GURU NANAK DEV UNIVERSITY COLLEGE

Ref NO……..
Dated……….

The board of control of the college in its meeting held on 28th January,2010 has decided to
adopt and implement the following formats for various certificated to be attached along
with project reports of MBA & MCA classes.

Student Declaration

This is to certify that the project entitled

“-----------------------------------------------------------------------------------------------------------
----------------------“ completed during the session ------------------------------ for MBA
degree is a bonafide piece of research work and all the sources used to complete this
project are duly acknowledged. In case the project report, or any part of it, is found to be
copied or quoted without reference, I shall be solely held accountable for the
repercussions arising therefrom.

Dated ……………….

Signature of the Student

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 Supervisor Certificate

The project entitled

“………………………………………………………………………………..” by
………………………………………….has been completed under my supervision.

Dated ………………..

Signature of the Supervisor

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 College Certificate

To whom it may concern

The project entitled “……………………………………………………………….”

Submitted by …………………………………… in the partial fulfillment for the award of
the degree of …………………………………………….. is a bonafide piece of work
completed during session.

Signature of Principal

3
INTRODUCTION TO CORPORATE GOVERNANCE

“ Corporate governance is about working ethically and

finding a balance between economic and social goals. It
includes the ability to function profitably while obeying laws,
rules and regulations”.

In the last decade, two events significantly contributed to making corporate governance
nearly a household term. The first was the wave of financial crises in Russia, Asia and
brazil in 1998, when the activities of the corporate sector influenced entire economics and
the global financial system. Three years latter, the corporate scandals in the U.S. had
highlighted the macroeconomic consequences of weak corporate governance systems. In
the aftermath, economists, the corporate world, and policy makers everywhere began to
recognize the importance of corporate governance.

The traditional analysis of corporate governance focused on the allocation of power and
duty among the Board of Directors, management and Shareholders. As the sole residual
claimants on company assets, shareholders were presumed to have the most incentive to
maximize company value. According to that perspective, the Board of Directors acted as
the shareholders agent and management was responsible for daily operations. In the
today’s scenario, the Board and management play the role of trustees.

4
Corporate governance is nothing more than how a corporation is administered or
controlled. Corporate governance takes into consideration company stakeholders as
governmental participants, the principle participants being shareholders, company
management, and the board of directors. Adjunct participants may include employees and
suppliers, partners, customers, governmental and professional organization regulators, and
the community in which the corporation has a presence. Because there are so many
interested parties, it’s inefficient to allow them to control the company directly. Instead,
the corporation operates under a system of regulations that allow stakeholders to have a
voice in the corporation commensurate with their stake, yet allow the corporation to
continue operating in an efficient manner. Corporate governance also takes into account
audit procedures in order to monitor outcomes and how closely they adhere to goals, and
to motivate the organization as a whole to work toward corporate goals. By using
corporate governance procedures wisely and sharing results, a corporation can motivate
all stakeholders to work toward the corporation’s goals by demonstrating the benefits, to
stakeholders, of the corporation’s success.

Corporate governance may include:

- Control and direction processes

- Regulatory compliance
- Active ownership and investment in a company

Primarily, though, corporate governance refers to the framework of all rules and
relationships by which a corporation must abide, including internal processes as well as
governmental regulations and the demands of stakeholders. It also takes into account
systems and processes, which deal with the daily working of the business, reporting
requirements, audit information, and long-term goal plans.

Corporate governance provides a roadmap for a corporation, helping the leaders of a

company make decisions based on the rule of law, benefits to stakeholders, and practical
processes. It allows a company to set realistic goals, and methodologies for attaining those
goals.

Development of corporate governance

In the 1800s, state corporation laws assisted in the creation of corporate boards, who
could govern, much like state congresses, without unanimous consent of shareholders.
This made the running of corporations much more efficient. As time passes, corporate
boards seem to be gathering more and more power, particularly with the inception of large
mutual funds and similar cash-building entities, which place another layer of organization
between stakeholders and corporate governors.

Fortunately, most people directly involved in corporate governance are honest and
interested in what’s best for the company, though there have been glaring and destructive

5
exceptions to that lately. Parties involved directly in corporate governance do not just
include the Board of Directors, but also the SEC, the company’s CEO, management, and
the more important shareholders. Shareholders typically delegate their decision-making
rights to managers to act in their best interests.

Corporate governance is based largely on trust – the trust, by the stakeholders, that
revenues will be fairly shared, and that those directly involved in running the company are
running it in an aboveboard, honest, and open manner, and that they represent the best
interests of the company and of the shareholders. Therefore, key elements of corporate
governance are honesty, trust and integrity, openness, responsibility, and accountability.
Recent new governmental regulation has attempted to reinforce these elements.

Business Ethics – the need of an hour

Ethics in general and of business ethics in particular provides a conceptual discussion of

the dynamics of ethics in society and the dynamics of business in the market place.

