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Group Size and Composition: Not more than 10 students per group. Not more than 4
students should be from the same group that participated in the group projects in Term IV
Group Leader should be rotated in such a manner that every student gets a chance to lead.
Date of submission of Synopsis to professor & exchange among groups: 20.10. 2010
Date for suggestions from other groups/ sections to the presenter groups: 10 days prior to
presentation date. (Bonus mark for acknowledged suggestions, as accepted by Professor.)
SECTION – 3 ………………………………..
Coord. CR ………………………………..
1. Standard of Ethics in Tata Group of firms
GL vs. GD Goenka Group of firms
2. Corporate Governance–Genesis in USA
GL
3. Independence of the Board of Directors as
GL demonstrated in the US Companies
4. Leading scams in the USA and the role of
GL the Regulator/ Judiciary
5. Corporate Social Responsibility: A mask
GL for corporate misconduct/ breach of ethics
6. Governance of the Governor: Disclosures
GL to be made by Regulators in the USA
I have requested the Registrar to countersign and display this notice on the Notice Board.
ABSTRACT: While corporate governance may not dictate the economic prospects
of developing countries, it certainly plays an integral role in shaping them. This Note
contains a detailed analysis of the corporate-governance architecture of one such
developing country, India, from its independence in 1947 to the present. The results are
surprising: India's corporate-governance framework is sophisticated for a developing
country. However, considerable room remains for improvement. This Note presents a
series of suggestions designed to improve corporate governance in India. Most notably,
India must reform how its boards of directors function, improve its enforcement
mechanisms, redefine its corporate laws, and embrace corporate governance as a
philosophy.
I. INTRODUCTION
VI. CONCLUSION
I. INTRODUCTION
Former World Bank President James Wolfensohn "has equated the importance of the
governance of corporations to that of the governance of countries." According to the
Organisation for Economic Co-operation and Development ("OECD"), "Corporate
governance deals with the rights and responsibilities of a company's management,
its board, shareholders and various stakeholders." The spectacular collapses of Enron
and WorldCom in the United States, where shareholders lost a combined $245 billion,
and the collapse of Italian dairy giant Parmalat in Europe, have transformed corporate
governance from an afterthought to the cornerstone of any firm's or country's long-term
success.
Corporate governance in a developing-country setting takes on additional importance.
Good corporate governance is vital because of its role in attracting foreign investment.
The extent of foreign investment, in turn, shapes the prospects for economic growth for
many developing countries. This Note presents an in-depth inquiry into corporate
governance in one such developing country, India. While India's corporate-governance
framework is advanced for a developing country, it still can be significantly improved.
Part II discusses the importance of corporate governance for developing countries.
Part III provides a brief history of corporate governance in India. Part IV examines the
current standards of corporate governance in India. Finally, Part V recommends
improvements to India's corporate-governance framework.
Corporate governance reform in India has focused primarily on the "role and composition
of the board of directors." Each of the three sets of recommendations (the CII Code
recommendations from 1997, the Kumar Mangalam Birla Committee recommendations
from 2000, and the Murthy Committee recommendations from 2003) has advanced a
more nuanced and sophisticated understanding of corporate governance in this respect.
For example, while the CII Code was silent on the financial-literacy levels expected of
directors, (84) the Murthy Committee recommended that companies train their "Board
members ... in the business model of the company as well as the risk profile of the
business parameters of the company." (85) Another notable recommendation of the
Murthy Committee was that the Audit Committee be comprised entirely of "financially
literate non-executive members with at least one member having accounting or related
financial …
The Minister for Corporate Affairs stated that the main objectives of the Bill were to:
(i) to revise and modify company law in consonance with changes in the national
and international economy;
(ii) to bring about compactness by deleting redundant provisions and regrouping
scattered provisions;
(iii) to rewrite various provisions of the Act to enable easy interpretation;
(iv) to delink procedural aspects from substantive law and provide greater
flexibility in rule making to enable adaptation to the changing economic and
technical environment.
The Bill makes significant new and amended provisions with an emphasis on
enhancing corporate governance standards. Certain major issues of enhancing
corporate governance could be summarised as follows.
