INTRODUCTION

Corporate Governance may be define as a set of rule, regulation, procedure and practices
be adopted by a firm management to manage its affairs in the best interest of its stokehold
-der, especially the share holder.
Corporate governance as the acceptance by management of inalienable right of share holder as
the true owner of the corporation and of their own role as trustees on behalf of the shareholder. It
is about commitment to values, about ethical business conduct and about making a distinction
between personal and corporate funds in the management of the company.
Corporate Governance has also been defined as a system of low and
sound approaches by which corporation are directed and controlled focusing on the internal and
the external corporate structure with the intention of monitoring the action of management and
thereby mitigating agency risk which may stem from the misdeeds of corporate officers

FEATURE OF CORPORATE GOVERNANCE

Major StakeholderThe management need to manage its affairs of the firm in the
best

interest of its stakeholder.The major stakeholder in the area of corporate governance

1-Within the firm the stakeholder within the organization include

management,shareholder,and employee.
2-Outsite the firm the stakeholder outsite the organization include lender such as
bank and other investers such as debentureholder.it also include customer,supplier society.

Corporate governance factor

The first is the commitment of the board of directors and management towords
integrity and transparency in business operaion.
The second is the legal and administrative framework of the government .is public
governance is weak,we can not have good corporate governance.

Corporate Governance- The Objective

The main objective of corporate governance is the enhancement of shareholder
value,keeping in the view the interest of other shareholder.
Therefore a company need to strike a balance at all times between the need to
enhance shareholder wealth and the need to protect the interest of shareholder other
stakeholder.

Aspect of Corporate Governance

First ther is no unique structure of corporate governanace in the developed world.the
corporate governance code of each country has to be designed keeping in view the
peculiarities of the country. second company will have to greater disclosures more
tansparent explanation for major decision and better corporate value.

Reasons for corporate governance

The assertion of right by the shareholder
The new growth apportunities brought about by changes in the business environment resulting
from globalization
The singnificant presence of foreign financial investors,who have high expectation about the
quality of management.
The greater accountability on the part of the financial institution.
The international standerds of disclosures and practices.
The need to comply with the statutory authorities such as SEBI in india.

Corporate Governance ReportThe item to be included in corpoated governance report are

*A brief statement on companys philosophy on code of governance
*Composition and catrgory of board of directors
*Role of committee
*Role of shareholder committee

*Details of general body meetings

*Diclosure relating to promoters and directors interest that may conflict with the interest of the
company at large.

PRINCIPPLES OF CORPORATE GOVRNANCE

1-Ensuring the basis for an Effective Corporate Framework

*The corporate governance framework should developed with a view to its impact on overall
economic performance ,market integrity and the incentives it creates for markets participants
and the promotion of transparent and efficient market.
*The legal and regulatory requirement that affect corporate governance practices in a jurisdiction
should be consistent with the rule oflaw, transparent and enforceable
*The division of responsibilities among different authorities in a jurisdiction should be clearly
articulated and ensure that the public interest is served.

2-The Right of Shareholder and key Ownership function

1-The basic shareholder right should include the right

*secure methods of wnership registration
*convey or transfer share
*obtain relevant and material information on the corporation on a timely and regular basis
*participate andvote in general shareholder meeting
*elect and remove member of the board

2-shareholder should have the righanges.t to participate in,and to be sufficient informed

on,decision concerning fundamental corporate changes.
Amendments to the statutes,or articles or incorporation or similar governing documents of the
company.the authorization of additional shares

3-shareholder should have th apportunity to participate effective and vote in general shareholder
meeting and should be inform of the rules including voting procedures that govern general
shareholder meeting

4-marketing for corporate control should be allowed to function in an efficient and transparent
manner.

3-The Equitable Treatment of Shareholder

1-All shareholder of the same series of a class should be treated equally

2-Insider trading abusive self- dealing should be prohibited
3-Members of the board and key executives should be required to disclose to the board whether
they directly,indirectly or on behalf of third parties,have a material interest in any tansaction or
matter directly affecting the corporation

4-The Role of Stakeholder in Corporate Governance

1)The right of stakeholder that are establishe by low or through mutual agreement are to be
respected.
2)Where stakeholder interests are protected by low,stakeholder should have the apportunity to
obtain effective redress for violation of their right.

3)Performance-enhancing mechanisms for employee participation should be permitted to

devlop.
4)The corporate governance framework should be complemented by an effective insolvency
framework and by effective enforcement of credited right

5-Disclosure and transprancy

1)Disclosure should include, but not be limited to, material information

-the financial and operating result of the company
-company objectives
-major share ownership and voting rights
2)information should be prepared and disclosed in accordance with high quality standards of
accounting and financial, non financial disclosure
3)An annual audit should be conducted by an independent, competent and qualified ,audit in
order to provide and external and objective assurance to the board and shareholder.
4)External auditor should be accountable to be shareholder and owe a duty to the company to
execise due professional care in the conduct of the audit.

6) The responsibilities of the boards

The corporate governance framework should ensure the strategic guidance of the company, the
effecting monitoring of management by the board , and the board accountability to the company
and the shareholder

1)Board member should act on fully informed basis, in good faith, with due diligence and care ,
and in the best interest of the company and the shareholder.
2)Where board decision may affect different shareholder group differently,the board should treat
all shareholder fairly.
3)The board should apply high ethical standard. it should take into account the interest of
stakeholder

COMPANY AND ITS GOVERNANCE

What is a company

Company , an association of person who contribute money to a common corpus to carry on a

business ,has its origin in 1600 A.D. when a east india company established by way of royal
charter in England. The modern form of company has its genesis in the legislative department in
the mid-nineteen century in the UK. Traditionally called joint stock company. The key concept
of the company is incorporation in the legal entity separate from its owner.

