Hony. Editor
Dr. Bindi Mehta
(Director, Research at ICSI - CCRT, Formerly, Chief economist, CRISIL, with long experience at IDBI and independent consulting, Writer and Researcher on CG)

The Institute of Company Secretaries of India (ICSI) has come out with its first Secretarial Standard pertaining to board meetings. At least five/six more such standards are in the process of being debated by the Secretarial Standards Board (SSB) and would be announced in due course. The standard issued by the Secretarial Standards Board of the ICSI, is for the time being only recommendatory in nature. But ICSI would be requesting the government and the regulatory authorities to make these standards/ norms mandatory. The first standard announced in January dwells on notice period, frequency, quorum, attendance, accounts and recording minutes of a board meeting. The secretarial standard - 1 (SS-1) on company board meetings, released by the Institute of Company Secretaries of India (ICSI) in mid-December, 2001, has to be viewed not only against the backdrop of the diverse secretarial practices followed by corporates but also the many gray areas in the Companies Act as far as this issue is concerned.

Business Line Reports:

As the preface to SS-1 seeks to suggest, the standards do not intend to substitute or supplant any existing laws or the rules and regulations framed there under. The intention is to supplement such laws, rules and regulations. It has also been clarified that if due to subsequent changes in law a particular standard or any part there from becomes inconsistent, the provisions of that law shall prevail. Finally, normally, the standards will also apply to the committees of boards.

Initially, the standards are recommendatory. Only after these have been deliberated upon in various forums and users have been educated will the question of ICSI urging the Union Government and other appropriate authorities to make the standards mandatory arise.

As for notice for board meetings, practices of companies vary widely in that some companies give seven days, notice while others may be giving 15 days' notice to the directors. SS -1 recommends that unless the Articles of a company prescribe a longer period, notice should be given at least 15 days before the date of the meeting.

The second important point dealt with by ICSI relates to frequency of board meetings. Currently, the Act provides for holding one board meeting for every block of three months.

Thus, for example, for the January- March block, a company may hold a board meeting, say, on January 2 and for next block, that is, April-June, it may schedule a meeting, say, on June 30. In spirit, the company may be abiding by the provision. But, actually, the gap between the meeting for the January-March block and that for the April-June block will work out to almost six months.

Now ICSI has recommended that a board should meet at least once in every three months, with a maximum interval of 120 days between any two meetings are held each year. It has been further suggested that each meeting should be of such duration as would enable proper deliberations on items placed before the board.

On this specific issue, direction has also been given to Chairmen of companies. A Chairman should encourage deliberations and debate and assess the sense of a meeting. A Chairman should ensure that the proceedings are correctly recorded and in doing so, "he may include or exclude any matter as he deems fit".

In the case of a public company, if the Chairman himself is interested in any item of the business, he should entrust the conduct of the proceedings in respect of such item to any other "disinterested" director and resume the chair after that item of business has been transacted.

• The agenda setting out the business to be transacted at a board meeting, together with notes thereon, should be given to directors at least seven days before the date of the meeting.
• Within seven days from the date of a board meetings, draft minutes thereof should be circulated to directors and they, in turn, should submit their comments within 15 days from the date of circulation: the minutes have to be entered in the minutes book within 30 days from the conclusion of a board meeting.
• Minutes can be inspected by directors, auditors and secretaries in whole-time practice appointed by companies; but shareholders have no right to inspect minutes.
• Minutes should record names of directors who dissent or do not give their decision on a listed item of business.
• Where under a scheme of arrangement a company has been merged or amalgamated with another company minutes of all board meetings of the transferor company should be preserved permanently by the transferee company, notwithstanding the fact that the identity of the transferor company may not survive such arrangement.

(Bindi Mehta & Business Line)

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Securities & Exchange Board of India's (SEBI) Corporate Governance Review Committee headed by Mr. J. R. Verma, former member of SEBI will fine tune the definition of 'Independent Directors' on companies boards with a view to improve management practices. This is perceived to be a weak area in the policy of corporate governance. These provisions, as and when implemented, would also be applicable to listed public sector undertakings. The committee would also look into the provisions for disclosures by subsidiaries of listed entities on investments in their parent companies. (Dr.Bindi Mehta).

(Bindi Mehta)

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It is reported that the Finance Ministry is finalizing amendments to the SEBI Act, to enhance the penalties on capital market offences from Rs. 500,000 now to Rs. 250 million or three times the legal gains from the offence and a 10-year prison term.

The proposed charges also involve overhaul of the SEBI board, to make it more broad based and professional and giving it more investigative powers. These measures are aimed at boosting investor confidence and to deter capital market related crimes through punishments, penalties, stringent monitoring and tougher surveillance systems. (YRK)

(YRK Reddy)

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It is learnt that DCA will after all not shy away from the challenge of prosecuting errant companies, albeit, gradually. The companies targeted are those which have not filed the mandatory returns or have not availed of the Company Law Settlement Scheme - 2000 (CLSS-2000). Of the total defaulter companies of 254,000, about half had availed of the CLSS scheme. The massive task of prosecuting the remaining 127,000 or so errant companies will be done in phases and segments, it is learnt.

The first set of corporates would be the listed companies, followed by unlisted public companies, NBFCs, other private companies with turnover of Rs.10 millions and above, and finally the rest of private companies.

It is estimated that a sizeable segment of the defaulting companies may be just not functioning any more. The department had also launched a fast track scheme (FTS) to provide a simple exit route for those companies with had availed of amnesty under the CLSS-2000 and also wanted their names to be struck off from the register of the Registrar of Companies (ROCs). This should clear the decks for narrowing the target for prosecution.

