CORPORATE GOVERNANCE IN BANKS. International Scenario Cadbury Committee Report, UK –May 1991 OECD...
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Transcript of CORPORATE GOVERNANCE IN BANKS. International Scenario Cadbury Committee Report, UK –May 1991 OECD...
CORPORATE GOVERNANCE IN BANKS
International Scenario
• Cadbury Committee Report, UK
– May 1991
• OECD Principles of Corporate Governance
– April 1998
• Basel Committee Report
Indian Scenario
• Kumara Mangalam Birla Committee, 1999• Naresh Chandra Committee, 2004• Narayana Murthy Committee 2003• Reserve Bank of India Norms• Khan Working Group Report, 1998• Narasimham Committee Report I, 1992• Narasimham Committee Report II, 1998• Dr. Patil Advisory Group• Varma Group• Report of the Consultancy Group of Directors of Banks /
Financial Institutions, 2002 Chaired by A.S.Ganguly
Corporate Governance Framework
• Companies Act, 1956
• Companies Act, 1956 (Amendment in 2002)
• SEBI Regulations for Listed Companies (Clause 49)
Corporate Governance Requests
• Minority shareholder protection• Voting Rights• Firm’s capital structure• Shareholder meetings• Structure and responsibilities of the Board of Directors• Board structure• Board meetings• Nomination and election of directors• Board committees• Disclosure• Audit committee responsibilities
Voting Rights
• Shareholders can appoint a proxy. • A proxy can demand a poll and cast vote but cannot
speak at the meeting. • The notice convening the meeting must state that
shareholders can appoint a proxy.• All shares are equal within one class.• Shares with different voting rights or dividend can be
issued as long as shareholders approve the issue and such shares do not exceed 25% of total share capital.
• Issue of share capital with different voting rights or dividends (Companies Rule 2001)
Capital Structure
• Mergers require a special resolution (more than 75% of
shareholders present) at the shareholder meeting.
• In the event shareholders are not called upon to approve
the merger, the acquirer has to make a public
announcement of his/her intent to acquire the shares.
(Regulation 12 SEBI- Takeover Code)
Capital Structure
• Acquisition of 15% or more shares or voting rights of any
company requires the acquirer to make a mandatory public
offering (Regulation 10 SEBI – Takeover Code).
• Exception: Compliance not mandatory when
– Acquirer already owns 15% or more but less than 75% of
shares or voting rights of the company and in one year
acquires less than 5% of shares or voting rights,
– Acquirer already owns 75% of shares or voting rights of
the company
Capital Increase
• If a company is issuing further capital it is required to
offer the shares to existing equity holders in proportion to
the capital paid-up on those shares on that date.
• Notice for exercising the offer should be given at least 15
days prior to the issue.
• The offer can be transferred to another person unless
the Articles of the company specifically disallow such
transfer.
Capital Increase
• Exception (Section 81 of Companies Act):
– Preferential allotment if a special resolution to that effect
has been passed in the Annual General Meeting,
– If a special resolution is not passed then the number of
votes cast in favour of forfeiting preferential allotment
should exceed votes against the forfeiture
– Central Government should approve the application of the
board of directors to waive requirement of preferential
allotment.
Buyback of Shares
• A company can acquire its owns shares if
– The buy-back is authorized by its Articles,
– A special resolution has been passed in the shareholders’
meeting authorizing the buy-back,
– The buy-back is less than 25% of the total paid up capital
and free reserves,
– The ratio of debt owed by the company is not more than
twice the capital and its free reserves after the buy-back.
Buyback of Shares
• Exception (Section 77A of Companies Act):
• A special shareholders resolution is not needed if the
buy-back is less than 10% of the total paid-up equity
capital and free reserves of the company and the buy-
back has been authorized by the Board of Directors of
the company.
Shareholder Meeting
• Companies are required to hold an Annual General
Meeting (AGM) every year (Section 166 of Companies
Act).
• Notice for such meeting should be sent to shareholders
21 days in advance (Section 171 of Companies Act).
