Despite welcome sops offered to Indias capital
markets in this years budget, the bourses have not
responded in a gung-ho fashion as expected and the investor,
particularly the small investor, is still avoiding the
from the ongoing US-led Iraq war, the main reason for
the low investor interest is the doubt in his mind whether
companies are following good corporate governance (GCG)
lack of GCG practices leaves the investor in an uncertain
frame of mind about a companys promoters and management.
The investor has now realised that the main reason for
the spectacular fall of once-deified companies like Enron
and many others was basically that they did not follow
practices essentially mean good management. Such practices
are not just for the benefit of shareholders but other
stakeholders of a company like the companys
creditors, vendors, employees and, last but not the
least, customers, whose stake, though intangible, is of
illustrate, not having GCG codes and practices would mean
that the shareholder is told that the company is making
profits while actually it may be making losses. The companys
bankers are assured that their monies are not being diverted
while in actuality they may be have been siphoned out.
vendor, often a small-scale unit in India, is unsure
that payments will be made on time. The plant manager
of the company is made to make false certifications that
the mineral water manufactured in his plant is according
to laid-down standards. Lastly, the customer is led to
believe that the mineral water he is consuming is according
to standards while actually it is not.
the initiative to improve GCG codes and practices, the
Securities and Exchange Board of India (SEBI) set up a
committee in November 2002 headed by Infosys chief mentor
N R Narayanamurthy to review the implementation of existing
GCG codes by listed companies and to recommend changes
to improve practices.
committee submitted its report to SEBI in mid-March 2003
and the report has been posted on SEBIs website
for comments from the general public and financial intermediaries,
which have to be submitted before 16 April 2003.
major recommendations of the committee are:
should lay down a code of conduct for all board members
and the senior management of the company.
the case of listed companies, the audit committee of
the company should review financial statements and draft
audit reports, including quarterly and half-yearly management
discussion and analysis of financial conditions and
results of operations.
audit committee also has to review reports related to
compliance with laws and risk management, management
letters of internal control issued by statutory internal
auditors and records of related third-party transactions.
members of the audit committee should be financially
literate and at least one member should have accounting
or related financial management expertise.
should move towards a regime of unqualified statements;
this recommendation is not mandatory, though.
raising money through a public issue should disclose
to the audit committee the uses and application of funds
by major category on a quarterly basis. In addition,
the company shall prepare a statement of funds utilised
for purposes other than those stated in the offer document
on an annual basis, which is to be certified by independent
auditors of the company.
practice of appointing nominee directors by financial
institutions should be discontinued. But if an institution
wishes to appoint a director on the board of the company,
it should be approved by the companys shareholders.
Such directors shall not be considered as independent
institutional director, thus appointed, shall have the
same responsibilities and shall be subject to the same
liabilities as any other director.
governments nominee on public sector companies
shall be elected with the approval of shareholders and
should be subjected to same responsibilities and liabilities
as any other director.
director will not have any material or pecuniary relationships
or transactions with the company, its promoters or its
senior management, except for receiving remuneration
as a director.
committee has said that it is in favour of ratings on
GCG by agencies like Crisil and ICRA. It has suggested
that companies should be rated on parameters of wealth
generation, maintenance and sharing as well as on GCG.
But the rating has not been mandatory as the ratings
process is still in a development phase.
recommendations are clearly designed to ensure that companies
set exemplary goals for themselves and adhere to their
goals. A regular review of operational performance ensures
that companies stick to their management objectives of
profitability and growth. A review of financial performance
ensures that the money is spent for the purposes for which
they are meant and financial malpractices, if any, are
detected at an early stage for which corrective action
can be taken.
most significant recommendation is regarding the composition
of the board of directors. This will ensure that directors
are independent and will function keeping the overall
interest of only the company into account. The change
in responsibilities and liabilities of nominee directors
will also ensure that there is no conflict of interest
between the institution they are representing and the
recommendations on GCG are largely meant to protect the
interests of shareholders and increase shareholder value.
The investor will be comfortable investing in a company
that follows recommended codes and practices. This will
go a long way in bringing the small investor to the capital
market, which it is shunning at the moment.
is awaiting recommendations from the general public and
financial intermediaries after which it will study them
and pass its ruling on the subject. Passing of the order
could take some time, as there are some dissenting voices,
especially with regard to the role of nominee directors.
however, would do well to start implementing the other
recommendations of the committee without waiting for SEBIs
order as that would improve their internal efficiencies;
it is not that only when ordered by the regulator that
certain practices have to be implemented.
like Infosys and Wipro have been implementing GCG much
before certain practices became mandatory and the success
achieved by these companies, their shareholders and other
stakeholders are there for all to see and emulate.
also see : www.sebi.gov.in