(YRK Reddy with online sources)

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It is reported that SEBI is giving a push for transparency in investments by firms which are floated by listed companies - it is preparing disclosure norms for investment firms about their parent companies and associates. The move arises from a finding that some of the investment firms had bought shares of listed parent companies to manipulate the price.

"We plan to direct listed companies to disclose to stock exchanges shares bought by investment companies floated by them on a quarterly basis. For this, SSEBI is in talks with DCA for necessary changes", said the SEBI chairman, Mr. D.R.Mehta, at the 2nd International Conference on Corporate Governance.

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Securities and Exchange Board of India (SEBI) has decided to withdraw its nominees from the boards of stock exchanges and ruled that brokers cannot be its office bearers like President, Vice president or treasurer of the Governing Board. The final decision in this respect is expected to be taken at SEBI's next board meeting.

In the mean time, regional stock exchanges under the umbrella of the Federation of Indian Stock Exchanges (FISE) has recommended to the SEBI the appointment of a non-executive chairman (from the broking community, who should relinquish membership during his tenure) and full time executive director and managing directors on boards of stock exchanges.

(Bindi Mehta)

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The department of company affairs has constituted a 13-member committee to administer the Investors Education & Protection Fund. The committee will be chaired by the Secretary DCA and will have members from the RBI, SEBI and Company Law Board. Members will hold office for two years. The fund will comprise the unpaid dividend amounts of companies, application money received for allotment of any securities and due for refund, matured deposits with companies and interest accrued on the amounts. The unclaimed amounts that remain unpaid for a period of seven years from the due dates of the payment will form part of the fund. The funds will be utilised for promoting and protecting the investors' interests.


(Bindi Mehta)

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The Central Vigilance Commission (CVC), probably for the first time has entered the regulatory arena. It has asked the financial institutions (FIs), including Life Insurance Corporation of India (LIC) and Industrial Development Bank of India (IDBI), to examine the alleged failure of their nominee directors to protect the interest of shareholders and FIs in the sale of Relianace Industries' stake in Larsen & Toubro to Grasim Industries Ltd.

Business Line reports:

"The commission has sent letters to LIC, IDBI and General Insurance Corporation (GIC) to look into the complaints by investors' organisations about the failure of FI nominees on L&T board to protect the share holders, the Chief Vigilance Commissioner, Mr. N. Vittal, told PTI here. The IDBI Chairman and Managing Director, Mr. P.P.Vora, said as a matter of policy, the FI did not wish to comment on individual corporates and the role of its nominee director. On November 18, Reliance Industries sold its 10.05 per cent stake in L&T to the Aditya Biral group's flagship company at Rs.306 per share aggregating Rs. 764 crore. Following the acquisition. Mr. Kumar Mangalam Birla and Ms. Rajashree Birla replace Mr. Anil Ambani and Mr. Mukesh Ambani on the L&T board."

(Source: Business Line)

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IDBI and IFCI have reportedly detected 22 instances where corporates diverted funds borrowed from the FIs and subsequently misused them. These are among the few cases where diversion has been conclusively established by the FIs.

ET Reports that:

IFCI has detected funds diversion in cases like Punjab Woolcombers, Sanghi Industries, BMB Music & Magnetics, NEPC, Unimetal Ispat, Grapco Industries, AVI Packaging, Munis Forge, Sidhartha Super Spinning Mills, Pentafour Products.

In nine cases, legal action has been initiated for recovery of dues and in one case, negotiated settlement of dues has been agreed to. In two cases, criminal proceedings have also been initiated, in addition to legal action.

IDBI has initiated action in 10 cases. These include DSQ Industries which was reported as willful defaulter to RBI and a suit has been filed against the company in the DRT. Funds diversion was also seen in Autolite India, Pacific Industries and Shruti Synthetics, which have now become NPAs and recovery suit has been filed.

In the case of Eider Technologies, it invested Rs.24 crore in equity shares of seven of its sister concerns. As the company was in default and had become NPA the loans were recalled and IDBI along with IFCI filed a joint suit. At Anand Solvex, Pioneer Farms, Rainbow Corporation, a special investigative audit (SIA) revealed diversion of funds and other financial irregularities. The company was reported as a willful defaulter to the RBI and a suit has been filed against the company at DRT.

Siphoning of money by promoters was observed in Priyaranjani Fibres and Rider Electronics, the concurrent auditors have observed diversion of funds to other projects and the account has become an NPA.

According to the RBI report, despite a variety of safeguards instituted by the lenders for ensuring end-use of funds, there have been diverted for capital market transactions and other unauthorized purposes. ICICI has reported to the RBI that no specific cases of funds diversion has been noticed. It says that with regard to project loans, certification by a firm of chartered accountants for end use of funds has been obtained."

(Source: Economic Times)

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A two-day Conference on CG was held in Mumbai on January 18 - 19 and was addressed by a number of eminent persons including Central Vigilance Commissioner, Mr. N. Vittal, IFC India Country Head, Mr. Vipul Prakash, and President, World Council for Corporate Governance, Mr. Madhav Mehra. Mr. Mehra dwelt on social responsibility issue and concluded that in today's market, only those companies will succeed that recognise responsibility to the society, environment that go beyond compliance with law. Dwelling on the experience of IFC, Mr. Prakash said that the governance issue is aof added importance since a large number of firms that IFC invests in are mostly family held. A session on 'Global Experiences' saw a number of experts sharing their country experiences including Mr. Ricardo Raineri from Chile and Mr. Alex Werder of Berlin University, Germany.