Features of accompany are outline as under:

*Incorporated association
Company is an incorporated association of a person created by a low of the country.Inthe
commonwealth countries including India, British law is the basis of the company low under
which companies are formed and registered.

*Independent lagal entity

a company has a legal entity distinct and separate from it constituent members. The rights and
obligations of a company are different from that of members. Share holders are not owner or part
of owner or joint owner of the company. No member can claim any ownership rights in the assets
of the company during its existence or on its winding up. The corporate personality is clearly
distinguished from the shareholder propery. A member cannot have any insurable interest in the
property of the company.
On account of the independent corporate existence, the creditor of a company are creditors of the
company alone and their remedy lies against the company not against its shareholder.

*Separation of ownership and Management

A company is owned by a number of shareholder which is too large a body to manage the affairs
of the company .Shareholder set the objectives of the company and appoint their representatives
or agent to manage the affairs of the company on their behalf to pursue their objectives.

* Limited Liability
The liability of shareholder of a company is different from the liability of the company.
Shareholder generally have limited liability- limited to the extent o unpaid value of share help
us. Shareholder have no obligation to the company once they have paid full amount on the share
held by them. In case of losses, shareholder are not called upon to make good the losses. credited
cannot claim from the personal wealth of the shareholder.
Transferability of Shares-Share of a company are transferable .One can sell ones share of
ownership rights to an interested buyer .While in case of public companies share are freely
transferable which is provided by the low, there are some restriction in the transferability of share
of private companies.

Theoretical Aspect of Corporate Governance

Meaning of corporate governanceCorporate governance is the act or manner of governing a company. The issue has been a long
standing one over since a company marked by separation of ownership with management was
conceived
Separation of management and ownership become more focused in the early twentieth century
with the rise of many public companies in the united state and the united kingdom.berle and
means(1932) drew attention to the issue I n their book The modern corporation and private
property. The pioneering work of berle and means led to the development of corporate
governance a concept. It also promoted a plethora of a research of the subject. The phrase
corporate governance came into vogue much later in 1978.Clifford C.Nelson, president of the
American Assembly nated corporate governance is a fancy term for the various influences that
determine what a company does not do or should or should not do
Corporate governance, since it evolution as a concept, has diverse approaches and interpretation.
It steel does not have a universally settle meaning and a theoretical base.

THEORIES OF CRPORATE GOVERNANCE

*Theories of corporate governance may be broadly categorized:

Agency Theory
Stewardship theory
Stakeholder Theory and stakeholder-agency theory

Agency theory
Agency theory provides the fundamental theoretical base of corporate governance.The essence of
the theory is separation of ownership and control.sharholder as owner of the company set the
objective and acting as the principal appoint the manager as their agent to pursue their
objectives.The objectives of manager many times are different from the shareholder .Such
conflict in objectives is referred as the agency problem.
Stewardship theory
Stewardship theory of corporate governance is an alternative to the agency theory which
discount the conflict of interest between manager and owner.Theory argues that manager are in
herently trustworthy and are not prone misappropriate the fund of the investors.
The theory put forth the argument that manager are not merely agents that manager of the
shareholder they are good stewards of company and work diligently to attain high level f
corporate profit by a much larger range of human motive,.including needs for achievements
,responsibility and recognition ,as well as belief ,respect for authority and motivation.
Stakeholder Theory
Stakeholder theory adopts a broader approach and lays emphasis on the fact that corporation
must take in to account wider interest of the society while running the businesses.The essential
premise of the theory is that a company has relationship with many constituent group referred as
the stakeholder that affect and are affected by its decision.
Stakeholder Agency Theory
It is common in corporate governance literature to distinguish between shareholder and
stakeholder approaches. The shareholder approach contends maximization of shareholder interest
as the primary responsibility of companies which is to be pursued while obeying the laws of the
land. The argument is that societal utility is maximized by focusing on the interest of the
shareholder

BOARD OF DIRECTORS

Meaning and types of directors

Director is one of a body of person appointed to direct and supervise the affairs of a
company.Any person occupaying the position of the director by whatever name called may be
termed as director.Company law in india and most other countries does not distinguish between
different type of director.Nevertheless,type of directors in the board of a company has relevance
for corporate governance and has been emphasized by both researchers and practitioners.
Shadow director
In addition to those who are formally appointed as directed, any person,other than a professional
adviser, with whose instruction the instruction the director of a company normally comply is a
shadow director.In other words,where a person who is not a director exerts such an influence
over the directors of a company and those directors are accustomed to act in accordance with that
persons instruction,that persons is ashadow director
De facto Director
A de facto director is a person who are formally appointed or who is disqualified to be appointed
as directed. But who in effect occupies the position of,and act as if he were,a director.
Additional Director
Constitution of companies may allow their boards to appointment of additional directors to hold
the position of directors till the ensuring annual general meeting of the company .Additional
directors are in addition to the directors of accompany appointed at the annual general
meeting.power,right and duties of additional directors are at par with other directors.