• Ethics is more than business foundation, it is a life foundation. It cannot be

compartmentalized.
• Business ethics has come to be considered a management discipline, especially
since the birth of social responsibility movement in the 1060s. in that decade,
social awareness movement raised expectations of business to use their massive
financial and social problems such as poverty, crime, environment protection,
equal rights, public health and improving education.

Corporate governance and economic development are intrinsically linked. Effective

corporate governance systems promote the development of strong financial systems
irrespective of whether they are largely bank- based or market-based, which in turn have
an unmistakably positive effect on economic growth and poverty reduction. Anglo-Saxon
countries US & UK pursues the interest of Shareholders. Japan, Germany, France
interests of all Stakeholders employees, customers as well as shareholders.

Corporate governance is a means whereby society can be sure that large corporations are
well-run institutions to which investors and lenders can confidently commit their funds.

 Is a term that refers broadly to the Rules, Processes, or Laws by which business
are operated, regulated and controlled. The term can refer to internal factors
defined by the officers, stakeholders as constitution of a corporation, as well as to
external forces such as customer groups, clients and government regulations.
 Safeguards against corruption and mismanagement, while promoting fundamental
values of a market economy in democratic society.
 (Considering the ethical failures in the last several years and the resulting crisis in
confidence)..A sincere commitment to creating and sustaining an ethical business
culture in public and private sectors (has norms been so important).

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Corporate Governance Norms

Corporate governance are the policies, procedures and rules governing the relationships
between the shareholders, directors and managers in a company, as defined by the
applicable laws, the corporate character, the company’s byelaws and formal policies.
Primarily it is about managing top management, building in checks and balances to ensure
that the senior executives pursue strategies that are in accordance with the corporate
mission. It consists of a set of processes, customs, policies, laws and institutions affecting
the way of a corporation is directed, administered or controlled. Corporate governance
governs the relationship among the many players involved and the goals for which the
corporation is governed.

Corporate governance is the set of processes, customs, policies, laws, and institutions
affecting the way a corporation (or company) is directed, administered or controlled.
Corporate governance also includes the relationships among the many stakeholders
involved and the goals for which the corporation is governed. The principal stakeholders
are the shareholders, management, and the board of directors. Other stakeholders include
employees, customers, creditors, suppliers, regulators, and the community at large.

Corporate governance is a multi-faceted subject.[1] An important theme of corporate

governance is to ensure the accountability of certain individuals in an organization
through mechanisms that try to reduce or eliminate the principal-agent problem. A related
but separate thread of discussions focuses on the impact of a corporate governance system
in economic efficiency, with a strong emphasis on shareholders' welfare. There are yet
other aspects to the corporate governance subject, such as the stakeholder view and the
corporate governance models around the world (see section 9 below).

There has been renewed interest in the corporate governance practices of modern
corporations since 2001, particularly due to the high-profile collapses of a number of
large U.S. firms such as Enron Corporation and MCI Inc. (formerly WorldCom). In 2002,
the U.S. federal government passed the Sarbanes-Oxley Act, intending to restore public
confidence in corporate governance.

Principal Players Of Corporate Governance

Management
Banks and Lenders
Board of Directors
Customers
Environment and Community at large
Regulators
Employees

7
Suppliers

Corporate Governance In India

The Indian corporate scenario was more or less stagnant till the early 90s.the position and
goals of the Indian corporate sector has changed a lot after the liberalization of 90s.
Indian’s economic reform programme made a steady progress in 1994. Indian with its 20
million shareholders, is one of the largest emerging markets in terms of the market
capitalization.

Corporate Governance Of India Has Undergone a Paradigm Shift

In 1996, confederation of Indian industry (CII), took a special initiative on corporate

governance. The objective was to develop and promote a code for corporate governance
to be adopted and followed by Indian companies, be these in the Private Sector, the Public
Sector, Banks or Financial institutions, all of which are corporate entities.
This initiative by CII flowed from public concerns regarding the protection of investor
interest, especially the small investor, the promotion of transparency within business and
industry.

Role Of Management In Banking Governance

Banking governance is a part of a larger framework of corporate governance, and begins

with support at the top management level. The senior management’s responsibilities are
reviewing and guiding corporate strategy, setting and monitoring achievement of
performance objectives and ensuring the integrity of the organizations systems. The top
management must also ensure that for appropriate BANKING GOVERNANCE, the
banking sector is properly aligned with the corporate strategic objectives of the firm.

The business goal and objectives of the organization must be well defined, and banks
must be well geared to share that vision. For this, expectations of the top management
should be clearly communicated to the banks, along with the effect of banking on the
various aspects of the firm’s business like growth, profitability, market share, service
quality. To set accountability at all levels, quantifiable goals must be set and
responsibilities clearly articulated. Clearly define objectives provide directions. Those
within banking department must be made aware of the relevant corporate governance
policies, procedures, and organizational objectives, so that they may understand them,
their scope and their relevance to their roles, and thus they may report risks due to
violations.

The banking unit should assist other business units in determining what business systems
are required to accomplish their mission and should specify how technology will be used
to achieve those objectives. Banking governance affects all the areas. Companies are
spending millions on banking governance.

