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4/25/2012

Corporate Governance

By,
Kaushal Mandalia
kaushal@insightHR.co.in

Learning Objective
To gain experiential perspective of the emerging
concepts of Corporate Governance
To know recent happening In Indian Corporate
Sector.
Few Practical Examples

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Knowledge and Skill without Integrity is


a Lethal Combination

Market Share
Profit
Market Cap
Expansion, Growth

Integrity
Honesty
Transparency
Ethics, Values

Corporate Governance

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Is it Required for India?


Is it really important?

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Other Statistics
 The

National Skill Mission will train 500 million Indians in


various skills by 2022.
 Over the last two years, Indian engineering and project export
companies have executed 2488 projects across 104 countries.
 Indorama started manufacturing polyester in Indonesia in 1991.
It has emerged as the largest producer of polyester in the
ASEAN region.
 Indias automobile exports grew 33% in FY2010, with Made in
India vehicle being exported to over 90 Countries.
 Around 540 million people are under the age of 25. This figure
is 4 times bigger than Japan, 25 times bigger than Australia. At
this growth rate, it will surpass the population of Europe by
2020.

Do we really need Corporate


Governance?

Quality

Corpor
ate
Govern
ance

Sustain
able
Growth

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Stakeholders of Corporate Governance

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Low Level
of
Corporate
Governance

Unethical
Practices
Resulting in
High Risk
Business

High Level
of GREED

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Absence of Corporate Governance


Cases of Serious Malpractice.

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Angels V/S Demons


The Biggest IT SCAMSTAR

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Case of Satyam
T he biggest corporate scam in India has come from one of the most
respected businessmen. Satyam founder Byrraju Ramalinga Raju
resigned as its chairman after admitting to cooking up the account
books.
His efforts to fill the "fictitious assets with real ones" through Maytas
acquisition failed, after which he decided to confess the crime.
A fraud involving about Rs 8,000 crore (Rs 80 billion),
Following the confession, India's fourth largest IT company lost a
staggering Rs 10,000 crore (Rs 100 billion) in market capitalisation as
investors reacted sharply and dumped shares, pushing down the scrip
by 78 per cent to Rs 39.95 on the Bombay Stock Exchange. US.

The Confession
"I am now prepared to subject myself to the laws of the land and face
consequences thereof," Raju said in a letter to SEBI and the Board of
Directors, while giving details of how the profits were inflated over the
years and his failed attempts to "fill the fictitious assets with real ones.
Raju said the company's balance sheet as of September 30 carries
"inflated (non-existent) cash and bank balances of Rs 5,040 crore (Rs
50.40 billion) as against Rs 5,361 crore (Rs 53.61 billion) reflected in the
books."

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The Big Bull

The Pied Piper of Stock Market

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Big Bull : Harshad Mehta


He was known as the Big bull
He triggered a rise in the BSE in year 1992 by trading in shares at
a premium across many segments
Taking advantages of the loopholes in the banking system,
Harshad and his associates triggered a securities scam diverting
funds to the tune of Rs 4000 crore (Rs 40 billion) from the banks
to stockbrokers between April 1991 to May 1992
.

Big Scam
Harshad Mehta worked with the New India Assurance Company before
he moved ahead to try his luck in the stock markets.
Mehta soon mastered the tricks of the trade and set out on dangerous
game plan. Mehta has siphoned off huge sums of money from several
banks and millions of investors were conned in the process.
 His scam was exposed, the markets crashed and he was arrested and
banned for life from trading in the stock markets

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Big Scam
He was later charged with 72 criminal offences. A Special Court also
sentenced Sudhir Mehta, Harshad Mehta's brother, and six others,
including four bank officials, to rigorous imprisonment (RI) ranging from
1 year to 10 years on the charge of duping State Bank of India to the
tune of Rs 600 crore (Rs 6 billion) in connection with the securities scam
that rocked the financial markets in 1992. He died in 2002 with many
litigations still pending against him.

Follower of Big Bull

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Scam : Ketan Parekh


Ketan Parekh followed Harshad Mehta's footsteps to swindle
crores of rupees from banks. A chartered accountant he used to
run a family business, NH Securities.

Ketan however had bigger plans in mind. He targeted smaller


exchanges like the Allahabad Stock Exchange and the Calcutta
Stock Exchange, and bought shares in fictitious names.

Scam : Ketan Parekh


His dealings revolved around shares of ten companies like Himachal
Futuristic, Global Tele-Systems, SSI Ltd, DSQ Software, Zee Telefilms,
Silverline, Pentamedia Graphics and Satyam Computer (K-10 scrips).
Ketan borrowed Rs 250 crore from Global Trust Bank to fuel his ambitions.
Ketan alongwith his associates also managed to get Rs 1,000 crore from the
Madhavpura Mercantile Co-operative Bank.

