Corporate Governance And Firm Performance In India Accounting Essay

Corporate administration has been a subject of hot argument in developed states like U.K. & A ; U.S.A. for the last two decennaries. With the opening up of economic systems, it has besides been a concern for developing state like India. This is because opening up of economic systems has changed the scenario of Indian market i.e. on one manus, it has made the universe market accessible to the Indian corporates & A ; on the other manus, it has increased competition in the domestic market with the coming of the transnational companies. In this changed scenario, the quality of administration has been an of import factor non merely for endurance of the companies but besides for act uponing the company ‘s ability to raise money from capital market. Again corporate administration is of import in Indian context because of the cozenages that occurred since liberalization from 1991, for e.g. the UTI cozenage, Ketan Parekh cozenage, Harshad Mehta cozenage, & A ; the latest Satyam Fraud instance.

In this paper, we will look into the historical background of corporate administration in India, recent developments in corporate administration in India boulder clay day of the month, issues related with regard to corporate administration in India. We will besides look into the latest & A ; the biggest cozenage that had occurred with regard to corporate administration i.e. The Satyam Fraud Case & A ; will seek to propose some solutions so that such frauds does non happen in the close hereafter.

Introduction:

The term ‘Corporate Governance ‘ has become a buzzword worldwide. Harmonizing to Vittal, N. , this is because of two grounds. First is, that after the prostration of Soviet Union & A ; the terminal of cold war in 1990 the construct of authorities commanding the dominating highs of the economic system has gone, alternatively the construct that market kineticss must predominate in the economic affairs has been the conventional wisdom that is accepted worldwide. Second ground is the puting up of World Trade Organisation ( WTO ) as a agency of advancing globalization. Globalisation involves the motion of four economic parametric quantities viz. fiscal capital in footings of money invested in the capital markets, physical capital in footings of works & A ; machinery, fiscal capital in footings of money invested in the Foreign Direct Investment ( FDI ) & A ; labour traveling across national boundary lines. Harmonizing to Vittal, N. , the gait of motion of the fiscal capital has grown because of the universe going a planetary small town.

* Member of Leeds University Business School, University of Leeds, U.K. & A ; Association of

British Scholars ( ABS ) , India.

Electronic mail: a.sen06 @ members.leeds.ac.uk

Corporate GOVERNANCE IN INDIA:

A Brief HISTORY [ PRE- LIBERALIZATION i.e. PRE-1991 ] :

The historical development of Indian corporate Torahs are marked with many interesting contrasts. For illustration at independency, India inherited one of the universe ‘s hapless economic systems but it had a mill sector which accounted for a ten percent of the national merchandise. India besides had four working stock markets and a banking system which had well-developed loaning norms & A ; recovery process. [ Goswami, O. ( 2002 ) ]

Corporate development in India was marked by the pull offing bureau system, which contributed to the birth of spread equity ownership & A ; besides gave rise to the pattern of direction basking commanding rights disproportionately greater than their stock ownership. [ Goswami, O. ( 2002 ) ]

The passage of 1951 Industries ( Development & A ; Regulation ) Act & A ; the 1956 Industrial Policy Resolution marked the beginning of a government & A ; civilization of protection, licencing & A ; ruddy tape that encouraged corruptness & A ; stilted the growing of the Indian corporate sector. Soon, corruptness, nepotism & A ; inefficiency became the trademark of Indian corporate sector. [ Chakrabarty, R. , Megginson, W. & A ; Yadav, P. ( 2007 ) ]

The corporate bankruptcy & A ; reorganization system was besides non free from jobs. In this respect, we should see the SICA or the Sick Industrial Companies Act 1985 & A ; the Board for Industrial & A ; Financial Reconstruction ( BIFR ) . Harmonizing to SICA, a company is declared ‘sick ‘ merely when its full net worth has been eroded & amp ; it has been referred to BIFR. The BIFR normally took over 2 old ages on norm merely to make a determination with regard to the companies. Merely a few companies emerged successfully from the BIFR & A ; the legal procedure on mean took more than 10 old ages by which the assets of the company were virtually worthless. Thus, protection of the creditors ‘ rights existed merely in paper & A ; the bankruptcy procedure was featured among the worst in the World Bank study on concern clime. [ Goswami, O. ( 2002 ) ]

