Third Edition
Corporate Governance in India An Evaluation
Subhash Chandra Das
Corporate Governance in India
Corporate Governance in India India An Evaluation Third Edition
Subhash Chandra Das Management Consultant Former Visiting Faculty Indian Institute of Social Welfare and Business Management University of Calcutta and Former Director (Finance), HPC Ltd.
Contents
Foreword
xiii
Preface
xv
Preface to the First Edition
xvii
List of Abbreviations
1
Introduction 1.1 1.2 1. 2 1.3 1.4 1.5
2
xix
Nature of the Study 1 Obj bjeect ctiive vess of of the the St Stud udy y 2 Issues Examined 3 Methodology 5 Design of the Study 6
Evolution of Corporate Governance in India 2.1 2. 1
1 –6
System Syst emss of of Corp Corpor orat atee Gov Gover erna nanc ncee in in Indi Indiaa 7 2.1. 2. 1.1 1 The Man Manag agin ing g Agenc Agency y Syste System m (1850 (1850–1 –1955 955)) 8 2.1. 2. 1.2 2 The Pro Promo mote terr Syst System em (19 (1956 56–1 –199 991) 1) 13 2.1.3 2.1 .3 The Ang Anglolo-Ame Americ rican an Sys System tem (199 (1992 2 and and Onw Onward ards) s)
7 –3 3
19
viii
3
Contents
Corporate Governance: The Conceptual Issues
34–67
3.1 3.2
Introduction 34 Philos Phi losoph ophy, y, Obj Object ective ivess and Pur Purpos poses es of Cor Corpor porate ate Governance 35 3.3 3. 3 Co Conc ncep eptt of Corpo Corpora rate te Gov Gover erna nanc ncee and and Its Fac Facto tors rs 36 3.3.1 3.3 .1 Corn Corners erstone tones/P s/Prin rincip ciples les of Corpor Corporate ate Gov Govern ernanc ancee 39 3.3. 3. 3.2 2 Th Theo eori ries es of of Corpo Corpora rate te Go Gove vern rnan ance ce 40 3.3. 3. 3.3 3 Un Unde derl rlyi ying ng Co Conf nfli lict ctss 41 3.4 Co Corp rpor orat atee Gove Govern rnan ance ce an and d Valu Valuee Cre Creat atio ion n 44 3.5 Gov Govern ernanc ance, e, Per Perform formanc ancee and and Deve Develop lopmen mentt at at Macro Macro and Micro Levels 45 3.6 Bu Busi sine ness ss Eth Ethic icss and and Cor Corpo pora rate te Go Gove verna rnanc ncee 47 3.7 3. 7 Co Corp rpor orat atee Soci Social al Res Respo pons nsib ibil ilit ity y (CSR (CSR)) and and Corporate Governance 48 3.8 3. 8 En Envi viro ronm nmen enta tall Issue Issuess and Corpo Corpora rate te Gove Governa rnanc ncee 49 3.9 Str Struct ucture uress and and Pro Proces cesses ses for Cor Corpora porate te Gov Govern ernanc ancee 50 3.9. 3. 9.1 1 Di Dire rect ctors ors—B —Boa oard rd of Dir Direc ecto tors rs (BOD (BOD)) 50 3.9. 3. 9.2 2 Bo Boar ard d Co Comm mmit itte tees es 58 3.9.3 Shareholders 61 3.9.4 3.9 .4 Inst Institu itutio tional nal Inve Investo stors rs (IIs) (IIs)/La /Large rge Sha Shareh rehold olders ers 63 3.9. 3. 9.5 5 Ot Othe herr Sta Stake keho hold lder erss 64 3.9.6 Auditors 65 3.9.7 Banks 66 3.10 3.1 0 Co Conc nclu ludi ding ng Re Rema marks rks 67
4
Corpor Corp orat ate e Gov Gover erna nanc nce e Cod Code e The The Wor orld ld Ov Over er— — Various Committees’ Reports, A Comparative Study 4.1 4.2
68–94
Introduction 68 Consti Con stitut tution ion of Some Some Ren Renown owned ed Com Commit mittee teess and and Sali Salient ent Features of Their Reports/Recommendations on Corporate Governance 70 4.2. 4. 2.1 1 The Ca Cadb dbur ury y Comm Commit itte teee Repor Reportt (199 (1992) 2) 70 4.2. 4. 2.2 2 Th Thee Green Greenbu bury ry Comm Commit itte teee Repo Report rt (199 (1995) 5) 72 4.2. 4. 2.3 3 The Ha Hamp mpel el Com Commi mitt ttee ee on Cor Corpo pora rate te Governance (1998) 73 4.2.4 4.2 .4 The Comb Combine ined d Code, Code, Princ Principl iples es of of Good Good Gover Governan nance ce and and Code of Best Practice, London Stock Exchange (1998) 75 4.2.5 4.2 .5 The Org Organi anizat zation ion for Eco Econom nomic ic Co-o Co-oper perati ation on and and Development (OECD) Principles on Corporate Governance (1999) 79
Contents
7.9 Best 7.9 Best Pra Pract ctic ices es and and Gov Gover erna nanc ncee Norm Normss for for CSR CSR 7.10 7.1 0 Co Conc nclu ludi ding ng Observ Observat atio ion n 218
8
218
Suggestions and Conclusions 8.1 8.2 8. 2
8.3
8.4
xi
219 – 255
Introduction 219 Sugg Su gges esti tion onss and Rec Recom omme mend ndat atio ions ns 220 8.2. 8. 2.1 1 Se Sect ctio ion n A: A: Str Struc uctu tura rall Cha Chang nges es 220 8.2.2 8.2 .2 Sec Sectio tion n B: Towar Towards ds a Compr Comprehe ehensi nsive ve and and Standa Standard rd Code Code of Corporate Governance and Disclosure Norms 222 8.2.3 8.2 .3 Sec Sectio tion n C: A Stan Standar dard d Code Code of Gove Governa rnance nce Prac Practic tices es and and Disclosure Norms on (a) Social Responsibility of Business, (b) Business Ethics, and (c) Environmental Issues 250 A Polic Policy y for Cus Custom tomiza izatio tion n and and Code Code Servi Servicin cing g for Cor Corpor porate ate Governance 254 8.3. 8. 3.1 1 Cus usto tom miz izaati tio on 254 8.3.2 Code Se Servicing 254 Conclusion 255
