Speaking against the subject: Group 4 208 Abhinav Singh Khanduja 209 Aayush Sharma 215 Nalini Katiyar

220 Mohit Rathi 236 Kriti Singh 261 Keshav Kishore

Flow of Presentation
What is Corporate Governance Importance of Corporate Governance Increasing Role of Institutional Investors Importance of Social Responsibility Growing Number of Scams Globalisation Indifference on the part of Shareholders Mergers and Acquisitions SEBI Conclusion

What is Corporate Governance

Corporate Governance is a system of making management

accountable towards the stakeholders for effective management of companies

The underlying principles of Corporate Governance revolve

around three basic interrelated segments viz. Integrity and Fairness, Transparency and Disclosures, Accountability and Responsibility procedures, practices and implicit rules that determine the ability of a company to make managerial decisions vis--vis its claimants in particular, its shareholders, creditors, customers, the State and employees

According to CII, corporate governance deals with laws,

Importance of Institutional Investors in Corporate Governance

Managers activities are potentially constrained by a

number of factors that constitute and influence the governance of the corporations that they direct
An increasingly important factor affecting governance

worldwide is the role of the institutional investor

Institutional investors can exert direct influence on

managements activities through their ownership, and indirect influence by their ability to trade their shares

Importance of Institutional Investors in Corporate Governance

Institutional Investors can better monitor managerial

performance since it is not just the separation of ownership and control but the diffuse nature of ownership which disincentivises effective monitoring
With large shareholdings by institutional investors,

this problem of diffuse ownership is overcome and there is better monitoring of managerial action

NEED FOR CG
If the founder of the company was allowed to design and implement a

corporate charter he likes. He may not clearly address the issues faced by other shareholders and thus conjure inefficient rules.
An externality may be defined as a good generated as the result of an

economic activity, whose benefits or costs do not accrue directly to the parties involved in the activity.
ID alone cannot play an effective role in isolation despite their

commitment to ethical practices. They cannot stop a decision that is detrimental to the members individually, but if they act collectively, then they can act prudently before arriving at any such decision.

Contd
The increasing number of scams, disordered politics, culture and

linguistic divide and discouraging attitudes of government toward investments tarnish Indias corporate image at the world stage.
The 2G scam and the Nira Radia tapes have washed the image of India

as it includes every single constituency the business world, government, politicians and media.
The Satyam Computer Services financial scandal .This has put a big

question on the role of quality of corporate governance, role of auditors and the regulatory bodies of India.
loan-for-bribe' scam reveals that real estate giants like Adani Group,

Lavasa & officials of public sector banks like Central Bank of India, Bank of India Punjab National and a top official of the LIC Housing Finance were involved in the scam.

Contd
Concentration of greater financial power and authority in a lesser

number of individuals.
Violations of foreign exchange rules and regulations.

Large scale diversion of funds to associate companies and risky

ventures.
Unfocussed business decisions leading to losses. Preferential allotment of shares to promoters at low prices, Exploited the weaknesses in the Accounting Standards to inflate profits

and understate liabilities.

Corporate Social Responsibilities (CSR)

Corporate Social Responsibility is the continuing commitment by

business to behave ethically and contribute to economic development while improving the quality of life of the workforce and their families as well as of the local community and society at large.
An obligation, beyond that required by the law and economics, for a

firm to pursue long term goals that are good for society .
About how a company manages its business process to produce an

overall positive impact on society.

Contd
Conducting business in an ethical way and in the interests of the wider

community
Responding positively to emerging societal priorities and expectations A willingness to act ahead of regulatory confrontation Balancing shareholder interests against the interests of the wider

community
Being a good citizen in the community

Globalization and Corporate Governance

Demand for investment capital is increasing throughout both the developed and developing world. At the same time, governments and multilateral agencies are cutting back on aid. As barriers to the free flow of capital fall, policy makers have come to recognize that the quality of corporate governance is relevant to capital formation.
They also realize that weak corporate governance systems, combined with corruption and cronyism:
Distort the efficient allocation of resources. Undermine opportunities to compete on a level playing field. Ultimately hinder investment and economic development.

The McKinsey Survey

In a McKinsey survey issued in June 2000, investors from all over the globe indicated that they will pay large premiums for companies with effective corporate governance. This finding is supported by a recent survey of investors in Europe and the US which found that approximately half of European investors, and 61% of US investors, have decided not to invest in a company, or have reduced their investment. In June 2000, McKinsey replicated this survey in Asia, Europe and Latin America, and the same results hold. Over 200 institutional investors in the US, Europe, Asia and Latin America (representing US $3.25 trillion (EUR3.5 trillion) in assets) were involved in the survey.

Paying For Good Governance

Are investors willing to pay more for a company with good board governance practices? A clear majority say yes
100%

80%
60% 40% 20% 0% Latin America Europe/ US Asia

No
Yes

Source: McKinsey & Company, Investor Opinion

The driving forces

Interest in corporate governance has exploded around the globe due to a host of factors: The spread of capitalism and privatisation. The growth of corporations.