Again, although the Companies Act provided clear direction for keeping & A ; updating portion registries but in world minority stockholders frequently suffered from abnormalities in portion transportations & A ; enrollments.For illustration, there were instances where the rights of the minority stockholders were compromised by the direction ‘s private trades in instance of corporate coup d’etats. [ Chakrabarty, R. , Megginson, W. & A ; Yadav, P. ( 2007 ) ]

Besides, for most of the pre-liberalization epoch the Indian equity markets were non sophisticated plenty to exercise effectual control over the companies. Listing demands of exchanges provided some transparence but non-compliance was non rare & A ; was besides non punished.

Recent DEVLOPMENTS IN CORPORATE GOVERNANCE IN INDIA TILL DATE [ POST- LIBERALIZATION i.e. POST- 1991 ] :

Liberalization of the Indian economic system began in 1991. Since so, there has been major alterations in both Torahs & A ; ordinances & A ; in the corporate administration landscape.

The most of import development in the field of corporate administration & A ; investor protection has been the constitution of the Securities & A ; Exchange Board of India ( SEBI ) in 1992. It has played a important function in set uping the basic minimal land regulations of corporate behavior in India. [ Chakrabarty, R. , Megginson, W. & A ; Yadav, P. ( 2007 ) ]

The following important event was the Confederation of Indian Industry ( CII ) Code for Desirable Corporate Governance developed by a commission chaired by Rahul Bajaj. The commission was formed in1996 & A ; it submitted it ‘s recommendation on April 1998. [ Chakrabarty, R. , Megginson, W. & A ; Yadav, P. ( 2007 ) ]

Subsequently two more commissions were constituted by SEBI, one chaired by Kumar Mangalam Birla & A ; the other by Narayana Murthy. The Birla commission submitted its study on early 2000 & A ; the 2nd commission submitted its study on 2003.The recommendation of these two commissions had been instrumental in conveying major alterations in the corporate administration through the preparation of Clause 49 of the Listing Agreement. [ Chakrabarty, R. , Megginson, W. & A ; Yadav, P. ( 2007 ) ]

Along with SEBI, the Department of Company Affairs & A ; The Ministry of Finance, Government of India, besides took some enterprises for bettering corporate administration in India. For illustration, the constitution of a survey group to operationalize the Birla Committee recommendations in 2000, the Naresh Chandra Committee on Corporate Audit & A ; Governance in 2002 & A ; the Expert Committee on Corporate Law ( J.J. Irani Committee ) in late 2004. [ Goswami, O. ( 2002 ) ]

SEBI implemented the recommendations of the Birla Committee through the passage of Clause 49 of the Listing understanding. Clause 49, can be referred to as a milepost with regard to the alterations in corporate administration in India. It is similar to Sarbanes – Oxley Act ( SOX ) in U.S. [ Chakrabarty, R. , Megginson, W. & A ; Yadav, P. ( 2007 ) ]

Clause 49 looks into the undermentioned affairs:

Composition of the board of the managers.

Composition & A ; Functioning of the Audit

Committee.

Governance & A ; disclosures sing subordinate

companies.

Disclosures by the company.

CEO/CFO enfranchisement of the fiscal consequences.

Reporting on corporate administration as portion of the

one-year study.

Certification of conformity of a company with the

commissariats of Clause 49.

The National Foundation for Corporate Governance ( NFCG ) was formed by the Ministry of Corporate Affairs, Govt. of India, in partnership with Confederation of Indian Industry ( CII ) , Institute of Chartered Accountants of India ( ICAI ) & A ; Institute of Company Secretaries of India ( ICSI ) with the end of advancing better corporate administration patterns in India. [ 6 ]

( g ) Corporate Governance Voluntary Guidelines ( 2009 ) was developed by

NFCG to assist the companies in accomplishing highest criterion of corporate

administration in India. [ 7 ]

ISSUES IN CORPORATE GOVERNANCE IN INDIA:

Corporate administration has been a subject of hot argument in developed states like U.K. & A ; U.S.A. for the last two decennaries. With the opening up of economic systems, it has besides been a concern for developing state like India. This is because, opening up of economic systems has changed the scenario of Indian market i.e. on one manus, it has made the universe market accessible to the Indian corporates & A ; on the other manus, it has increased competition in the domestic market with the coming of the transnational companies. In this changed scenario, the quality of administration has been an of import factor non merely for endurance of the companies but besides for act uponing the company ‘s ability to raise money from capital market.

