Principles of Corporate Governance

PRINCIPLES OF CORPORATE GOVERNANCE
HIDAYATULLAH NATIONAL LAW UNIVERSITY

RAIPUR, C.G.
CORPORATE - II PROJECT
ON
Project submitted to
Dr. Y. Papa Rao
Faculty, Corporate Law
Project submitted by
Sarthak Mishra
(Economics, Major)
Semester VI
Section B
Roll no. 131

TABLE OF CONTENTS
CERTIFICATE OF DECLARATION.........................................................................................2
ACKNOWLEDGEMENT............................................................................................................3
INTRODUCTION.........................................................................................................................4
RESEARCH METHODOLOGY.................................................................................................6
OBJECTIVES................................................................................................................................7
CHAPTERISATION.....................................................................................................................8
CHAPTER 1................................................................................................................................8
CHAPTER 2..............................................................................................................................10
CHAPTER 3..............................................................................................................................12
CONCLUSION............................................................................................................................15
BIBLIOGRAPHY........................................................................................................................17
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CERTIFICATE OF DECLARATION
I hereby declare that the project work entitled PRINCIPLES OF COPORATE
GOVERNANCE submitted to HNLU, Raipur, is record of an original work done by me under
the guidance of Dr. Y. Papa Rao, Faculty Member, HNLU, Raipur.
Sarthak Mishra
Roll. No. 131
Semester 6th
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ACKNOWLEDGEMENT
I am highly elated to carry out my research on the topic, PRINCIPLES OF CORPORATE
GOVERNANCE. I would like to give my deepest regard to my course teacher Dr. Y. Papa Rao,
who held me with his immense advice, direction and valuable assistance, which enabled me to
march ahead with this topic. I would like to thank my friends, who gave me their precious time
for guidance and helped me a lot in completing my project by giving their helpful suggestion and
assistance. I would like to thank my seniors for their valuable support. I would also like to thank
the library staff and computer lab staff of my university for their valuable support and kind
cooperation
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INTRODUCTION
India has the largest number of listed companies in the world, and the efficiency and well-being
of the financial markets is critical for the economy in particular and the society as a whole. It is
imperative to design and implement a dynamic mechanism of corporate governance, which
protects the interests of relevant stakeholders without hindering the growth of enterprises. The
scale of the financial crisis triggered by the bankruptcy of Lehman Brothers in autumn 2008 and
linked to the inappropriate securitization of US subprime mortgage debt led governments around
the world to question the effective strength of financial institutions and the suitability of their
regulatory and supervisory systems to deal with financial innovation in a globalized world. The
massive injection of public funding in the US and Europe up to 25% of GDP was
accompanied by a strong political will to learn the lessons of the financial crisis in all its
dimensions to prevent such a situation happening again in the future. In its Communication of 4
March 20091, effectively a programme for reforming the regulatory and supervisory framework
for financial markets based on the conclusions of the Larosire report2, the European
Commission announced that it would (i) examine corporate governance rules and practice within
financial institutions, particularly banks, in the light of the financial crisis, and (ii) where
appropriate, make recommendations, or even propose regulatory measures, in order to remedy
any weaknesses in the corporate governance system in this key sector of the economy.
Strengthening corporate governance is at the heart of the Commission's programme of financial
market reform and crisis prevention. Sustainable growth cannot exist without awareness and
healthy management of risks within a company. As highlighted by the Larosire report, it is clear
that boards of directors, like supervisory authorities, rarely comprehended either the nature or
scale of the risks they were facing. In many cases, the shareholders did not properly perform
their role as owners of the companies. Although corporate governance did not directly cause the
crisis, the lack of effective control mechanisms contributed significantly to excessive risk-taking
on the part of financial institutions. This general observation is all the more worrying because
corporate governance has been relied upon as one of the ways of regulating business life.
Consequently, there is a need to address the fundamental question of whether the existing
1 COM (2009) 114 final.
2 Report of the High-Level Group on Financial Supervision in the EU published on 25 February
2009.
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corporate governance regime is deficient as far as financial institutions are concerned or whether
it has rather been poorly implemented. In the financial services sector, corporate governance
should take account of the interests of other stakeholders (depositors, savers, life insurance
policy holders, etc), as well as the stability of the financial system, due to the systemic nature of
many players. At the same time, it is important to avoid any moral hazard by not diminishing the
responsibility of private stakeholders. It is therefore the responsibility of the board of directors,
under the supervision of the shareholders, to set the tone and in particular to define the strategy,
risk profile and appetite for risk of the institution it is governing.
This projects aims at enumerating the principles of the concept of corporate governance over the
period of time in the corporate sector and has tried to draw out an analogy between the older and
more recent norms of the corporate governance and thereafter find its relevance in the extremely
nascent and dynamic Indian corporate society.
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RESEARCH METHODOLOGY
The method of research adopted for the project is the analytical and descriptive method. The
texts that were used for the project include articles, research papers and news given in various
websites as well as online journals.
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OBJECTIVES
To discuss the concept of Corporate Governance in Financial Institutions.
To discuss about the various corporate governance initiatives taken in India till date.
To discuss about the recent policy steps taken by SEBI for ensuring better governance in
listed companies.
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CHAPTERISATION
CHAPTER 1
The Concept of Corporate Governance in Financial Institutions
The traditional definition of corporate governance refers to relations between a company's senior
management, its board of directors, its shareholders and other stakeholders, such as employees
and their representatives. It also determines the structure used to define a company's objectives,
as well as the means of achieving them and of monitoring the results obtained.3 In a narrow
sense, corporate governance involves a set of relationships amongst the companys management,
its board of directors, its shareholders, its auditors and other stakeholders. These relationships,
which involve various rules and incentives, provide the structure through which the objectives of
the company are set, and the means of attaining these objectives as well as monitoring
performance are determined. Thus, the key aspects of good corporate governance include
transparency of corporate structures and operations; the accountability of managers and the
boards to shareholders; and corporate responsibility towards stakeholders. While corporate
governance essentially lays down the framework for creating long-term trust between companies
and the external providers of capital, it would be wrong to think that the importance of corporate
governance lies solely in better access of finance.4 Companies around the world are realizing that
better corporate governance adds considerable value to their operational performance:
It improves strategic thinking at the top by inducting independent directors who bring a
wealth of experience, and a host of new ideas,5

