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Vol
4: Issue No.4 : April, 2004 |
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| The days of the ‘fly-by-night’ companies may be numbered as protecting gullible investors becomes a priority with the regulators. Committed to the task of sheltering investors from being lured by such promoters, the Department of Company Affairs (DCA) has now taken up a series of educational and awareness activities, including media campaigns and panel discussions. To probe deeper into why companies such as these are at fault in paying investor dues, the Department has asked the Institute of Capital Markets to conduct a thorough study. “Besides, knowing the reasons will also help us in plugging the loop holes, if any,” DCA officials have said. Elaborating on the initiatives undertaken by DCA, sources said, the department is supporting setting up of a Website, ‘Watch out Investors’, which would list all companies that have defaulted in complying with corporate legislations. ‘Prime Investors and Associates’ are developing this Web site. The
Department is working through non-government organizations (NGOs)
to educate investors. At present, there are about eight NGOs registered
with the department. A 13-member committee to administer investor
protection activities funded by the Investor Education & Protection
Fund (IE & PF) selects the NGOs. The Department proposes to
reimburse those NGOs that take up class action suits and succeed.
For the year 2003-04 the amount allocated for investor awareness
out of the IE & PF was Rs.3 crore. The IE & PF itself
has a corpus of around Rs.200 crore. Further, the Department is
also undertaking capacity building exercise for NGOs in order
to fully equip them to undertake such activities.
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| The business houses in the country should act responsibly, in accordance with norms of good governance and they should not consider themselves above the accepted principles of social justice, equity and fair play, Mr. Soli Sorabjee, Attorney-General for India, has said. Delivering a lecture on good governance, organized by the Centre for Policy Studies the Government of the day and the corporate sector are all equally responsible in upholding the basic norms without which it would not be possible to build and maintain a civilized society. In the matter of appointments, too, the corporate houses should follow certain norms and they should not take arbitrary decisions. To
make informed choice, people should know the facts and therefore
the Government should dispense with secrecy except in the case
of certain military secrets and sensitive financial information
likely to have impact on the markets. The syndrome of secrecy
is causing great harm. Professor Prasanna Kumar, Director of the
Centre of Policy Studies, presided over the meeting.
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According to Mr. Sumant Sinha, Chief Financial Officer, AV Birla Group, the pursuit of good corporate governance is not a zero-one type binary situation, i.e., if you meet the regulator’s standards you are automatically considered to be following good corporate governance practices, otherwise you are not. The financial benefits that could accrue to a corporate include a lower cost of equity capital by virtue of a higher valuation in the market. While the regulators need to focus on historical transparency and disclosure in terms of timeliness, accuracy and fairness, the reality is that investors value a company for their forward looking measures. Another factor to
consider is that capital flow is increasingly borderless and
therefore, a company; key investor base may actually be sitting
in a completely different corporate governance jurisdiction.
While a company has to meet its domestic corporate governance
standards, management also needs to be cognizant of corporate
governance standards in jurisdictions where a bulk of the company’s
investors reside. Companies that follow better corporate governance
standards tend to have a superior reputational and brand equity
value. This allows them to hire better quality employees at
a lower cost because of those employees’ desire to be associated
with higher quality companies.
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Company
secretaries have urged the SEBI to prescribe `independent secretarial
audit' once in every six months for all listed companies.
"The Institute of Company Secretaries of India (ICSI) has submitted a memorandum to the SEBI requesting the same," ICSI sources said. Speaking to Business Line, they said: "We have suggested that the SEBI prescribe independent secretarial audit once in every six months for all listed companies with its report to be submitted to the board of directors and circulated among the shareholders." A secretarial audit has wide connotations and includes compliances of all statutory requirements by a company covering areas such as corporate and securities laws, industrial and labour laws, competition and economic laws, environmental laws, and listing agreement, according to professionals. Commenting on the purpose that such an audit will serve, the sources said: "An independent secretarial audit will go a long way in ensuring implementation of those norms, thereby providing the required comfort and assurances to the entire board, including the independent director, that there has been no legal violation by the company." Further, it will provide an in-built mechanism to ensure that corrective measures are taken to prevent violation of law, they added. The independent directors are exposed to onerous liability of non-compliance of laws, and the introduction of secretarial audit will make it easier for them to assume their real responsibility and the real spirit of good corporate governance can thus prevail in the organisation. On the authenticity of such audits and how independent will it be, the sources said: "Company secretaries undergo rigorous training to gain knowledge and expertise in corporate and securities laws comprising a major part of corporate governance. A company secretary in practice is an independent professional governed by the code of conduct provided in the Company Secretaries Act, 1980." |
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Indian
accountants will not kow-tow to the US: they are sticking to their
principle-based approach to accounting standards.
Institute of Chartered Accountants of India (ICAI) has said they intend to stick to the principle-based approach rather than switch over to the rule-based approach that the US follows under its Generally Accepted Accounting Principles (GAAP). Explaining the difference between the two approaches, a senior ICAI official said in a rule-based approach, the ‘rule’ is spelt out in black-and-white and that has to be followed, whereas in a principle-based approach, it is the abiding principle or the rationale that is important. The US GAAP follows a cookbook approach — providing auditors with a comprehensive checklist of rules to follow. The International Accounting Standards (IAS) — the global standard fashioned by Europe that will become mandatory for all publicly traded European Union companies from January 1, 2005 — is based on general principles, compelling auditors to enforce the spirit of the law and not just the letter. Indians have preferred to go the European way rather than adopt the US accounting standards even though more and more companies across the world are choosing to report their accounts using US GAAP, which is mandatory if they seek listing on the American bourses. The disenchantment with US GAAP comes after a string of accounting scandals in the US, especially the Enron debacle. According to experts, under the IAS, Enron auditors would have looked not just at the numbers but also quizzed the management about why it had shunted assets and liabilities off its balancesheet and then made their own assumptions about what was actually going on. “Rule-based accounting standards are prone to misuse. This has been amply demonstrated in the events of corporate wrongdoing such as Enron that shook the US in recent years. A principle-based approach is much better,” said ICAI technical director Avinash Chander. European countries have been following the principle-based approach even before scams hit the US corporate world, particularly Enron. “However, after Enron, not only various countries, but the US has also started a process of collaboration with the IAS on several spheres, even though they will retain their separate accounting standards,” said Chander. ICAI has recently revised the preface to the statements of accounting standards after a gap of 25 years. The institute has taken this as an opportunity to highlight in the preface itself that India will stick to the principle-based approach which it has been following and sees no reason to change. Rahul Roy, partner in S. R. Batliboy & Co (Indian partner of Ernst & Young), said, “The IAS is undergoing major improvements, which are becoming more important the world over than the US GAAP with which it is at considerable variance.”
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| © 2001 Academy of Corporate Governance |
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