Corporate administration is besides of import in Indian context because of the cozenages that occurred since liberalization from 1991, for e.g. the UTI cozenage, Ketan Parekh cozenage, Harshad Mehta scam & A ; the latest & A ; the biggest of them all the Satyam Fraud cozenage.

Another ground, is that in emerging market like India when investings take topographic point investors want to verify that non merely are the capital markets or the companies on which they have invested run aptly but they besides have good corporate administration.

Another ground, is that it is believed that hapless transparence & A ; corporate administration norms were one of the chief grounds for the Asiatic crisis in 1997. And besides because such crisis have immense impact on the economic system which can put a state several old ages back in its way to development. [ Vittal, N. ]

Another ground, is that the legal & A ; administrative environment in India provide first-class range for corrupt patterns in concern. [ Vittal, N. ]

Harmonizing to Goswami, ( 2000 ) , the research on corporate administration has remained in its babyhood in India because of opaque revelation patterns followed by Indian corporate sector.

However it should be noted that the corporate administration jobs in India is different from that in U.S. or U.K. The administration issue in U.S. or U.K. is that of training the direction while the job in the Indian corporate sector is that of training the dominant stockholder & A ; protecting the minority stockholders. [ Varma, J. ( 1997 ) ]

4.0 THE SATYAM FRAUD CASE:

In one of the biggest frauds in India ‘s corporate history, B. Ramalinga Raju, laminitis & A ; CEO of Satyam Computers, India ‘s 4th largest IT services house announced on January 7th, 2009 that his company has been distorting histories for old ages, exaggerating grosss & A ; blow uping net incomes by $ 1 billion. The Satyam cozenage had been referred to as ‘India ‘s Enron ‘ by the experts. [ 8 ]

The admittance of perpetrating fraud & A ; surrender by Raju showed that the company had been feeding investors, stockholders, clients & A ; employees a steady diet of untruth with regard to its fiscal public presentation. Raju said in a missive addressed to the board, the stock exchanges & A ; SEBI that Satyam ‘s net income was inflated over several old ages to unwieldy proportions & A ; that it was forced to transport more assets & A ; resources than its existent operations. Harmonizing to Raju, ‘It was like siting a tiger non cognizing how to acquire off without being eaten. ‘ [ 8 ]

Raju ‘s going was followed by surrender of the company ‘s CFO & A ; assignment of an interim CEO. Meanwhile, a squad of hearers from SEBI began probe into the fraud. Besides, since Satyam ‘s stocks were registered on the New York Stock Exchange along with the Bombay Stock Exchange international regulators swung into action. Two US jurisprudence houses filed class- action jurisprudence suits against Satyam. Satyam ‘s portion monetary value fell to Rs.11.50 on January 2009 compared to a high of Rs. 554 in 2008. In New York Stock Exchange besides Satyam ‘s portions were merchandising at $ 1.80 in March 2009 as compared to $ 29.10 in 2008. [ 8 ]

Satyam fraud instance had laid bare the complete deficiency of answerability in the company & A ; prompted inquiries about corporate administration patterns of the company.

( A ) Function OF THE BOARD:

Among the many defects of the Satyam episode, the most important 1 has been the function of the independent managers who were supposed to safeguard the involvement of all stakeholders. While the three commissions had explicitly mentioned the function, independency, wage & A ; duties of independent managers the same did non interpret into action but was merely on paper. [ 9 ]

Harmonizing to Andrew Holland, CEO, equities Ambit capital, independent managers should besides be held accountable for board determinations & A ; audit-related conformity patterns. [ 9 ]

( B ) ROLE OF THE AUDITORS:

Although maximal focal point in the Satyam episode was on the function of the independent managers, experts believe the function of the hearers in this instance Price Waterhouse Coopers should besides be taken into history.