It rationalizes the management and monitoring of risk that a firm faces globally,6
It limits the liability of top management and directors, by carefully articulating the
decision making process,7

It assures the integrity of financial reports,8
It has long term reputational effects among key stakeholders, both internally and
externally.
3 OECD'S PRINCIPLES OF CORPORATE GOVERNANCE, p. 11, (2004).

4DISCUSSION PAPER CORPORATE GOVERNANCE IN INDIA: THEORY AND PRACTICE, p. 2, National
Foundation for Corporate Governance, (2004).
5Supra Note 4.
6 Ibid at 4.
7 Id at 4.
8 Id at 4.
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In a broader sense, however, good corporate governance- the extent to which companies are run
in an open and honest manner- is important for overall market confidence, the efficiency of
capital allocation, the growth and development of countries industrial bases, and ultimately the
nations overall wealth and welfare. It is important to note that in both the narrow as well as in
the broad definitions, the concepts of disclosure and transparency occupy centre stage. In the first
instance, they create trust at the firm level among the suppliers of finance. In the second instance,
they create overall confidence at the aggregate economy level. In both cases, they result in
efficient allocation of capital.9
Two definitions of Corporate Governance highlight the variation in the points of view:
Corporate governance is concerned with ways of bringing the interests of investors and
manager into line and ensuring that firms are run for the benefit of investors.10
Corporate governance includes the structures, processes, cultures and systems that engender
the successful operation of organizations.11
In India, we have sought to resolve the shareholder vs. stakeholder debate by taking the view
that since shareholders are residual claimants, in well performing capital and financial markets,
whatever maximizes shareholder value should maximize corporate prosperity and best satisfy the
claims of creditors, employees, shareholders, and the State. Moreover, there exist well-defined
laws to protect the interests of employees, and recently framed legislations have considerably
strengthened the rights of the creditors. It is therefore appropriate that corporate governance
regulations in India seek to promote the rights of shareholders, while at the same time ensuring
that the interests of other stakeholders are not adversely affected.
9 F. MAYER; S. DEAKIN AND A. HUGHES (eds.), CORPORATE GOVERNANCE, COMPETITION, AND

