NAME- PRATYASHA DASGUPTA

PRN- 20010422099

SEAT NUMBER- 447588

SUBJECT- CORPORATE GOVERNANCE AND FINANCE

COURSE- BBA.LLB

SEMESTER- 3
1B) NEED, IMPORTANCE AND OBJECTIVES OF CORPORATE GOVERNANCE

In order to overcome the under noted serious concerns within the business community, there is a
need to introduce a system of corporate governance that will ensure the transparency, integrity
and accountability of Management including non-executive directors. Concentration of greater
financial power and authority in a lesser number of individuals, • Violations of foreign exchange
rules and regulations, • Large scale diversion of funds to associate companies and risky ventures,
• Unfocussed business decisions leading to losses, • Preferential allotment of shares to promoters
at low prices, • Exploited the weaknesses in the Accounting Standards to inflate profits and
understate liabilities, • Frequent changes in Board structures, • Spinning off profitable business
operations to subsidiary companies. In an open financial market, investors choose from a variety
of investment vehicles. The existence of a corporate governance system is likely a part of this
decision-making process. In such a scenario, companies that are more open and transparent, and
thus well governed, are more likely to raise capital successfully because investors will have the
information and confidence necessary for them to lend funds directly to such companies.
Moreover, well-governed companies likely will obtain capital more cheaply than companies that
have poor corporate governance practices because investors will require a smaller “risk
premium” for investing in well-governed companies. Thus, in an efficient capital market,
investors will invest in companies with better corporate governance frameworks because of the
lower risks and the likelihood of higher returns. Good corporate governance practices also enable
Management to allocate resources more efficiently, which increases the likelihood that investors
will obtain a higher rate of return on their investment. (11) Moreover, Good corporate
governance practices ensure: ƒ Adequate disclosures and effective decision making to achieve
corporate objectives; ƒ Transparency in business transactions; ƒ Statutory and legal compliances;
ƒ Protection of shareholder interests; ƒ Commitment to values and ethical conduct of business. ƒ
Long-term survival of the companies. (12) 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. Generally developing countries that have good
corporate governance structures consistently outperform developing countries with poor
corporate governance structures. Moreover, corporate governance can play a role in reducing
corruption, and decreased corruption significantly enhances a country’s development prospects.
Ultimately, the concept of corporate governance is not just one of those imported western
luxuries; it is a vital consideration to be enforced successfully. (13) The aim of "Good Corporate
Governance" is to ensure commitment of the board in managing the company in a transparent
manner for maximizing longterm value of the company for its shareholders and all other
partners. It integrates all the participants involved in a process, which is economic, and at the
same time social. (14) The fundamental objective of corporate governance is to enhance
shareholders' value and protect the interests of other stakeholders by improving the corporate
performance and accountability. Hence it harmonizes the need for a company to strike a balance
at all times between the need to enhance shareholders' wealth whilst not in any way being
detrimental to the interests of the other stakeholders in the company. Further, its objective is to
generate an environment of trust and confidence amongst those having competing and
conflicting interests. (15) There is a global consensus about the objective of ‘good’ corporate
governance: maximizing long term shareholder value. Since shareholders are residual claimants,
this objective follows from a premise that, in well performing capital market, whatever
maximizes shareholder value must necessarily maximize corporate prosperity, and best satisfy
the claims of creditors, employees, customers, shareholders and the State.
2A) The role of the audit committee with reference to Clause 49 of the Listing Agreement

