Corporate Governance By – Prasham Srivastava (B12029) Puja Jaiswal (B12033) Rajan Antony (B12035) Sanket Balgi (B12042)

Corporate Governance Corporate Governance refers to the system by which corporations are directed and controlled The governance structure specifies the distribution of rights and responsibilities among different participants in the corporation (such as the board of directors, managers, shareholders, creditors, auditors, regulators, and other stakeholders) and specifies the rules and procedures for making decisions in corporate affairs. Governance is a mechanism for monitoring the actions, policies and decisions of corporations. Governance involves the alignment of interests among the stakeholders.

Corporate Governance (Contd.) Corporate Governance is a relationship among stakeholders that is used to determine and control the strategic decision and performance of organization Concerned with identifying ways to ensure that strategic decisions are made effectively Used in corporations to establish order between the firm’s owners and its top-level managers

Principles of corporate governance Rights and equitable treatment of shareholders: Organizations should respect the rights of shareholders and help shareholders to exercise those rights. Interests of other stakeholders: Organizations should recognize that they have legal, contractual, social, and market driven obligations to non-shareholder stakeholders, including employees, investors, creditors, suppliers, local communities, customers, and policy makers. Role and responsibilities of the board: The board needs sufficient relevant skills and understanding to review and challenge management performance. Integrity and ethical behavior: Organizations should develop a code of conduct for their directors and executives that promotes ethical and responsible decision making. Disclosure and transparency

Objectives Economic efficiency Employees participation Code of conduct Balance between economic and social goals and between individual and community goals Efficient use of resources Setting standards Accurate and reliable information Transparency

Mechanism The Companies Act – provides for Director’s Responsibility Statement, Constitution of Audit Committee, paid up capital, proper disclosure by Directors of the nature of contract. SEBI – Clause 49 of listing agreement provides for the composition and role of BOD and Audit Committee, remuneration, etc. Statutory Audit – Whistle Blower Mechanism Code of Conduct – Board shall lay down code of conduct for all Board Members and senior management

Systemic problems of Corporate Governance Demand for information: A barrier to shareholders using good information is the cost of processing it, especially to a small shareholder. Monitoring costs: In order to influence the directors, the shareholders must combine with others to form a voting group which can pose a real threat of carrying resolutions or appointing directors at a general meeting. Supply of accounting information: Financial accounts form a crucial link in enabling providers of finance to monitor directors. Imperfections in the financial reporting process will cause imperfections in the effectiveness of corporate governance.

Satyam Consultancy LTD. (Case on Scam) In December 2008 Satyam announced acquisition of 2 companies Maytas Properties (100% stakes) and Maytas Infrastructure (50% stakes) owned by family of Satyam’s founder and Chairman Ramalinga Raju Due to adverse reaction from institutional investors and stock markets the deal was withdrawn and the prominent independent directors resigned. The company’s balance sheet was inflated to 5361 Cr against 5040 Cr, revenue to 2700 Cr against 2112 Cr and operating margin to 6494 Cr against 61 Cr. Questions were raised on corporate governance practices. Analysts and investors questioned the acquisition being a related party transaction.

Case on Scam (Contd.) Governance issue at Satyam arose because of non fulfilment of obligation of the company towards various stakeholders. They were not provided with accurate information regarding the M&A, financial reporting and transparent dealing in the organisation. The company even did not pay advance tax for FY 2009 It was blacklisted by World Bank over charges of bribery It was declared ineligible for contracts to providing improper benefit to bank staff and failing to maintain documentation to support fees Satyam Computers was taken over by Mahindra Group – Tech Mahindra

Sherman Antitrust Act(1890) Prohibits monopolies or other acts in restraint of trade that affect interstate or foreign commerce Allows for injunctions to stop such activates and for any one injured by such activities to recover through treble damages in civil court Treble damages : three times actual loss as a result of a violation of antitrust laws It provides criminal penalties like fines and jail time of 3years

The Clayton Antitrust Act of 1914 A supplement of the Sherman act Corporate officers and officials can be held responsible, but the Clayton act is only applied to individuals and translations engaged in interstate commerce. The Clayton act does exempt labour and agricultural organizations from anti trust legislation

Federal Trade Commission Act(1914) The FTC act established the federal trade commission to enforce previous federal acts The Wheeler-Lea Act gives the FTC broader power: To regulate unfair or deceptive practices whenever the public is deceived. The FTC tries to minimize violations by entering into consent decrees with potential violators. Consent decree: a written agreement between a defendant and the prosecution to avoid undertaking an act that would violate law.

Robinson-Patman Act 1936 Often described as the price discrimination act. Makes it illegal to induce or receive a discriminatory price – it is particularly aimed at large firms engaged in interstate commerce. Requires proportionately equal terms be made to buyers in common market. Proportionately equal terms: buyers in horizontal competition must receive substantially equal offers. Offers may be proportioned by the volume of business from each buyer. Promotional allowance must be equally available to all customers.

Monopolistic and Restrictive Trade Practice under MRTP Act, 1969 Monopolistic and Restrictive Trade Practice under MRTP Act, 1969 is an important piece of economic legislation designed to ensure that the operation of the economic system does not result in the concentration of the economic power to the common detriment. Regulation of MRTP Act: Regulation of production and fixing the term of sale. Prohibition any action that restricts competition. Fixing standards for goods produced. Regulating restrictive and unfair trade practices.

Competition Act, 2002 The broad objectives of the competiton Act, as laid down in its preamble are: “ To prevent practices having adverse effect on competition, to promote and sustain competition in markets, to protect the interest of the consumer and to ensure freedom of trade carried on by other participants in markets in India”

Objectives of Competition Act, 2002 It prohibits Anti-Competitive Agreements(Sec 3) : Eliminate practices having adverse effect on competition. It regulates Acquisitions, Mergers and Combinations(Sec 5&6): Promote and sustain competition. It prohibits Abuse of Dominant Position(Sec 4) : Protect consumers interests. It mandates Competition Advocacy (Sec49) : Ensure freedom of trade carried on by other participants in markets, in India.

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