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Reforming corporate governance

Rights and equitable treatment of shareholders:[Organizations should respect the rights of shareholders and help shareholders to exercise those rights. They can help shareholders exercise their rights by openly and effectively communicating information and by encouraging shareholders to participate in general meetings. Interests of other stakeholders: Organizations should recognize that they have legal, contractual, social, and market driven obligations to non-shareholder stakeholders, including employees, investors, creditors, suppliers, local communities, customers, and policy makers.

Role and responsibilities of the board. The board needs sufficient relevant skills and understanding to review and challenge management performance. It also needs adequate size and appropriate levels of independence and commitment
Integrity and ethical behavior: Integrity should be a fundamental requirement in choosing corporate officers and board members. Organizations should develop a code of conduct for their directors and executives that promotes ethical and responsible decision making.

Disclosure and transparency: Organizations should clarify and make publicly known the roles and responsibilities of board and management to provide stakeholders with a level of accountability. They should also implement procedures to independently verify and safeguard the integrity of the company's financial reporting. Disclosure of material matters concerning the organization should be timely and balanced to ensure that all investors have access to clear, factual information.

Internal corporate governance controls

Monitoring by the board of directors: The board of directors, with its legal authority to hire, fire and compensate top management, safeguards invested capital. Regular board meetings allow potential problems to be identified, discussed and avoided. Whilst non-executive directors are thought to be more independent, they may not always result in more effective corporate governance and may not increase performance. Different board structures are optimal for different firms. Moreover, the ability of the board to monitor the firm's executives is a function of its access to information. Executive directors possess superior knowledge of the decision-making process and therefore evaluate top management on the basis of the quality of its decisions that lead to financial performance outcomes, ex ante. It could be argued, therefore, that executive directors look beyond the financial criteria. Internal control procedures and internal auditors: Internal control procedures are policies implemented by an entity's board of directors, audit committee, management, and other personnel to provide reasonable assurance of the entity achieving its objectives related to reliable financial reporting, operating efficiency, and compliance with laws and regulations. Internal auditors are personnel within an organization who test the design and implementation of the entity's internal control procedures and the reliability of its financial reporting Balance of power: The simplest balance of power is very common; require that the President be a different person from the Treasurer. This application of separation of power is further developed in companies where separate divisions check and balance each other's actions. One group may propose company-wide administrative changes, another group review and can veto the changes, and a third group check that the interests of people (customers, shareholders, employees) outside the three groups are being met. Remuneration: Performance-based remuneration is designed to relate some proportion of salary to individual performance. It may be in the form of cash or non-cash payments such as shares and share options, superannuation or other benefits. Such incentive schemes, however, are reactive in the sense that they provide no mechanism for preventing mistakes or opportunistic behavior, and can elicit myopic behavior. Monitoring by large shareholders and/or monitoring by banks and other large creditors: Given their large investment in the firm, these stakeholders have the incentives, combined with the right degree of control and power, to monitor the management.

External corporate governance controls

External corporate governance controls encompass the controls external stakeholders exercise over the organization. Examples include:

competition debt covenants demand for and assessment of performance information (especially financial statements) government regulations managerial labour market media pressure takeovers

Current developments
A new Companies Act is being drafted that will reportedly allow class

action lawsuits and statutory derivative suits. MCA-21, a programme to streamline the Ministry of Company Affairs (MCA) and deter corrupt practices by tis officers. The SEBI Act is being amended to give the regulator, among other things, more powers of investigation and prosecution. The institute of Chartered Accounts (ICAI) has formed a committee to create a road map for the convergence of Indian accounting standards with international Financial Reporting standards by 2008. SEBI formed a committee on disclosures and accounting standards in late 2006 to advice on disclosure requirements for listed companies and to facilitate the implementation of ICAI accounting standards as they relate to the capital markets. A code of corporate governance is being developed for public-sector enterprise in both listed and unlisted companies.

S.E.B.I

Introduction
In 1988 the Securities and Exchange Board of India (SEBI) was established by the Government of India through an executive resolution, and was subsequently upgraded as a fully autonomous body (a statutory Board) in the year 1992 with the passing of the Securities and Exchange Board of India Act (SEBI Act) on 30th January 1992. In place of Government Control, a statutory and autonomous regulatory board with defined responsibilities, to cover both development & regulation of the market, and independent powers have been set up. Paradoxically this is a positive outcome of the Securities Scam of 1990-91. The basic objectives of the Board were identified as: to protect the interests of investors in securities; to promote the development of Securities Market; to regulate the securities market and for matters connected therewith or incidental thereto.