8
Role Of Banks

The role of banks cannot be underestimated in a closely-knit business environment. The

concept of corporate governance, which emerged as a response to corporate failures and
widespread dissatisfaction with the way many corporates function, has become one of the
wide and deep discussions across the globe recently. It primarily hinges on complete
transparency, integrity and accountability of the management. There is also an
increasingly greater focus on investor protection and public interest. Corporate
governance is concerned with the values, vision and visibility. It is about the value
orientation of the organization, ethical norms for its performance, the direction of
development and social accomplishment of the organization and the visibility of its
performance and practices.

Indian Banking Industry

Indian banking has around 200 years of history and has undergone many transformations
since independence. But, Liberalization, Privatization and Globalization and Information
Technology are currently changing the Indian banking radically.

Earlier, banking was virtually a monopoly of the public sector banks with full protection
from the State. But the process of reforms in the Indian banking system has thrown them
out to more liberal and free market forces. Now the banks, more particularly the public
sector ones, feel the real heat of the competition. The interest rate cuts, dwindling margins
and more number of players to serve a reduced number of bankable clients have all added
to the worries of the banks. The customer has finally come to hold the center stage and all
banking products are tailor-made to suit his tastes and preferences. This sudden change in
the banking environment has bereaved the banks of all their comforts and many of them
are finding it extremely difficult to cope with the change.

Need for Corporate Governance in Banks

Since banks are important players in the Indian financial system, special focus on the
Corporate Governance in the banking sector becomes critical.

• The Reserve Bank of India, as a regulator, has the responsibility on the nature of
Corporate Governance in the banking sector.
• To the extent that banks have systemic implications, Corporate Governance in the
banks is of critical importance.
• Given the dominance of public ownership in the banking system in India,
corporate practices in the banking sector would also set the standards for
Corporate Governance in the private sector.
• With a view to reducing the possible fiscal burden of recapitalising the PSBs,
attention towards Corporate Governance in the banking sector assumes added
importance.

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Prerequisites for Good Governance

There are some pre-requisites for good corporate governance. They are:

• A proper system consisting of clearly defined and adequate structure of roles,

authority and responsibility.
• Vision, principles and norms which indicate development path, normative
considerations and guidelines and norms for performance.
• A proper system for guiding, monitoring, reporting and control.

Recommendations by the Birla Committee

The report of the Committee on Corporate Governance, set up by the Securities and
Exchange board of India, under the Chairmanship of Kumar Mangalam Birla, is the first
formal and comprehensive attempt to evolve a Code of Corporate Governance, in the
context of prevailing conditions of governance in Indian companies, as well as the state of
capital markets. The committee has identified the three key constituents of corporate
governance.

Shareholders' Role

The role of shareholders in corporate governance is to appoint the directors and the
auditors and to hold the board accountable for the proper governance of the company by
requiring the board to provide them periodically with the requisite information, in
transparent fashion, of the activities and progress of the company.

Board of Directors' Role

The board of directors performs the pivotal role in any system of corporate governance. It
is accountable to the stakeholders and directs and controls the management. It stewards
the company, sets its strategic aim and financial goals, and oversees their implementation,
puts in place adequate internal controls and periodically reports the activities and progress
of the company in a transparent manner to the stakeholders.

Management's Role

The responsibility of the management is to undertake the management of the company in

terms of the direction provided by the board, to put in place adequate control systems and
to ensure their operation and to provide information to the board on a timely basis and in a
transparent manner to enable the board to monitor the accountability of management to it.

The Basel Committee Recommendations

The Basel Committee published a paper for banking organisations in September 1999.
The Committee suggested that it is the responsibility of the banking supervisors to ensure
that there is an effective corporate governance in the banking industry. It also highlighted

10
the need for having appropriate accountability and checks and balances within each bank
to ensure sound corporate governance, which in turn would lead to effective and more
meaningful supervision.

Efforts were taken for several years to remedy the deficiencies of Basel I norm and Basel
committee came out with modified approach in June 2004. The final version of the
Accord titled " International Convergence of Capital Measurement And Capital
Standards-A- Revised Framework" was released by BIS. This is popularly known as New
Basel Accord of simply Basel ll. Base ll seeks to rectify most of the defects of Basel l
Accord. The objectives of Basel ll are the following:

• To promote adequate capitalization of banks.

• To ensure better risk management and
• To strengthen the stability of banking system.

Essentials of Accord of Basel ll

• Capital Adequacy: Basel ll intends to replace the existing approach by a system

that would use external credit assessments for determining risk weights. It is
intended that such an approach will also apply either directly or indirectly and in
varying degrees to the risk weighting of exposure of banks to corporate and
securities firms. The result will be reduced risk weights for high quality corporate
credits and introduction of more than 100% risk weight for low quality exposures.
• Risk Based Supervision This ensures that a bank's capital position is consistent
with overall risk profile and strategy thus encouraging early supervisory
intervention. The new framework lays accent on bank managements developing
internal assessment processes and setting targets for capital that are commensurate
with bank' particular risk profile and control environment. This internal
assessment then would be subjected to supervisory review and intervention by
RBI.
• Market Disclosures The strategy of market disclosure will encourage high
disclosure standards and enhance the role of market participants in encouraging
banks to hold and maintain adequate capital.