PERFORMANCE, IN ENTERPRISE AND COMMUNITY: NEW DIRECTIONS IN CORPORATE GOVERNANCE,
Blackwell Publishers, Oxford, (1997).
10Ibid at 9.
11K. KEASEY, S. THOMPSON AND M. WRIGHT, CORPORATE GOVERNANCE: ECONOMIC, MANAGEMENT, AND FINANCIAL
ISSUES, Oxford University Press, London, (1997).
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CHAPTER 2
Corporate governance initiatives taken in India till date
There have been several major corporate governance initiatives launched in India since the mid1990s. The first was by the Confederation of Indian Industry (CII), Indias largest industry and
business association, which came up with the first voluntary code of corporate governance in
1998. The second was by the SEBI, now enshrined as Clause 49 of the listing agreement. The
third was the Naresh Chandra Committee, which submitted its report in 2002. The fourth was
again by SEBI, the Narayana Murthy Committee, which also submitted its report in 2002. Based
on some of the recommendation of this committee, SEBI revised Clause 49 of the listing
agreement in August 2003. Subsequently, SEBI withdrew the revised Clause 49 in December
2003, and currently, the original Clause 49 is in force.
The CII Code
More than a year before the onset of the Asian crisis, CII set up a committee to examine
corporate governance issues, and recommend a voluntary code of best practices. The
committee was driven by the conviction that good corporate governance was essential for
Indian companies to access domestic as well as global capital at competitive rates. The first
draft of the code was prepared by April 1997, and the final document (Desirable Corporate
Governance: A Code), was publicly released in April 1998. The code was voluntary, contained
detailed provisions, and focused on listed companies.
Kumar Mangalam Birla Committee Report
While the CII code was well-received and some progressive companies adopted it, it was felt that
under Indian conditions a statutory rather than a voluntary code would be more purposeful, and
meaningful. Consequently, the second major corporate governance initiative in the country was
undertaken by SEBI. In early 1999, it set up a committee under Kumar Mangalam Birla to
promote and raise the standards of good corporate governance. In early 2000, the SEBI board
had accepted and ratified key recommendations of this committee, and these were incorporated
into Clause 49 of the Listing Agreement of the Stock Exchanges.
The Naresh Chandra committee report on Corporate Governance
The Naresh Chandra committee was appointed in August 2002 by the Department of Company
Affairs (DCA) under the Ministry of Finance and Company Affairs to examine various corporate
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governance issues. The Committee submitted its report in December 2002. It made
recommendations in two key aspects of corporate governance: financial and non-financial
disclosures: and independent auditing and board oversight of management.
Narayana Murthy committee report on corporate governance
The fourth initiative on corporate governance in India is in the form of the recommendations of
the Narayana Murthy committee. The committee was set up by SEBI, under the chairmanship of
Mr. N. R. Narayana Murthy, to review Clause 49, and suggest measures to improve corporate
governance standards. Some of the major recommendations of the committee primarily related to
audit committees, audit reports, independent directors, related party transactions, risk
management, directorships and director compensation, codes of conduct and financial
disclosures.
Clause 49 of SEBI Regulations
Clause 49 of the Equity Listing Agreement consists of mandatory as well as non-mandatory
provisions. Those which are absolutely essential for corporate governance can be defined with
precision and which can be enforced without any legislative amendments are classified as
mandatory. Others, which are either desirable or which may require change of laws are classified
as non-mandatory. The non-mandatory requirements may be implemented at the discretion of the
company. However, the disclosures of the compliance with mandatory requirements and
adoption (and compliance) / non-adoption of the non-mandatory requirements shall be made in
the section on corporate governance of the Annual Report.
1. Mandatory provisions comprises of the following:
Composition of Board and its procedure - frequency of meeting, number of independent
directors, code of conduct for Board of directors and senior management;
Audit Committee, its composition, and role
Provision relating to Subsidiary Companies
Disclosure to Audit committee, Board and the Shareholders
CEO/CFO certification
Quarterly report on corporate governance
Annual compliance certificate
2. Non-mandatory provisions consist of the following:
Constitution of Remuneration Committee
Despatch of Half-yearly results
Training of Board members
Peer evaluation of Board members
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Whistle Blower policy
As per Clause 49 of the Listing Agreement, there should be a separate section on Corporate
Governance in the Annual Reports of listed companies, with detailed compliance report on
Corporate Governance. The companies should also submit a quarterly compliance report to the
stock exchanges within 15 days from the close of quarter as per the prescribed format. The report
shall be signed either by the Compliance Officer or the Chief Executive Officer of the company.
CHAPTER 3
Recent policy steps taken by SEBI for ensuring better governance in listed companies
The introspection that followed the Satyam episode has resulted in some major changes in
Indian corporate governance regime. Some of the recent steps taken in this regard are as
follows:
1. Disclosure of pledged shares:
It is made mandatory on the part of promoters (including promoter group) to disclose the
details of pledge of shares held by them in listed entities promoted by them. Further, it was
decided to make such disclosures both event-based and periodic.
2. Peer review:
In the light of developments with respect to Satyam SEBI carried out a peer review exercise
of the working papers (relating to financial statements of listed entities) of auditors in respect
of the companies constituting the NSE Nifty 50, the BSE Sensex and some listed