Shareholder Democracy
The Bill intends for less government intervention in the private sector and propagates
letting shareholders decide what they want to do, as this will reinforce shareholder
democracy. The Bill does not prescribe any limit on overall maximum managerial
remuneration, in contrast to the ceiling of 11% on total managerial remuneration
under existing company law; it also dispenses with the requirement of
Central Government approval in certain cases. Further, companies having paid-up
capital as may be prescribed, or transactions of prescribed limits, can enter into
related party transactions if approved by shareholders by way of special resolution,
unless the transaction is in the ordinary course of business and at arm’s length. This is
a departure from the existing Act, which requires approval from the Central
Government.
Listed companies for the first time would be required to submit a report to the
Registrar of Companies on each annual general meeting in the manner as may be
prescribed and to confirm that the meeting was convened, held and conducted as per
the legal requirements.
Independent Director
The Act remained silent on the provision of independent directors, which so far
remains the exclusive domain of the Securities Exchange Board of India. The Bill has
at last taken the long waited step of making provisions for appointment of
independent directors. Every listed public company is required to have at least one-
third of its directors as independent directors. The Bill empowers the Central
Government to prescribe the share capital of listed company and to prescribe the
minimum number of independent directors in other categories of public companies
and subsidiaries of public company.
The board has been given the responsibility of ensuring, while appointing an
independent director, that such independent director is a person of integrity, possesses
relevant expertise and experience, and is not disqualified to act as an independent
director. The board needs to submits a report in the general meeting that, in its
opinion, an independent director proposed for appointment fulfils the conditions
specified in the Bill for such an appointment.
The proposed company law attempts to lay down the duties of a director. A director is
required to act: (i) in accordance with the articles of association, (ii) in good faith to
promote the objectives of the company for the benefit of members; and (iii) in the
best interest of the company. A director also has to exercise his duties with due and
reasonable care, skill and diligence and is prohibited from achieving or attempting to
achieve any undue advantage either to himself or to his relatives, partners or
associates.
The Bill categories the managing director, chief executive officer, manager and, in
the absence of a managing director, chief executive officer or manager, the full-time
directors and directors, along with the company secretary and the chief financial
officer, as KMP and authorises the Central Government to prescribe the class or
description of companies which shall appoint KMP. In case of any vacancy in the
office of a KMP, the same is required to be filled by the board at its meeting within a
period of six months from the date of such vacancy. KMP are considered at par with
directors with regard to accountability in number of provisions, including treating
KMP as officer in default; requirements to submit information and remuneration
details to the registrar in annual returns; requirements to submit details of their
interest, if any, in explanatory statement for special businesses; requirements to
disclose interest in contracts; and prohibition of forward dealings, etc.
The Bill also proposes to expand matters that shall be decided only by way of
resolutions passed at board meetings. Such additional matters are; approval of
financial statements, director’s report, any scheme of arrangement / reconstructions /
takeover of a company, diversifications of the business of the company, and
acquisitions of a controlling stake in another company.
Additional Disclosures
The Bill provides for additional disclosures under the directors’ report, such as
shareholding pattern, number of board meetings held, disclosure relating to
managerial remuneration, particulars of inter-corporate loans / investments beyond
permitted ceilings, and particulars of related party contracts along with the
justification for entering into such contract or arrangement. Some of these disclosures
are part of the listing agreement applicable to listed company only. Further, additional
disclosures needs to be made in the annual return, such as particulars of holding /
subsidiary / associate companies, details of promoters and changes thereto, meetings
of members, board and committee meetings and attendance, remuneration of directors
and key managerial personnel, penalties imposed on company, its directors and
officers, and details of compounding of offences.
The Bill proposes to introduce a new concept of valuation through registered valuers
for certain major corporate actions, namely: (i) allotment of shares on preferential
basis; (ii) non cash transactions involving directors; (iii) arrangement with creditors
and members; (iv) purchase of minority shareholding; and (v) valuation of assets in
case of winding up, etc. The framework would ensure a uniform basis of valuation for
corporate actions, which is totally unregulated under the provisions of the existing
Act. Such valuers will be professionals, such as chartered accountants, company
secretaries, etc., and they are required to be registered with the Central Government.