• Shareholder controlling 10% of voting rights or paid-up
capital can call for a special or Extraordinary General
Meeting (EGM) (Section 169 of Companies Act).
Shareholder Meeting
• Foreign Institutional Investors (FIIs) must register with
SEBI to participate in the market.
• Investments and returns are freely repatriable, except in
the case of certain specified items which attract the
condition of dividend balancing and/or where the
approval is subject to specific conditions such as lock in
period on original investment, dividend cap, foreign
exchanging neutrality, etc.
Shareholder Meeting
• Companies are required to create • ‘Shareholders/Investors Grievance Committee’• Chairmanship of a non-executive director to look into the
redressing of shareholder and investor complaints like transfer of shares, non-receipt of balance sheet, non-receipt of declared dividends etc (SEBI Code, Clause 49).
• Quorum is set at five persons for a public company and two for other companies (Section 174 of Companies Act).
Board Structure
• An independent director is a non-executive director (SEBI
Code, Clause 49):
– Aside from director’s remuneration, does not have any
material pecuniary relationship or transactions with the
company, its promoters, management or subsidiaries
which may affect the independence of judgment,
– Not related to the promoter or a person in management
on the board or one level below the board,
Board Structure
– Not been an executive for the past three years,
– Not or has not been a partner in the past three years
of a statutory or internal audit firm or a firm providing
consulting services to the company.
• All pecuniary relationship/transactions of nonexecutive
directors should be disclosed in the annual report (SEBI
Code, Clause 49).
Independent Directors
• The number of independent directors is dependent on
whether the Chairman is an executive or non-executive
director.
• In the case of a non-executive chairman, at least one-
third of the board should be comprised of independent
directors and in the case of an executive chairman, at
least half of the board should be comprised of
independent directors (SEBI Code, Clause 49).
Board Responsibilities
• The Board shall meet at least four times a year, with a minimum time gap of three months between any two meetings (SEBI Code, Clause 49).
• Quorum for board meetings is 33% of total board strength or 2 members whichever is higher (Section 287 of Companies Act).
• No specific provision mandating the creation of a board-level nominating committee.
• The directors of the Board are appointed by the company in the Annual General Meeting (Section 255 of Companies Act).
Board Resposibilities
• At the time of appointment of a new director or the re-
appointment of a director, shareholders must be
provided with a brief résumé of the director, expertise in
specific functional areas and names of companies in
which the person also holds other directorships (SEBI
Code, Clause 49).
• Unless the Articles of a Company provide for the
retirement of all directors at every AGM, not less than
one-third directors have to be appointed by the company
at the AGM (Section 255 of Companies Act).
Board Committee
• Every board is required to have an audit committee and
a shareholder grievance committee.
• The board of directors is required to consider the CEO’s
remuneration.
• Creation of a separate remuneration committee is a non-
mandatory requirement (Clause 49 of SEBI’s listing
requirements).
• In practice, however, most Boards of large companies
have an audit, remuneration and nomination committee.
Disclosure
• Every company is required to appoint a compliance officer who is responsible for setting policies, procedures, monitoring adherence to the rules for the preservation of ‘price sensitive information’ to prevent insider trading (SEBI Insider Trading Regulation, 2002).
• There should be a separate section on Corporate Governance in the annual report to shareholders.
• Non-compliance with any mandatory requirements and the extent to which the non-mandatory requirements have been adopted should be specifically highlighted (SEBI Code, Clause 49).
Disclosure
• Information such as quarterly results and presentations made by companies to analysts shall be put on the company’s website, or shall be sent in such a form as to enable the stock exchange on which the company is listed to put it on its website (SEBI Code, Clause 49).
Remuneration of Directors
• All fees/compensation paid to non-executive directors
are fixed by the Board of Directors and require previous
approval of shareholders in the Annual General Meeting.
• The shareholder’s resolution should specify the limits for
the maximum number of stock options that can be
granted to non-executive directors in any financial year
and in aggregate (SEBI Code, Clause 49).
Conflict of Interest
• A company is required to disclose all bases for related
party transactions to the audit committee.