Alternate Director
Alternate Directors is a person who is nominated to act in placeof director during his agreement
of majority of a directors .While acting as a directors, the alternate director has the same right
and duties s other directors have under the low.
Nominee Director
Nominee director is a person who is nominated to the board a major shareholder or other
contractual stakeholder such as a bank or financial institution to represent and safeguard their
interest.The nominee director appointed by the public financial institution have been widely
prevalent in the boards of most companies in India till recently.
Executives directors
Executives directors are those directors who are also involved in day to day management of the
company .Also termed as whole time directors .They are in full time employment with the
company .As they are involved in the company they may, in practice, have a specific titles and
managerial responsibilities within the company for example managing director ,finance director,
marketing directors etc.
Non-Executives Directors
Non-executive director are not involved in day to day management of the company and do not
hold any executives management position within the company .the rationale behind appointing
non executives director is that ,as they are not involved in day to day management, they can
bring an independent voice and perspective to the board..

Role and Responsibilities of Board of Directors

The prime responsibility of board of director is to determine the broad strategy of the company
and to ensure its implementation .The board needs to perform following roles.

*To established corporate objects including vision, mission and value of the company.
*To develop, review and guide broad strategy of the company
*To establish governance practices of the company and making changes as needed.
*To set performance objectives, monitor corporate performance; oversee capital expenditure,
acquisitions and divestitures
*Selecting compensating, monitoring and when necessary replacing chief executives officers and
other key executives and overseeing succession planning.
*To provide and an ultimate direction to the company
*To monitor and evaluate the implementation of the policies, strategies and business plan.
*To act as custodian of assets of the company and add value to those assets.
*To ensure that the company has adequate information, internal control and audit system in place
to meet the business objectives. Board has to ensure the integrity of companies accounting and
financial reporting systems.
*To ensures the companys compliance with all the applicable laws and its own ethical standards.
*To ensure that the communication with all the stakeholder is effective.
*To monitor the relationship with all the stakeholder by effecting communicating with them and
thereby to enhance the image of the company

Strategic Guidance and Decision Making

*Defining Corporate Philosophy and Mission
Corporate philosophy and mission is laid down by the board. It should be consistent with the law
of the land and in particular with the memorandum of association of the company. The board
should see that the corporate philosophy is broad based to reflect the expectation of the
shareholder and other stakeholder.
*Providing Strategic Decision
The board is not mandate to micro manage the affairs of the company but the give strategic
direction by showing the way ahead and to lead the company. The board has to ensure that a
strategic plan is adopted for the company and specific goal and objective are set up and methods
and time frame for comparing actual results with the plan are in place.
*Setting Policy
Endures internal budget planning guidelines, and processes for the department of the company
Set policies for resources allocation.
Set recruitment policies
Set performance evaluation policies to recognize individual and group contribution.
Overseeing Corporate Activities
Developing a comprehensive framework for reporting on performance of the company.
Ensuring that the company has adequate management information system and robust control
system in place.
Ensuring that satisfactory arrangement are in the place for internal and external audit.
Reviewing the effectiveness of its processes and system on continuous basis.

Appointment of the CEO

Board is responsible for identifying potential candidates for the position of chief executive
officer. The CEO is responsible for the executive management of the company .He is the senior
executives in charge of the executives team, to whom the other entire executive managers report.
Succession Planning
This is a vital aspect of the boards duty .Many a time, the companies suffer on account of not
being able to replace their CEOs. Succession planning, thus, becomes important for the board to
ensure that right person with right skills is in the right place at the right time.

Setting Business Strategies

Strategic planning concerns expansion of existing capacity, capitalization efforts, entry or exit
from market, acquisitions and take-over, buy back of securities, raising funds through loans,
issuing of shares and other securities, venturing into new businesses etc. Director should apply
multiple skills, experience and interest to the strategic planning. This involves anticipation of the
changing market scenario, changes in the capital market, currency rates, regulatory changes,
changes in the demand and supply dynamics, consumer preferences etc.

Setting Risk Management Framework

Risk are the uncertainties associated with future events which may affect the profitability of a
company in a major way and even threaten the survival of the company. It is inherent in any
business activity and cannot be eliminated completely. Risk management is concerned with
identifying and managing a firms exposure to different risk like financial, operational,
technology, business and legal risk

BOARD

OF COMMITTEE

Committees of the board are use for various purposes, the main being to assist the dispatch of
business by considering it in more detail than would be convenient for the whole board.
Audit Committee
Audit committee, the most important of the board sub-committees was originated in the US in
the 1970s. It was conceived as an interface between the external auditors and the board. To
lessen the dominance of the senior executives in the audit process, the committee was designed
to comprise entirely or predominantly of independent non-executives directors.
Remuneration committee
Imperative of good governance demand fairness and transparent procedures for setting the
remuneration level of executive directors and other senior executive. Allegedly excessive
executive directors remuneration remains a concern around the worlds. To avoid conflict of
interest, executives direction should not determined their own pay structure.
Composition of remuneration committee
To ensure fairness and transparency in determination of remuneration structure of the executives,
it is absolutely vital that remuneration committee consist entirely of independent non-executives
directors. The chairman of the company may be member of the committee provided he meets the
criteria of independent directors.
Nomination committee
As stated earlier, the director of a company are appointed-reappointed by the shareholder of a
company at the annual general meeting of a company. The appointment or reappointment, in
practice takes place on the recommendation of the directors.
The nomination committee is responsible for formulating policy and making recommendation to
the board of directors on nomination, appointments of directors and board succession.

