
 Emerging CG Issues in India
11.Disclosure, Transparency & Accountability: Making
sure that companies tell everyone what's going on and
are responsible for what they do.
• Example: Companies should share accurate and timely
information about how they're doing and what they're
doing, so everyone knows what's going on.
LINK
BHOPAL GAS TRAGEDY – A SOCIAL, ECONOMIC, LEGAL AND ENVIRON
MENTAL ANALYSIS
 Bing Vide
os
KUMAR
MANGALAM
BIRLA
COMMITTEE REPORT ON
CORPORATE GOVERNANCE

KUMAR MANGALAM BIRLA COMMIT

TEE REPORT (youtube.com)
 PREFAC
E

Corporate governance has been gaining attention in

India beyond academic circles. It's now recognized as
important in industries and capital markets.

A special group led by Shri Kumar Mangalam Birla,

appointed by SEBI, is addressing issues related to
insider information involving stock exchanges,
intermediaries, financial institutions, mutual funds, and
professionals.
 KUMAR MANGALAM BIRLA
COMMITTEE
In early 1999, the Securities and
Exchange Board of India (SEBI) formed a
committee led by Shri Kumar Mangalam
Birla, a member of the SEBI Board, to
improve corporate governance standards.

The committee's report was the first

comprehensive effort to create a "Code of
Corporate Governance" tailored to the
conditions of governance in Indian
 Objectives
1. The Kumar Mangalam Birla Committee
recommendations apply to all listed
companies in India. Point to
remember
2. These recommendations are mandatory Listing
Agreement:

for compliance, meaning companies must A listing

agreement is
a contract
follow them by law. between a
company and
a stock

3. The aim is to ensure uniform standards of exchange. It's

about putting
the company's
corporate governance across all listed shares up for
trading.

companies.
 Objectives

4. Applicability extends regardless of the size or

industry of the company.
5. The goal is to promote transparency,
accountability, and fairness in company
operations.
6. Universal application aims to foster investor
confidence and protect shareholder interests.
 THE RECOMMENDATION OF THE COMMITTEE

• Board Composition: Ensure a diverse and

independent board of directors to provide
effective oversight.
• Audit Committees: Strengthen audit
committees to ensure accurate financial
reporting and internal controls.
• Disclosure: Emphasize transparent
disclosure of financial and non-financial
information to shareholders and
 THE RECOMMENDATION OF THE COMMITTEE

• Remuneration: Establish guidelines for

executive remuneration to ensure fairness
and alignment with company performance.
• Shareholder Rights: Empower
shareholders with more rights and
information to make informed decisions.
• Ethical Conduct: Promote ethical conduct
and integrity throughout the organization's
culture and operations.
 THE RECOMMENDATION OF THE COMMITTEE

• Risk Management: Implement robust risk

management processes to identify and mitigate
potential risks.
• Compliance: Ensure compliance with regulatory
requirements and industry standards to maintain
legal and ethical standards.
• Training and Development: Provide training and
development opportunities for board members and
executives to enhance their governance knowledge
and skills.
 THE RECOMMENDATION OF THE COMMITTEE

• Whistleblower Protection: Establish

mechanisms to protect whistleblowers and
encourage reporting of misconduct or unethical
behavior.
• Sustainability: Integrate environmental, social,
and governance (ESG) factors into decision-making
processes to promote sustainable business
practices.
• Stakeholder Engagement: Foster active
engagement with stakeholders to understand their
concerns and incorporate their feedback into
 APPLICABILITY OF THE
RECOMMENDATIONS

Mandatory and Non-mandatory

recommendations Point to
 The committee divided the recommendations into two remember
Listing
categories, namely, mandatory and non-mandatory. Agreement:
A listing
agreement is
a contract
between a
 Mandatory recommendations for corporate governance company and
a stock
are like must-do rules. They're specific and enforced exchange. It's
about putting
through agreements with stock exchanges. the company's
shares up for
trading.