Powers of Audit Committee

The audit committee shall have powers, which should include the following: 1. To investigate
any activity within its terms of reference. 2. To seek information from any employee. 3. To
obtain outside legal or other professional advice. 4. To secure attendance of outsiders with
relevant expertise, if it considers necessary. (D) Role of Audit Committee The role of the audit
committee shall include the following: 1. Oversight of the company’s financial reporting process
and the disclosure of its financial information to ensure that the financial statement is correct,
sufficient and credible. 2. Recommending to the Board, the appointment, re-appointment and, if
required, the replacement or removal of the statutory auditor and the fixation of audit fees.
Approval of payment to statutory auditors for any other services rendered by the statutory
auditors. 4. Reviewing, with the management, the annual financial statements before submission
to the board for approval, with particular reference to: a. Matters required to be included in the
Director’s Responsibility Statement to be included in the Board’s report in terms of clause (2AA)
of section 217 of the Companies Act, 1956 b. Changes, if any, in accounting policies and
practices and reasons for the same c. Major accounting entries involving estimates based on the
exercise of judgment by management d. Significant adjustments made in the financial statements
arising out of audit findings e. Compliance with listing and other legal requirements relating to
financial statements f. Disclosure of any related party transactions g. Qualifications in the draft
audit report. 5. Reviewing, with the management, the quarterly financial statements before
submission to the board for approval 5A. Reviewing, with the management, the statement of uses
/ application of funds raised through an issue (public issue, rights issue, preferential issue, etc.),
the statement of funds utilized for purposes other than those stated in the offer
document/prospectus/notice and the report submitted by the monitoring agency monitoring the
utilisation of proceeds of a public or rights issue, and making appropriate recommendations to
the Board to take up steps in this matter. 6. Reviewing, with the management, performance of
statutory and internal auditors, adequacy of the internal control systems. 7. Reviewing the
adequacy of internal audit function, if any, including the structure of the internal audit
department, staffing and seniority of the official heading the department, reporting structure
coverage and frequency of internal audit. 8. Discussion with internal auditors any significant
findings and follow up there on. 9. Reviewing the findings of any internal investigations by the
internal auditors into matters where there is suspected fraud or irregularity or a failure of internal
control systems of a material nature and reporting the matter to the board. 10. Discussion with
statutory auditors before the audit commences, about the nature and scope of audit as well as
post-audit discussion to ascertain any area of concern. 11. To look into the reasons for substantial
defaults in the payment to the depositors, debenture holders, shareholders (in case of non
payment of declared dividends) and creditors. 12. To review the functioning of the Whistle
Blower mechanism, in case the same is existing. 12A. Approval of appointment of CFO (i.e., the
whole-time Finance Director or any other person heading the finance function or discharging that
function) after assessing the qualifications, experience & background, etc. of the candidate. 13.
Carrying out any other function as is mentioned in the terms of reference of the Audit
Committee.

The Audit Committee shall mandatorily review the following information: 1. Management
discussion and analysis of financial condition and results of operations; 2. Statement of
significant related party transactions (as defined by the audit committee), 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; and 5. The
appointment, removal and terms of remuneration of the Chief internal auditor shall be subject to
review by the Audit Committee.
3B) Any discussion on corporate governance must necessarily begin with the Cadbury
Committee report in UK in early 1990s. The circumstances in which the Cadbury Committee
was set up deserve a special mention as they are as relevant, or even more relevant, to the
conditions today. First, there was a concern at the low level of financial reporting and the
inability of auditors to provide safeguards that the users of financial information expected. The
underlying factors were seen as the looseness of accounting standards which provided too many
options, the absence of a clear framework for ensuring that the directors kept the controls in their
busi- ness under review, and the competitive pressures both on companies and auditors which
made it difficult for the auditors to stand up to the demanding boards. Sec- ond, there had been
unexpected failures of major companies in the UK. There was a feeling that annual reports had
failed to provide forewarning of companies which subsequently failed. Third, there were
criticisms as far as boards were concerned that the directors of the' board were being paid
excessive salaries or remuneration that was unlinked to their actual corporate performance. It
was for the first time that this committee gave corporate governance a form and a substance and
more impor- tantly gave it a definition to say, "corporate governance is the system by which the
companies are directed and controlled". Other efforts in this regard include, among others,
corporate governance principles adopted by the Organisation of Economic Co-operation and
Development (OECD), and in the US, UK (London Stock Exchange Combined Code), and
European and other countries. The latest in the series is the set of reforms proposed by the New
York Stock Exchange in May 2002. The studies on this subject in India are comparatively of
recent origin and include the reports of the task force of the con- federation of Indian industry
(CII) in April 1997, committee of the securities and exchange board of India (SEBI) in 1999,
advisory group of RBI in March 2001, and the RBI consultative group of directors of
banks/financial institutions in April 2002. While there are some variations and change of
emphasis, the ground covered in these reports largely overlaps. The areas covered include,
among others, size, composition, charter, responsibilities and meetings of the board of directors;
tenure of directors; age limit for appointment as directors; liability of directors; account- ability
to shareholders and stakeholders; access to information; nominee directors and their
remuneration; committee on grievances of shareholders; executive vs non-executive chairman of
the board; audit committee; remuneration commit- tee; nomination committee; board pro-
cedures; accounting standards and financial reporting; disclosure and transparency; auditor
independence; respon sibilities of individual and institutional shareholders; and matters relating
to implementation of the canons of corporate governance.
4A) FUNCTIONS OF FINANCE MANAGER

Finance function is one of the major parts of business organization, which involves the
permanent and continuous process of the business concern. Finance is one of the interrelated
functions which deal with personal function, marketing function, production function and
research and development activities of the business concern. At present, every business concern
concentrates more on the field of finance because, it is a very emerging part which reflects the
entire operational and profit ability position of the concern. Deciding the proper financial
function is the essential and ultimate goal of the business organization. Finance manager is one
of the important role players in the field of finance function.

He must have entire knowledge in the area of accounting, finance, economics and management.
His position is highly critical and analytical to solve various problems related to finance. A
person who deals finance related activities may be called finance manager.