• It has to periodically provide a statement in summary
form of transactions with related parties in the ordinary
course of business, details of material individual
transactions with related parties which are not in the
normal course of business, and transactions with related
parties or others that are not on an arms length basis
with management’s justification for such transactions
(SEBI Code, Clause 49).
Conflict of Interest
• Disclosure of materially significant related party
transactions that may have potential conflicts with the
interests of the company at large have to be made in the
Report on Corporate Governance in the Annual Report
to Shareholders (SEBI Code, Clause 49).
Internal Control and Risk Management System
• The company is required to lay down procedures to
inform Board members about risk assessment and
minimization procedures. These procedures shall be
periodically reviewed to ensure that executive
management controls risk through means of a properly
defined framework (SEBI Code, Clause 49).
Internal Control and Risk Management System
• The audit committee also has to review the adequacy of
the internal audit function, if any, including the structure
of the internal audit department, staffing, seniority of the
officials heading the department, reporting structure
coverage, and frequency of internal audit (SEBI Code,
Clause 49).
Standards
• India materially conforms to
• International Financial Reporting Standards (IFRS)
• International Standards on Auditing (ISA).
• Institute of Chartered Accountants of India (ICAI)
guidelines
• Companies Act
Audit Report
• Quarterly reports are subject to limited audit review.
• As part of the non-mandatory requirements, a half-yearly
declaration of financial performance, including a
summary of the significant events in the last six months,
may be sent to each household of shareholders (SEBI
Code, Clause 49).
• Comprehensive audits are conducted annually.
Audit Quality
• Every company at each AGM shall appoint an auditor(s)
to hold office till the conclusion of the next AGM (Section
224 of Companies Act).
• The Companies Act requires annual accounts to be
audited by an independent certified chartered accountant
who is a member of the Institute of Chartered
Accountants of India (ICAI)
Audit Quality
• The quality of financial disclosures for listed companies
is determined by the Department of Company Affairs,
SEBI, and the ICAI.
• The ICAI lays down the parameters of accounting and
auditing standards.
• The Companies Act requires management to explain any
deviations from the prescribed accounting standards in
financial statements.
Audit Committee
• The audit committee shall have minimum three directors
as members, with two-thirds of the members being
independent (SEBI Code, Clause 49).
• All members of the audit committee should be financially
literate and at least one member shall have accounting
or related financial management expertise (SEBI Code,
Clause 49).
Internal and External Auditor
• The audit committee recommends to the Board the
appointment, re-appointment, and if required the
replacement or removal of the external auditor and the
fixation of audit fees.
• The committee also has to approve payment to auditors
for other services provided (SEBI Code, Clause 49).
Internal and External Auditor
• The audit committee has to review with management the
performance of the external and internal audit firm and
the adequacy of internal control systems (SEBI Code,
Clause 49).
Ownership and Control
• Senior management is required to disclose potential conflicts of interest to the board.
• Directors are required to disclose share dealings beyond prescribed thresholds.
• SEBI has issued rules against insider trading.• Monitoring and prosecuting insider trading activity is very
difficult .• An acquirer, who acquires shares or voting rights
exceeding specified threshold levels has to disclose at every stage the aggregate holdings or voting rights to the company and to the stock exchanges where the companies are listed. Current threshold limits are 5%, 10% or 14% of shares or voting rights (Regulation 7 SEBI – Takeover Code).
Regulatory Environment
• The Ministry of Company Affairs (MoCA), regulators like RBI
and SEBI and stock exchanges have surveillance functions.
• MoCA has surveillance responsibility over unlisted
companies.
• For listed companies, stock exchanges are considered to be
the first line of defence followed by SEBI.
• RBI oversees companies in the banking and financial sector.
Independence of Supervisory Body
• SEBI is an independent quasi-judicial body that plays an
active regulatory and development role in India’s security
market.
• The Central Government appoints the chairman and may
nominate a maximum of nine other members.
• The body is funded by contributions from public financial
institutions, banks and the Government of India.
Corporate Governance of Banks
• Openness
• Accountability
• Transparency
• Responsibility
• Risk Management