GROUP 3

SOME ISSUES OF
CORPORATE
GOVERNANCE

Suhani (889) Vanshika Agrawal (1307)

Akshita (1241) Kanik Kaur(922)
Jagriti Chadha (900) Tejaswini (845)
Kavya Goel (841) Akriti (1019)
Aastha Agrawal (902)
Easha A Pai (949)
Khushi Maan (1197)
Vanshika Kapoor (986)
 1 Whistle Blowing

2 Insider Trading

3 Rating Agencies

Topics to 4 Shareholder’s Activism

be covered 5 Class Action

6 Proxy Advisory Firms

7 Corporate Governance in PSU

8 Corporate governance in
Banks and NBFC’S
 Whistle Blower

WHISTLEBLOWER POLICY
COMPONENTS OF A
Define Individuals Non- Retaliation
Used to describe the disclosure of
Covered Provisions
information that one reasonably
believes to be evidence of Confidentiality Process
contravention of any laws or
regulation or information that Communication
involves mismanagement, corruption Disclaimer
or abuse of authority within an
organization. Theft
Insider Trading
Raising a concern about wrongdoing Harrasment
within an organization or through an Corruption and bribery
Unethical Practices

UNETHICAL
independent structure associated

PRACTICES
Financial Statement
with it. Fraud Misrepresentation
Can be internal (report to a fellow or Dishonesty Discrimination
superior employee) or
Violation of Lack of Independence
external(report misconduct to
Regulations of Auditors
lawyers, media etc.)
and Code of Conduct
 Whistle Blowing Mechanism
In India, Public Interest Disclosure and Protection to
Persons Making the Disclosure Bill, 2010 was introduced in
the Parliament.
The Companies Act, 2013 has the specific provisions on
The Bill contains provisions to provide adequate safeguards establishing whistle-blowing mechanism by a listed public
against victimisation of the person making disclosure on any company.
allegation of corruption or wilful misuse of discretion against
Section 177 of the Act provides that:
any public servant.
(1) Every listed company or such class or classes of
No protection to be provided to whistleblowers in the companies, as may be prescribed, shall establish a vigil
private sector. mechanism for directors and employees to report genuine
concerns in such manner as may be prescribed.
Suggested that employees should also have access to
company’s audit committee without necessarily informing
the senior. (2) The vigil mechanism under shall provide for adequate
safeguards against victimisation of persons who use such
Every employee is encouraged to come out with their
mechanism and make provision for direct access to the
complaints as to any kind of misuse of company’s
properties, mismanagement or wrongful conduct prevailing chairperson of the Audit Committee in appropriate or
in the company. exceptional cases. The details of establishment of such
mechanism shall be disclosed by the company on its
Whistleblower could be a present employee or ex-employee.
website, if any, and in the Board's report.
He has to blow the whistle to the Audit Committee of the
company without fear of retailiation.
 Insider Trading
Insider trading refers to the purchase or sale of shares by someone based on non-public
price-sensitive information and using confidential information to make a profit or avoid a
loss at the expense of other co-investors.
In various countries insider trading is illegal as it is unfair to those who don’t have the
information to use for their benefits of gaining profits or saving loses

Insiders Higher
Family profits
Brokers Associates
members $$$ Before the
announcement
Finance
Corporate Insiders of quarterly
Manager
Company results buy
Company’s officers, and any A shares in
beneficial owners of more than company A
10% of class of company’s equity
shares
 Regulations
United States
The Securities Act of 1933, the Securities
Exchange Act of 1934, and other regulations of
the SEC not only prohibit insider trading but
also empower the SEC to conduct investigation
in suspected cases of insider trading and
prosecute the guilty.
India
In India, Insider trading is regulated by the SEBI
regulations 1992, which criminalizes insider
trading and abusive self dealing. Anybody in
possession of price sensitive information is
considered an Insider.
1995- Surveillance department
2002-Amendments in regulations
Difficulties
Regulations against insider trading in India are
perceived to be soft and wavering. Since,
insider trading is difficult to detect and
prosecute. More countries have given
sweeping powers to the regulators to catch the
inside traders.
For Instance: Security and Exchange
commision of the US relied heavily on phone
tapping to won landmark insider trading case
against hedge fund manager Raj Rajaratnam.
SEBI does not have the power of tapping the
phones or presenting this as an evidence
against the crime. Most of the orders passed
by SEBI have been set aside by higher
authorities mainly on account of SEBI’s failure
to prove the charges.
 Rating Agencies
Rating agencies, also known as credit rating agencies (CRAs), are organizations that assess the
creditworthiness of entities such as companies, governments, and financial instruments.
Credit ratings represent the assessment of an entity's creditworthiness and the likelihood of default on its
financial obligations. They are expressed through letter grades (e.g., AAA, AA, A, BBB, etc.).