FINANCE MANAGER PERFORMS THE FOLLOWING MAJOR FUNCTIONS:

1. Forecasting Financial Requirements: is the primary function of the Finance Manager. He is

responsible to estimate the financial requirement of the business concern. He should estimate,
how much finances required to acquire fixed assets and forecast the amount needed to meet the
working capital requirements in future.

2. Acquiring Necessary Capital: After deciding the financial requirement, the finance manager
should concentrate how the finance is mobilized and where it will be available. It is also highly
critical in nature.

3. Investment Decision: The finance manager must carefully select best investment alternatives
and consider the reasonable and stable return from the investment. He must be well versed in the
field of capital budgeting techniques to determine the effective utilization of investment. The
finance manager must concentrate to principles of safety, liquidity and profitability while
investing capital.

4. Cash Management: Present days cash management plays a major role in the area of finance
because proper cash management is not only essential for effective utilization of cash but it also
helps to meet the short-term liquidity position of the concern.

5. Interrelation with Other Departments: Finance manager deals with various functional
departments such as marketing, production, personnel, system, research, development, etc.
Finance manager should have sound knowledge not only in finance related area but also well
versed in other areas. He must maintain a good relationship with all the functional departments
of the business organization.
5A) RESPONSIBILITIES OF BOARD

Responsibilities cast upon Directors are quite onerous and multifarious. The duties of directors
are partly statutory, partly regulatory and partly fiduciary. Directors are in fiduciary position and
must exercise their powers for the benefit of the company. Board is responsible for direction,
control, conduct management and supervision of the company‘s affairs. They have to establish
effective corporate governance procedures and best practices and whistle blower mechanism.
Ultimate control and management vests with the Board. The board functions on the principle of
majority or unanimity. A decision is taken on record if it is accepted by the majority or all of the
directors. A single director cannot take a decision. This is one of the purposes of forming a
board. If the power of decision making is given to a single director he might take biased
decisions. He may take decisions which benefit him in his personal capacity. The scope of
biasness, partiality and favoritisms is eliminated with the concept of the board. The purpose to
have a board in the company is to have directors who are expected: To contribute to the business
of the company through their knowledge and skills. To advise on such matters as need their
attention and influence. To critically analyze the performance and operations of the company. To
be able to act as a professional aide. To be able to offer their professional expertise in the
relevant field. To establish sound business principles and ethics. To act as a mentor to the
management. The responsibilities of the directors can be summarized as below: Responsibilities
towards the company The board should ensure that: It acts in the best interest of the company.
The decisions it takes do not serve the personal interests of its members. It helps the company in
increasing its profits and turnover by following principles of equity, ethics and values. It helps
the company in building its goodwill. It shares with the management the decision taken by them
and the reasons thereof. That the company has systems and means to best utilize the resources of
the company and especially its intangible resources.

Responsibilities towards management

The board must ensure that: It gives its guidance, support and direction to the management in
every decision. It acts as leader to inspire and motivate the management to perform their duties.
It encourages compliance and disclosures. It trusts the management and gives it the freedom to
act. It does not dictate terms but take objective decisions. It follows the company‘s code of
conduct and the other rules and the regulations of the company. Responsibilities towards
stakeholders The board must ensure that: Its every decision helps in the increasing the
stakeholders value. It does not act in a manner by which any stakeholder is prejudiced. One
stakeholder should not be benefited at the cost of the other. — It must discourage restrictive or
monopolistic activities for the undue benefit of the company. That proper system is established
and followed which helps in resolving the grievances of the stakeholders. That company has
policies for different class of stakeholders which are equally applicable. Such policies should be
based on the principles of equity and justice. That company discloses its policies to all the
stakeholders. The stakeholders are able to establish long term relationships based on trust and
confidence. Corporate Social Responsibility The board must ensure that: The company has
policies which encourage social activities on purely non profitable basis. Such policies are
followed ethically and resources are provided to give effect to these policies. The actual benefit
is actually passed on to the society by doing such activities. That these policies cover activities
such as upliftment of society, providing education to the needed, promoting employment,
preservation of environment, etc. That the company‘s products are eco-friendly and comply with
all the related norms. That the company does not take any decision which affects the society
adversely. Responsibility towards government The board must ensure that: The company
complies with all the laws applicable to it whether they are the central laws or state laws. There
are systems and checks to ensure that the above is complied. That all the dues towards the
government in the form of taxes, rates, etc. are paid on time. It supports the initiatives taken by
the government for the promotion of welfare and security of the nation. Inter-se responsibilities
The board must ensure that: True and full disclosure of all the transactions, where there is an
interest, is made to the other members of the board. Follow board decorum and code for conduct
of meetings. All relevant information is shared among themselves for a proper decision making.
Enable to the board to take an independent, unbiased and objective decisions. The executive
directors respect and give due regard to the presence and opinions of the non-executive
independent directors.