National Events

Hony. Editor
Dr. Bindi Mehta
(Director, Research at ICSI - CCRT, Formerly, Chief economist, CRISIL









 
 
National News-April, 2003
Sarbanes – Oxley may find an echo in RBI

The Sarbanes – Oxley Act, which has made life tougher for finance professionals in America, could soon find its way into Indian Banks. The new law has fixed new reporting standard for US Auditors and top managements and there are stiff penalties, should they fail to meet them. As corporate governance has emerged as a matter of concern in banks, the Reserve Bank of India (RBI) is keen on introducing a few features of the Sarbanes – Oxley Act in to the local banking sector. This is likely to be done in a way that would not require any existing laws to be amended.

It may be mentioned that unlike auditors for entities under the Companies Act, banks have to change their auditors every few years. The auditors, who have to be empanelled with RBI, are required to directly report to RBI all cases of irregularities. Besides redefining the auditor's liability, bank CEOs, in line with the tenets of the US law, may be asked to certify each periodic financial statement as being true and fair. While bank management will fall in line with RBI's diktat, auditors clearly do not fall within RBI's jurisdiction. The Sarbanes – Oxley Act, which was signed by US President, George W Bush into law last July, has brought about sweeping changes in financial reporting and is being perceived to be the most significant changes to the federal securities law since the 1930s. Besides directors and auditors, it has laid down new accountability standards for security analyst and legal counsel also.

 
 
 
   
Performance governance, self-appraisal mooted for better governance

While performance governance has been made mandatory in some countries, it is yet to be embraced by India Incorporated. “We have made recommendations to the Narayana Murthy Committee that performance governance and self appraisal of directors should be made mandatory" said Mr. Shailesh Haribhakti, Chairman - Governance Forum, Indian Merchant's Chamber. Mr. Haribhakti is also Managing Partner & CEO, Haribhakti Group.

Broad parameters that govern self - appraisal and performance governance include attendance, quality of contribution and degree of preparedness. If adopted, the measure is expected to raise the level of performance among directors and as a result lead to an improved shareholder value creation. Performance measurement systems plays a major role in corporate governance because their design affect the incentives of managers and thereby the firms efficiency. They are defined as systems that make it possible for the firm's constituencies to gather and analyse information about the firm.




 






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The Securities and Exchange Board of India (SEBI) has given stock exchanges six months to prepare a scheme for implementing corporatisation and demutualisation as recommended by the Kania Committee. In its communication dated January 30, 2003, SEBI has advised the exchanges to submit a scheme together with the changes in rules, by-laws and articles that would be required to implement the scheme with-in the time frame for its approval.

As per the Committee report also considered by the SEBI Board out of the 23 stock exchanges, the Bombay stock exchange, the Ahmedabad stock exchange and the Indore stock exchange will have to be both corporatised and demutualised. Of the balance 20, 18 exchanges are already corporate entities and they only need to be demutualised.

The committee, which observed that the concept of the regional stock exchanges has lost its relevance in the day of automated trading. However, felt that the corporatisation and demutualisation would facilitate the process of consolidation of exchanges. The committee said that the members would be entitled for shares in the corporatised / demutualised exchanges in lieu of the existing rights, while the voting rights would be determined in consultation with the government.

 


 

 





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Investors put fees, commission under spotlight

Exactly how much are investors paying for mutual funds? Regulators under increasing pressure from investors (counting big losses in 2002) want to know. The fee issue is one that has surfaced before. This time, however, it coincides with two additional factors - (i) Calls for greater mutual funds transparency and (ii) a poor equity market. Each fund charges different fees, and fees are sometimes not apparent because they are deducted from annual mutual fund returns or taken off the top when a broker executes a trade. In a study last year by the Investment Company Institute, the mutual fund industry group suggests that the total fees and expenses incurred by the mutual fund investors continued to fall between 1998 and 2001. An earlier study found costs fell between 1980 and 1998. In 2002, however, mutual fund industry assets sank in the third consecutive year of a falling equities market and it is likely that fees went up

 

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D & O cover no substitute for corporate governance

The directors and officers (D&O) liability cover being offered by general insurers was aimed at complementing good governance amongst companies, and cannot be construed as a substitute for corporate governance, according to an AIG expert. The issue of corporate governance has assumed significance in India with the Naresh Chandra Committee report on the subject. D & O liability involves damages preferred against a company in case of any act, willful or non-willful, that hurts the shareholders. Insurers provide cover in the event of such a claim arising, including the legal costs of the defendant, in this case the insured company.

The number and volume of claims has grown phenomenally in the last few years after the collapse of several Fortune 500 companies. According to the AIG spokesperson, AIG examined a number if parameters before extending a D & O cover, including the composition of the board, the record and reputation of individual directors, the financials of the company, its accounting and corporate governance norms, etc. He was speaking on the sidelines of a seminar by Tata AIG on directors and liability insurance in New Delhi.

 





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Consolidated supervision must for groups under bank

The Reserve Bank of India (RBI) has said consolidated supervision would be mandated for all groups where the controlling entity is a bank. This is in line with the core principles for effective banking supervision issued by the Basle Committee on Banking Supervision which under scores that supervisors should be empowered to undertake consolidated supervision of bank groups.

In due course, the RBI said that banks in mixed conglomerates would be brought under consolidated supervision, where:

i) the parents may be non-financial entities, or
ii) the parents may be financial entities falling under the jurisdiction of other regulators like Insurance Regulatory and Development Authority (IRDA) or Securities and Exchange Board of India (SEBI), or
iii) the supervised institution may not constitute a substantial or significant part of the group.

As a part of consolidated supervision the following prudential norms/limits are prescribed for compliance by the consolidated bank: a) Capital Adequacy b) Large Exposures c) Liquidity Ratios mismatches, d) Statutory Liquidity Ratio, Cash Reserve Ratio (where applicable).

 


 







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Gujarat has highest number of vanishing firms
The Registrars of Companies (ROC) in 13 states across the country have initiated legal actions including registration of criminal case against 117 companies which allegedly have violated different provisions of the Companies Act, 1956 and closed down their operations leaving lakhs of investors in the lurch. Gujarat tops the list with 33 vanishing companies, while ROCs of Delhi and Haryana have initiated legal actions against 27 and 10 companies respectively. Interestingly from Gujarat, Topline Shoes Limited, a Vadodara-based company in which former Indian cricket skipper Mr. Sunil M Gavaskar is one of the directors, is featured in the list of vanishing companies against whom legal actions have been initiated by the ROC, Ahmedabad.

Most interestingly, lowest number of such cases have been reported from ROCs in Andhra Pradesh, Orissa and Karnataka, where one case each has been registered. Four cased have been registered by the ROC, Kolkata, five cases have been registered by the ROC in Bihar, six cases in Kerala and seven cases by Coimbatore ROC and eight each with the ROCs in Mumbai and Chennai.
Small investors get merely 5 % of total capital from public issues
Small investors have been offered a meager 5 per cent of the total capital of Rs. 49,993 crore in public issues during the past five years. This was found in a study done by Prime Database on 199 public issues during the past five years. In the case of book-building IPOs, the share of small investors has been even lower at 3 per cent. Of the total public issues, 20 issues were book building, 173 were at a fixed price and six were from listed companies.

 

© 2001 Academy of Corporate Governance