Steps to be taken

To overcome from these challenges, banks are required to emphasize on certain

factors, which will increase their transparency and lead to higher foreign investment.

• Self- Appraisal System: Good governance is like trusteeship. It is not just a matter
of creating checks and balance but it emphasizes on customer satisfaction and
shareholders value. The law regulates certain responsible areas on borrowing,
lending, investigating, transparency in accounts etc. The directors, there fore,
evaluate themselves through self-introspection.

11
 • The Board's Committees: It will be difficult for a board, with all the members
acting together on some issues, to achieve its objectives effectively and with apt
independence. The board, therefore, needs to be assisted by the some committee.
• Transparency: Transparency can reinforce sound corporate governance. Therefore,
public disclosure is desirable in Board Structure, Senior management, Basic
organisational structure and incentive structure of the bank.

Conclusion

Corporate governance has assumed vital role and significance due to globalization and
liberalization. With the opening of economy and to be in line with WTO requirements, if
the Indian corporates have to survive and succeed amidst increasing competition globally,
it can only be through transparency in operations. The excellence in terms of customer
satisfaction, in terms of return, in terms of product and service, in terms of return to
promoters and in terms of social responsibilities towards society and people cannot be
achieved without practicing good corporate governance.

The National Task Force

A national task force was set up. The task force presented the draft guidelines and the
code of corporate governance (Desirable Corporate Governance Code) in April 1997 (at
the National Conference and annual sessions of CII)
Since 1974, CII has tried to chart new path in terms of the role of an industry association
such as itself. It has gone beyond dealing with the traditional work of interacting with
Government of policies and procedures which impact on industry.

CII has taken initiative in quality, environment, energy, trade fairs, social development,
international partnership building etc. as part of its process of development and expanding
contribution to issues of relevance and concern to industry.

Securities and Exchange Board Of India

The government of India’s securities watchdog, the securities Board of India, announced
strict corporate governance norms for publicly listed companied in India.
The Indian economy was liberalized in 1991. In order to achieve the full potential of
liberalization and enable the Indian Stock Market to attract huge investments from
Foreign Institutional Investors (FII)s , it was necessary to introduce a series of stock
market reforms .
SEBI established in 1998 and became a fully autonomous body by the year 1992 with
defined responsibilities to cover both development and regulation of the market.

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Securities Exchange Board of India

• On 12 April 1988, the securities and exchange board of India (SEBI) was
established with a dual objective of protecting the rights of small investors and
regulating and developing the stock market in India.
• In 1992, the Bombay Stock Exchange (BSE), the leading stock exchange in India,
witnessed the firs major scam masterminded by HARSH MEHTA.
• Analysts unanimously felt that if more powers had been given to SEBI, the scam
would not have happened.
• As a result the Government of India (GoI) brought in a separate legislation by the
name of SEBI Act 1992 and conferred statutory powers to it.
• Since then, SEBI had introduced several stock market reforms. These reforms
significantly transformed the face of Indian Stock Markets.

SEBI CLAUSE 49

 SEBI asked Indian firms above a certain size to implement clause 49, a regulation
that strengthens the role of independent directors serving on corporate boards.
 On 26 august,2003, SEBI announced an amended clause 49 of the listing
agreement which every public company listed on an Indian Stock Exchange is
required to sign. The amended clauses come into immediate effect for companies
seeking a new listing.

Clause 49, which has recently been revised by the SEBI, of the listing agreement between
listed companies and the stock exchanges is all set to enhance the corporate governance
(CG) requirements, primarily through increasing the responsibilities of the Board,
consolidating the role of the Audit Committee and making management more
accountable.

 These changes are aimed at moving Indian companies rapidly up the evolutionary
path towards business processes and management oversight techniques.

Major Changes To Clause 49

1). Independent Directors - 1/3 to ½ depending whether the chairman of the board is a
non-executive or executive position.

2). Non-Executive Directors - the total term of office of non- executive directors is now
limited to three terms of three years cash each.

13
3). Board Of Directors – the board is required to frame a code of conduct for all board
of members and senior management and each of them have to annually affirm compliance
with the code.

4). Audit Committee – financial statements and the draft audit report/ reports of
management discussion and analysis of financial condition and results of operations/
reports of compliance with laws and risk management/ management letters and letters of
weaknesses in internal controls issued by statutory and internal auditors/ appointment,
removal and terms of remuneration of the chief internal auditor.

5). Whistleblower policy – this policy has to be communicated to all employees and
whistleblowers should be protected from unfair treatment and termination.

6).Subsidiary Companies – 50% non- executive directors & 1/3 & ½ independent
directors depending on whether the chairman is non-executive or executive.

7).Disclosures – contingent liabilities/ basis of related party transactions/ risk

management/ proceeds from initial public offering/ remuneration of directors.