Harmonizing to a fund director, there should be a system similar to one adopted in instance of Public Sector Unit ( PSU ) Bankss where hearers are changed every three old ages. [ 9 ]

A major ground for the radioactive dust of the Satyam instance was the issue related to the hold in execution of Indian corporate Torahs. Harmonizing to N.K. Jain, secretary & A ; CEO of the Institute of Company Secretaries of India, the demand of the hr is to implement corporate Torahs in transparent, Swift & A ; unvarying manner. [ 9 ]

( C ) MINORITY SHAREHOLDERS:

Harmonizing to experts, institutional investors have the tools, bandwidth & A ; clout to pull out information & A ; play an activist function in guaranting that direction do n’t travel off path as they played in the instance of Satyam. If institutional investors act jointly they can demand the needed alteration in the companies they have invested. [ 9 ]

Harmonizing to Anup Bagchi, executive manager, Industrial Credit & A ; Investment Corporation of India ( ICICI ) Securities, although independent managers play an of import function in guaranting better hazard direction, it is the demand for good administration by institutional stockholders which is the best driver towards higher administration criterions. [ 9 ]

( D ) IMPACT ON BRAND INDIA:

The Satyam Fraud Scam had raised concerns about the possible harm to India ‘s entreaty to foreign investors & A ; the IT services industry in peculiar.

Harmonizing to Michael Useem, Wharton direction Professor, one or two more accounting dirts similar to Satyam will do the foreign investors wary about puting in India. [ 8 ]

On the other manus, corporate India had tried to command the harm. For illustration, Rajeev Chandrasekhar, president of the Federation of Indian Chambers of Commerce & A ; Industry ( FICCI ) , called upon regulators to travel rapidly to show that the Satyam was an exceeding instance among corporations & A ; investors need non worry about Indian corporate administration & A ; accounting criterions. [ 8 ]

Even though, Raju was widely blamed for unleashing India ‘s Enron, a major difference between Enron & A ; Satyam is that in Enron the CEO stonewalled, while whistle blowers came out with the truth but in Satyam there were no whistle blowers the CEO blew the whistling on himself. [ 8 ]

5.0 Recommendations:

1. SEBI should develop equal expertness for analyzing fiscal statements so that it is able to observe fraud in the fiscal statements in the hereafter.

2. The Institute of Chartered Accountants of India ( ICAI ) or the Government should promote the development of a whistle-blowing commission so that anybody who finds anything dubious or fishy about a company should describe against the same instantly to the commission.

3. SEBI should reconsider its fiscal revelation norms. A few old ages back SEBI suspended sending of printed transcript of audited balance sheets to the stockholders as a cost film editing step. In today ‘s universe, it can be done easy by uploading the same in the cyberspace.

Besides Bankers & A ; Rating Agencies can besides so analyse the fiscal statements for observing fraud.

4. The ICAI should implement a regulation, bespeaking that audit houses should be allowed to work as hearers of big companies for a period of two old ages on a rotary motion footing in order to avoid undue influence committed by the audit signifiers.

5. The Benami Transaction Prevention Act & A ; The Prevention of Money Laundering Act, should be encouraged in order to forestall deceitful activities & A ; besides to guarantee that corrupt patterns are efficaciously punished. [ Vittal, N. ]

6.0 Decision:

Therefore, in this paper we have tried to see the historical background of corporate administration in India, the developments in this field boulder clay day of the month, the issues of corporate administration in India, the Satyam Fraud instance & A ; besides provided recommendations so that similar fraud does non go on in the close hereafter.

Therefore, it can be concluded that while corporate administration model in the state is seen at par with the developed states the same has to be implemented in missive every bit good as spirit. [ 9 ]

Besides, stockholders should guarantee that the composing of the board of managers is a balanced mix of independent managers & A ; direction appointees as this would assist to maintain a cheque on the internal procedure of a company. [ 9 ]

Finally, we should near corporate administration issues in India non simply from the point of position of the Companies Act or the guidelines issued by Birla commission, Murthy Committee, but look at the full web of assorted regulations & A ; ordinances encroaching on concern so that an integrated wholistic system is created to guarantee that transparence & A ; good corporate administration prevail.