Committee develops selection procedures for candidates, and considers different criteria of
selection including appropriate professional knowledge and industry experience.

Models

of Corporate Governance

The comparative corporate governance literature has described corporate governance models
along several dimensions. The important being the ownership structure, role of bank and other
intermediaries, worker participation, legal protection and corporate philosophy are the other
notable dimensions which have attracted the attention span of researchers.
Following four broad models of corporate governance can be distinguished:
Anglo-Saxon Model
The corporate governance system of the U.S.A,U.K, Canada, Australia and Commonwealth
countries including India is broadly categories as the Anglo-Saxon model.
Based on market capitalism, the model is characterized by a well developed stock market with
substantial degree of liquidity and depth. The market capitalization of domestic stock expressed
as a percentage of GDP is also very high
The striking feature of the Anglo-Saxon model is the structure of ownership pattern. The
comparative study by La Porta et al. (1999) show the equity shares of typical Anglo-Saxon firm
as widely dispersed. Influences of trade union are much less in the Anglo-Saxon models as
compared with the European model of Germany.
The Anglo American countries have a low and declining rate of unionization as the model does
not allow for labour to participate in strategic management decision.
German model
German model, also known as Continental Europe model, is prevalent in Germanic countries
such as Germany, Switzerland, Australia, and Netherlands. This model is based on the
stakeholder theory of corporate governance. Comparatively less developed financial market,

closely held large block holding of share, inter-firm cross shareholding, dominant role of bank
and employee representatives in the two tier board of director are the striking feature of
corporate governance system in large parts of the Continental Europe.
A key feature of the German model is the dual-board system. All public limited companies and
private limited companies with more than 500 employees have a supervisory board and
executives board. The three organ of corporate governance in German model:
German model is based on the prominent role of bank and an extensive cross ownership link. It
is common for the universal bank in Germany ,Australia, Switzerland to act as suppliers of
bank loan and equity capital
Japanese Model
The classic Japanese business model is that of the Zaibastu, which is a totally integrated group
engaged in manufacturing, distribution, trade and finance across a wide range of businesses. The
present Japanese model comprises a small number of dominant group called Keiretsu. Most of
thes group are diversified and vertically integrated by cross shareholder and relationship with
number of small businesses. This group is close to the governance as group often employ retired
civil servant and work together on government sponsored committees also.
The government plays an important role of supervision and control over the corporate activities.
Retired government officers are placed on the board of the companies to seek preferential
treatment from the government. The retired bureaucrats also ensure effective implementation of
the government policies.
The main source of fund of Japanese companies is mostly banks and other financial institutions
which provide debts as well as equity capital by a consortium led by a major bank called main
bank.
Family-based model
Family based model of corporate governance is prevalent in many emerging as well under
developed country of the world, particularly in East Asia, South America, Middle East and India.
The model has not received much attention in the west dominated corporate governance

literature. The studies of la porta et al, and claessens et al have reported that over 70 percent of
the listed firm in East Asian countries have a dominant shareholder which is usually a family.
And the families together own more than 50 percent of the issued share capital:
Many families have development the business in these countries from its inception. Initially,
family businesses were set up with internal funds. As the enterprises grew with time, the role of
bank and outside equity become important as suppliers of fund. But neither the bank nor the
outside equity shareholder exert control over the family enterprises. This is often on account of
weak regulatory framework and apathy of the investors which is ingrained in the cultural milieu
of the countries. In general the business families are taken in high esteem in these countries
recognizing their role in the economic development of the country.
Most of the families controlling the conglomerate of firm secure their control via complex
ownership structures such as pyramid, cross-shareholding or inter-locking directorship. These
structure allow the controlling the families to exercise a great deal of control over the companies
despite small shareholding.

Corporate Governance codes

Meaning of Code
Corporate governance code refers to a set of prescription and practices that provide guidelines
with regard to the effective control of a company in the interest of its shareholder and other
stakeholder. The code present a comprehensive set of norms on the composition and role of the
board of the directors, relationship with the shareholder and top management, and disclosure of
financial as well as non-financial information. The objective of the code is to improve the overall
corporate governance of firms. And to draw adequate disclosure of corporate governance
practices to enable informed judgment by investors and other stakeholder.
In this chapter, corporate governance codes or best practice recommendations put forth by
authorities or committees in major developed and emerging countries of the world are presented.

Initiatives in India on the development of the corporate governance code are reviewed separately
for a detailed analysis.

Code in the United Kingdom

The movement for better corporate governance evolved in response to the failure of big
corporation. U.K. was once the first countries in the worlds to take a nationwide initiative in this
direction consequential to the collapse of corporation such as the Maxwell publishing group,
BCCI Bank and policy peck. The London Stock Exchange and Bank of England set up a
committee in 1991 under the chairmanship of sir Adrian Cadbury to look in to the financial
aspect of corporate governance.
Code in the U.S.A.
The need for good corporate governance dawned even earlier in the U.S.A. the stock market
crash of 1929 did considerable damage to investor confidence. The main reason for the crash was
analysed to be lack of understandable information to shareholder, and diversity in accounting
practices due to absence of national regulation. Securities and Exchange Commission, a federal
regulatory agency was consequently set up in 1934. Again way back in1978 the New York Stock
Exchange was the first to require every listed company to have audit committee comprising
solely of independent directors. Most of suggestion of the Commission focused on the audit
committee.

