• Home
• case study
• case study
• Book Review
• SME Finance
• Editorials
• Top Stories
• Cover Stories
• Focus
• Interviews
• Technology
• Money
• Features
• Special Reports
• Marketing
• Featured Entrepreneur
• The Last Word
• Knowledge Kit
• Government Schemes
• Health & Wellness
• SME Worldwide
• General
• First Person Singluar
• Government Procurement
• Ask Our SMEs Experts
• SME Events
• SME Events
• Personality
• Micro Finance
• Research
• SME Exchange
• Time Travel
• SEMINARY - Special Supplement, Oct-Dec'2011
• Archives

Editorials

by Rajen Kumar

For over four years now, we have been making relentless efforts to fill information deficit that painfully exists in the country's Micro, Small and Medium Sector. Encouragingly enough,...

Special Reports

Be Skeptical. Be very Skeptical. Mistake upon Mistake

In recent months, we've had a few slip-ups by the official statistical system in India: • Yesterday's IIP release was preceded by a mistake. Mint says: On Monday, the...

• Be Skeptical. Be very...
• Ahmedabad Unit Makes...

On the Stands

Scrip on Healthy Small Bourse: SME Stock Exchange in Context of Corporate Governance

With globalization of the Indian economy, there has been shift of economic policies in favor of open, democratic and competitive environment. As a result of these reforms process, for last almost two decades, the country has been passing through unprecedented changes in the various economic fields.

 

One of the major areas has been the 'capital market' reform since corporates are increasingly shifting to financial markets as the pre-eminent source for capital As a first step the Government has set up Securities and Exchange Board of India (SEBI) on the lines of SEC ( Securities and Exchange Commission ) of USA. SEBI has been doing a commendable job by taking various measures in order to protect the Shareholder and Investors interest. Now, the clearance for setting up of the SME Stock Exchange for facilitating financing of growth oriented Small and Medium Enterprises.

 

SEBI on Corporate Governance

 

With a view to ensuring that we adopt international standards in this respect, SEBI set up a Committee on 'Corporate Governance' to recommend the measures necessary to promote and raise the standards of corporate governance in India, under the Chairmanship of Kumar Mangalam Birla, an eminent industrialist and member SEBI board, with other specialists from various related fields as members.

 

The Committee after detailed deliberations and drawing from the various reports and codes from advanced countries and taking into account the Indian environment submitted its report in November 1999.

 

The SEBI board considered the recommendations at its meeting of January 25, 2000 and decided to implement the same through amendments to the listing agreements, as suggested by the Committee (The listing agreement is the legal contract between the Stock Exchanges and the Listed Companies for enabling the Companies to list their shares for trading on the terms and conditions mentioned in the agreement) by introducing new clause 49. SEBI issued circular reference F.No.SMDRP/POLICY/CIR-10/2000 dated 21.2.2000.

{pageBreak} 

The recommendations are broadly in two categories - mandatory and non-mandatory. However, it has also been emphasized that the same should be reviewed with the changing context and times, particularly, with the changing expectations of the stakeholders and increased sophistication in the capital markets.

 

Long Term Shareholder Value

 

Based on the terms of reference the committee had agreed that the fundamental objective of corporate governance is the "enhancement of the long term shareholder value while at the same time protecting the interest of other stakeholders"

 

The corporate structure separates management from ownership. As a result basic underlying concept is of stewardship and of related concepts of accountability, transparency and reporting.

 

The corporate governance depends mainly on three entities - The Board of Directors, Management and Shareholders.

 

In order for the corporate governance to succeed all the three entities need to understand their role properly and act in harmony with each other. However, the ultimate responsibility for putting the Code into practice lies directly with the Boards of Directors.

{pageBreak} 

The Board of Directors is responsible for the governance of the company. They provide leadership, strategic guidance and objective judgement independent of management to the company and exercises control over the company. There key function is to direct and control. There effectiveness will depend on how efficiently they perform this dual function. They are primarily responsible to the shareholders for creating, protecting and enhancing wealth and resources for the company.

 

Role of Board of Directors

 

In this respect there is special emphasis on composition, structure and responsibilities of the Board of Directors. The composition of the Board of Directors is critical for the effective and independent functioning.

 

The Committee has observed that till recently it has been the practice of most of the companies in India to fill the board with representatives of the promoters of the company, and independent directors if chosen were also handpicked thereby ceasing to be independent. This has undergone a change and increasingly the boards comprise of following groups of directors - promoter director, executive and non-executive directors, a part of whom are independent

 

Under the new scheme of things, there will be combination of three categories of Directors, namely, Executive, Non-executive and Independent (Independent directors are directors who apart from receiving director's remuneration do not have any material pecuniary relationship or transactions with the company, its promoters, its management or its subsidiaries, which in the judgment of the board may affect their independence of judgment). There is a key role for the Non-Executive and Independent Directors in the independent functioning. Due to their presence on one hand no individual or a group is able to dominate the Board and on the other hand they bring external and wider perspective to the decision-making. The independence of the board is also critical to fulfill its oversight role objectively.

 

With the fresh directives, the Board of a company would have an optimum combination of executive and non-executive directors with fifty percent of the Board comprising the non-executive directors. If the Chairman is non-executive at least one-third of the Board should comprise of independent directors and in case of an executive Chairman, at least half of the board should be independent.

