Corporate finance

Unit 5: Corporate
Reference:

1. Financial
Governance
Management –
MY Khan and
PK Jain
Subject code: 8014
2. Corporate
Finance –
Richard A
Brealey,
Prepared and Presented by,
Stewarts C N. Ganesha Pandian
Myers, Franklin
Allen, Pitabas
Mohanty
Content – Corporate Governance
1. Corporate governance
2. SEBI guidelines
3. Corporate disasters and ethics
4. Corporate social responsibility
5. Stakeholders and Ethics
6. Ethics, Managers and Professionalism
 Corporate Governance
• -refers to the distribution of rights and responsibilities among
different participants in a corporate entity such as shareholders,
management and lenders/creditors
• The core principles of corporate governance practices are:
1. Fairness 2. Transparency 3. Accountability
4. Responsibility
The codes and standards which are applicable for Indian listed
companies – detailed by Naresh Chandra and Narayan Murthy
Committees
SEBI has mandated corporate governance in the listing requirement in
clause 49 of the listing agreement
 Corporate Governance
(Clause 49 listing agreement)
1. Board of Directors:
a. Composition of Board of Directors:
- Should have optimum combination of
executive and non executive directors with not less
than 50% comprising of on executive directors
Independent directors – non executive directors
Contd…
1. Does not hold any material pecuniary relationship
2. Not related to promoters or person occupying
management position
3. Not been an executive of the company-immediately
preceding 3 financial years
4. Not a partner or an executive during 3 financial years
5. Not a partner, material supplier, service provider or
customer
6. Not a substantial shareholder of the company, owing
2% or more of shares Contd…
b, Meeting of Audit Committee :
• The audit committee should meet at least four times in a
year and not more than 4 months elapse between two
meetings
c, Powers of Audit committee :
1. To investigate any activity within its term of reference
2. To see information from any employee
3. To obtain outside legal or other professional advice
4. To secure attendance of outsiders with relevant
expertise Contd…
d. Role of Audit committee:
1. Overnight of the company’s financial reporting process and the
disclosure of its financial information
2. Recommending board, about appointment, re- appointment and
removal or replacement of auditor
3. Approval of payment to auditors
4. Reviewing with the management, the annual financial statement
before submission to the board for approval
5. Reviewing with the management, the quarterly financial
statements
6. Performance of statutory and internal auditors , adequacy of
internal control system (review with management) Contd…
7. Reviewing the adequacy of internal and audit function
8. Discussion with internal audit – any significant findings
9. Reviewing the findings of any internal investigation by
the internal auditors into matters
10. Discussion with statutory auditors before the audit
commences
11. To look into reasons for substantial defaults in the
payment to the depositors, debenture holders and
shareholders
12. To review the functioning of the whistle blower
mechanism Contd…
E. Review of information by audit committee:
1. Management discussions and analysis of financial
condition and results of operations
2. Statement of significant related party transactions,
submitted by management
3. Management letters/ letters of internal control
weaknesses issued by the statutory auditors
4. Internal audit reports relating to internal control
weaknesses
5. The appointment, removal and terms of remuneration of
the chief internal auditor should be subject to review by
the audit committee Contd…
III. Subsidiary company:
The management should periodically bring to the
attention of the board of directors of the listing holding
company
The term “Materials non listed Indian Subsidiary” –
means an unlisted subsidiary incorporated in India
The term “Significant transaction or arrangement”
means any individual transaction or arrangement the
exceeds or is likely to exceed 10% of total revenues/total
liabilities/total assets/total expenses.
IV. Disclosures:
a. Basis of related party transaction:
A statement in summary form of transaction with related
parties in the ordinary course of business should be placed
periodically before the audit committee
b. Disclosure of Accounting treatment:
where in the proportion of financial statements, a treatment
different from that prescribed in an Accounting standard have
been followed, fact should be disclosed in financial statement
c. Board Disclosure – risk management:
The company should lay down procedures to inform board
members about the risk assessment and minimization
procedures Contd…
d. Proceeds from public issues, right issues, preferential issues and etc.,

Where money is raised through an issue should be disclosed to the audit committee

e. Remuneration of Directors:

All pecuniary relationship or transactions of the non executive director should be

disclosed in Annual report

f. Management:

Senior Management should be made disclosures to the board relating to all material
financial and commercial transactions.

g. Shareholders:
in case of the appointment of a new director or re-appointment of a director, the
shareholder must be provided with the following information