Codes of Australia
Corporate governance system of Australia is on the lines of the Anglo Saxon model. In1987,
Australia Stock Exchange was formed by amalgamating six independent stock exchanges which
were functioning since the nineteen century. ASX corporate governance Council was formed
in2002 by bringing together 21 diverse shareholder and investment group. The council chaired
by the Australian Stock Exchange Market is mandated to developed principle- best corporate
governance framework for the Australian listed companies.

Code in Germany
The German corporate governance model is best on the dual board system comprising of a
supervisory board and an executive board. The governance the companies in Germany is based
on the co- determination principle which provides for compulsory board level participation of
employees. One third to one half of the directors on the supervisory board is elected by the
employees. The supervisory board consist of both full time employees and of non-executives
outsiders such as professional advisors to the company, representatives from bank and other
firms with which the corporation has a relationship.
Codes in South Africa
South Africa, although an emerging economy, has some of the most advanced corporate
governance principles and practices in the world. Corporate governance was institutionalised in
South Africa with the formation of the King Committee on corporate governance in 1992 under
the auspices of the Institute of the directors.
Codes in Malaysia
Corporate governance system in Malaysia is broadly based on the Anglo-Saxon model. The main
legislation concerned with corporate activity in Malaysia in the companies act, 1965 which is
based on UK companies Act of 1948. The securities Commission under the Ministry of Finance
regulate the capital market.
Codes in South Korea
Corporate governance system in South Korea is pre-dominantly family based. The chaebols, the
descendant of the individual who founded Korean business group, wield considerable control in
various companies through both direct equity holding and cross holding of shares. East Asian
financial crisis of 1997 brought the issue of corporate governance to the fore front in South
Korea. Many analysts including the world bank pointed to weak corporate governance
characterized by the lack of disclosure and transparency, ineffective boards and family
dominance as the major factors behind the financial and economic collapse of the affected Asian
economies.

Models of Corporate Governance in India

Corporate governance has evolved in India gradually through various stages front of system of
management by managing agent around 1850 in to the present model which resembles to a large
extent with Anglo-American model
Three models of corporate governance are discernible in India which proceeded in the following
order:
*The Managing Agency Model(1850-1956)
*The Business House Model(1956-1991)
*The Post liberalization Model(199 to date)
Managing Agency Model
The Model of corporate governance in India in the initial period was the managing agency
model. The managing agency enjoyed a predominant position in the corporate and business
structure of the Indian economy for over a century from the time Joint Stock Company was
introduced in India by the companies act of the1850. Joint stock companies and managing
agency grew simultaneously till 1956 when the new Indian companies act, 1956 was passed
which finally abolished the managing agency system in 1970.
Business House Model
After independence of the country, a new companies Act enacted with the object of achieving a
minimum standard of good behavior and conduct by the companies. It is a substantive law for
corporate business in India which provides a legal framework for regulating the corporate
activities including governance and administration of companies, rights of shareholders and
creditors, and disclosures of information for stakeholder.
The Post - Liberalisation Mode

In the wake of liberalization and globalization process as part of the structural adjustment
programme unleased in India1991, the key tenets of the Anglo-American model of corporate
governance were adopted. The Indian companies act,1956 which was already in line largely with
the basic Anglo-American model was revamped to reduced its complexity and bureaucratic
interferences. The capital issue control act,1947 was scrapped removing the control of the
government over the issue of securities. The securities and exchange board of India was set up
ininin1992.

Regulatory Framework of Corporate Governance in India

Indian corporate sector consist of private and public limited companies both in the government
and non-government sector. There were 847165 companies registered in India as on 2010.these
81623 were the public limited companies in the non government sector and 1199 in the
government sector. Although India has 21 recognised stock exchanges have emerged as the
nation-wide stock exchanges contributing more than 99 percent of the total turnover of the Indian
stock market.
The legal framework in India is base on the British common law. The corporate sector is
governed by the companies act of 1956 as amended. The companies act aims to achieve a
minimum standard of good behaviour and conduct by the company management. It is a
substantive law for corporate business in India which provides a legal framework for regulating
the corporate activities including governance and administration of companies, rights of
shareholder and directors, disclosure of shareholder of information relevant for shareholder. The
companies act,1956 closely parallels the Anglo-American model wherein a single-tier boards
role is that of governance, while management is responsible for day to day operation of the
company.
The Act is administered by the ministry of corporate affairs and enforced by the Company Law
Board and the courts.
The Securities and Exchange Board of India regulates the stock exchanges, stock brokers,
share transfer agents, merchant banks, portfolio managers, other market intermediaries collective

investment scheme and primary issues. It prohibits fraudulent and unfair trade practices, and
regulates the substantial acquisition of shares and takeovers.

Regulatory Provision in respect of the Principles of Corporate Governance

The Right of Shareholders
Share Ownership:- In India shares may be held in physical form or in dematerialized form.
Registration in a depository/ share Certificate is proof of ownership of shares
Transferability of Shares-: Shares are freely transferable in case of a public company
Obtaining relevant information-: Annual and half yearly statement are mailed to shareholder
quarterly account are published in newspapers and posted on the websites of the companies and
stock exchanges.
The Equitable Treatment of shareholder
Minority shareholder and redressal of grievances: The companies act confer right to shareholder
in matters of oppression by the majority of management. The lesser of the100 shareholder or
those holding10 percent of voting rights can apply to the CLB for redress.
Insider trading and self dealing: SEBI Regulation, 1992, criminalizes insider trading and abusive
self dealing. Anybody in possession of price sensitive information is considered an insider.
Role on stakeholder in Corporate Governance
Protection of rights of stakeholder : Creditor can petition the CLB, SEBI, MCA, Board for
Industrial and Financial Reconstruction, civil and high courts, as well as dept recovery tribunals
for violation of their rights. Employees and environmental group can seek redress through the
civil and high courts.
Access to relevant information : Company is required to post the relevant information on the
company and stock exchange websites.