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Hopefully, our "First Principles of Corporate Governace in PEs" have sparked a new line of thinking - speaking at the annual day of National Institute of Bank Management, Reserve Bank Governor, Dr. Bimal Jalan has raised the issue of accountability and governance at the Public Sector Banks (PSBs). He said that the crucial issue the country has to debate is whether corporate governance is compatible with public ownership, which makes the system accountable to political institutions and not to the economic institutions or even the regulators. The issue could be to change to a corporate structure for the PSBs.

(Dr. Bindi Mehta)

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Pursuing the line of thinking exhibited in the First Principles of Corporate Governance for PEs, RBI Deputy Governor, Dr. YV Reddy while addressing the BECOPN conference suggested that all public sector banks (PSBs) should be converted into companies and a holding company for all PSBs be formed in which all shares held by Government and the RBI be transferred. He suggested that converting banks into companies would impart flexibility to make changes in ownership, mergers and acquisitions and lead to better corporate governance.

Distributed model of ownership is the most viable model for implementation of corporate governance as against the existing public or private ownership models, according to Mr. H. N. Sinor, Managing Director and CEO of the ICICI Bank. Three pillars of governance in the banks according to Mr. Sinor were - clear division of responsibility within the bank, proper checks and balances on operations including independent board level committees to oversee the functioning of the banks and disclosures and transparency. Echoing Mr. Sinor's concerns, Dr. R. H. Patil, Chairman Clearing Corporation of India and Disinvestment Commission, felt that the 'outside model' prevalent in the USA and the UK was more relevant for the PSUs and the PSBs. He suggested empowerment of the boards and maintaining arms length relationship between the ministry and the corporate enterprise (or bank) for better corporate governance.

(Dr. Bindi Mehta)

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Financial institutions Industrial Credit & Investment Corporation of India Ltd (ICICI) and Industrial Finance Corporation of India (IFCI) are likely to withdraw their nominees from the boards of several companies. The move is intended to protect them from future disqualification from board level posts in other companies, if they are directors of defaulting companies now. Consequent to the recent amendments of the Section 274 of the Companies Act, 1956, all directors are liable to be disqualified for five years if they are on the boards of defaulting companies. This would apply to the institutional directors also who are governed by the Companies Act. While the Industrial Development Bank of India (IDBI), the Life Insurance Corporation of India (LIC) and the State Bank of India (SBI) are governed by separate legislations, the IFCI and ICICI are governed by the Companies Act.

The amended section of the Companies Act has included companies that have failed to file their annual accounts for three years in a row, companies that have not repaid their deposits or paid interest, failed to redeem debentures on the due date or have not paid dividend for a year or more. It is learnt that the finance ministry has taken up the matter with the Department of Company Affairs (DCA) for getting a blanket waiver for banks and institutional nominees in this regards.

(Dr. Bindi Mehta)

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Can a defaulter company against whom a Bank has proceeded with a legal suit for recovery get financed by another? So far, yes. This has been commented upon by several who believe that Indian system allows intentional firewalls in information transactions between among Banks/FIs. As a small step to rectify this problem, RBI has been publishing, including on its internet, all cases of default of over Rs.10 millions and above and another for those who have borrowed over Rs.2.5 Million. It is learnt that RBI has noticed willful default by Banks and FIs of ignoring the list and financing the culprits.

The RBIs circular says: "It has been observed that some of the banks/FIs have not exercised due precaution by reference to the lists of defaulters while investing in bonds, debentures etc of companies. Banks/FIs are, therefore, advised to exercise due caution while taking any investment decision to subscribe to debentures, bonds, shares etc and refer to the 'Defaulters List' to ensure that investments are not made in companies/entities who are defaulters to the banks and FIs".

RBI has also appointed a committee, to suggest the modalities and related aspects of disseminating data pertaining to the defaulters to the Credit Information Bureau, which has been promoted by State Bank of India and HDFC.

(YRK Reddy from news sources)

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A Reserve Bank of India (RBI) working group has recommended that all banks, listed and unlisted, should prepare and disclose consolidated financial statements (CFS) from April 1, in addition to the regular financial statements. The central bank also said the assessment of group capital should exclude intra-group holdings.

The report of the "working group on consolidated accounting and other quantitative methods to facilitate consolidated supervision", which was placed at the board for financial supervision (BFS) on January 29, says that a parent presenting CFS should consolidate all subsidiaries (domestic as well as foreign).

Investments in associates should be accounted for under the 'equity method' of accounting, while investments in joint ventures should be accounted for under the 'proportionate consolidation' method, it said.

The consolidated prudential reports (CPR, which should be initially introduced on a half-yearly basis from April 1 as part of the off-site monitoring system, combines the assets, liabilities and off-balance sheet positions of supervised institutions and their related financial entities and furnish the consolidated financials as a single business entity. The working group says that existing liquidity requirements applicable to banks on a solo basis need to be extended to the consolidated position of the groups. If the group is a homogeneous group of banks, cash reserve ratio and statutory liquidity ratio could be evaluated on a consolidated basis after netting out intra-group transactions and exposures. In case, the group is heterogeneous group suitable, modalities are required to be prescribed by the regulator, it said. Deduction of investment in deconsolidated entities (subsidiaries) should be in equal proportion from Tier-I and Tier-II capital, in line with international best practice. Presently, investment made by a parent bank towards the equity capital of a subsidiary is deducted from the bank's Tier-I capital.