{pageBreak} 

The code also lays special emphasis on the role of the Chairman. The Committee is of the view that the Chairman's role in principle be different from that of the chief executive.

 

Balance of Power

 

The Chairman has to maintain a balance of power in the board, make certain that all directors participate and receive adequate information, well in time.

 

Similarly, the role of a nominee Director also will have to be specified whether he is representing in the capacity as a Lender or an Investor.

 

This will provide the readers with the changed requirements, along with the broad philosophies and logics applied by the Committee in their recommendations, to be followed by listed companies only in respect of composition of the Board. Similarly, the Committee has also made number of other recommendations, which have been briefly highlighted and could be dealt with at greater length at a later date.

 

The companies would also now be required to have following Sub-committees in order to assist the Board in efficient discharge of its responsibilities.

 

Audit Committee shall be set up comprising of non-executive and independent directors. One of them should have financial and accounting knowledge. Their main role is to oversight the company's financial reporting process. The financial statement should be correct, sufficient and credible. In order to unable them to perform the said function effectively they have also been given sufficient powers and authorities.

{pageBreak}
Remuneration Committee shall deal with remuneration policies and provides that the board shall fix the remuneration of the non-executive directors. It also requires complete disclosure on Directors remuneration in the Annual Report.

 

Shareholder / Investors Grievances Committee to redress shareholder and investors complaints.

 

The Board Procedures lays down detailed requirements regarding conducting of number of board meetings, time gaps and the minimum information to be placed before the board. The information includes the operating plans, budgets, capital budgets, quarterly results, report of committees, material information on key personnel, HR / IR, legal compliances/defaults etc. This will ensure that the directors are provided with minimum critical information relevant to ensure efficient discharge of their responsibilities and in performance evaluation of the company.

 

Management Discussions and Analysis Report is required to be submitted as part of the annual report. This would provide shareholders with a information on the industry, segment-wise performance, opportunities and threats and such other material information which other wise is not available but at the same time is important enough for them to know so as to take informed decisions, subject to the limits set by company's competitive position.

 

Report on Corporate Governance - there shall be a separate section in the annual report on Corporate Governance, with a detailed compliance report. Non-compliance of any mandatory requirements, with reasons thereof and the extent to which non-mandatory requirements have been adopted should be high lighted. The report requires suggested items for disclosure as:

 

Company's philosophy on the code, information on Directors, report on Committees -Audit, Remuneration and Shareholders, General body meetings, related party transactions, communication to Shareholders, general shareholder information etc.

{pageBreak} 

Compliance Certificate - the directors' report shall be annexed with a certificate from the auditors of the company regarding compliance of conditions of corporate governance as stipulated in the clause. A copy of the same shall also be forwarded to the Stock exchange.

 

The Committee has also made important suggestion with regard to the role and responsibilities of other two entities namely, Management and Shareholders.

 

Maximizing Shareholder Value

 

Managements responsibility include the over-riding aim of maximizing shareholder value without being detrimental to the interests of other stakeholders at the same time to operate within the boundaries and the policy framework laid down by the board. It has to translate into action, the policies and strategies of the board and implementing its directives to achieve corporate objectives of the company. Simultaneously, to ensure that control systems are in place to achieve the objectives laid down by the board, and also to help the board discharge its responsibilities to the shareholders.

 

The shareholders' can play a very effective role in good Corporate Governance at the same time maintaining a high standard of corporate behavior and also without getting involved in the day-to-day functioning of the company. General Body Meetings provide an opportunity to the shareholders to address their concerns to the Board of Directors and to ensure that the company is being stewarded for maximizing the interests of the shareholders. The shareholders must therefore show a greater degree of interest and involvement in the appointment of the directors and the auditors. For this they should demand complete information about them before approving their appointments.

 

In conclusion, while structures and rules are necessary the real success will lie with taking proactive initiatives by corporates and treating it as a way of life. The breadth and depth of a code or the stringent enforcement norms will not help much. The code should be complied with in letter and spirit and while interpreting it, give precedence to substance over form.

 

Ultimately, the quality of governance will depend to a great extent on integrity of management, the ability of the board, their commitment level, quality of reporting and adequacy of the processes. The efficient corporate governance is far above compliance - it builds on best corporate practices based on basic regulatory requirements.

 

It is now time for the Indian corporates to shade their image of Small and Family Owned Businesses. Get globalised and accept, adopt and master the rules of the modern day International business norms so as to avail of the tremendous opportunities. This will help them to survive and grow in the new competitive world order.

Our Achievements

• Winner of appreciation award for promoting SMEs in India.
• 1st ever Indian magazine to penetrate tier II, III cities & the rural belt.
• Industry Partnerships include CII, FICCI, ASSOCHAM, PHDCC, AIMA, ITPO, SME Network, Federation of Indian Micro Small Enterprises (FISME)
• Official Magazine Partners for several national & international MSME events.

The Last Word

Down the Memory Lane

Zainul Abdin was the only person who would pour his heart out to me in a mix of Urdu-Hindi (Hindustani ) in hush-hush tones during the war-torn Dhaka (then Dacca) in the early 70s where I worked...

Contribute

You can also write for SME WORLD

We are looking for writers and experts to contribute original stories and articles. Send an email to smeworld@gmail.com with your story idea and lets get talking.