Quality of Corporate Governance

The quality of corporate governance at the company level is perceived as most valuable in situation Mandated disclosure and legal protection for shareholders are weaker Investors believe there is much scope for improvement Deregulation and globalization Shareholder activism The Asian crisis

Indifference on the part of shareholders

Shareholder activism in India is at a nascent stage and comes to the

fore only in instances where institutional investors holding a significant stake.

Minority shareholders do not have complete understanding of their

rights or the avenues through which these rights could be exercised.

Generally, they are inactive in the management of companies of which

they are shareholders. They only attend the Annual general meeting.

Therefore, directors misuse their power for their own benefits. So, there is a need for corporate governance to protect all the stakeholders of the company.

Shareholders vs. Stakeholders Theory

Shareholders Theory
Shareholders theorists of Good governance tend to follow the view that social responsibility of businesses is to increase business and consider that shareholders interest in the increase in value of their shares as paramount of

Corporations goals.

Corporation must be run in the interest of shareholders, particularly, in the interest of minority shareholders, which should be adequately protected.

Stakeholders Theory
The corporation must be run in the interest of stakeholders. Corporation can be seen as a community, and as such must be run.

Principle Agent Relation and Agency Gap

Principle Agent Relation
Companys Directors and Executives act as agents of the shareholders, and should use Corporations resources only for their principals benefit.

Agency Gap
In India the Agency Gap is between Majority shareholders and minority shareholders. This applies across the spectrum of Indian companies with dominant shareholders such as PSUs, MNCs, Private sector family owned companies and business group.

So, there is requirement of effective Corporate Governance to overcome problems of conflict of interest with considering shareholders interest.

Mergers & Acquisitions

1+1=3
This Equation is the special alchemy of a Merger or an Acquisition.

The key Principal is to create shareholder value over and

above that of the sum of the two companies.

Two Companies together are more valuable than two

separate companies.

Corporate Governance and M&A

Corporate Governance = Top Management
Top

Managem ent

Value Creation

Value Transfer

Profits/Efficiency

sharehold er

Employee s

Customer s

Suppliers

Creditors

Society

Good Governance after M&A

Human Rights Labour Conditions

Environmen t

AntiCorruption

Human Rights

Labour Conditions

Support and Respect Internationally Proclaimed HR

The Right to Collective Bargaining

Not Complicit in HR abuses

Abolition of Child Labour

No Discrimination

Environment
Precautionary approach to Environmental Challenges

Anti- Corruption
Work against all forms of corruption, including Extortion and Bribery

Environmental Responsibility

Environmentally Friendly Technologies

SEBI and Corporate Governance

One of the goals of good corporate governance is investor protection. The individual investor is at the end of a chain of financial information, stretching from corporate accountants and management, through Boards of Directors and audit committees, to independent auditors and stock market analysts, to the investing public. Many of the links in this chain need to be strengthened or replaced to preserve its integrity. SEBI, therefore, believed that a need to review the existing code on corporate governance arose from two perspectives, (a) to evaluate the adequacy of the existing practices, and (b) to further improve the existing practices.
Clause 49 (revised) of the Listing Agreement to the Indian stock exchange came into effect from 31 December 2005. It has been formulated for the improvement of corporate governance in all listed companies.

Need for SEBI Guidelines

SEBI sets governance standards in which the securities market must

operate, protecting the rights of issuers and investors.

SEBI has power to investigate circumstances where the market or its

players have been harmed and can enforce governance standards with directives. SEBI may terminate from the securities list any company that does not comply with its governance standards and regulations. accounting standards, the regulation of auditors and obstacles to voting for investors who are unable to attend company meetings.

An appeal process in place ensures accountability and transparency.

The main concern is to address core governance issues such as

Clause 49 of Listing Agreement

Some of the features of Clause 49: For a company with an Executive Chairman, at least 50 per cent of the board should comprise independent directors. In the case of a company with a nonexecutive Chairman, at least one-third of the board should be independent directors. It would be necessary for chief executives and chief financial officers to establish and maintain internal controls and implement remediation and risk mitigation towards deficiencies in internal controls, among others. Clause VI (ii) of Clause 49 requires all companies to submit a quarterly compliance report to stock exchange in the prescribed form. The clause also requires that there be a separate section on corporate governance in the annual report with a detailed compliance report. A company is also required to obtain a certificate either from auditors or practicing company secretaries regarding compliance of conditions as stipulated, and annex the same to the director's report. The clause mandates composition of an audit committee; one of the directors is required to be "financially literate".

Conclusion
Good corporate governance ensures corporate success and economic growth. Strong corporate governance maintains investors confidence, as a result of

which, company can raise capital efficiently and effectively.

It provides proper inducement to the owners as well as managers to achieve objectives that are in interests of the shareholders and the organization. Good corporate governance also minimizes wastages, corruption, risks and mismanagement. It ensures organization in managed in a manner that fits the

best interests of all.

The Securities Exchange Board of India is essential to corporate governance of India's securities market, as it serves as the central body that ensures investors are protected and the securities market is regulated.

It is the belief of the Securities and Exchange Board of India that efforts to improve corporate governance standards in India must continue. This is because these standards themselves were evolving in keeping with market dynamics.
Hence, we believe that Corporate Governance should not be abolished.