Articles

Stanadard & Poor's (S&P) has gone and done it. The credit rating agency, whose stock indices are widely used for benchmarking the value of equities and is, therefore, in a position to influence investor and corporate behaviour, has redefined operating earnings and has, among other things, urged that employee stock options be treated by companies in the US as a quarterly expense against earnings.

This suggestion has been made by S&P in a paper titled 'Measures of corporate earnings' released in the US, which, according to a press statement issued by the rating agency, "completes a process S&P began in August, 2001, when the firm began discussions with securities and accounting analysts, portfolio managers, academic research groups and others to build a consensus for changes that will reduce investor frustration and confusion over growing differences in the reporting of corporate earnings".

It may be recalled that the computation of core earnings, especially those of tech companies, had been at the centre of considerable controversy in the US during the Internet bubble when New Economy companies were increasingly resorting to what are called pro forma earnings results - results stripped off some very significant costs.

At the centre of S &P's "effort to return transparency and consistency to corporate reporting" it its focus on what it refers to as core earnings, or the after-tax earnings generated from a corporation's principal business or businesses.

As S &P believes that there is a general understanding of what is included in 'As Reported Earnings', its definition of core earnings begins with 'as Reported' - and then makes a series of adjustments.

Its definition of core earnings includes employees stock options grant expenses, restructuring charges from ongoing operations, write-downs of depreciable or amortizable operating assets, pension costs and purchased research and development.

Excluded from the definition are impairment of goodwill charges, gains or losses from asset sales, pension gains, unrealised gains or losses from hedging activities, merger and acquisition related fees and litigation settlements.

In the context of its revamped definition of core earnings, Mr Leo O'Neill, S & P President, has been quoted as saying: "The increased use of so-called pro forma earnings and the measures to report corporate performance has generated much controversy and confusion and has not served investor interests. S & P's core earnings definition will help build consensus and restore investor trust and confidence in the data used to make investment decisions".

According to media reports, S&P will start using its new core earnings measure immediately as the accuracy of earnings measure immediately as the accuracy of earnings and trends in earnings are a critical component of its credit analysis/debt rating methodology. And so, its equity analysts will henceforth use the new measure to work out core earnings when they examine and review stocks. And then again, the firm will immediately begin to calculate core earnings per share for its US indices and the main sectors in these indices. Supporting data, S&P says, will be in its COMPUSTAT database later this year.

The most controversial item in S&P's new definition of core earnings is likely to be the one relating to the expensing of options. Even though companies are under no statutory compulsion to act on S&P's proposals, it is expected that this item is likely to hit tech companies hard. In fact, Dow Jones, quoting S&P officials, has reported that the stock options change alone would cut financial year 2002 estimated earnings for companies in the S&P 500 index by an average of 10 per cent.

(Source: Business Line)

Go to top

It is part of the series of efforts being made by two independent regulatory bodies in the last 2 or 3 years to accomplish harmonization of regulations, policies and guidelines made applicable to the regulated entities. This time around RBI had advised, on a suggestion from the SEBI, that the Indian commercial banks (both public and private sector), which are listed on the stock exchanges, should adopt the guidelines of SEBI committee on corporate governance (which were earlier issued by SEBI for implementation of corporates other than banking and financial institutions in February, 2000).

The RBI in its circular of June 4, 2002 set out, that many of the SEBI committee recommendations on CG were already under implementation by the banks as some of them were mandatory under the Banking Law, RBI's past and current regulations, norms and guidelines. But it has culled out those, which could now be adopted for further improving the CG standards in banks. Para 5 of its circular sets out these and also attached to it is a summary of SEBI - CG committee's recommendations. The RBI's circulated guidelines of June 4, 2002 are given is an attachment.

P. R. Gopala Rao

Hon. Advisor - ACG

SEBI Committee on Corporate Governance - guidelines to
Indian commercial banks listed in stock exchanges

DBOD No.BC.112 /08.138.001/2001-02                                                                                                       4.06.2002

The Chairman/Chief Executives of Indian Commercial Banks Dear Sir, SEBI Committee on Corporate Governance - guidelines to Indian commercial banks listed in stock exchanges As you are aware, the Securities and Exchange Board of India (SEBI) had constituted a Committee on Corporate Governance and circulated the recommendations to all stock exchanges for implementation by listed entities as part of the listing agreement vide SEBI's circular SMDRP/Policy/CIR-10/2000 dated February 21, 2000. However it had at that time exempted body corporates such as public and private sector banks, financial institutions, insurance companies and those incorporated under separate statute. SEBI has now suggested to RBI to consider issuing appropriate guidelines to banks and financial institutions so as to ensure that all listed companies would have uniform standards of corporate governance. As requested by SEBI, it has now been proposed that the SEBI Committee's guidelines may be taken up for adoption by those commercial banks listed in stock exchanges so that they can harmonize their existing corporate governance requirements with the requirements of SEBI, wherever considered appropriate.

2. On a review by RBI of the existing corporate governance requirements in banks, it is observed that many of the recommendations in regard to the following stand implemented in banks and may not require further action towards implementation in respect of these guidelines for the present. a. Optimum combination of executive and non-executive directors in the Board b. Pecuniary relationship or transactions of the non-executive directors vis-à-vis the bank c. Independent Audit Committees, their constitution, chairmanship, power, roles, responsibilities, conduct of business, etc d. Remuneration of Directors (in case of private sector banks) e. Periodicity /number of board meetings f. Disclosure by management to the board about the conflict of interest g. Information to shareholders regarding appointment/re-appointment of directors, display of quarterly results/presentation to analysts on the web- site h. Maintenance of office by non-executive Chairman. i. Reviewing with the management by the Audit Committee of the board the annual financial statements before submission to the Board, focusing primarily on: o Any changes in accounting policies and practices, o Major accounting entries based on exercise of judgement by management, o Qualifications in draft audit report, o Significant adjustments arising out of audit, compliance with accounting standards, o Compliance with stock exchange and legal requirements concerning financial statements, and o The going concern assumption.

3. The Audit Committee of the board may look into the reasons for default in payment to depositors, debenture holders, shareholders (non-payment of dividends) and creditors, wherever there are any cases of defaults in payment. SEBI Committee's recommendations on other additional functions to be entrusted to the Audit Committee may be complied with by the listed banks as per listing agreement.

4. As regards the appointment and removal of external auditors, the practice followed in banks is more stringent than that recommended by the Committee and hence will continue. Further, fixation of audit fee and also approval of payment for any other services are already subject to the instructions of RBI. As regards recommendation for obtaining a certificate from auditors regarding compliance of conditions of Corporate Governance, it may be stated that the compliance of banks with RBI instructions is already being verified by the statutory auditors. Therefore, a separate certificate from the auditors is not considered necessary.

5. With a view to further improving the Corporate Governance standards in banks, the following measures are now recommended for implementation.

a. In the interest of the shareholders, the private sector banks and public sector banks which have issued shares to the public may form committees on the same lines as listed companies under the Chairmanship of a non-executive director to look into redressal of shareholders' complaints.

b. All listed banks may provide un-audited financial results on half yearly basis to their shareholders with summary of significant developments.

6. A brief summary of the SEBI Committee's recommendations on Corporate Governance as applicable to banks is enclosed for ready reference. Full text of recommendations of the Committee which form part of a detailed circular issued by SEBI to the stock exchanges on February 21, 2000 can be had by access to SEBI's website www.sebi.gov.in/circulars/2000.

Go to top