Corporate Governance and Capital Market Regulations Rajnikant Patel-MD & CEO Bombay Stock Exchange Ltd Friday, February 17, 2006

New Paradigm Corporate Governance issues are more challenging on account of a new paradigm of Higher levels of institutional/remote ownership Short term nature of ownership Impact of Globalization Disruptive forces of technology Constant churn in management resources Relentless pressure of quarterly results

Ownership Pattern Institutional ownership on the rise in India In the top ten companies (on the criterion of market capitalization) institutional holding vary between 28% and 72% High levels of interest in the India story likely to strengthen the trend Better corporate governance norms will pave way for higher levels of investment

Remote investors With higher levels of institutional holding, remoteness of ownership poses issues The shareholding patterns in the institutions are often defused and remote - implying low levels of activism Often short term nature of the investments prevent a holistic view to governance and sustainable growth plans

Globalization & Technology Increasing globalization has made it difficult to build stable businesses M&A activities and consolidation change competitive scenario abruptly The disruptive force of technology can make a business non-viable overnight High inter-linkages mean higher degrees of vulnerability Businesses need to grapple with high levels of uncertainty, sometimes discouraging long-term views

Management as a Resource With access to and information about global markets readily available, capital is relatively less critical for businesses now Management as a resource more significant for growth and success Resource characterized by high levels of churn and short-term commitments

Short termisms Quarterly results exert high levels of pressure to show results New initiatives and change often take much longer time to yield results Need to produce short-term results could encourage sub-optional decisions and resource allocation ESOPs etc. could accentuate the malady

Good Governance Good Corporate Governance is to promote sustainable growth Achieve the right balance between the interests of all stake holders Longer-term view is necessary for sustainability Host of factors on the other hand encourage short-term approaches and quick-fixes An aspect of corporate governance not often discussed

Time Horizon Institutional investors to take a longer term view of their investments and provide continuity and stability in ownership Institutional shareholder activism will help Independent directors to evaluate whether strategies are designed to yield only short term results Executive compensation to be structured for sustained performance Good corporate governance to encourage management to take longer-term views

Thank You