1. A brief resume of the Director

2. Nature of his expertise in specific functional areas

3. Names of companies in which the person also holds the directorship and the membership

4. Shareholding of non executive directors as stated in clause 49 (IV)(E)(V)

Contd…
V. CEO/CFO Certification
• CEO – MD or manager appointed in terms of Companies Act 1956
• CFO – whole time finance director or head of finance function shall certify
to the board that:
1. They have reviewed financial statements and the cash flow statement for
the year and that to the best of their knowledge and belief
2. To the best of their knowledge and belief, no transactions entered into by
the company during the year – fraudulent, illegal or violation of
company’s code of conduct
3. They accept responsibilities for establishing and maintaining internal
controls
Indicated to the auditors and audit committee 1. significant changes in
internal control 2. significant changes in accounting policies 3. Instance
of significant fraud Contd…
 Report on corporate Governance
• The suggested list of items to be included in this
report is given in annexure 37.I.C and the list
non-mandatory requirement is given in
Annexure 37.I.D
• The companies should submit a quarterly
compliance report to stock exchanges within 15
days from close of quarter annexure 37.I.B
VII. Compliance
• The company should obtain a certificate from either the
auditors or practicing company secretaries – regarding
compliance of conditions of corporate governance
• The certificate with the directors’ report – set annually to
the shareholders of the company
• The same certificate should also be sent to stock
exchanges along with the shareholders of the company
• The same certificate should also be sent to stock
exchanges along with annual report filed by the company
Important Annexure
• Annexure 37.I.A – Information to be placed before board
of directors
• Annexure 37.I.B – Format of quarterly compliance
report on corporate governance
• Annexure 37.I.C – suggested list of items to be included
in the report on corporate governance in the annual
report of companies
• Annexure 37.I.D non mandatory requirements
Corporate governance rating
• Indicates the relative level to which a corporate entity accepts and
follows the codes and guidelines of corporate governance practices.
• Key variables that are analyzed for CGR (Corporate Governance
rating) as follows;
1. Shareholding structure
2. Governance structure and management processes
3. Board structure and processes
4. Stakeholder relationship
5. Transparency and disclosures
6. Financial Discipline
1. Shareholding structure
• ICRA analyses an organization’s shareholding
structure to understand its ownership pattern,
identify the dominant shareholders evaluate
the extent of cross holding and identify the
extent of shares held by promoters/promoters
group
 2. Governance structure and
management process

• The key focus of ICRA’s analyses here – internal

decision making process – company rated
• Quality and nature of information presented to
board.
3. Board structure and processes
• The board of directors are expected to lend
leadership and strategic guidance to the
corporate to ensure that the legal and statutory
requirements are complies with and balance the
rights and concerns of shareholders and
stakeholders
4. Stakeholders relations
• The emphasis of ICRA’s analysis is on evaluating
the extent to which a company goes beyond that
is mandatory required by the law to ensure the
rights and interests of its shareholders
5. Transparency and disclosures
• Shareholders and potential investors require
access to regular, reliable and comparable
information in sufficient detail to access the
quality of management, the organization’s
growth prospects, and associated risk factors.
6. Financial discipline
• The ultimate objective of corporate governance
is to create and maximize the shareholder value
• The ICRA analysis, therefore focuses on factors
that are within the company’s control – impact
shareholder value in long run
 CGR rating scale
• CGR 1: implies rate company has adapted and follow such practices,
conventions and codes – provide highest assurance of quality
• CGR 2: implies rate company has adapted and follow such practices,
conventions and codes – provide high level of assurance
• CGR 3: implies rate company has adapted and follow such practices,
conventions and codes – provide adequate level of assurance
• CGR 4: implies rate company has adapted and follow such practices,
conventions and codes – provide moderate level of assurance
• CGR 5: implies rate company has adapted and follow such practices,
conventions and codes – provide inadequate level of assurance
• CGR 6: implies rate company has adapted and follow such practices,
conventions and codes – provide low level of assurance in quality
Corporate disasters
• When the corporate governance and its rules
and regulations or code of conduct violated by
the parties relating to the management leads to
the undesired consequences like fall down of the
company called corporate disasters.
• Example: Satyam Computers – a case study
Corporate Social responsibility (CSR)
• Corporate social responsibility is the integration of
socially beneficial programs and practices into a
corporation’s business model and culture
Benefits of CSR:
1. Prevent financial ramifications
2. Increase employ loyalty
3. Maintain positive reputation
4. Environmental consciousness
5. Social Concern
6. Local Community Contd…
• CSR aims to ensure the conduct of ethical business
and company’ sense of responsibility of society
• The company doesn’t operated in isolation and it
operates in the society
• Stakeholders includes – employees, customers,
chairman, Auditors and all persons or institutions
associated to a concern or firm.
• To summarize CSR, is not only the responsibility of
company management alone. It is responsibility of
all persons associated with