Disclosure and transparency

Disclosure and material matter: Companies are required to prepare and sent the Annual Reports
to the shareholder, the stock exchange, MCA, and ROC. Its content is required by statute. It
includes a chairman statement, management discussion and analysis, director report, balance
sheet, profit and loss account notes, etc. Quality of disclosure: The quality of financial disclosure
for listed companies is determined by the MCA, SEBI, and ICAI, ICAI lays down the parameters
of accounting and auditing standards.
The responsibility of the board
Board accountability to the company and the shareholder: Companies in India are required to
have a unitary board structure. The board is accountable to the shareholder. It ensures the
strategic guidance of the company and monitors the management. The members of the board of
director are considered to hold the fiduciary position of a trustee for the company.
The boards responsibility to ensure compliance with applicable law: Under the companies act,
every company is required to employ a qualified Company secretary or file with the ROC a
Secretarial Compliance Certificate from a qualified Company Secretary.
Key function of the board: As per the companies act, the board of director of a company has the
power to do all such act as the company is authorizes to do. These include issue of shares,
debentures, and loan; making call on shares; power to recommend rate of dividend; power to fill
casual vacancy of directors and auditors.
It is boards responsibility to appoint senior management.

Provision of the Companies Bill 2011concerning Corporate Governance

The companies bill 2011, introduced in the parliament in December 2011 is expected to
overhaul the corporate law of the country to strengthen corporate governance and increased
transparency. The new law proposes to make it mandatory for big companies to adopt corporate
social responsibility policy and set aside fund for it. The provisions of the Bill concerning
corporate governance are as under:
Disclosure of Promoters Holding
Every listed company shall file a return in the prescribed form with the Registrar with respect to
change in the number of shares held by promoters and top ten shareholder of such company,
within fifteen days of such changes
Voting by Electronic means
The central government may prescribe the class or the classes of companies and manner in which
a member may exercise his right to vote by the electronic means.

National Financial Reporting Authority

*The central Government may constitute a National Financial Reporting Authority to provide for
matters relating to accounting and auditing standard.
*Monitor and enforce the compliance with accounting and auditing standards recommended by it
in such manner as may be prescribed;
*perform such other function as may be prescribed.
Corporate Social Responsibility
Every company having net worth of rupees five hundred corer or more, during any financial year
shall constitute a Corporate Social Responsibilities Committee of the Board consisting of three
of more directors, out of which at least one director shall be an independent director.

The Boards report shall disclose the composition of the Corporate Social Responsibility
Committee.
Audit and Auditors
Every company shall, at the first annual general meeting, appoint and individual or a firm as an
auditor who shall hold office from the conclusion of that meeting till the conclusion of its sixth
annual general meeting and thereafter till the conclusion of every sixth meeting and the manner
and the procedure of selection of procedure of auditor by the member of the company at such
meeting shall be such as may be prescribe.
No listed company or a company belonging to such class or classes of companies as may be
prescribed shall appoint of re-appoint:
The central government may, by rules, prescribe the manner in which the companies shall rotate
their auditors.
Audit committee
The Board of Directors of every listed company and such other class or classes of companies, as
may be prescribed, shall constitute an audit Committee.
The audit Committee shall consist of a minimum of three directors with independent directors
forming a majority. Every audit committee of a company existing immediately before the
commencement of this act shall, within one year of such commencement, be reconstituted in
accordance with sub section
Nomination and Remuneration Committee
The board of director of every listed company and such other class classes of companies, as may
be prescribed shall constitute the Nomination and Remuneration Committee consisting of three
or more non- executive director out of which not less than one half shall be independence
directors. The Nomination and remuneration Committee shall identify person who are qualified
to become directors and who may be appointed in senior management in accordance with the
criteria laid down, recommend to the board their appointed and removal and shall carry out
evaluation of every directors performance.

Class Action
Such number of member, of members, depositor or depositors or any class of them, as the case
may be as are indicated in sub section may, if they are of the opinion that the management or
conduct of the affair of the company are being conducted in a manner prejudicial to the interest
of the company or its member or depositors for seeking all or any of the following orders,
namely.

To restraint the company from committing an act which is ultra vires the articles of

memorandum of the company.

To restrain the company from committing breach of any provision of the companies
memorandum of article.
Special Courts
The central government may, for the purpose of providing speedy trial of offences under
this Act, by notification, established or designate as many special courts as may
necessary.
A special court shall consist of a single judge who shall be appointed by the central
government with the concurrence of the chief justice of high court whose jurisdiction the
judge to be appointed is working.

Liability for Fraud

Without prejudice to any liability including repayment of any debt under this Act or any other
law for the time being in force, any person who is found to be quilt of fraud , shall be punishable
with imprisonment for a term which shall not be less than six month but which may extent to ten
years and shall also be liable to fine which shall not be less than the amount in the fraud, but
which may extent to three time the amount involved in the fraud. Where the fraud in question
involves public interest, the term of imprisonment shall not be less than three years.

