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Ismr2013 C PDF
Ismr2013 C PDF
International comparison
According to a World Bank study “Doing Business 2014”, India ranks 34th worldwide in terms of investor protection—
an important indicator of corporate governance--across all countries considered. It has fared better than China, Brazil
and Russia (See Table-1). It may be noted that India has been outperforming other BRIC countries persistently over the
past 5 years. At an overall score of 6.3 out of 10, India beats the South Asia average of 5.1 and is also marginally higher
than the OECD average of 6.2.
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I S MR Corporate Governance in India: Developments and Policies 148
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149 Corporate Governance in India: Developments and Policies IS M R
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I S MR Corporate Governance in India: Developments and Policies 150
company. In case such a contract or arrangement is entered into with a related party, it must be referred to
in the Board’s Report along with the justification for entering into such contract or arrangement. Further,
any RPT between a company and its Directors shall require prior approval by a resolution in general
meeting. Violations of these provisions would be punishable with fine or imprisonment or both.
v. Corporate Social Responsibility (CSR) (Clause 135): The new Act has mandated the profit making
companies to spend on CSR related activities. Every company having net worth of Rs 500 crore or more
or turnover of Rs 1000 crore or more or net profit of Rs 5 crore or more during any financial year shall
constitute a CSR Committee of the Board. In pursuance of its CSR policy, the Board of every such
company–through these committees--shall ensure that the company spends (in every financial year) at
least 2 percent of the average net profits of the company made during the three immediately preceding
financial years.
vi. Auditors (Clause 139): A listed company cannot appoint or reappoint (a) an individual as auditor for more
than one term of five consecutive years, or (b) an audit firm as auditor for more than two terms of five
consecutive years. To avoid any conflict of interest, the Act has mentioned the services that an auditor
cannot render, directly or indirectly, to the company, which include: accounting and book-keeping
services, internal audit, investment banking services, investment advisory services, management services
etc.
vii. Disclosure and Reporting (Clause 92): In the new Act, there is significant transformation in non-financial
annual disclosures and reporting by companies as compared to the earlier format in the Companies Act,
1956.
viii. Serious Fraud Investigation Office (SFIO) (Clause 211): The Act has proposed statutory status to SFIO.
Investigation report of SFIO filed with the Court for framing of charges shall be treated as a report filed
by a Police Officer. SFIO shall have power to arrest in respect of certain offences of the Act which attract
the punishment for fraud. Further, the new Act has a provision for stringent penalty for fraud related
offences.
ix. Class action suits (Clause 245): For the first time, a provision has been made for class action under which it
is provided that specified number of member(s), depositor(s) or any class of them, may file an application
before the Tribunal seeking any damage or compensation or demand any other suitable action against
an audit firm. The order passed by the Tribunal shall be binding on all the stakeholders including the
company and all its members, depositors and auditors.
D. Ownership structure
The prevailing ownership pattern is a crucial impediment in raising corporate governance standards in India. There are
two sets of issues pertaining to the ownership structure of the listed companies in India. First, there is high concentration
of ownership, which gives particular individuals or families actual or effective control of most companies, even publicly
traded companies. For example, the share of promoters in NSE listed companies rose from 47.7 percent in March 2002
to 57.8 percent in March 2010, but fell subsequently to 53.7 percent in March 2013. The picture is not very different
for the top companies. Second, a large number of companies in India are grouped together under the common control
of a single shareholder or family. In other words, not only are most firms effectively controlled by a promoter group,
but the same promoter group often controls a large number of firms. This pattern of ownership poses challenges for
improving governance, partly because it raises probability of price manipulation. Also, by making it easier for the
controlling shareholders to use related party transactions (RPTs) as a vehicle for illegitimate expropriation of corporate
value at the cost of minority shareholders’ interest, this pattern of ownership gives rise to serious potential conflicts of
interest between the promoter group and the minority investors. .
Partly with the aim of addressing this situation, the minimum public shareholding norms were prescribed in August
2010. Accordingly, the listed private and public sector companies existing as of the date of the circular were required
to ensure a minimum public shareholding of 25 percent (by June 2013) and 10 percent (by August 2013) respectively.
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151 Corporate Governance in India: Developments and Policies IS M R
As of the quarter ended in September 2013, all PSUs were in compliance with the minimum public shareholding;
however, 21 non-PSUs listed on NSE were in non-compliance with the above provisions.
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