An opinion on probability of default FINANCIAL

Rating is :
CRITERIA Forward looking PRODUCTS
Specific to the obligation being rated Bonds
Financial performance

Rating is not :
A comment on the issuer's general Mutual fund
Industry outlook performance
Management quality IPOs
An indication of the potential price
Market position A recommendation to buy/sell/hold Bank Loans
Legal and Regulatory
Debt schemes
Environment
Some rating agencies are CRISIL,
Moody, S&P, ICRA
 Functions of Rating Agencies
Professional Assessment
Rating agencies' evaluations of the securities
are accurate, trustworthy, and derived from
data analyzed by highly qualified personnel.
Independent Opinion
Rating agencies offer an objective assessment of
the problems' relative capacity to fulfill the
security's obligations. The agency has no
personal stake in the matter and is impartial
toward the issuer.

Basis for Investment Discipline on Borrowers

Investors can select securities for investment
based on their preferred level of risk because
they are equipped with expert knowledge
regarding the risks and returns associated with
the securities.
The securities that they rate are constantly
under observation by the rating agencies. It
maintains the borrowers' discipline to fulfill their
securities commitments. The borrowers are alert
since they are afraid of their ratings dropping.

Understandable Information
Rating symbols are a readily comprehensible
way for rating agencies to indicate their
opinion.
Rating Agencies
To Investors
Facilitate Investment Decisions
Facilitate Review of Investments
Safeguard against Bankruptcy
Saving in Cost and Efforts
To Issuers/Companies
Improves Corporate Image
Lower Cost of Borrowing
Market for Debts
Aid Growth and Expansion
Easy to Raise Funds for Closely-
held Companies
Benefits
Dubious Role of Credit Agencies
Credit rating agencies provide a check and balance on companies seeking
to raise debts from the market. The credit rating agencies assess the
creditworthiness and financial strength of the companies and express
opinion to meet the interest and principal obligations of the issuers.
Unfortunately, in many instances, the role of rating agencies has been
found to be dubious
Reasons
1. Competitive Pressure
Rating agencies often compete with each other in providing rating
competitive Pressure. These pressures may lead to lowering of the rating
standards.
2. Conflict of Interest
This gives rise to conflict of interest as the pressure always exists on the
rating agencies to grow its profits. Many times, rating agencies also provide
ancillary services to the companies which give rise to more conflicted
interest.
 Rating Suggestions
Agencies
1. Rating agencies must keep their sales and research functions completed
segregated by the Chinese Walls like structures, so that income received by
the agencies from their clients does not affect the ratings being assigned by
them.

2. The rating agencies must be debarred from rendering non-rating services

to their clients.

3. The rating fees received by the agencies must be adequately disclosed.

4. There should be closer monitoring of rating agencies by the market

regulators.

5. Corporate governance of rating agencies must be improved to enhance

accountability and transparency in the functioning.
 Shareholder Activism
Shareholder activism is a way in which they can influence a
corporation’s behaviour by exercising there right as owner.

There are various ways in which shareholders may raise their voice against
a particular proposal by influencing the BOD and the management.

The legal framework and policy initiatives of the regulators are geared

towards the protection of interest of investors including minority shares.

Shareholder activism is getting manifested through the following-
INSTITUTIONAL INVESTORS, SHAREHOLDER ASSOCIATION.
 Institutional Investors
Institutional investors are important force to monitor the controlling groups to ensure
that the company is run in the intrest of all investors. They are “as good as regulators”.
In developed countries, institutional investors even get CEO’S changed, stop mega
mergers, even stock options changed.

Shareholder’s association
In developed countries where shareholder association and unions are very
strong and are known to have blocked certain proposals that they percieved
to be against their interest. These associations are finding it difficult to
operate in current environment as they are usually dependent on
government grants and find solace in conducting investors meet.
 Companies Act, 2013

Rights to the shareholders

Right of access to Documents and Books.

Right to make Fundamental Corporate Decisions
Right of participation in General Meeting
Right to appoint Directors
Right as to Accounts and Audit
Right to participate in the profits of the company
Shareholding Rights

Rights to the Retail shareholders

Appointment of the Small Shareholders' Director
Protection against Oppression and mis-management
Class Action Suit
 Class Action

A class action is a lawsuit that allows a

large number of persons with a common cause in
matter to sue as a group.