It pointed out that the key issue in operationalising consolidated supervision was defining the 'target group' that is which institutions in the supervisory jurisdiction should be supervised on group-wide basis. The working group feels that banks having a network of subsidiaries constitute banking groups and are clear candidates for consolidated supervision.

In respect of all registered NBFCs that have networks of subsidiaries and are in control of the group, the working group said that supervision may be applied on selective basis, based on pre-determined parameters such as size of the group (in terms of assets and/or income) vis-à-vis that of the parent and strength of linkages and controls between them.

(Business Standard)

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National Centre for Non-Profit Boards (now renamed Board Source) based in Washington, USA held a workshop on "NGO Governance in Changing Times" in Mumbai during January 2002. The workshop was addressed by Dr. Marilyn Wyatt, Director, Consulting & Training, Europe and Asia and Mr. Dadrawala of Centre for Advancement of Philanthropy, among others. A large number of Non-Government Organisations (NGOs) and voluntary bodies participated in the workshop. Issues debated were role of boards of directors, need for training and capacity building at the board level and promotion of transparency and credibility in the voluntary sector.

(Dr. Bindi Mehta)

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U.S Securities and Exchange Commission Chairman Harvey Pitt on Thursday proposed a tougher governing body for accountants to help prevent financial debacles like Enron's collapse.

Responding to growing complaints about bungled audits like Big Five accounting firm Anderson's work at fallen energy giant Enron, Mr Pitt proposed a supervisory body with new powers that would eclipse those of the profession's present overseer.

"We initially envision a public body that will be dominated by public members with two primary components-discipline and quality control", Mr. Pitt said at a news conference. The proposals were seen as a step in the right direction, but were greeted by top accountants as short on detail. "Without a doubt we need a new regulator independent of the accounting profession", said Lynn Turner, former SEC Chief Accountant and now a university professor in Colorado.

"But to the extent that it fails to incorporate a governing board comprised solely of public interests able to investigate, discipline and set auditing standards, it will miss the mark". Mr. Pitt said accountants and non-accountants would be involved in the new body. He said there would be no role in it for the American Institute of Certified Public Accountants, the trade group that now regulates the profession on its own, in conducting reviews and disciplining accounting firms.


(Source: Economic Times)

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What do ENRON, CENDANT, WARNACO, PSINET and WASTE MANAGEMENT INC. all have in common? All were large, publicly traded companies and like ENRON, all experienced sudden, unexpected, calamitous falls in value. In each case the companies were followed by various professionals: Wall Street analysts, accountants, auditors and regulators. Yet, none of those parties were able to warn shareholders, their employees, their creditors, outside vendors, sub-contractors nor their surrounding communities of what was to come.

Are more problems on the way? The trends and antidotal evidence certainly suggest it. Its been reported that more than 500 DOT-COM companies have announced bankruptcies this past year. Class actions claiming securities fraud in the U.S. have more than doubled this year over last, according to the Stanford Securities Class Action Clearinghouse1. Of course it's natural that when the market was booming, there were few complainers, but now it is becoming clear just how many companies where not accurately reporting their finances.

If you are involved, you might be responsible

It's more than just investors who stand to lose. Did you know that in the U.S. at least, Bankruptcy Courts are now ruling that even "innocent partners" totally unaware of another partners misdeeds, ("and certainly not benefiting from them"), can still be held responsible for the full amount of losses, because, according to recent court findings:

"the fraud of one is imputed to the other partners".

Board Directors, even those who believe they are protected by charter exemptions or liability insurance may also be in jeopardy. In Lukens Inc. vs. Shareholders litigation, the Court concluded:

"Plaintiffs have averred sufficient circumstantial evidence to permit the inference that one or more defendants (Board Directors) may have knowingly withheld material information from the Company's shareholders…and thus would not warrant immunity under the exculpatory clause of the Company's corporate charter."

And don't think your losses are necessarily confined to financial pain. Anyone or any company engaging another accused of fraud better be prepared to lose reputation and gain lots of legal fees.

How can liability be avoided? Proper accounting, effective internal controls and the oversight of auditing committees may have prevented most of these cases. There was certainly a Board of Directors in each case. But how does one find out if there was proper oversight of companies you are about to engage? Before your bank lends the money? Before your company supplies credit? Before your firm contracts with them for services, products or other commitments?

When the three A's (Analysts, Accountants and Auditors) are not enough
Forensic Accounting, Corporate Subsidiary Investigations

How does one protect themselves before entering into a strategic partnership, a significant investment in a public or private company, or simply agreeing to oversee business as a Board Member? We have already seen where financial analysts, accountants, auditors and other experts have failed the test in the most public venues.

The best answer is of course conducting your own Due Diligence, the kind supplied by investigative experts who specialize in the fields of pre-transaction intelligence, foreign market entry analysis, forensic accounting and asset discovery. This is especially true when operating internationally and yet it is amazing how many firms are willing to make sizable commitments in money, time, personnel and reputation, by engaging partners and parties they know little or nothing about. For a small fraction of the proposed investment, risks can be avoided, but few business executives investigate before its too late. Truly in today's business environment, the saying, "an ounce of prevention is worth a pound of cure" has never rung so true.

In the case of CENDANT CORPORATION, for example, a forensic investigation revealed (1) fictitious sales, (2) delayed recording of membership cancellations and credit card charge backs, (3) recording of long-term revenue as short-term sales, (4) use of reserves to create revenue. These were discoverable and could have been brought to light by an independent outside party. The lesson: Due Diligence matters.