 The Securities and Exchange Board of India (Sebi) has come out with a code of

Sebi code

conduct for its members of the governing board. The code is aimed at avoiding conflict of interest and ensuring that members conduct their duties in a manner that does not compromise on their ability to accomplish the regulators mandate. The code was adopted by the board in its meeting held on December 4 2006. Sebi has made the code applicable to all members, including its Chairman. The code includes provisions such as disclosing holdings of shares by members and their families, non-acceptance of gifts from intermediaries and avoiding conflict of interests that can affect decisions of the board. Sebi has also said that no member shall hear or decide on any matter where he has a conflict of interest. Sebi Chairman then C B Bhave has followed certain high moral standards after taking charge. Prior to becoming Sebi chief, Bhave was the Managing Director of NSDL against which the market regulator had issued an order in the 2006 IPO scam. To avoid conflict of interest, Bhave stayed away from board meetings where the NSDL issue was to be discussed. The code also outlines what members should do while dealing with intermediaries in their personal capacities. It requires them to disclose their professional relationship with market intermediaries in the past five years. Whole-time members are barred from holding any office of profit.

CODE OF CONDUCT FOR INTERMEDIARIES OF MUTUAL FUNDS:

1. Take necessary steps to ensure that the clients interest is protected. 2. Provide full and latest information of schemes to investors in the form of offer documents, performance reports, fact sheets, portfolio disclosures and brochures, and recommend schemes appropriate for the clients situation and needs. 3. Highlight risk factors of each scheme, avoid misrepresentation and exaggeration, and urge investors to go through offer documents/key information memorandum before deciding to make investments. 4. Avoid colluding with clients in faulty business practices such as bouncing cheques, wrong claiming of dividend/redemption cheques, etc. 5. Maintain confidentiality of all investor deals and transactions. 6. When marketing various schemes, remember that a clients interest and suitability to their financial needs is paramount, and that extra commission or incentive earned should never form the basis for recommending a scheme to the client. 7. All employees engaged in sales and marketing should obtain AMFI certification. Employees in other functional areas should also be encouraged to obtain the same certification.

CODE OF CONDUCT FOR MERCHANT BANKERS:

A Merchant Banker shall make all efforts to protect the interests of

investors. A Merchant Banker shall maintain high standards of integrity, dignity and fairness in the conduct of its business. A Merchant Banker shall fulfill its obligations in a prompt, ethical, and professional manner. A Merchant Banker shall at all times exercise due diligence, ensure proper care and exercise independent professional judgment. A Merchant Banker shall endeavor to ensure that copies of the prospectus, offer document, letter of offer or any other related literature is made available to the investors at the time of issue or the offer. A Merchant Banker shall not discriminate amongst its clients, save and except on ethical and commercial considerations. A Merchant Banker shall not make any statement, either oral or written, which would misrepresent the services that the Merchant Banker is capable of performing for any client or has rendered to any client.

Continued..
A Merchant Banker shall not make untrue statement or suppress any

material fact in any documents, reports or information furnished to the Board. A Merchant Banker shall ensure that the Board is promptly informed about any action, legal proceedings etc., initiated against it in respect of material breach or non compliance by it, of any law, rules, regulations, directions of the Board or of any other regulatory body. A Merchant Banker shall ensure that good corporate policies and corporate governance are in place.

SEBI's new takeover code better than the earlier one :

While the formal takeover code has been in place since

1997, SEBI constituted a Takeover Regulation Advisory Committee in September 2009 to review the extant norms and make them more relevant for the present day scenario. While the committee submitted its report in July 2010, SEBI has, subsequent to its internal deliberations, taken up most of the recommendations and made sweeping changes to the old norms. To start with, the trigger point for open offer is increased from 15 per cent level to 25 per cent and the open offer size, after the 25 per cent trigger is hit, is enhanced from the current 20 per cent to 26 per cent. With the new trigger of 25 per cent, a potential acquirer can continue making creeping acquisition of an additional 10 per cent stake in the target company.

What the committee proposed originally :

Take the case of Hotel Leela Ventures, where ITC currently

holds 14.5 per cent stake. Under the new norms, ITC can hike its stake by another 10 per cent and still stay away from making an open offer for additional 26 per cent as would be required now. More interesting would be the case of EIH Ltd - the hospitality company which owns and operates the Oberoi chain of hotels - wherein Reliance and ITC are currently holding 14.5 per cent stake each. However, if an acquirer acquires at least 25 per cent stake in a company, then he has to come out with minimum 26 per cent open offer. This will result in making an acquirer ending up with "controlling" 51 per cent stake in the target company.

The intent behind a revised Takeover Code : The revised norms will change the dynamics of mergers and acquisitions in India. However, the revisions are not as dynamic as proposed by Takeover Committee, which proposed an open offer size of 100 per cent after the trigger was hit. Had the 100 per cent norm been implemented, it would have freed up other shareholders off the company though the acquirer company would have had to be additionally "serious" and commit more money than otherwise. However, even under the current norms the cost of acquisitions goes up substantially. Because earlier after the 15 per cent trigger, the acquirer had to seek another 20 per cent and hold a cumulative 35 per cent in the target company. The cost would now be higher as the acquirer needs to hold 51 per cent subsequent to the open offer.

 For smaller investors, removal of non-compete fees which is in

line with Takeover Committee recommendations, is good news.

Undoubtedly the new code will herald an era of aggressive corporate wars. Promoters can no longer sit idle with minority holding. They have to put there money into the equities of companies they wish to retain. Tatas and Birlas and more companies and big business tycoons should watch out, because the game will get tough!
SEBI Chairman UK Sinha

Thank you