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Dear Friends,

Recently a lot of changes were seen in the corporate world in india, which again and again raises question to the investor protection and corporate governance, apart from this some innovations are really eyebrow raising like the launching of initial public issues without the existance of comapany!!!

we need to discover the loopholes and thier remedies, to start with here i am describing the very famous concept of "Corporate Governance"as the term "corporate governance" in not new to anyony one.

Technically, It is the processes by which companies are directed and controlled encouragement of companies' compliance with codes , investment technique based on active ownership a field in economics, which studies the many issues arising from the separation of ownership and control.

At its broadest, corporate governance encompasses the framework of rules, relationships, systems and processes within and by which fiduciary authority is exercised and controlled in corporations.

Relevant rules include applicable laws of the land as well as internal rules of a corporation. Relationships include those between all related parties, the most important of which are the owners, managers, directors of the board (when such entity exists), regulatory authorities and to a lesser extent employees and the community at large. Systems and processes deal with matters such as delegation of authority, performance measures, assurance mechanisms, reporting requirements and accountabilities.

Corporate governance” is the set of processes, customs, policies, laws and institutions affecting the way a [corporation] is directed, administered or controlled. Corporate governance also includes the relationships among the many players involved (the stakeholders) and the goals for which the corporation is governed. The principal players are the [shareholder]s, [management] and the [board of directors].Other stakeholders include employees, suppliers, customers, banks and other lenders, regulators, the environment and the community at large. Corporate governance is a multi-faceted subject. An important part of corporate governance deals with accountability, [fiduciary duty] and mechanisms of auditing and control. In this sense, corporate governance players should comply with codes to the overall good of all constituents. Another important focus is economic efficiency, both within the corporation (such as the best practice guidelines) as well as externally (national institutional frameworks)

The central goal of Securities Markets, which is to obtain a widely dispersed ownership and trading in securities, innately induces conflict of interest between the management team, which controls the firm, and the shareholders, who own the firm. Many policy efforts in recent years have been devoted in increasing the incentives for managers to maximize theinterests of shareholders. One important element of this is the market for corporate control. If a management team is producing poor cash flows for the owners, then this should induce competing management teams to take control the assets of the firm. SEBI has steadily refined the institutional framework for these transactions under the ‘takeover code’. In September, 2002, SEBI amended the takeover code in many new important directions, reflecting the experience of the market for corporate control in recent years. The SEBI had constituted a Committee on Corporate Governance under the chairmanship of N R Narayana Murthy to improve standards of corporate governance in India. SEBI introduced some major amendments based on the report of this committee on 26th August, 2003, in clause 49 of its listing agreement. All companies which were required to comply with the requirement of the erstwhile clause 49 i.e. all listed entities having a paid up share capital of Rs 3 crores and abov e or net worth of Rs 25 crores or more at any time in the history of the entity, are required to comply with the requirement of this clause. This clause does not apply to other listed entities, which are not companies, but body corporates, incorporated under other statutes. However, Clause 49 will apply to these institutions as long as it does not violate their respective statutes, guidelines or directives. Corporations have an important perspective to contribute to the public policy dialogue and should be actively involved in discussions about the development, enactment and revision of the laws and regulations that impact their businesses and that affect the communities in which they operate and their employees reside.Effective corporate governance requires a clear understanding of the respective roles of the board and of senior management and their

relationships with others in the corporate structure. The relationships of the board and management with stockholders should be characterized by candor; their relationships with employees should be characterized by fairness; their relationships with the communities in which they operate should be characterized by good citizenship; and their relationships with government should be characterized by a commitment to compliance.

Agreements entered into by the listed companies with the respective stock exchanges where

the shares of the company are listed has over the times emerged to be the prime document for ensuring corporate transparency and investor protection. The Listing Agreement requires a company to promptly furnish to the Stock Exchange certain information about the working and affairs of the company and the decisions taken by the company from time to time. The idea is to keep the general public informed of certain material information and developments regarding the working and affairs of the company so as to avoid market manipulation or insider trading.31 The SEBI had constituted a Committee on Corporate Governance under the chairmanship of N R Narayana Murthy to improve standards of corporate governance in India. SEBI introduced some major amendments based on the report on this committee on 26th August, 2003, in clause 49 of its listing agreement. All companies which were required to comply with the requirement of the erstwhile clause 49 i.e. all listed entities having a paid up share capital of Rs 3 crores and above or net worth of Rs 25 crores or more at any time in the history of the entity, are required to comply with the requirement of this clause.

It is interesting to observe that all the members of the Audit Committee are required to be financially literate and at least one member should have accounting/management expertise.

As per the code, one who has the ability to read and understand the basic financial statements, i.e, the balance sheet, profit and loss account and the statement of cash flows would be considered as being financially literate. The question which obviously arises is whose call it would be to determine whether a person is financially literate or not. It has to be assumed necessarily that the concerned person himself has to testify that he is financially literate. That takes away from its efficacy as an instrument to further corporate transparency.

As for independent directors, it is provided that a person shall be eligible for holding the office of independent director so long as his tenure does not last more than three terms of three years each, running continuously. This implies that one cannot be on the board as an independent director beyond a period of nine years. This stipulation is blatantly unfair in that it automatically unseats promoter-directors holding such office upon completion of nine years. Therefore we see that the Amendments brought about are not very pragmatic or fair in fulfilling goals of corporate transparency or efficacy. Also, the penalty for non-compliance is delisting, which only hurts the shareholders, who are one of the principle stakeholders requiring the protection of efficient Corporate Governance norms.




Category Corporate Law, Other Articles by - C S Alok Singh 



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