companies outside the Sensex and Nifty chosen on a random basis.
3. Disclosures regarding agreements with the media companies:
In order to ensure public dissemination of details of agreements entered into by corporates
with media companies, the listed entities are required to disclose details of such agreements
on their
websites and also notify the stock exchange of the same for public dissemination.
4. Maintenance of website:
In order to ensure/enhance public dissemination of all basic information about the listed
entity, listed entities are mandated to maintain a functional website that contains certain basic
information about them, duly updated for all statutory filings, including agreements entered
into with media companies, if any.
5. Compulsory dematerialization of Promoter holdings:
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In order to improve transparency in the dealings of shares by promoters including pledge /
usage as collateral, it is decided that the securities of companies shall be traded in the normal
segment of the exchange if and only if, the company has achieved 100% of promoters and
promoter groups shareholding in dematerialized form. In all cases, wherein the companies
do not satisfy the above criteria, the trading in securities of such companies shall take place
in trade for trade segment.
6. Peer reviewed Auditor:
It has been decided that in respect of all listed entities, limited review/statutory audit reports
submitted to the concerned stock exchanges shall be given only by those auditors who have
subjected themselves to the peer review process of ICAI and who hold a valid certificate
issued by the Peer Review Board of the said Institute;
7. Approval of appointment of CFO by the Audit Committee:
In order to ensure that the CFO has adequate accounting and financial management expertise
to review and certify the financial statements, it is mandated that the appointment of the CFO
shall be approved by the Audit Committee before finalization of the same by the
management. The Audit Committee, while approving the appointment, shall assess the
qualifications, experience & background etc. of the candidate.
8. Disclosure of voting results:
In order to ensure wider dissemination of information regarding voting patterns which gives
a better picture of how the meetings are conducted and how the different categories of
investors have voted on a resolution, listed entities are required to disclose the voting results/
patterns on their websites and to the exchanges within 48 hours from the conclusion of the
concerned shareholders meeting.
9. Enabling shareholders to electronically cast their vote:
In order to enable wider participation of shareholders in important proposals, listed
companies are mandated to enable e-voting facility also to their shareholders, in respect of
those businesses which are transacted through postal ballot by the listed companies.
10. Manner of dealing audit reports filed by listed entities:
SEBI board has approved a mechanism to process qualified annual audit reports filed by the
listed entities with stock exchanges and Annual Audit Reports where accounting irregularities
have been pointed out by Financial Reporting Review Board of the Institute of Chartered
Accountants of India (ICAI-FRRB). In order to enhance the quality of financial reporting
done by listed entities, it has been, inter-alia, decided that:
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a) Deficiencies in the present process would be examined and rectified.
SEBI would create Qualified Audit Report review Committee (QARC) represented by
ICAI, Stock Exchanges, etc. to guide SEBI in processing audit reports where auditors
have given qualified audit reports.
b) Listed entities would be required to file annual audit reports to the stock exchanges
along with the applicable Forms (Form A: 'Unqualified' / 'Matter of Emphasis Report';
Form B: 'Qualified' / 'Subject To' / 'Except For Audit Report').
c) After preliminary scrutiny and based on materiality, exchanges would refer these
reports to SEBI/QARC
d) Cases wherein the qualifications are significant and explanation given by Company
is unsatisfactory would be referred to the ICAI-FRRB. If ICAI-FRRB opines that the
qualification is justified, SEBI may mandate a restatement of the accounts of the entity
and require the entity to inform the same to the shareholders by making the
announcement to stock exchanges.
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CONCLUSION
The solution has been to improve the functioning of vital organs of the company like the board of
directors. The problem in the Indian corporate sector (be it the public sector, the multinationals
or the Indian private sector) is that of disciplining the dominant shareholder and protecting the
minority shareholders. A board which is accountable to the owners would only be one which is
accountable to the dominant shareholder; it would not make the governance problem any easier
to solve. Clearly, the problem of corporate governance abuses by the dominant shareholder can
be solved only by forces outside the company itself. Corporate governance abuses perpetrated by
a dominant shareholder pose a difficult regulatory dilemma in that regulatory intervention would
often imply a micro-management of routine business decisions. The regulator is forced to
confine himself to broad proscriptions which leave little room for discretionary action. Many
corporate governance problems are ill suited to this style of regulation. The past few years have
witnessed a silent revolution in Indian corporate governance where managements have woken up
to the power of minority shareholders who vote with their wallets. In response to this power, the
more progressive companies are voluntarily accepting tougher accounting standards and more
stringent disclosure norms than are mandated by law. They are also adopting more healthy
governance practices. It is evident that these tendencies would be strengthened by a variety of
forces such as:
Deregulation: Economic reforms have not only increased growth prospects, but they have
also made markets more competitive. This means that in order to survive companies will
need to invest continuously on a large scale.