Corporate Governance Practices in India

In the Anglo-Saxon countries U.S, U.K, Australia and Canada- the primary corporate
objectives is maximizing the shareholders value, although there is a growing recognition to
address the other stakeholders interest to maximized shareholder value over the long-term. The
Narayana Murty Committee also affairs the aim of good corporate governance as enhancement
of long term value for its shareholder and all other partner. The key objective of good corporate
governance of most of companies in India as stated in their philosophy statement is enhancement
of long term shareholders value keeping in view the interest of other stakeholder. Some cases
in point are:
Role of Board of director
Most corporate governance guideline and codes affirm the board of directors as the focal point of
corporate governance being collectively responsible for the success of the company. The board
of directors is the central mechanism for oversight and accountability in the corporate
governance system entrusted with the direction of corporation, including responsibility for
deciding how the board itself should be organized, how it should function, and how it should
order priorities. The responsibilities of the board include setting the companys strategic aims,
providing the leadership to put them into effect, supervising the management of the business and
reporting to shareholder on their stewardship.
Board meeting Frequency
Number of meeting of board of directors of a company is an indicator of boards efforts in
discharging its role and its involvement in the effective government of the company. While most
of code of best practice world over lay down that the board should meet sufficiently regularly to
discharge its responsibilities effectively, Section 285 of the Indian companies act 1956 and also
the clause 49 require a company to hold at least 4 board meeting in a year with a gap not more
than 3 month between the consecutive meeting.
Board size
With the statutory of minimum three directors on the board of the public companies, the size of
the board of typically family manage companies in India use to be constrained by the compulsion

To accommodate family member and associates. Another important factors was the presence of
nominees directors appointed on the board of assist companies by the financial institution. With
the statutory Codes of Corporate Governance being in vogue, the board size has become more
important an issue as the requirement of non-executives directors and independent directors on
the board of the companies are linked with the total number of directors.
Board Composition: Independent Directors
Composition of directors has undergone a rapid transformation worldwide following the
publication of corporate governance guideline and code of best practice which call for a majority
of the board to be comprised of independent directors. Definition of independence varies. The
Cadbury Code, for example , states non executives directors should bring an independent
judgment to bear on issue of strategy, performance, resources, including key appointment, and
standard of conduct. The majority. The majority should be independent of management and free
from any business or other relationship which could materially interfere with the exercise of the
their independent judgment, apart from their fees and shareholding

Board Composition Practices

As pointed out earlier, traditionally Indian companies were by and large one family controlled
and in a sizable proportion of listed companies, the board of director comprises of all nonexecutive director. As per the guptas study covering the period 1982-83, the proportion of
executive director was only 15.7 percent out of 2007 directorship in 225 companies surveyed.
The study of kapur (1991) also pointed out that in over 50 percent of companies. The proportion
of executive director to total director ranged between 10-30 percent. This was owing to the
compulsion of families controlling many companies. a family firm moving into the second
generation may find that, whilst some family members continue to be directly involved in the
management of the firm, other where now outside the firm and shareholder only. Calls for nonexecutive director to represent the non-management family shareholder on the board may now
Aries in India, the nominees of promotes are non-executive director continue to wield
considerable power over the companies since the managing agency days.

Independent Directors: practices in India

Indian companies began to induct independent director on their board from the year 2000-01
largely to meet the requirement of the mandatory provision of the statutory code. Although, a few
company such as Infosys, Nicholas piramal (now piramal health care), atlas copco took a lead in
this direction after the publication of CII code in the year 1999. Despite voluntary, the CII code
was responded . Those companies not only adopted the recommendation of the code also.
Most important, however is the practice adopted by the companies in india which indicates
ticking the box exercise in most cases the first version of the SEBI code adopted a liberal
definition of independent director and left considerable scope of discretion to the management of
the companies.
Lead independent director
Higgs Review of the role and Effectiveness of non-executive Directors released in2002 in the
UK emphasized identification of a senior independent directors to be available to the
shareholder to resolve their concern and who would also regularly attend meeting of the
management. The Combined Code of the UK contains a main principle. Led by the senior
independent directors, the non-executives directors should meet without the chairman present at
least annually to appraised the chairman performance..
Attendance of Independent Directors in Board Meeting
It cannot be overemphasized that good governance of a company does not flow mechanically
from the generic structural characteristics of number of independent directed or the number of
board meeting held. What is more important is an active board and directors attendance of the
board meeting can be taken as one indicators of the involvement of independent directors in
board processes. It is heartening that average attendance of independence directors in India is
showing a positive trend as is worked out from the study.
Term of independent Directors
The companies act in India mandates the retirement of one-third of the board member every year.
The retiring directors are permitted to be re- appointed Executives directors are appointed by the

