Capital Markets : Best Practices India CFO Summit 2005 – Mumbai 25 Nov Alok Misra, Group CFO MphasiS BFL

Confidential © MphasiS 2 Corporatization Corporatization is a form of economic reform which takes services from the direct control of the government, and places them in the control of government-owned corporations. This is often seen as a step towards full-scale privatization Impacts  Unlock value  Introduction of higher standards of corporate governance  Capital market behavior  Better regulation of commercial and business transactions  Consumer protection.  These steps will all contribute to the nourishment and strengthening of the private sector Examples  VSNL / BSNL  ONGC & other Oil PSUs  Maruti

Confidential © MphasiS 3 Demutualization The process of changing corporate structure from a mutual fund company to some other form, such as a limited liability or corporation Demutualization in exchanges refers to the change in the legal status of the exchange from a mutual association with having one vote per member (with possibly consensus based decision making) into a company limited by shares, with one vote per share (with majority based decision making) Demutualization also offers potential opportunities for  strengthening governance  offering alternate business models of exchanges  raising capital and  improving operational efficiency Challenges  Regulatory framework  Conflicts of interests

Confidential © MphasiS 4 Demutualization Asian Stock Exchanges corporate structure Stock ExchangesDemutualization in AustraliaOct-98 SingaporeDec-99 Hong KongMar-00 PhilippinesAug-01 TokyoNov-01 NationalNov-94 Bombay2005

Confidential © MphasiS 5 Demutualization Market data NSE Traded quantity (lakhs)1353,150 Traded Volume (Rs. Cr.)1965,549

Confidential © MphasiS 6 The India Feel Good Factor Capital markets & foreign investments  free currency flows  foreign investments for Indian companies  regulatory nuisance factors  a capital markets Code of Conduct Accounting and taxation essentials  Accounting standards  Presentation and disclosure of financials  Taxation of foreign companies  Taxation of foreign investments Corporate governance & the pivotal role of the Board

Confidential © MphasiS 7 Board Structures* ParameterIndia (Nifty Fifty Co.)US (top 50 out of NYSE 100 index) Ownership pattern 48% of Indian companies have largest shareholder holding > 50% Largest shareholder holds less than 10% in all cases Board size Largest Board size: 17, smallest: 5 44% have more than 12 directors Largest Board size: 18, smallest: 10 66% have more than 12 directors Board Independence 58% of companies have board majority of independent directors 12% have less than 1/3 rd of the directors independent All companies have a board majority of independent directors Executive directors on board In 35 companies 50% of the directors-or-more-are executive directors 49 companies have less than 25% executive directors Chairman & CEO In 60% companies, roles are separate 80% have same person for the two roles Lead Independent Director Only 3 companies have it20 companies have it

Confidential © MphasiS 8 Board Structures* ParameterIndia (Nifty Fifty Co.)US (top 50 out of NYSE 100 index) Board Committees All companies have audit committees, 54% have fully independent Audit Committees 33 companies have remuneration committees- of these 14 are fully independent and 16 have majority independent 9 companies have nomination committees – 6 are fully independent and 3 have majority independent committees All companies have fully independent audit, remuneration and nomination committees * Crisil Ratings

Confidential © MphasiS 9 Integration of Stock exchanges / Regionalisation The challenge for each capital market:  Increase of liquidity, avoid marginalisation.  Preconditions: Economic stability, economic growth, issuers, company structure, governance and results  Remote members and cross membership & Cross listing  Linked trading systems and Links on execution side (clearing, settlement, registry)  Regulatory framework supervision, transparency & Role of market participants The benefits of a regional integration of stock exchanges :  Diversified risk in a wider market  More efficient and competitive markets – larger players  Lower costs & higher returns by increased cross border capital flows  By pooling the resources of fledgling and fragmented capital markets, regionalization could boost liquidity and the ability of these markets to mobilize local and international capital for private-sector and infrastructural development  Investors would gain access to a broader range of shares; issuers would gain access to a larger number of investors  Prevent large capital outflows from the region

Confidential © MphasiS 10 Working with shareholders and management Disclosures  Financial Statements  Clause 35  Clause 41 Transparency / Governance  Clause 49  Governance rating Accountability / Internal Control  CEO/CFO Certification  Enterprise Risk Management  SOX-ing the Listing Agreement Compliance  Internal audits  Statutory Compliance processes - global Issues  Company Law v SEBI Guidelines v Listing Agreements

Confidential © MphasiS 11 The Way Forward For India A single regulator for  Banking  Securities/stocks  Insurance  Asset management With a thematic approach to  eCommerce  the impact of the Internet  the foreign investor  the growing retail investor

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