In other recent cases of investigators performing background checks, before companies engaged in business with other parties, losses were prevented when (1) it was learned that a innocent looking Hungarian company had direct ties to the Russian mafia; (2) a Lebanese deal would require bribes and protection payoffs, and (3) a holding company was notorious for shifting assets in order to secure lending. In other cases, the discovery of international subsidiary holdings, including assets and debts revealed obvious improprieties. Much of this information was obtained in a time-sensitive and cost-effective manner by sophisticated sleuthing. Individuals and corporations, however stealthy, leave paper and information trails. But it certainly takes more than an internet search to find pertinent data. Professional investigators are the key. I can't stress it enough. Whether you are doing business with parties in the U.S. or elsewhere in the world, if you are in business, you are taking a terrible gamble if you don't know your customers, your partners, your vendors and your own employees. This fact has become an inseparable part of commercial transactions and must factor into our cost of doing business.

What are the key questions to ask?

What is the background of the key people in the business? Who really owns the companies involved? Do they own other companies, shell companies or subsidiaries that can receive or share assets? Are these companies connected to other organizations via, corporate charter, sub-contracts or Directors of the Board? Do the lifestyles and assets of principals' jive with their stories? Do their references and resumes match their representations? Are they involved in regulatory or civil actions? Are the parties reputable, or have they been involved with criminal or terrorist elements. Now, more than ever, security concerns are being added to financial risk of doing business with dubious parties.

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Mr. Chairman, delegates and invitees, it gives me a great pleasure addressing this conference at my favorite location in India. I have always found the warmth, intellectual stimulation and professional interaction as invigorating as the ayurvedic treatment and the scenic beauty of the God's own country.

The theme of the seminar and the title of this session demands a broad brush and yet a technically sound exposition. This indeed is a challenge considering that most deliberations on Corporate Governance make a binary choice of one or the other and run the risk of being dubbed as "waffle" or serious "nose picking".

In my attempt to meet this challenge, I will raise a few critical points in three parts:

1 Select generic issues and dilemmas
2 The contours of progress in Corporate Governance and the challenge for India
3 The debate regarding the connectivity among Corporate Governance, business performance and a better world.

1.0. Select Generic Issues and Dilemmas:
1.1. Corporate Governance has been defined in diverse manners arising primarily from the context and the disciplinary standpoint. These definitions broadly cover aspects of structures, systems, policies, practices, principles of board practice, shareholder meetings, shareholder rights, supervisory mechanisms, regulatory aspects, ethics and corporate social responsibility. Fortunately, this welt of perspectives has promoted the thirst for more knowledge and raised the attention levels. As the World Bank President, James Wolfenson, remarked "The proper governance of companies will become as crucial to the world economy as the proper governing of countries".

1.2. Corporate Governance has traversed from the theoretical propositions of Berle and Means (the work on modern corporation in 32) and of Coase ( the nature of the firm in 37) regarding aspects of ownership, control and transaction costs, after a lapse of over 50 years to being center stage for all modern business. Currently, corporate governance is being evaluated in terms of its ability to sub serve democratic principles, economic efficiency and public welfare.

1.3. It is in this context that multilateral agencies have started evolving principles and guidelines, which could help in creating policy environment that can promote corporate governance. Thus, the codes and principles prescribed by the IMF, OECD, the CACG, BIS, the IOSCO etc., have the purpose of nudging all countries and sensitive sectors to become active promoters of corporate governance in their policy framework. Of particular importance is the recent initiative by such multilateral organisations to address the issue of "International Financial Architecture" (a term coined in 1998) to address, inter alia, the increasing vulnerability of the financial system and its critical role in the stability of economies. There is concerted effort now amongst policy makers in several countries to ensure that governance structures are in place that would promote transparency, accountability, timeliness and continuous risk management at different levels of the economy. Hopefully, in the course of the next few years, there would be convergence within the country and also amongst countries to bring about a robust governance structure that could promote corporate stability, performance and accountability.

2.0. Contours of Progress in Corporate Governance and Challenges for India:
2.1. India has been actively involved in these efforts both at the multilateral as well as at the national levels. In the corporate arena, the CII code and the Kumara Mangalam Birla recommendations have created sufficient awareness and sensitivity amongst the listed companies. The measures by SEBI (particularly the amendment to Clause 49 of the listing agreement) have brought about noticeable churning up in board structures, reporting and disclosures. However, corporate governance is yet to pervade the Indian economy on similar lines as it has in some of the smaller and market oriented countries. This is despite the fact that several of the Indian companies are amongst the most admired in the world for their adherence to the spirit of corporate governance and social responsibility, going beyond the minimal obligations / requirements. Infosys, DRL, WIPRO have been oft cited in this context.

2.2. A study by ICSI-CCRT also reveals that most of the top 100 companies have restructured their boards in conformity with the global thinking ahead of the SEBI imposed requirements. (As of 2000, 70% of the 100 best performance companies had the requisite number of independent directors; and 80% had constituted audit committees and 47% had already given a chapter on corporate governance in their annual reports). Several companies, particularly those in the ICE segments, have started matching the international accountant standards, US GAAP and reporting and disclosure statements. Thus, inviting investor confidence and market respect.