Appendices 1
List of Important SEBI Regulations
257–258
2
Corp rpo ora rate te Go Gove vern rna ance Sys ysttems: The USA SA,, The UK, Germany and Japan
259–263
3
Impact Impa ct of In Inte tern rnat atio iona nall Co Comm mmit itte tees es’’ Re Reco comm mmen enda dati tion ons s on National Committees’ Recommendations and Enactments in India on Corporate Governance 264–266
4
A Sn Snap aps sho hott of Cla lau use 49 of SE SEB BI Lis isttin ing g Agreement
267–269
Inform Info rmat atio ion n to to be be Pla Place ced d Bef Befor ore e Boa Board rd of Di Dire rect ctor ors s (Ann (A nnexu exure re IA IA of Cla Clause use 49 of of SEBI SEBI List Listing ing Ag Agree reemen ment) t)
270–27 270 –271 1
5
6
Format Form at of Qu Quar arte terl rly y Com Compl plia ianc nce e Rep Repor ortt on on Cor Corpo pora rate te Governance (Annexure IB of Clause 49 of SEBI Listing Agreement) 272–273
7
Sugges Sugg este ted d Lis Listt of of Ite Items ms to be In Incl clud uded ed in th the e Rep Repor ortt o on n Corporate Governance in the Annual Report of Companies (Annexure IC of Clause 49) 274–276
8
Boa Bo ard Stru ruct ctu ure of Se Sele lec cte ted d Co Compan anie ies s in in
Introduction
1.1
NATUR URE E OF OF TH THE E ST STUD UDY Y
Corporate governance is a system of structuring, operating, and controlling a company with a view to achieving long-term strategic goals to satisfy its shareholders, creditors, employees, customers and suppliers. It aims to comply with the legal and regulatory requirements, besides meeting the environmental and local community needs. It includes the policies and procedures adopted by a company to achieve its objectives in relation to its shareholders,, employees, customers suppliers, regulatory authorities and shareholders the community at large. It prescribes a Code of Corporate Conduct in relation to all the stakeholders. Therefore, a framework of effective accountability accountabili ty to the stakeholders is the essence of corporate governance. In India, the question of corporate governance has come up mainly in the wake of economic liberalization liberalizat ion and deregulation of industry and business as well as the demand for a new corporate ethos and stricter compliance with the legislation. In this context, where the financial institutions hold substantial stakes in companies, the accountability of all the directors,
Evolution of Corporate Governance in India
2.1
SYSTEM SYS TEMS S OF OF CORP CORPORA ORATE TE GOV GOVERN ERNANC ANCE E IN IN INDI INDIA A
Looking at the history, it can be said that a good corporate governance has always been an issue since the companies started using stock market to meet their financing needs. The history of East India Company (EIC) suggests how the first publicly listed company’s indulgence in trade and accounting malpractices led to the widespread public protests and demand for reform. A unique similarity of such corruptive practices has been observed even after 400 years and repeated in modern corporates like Enron and WorldCom. Executive greed, rampant corruption, insider trading and appalling corporate governance practices were all there. It is sheer irony that East India Company, where the seeds of the modern-day board were first sown, faired miserably on corporate governance front. Even then, the importance of practicing corporate governance principles was not played down. In India, every segment attached to the corporates has unanimously
Third Edition
Corporate Governance in India An Evaluation
Subhash Chandra Das This compact and concise text, now in its third edition, continues to give a clear analysis of the principles and practices of corporate governance—the corporate governance practices prevalent in India as well as in other industrialized countries around the globe. The book begins with an introduction to corporate governance, and then moves on to describe the evolution of corporate governance system. It gives a detailed description of the principles, philosophy, structure and the process of corporate governance. The text also contains sample study analyses of some listed Indian companies under BSE Sensex and NSE Nifty. Besides, it provides recommendations of various national committees on corporate governance reforms. In this edition, a new chapter on Corporate Social Responsibility and Sustainability has been added. Primarily intended for the students of management, law and commerce, the book can also be used by professionals, regulatory authorities and policy-makers. KEY FEATURES x
Outlines a road map for Indian companies to achieve international standards of corporate governance. Provides an explorative and evaluative study on the standards and practices of corporate governance in India. I ndia. x Includes figures and tables to give a better understanding of the concepts discussed. x