Class actions are most common where the

allegations involve a large number of people
who have been injured by the same defendant
in the same way.
 REMEDIES OF CLASS ACTION
Section 245 of the Act provides the following remedies:
• If members or depositors are of the opinion that the affairs of the company
are being conducted in a manner prejudicial to the interests of the company or its members, they
can file application before the Tribunal to seek any of the following orders:
1)to restrain the company from committing an act which is ultra vires the articles or memorandum of
the company.
2)to declare a resolution altering the memorandum or articles of the company as void id the
resolution was passed by suppression of material facts.
3) to restrain the company and its directors from acting on such resolution.
4) to claim damages or compensation or demand any other suitable action.

•The requisite number of members shall be:

1)In the case of a company having a share capital not less than one hundred members, or not less
than one tenth of the total number of members whichever is less subject to the condition that
applicant have paid all calls and other sums due on his share.
2) In the case of a company not having a share capital, not less than one fifth of the total number of
its members.
 Proxy Advisory Firms
Proxy Advisor refers to any individual or organisation that prepares recomendations and
gives advice for the institutional investors or shareholders to help them in casting their
votes in respect of any policy issues or a public offer.

Proxy advisory firms are independent research outfits which provide voting
recomendations for its clients after weighing all the pros and cons of any proposal.

Proxy Advisory Firm are of utmost importance to institutional investors and high net
worth individuals as they help in providing recomendations on the basis of which votes
can be cast.

The need for such firms was felt in India after the Satyam Scam in early 2010.

The 1st proxy advisory firm of India was started in June 2010- ‘InGovern Research
Services’
 Functions of Role of
Proxy Advisory Firms Proxy Advisory Firms

Advisory Function - Advising on the matters, Ensures compliance of stringent corporate

come up for voting at the general meetings
governance norms by companies.
and other meetings of companies.

Positive recommendations help build

Shareholders Aid- Aid shareholders in
exercising their voting rights in the company companies reputation and trust among
in significant decisions. shareholders.

Corporate Governance Rating- Such firms Promotes transparency and accountability

also provide a report or rating on the through independent analysis of proposals.
corporate governance of the entity.
Act as a watchdog of companies by keeping a
Risk Monitoring- The firms also monitor the check on whether companies are working in
risks of the companies to provide timely best interest of the shareholders or not.
advise to the investors with a view to protect
the interest of the investors.
SEBI Norms on Proxy Advisory Firms

If there are discrepancies, false information or

All the proxy firms are required to be material revisions are required to be done, then
registered with SEBI the same should be disclosed to the clients with
them 24 hours of realisation of such error.

Firms are required to disclose all the

recommendations of voting and these
are to be reviewed every year.
If the opinion of the company varies from
the Proxy Advisor’s report and it could not
be justified by minor amendments, then
additional report to be issued.
Methodologies,procedures and sources refered
to prepare the report should be diclosed to the
clients.
A proper Framework is to be established by
these fIrms to look after the internal
functioning and to handle and resolve any
conflict of interest.

A proper code of conduct is required to be followed

encompassing principles of honesty, good faith,
confidentiality,etc.
Corporate Governance in Public Sector Undertakings
Overview of PSUs in India:

Departmental Undertakings Statutory Public Corporations Government Companies

Role of Department of Public Enterprises (DPE):

- Formulates Corporate Governance Guidelines for PSUs
- Ensures transparency, accountability, and efficiency in PSU operations
Importance of Corporate Governance:
- Protects stakeholders' interests (shareholders, employees, customers, public)
- Ensures ethical conduct, risk management, and long-term sustainability

Key features of Corporate Governance in PSUs:

Appointment of directors, managing director and chairman through a prescribed procedure,
Appointment of Statutory Auditor by the Comptroller and Auditor General of India,
Remuneration of directors, employees on basis of recommendations of Pay Committee constituted by Govt,
Annual Report on both the Houses of the Parliament,
Scrutiny of the working by the Parliamentary Committees.
 Guidelines on Corporate Governance by DPE :
For the purpose of evolving Guidelines on Corporate Governance, CPSEs have been categorized into two
groups:
1) Those listed on Stock Exchange 2) Those not listed on Stock Exchange