8). Certifications – reviewed the necessary financial statements and directors report;
established and maintained internal controls, disclosed to the auditors informed the
auditors and audit committee of any significant changes in internal control and of
accounting policies during the year.

The clause 49 of the listing agreement of SEBI act is the outcome of Narayana Murthy
Committee, which has come into effect on 1st January 2006.

 Amended clause 49 of the listing agreement.

 Aid to corporate governance.

• Control Environment
• Risk Assessment and Management.

Industrial Policy & Foreign Investment

The industrial policy was introduced in July 1991 achieved a dramatic overhaul of
regulations governing foreign investment. Government approval for equity investments of
up to 51 % in 35 industries covering the bulk of manufacturing activities is automatic.
Requests to increase equity stakes beyond 51% still require approval from the
Government’s Foreign Investment promotion Board. All sectors of the Indian economy
are now open to foreign investment except those with security concerns such as Defense,
Railways and Atomic Energy.

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Industrial Policy

Industrial policy- the government’s liberalization and economic reforms programme aims
at rapid and substantial economic growth and integration with the global economy in a
harmonized manner. The industrial policy reforms have removed the industrial licensing
requirements, removed restrictions on investment and expansion and facilitated easy
access to foreign technology and foreign direct investment.

Foreign Direct Investment- government wishes to facilitate Foreign Direct Investment

(FDI) and investment from Non-Resident Indians (NRI)s including Overseas Corporate
Bodies (OCB)s, that are predominantly owned by them, to complement and supplement
domestic investment. Investment and returns are freely repatriable, except where the
approval is subject to specific conditions such as lock in period on original investment,
dividend cap, foreign exchange neutrality etc. as per the neutrality sectoral policy.

Foreign Direct Investment(FDI)

Foreign Direct Investment is freely allowed in all sectors including the services sector,
except where the existing and notified sectoral policy does not permit FDI beyond a
ceiling .FDI for virtually all items can be brought in through the automatic route under
powers delegated to the Reserve Bank Of India (RBI) and for there maining items through
Government approval. Government approvals are accorded on the recommendation of the
Foreign Investment Promotion Board (FIPB) chaired by the secretary, department of
Industrial policy and Promotion (Ministry of Commerce & Industry) with the union
Finance Secretary, Commerce Secretary and other key Secretaries of the Government as
its members.

15
 Introduction To The Topic

Various acts like the “Sarbanes- Oxley Act of 2002” have heralded an era in which
shareholders wealth has been linked to corporate governance and accountability. There
are a number of high profile cases that corroborate the serious implications of failure to
adhere to government legislations and both horizontal and vertical market regulations. In
addition to this are perhaps more important factors, the additional cost and the burden on
resources that are generated by an inadequate awareness and compliance program, for
instance the cost of preparing for internal and external audits reports. A good corporate
governance strategy is necessary for minimizing risk and maximizing returns. Today
corporate governance is not a management fad but a reality and is taking the corporate
houses by a storm. The numerous debates on the topic and the development in the
corporate world are slowly changing our understanding of corporate governance. This
paper attempts to look at the role of Banking in corporate governance or Banking
governance, as it is properly known as. There are numerous technological innovations
which are lending a helping hand towards corporate governance, but this article looks at
the broader picture of the interface of banking and corporate governance. Banking
governance is a fusion of the business process with banking. It is already changing the
face of records and information management. Banking governance does not need multi-
million dollar budgets.

Banking governance is the way in which banking supports the various “Corporate
governance” initiatives and standards of the organization. Most organizations struggle
while putting up in places a banking governance policy and face even more challenges
when they try to map it onto the various management and operational issues. Many
organizations are beginning to realize that the rules of corporate governance spillover to
banking because there has to be some sort of structure in place to ensure that the
company’s strategies and objectives are being supported by its banking systems. Banking
governance is continuously refined and redefined.

COBIT (Control Objectives For Information And related Technology) defines banking
governance in its executive summary as “ a structure of relationship and process to direct
and control the enterprise in order to achieve the enterprise goals by adding value while
balancing risk versus return over banking and its processes.”

16
 Review Of Literature

The success of any market research calls for the development of the most efficient plan
for gathering the needed information. For the very purpose of project undertaken, I come
across certain studies, which are conducted in relation to topic. Papers which are to some
extent related to my topic are discussed below.

“Corporate governance in India” by Mr. Pradeep Kumar Gupta, associate lecturer, LM

Thapur School of Management , Patiala, Feb 2009. While corporate governance may not
state the economic prospectus of developing countries, it certainly takes part in shaping
them. Good corporate governance is vital because of its role in attracting investors to
invest not in the domestic and in the international capital markets. Investors primarily
consider two variables before making investment decision in the components the rate of
return on invested capital and the risk associated with the investment. Good corporate
practices reduce this risk by ensuring transparency, accountability and enforceability in
the capital marketplace. As a result, investors except the board and management in the
companies to act in their best interests at all times as to earn a risk adjusted rate of return
that is higher than the cost of capital. Practices that the board of directors of a listed entity
follows to fulfill the expectations of all the stakeholders(i.e. shareholders, employees,
creditors, customers, government, regulatory authorities ans socirty at large) is called
corporate governance practices.