2.3. Yet, there are several challenges before the country at the regulatory and as well as at the company level. A recent report alludes to the fact that 4% of companies in S&P Nifty and 24% of group A companies had not complied, as of 1st April, 2001, with the requirements of SEBI, and the respective stock exchanges were following up with these companies. Several corporate governance watchers appear to be doubtful of the quality of disincentives that will be imposed by the regulator on such defaulters - which in turn should encourage more to default in law or its spirit. There are questions being raised both on the will as well as the ability of the regulators in punishing the willful offenders. Recent news about the Department of Company Affairs` (DCA) approach towards the defaulting companies reinforces such an apprehension. It is reported the DCA is going soft on all those 150,000 companies which have not filed their returns or have not availed of the amnesty scheme - for reasons of potential inspector tyranny and the inability to deal with such a mass of culprits! Some believe that the real reason is to find comfort to the many "front" companies which have been systematically spiriting away funds without the knowledge of the common investors.

2.4. Nevertheless, the listed companies in the corporate sector have been fortunate to have some climate creation, if not action, by the SEBI to make them take a step towards corporate governance. There are massive sectors, which have been outside the net of any such concern. Such laxity is particularly evident in the case of government controlled unlisted companies and statutory bodies as well as most part of the banking sector. The reasons are primarily due to the inability or unwillingness to restructure the interface of the government, other superintending ministries / agencies and the regulators with the Boards and managements.

2.5. The challenge for the country is obviously both in tackling the policy environment as well as the quality of governance at the organisation level. One will not substitute the other. Any attempt with one will only bring in cynicism on account of the other. The size of the problem can be gauged by looking at some numbers.

(i) There are about 10,000 listed companies in 24 stock exchanges and over 150,000 companies.
(ii) About a 100 scheduled commercial banks (leaving the 67 in the co-operative sector and the 196 RRBs)
(iii) About 240 central public undertakings and over 1000 state level public enterprises. The size of corporate governance challenge is so massive that there is need for simultaneous advocacy, capacity building, training and development and policy and legislative reforms throughout the country.

3. The debate and evidence regarding the connectivity between Corporate Governance, business performance and a better world:

3.1. Good corporate governance is not merely a good symbolism or a socially desirable factor - it will be a hygiene condition for survival. In the current world several countries are competing for the limited financial flows. Finance will flow only where the markets can assure stability, transparency, accountability, responsive legal / settlement system and connected aspects of corporate governance. If India cannot join the race for corporate governance soon enough, it faces the dire prospect of further drop in its competitiveness, human development and trade. With dwindling flows, connected inefficiencies and loss of markets the world will look dim place for us - where the socio-economic benefits of good business practices will all have been a foregone opportunity.

3.2 At the enterprise level, there has been sufficient proof arising from the US markets to show that good corporate governance will lead to higher investor confidence and better Market Value Addition (MVA). There are several guesstimates, but one is that corporate governance improves the valuations by about 11%. Threats of take-over or an active market for control are also known to have contributed to higher MVA. The most admired companies also seem to be adhering to good corporate governance principles and there is reasonable basis to believe that good corporate governance leads to sustained performance.

3.3. Good corporate governance aimed at better MVA for the shareholders does not necessarily mean that the stakeholders will be pilloried. Despite the raging controversy on the "stakeholder theory" and its possible trades off with efficiency, it is becoming increasingly clear that the process of good corporate governance implies respect for law, ethical conduct and social responsibility. It may not support social activism and social action per se. Yet, stakeholder care is implicit in good corporate governance and this is irrefutable. The relevant OECD principle is a pointer to the philosophy of the imbedded ness of stakeholder care in pursuing shareholder value. The OECD principle III states "The corporate governance framework should recognize the rights of stakeholders as established by law and encourage active cooperation between corporations and stakeholders in creating wealth, jobs and the sustainability of financially sound enterprises"

a) The corporate governance framework should assure that the rights of stakeholders that are protected by law are respected.
b) Where stakeholder interests are protected by law, stakeholders should have the opportunity to obtain effective redress for violation of their rights.
c) The corporate governance framework should permit performance-enhancing mechanisms for stakeholder participation.
d) Where stakeholders participate in the corporate governance process, they should have access to relevant information"

3.4. Similarly the Commonwealth Association has adopted an inclusive approach and a triple bottom-line focus that accommodates public policy issues and social responsibility within the corporate governance framework. Like wise, the Global Forum for Corporate Governance (now headed by Ms Anne Simpson who had co-authored the book "Fair Shares") had referred to the complex sets of internal and external structures, agents and publics who form part of the corporate governance frame work. These include not only reputation agents but also the critical stakeholders interfacing the internal and the external players.

In conclusion, it is evident that we cannot have a better world without good corporate governance as the principles of corporate governance must spread among not only corporates but all businesses. The spirit of the Corporate Governance principles must pervade all forms of economic activity that are adding value to the society. The challenge before the nation is a massive one even as there is a global race to meet international standards to derive the socio-economic benefits implicit in a free flowing world. The corporate governance agenda is long and growing as much in front of the policy makers as the organizations themselves. The corporate boards, owners and policy makers need to build capabilities and more importantly, faith that good practices that promote corporate governance are less altruism and more of enlightened self-interest.

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Business India has reported an interesting study by Amit Dalal,
estimating the fair value of growth on the lines of the Sanity Test by David Stires for US stocks
reported in December 17th issue of Fortune, 2001.
The key results are as below. The results also suggest that
there are more number of companies in the positive Sanity Test Score list
which have a good corporate governance system.

Editor

Concepts of the Model:

The market value added (MVA): Net worth is the shareholder's equity. It is the value, as per the statement of accounts, which belongs to the shareholder in case the company is dissolved. Universally, prudent accounting results in the book value of net worth being much lower than the market value of net assets of any company.

If the market capitalization of a company is much lower than book value, the market has either identified hidden liabilities which would lower the value of net worth on dissolution; forecasts consistent negative growth in earnings or even losses; or the market has mispriced the stock.