 Non-mandatory recommendations are more like

suggestions. They're not strict rules, but they're still
important for best practices in running a company.
MANDATORY RECOMMENDATIONS
1. Composition of board of directors should be optimum
combination of executive & non-executive directors.
2. Audit committee should contain 3 independent
directors with one having financial and accounting
knowledge.
3. Remuneration committee should be setup
4. The Board should hold at least 4 meetings in a year with
maximum gap of 4 months between 2 meetings to
review operational plans, capital budgets, quarterly
results, minutes of committee’s meeting.
MANDATORY RECOMMENDATIONS

5. Director shall not be a member of more than

10 committee and shall not act as chairman of
more than 5 committees across all companies
6. Management discussion and analysis report
covering industry structure, opportunities,
threats, risks, outlook, internal control system
should be ready for external review
7. Any Information should be shared with
shareholders in regard to their investments.
 NON-MANDATORY
RECOMMENDATIONS
1. Role of Chairman: The committee suggests guidelines for the role of the
chairman, though adherence to these guidelines is not mandatory.

2. Remuneration Committee of the Board: It recommends establishing a

committee to decide on executive pay, but this isn't compulsory.

3. Shareholder's Right for Receiving Half-Yearly Financial

Performance: While shareholders should receive financial updates, it's
not mandatory for these to include critical matters like changes to the
company's structure.

4. Sale of Whole or Substantial Part of the Undertaking: The

recommendation advises on the sale of significant parts of the company,
but companies aren't obligated to follow it.
 NON-MANDATORY
RECOMMENDATIONS
5. Corporate Restructuring: While restructuring guidance is
provided, companies aren't required to implement these
suggestions.

6. Further Issue of Capital: Recommendations regarding

issuing more company shares are provided, but companies
can choose whether or not to follow them.

7. Venturing into New Business: The committee suggests

guidelines for entering new business areas, but this is
optional for companies to adopt.
 CLAUSE 49
Clause 49 refers to a specific section within the Listing Agreements
enforced by SEBI. It outlines regulations related to corporate governance
practices that listed companies must adhere to. These are
1. Board Composition: Clause 49 specifies who should be on the board,
focusing the need for independent directors to ensure fairness.

2. Board Functions: It explains what the board should do, like making
important decisions and protecting shareholders' interests.

3. Audit Committees: This part says companies must have committees to

check finances and make sure everything is done properly.
 CLAUSE 49

4. Disclosures: Companies have to share important

information promptly, like how they're doing financially and if
they're doing business with related parties.

5. Remuneration Policies: It talks about how companies

decide how much to pay their top executives, making sure
it's fair and based on performance.

6. Compliance and Reporting: Companies must follow these

rules and tell everyone if they're doing so in their yearly
reports, showing they're being open and honest.
 Recommendations by committee using
Clause 49

a. The committee proposes applying the recommendations to all listed companies,

including their directors, management, employees, and associated professionals,
following a specified timetable.
b. These recommendations will be enforced for both private and public sector listed
companies according to a set schedule.
c. Recognizing potential challenges, especially for smaller companies, the
committee acknowledges the need for restructuring and gradual compliance.
d. SEBI implemented these recommendations through Clause 49 of the Listing
Agreements, progressively integrating them over time.
Suggested List of items to be Included in the report on
Corporate Governance in the Annual Report of Companies

1. A brief statement on company’s

philosophy on code of governance.
2. Board of Directors.
3. Audit Committee.
4. Remuneration Committee report.
5. Shareholders Committee.
6. General Body meetings.
7. Disclosures.
8. Means of communication.
9. General Shareholder Information.
It’s a time to think!!!!!
 Can we rate the corporate
governance practicing companies??
Can you mention some of the corporate
governance rating agencies in India?
 Bing Videos

ISS ESG Fund Rating (youtube.com)