“Corporate governance in India” by Tafzeel EL-Majid Mazki, G Srikanth and 2004.

Taking cues from several other best governance practices in the world, Indian Corporate
Governance has evolved over the last few years.Three different committies had been set
up whose recommendations are adopted in same measure. Some of these
recommendations are made mandatory while many others are yet to see the light of the
day. India, becoming a major FDI destination for many global companies, and Indian
companies going global, the need for prudent corporate governance practices is
increasing.

“CORPORATE GOVERNANCE IN INDIA; CONCEPT, COURSE OF ACTION AND

COMPLIANCE” by Mr. Pradeep Kumar Gupta, Feb 2009 Volume 3 Issue 4/4. while
corporate governance may not state the economic prospects of developing countries, it
certainly takes part in shaping them. Good corporate governance is vital because of its
role in attracting investors to invest both in the domestic and in the international capital
markets. Investors primarily consider two variables before making investment decision in
the companies-the rate of return on invested capital and the risk by ensuring transparency,
accountability and enforceability in the capital marketplace. As a result, the investors
expect the Board and the Management in the companies to act in their best interests at all
times so as to earn a risk adjusted rate of return that is higher than the cost of capital.
Practices that the Board of Directors of a listed entity follows to fulfill the expectations of
all stakeholders (i.e. shareholders, employees, creditors, customers, government,
regulatory authorities and society at large) is called corporate governance practices. While
sound corporate governance practices ensure a company’s long-term success, weak
practices often lead to serious problems.

17
“Corporate governance in India – Evolution and Challenges” by Rajesh Chakrebarti.
While recent high-profile corporate governance failures in developed countries have
brought the subject to media attention, the issue has always been central to finance and
economics. The issue is particularly important for developing countries since it is central
to financial and economic development. Recent research has established that financial
development is largely dependent on investor protection in a country – de jure and
defacto.

With the legacy of the English legal system, India has one of the best corporate
governance laws but poor implementation together with socialistic policies of the
performance has affected corporate governance. Concentrated ownership of shares,
pyramiding and tunneling of funds among group companies mark the Indian corporate
landscape. Boards of directors have frequently been silent spectators with the DFI
nominee directors unable or unwilling to carry out their monitoring functions. Since
liberalization, however, serious efforts have been directed at overhauling the system with
the SEBI instituting the clause 49 of the listing agreements dealing with corporate
governance. Corporate governance of Indian banks is also undergoing a process of change
with move towards more market- based governance.

Objectives

1. To study and anaylse the reporting practices of corporate governance in Banking

Sector.

2. Comparison in practices in public and private sector banks.

Introduction To Sample Units

o State Bank Of India

o Punjab National Bank
o Union Bank
o HDFC
o Axis Bank
o ICICI

18
 State Bank Of India

The bank traces its ancestry to British India, through the Imperial Bank of India, to the
founding in 1806 of the Bank of Calcutta, making it the oldest commercial bank in the
Indian Subcontinent. The Government of India nationalised the Imperial Bank of India in
1955, with the Reserve Bank of India taking a 60% stake, and renamed it the State Bank
of India. In 2008, the Government took over the stake held by the Reserve Bank of India.

SBI provides a range of banking products through its vast network in India and overseas,
including products aimed at NRIs. The State Bank Group, with over 16000 branches, has
the largest branch network in India. With an asset base of $250 billion and $195 billion in
deposits, it is a regional banking behemoth. It has a market share among Indian
commercial banks of about 20% in deposits and advances, and SBI accounts for almost
one-fifth of the nation’s loans.

SBI has tried to reduce over-staffing by computerizing operations and Golden handshake
schemes that led to a flight of its best and brightest managers. These managers took the
retirement allowances and then went on to become senior managers in new private sector
banks.

The State bank of India is the 29th most reputed company in the world according to
Forbes.

State Bank of India is one of the Big Four Banks of India with ICICI Bank, Axis Bank
and HDFC Bank.

The roots of the State Bank of India rest in the first decade of 19th century, when the
Bank of Calcutta, later renamed the Bank of Bengal, was established on 2 June 1806. The
Bank of Bengal and two other Presidency banks, namely, the Bank of Bombay
(incorporated on 15 April 1840) and the Bank of Madras (incorporated on 1 July 1843).
All three Presidency banks were incorporated as joint stock companies, and were the
result of the royal charters. These three banks received the exclusive right to issue paper
currency in 1861 with the Paper Currency Act, a right they retained until the formation of
the Reserve Bank of India. The Presidency banks amalgamated on 27 January 1921, and
the reorganized banking entity took as its name Imperial Bank of India. The Imperial
Bank of India continued to remain a joint stock company.