Board of Audit Remuneration

Directors
Optimum mix of functional,
nominee, and independent
directors
Limit on functional and
nominee directors'
presence.
Code of conduct for all
board members and senior
management.
Restrictions on committee
memberships for directors.
Committee
Must consist of at least
three directors, with a
majority being
independent directors
An Independent Director
serving as Chair
Members should possess
financial expertise.
Meet at least four times
annually.
Committee
Comprise at least three
part-time Directors,
headed by an
Independent Director.
Decide annual
bonus/variable pay
pool and policy for its
distribution across
executives within
prescribed limits.
 Disclosures
Provide periodic summaries of related party transactions and explain any deviations from
Accounting Standards in financial statements.
Prepare consolidated financial statements as per Accounting Standards.
Lay down risk management procedures and review periodically.
Disclose pecuniary relationships of part-time Directors.
Include Management Discussion and Analysis Report in Annual Report.

Subsidiary Companies
Ensure at least one Independent Director on the Board of holding
company serves on subsidiary company's Board.
Review subsidiary financials through Audit Committee.

Report, Compliance & Implementation

Include Corporate Governance section in Annual Report.
Obtain compliance certificate from auditors/Company Secretary.
Disclose related party transactions, accounting standards, and risk management
in Annual Report.
Include Management Discussion and Analysis Report for strategic insights.
 Corporate Governance Norms: For Banks
Prescribed by SEBI and RBI, SEBI (Listing Obligations and Disclosure Requirements)
Regulations,2015, other instructions issued by RBI

Applicability
private sector banks, SFBs, wholly owned subsidiaries of foreign banks
for state and nationalised banks, to be read along with specific statutes
or instructions issued
not applicable to foreign banks operating as branches in India

Chair and Meetings

Chaired by an Independent Director
quorum: one-third or three, whichever is higher
at least half of the attendees should be independent directors
 Committees of the Board
Audit Committee
of the Board
(ACB)
consists only of NEDs
quorum of three members
two thirds of attendees will
be independent directors
meet at least once in a
quarter
chaired by an independent
director who shall not chair
any other committee
at least one member should
have requisite professional
expertise/knowledge
Risk Management
Committee of the
Board (RMCB)
majority of NEDs
quorum of three members
at least half of the
attendees shall be
independent directors
meet at least once in a
quarter
chaired by an independent
director who shall not chair
the board or any other
committee
at least one member shall
have professional expertise
Nomination and
Remuneration
Committee (NRC)
consists only of NEDs
quorum of three members
at least half of the
attendees shall be
independent directors, of
which one shall be member
of the RMCB
chaired by an independent
director
meetings are held as and
when required
 Age, Tenure and Remuneration

NEDs
upper age limit : 75
total tenure : 8 years
minimum gap of 3 years
remuneration: sitting fees + expenses related to meetings + fixed remuneration, shall
not exceed 20 lakh per annum

MD & CEO AND WTDs

upper age limit : 70

total tenure : 15 years
minimum gap of 3 years
a promoter/major shareholder cannot hold this post for more than 12 years,
can go upto 15 years in extraordinary circumstances, at the sole discretion of
RBI
 Corporate Governance Norms For NBFCs
SEBI RBI RBI

Listed NBFCs are required NBFCs not covered under

to comply with SEBI regulations of SEBI.
Include constitution of Audit NBFCs are mandated to
Regulations, 2015.
committee for frame their internal
The regulation contains
requirements on -
A. NBFCs - D -> Deposits of Rs. 20cr guidelines on corporate
and above
1. Board composition, governance which are
B. NBFCs - ND -> Asset size of Rs.
2. Board process 50cr required to be
3. Board Committees - Constitution of Nomination published on the
Audit Committee committee for websites of the
Nomination and A. NBFCs -D -> Deposits of Rs. 20cr
and above
companies.
Remuneration committee,
B. NBFCs - ND -> Asset size of Rs.
etc. 100cr
4. Disclosure obligations and Constitution of Risk
obligations of key personnel. Management Committee
NORMS :-
Requirement of Minimum Net Owned Funds (NOF) Of Rs. 200 Lakhs
NBFCs are required to obtain a Certificate of Registration from the banks to commence/ carry on business of
NBFI in terms of section 45 -IA of RBI Act, 1934.
The minimum NOF for companies that were already in existence before 21 April, 1999 -> Rs. 25 Lakhs.
The minimum NOF at present -> Rs. 200 Lakhs as per the milestones-
A. Rs. 100 Lakhs by end of March 2016
B. Rs. 200 Lakhs by end of March 2017
Need - in order to strengthen the financial sector and technology adoption.