According to RBI regulations, a broker is allowed a loan of only Rs 15 crore


(Rs 150 million). There was evidence of price rigging in the scrips of Global
Trust Bank, Zee Telefilms, HFCL, Lupin Laboratories, Aftek Infosys and
Padmini Polymer
.

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C R Bhansali Scam

C R Bhansali Scam
The Bhansali scam resulted in a loss of over Rs 1,200 crore (Rs 12 billion).
He first launched the finance company CRB Capital Markets, followed by
CRB Mutual Fund and CRB Share Custodial Services. He ruled like a
financial wizard 1992 to 1996 collecting money from the public through
fixed deposits, bonds and debentures. The money was transferred to
companies that never existed
.
CRB Capital Markets raised a whopping Rs 176 crore in three years. In
1994 CRB Mutual Funds raised Rs 230 crore and Rs 180 crore came via
fixed deposits. Bhansali also succeeded to to raise about Rs 900 crore
from the markets.

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C R Bhansali Scam
However, his good days did not last long, after 1995 he received
several jolts. Bhansali tried borrowing more money from the
market. This led to a financial crisis.

It became difficult for Bhansali to sustain himself. The Reserve


Bank of India (RBI) refused banking status to CRB and he was in the
dock. SBI was one of the banks to be hit by his huge defaults.

The Cobblers Scam Sohin Daya

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The Cobblers Scam Sohin Daya


Sohin Daya, son of a former Sheriff of Mumbai, was the main
accused in the multi-crore shoes scam. Daya of Dawood Shoes,
Rafique Tejani of Metro Shoes, and Kishore Signapurkar of Milano
Shoes were arrested for creating several leather co-operative
societies which did not exist.

They availed loans of crores of rupees on behalf of these fictitious


societies

The Cobblers Scam Sohin Daya


The scam was exposed in 1995. The accused created a fictitious
cooperative society of cobblers to take advantage of government
loans through various schemes.

Officials of the Maharashtra State Finance Corporation, Citibank,


Bank of Oman, Dena Development Credit Bank, Saraswat Cooperative Bank, and Bank of Bahrain and Kuwait were also charge
sheeted.

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Dinesh Dalmiyas Stock Scam

Dinesh Dalmiyas Stock Scam


Dinesh Dalmia was the managing director of DSQ Software Limited
when the Central Bureau of Investigation arrested him for his
involvement in a stocks scam of Rs 595 crore (Rs 5.95 billion).
Dalmia's group included DSQ Holdings Ltd, Hulda Properties and
Trades Ltd, and Powerflow Holding and Trading Pvt Ltd. Dalmia
resorted to illegal ways to make money through the partly paid
shares of DSQ Software Ltd, in the name of New Vision Investment
Ltd, UK, and unallotted shares in the name of Dinesh Dalmia
Technology Trust.
Investigation showed that 1.30 crore (13 million) shares of DSQ
Software Ltd had not been listed on any stock exchange.

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The Fake Stamp Racket

The Fake Stamp Racket


H e paid for his own education at Sarvodaya Vidyalaya by selling
fruits and vegetables on trains.
He is famous (or infamous) for being he man behind one of The big
scam that rocked India.
The fake stamp racket involving Abdul Karim Telgi was exposed in
2000. The loss is estimated to be Rs 171.33 crore (Rs 1.71 billion),
it was initially pegged to be Rs 30,000 crore (Rs 300 bilion), which
was later clarified by the CBI as an exaggerated figure.

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The Fake Stamp Racket


In 1994, Abdul Karim Telgi acquired a stamp paper license from the
Indian government and began printing fake stamp papers.
Telgi bribed to get into the government security press in Nashik
and bought special machines to print fake stamp papers.
Telgi's networked spread across 13 states involving 176 offices,
1,000 employees and 123 bank accounts in 18 cities.

The Money Market Fraud

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The Money Market Fraud


Virendra Rastogi chief executive of RBG Resources was charged
with for deceiving banks worldwide of an estimated $1 billion.

He was also involved in the duty-drawback scam to the tune of Rs


43 crore (Rs 430 milion) in India.
The CBI said that five companies, whose directors were the four
Rastogi brothers -- Subash, Virender, Ravinde and Narinder -exported bicycle parts during 1995-96 to Russia and Hong Kong by
heavily over invoicing the value of goods for claiming excess duty
draw back from customs.