Pursuant to the provisions of the State Bank of India Act (1955), the Reserve Bank of
India, which is India's central bank, acquired a controlling interest in the Imperial Bank of
India. On 30 April 1955 the Imperial Bank of India became the State Bank of India. The
Govt. of India recently acquired the Reserve Bank of India's stake in SBI so as to remove
any conflict of interest because the RBI is the country's banking regulatory authority.

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Offices of the Bank of Bengal

In 1959 the Government passed the State Bank of India (Subsidiary Banks) Act, enabling
the State Bank of India to take over eight former State-associated banks as its subsidiaries.
On Sept 13, 2008, State Bank of Saurashtra, one of its Associate Banks, merged with
State Bank of India.

SBI has acquired local banks in rescues. For instance, in 1985, it acquired Bank of Cochin
in Kerala, which had 120 branches. SBI was the acquirer as its affiliate, State Bank of
Travancore, already had an extensive network in Kerala.

State Bank of India has often acted as guarantor to the Indian Government, most notably
during Chandra Shekhar's tenure as Prime Minister of India. With 11,448 branches and a
further 6500+ associate bank branches, the SBI has extensive coverage. State Bank of
India has electronically networked all of its branches under Core Banking System (CBS).
The bank has one of the largest ATM networks in the region, with more than 9000 ATMs
across India. The State Bank of India has had steady growth over its history, though it was
marred by the Harshad Mehta scam in 1992. In recent years, the bank has sought to
expand its overseas operations by buying foreign banks. It is the only Indian bank to
feature in the top 100 world banks in the Fortune Global 500 rating and various other
rankings.

Highlights For 2007-2008

 Income was for the quarter ended December 31,2008.

 Net profit after tax was crore for the quarter ended December 31,2008.
 Earnings per share increased to from in the corresponding quarter in the previous
year.

Highlights For 2008-2009

• Income was Rs32231.45crore for the quarter ended December 31, 2009.
• Net profit after tax was Rs2479.05crore for the quarter ended December 31, 2009.
• Earnings per share increased to Rs34.83% from Rs23.49% in the corresponding
quarter in the previous year.

Financial Results

20
Conclusion

 State Bank of India is the largest public sector bank in the country. It has
maintained its leadership position across financial products
 and has aggressively expanded its deposit and advances book in recent past thus
gaining market share. The bank is looking to
 increase its market share in a rapid way and that could have a negative impact on
its cost to income ratio and profits over the near
 term.
 The asset quality of the bank continues to be a matter of concern. It has managed
to slightly increase its CASA during the quarter.
 While the bank seems to have managed its NIM during Q3FY10, the Cost to
Income ratio has become a major area for concern. The
 need for further provisioning to adhere to the latest RBI’s regulation of 70%
coverage will mean a hit on EPS and ABV in the quarters to
 come.
 SBI remains leveraged to the economy. It can however under perform if the signs
of economic recovery prove to be temporary.
 In our previous result update (Q2FY10 update) we had revised upwards our FY10
(E) EPS and BV estimates but downward the
 Adjusted BV. We had estimated that it could trade in the Rs.1875 – Rs 2315 band
for the next couple of quarters. SBI later made a high
 of Rs 2368 in November 2009, after which it touched a low of Rs 1974 in January
2010. SBI currently quotes at 12.26 times FY10 (E)
 EPS and 2.37 times FY10 (E) Adj. BV. Rising NPAs, requirement of enhanced
provisions and depressed NIMs are key threats to the
 share performance going forward.
 Though banks as a sector could be the first t start performing in an era of
economic turnaround, we think other PSU banks like PNB
 BOB are better placed in the initial phase of such a turnaround and SBI could start
performing only in the later part.
 stock could trade in the Rs 1890 – Rs 2125 band in the next quarter.

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Limitations Of Study

The study has following limitations-

• The study is based on secondary data. So in that case it includes all the limitations
inherent with the secondary data.
• Some information may have become obsolete due to time factor.
• Sudden change in the corporate governance during the course of research can
affect the results.

Techniques Used In The Project

Regression Analysis is a powerful and flexible procedure for analyzing associative

relationships between a metric dependent variable and one or more independent variable.
It can be used in the following ways-

 Determine whether the independent variables explain a significant variation in the

dependent variable: whether a relationship exists.
 Determine how much of the variation in the dependent variable can be explained
by the independent variables: strength of the relationship.
 Determine the structure or form of the relationship: the mathematical equation
relating the dependent and independent variables.
 Predict the values of the dependent variable.
 Control for other independent variables when evaluating the contributions of a
specific variable or set of variables.

Multiple Regression involves a single dependent variable and two or more independent
variables. The questions raised in the context of bivariate regression can also be answered
via multiple regression by considering additional independent variables.

 Can variation in sales be explained in terms of variation in advertising

expenditures, prices and level of distribution?
 Can variation in market shares be accounted for by the size of the sale force,
advertising expenditures and sales promotion budgets?
 Are consumers perceptions of quality determined by their perception of prices,
brand image and brand attributes?