MAV is the value that the current shareholders can get over and above the equity ownership represented by the financial accounts. It represents the market's perception of the company's ability to add value to the current book value from future earnings.

MVA = Market capitalization less book value of net worth.

Economic value added (EVA): EVA is the net operating cash profit (NOPT) earned by the company less the cost of capital. Non-cash charges like depreciation are added back to NPAT and non-operating items are reduced less the cost of capital.

EVA = (Net profit after tax-non-recurring items + depreciation) less: cost of capital

Present value of EVA earned to perpetuity (PV): The model computes the value of each company as the discounted value of each company as the discounted value of future earnings earned to perpetuity. The model has taken the previous year's EVA as unchanged in all future years.

PV - EVA/expected rate of return

Future growth value (FGV): While computing PV we assumed that EVA would remain constant to perpetuity. The differential between the market capitalization of the company and the PV indicates the market's forecast of future years' EVA.

FGV = Market capitalization less present value

Sanity Test (%): The ratio of FGV to MV of a company indicates the extent to which the market is valuing future growth. Higher the percentage greater is the optimism for the stock. To invest in a company with more than 50 percent Sanity Test, an investor must be certain about the substantially higher EVA growth estimate. A negative Sanity Test shows tremendous negative sentiment about the company.

Sanity Test (%) = Future growth value/market valuex100.

Companies with a negative Sanity Test

Companies with high Sanity Test ratios

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Mr. Bhide, Dr. Saha, Distinguished Chairpersons of banks, FIs, and friends,

The Annual Day of the NIBM has become an important event in the Bank's calendar that all of us look forward to, and I am glad to be with you once again. I am thankful to Mr. Bhide and the Board of the NIBM for giving me this opportunity for an exchange of views on the important subject of Corporate Governance in banks and financial institutions.

This is a timely initiative as the events of last year have made it clear that we in India still have some ground to cover in order to make all our banking institutions safe, sound and efficient. Banks including co-operative banks, NBFCs and FIs, are the custodians of public money, and it is of utmost importance that the public - as depositors, borrowers, and as participants in the economy - has full confidence in the banking system and the sanctity of banking transactions.

This is not possible until each and every institution participating in the financial system has internal management, governance and accountability structures which are upto the best possible standards. This is the reason - the overwhelming public interest - why this subject is so important.

I am also happy to know that, as part of its Annual Day celebrations, NIBM has organised seminars on two other important subjects - interest margins/cost of funds and convergence of business strategies with IT plan. The technical seminars make the Annual Day. - not only an occasion for celebration, but also for an interchange of views on important subjects of common interest among bankers. This is an important initiative and I would like to convey my appreciation to NIBM for organising the seminars at RBI's request.

Needless to say that both these subjects are exceedingly important and have tremendous long term significance for improving the performance of banks, particularly public sector banks. The question of differences in interest spreads in different segments of the banking sector, and the high operational costs of public sector banks in particular was discussed by the Board for Financial Supervision (BFS) of RBI, and NIBM was requested to conduct a study sometime ago. The study has been extensively discussed by banks and further refined in the light of comments. The seminar today will no doubt help in working out an action plan to reduce costs and make the interest rate structure more flexible.

Similarly, the study done by NIBM at the request of RBI on IT is of immense interest. Introduction of computerisation and IT is no longer a matter of choice - unless banks provide easy and fast access to their services, they are bound to lose business. This matter was also discussed by BFS, and followed up with a supplemental comparative study by the RBI on actual productivity and financial gains associated with IT in banks with different levels of computerisation and inter-branch connectivity. The technical sessions this afternoon on this subject, I am sure will be of interest to all the representatives of banks present here.

I am also glad that, in order to participate in the seminars and to give the benefit of his views, Shri Malegam, a member of the BFS and Board of RBI in addition to the RBI Deputy Governors, is also here. We are thankful to him for sparing his valuable time.

I have no special experience on issues relating to Corporate Governance, on which volumes have been written by management and business experts as well as some important committees in several organisations and countries, including OECD, U.K., U.S., and also in India. So with your permission, I would like to just share some random thoughts with you without any rigorous structure. I hope some of the general issues that I mention would be of relevance to your more technical discussions later.

Banks, corporations, financial institutions have been around for a very long time, and an interesting question to ask ourselves is - why this sudden flurry of interest in Corporate Governance? In the last few years, this subject has come to the fore, and a number of committees - the Cadbury Committee, the OECD Code, Combined Code of London Stock Exchange, the Blue Ribbon Committee in U.S, and the Kumara Mangalam Birla Committee in India - why? Why has this subject attracted so much attention in 2002 and not 10 or 20 years ago when all the institutions, banks, and corporations were very much there.

It seems to me that there are some fundamental reasons why Corporate Governance issues have become crucial.

(1) First, liberalisation and deregulation the world over. The regulatory framework and the sophistication of financial markets. In India, for example, earlier either the Government or the RBI will tell you what to do, today there are policies and priorities but considerable deregulation - who to lend, what maturity structure, interest rates, asset management - have to be decided by each bank. Greater freedom implies greater responsibilities. And there are many more players -public sector banks, private banks, co-operatives and NBFCs, etc. Markets are free and more complex.