PRUDENTIAL NORMS
Conduct of
Objective business
regulations
Prudential
Regulations Where Customer interface is invoved
Address systemic risk

Where public funds are acepted

 NBFCs-ND -> Asset size of less than Rs. 500cr
Shall not be subject to any regulations either prudential or conduct of business regulations
viz FPC, KYC, etc. if they have not accessed any public funds and do not have a customer
interface.
Having customer interface will be subjected only to conduct of business regulations
including FPC,KYC etc. if they are not accessing public funds.
Accepting public funds will be subjected to prudential regulations but not conduct of
business if they dont have customer interface.
Where both public funds are accepted and customer interface exists, such companies
subject to both prudential regulations and conduct of business regulations.
Irrespective of any category of NBFC, registration under section 45-IA of the RBI Act will be
mandatory.
NBFCs-ND -> Asset size of Rs. 500cr and above Prudential Regulations applicable to NBFCs-ND -
> Asset size of less than Rs. 500cr
Irrespective of whether they have accessed Consequent to redefining of ‘systemic
public funds or not, shall comply with significance’ :-
prudential regulations as applicable to Are exempted from the requirement of
NBFCs-ND-SI. maintaining CRAR.
Shall also comply with conduct of business Complying with Credit Concentration Norms.
regulations if customer interface exists. A leverage ratio of 7 is being introduced for all
such NBFCs-ND to link their asset growth with the
capital they hold.
Leverage Ratio = Total Outside Liabilities/Owned
Funds
Prudential Regulations for NBFCs-ND-SI (asset of Rs.
500 crore and above) and all NBFCs-D:
Tier 1 Capital Requirements:
Currently, all NBFCs-D and NBFCs-ND with assets of Rs. 100 crore and above must maintain a
minimum Capital to Risk (Weighted) Assets Ratio (CRAR) of 15%, ensuring Tier 1 capital of at least 7.5%.
Infrastructure Finance Companies (IFCs) are required to maintain Tier 1 capital of at least 10%.
NBFCs primarily engaged in lending against gold jewelry must maintain a minimum Tier 1 capital of 12%
starting April 1, 2014.

Revised Tier 1 Capital Requirements :

Due to the niche nature and concentration risk associated with the business activities of NBFCs, and
based on the re-definition of systemic importance:
NBFCs-ND with assets of Rs. 500 crore and above, and all NBFCs-D, are mandated to maintain a
minimum Tier 1 Capital of 10%.
Compliance to the revised Tier 1 capital will be phased in gradually:
8.5% by the end of March 2016.
10% by the end of March 2017.
Corporate Governance and Disclosure norms
for NBFCs
Committees Required Additional Advisory for NBFCs-D:
NBFCs are mandated to establish three
committees of the board: - NBFCs-D with deposits of Rs. 50 crore and above
are advised to stipulate the rotation of audit firm
- Nomination Committee partners every three years.
- Audit Committee
- Risk Management Committee

Specific Requirements for NBFCs-D and Audit Committee Responsibilities:

NBFCs-ND:
- NBFCs-D with deposits of Rs. 20 crore and above, and - The Audit Committee of all NBFCs-ND-SI and
NBFCs-D must ensure the conduction of an
NBFCs-ND with assets of Rs. 50 crore and above, are Information Systems Audit of internal systems and
required to constitute an Audit Committee. processes at least once every two years to assess
- NBFCs-D with deposits of Rs. 20 crore and above, operational risks.
and NBFCs-ND with assets of Rs. 100 crore and above,
are advised to consider constituting a Nomination
Committee to ensure the 'fit and proper' status of
proposed/existing Directors and Risk Management
Committee.
 Disclosures in Financial
Statements - Notes to Account:
Balance Sheet Disclosures:
- Capital to Risk (Weighted) Assets Ratio (CRAR)
- Exposure to the real estate sector (direct and indirect)
- Maturity pattern of assets and liabilities

Additional Disclosures for NBFCs-ND-SI and NBFCs-D

In addition to these all NBFCs-ND-SI as also all NBFCs-D are equired to additionally disclose the
following in their Annual Financial Statements:

Registration/licence/authorisation obtained from other financial sector regulators;

Ratings assigned by credit rating agencies and migration of ratings during the year,
Penalties, if any, levied by any regulator;
Information viz., area, country of operation and joint venture partners with regard to JointVentures and Overseas
Subsidiaries; and
Asset liability profile, extent of financing of parent company products, NPAs and movement of NPAs, details of all
off-balance sheet exposures, structured products issued by them as also securitization/assignment transactions
and other disclosures as given in the RBI guidelines.