An equation used to explain the results of multiple regression analysis:

Y= a+b1X1+b2X2+b3X3+……………..+bkXk

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Statistics Associated With Multiple Regression

Most of statistics and statistical terms are used in multiple regression. In addition
following statistics are used:

Adjusted R2 , R2, coefficient of multiple determination, is adjusted for the minor of

independent variables and the sample size to account for diminishing returns. After the
first few variables, the additional independent variables do not make much contribution.

Coefficient of multiple determination. The strength of association in multiple regression is

measured by the square of the multiple correlation coefficient, R2, which is also called the
coefficient of multiple determination.

F test. The F test is used to test the null hypothesis that the coefficient of multiple
determination in the population, R2 POP, is zero. This is equivalent to testing the null
hypothesis.

Partial Regression Coefficients

The partial regression coefficient, b1, denotes the change in the predicted value, Y, per
unit change in X1 when other independent variables, X2 to XK are held constant.

Various Variables Taken Into Consideration

Seven independent variables were hypothesized to influence firm performance. These are
described below:-

NED: this variable measures the proportion of non-executive directors on the board of
directors, expressed on a percentage. It is defined as the number of non-executive
directors, dividend by the total number of directors on the board of the economy. It is
hypothesized that the higher the proportion of NED, the board is more independent in
making decisions, and hence better company financial performance in terms of ROE.

CHAIRAC: this is a binary variable for the chairman the audit committee. This variable
takes a value of one if the chairman of the audit committee is a non-executive director.
Otherwise, the variable assumes a value of zero. The variable is used to test the degree of
independent of the audit committee on financial returns. An independent chairman of the
audit committee is expected to undertake more rigorous monitoring, which can improve
the performance of the company.

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INST: this variable measures the proportion of large institutional investors owing shares
in the company. It is hypothesized that the higher the proportion of large institutional
investors, the greater the monitoring role of these investors, and hence the greater the
chance of better financial performance.

GEAR: this variable is defined as the total amount of debt awed by the company divided
by its total capital, where total capital is equivalent to shareholders ordinary funds
reserves. The impact of the gearing ratio on the financial performance of the firm is not
clear. On the one hand, it can be hypothesizes that the higher the gearing ratio, the higher
the monitoring by lending banks, which then leads to higher financial performance of the
firm. On the other hand, a higher gearing ratio leads of debt burden, which then limits the
ability of the firm to take on more risky ( and potentially profitable projects).

CONCERN: this variable measures the proportion of concentrated ownership of the firm,
owned by a single person of entity, or a few entities. The higher the proportion, the
greater is the monitoring role of large owners. In this study, concentration is measured as
the percentage of total shares of a company owned by the largest shareholders. It is
hypothesized, based on agency theory, that greater concentration of ownership reduces
agency costs and hence improves the financial performance of the firm.

SIZE: this variable denotes the size of the company in terms of turnover (gross revenue).
Size is expected to be a positive influence of company performance, dur to greater
diversification economies of large- scale production and greater access to new technology
and cheaper sources of funds. It is hypothesized that size will have an impact on corporate
governance because the quality of governance is related to the level of operation of a firm.

One independent variable used in Regression Analysis id “Return On Equity”. The model
is-

ROE = a+b(NED)+c (CHAIRC)+d(INST)+e(GEAR)+f(CONCERN)+g(SIZE).

Interpretation

24
Collection Of Data Sources

25
The data source for the project research and analysis would be secondary in nature i.e.
which is already available in published or unpublished form. Various Websities like
www.sebi.gov.in, www.bseindia.com, www.moneycontrol.com, www.sebiedifar.nic.in,
www.rediffmoney.com etc. would be assessed to get relevant information. Besides this
company related information would be assessed from their respective websities.

Corporate governance data is gathered from electronic data information filing and
retrieval (EDIFAR). The handbook provided information in the following-

The companies governance philosophy:

Corporate governance rating and governance structure
Board of Directors:
Composition of the board, number of board meetings, code of conduct etc…………..

Committees of the board:

Audit committee, human resources (HR) committee, Remuneration Policy for
Directors, ESOP Compensation committee, Investors Grievance committee, Nature of
complaints and redressal status etc……..

Subsidiary companies
General board meetings
Disclosures

Details of compliance with mandatory requirements and adoption

of non- mandatory requirements of clause 49 of the listing agreement, means of
communication, etc……

General shareholders information

Auditor’s report

Conclusion

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BIBLOGRAPHY

27
Books

 A guide to corporate governance by N.Gopalsamy.

 Corporate governance by P.P Arya, B.B.Tondon and A..K.Vashisht.

Journals and Magazines

 “ICFAI Journal of corporate governance, July, 2008.

 “ICFAI Reader on corporate governance July 2008.
 “Does superior governance still lead to better financial performance?’ by Cutis C.
Vershoor, (oct2008).

Websites Links:

 http:/scbiedifar.nic.in.
 www.wikipedia.com.
 www.hdfcbank.com.
 www.moneycontrol.com.
 www.bseindia.com.
 www.axisbank.com.
 www.rediffmoney.com.
 2009corporate_governance_report.html.

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