Disintermediation: Meanwhile, financial sector reforms have made it imperative for firms to
rely on capital markets to a greater degree for their needs of additional capital.
Institutionalization: Simultaneously, the increasing institutionalization of the capital markets
has tremendously enhanced the disciplining power of the market.

Globalization: Globalization of our financial markets has exposed issuers, investors and
intermediaries to the higher standards of disclosure and corporate governance that prevail in
more developed capital markets.

Tax reforms: Tax reforms coupled with deregulation and competition have tilted the balance
away from black money transactions. This makes the worst forms of mis-governance less
attractive than in the past.
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While these factors will make the capital markets more effective in disciplining the dominant
shareholder, there are many things that the government and the regulators can do to enhance this
ability:
Disclosure of information is the pre-requisite for the minority shareholders or for the capital
market to act against errant managements. The regulator can enhance the scope, frequency,
quality and reliability of the information that is disclosed.

Regulatory measures that promote an efficient market for corporate control would create an
effective threat to some classes of dominant shareholders as discussed earlier.
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BIBLIOGRAPHY
A. PAHUJA, B.S. BHATIA DETERMINANTS OF CORPORATE GOVERNANCE DISCLOSURES: EVIDENCE
FROM
COMPANIES IN NORTHERN INDIA, IUP Journal of Corporate Governance, vol. 9(3), pp. 69-
88, (2010).
J.P. WALSH, J.K. SEWARD, ON THE EFFICIENCY OF INTERNAL AND EXTERNAL CORPORATE
CONTROL MECHANISMS The Academy of Management Review, vol. 15, NO.3, 421458, (1990).
N. BALASUBRAMANIAM, TOWARDS EXCELLENCE IN BOARD PERFORMANCE, The IIMB
Management Review, pp. 67-84, January-March, ((1997).
N. SIVAKUMAR, "VALUES-BASED CORPORATE GOVERNANCE AND ORGANIZATION BEHAVIOR
GUIDELINES FROM
MANUSMRITI FOR ETHICAL AND SOCIAL RESPONSIBILITY ," IUP Journal of
Corporate Governance, vol. 9(5), pp. 573-585, (2009).

R. BAJAJ, DRAFT CODE ON CORPORATE GOVERNANCE, CONFEDERATION OF INDIAN INDUSTRY,
(1997).
S. K. BARUA, & J. R. VARMA, FERA IN REVERSE GEAR; MNCS STRIKE GOLD, ECONOMIC
TIMES, NOVEMBER 12, 1993.
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PRINCIPLES OF CORPORATE GOVERNANCE

HIDAYATULLAH NATIONAL LAW UNIVERSITY