UTI Scam

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UTI Scam
Former UTI chairman P S Subramanyam and two executive
directors -- M M Kapur and S K Basu -- and a stockbroker Rakesh G
Mehta, were arrested in connection with the 'UTI scam'.

UTI had purchased 40,000 shares of Cyberspace On September 25,


2000, for about Rs 3.33 crore (Rs 33.3 million) from Rakesh Mehta
when there were no buyers for the scrip. The market price was
around Rs 830. The CBI said it was the conspiracy of these four
people which resulted in the loss of Rs 32 crore (Rs 320 million)
.

UTI Scam
Subramanyam, Kapur and Basu had changed their stance on an
investment advice of the equities research cell of UTI. The
promoter of Cyberspace Infosys, Arvind Johari was arrested in
connection with the case. The officals were paid Rs 50 lakh (Rs 5
million) by Cyberspace to promote its shares.

He also received Rs 1.18 crore (Rs 11.8 million) from the company
through a circuitous route for possible rigging the Cyberspace
counter.

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Home Trade

Home Trade
Home Trade had created waves with celebrity endorsements. But
Sanjay Agarwal's finance portal was just a veil to cover up his
shady deals. He swindled a whopping Rs 600 crore (Rs 6 billion)
from more than 25 cooperative banks.

The government securities (gilt) scam of 2001 was exposed when


the Reserve Bank of India checked the acounts of some
cooperative banks following unusual activities in the gilt market.

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Home Trade
Co-operative banks and brokers acted in collusion in abid to make
easy money at the cost of the hard earned savings of millions of
Indians. In this case, even the Public Provident Fund (PPF) was
affected.

A sum of about Rs 92 crore (Rs 920 million) was missing from the
Seamen's Provident Fund. Sanjay Agarwal, Ketan Sheth (a broker),
Nandkishore Trivedi and Baluchan Rai (a Hong Kong-based NonResident Indian) were behind the Home Trade scam.

Home Trade
Gilt funds, as they are conveniently called, are mutual fund schemes
floated by asset management companies with exclusive investments in
government securities.
The schemes are also referred to as mutual funds dedicated exclusively
to investments in government securities. Government securities mean and
include central government dated securities, state government securities
and treasury bills.
The gilt funds provide to the investors the safety of investments made in
government securities and better returns than direct investments in these
securities through investing in a variety of government securities yielding
varying rate of returns gilt funds, however, do run the risk.. The first gilt
fund in India was set up in December 1998. .

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Being hurt is something you cant stop


from happening. But being miserable is
always your choice.

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Board of Directors
STATUTORY DUTIES
 To file return of allotment: Section 75 .
 Not to issue irredeemable preference share or shares or share





redeemable after 20 years


To disclose interest (Section 299-300)
To disclose receipt of compensation from transferee of shares
(Sec.320)
Duty to attend Board meetings
To convene statutory, Annual General meeting (AGM) and also
extraordinary general meetings [ Section 165,166 &169]

Board of Directors
 To prepare and place at the AGM along with the balance sheet and

profit & loss account a report on the companys affairs including the
report of the Board of Directors (Section 173, 210 & 217).
 To authenticate and approve annual financial statement (Section

215).
 To appoint first auditor of the company (Section 224).
 To appoint cost auditor of the company (Section 233B).
 To make a declaration of solvency in the case of Members voluntary

winding up (Section 488)

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Board of Directors
1. Duty of good faith
2. Duty of Care
3. Duty Not to Delegate

GENERAL DUTIES

LIABILITIES
A. Liabilities to the Company
Breach of fiduciary duty
Negligence
Mala fide Acts

Board of Directors
1. Liabilities to third parties
1. Liabilities under Companies Act
1. Prospectus
2. With regard to allotment
3. Unlimited Liability
4. Fraudulent Trading
2. Liability for breach of Statutory Duties
3. Liability for acts of co-directors
4. Criminal Liability

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Corporate Governance
 CORPORATE GOVERNANCE is the system by which companies are
directed and controlled by the management in the best interest of the
shareholders and others ensuring greater transparency and better and timely
financial reporting. The Board of Directors are responsible for governance of
their companies.
 CORPORATE GOVERNANCE is needed to create a corporate culture of
consciousness, transparency and openness. It refers to combination of laws,
rules, regulations, procedures and voluntary practices to enable the companies
to maximize the shareholders long-term value. It should lead to increasing
customer satisfaction, shareholder value and wealth.

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Corporate Governance in India


Indian Corporate Scenario was more or less stagnant till 90s
The position and goal of the Indian corporate sector has changed a lot
after the liberalization.
Indias reform program make a steady progress since 1994.
India with its 20 million shareholders , is one of the largest emerging
market in terms of market capitalization.