(2) You may ask - so what? It is upto each corporation or its shareholders - if it does well, they will gain; if they don't, they will lose and so be it. It is their business, why should we collectively worry? Here, banks and financial institutions are in a completely different category. What happens in a particular bank is a concern of all. Fear of contagion and systemic implications. Think of some recent bad cases involving banks, including co-operative banks. Relatively small, but affected a lot of institutions, including some several times larger. In India, because of the dominance of public sector institutions, investors expect more. (Example of LTCM Fund in U.S).

(3) Another factor is that we live in a more volatile and inter- linked world. Effects are instantaneous. If one Letter of Credit fails, it may affect other countries and other institutions. So much greater international attention. Examples of East Asia and Japan. So international institutions are getting involved - in codes and standards, and in assessment of Corporate Governance Structure.

So, for all these reasons, this subject has acquired a completely new dimension and wider interest. And we can no longer avoid it. As you discuss the subject, please keep this in mind.

What is the core of Corporate Governance - for private entities, it may be profit. In the banking sector, it seems that it is risk containment, and early warning systems and prompt corrective action to avoid failure. It is not risk aversion, but risk assessment and providing adequately to cover risks. It is also clear that earlier the detection, the lesser the cost.

Obviously, without a viable and accountable Corporate Governance structure, all this is not possible, however able the CEO. The three essential ingredients of Corporate Governance in this context are:

(a) Checks and Balances: Auditing Committees, External and Internal accounting systems which are independent of decision making on credit and borrowings.
(b) Clear division of responsibility: Both vertical and horizontal, so that responsibility is taken by those who make the decisions.
(c) Disclosure and Transparency: So nothing stays hidden for long, once a decision has been made.

How do we in India fare in Corporate Governance in the financial sector? I am told that there are number of models of Corporate Governance -

(a) the "Outsider" model of the U.S. and U.K. type where there is separation of Ownership and Management; and

(b) the "Insider" model - as in Europe or Asia, where a small group of inter-connected shareholders exercise control over management. East Asian model is more family oriented while European model involves inter-connected entities. In the "insider" model, it is difficult to distinguish between shareholder and management respectively.

In India, in the financial sector, we now have all the three varieties with certain important differences with the U.S., Europe or Asia. Public sector banks/FIs, for example, are more akin to the 'outsider' model with separation of "Ownership' and 'Management'. Private sector banks/NBFC/Co-ops - much more "insider" models with families, inter-connected entities or promoters running the management. There is some uniformity in the Corporate Governance structure in the "outsider model" consists of relatively large public institutions, and which are also relatively old.

On the positive side:
(a) difference in 'Ownership' and 'Management';
(b) Disclosure and transparency(with one or two exceptions). They are also becoming subject to better accounting standards;
(c) Prudential norms - Capital Adequacy Ratio (CAR), provisioning, rec. norms are fairly good. Because of sovereign risk, money is also safe with one - two aberrations.

On the negative side:
(a) there is separation of 'Ownership' and 'Management', but no checks and balances. CEO as well as the Board is appointed by the owner, i.e Government
(b) Very little accountability to the Board as Board cannot remove the Chairman;
(c) Substantial limitations on management as staff issues are outside the purview of management;
(d) Weak on internal auditing and risk management.

The crucial issue that the country has to debate is whether Corporate Governance is compatible with public ownership, which makes the system accountable to political institutions and not to the economic institutions or even regulators. This is a big and fundamental issue which our country has to debate and decide. Is a "via media" possible? Could we have public ownership without Government or political control or do we need to change to a corporate structure? Is it possible to make the Boards responsible for appointment of CEOs, and make the Board appointments less discretionary on the part of the Government in power?

I don't want to express a view, but these are real issues. As the resolution of these issues will take considerable time, our task is to see what can be done within the present public sector structure.

Something can be done - better internal checks and balances, better auditing, better transparency, better enforcement of policies, better action over NPAs, timely action against frauds. I hope you will give consideration to these in the interim, while we debate the larger issues.

As regards the "insider" model, there is a tremendous variation both in terms of risk as well as Corporate Governance structure. By and large, the structure is very weak in Co-operatives and NBFCs for historical reasons, local practices, and multiplicity of regulators and laws. Old private banks also have very poor auditing and accounting systems. New private banks - generally good on accounting, but poor on accountability. More modern and computerised, but less risk conscious, One thing which is common to all is that Corporate Governance is highly centralised with very little real check on the CEO, who is generally also closely linked to the largest owner groups. Boards or auditing systems are not very effective.

So, in all the segments, and all different sizes of institutions, we have a great deal of work to do in the area of Corporate Governance. RBI has been working on new accounting, auditing and disclosure standards. Work is also in progress in setting better internal auditing and better system of checks and balances. A Committee of Ind. Dir. has also been set up under Dr. Ganguly, Member of the BFS to learn from the past experience. RBI and other regulators would do their best to bring about better standards, but ultimately it is upto the individual institutions, and the people managing them to ensure what actually happens on the ground.

Let me conclude. Corporate Governance has never been more imp than now. It is not only the business of an individual bank or entity, but of all of us. 5 or 10 years down the line, you would not be able to operate unless we have Corporate Governance of the best standards. In many areas, we have made progress in laying down what needs to be done. The important task now is to put appropriate mechanisms in place to enforce accountability, asset liability management, early warning and prompt corrective action systems. With your help, and the leadership shown by NIBM, I am sure we will get there.

In the end, let me congratulate Mr. Bhide and Dr.Saha once again. As you know, following Tarapore Committee, RBI has introduced important changes in the management structure of NIBM. NIBM has made substantial progress in the last couple of years I have no doubt that with the help of all of you, NIBM would become a truly national institution of distinction for improving the management and Corporate Governance in banks and financial institutions.

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