CORPORATE GOVERNANCE:

THE INDIAN SCENARIO

CHAPTER 19
OBJECTIVES
India as a developing economy offers a mixed fare with
regard to corporate governance. While regulatory
institutions are in place for a long time, they suffer from
certain administrative infirmities. As a consequence,
their responses to corporate scams are slow in coming
and often insufficient and lack efficacy since they are
not able to get the violators penalized. Non-compliance
of rules and regulations by wrong-doers makes a
mockery of the entire system. This chapter analyses
the Indian scenario, the genesis of corporate
governance issues, the responses of various
stakeholder groups, initiatives from all sides, legislative
changes, the successes and failures of regulators and
the future outlook for corporate governance in the
country.
Chapter Outline
Introduction
Emergence of Corporate Governance Issues in
India
Efforts to Initiate Corporate Governance in the
Country
Implementation of Recommendations of Birla
Committee Report
Pioneers in Good Governance Practices
Need for Accounting Standards
Corporate Governance in India A Performance
Appraisal
The Future of Corporate Governance in India
The Need for Corporate Governance in
India

The legal and administrative environment in India
provides great scope for corrupt practices in
business. For more than five decades since
Independence, lack of transparency and financial
disclosures, corruption and mismanagement have
been accepted as a way of life and taken in stride
in an insulated, license-ridden and non-
competitive economic environment.
The Companies Act, the Harbinger of
Corporate Governance
The Companies Act, 1956 was a consolidating
legislation with far reaching impact that significantly
altered the structure of corporate management in
India. This Act legislated, inter alia, the abolition of the
system of managing agencies, an institution that had
served the country truly and well during the early days
of corporatization and more significantly,
industrialisation. But, it has fallen into disrepute
through abuse and malpractice by its latter day
exponents.
Emergence of Corporate Governance
Issues in India
In India, the real history of Corporate Governance dates
back to the year 1992, following efforts made in many
countries of the world to put in place a system
suggested by the Cadbury Committee. The
Confederation of Indian Industry' framed a voluntary
code of Corporate Governance for listed companies in
1998. This was followed by the recommendations of the
Kumar Mangalam Birla Committee set up in 1999 by
SEBl culminating in the introduction of Clause 49 of the
Standard Listing Agreement to be complied with all the
listed companies in stipulated phases.
Efforts to Initiate Corporate Governance in
the Country
The Companies Amendment Act, 2000

Many provisions relating to corporate governance such
as additional ground of disqualification of directors in
certain cases, setting up of audit committees, Directors'
Responsibility Statement in the Directors' Report, were
introduced by the Companies (Amendment) Act, 2000.
Naresh Chandra Committee (2002)
In the year 2002, a high level committee was appointed
to examine and recommend drastic amendments to the
law involving the auditor-client relationships and the
role of independent directors by the Department of
Company Affairs
Narayana Murthy Committee (2003)
The Narayana Murthy Committees Report
summed up the utility of the Corporate
Governance in the following words:
"Effectiveness of a system of corporate
governance cannot be legislated by law nor can
any system of corporate governance be static. In
a dynamic environment, systems of corporate
governance need to be continually evolved.
Provisions and Requirements of
Clause 49
Composition of Board
Constitution of the Audit
The Audit Committee

Remuneration of Directors
Shareholders Information
CEOs Accountable for Companies Risk Systems
Reserve Banks and Other Regulations
Self-regulation

Pioneers in Good Governance Practices
Industry Initiatives

Corporate Initiatives

Individual Initiatives

Banks and Corporate Governance

Transparency in the Private Sector
Setting up of the Centre for Corporate
Excellence
The government of India has set up the Centre for
Corporate Excellence under the aegis of the Department
of Company Affairs as an independent and autonomous
body. The Centre would undertake research on
corporate governance; provide a scheme by which
companies could rate themselves in terms of their
corporate governance performance; promote corporate
governance through certifying companies who practise
acceptable standards of corporate governance and
institute annual awards for outstanding performance in
this area.
Establishment of the
Serious Fraud Office

The Department of Company Affairs has set up a
Serious Fraud Office (SFO), a new push to crack
down on company fraud and improve corporate
governance. The SFO will investigate economic
crimes. The SFO investigates company finances
and prosecutes them in cases where there has
been violation of corporate laws.
Establishment of the National
Foundation of Corporate Governance
To provide a platform to deliberate on issues relating to
good corporate governance, the Indian government has
taken a step forward in setting-up the National
Foundation for Corporate Governance (NFCG). In
September 2003, the Union Cabinet had given its
consent for setting up the NFCG as a Trust. The
Foundation will work in synergy with the Investor
Protection and Education Fund. Among the broad
objectives of NFCG will be to provide research and
training in the field of corporate governance. It would
also be a source of financial or any other assistance for
activities aimed at promoting corporate governance,
including research and training.
NEED FOR ACCOUNTING STANDARDS

There are some gaps in Indian Accounting
Standards, which need to be closed or narrowed
down for greater transparency. The Institute of
Chartered Accountants of India has come out
with a set of new accounting standards, which
became mandatory from April 1 2001.
Indian Accounting Standards, (abbreviated as india AS) are a set of
accounting standards notified by the Ministry of Corporate Affairs which
are converged with International Financial Reporting Standards (IFRS).
These accounting standards are formulated by Accounting Standards
Board of Institute of Chartered Accountants of India.
CORPORATE GOVERNANCE RATING

The Department of Company Affairs has set up an
institute to rate corporate excellence similar to
credit rating agencies such as CRISIL. This
institute will undertake research in the area of
corporate governance to be able to improve the
overall legal framework and to advise companies
and directors on how they can take corporate
excellence forward.
ICRA's Rating Methodology
(i) Shareholding Structure
(ii) Governance Structure and Management Process
(iii) Board Structure and Process
(iv) Examine Stakeholder Relations
(v) Transparency and Disclosures
(vi) Financial Discipline
CORPORATE GOVERNANCE IN INDIA
A PERFORMANCE APPRAISAL
A Report Card That Doesnt Impress

In early 2004, a corporate governance country
assessment for India was carried out as part of
the joint World BankIMF programme of Report
on the Observance of Standards and Codes.
The Report has made several policy
recommendations if a principle is less than
fully observed:
(i) Sanction and Enforcement
(ii) Necessity for Clear Demarcation of Controls
(iii) Lack of Professionalism of Directors
(iv) Role of Institutional Investors
(v) Indian Boards Show Poor Professionalism
(vi) Independent Directors are not so Independent
(vii) Whistle Blower Policy
(viii) Unlisted Investment Companies
(ix) Accounting Gimmicks
(x) Poor Shareholder Participation
(xi) Obliging Auditors
Impetus for the growth of Corporate
Governance in India
1) Competition-driven
2) New Players Professionalism
3) Growth in Market Capitalisation
4) Foreign Portfolio Investors
5) Media Influences
6) Influence of Banks and Financial Institutions
7) Realisation among Indian Corporates of the
benefits of Corporate Governance
8) Impending Full Capital Account convertibility
will exert its own pressure