THE AUTHOR
SUBHASH CHANDRA DAS [MCom, FICWA, MWSOM (UK), PhD], a Management Consultant, is Former Director (Finance), Hindustan Paper Corporation (HPC) Limited, and a visiting faculty in many universities and B-Schools. He has over three decades of professional experience as a Financial and Organization & Methods (O&M) expert in Tata Steel, Greaves Cotton, Steel Authority of India Limited (SAIL), Hindustan Cables Limited (HCL), and Hindustan Paper Corporation (HPC) Limited. He has contributed more than twenty articles on management topics to journals and research bulletins of various professional and management institutes of the country. He has authored three books, Corporate Governance—Codes, Systems, Standards and Practices, Practices, Management Control Control Systems— Principles and Practices Practices,, and Project Management and Control , all published by PHI Learning, New Delhi.
You Y ou may also be interested in Business Policy and Strategic Management: Concepts and Applications, Applications, 2nd ed. (Revised), Vipin Gupta, Kamala Gollakota and R. Srinivasan Corporate Environmental Management: Management: A Study with Reference to India, India, Bhabatosh Banerjee Economic Environment of Business, Business, 3rd ed., Veena Keshav Pailwar
ISBN:978-81-203-4604-8
` 295.00 www.phindia.com
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CORPORATE GOVERNANCE IN INDIA : AN EVALUATION
DAS, SUBHASH CHANDRA EDITION: THIRD EDITION ISBN: 978-81-203-4604-8 PRINT EDITION PAGES: 320
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About The Book Book Description: This compact and concise text, now in its third edition, continues to give a clear analysis of the principles and practices of corporate governance — —the the corporate governance practices prevalent in India as well as in other industrialized countries around the globe.
The book begins with an introduction to corporate governance, and then moves on to describe the evolution of corporate governance system. It gives a detailed description of the principles, philosophy, structure and the process of corporate governance. The text also contains sample study analyses of some listed Indian companies under BSE Sensex and NSE Nifty. Besides, it provides recommendations of various national committees on corporate governance reforms. In this edition, a new chapter on Corporate Social Responsibility and Sustainability has been added. Primarily intended for the students of management, law and commerce, the book can also be used by professionals, regulatory authorities and policy-makers. KEY FEATURES :
Outlines a road map for Indian companies to achieve international standards of corporate governance. Provides an explorative and evaluative study on the standards and practices of corporate governance in India. Includes figures and tables to give a better understanding of the concepts discussed. Contents: Foreword • Preface • Preface to the First Edition • List of Abbreviations 1. Introduction 2. Evolution of Corporate Governance in India 3. Corporate Governance — —The The Conceptual Issues 4. Corporate Governance Code The World Over —Variou Over —Variouss Committees’ Committees’ Reports, Reports, A Comparati Comparative ve Study 5. Corporate Governance in India —Various Committ Committees’ ees’ Recommend Recommendations— ations— A Critical Analysis of of Various Regulati Regulations ons and Enactm Enactments ents and and Suggestions for Improvement 6. Corporate Governance Practice in India — India — A Case Study Study of Selected Listed Companies Companies for the Financia Financiall Year 2004 2004 – –2005 2005 7. Corporate Social Responsibility (CSR) and Sustainability 8. Suggestions and Conclusions Appendices 1. List of Important SEBI Regulations 2. Corporate Governance Systems: The USA, The UK, Germany and Japan 3. Impact of International Committees’ Recommendations on National Committees’ Recommendations and Enactments in India on Corporate Governance 4. A Snapshot of Clause 49 of SEBI Listing Agreement 5. Information to be placed Before Board of Directors (Annexure 1A of Clause 49 of SEBI Listing Agreement) 6. Format of Quarterly Compliance Report on Corporate Governance (Annexure IB of Clause 49 of SEBI Listing Agreement 7. Suggested list of items to be included in the Report on Corporate Governance in the Annual Report of Companies (Annexure IC of Clause 49) 8. Board Structure of Selected Companies in 2004 – 2004 –2005 2005 — —Industrywise Industrywise (Listed under BSE Sensex and NSE Nifty) 9. Board Strength of Executive Directors, Non-Executive Directors and Independent Directors of Selected Companies in 2004 – –2005 2005 (Listed under BSE Sensex and NSE Nifty) Bibliography • Index