Banks get a downgrade from Moody's. Here are th

e 10 lenders impacted. - CBS News
Lawsuit accuses rating agencies of fraud in compa
ny evaluations (youtube.com)

Why India has a POOR CREDIT RATING Despite b

eing the fastest growing ECONOMY? : Detailed
CaseStudy (youtube.com)
 Name of Rating Agencies
Name Services
• Institutional Shareholder Services (ISS) - Proxy Voting, Governance
Advisory
• Glass, Lewis & Co. - Proxy Research, Shareholder Activism
• Sustainalytics - ESG Research, Sustainability Ratings
• Ethisphere Institute - Ethics Recognition, Compliance Programs
• MSCI ESG Research - ESG Ratings, Sustainable Investing
• Governance Metrics International (GMI) Ratings - Governance Risk Assessment
• Standard & Poor's Governance Services - Governance Assessments, Risk
Evaluation
• Moody's ESG Solutions - ESG Assessments, Credit Analysis
 Why to Rate companies on CG?
• Risk Assessment: CG ratings help assess investment risk by evaluating
governance practices.
• Accountability: They ensure companies are accountable for their actions and
decisions, fostering transparency.
• Trust Building: Ratings promote trust among stakeholders, signaling ethical
behavior and responsible management.
• Performance Enhancement: Good governance leads to better long-term
performance, e
• Encouraging companies to follow high standards.
• Investor Attraction: Higher ratings attract investment by signaling
trustworthiness and transparency to investors.
 Most Popular Rating System
Categories
Category 1: Board Structure and Accountability
• Board Independence: Assessing independence from
management.
• Board Size: Evaluating optimal board size.
• Attendance: Monitoring board meeting attendance.
• CG Code Disclosure: Ensuring transparency in governance code
adherence.
Most Popular Rating System
Categories
Category 2: Executive and Director
Compensation
• Compensation Level: Assessing amount and
form of compensation executives and
directors.
• Evaluation Criteria: Reviewing performance
metrics determine compensation .
• Pension Plans: Examining structure and
sustainability of pension plans to Executives
and directors
 Most Popular Rating System
Categories
• Category 3: Audit
• Appointment: Examining auditor selection
process with out management influence.
• Independence: Ensuring auditors'
independence for unbiased financial reports .
• Financial Discussion: Monitoring financial
issue discussions during audit meetings for
oversight and risk management.
 Most Popular Rating System
Categories
• Category 4: Shareholders' Rights and
Takeover Practices
• One Share One Vote System: Assessing if each
share carries one voting right, ensuring fair
representation of shareholders' interests.
• By-laws Amendment: Reviewing procedures for
amending or creating by-laws, safeguarding
shareholder rights and transparency in governance
changes
 Pioneers in Corporate Governance Practices

Individuals, organizations, or companies that have played a significant role

in shaping and advancing governance standards globally.
• Cadbury Committee: Formed in the UK in 1991,
it addressed governance issues comprehensively,
resulting in the Cadbury Code, a landmark in
governance reform.
• OECD Principles: Introduced by the
Organization for Economic Co-operation and
Development in 1999, these principles provided a
global framework for governance standards,
influencing policies worldwide.
 Pioneers in Corporate Governance Practices

• Institutional Investors: Pension funds,

mutual funds, and sovereign wealth funds have used
their power as shareholders to push for more openness,
responsibility, and rights for shareholders in companies.
• Shareholder Activists: Through proxy voting,
resolutions, and campaigns, activists have pressured
companies to improve governance practices, aiming to
enhance shareholder value and corporate
accountability.
 Pioneers in Corporate Governance Practices

• Regulatory Bodies:
Government agencies like the SEC(Securities and
Exchange Commission) in the US, the FCA
(Financial Conduct Authority) in the UK, and
regulatory bodies (SEBI) in India are essential.
They make rules for good business conduct and
make sure companies stick to them for fair and
honest practices.