Good Corporate Governance Initiatives


 CII came up with first Voluntary code of conduct in 1998
SEBI incorporation of Clause 49
SCOPE Awards for Excellence and Outstanding Contribution to the
Public Sector Management launched in 1996-97
In 2002, a SCOPE Centre for Excellence in Corporate Governance was
established
Aim to promote and inculcate good corporate governance practices
among public enterprises as a means of enhancing their competitiveness

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Clause 49
Clause 49 lays down guidelines for composition of the board
including the number and qualities of independent directors,
remuneration of board members, code of conduct, and the
constitution of various committees (including audit),
disclosures, and suggested contents of annual reports.
These changes are aimed at moving Indian companies rapidly
up the evolutionary path towards business processes and
management oversight techniques.

Insurance Industry Ethical Concerns


Cases related to
Mis-Representation of the Information
Pressurising Underwriters to clear the case
Inflating the Profits, to show them as ready for IPO
Audit Issues : Change in the policy terms after issuing
the policies,

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Legal Provision under IPC


No specific provisions in IPC for insurance fraud
Action at best is limited to:
Section 205. Cheat by personation
Section 420. Cheating and dishonestly inducing delivery of property
Section 464: making a false document including signs and seals and
forgery
Section 405. Criminal breach of trust suited to life insurance
All these legal provisions are not adequate to prosecute an individual
legally due of time and cost involved

Corporate Governance Findings / Issues


by Insurance Institute of India
No Fraud management policy documented
Action limited to:
Rejection of claims for serious fraud all the cases
Cancelation of policy in serious fraud cases and not
abuse or mis-declaration
Most companies do not have an underwriting loop for
cases of mis-declaration and non-declaration
Action against agents limited
Legal action against fraud not very common
Recoveries rare

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Good Corporate Governance Cases

State Bank of India


Governed by act of Parliament(SBI Act 1955)
President of India is the Largest Shareholder (59.41%)
Non residents(FII,NRI,GDR) (12.33%)
Institutions (10.90%)
Resident Individuals(6.7%)
Board of Directors
3 Executive Directors and 7 non Executive Directors
Chairman, 2 MD (Executive Directors)
4 directors- elected by Shareholders
3 directors- nominated by GOI
Non EDs include Academicians, Journalists,
Professionals

Business

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State Bank of India - Committee


9 Committees
Executive Committee
Audit Committee
Shareholders/Investors Grievance Committee,
Risk Management Committee
Special Committee for Monitoring of Large Value Frauds
(Rs.1crore and above)
Customer Service Committee
Technology Committee
Committee on Rural Sector Business
Remuneration Committee of the Board

L&T
The Company's philosophy on Corporate Governance is built on a
rich legacy of fair and transparent governance and disclosure
practices
Larsen & Toubro (L&T) has been judged as India`s Best Managed
Company by leading business magazine `Business Today` and its
knowledge partner `Ernst & Young` (2008)
The Company had adopted Corporate Governance and disclosure
practices much before these were mandated by legislation.

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L&T Governance Structure


The Company has four tiers of Corporate Governance structure
Strategic Supervision
Executive Management
Strategy & Operational Management
Operational Management
The four-tier governance structure besides ensuring greater
management accountability and credibility, facilitates increased
autonomy of businesses, performance discipline and development
of business leaders, leading to increased public confidence

Wipro
Wipro has been named amongst The Five Best Companies in
Corporate Governance Practices in Asia/Pacific in 2007 by MZ
Consult
As on March 31, 2009,the Board comprised of 6 Independent
Directors out of a total strength of 10 directors

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Wipro
Corporate Governance philosophy is put into practice in
Wipro through the following four layers, namely
1. Governance by Shareholders
2. Governance by Board of Directors
3. Governance by Sub-committee of Board of Directors
4. Governance of the management process

Wipro
Highlight of Wipros CG TRANSPARENCY
The following are very clearly shared on the web:
Charters of the Committees
Wipro's ombudsprocess for Non employees and Employees
Corporate governance guidelines
Code of ethics for principal & finance officers
Code of business conduct and ethics
NYSE Corporate Governance Report 2009

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Challenges with Corporate Governance


Implementation
Goal Congruence
Turning Corporate Governance Rules/Regulations in
Everydays Action and Behaviour
Synergy of Think Act Communicate
Ownership

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While
Training
is only
Showing
the path,
Walking
on to it
should
be your
Choice

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4/25/2012

By,

Kaushal Mandalia
kaushal@insightHR.co.in

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