The valuer would be appointed by the company for the valuation of any property,
stocks, shares, debentures, securities or goodwill, or the net worth of the assets of the
company. A valuer would be required to be appointed by the audit committee or in its
absence by the board of directors of that company.
For the first time in India, the Bill introduces the right of one or more members, or
class of members or creditors, to file a class suit. This will empower any one or more
members to take legal action in case of any fraudulent action on the part of company
and to take part in investor protection activities. It recognises submission of class
action suites in tribunal cases when shareholders or creditors are of the opinion that
the management or control of the affairs are conducted in a manner prejudicial to the
interest of the company or its members or creditors, including acts which are ultra
vires to the articles or memorandum, passing of a resolution by suppression of
material facts or misstatement, or any act which is contrary to provisions of the
company law or other laws.
The Bill has given free reign to corporates on the number of subsidiaries they can
have, but preparation of a consolidated statement and presentation at the annual
general meeting has been made mandatory, along with its financial statements. The
Central Government is proposed to assume power in consultation with the National
Advisory Committee on Accounting Standard to issue accounting standards. The
company will not only be required to adhere to accounting standards but also has to
comply with auditing standards. The Bill also recognises secretarial standards for first
time and makes it mandatory for companies to comply with respect to board and
general meetings.
The statutory auditor can render only such services as approved by board or audit
committee. The Bill has notified a list of services as prohibited services that an
auditor of a company can provide, such as, internal audit functions, investment
advisor, management services, actuarial services, accounting and book keeping etc.
This is will ensure independence of auditors.
The Bill envisages and provides for cross border amalgamation by mutual consent of
a foreign company with a company registered under the Bill or vice versa, and
authorises the Central Government to make detailed provisions and rules in this
regard.
Further, the Bill also provides that the merger of two small companies having such
share capital not exceeding Rs. 50 million or turnover not exceeding Rs. 200 million
as may be prescribed by the Central Government would not require approval of the
Court. Similarly, merger of a holding company with its wholly owned subsidiary
company would not require approval of the Court.
The Bill has substantially increased the amount of penalties. For example, for non
submission of an annual return, the company will be punishable with fine which shall
not be less than 50,000 rupees but which may extend to five lakhs rupees, and every
officer of the company who is in default shall be punishable with imprisonment for
six months or with fines not less than 50,000 rupees but which may extend to five
lakh rupees, or with both. Similarly, in cases where the company fails to comply with
any provisions with regard to charges, the minimum penalty would be Rs. 1 lac which
can go up to Rs. 10 lac and any officer of the company who is in default shall be
punishable with imprisonment for a term which may extend to six months or with
fines not less than Rs. 10,000 and which may extend up to Rs. 1 lacs, or with both.
Accordingly, the Bill indentifies a company as a separate entity for imposition of
monetary penalties from the officers in default.
Further, the statutory filing to the Registrar would be required to be submitted within
a specified time period. In case of delay, such statutory filing can be made within a
period of 270 days upon payment of an additional fee. However, in the case of default
in submitting the document even after 270 days, the company and its officers in
default, shall, without prejudice to the liability for payment of the fee and for an
additional fee, shall also be liable for action or liability for such failure or default.
Conclusion
The present Bill is an extract of corporate developments over the past five decades,
lessons learned from previous failures, and an attempt to plug the loopholes of
existing company law. The Bill proposes some far-reaching changes in the statutory
framework to address the business and investor community’s desire for a more
contemporary framework. The Ministry of Corporate Affairs (MCA) with support of
various forums has taken an initiative on public debate and seeking recommendation
on the proposed Bill. Accordingly, recommendations of earlier committees on
company law and various other recommendations – such as inclusion of specific
governing provisions for joint ventures companies, providing threshold limit for class
action suits, minimum level of disclosures in explanatory business for special
business to shareholders, inclusion of specific provisions on issuance of differential
voting shares by the company, free transferability of shares of public company, etc. –
have been made to the MCA for its consideration for inclusion into the Bill. Further,
upon legislature as law, corporates would see number of regulations which would be
notified on procedural aspects and would then bring more clarity on its actual impact
on corporate functioning and maintaining corporate governance.