Governance as an effective tool for growth

1. Governance as an effective tool for growth - Parag Basu General Manager, SEBI

2. Governance • Dates back to Ancient India • Focus on principles of good administration and governance • Kautilya’s Arthashastra • References in Indian literature “Proper examination of issues coming up, impartial consideration and doing justice to every one is good governance” – Thirukkural by Tiruvalluvar • Relevance to Corporate India – and the need for good governance

3. Relevance to India Inc. • Various stakeholders • Consumers • Shareholders • Employees • Suppliers • Lenders • Regulatory agencies / Government • Society • Accountability of corporates to stake holders

4. Good corporate governance aims at :- • Objective decision making • Transparent organizational practices • Value creation for stake holders • Accountability of the management • Effective control on corporate affairs • Better brand building

5. Corporate Governance – the Indian Experience • Revised norms effective since January 01, 2006 • Continuous listing requirement • Broad framework under Clause 49 of the Listing Agreement • Extant laws on par with global standards

6. Indian Corporate Governance requirements – Major provisions • Composition of the Board • Audit Committee, Remuneration Committee & Shareholders’ Grievances Committee – Composition and scope • Disclosures • Related party transactions • Accounting treatments • Remuneration of Directors • CEO/CFO Certification of financial statements • Report on Corporate Governance

7. Enforcement and Compliances • SEBI receives quarterly reports from Stock Exchanges • SEBI advises SEs to encourage/exhort the companies to ensure compliance • To have a demonstrative effect, SEBI has initiated adjudication proceedings against a total of 20 companies both from the private and public sector • Tick Box Compliances: Cannot be ruled out

8. It pays to follow good governance • A recent study by Governance Metrics International (GMI) shows corporations that are rated highest for governance practices have delivered superior investment returns • Even in a survey conducted by the CLSA, covering Asia-Pacific Markets, it was found Return on Capital employed and Return on Equity of the companies which had higher corporate governance ratings are high as compared to the companies which had lower corporate governance ratings

9. CG ratings • ICRA gives Corporate Governance Rating (CGR) and Stakeholder Value and Governance Rating (SVG) • CRISIL’s Governance and Value Creation Ratings • Studies suggest companies having better rating are having better market capitalisation and giving good ROE • The ESG India Index was recently launched by Standard and Poor, CRISIL and KLD Research & Analytics comprising 50 companies, is the index of companies whose business strategies and performance demonstrate a high level of commitment to meeting Environmental, Social and Governance standards

10. Challenges… • Technical compliance vis-à-vis compliance in spirit (in the context of rule Vs principle based Regulations) • Measuring corporate governance to assess its adequacy • Quantifying corporate governance parameters • Accounting aspect – Inadequate scrutiny of financials may result in possible unethical accounting practices going unnoticed

11. Challenges…Contd. • More stringent enforcement of extant laws • How ‘independent’ are the independent directors and accountability of the same • Globalization of businesses – stakeholders across various parts of the world; hence, a need to satisfy a wider gamut of participants so as to drive growth. • Setting up of governance standards for SMEs-minimising compliance costs

12. Recent Trends- Companies Bill 2008 • Requirement of Independent director even for unlisted public companies • Independent director- Defn. expanded • Material pecuniary limit – defined- 10 % or more of its gross turnover or total income during the 2 immediately preceding financial years or during the current financial year • Nominee director –not independent director • Independent director should not be a Chief Executive or director, by whatever name called, of any non-profit organisation that receives 25% or more of its income from the company, any of its promoters, directors or its holding, subsidiary or associate company or that holds two per cent. or more of the total voting power of the company;

13. Recent Trends- Companies Bill 2008 • Committees • Audit Committee (Addl. Terms of reference like valuation of undertakings, internal financial control ) • Remuneration committee (now not mandatory) • Stakeholders Relationship Committee For Companies having a combined membership of the shareholders, debenture holders and other security holders of more than 1000 at any time during a financial year

14. Recent global trends • Ill governance practices in large corporations lead to downfall of Enron, WorldCom • Poor risk management systems, imprudent investment practices, etc. lead to global financial markets melt down and the consequent credit crunch • Adverse impact on the stake holders’ interest

15. Corporate governance – a driver of growth • Fair, transparent management practices and high standards in internal quality controls result in enhanced product / service quality • Better product / service quality ensures customer satisfaction • Positive customer experience and word of mouth feedback results in greater sales and drives growth • Impact on stock market valuations and lead to wealth creation for investors

16. Auditors role in Corporate Governance • Though not have direct responsibility but Auditors provide a check on the information aspects of the governance system • Primary role is to check whether the financial information given to investors is true and fair • Investor rely on them to make economic decisions

17. Beyond enforcement • The financial markets are being globally integrated, the global investors expect the entities with which they are investing are governed competently and have good corporate governance standards • Imperative for corporate governance lies not merely in drafting a code, but in practising it and the best results would be achieved when the companies begin to treat the corporate governance principles not merely as a statutory obligation but also as a way of life

18. Beyond enforcement • Structures and rules are important because they provide a framework, which will encourage and enforce good governance; but alone, these cannot raise the standards of corporate governance. What counts is the way in which these are put to use • The real onus of achieving the desired level of corporate governance, lies in the proactive initiatives taken by the companies themselves and not only in the external measures like breadth and depth of a code or stringency of enforcement of norms

19. Thank You