shareholder for a maximum period of five years at a time, but are eligible for re-appointment
upon completion of their term. Non-executives independent directors do not have a specified
term, but retire by rotation as per the law. While the SEBI Code is silent on the issue, Corporate
Governance Voluntary Guidelines,2009 issued by the Ministry of Corporate Affairs provides for
a maximum of three terms for independence directors.
Nomination of independent Director
Who appoints the independent directors? How of on what basis the appointment of independent
directors is made? These are important question which may have abearing on the independence
of the directors appointed. Right to appointed the directors, legally speaking is the domain of the
shareholder. When this power is usurped by a few individual shareholder of the CEO of the
company, the institution of independence directors become suspect and the board become a cozy
club.
Induction, Trading, and Development of Directors
A newly appointment directors needs to undergo in induction programmed to obtain essential
knowledge about the company and its industry. For incumbent directors, continuous updating
and professional development has become all the more important in the wake of growing
complexities of the business and rapid acceleration of new regulation and requirement. Many
codes and guidelines world over have put a considerable emphasis on training of director. In
countries like China, Malaysia, Singapore and South Korea also board members as board
member.
Evaluation of directors
Evaluation of directors by the peer group is making much headway in the US, UK and other
developed countries of the worlds. Many corporate governance code and stock exchange listing
rules recommend or require an annual assessment of the performance of individual directors.
Hampel Committee suggested that board should introduced formal procedures to assess both
their own collective performance and that of individual directors.
The combined Code in the UK lay down that the board should undertake a formal and rigorous
annual evaluation of its own performance and that of its committees and individual directors.

Corporate Governance in India: Issue and Concerns

Role of Independence Directors

Role of independent directors in the board of the companies is an issue which is of concern in
India especially after the debacle of the Satyam. Independent directors were imposed by the
regulators on the Indian board which were accustomed to work as a cozy club or rubber stamp
at times showering bouquets of praises on the moves including antics of the promoters of the
companies who usually happened to be the established industrial families. It seems not much
has changed in most of the companies in India with the advent of independent directors. The
promoters have learned to live with them slightly adjusting the way boards were functioning
before.
Role of Auditor
The companies act in India contains provision directed at independence of the auditors of the
companies. It provides for appointments of a company auditors by the shareholders of the
company in the annual general meeting. Audit committee of the company has the mandate to
recommend the appointment of the auditors. In practice, however, the auditors is appointed by
the company management, and in most cases the auditors are retained year after year for many
years. This creates conflict of interest-perverse incentives, which heightens the risk of lack of
over-sight and fraud. Audit firms compete fiercely to bag big corporate assignment.
Role of Institutional Investors
The apathetic behavior of the institutional investors reported by several surveys and studies is a
cause of concern in India. Most corporate codes worldwide including the OECD Principle of
corporate governance advise the institutional investors to intervene, state their voting policies
and exercise voting power at the general meeting of the companies. The U.K. combined code
recommends that the institutional institutional shareholder should enter into a dialogue with
companies based on the mutual understanding of objectives

Participation and Protection of Retail/ Minority Shareholders

Retail shareholder or individual shareholders, although contribute to the equity capital of
companies they have a little influence and power in the functioning of companies. the legal
framework and policy initiatives of the regulators are geared towards protection of the interest of
investors including minority shareholder. In practice, however they have no real effective right
and at times have to bear the brunt of unscrupulous promoters. The views of individual
shareholder are seldom taken seriously and their votes have virtually no impact.
Corporate Frauds and Corruption
It is widely that a culture of greed and self-interest in organization in variably lead to fraud and
inimical to corporate governance. In resent year India has seen a market increase in the number
of scams that have surfaced both and private and public sectors.
Some cases of corporate scams which rocked the country are given:
Satyam Scam(2009), 2G Spectrum Scam(2010), Mining Scam(2011), Adarsh housing Society
Fraud(2010), Housing Finance Loan(2010), Indian Premier League Scam(2010), Share Pricing
Rigging(2010), City Bank Manager Fraud(2010), IPO Scam (2005).
Insider Trading
Insider trading refers to purchase or sale of share by a person on the basic of non-public price
sensitive information and using confidential information to make a profit or avoid a loss at the
expense of other co-inventors. Although insider trading is a phenomenon, it is relatively high in
countries like India, China, Russia, Venezuela and Mexico, resulting in much higher volatility in
share prices.
Family-controlled Companies
As pointed earlier, corporate sectors in India is dominated by the companies belonging to the
industrial house. The traditional of family dominance is entrenched in the Indian corporate
governance since the managing agency times. Most of the Indian companies are liked extended
Indian families , a maze of complex holding all interlinked together giving the shape of a
pyramid ruled by a patriarch who is the family head and promoter of group companies.

Corporate Governance in Un- listed Companies

Corporate governance practices in India have gained impetus after the adoption of the Securities
And Exchange Board of India appointed Kumar Mangalam Birla Committee Report on corporate
governance. The report was a timely intervention to keep a check on the uninhibited corporate
misdememeanors rampant in India.
Small and medium Enterprises
Small and medium enterprises play and important role in the Indian economy. Besides acting as
an entrepreneurial engine, they are also the largest employment generators. The majority of
companies in India are small- to- medium enterprises which often view corporate governance
with skepticism only relevant to large companies.
Corporate Governance Rating
Corporate governance rating is the assessment by independent agencies, of corporate governance
practices being followed in a company. Such a rating may contribute to the process of open,
transparent and timely information sharing in a market characterized by the information
asymmetry. The market participant cans guage the level and quality of corporate governance of
the rated companies. This could bring down the risk premium associated with the equity
investment and may lower down the price volatility.
Multiplicity of Regulatory Agencies
The regulatory framework in India places the oversight of listed companies partly with the
Ministry of Company Affairs, partly with the Securities and Exchange Board of India and partly
with the stock exchanges. In addition, in case of banking companies, Reserve Bank of India, and
insurance Regulatory and Development Authority exercise power of supervision over insurance
companies.