Corporate Governance in India: Aims and Objectives

Corporate governance, in plain terms, refers to the rules, processes, or laws by which businesses are operated, regulated, and controlled. The term can refer to internal factors defined by the officers, stockholders or constitution of a corporation, as well as to external forces such as consumer groups, clients, and government regulations.
However, an enforced corporate governance provides a structure that, at least in theory, works for the benefit of everyone concerned by ensuring that the enterprise adheres to accepted ethical standards and best practices as well as to formal laws. To that end, organizations have been formed at the regional, national, and global levels.
In recent times, corporate governance has received increased attention because of high-profile scandals involving abuse of corporate power and, in some cases, alleged criminal activity by corporate officers. An integral part of an effective corporate governance regime includes provisions for civil or criminal prosecution of individuals who conduct unethical or illegal acts in the name of the enterprise.
Aims and Objectives
It is said that good corporate governance helps an organization achieve several objectives and some of the more important ones include:
• Developing appropriate strategies that result in the achievement of stakeholder objectives
• Attracting, motivating and retaining talent
• Creating a secure and prosperous operating environment and improving operational performance
• Managing and mitigating risk and protecting and enhancing the company’s reputation.
Some aspects covered in the poll include:
• Corporate governance regulations in India
• Corporate governance concerns in India and role of independent directors and audit committees in
addressing these concerns
• Board practices, board oversight of risk management and the importance given to integrity and ethical
values
• Practices that are fundamental to improved corporate governance.
In comparison with developed countries that impose stringent penal and criminal consequences for poor corporate governance, penalty levels in India are considered to be inadequate to enforce good governance. 71 percent of the respondents considered penalty levels to discipline poor and unethical governance to be low. 22 percent of the respondents were either undecided or did not know if the penalty levels are low.
Enforcing Clause 49
In recent years, more and more Indian companies have been raising capital overseas by getting themselves listed on international stock exchanges. These efforts have been accompanied by the Indian government's drive to attract more Foreign Direct Investment (FDI). Both factors have gone hand in hand with the realization that if Indian companies want more access to global capital markets, they will need to make their operations and financial results more transparent. In other words, they will need to improve their standards of corporate governance.
The Securities and Exchange Board of India (SEBI), which regulates India's stock markets, took a major step in this direction a year ago. It asked Indian firms above a certain size to implement Clause 49, a regulation that strengthens the role of independent directors serving on corporate boards. Have these steps made a difference to corporate governance in Indian firms?
Corporate Social Responsibility
Corporate Social Responsibility (CSR) is a concept through which organizations consider the interests of society by taking responsibility for the impact their activities have on customers, suppliers, employees, communities and the environment. This responsibility goes beyond compliance with regulations and is about organizations voluntarily taking further steps to improve the quality of life for employees as well as for the local community and society at large.47 percent of the respondents believe that CSR is not high on the agenda of Indian companies. Thirty percent of the respondents were undecided on this aspect.
Integrity and Ethical Values
Indian companies have been focusing on code of conduct and whistle blower mechanism as a fundamental of good governance. Respondents were asked if similar importance was given to integrity and ethical values. Majority of the respondents say that although Indian companies give similar importance to integrity and ethical values, significant scope exists to enhance integrity and ethical values within the organization and the eco-system.
Effectiveness of Corporate Governance
Monitoring the effectiveness of corporate governance practices is also a key concept emerging in India. We asked respondents who should monitor the effectiveness of corporate governance practices. Forty-seven percent of the respondents believe that effectiveness of corporate governance should be monitored by way of corporate governance audits carried out by corporate governance specialists. Twenty-six percent of the respondents believe that it should be monitored by the boards themselves through self-assessment tools. Fifteen percent of the respondents believe that the monitoring should be by way of investors / minority shareholder groups having access to full information and another 12 percent believed that the monitoring should be through rating agencies.
Factors To Improve Corporate Governance
• 85 percent of the respondents think that the remuneration of Chief Executive
Officers (CEO) should be significantly linked to company performance
• Most respondents believe that while steps at introducing the code of conduct
and whistle blower policy have been introduced, there exists a significant need
to enhance integrity and ethical values in the larger eco-system
• 72 percent of the respondents believe it is necessary for an independent and
transparent process to evaluate performance of board members
• Two-thirds believe that exclusive sessions of independent directors are essential
• 47 percent feel that the effectiveness of corporate governance should be
monitored through audits by corporate governance specialists.

Government’s Initiatives
The Ministry of Corporate Affairs has proposed the New Companies Bill 2008 which aims to improve corporate governance by vesting greater powers in shareholders. These have been balanced by greater emphasis on self-regulation, minimization of regulatory approvals and increased and more transparent disclosures. 53 percent of the respondents believe that the new Companies Act might have a limited or insignificant impact in addressing contemporary corporate governance issues in India. 28 percent of the respondents believe that its impact is likely to be positive. The remaining 19 percent were undecided.
In October 2011, the Ministry of Corporate Affairs said it was in favor of introducing a corporate governance index that would offer rankings to companies adopting governance standards. The index would offer rankings for corporate houses adopting governance standards.
The Ministry was keen to introduce a corporate governance policy to take forward the government's efforts towards better governance in companies. It had been worked out and the competition law would be revisited and amendments would be introduced soon.
Supreme Court’s Verdict
In May 2011, the Supreme Court has given a very fair judgment, with far-reaching implications both for the government and India Inc., in the Reliance Industries Limited (RIL) vs RNRL gas pricing case. It has established unequivocally that the production sharing contract between the government and RIL overrides any private memorandum of understanding arrived at between two individuals. In short, it refused to give sanctity to the Memorandum of Understanding (MoU) signed between the two Ambani brothers. This principle had to be established in the interest of corporate governance or it would have created havoc in the corporate world with promoters of public limited, quoted companies coming together and signing MoUs without a care for the shareholders and other stake holders in the company. Till today the shareholders have not okayed the MoU entered into between Mukesh and Anil Ambani when they divided between themselves the empire created by their father, Dhirubhai Ambani.The second important aspect of the judgment is that the natural resources of a country belong to the government and the government has the right to price it and prioritize the beneficiaries. While it is a well known fact, even internationally, that natural resources belong to the government, the government as a monopoly has the sacred responsibility to put the interest of the nation before everything else when deciding on its use and sale price. This is where the judgment has implications that go beyond the Ambani brothers. The petroleum minister has expressed his happiness that the apex court has upheld his contention that the gas in this case belongs to the government and RIL is only a contractor who can market the product. But it will be the government that will decide at what price it should market it, and to whom it should market it. This is a double-edged sword.

51% FDI in Multi-Brand Retail: Boost to Jobs and Investments

The federal government has approved a proposal to allow 51 per cent Foreign Direct Investment (FDI) in multi-brand retail, and decided to scrap the 51 per cent cap in single-brand retail, where 100 per cent FDI will be permitted.
The government also cleared the Companies Bill, 2011 that seeks to tighten norms on insider trading, prevent corporate frauds and introduce new concepts like class action suits. Once approved by Parliament, it would replace a 55-year-old legislation.
The Bill has introduced ideas like Corporate Social Responsibility (CSR), class action suits and a fixed term for independent directors.
Among other things, it also proposes to tighten laws for raising money from the public. The Bill also seeks to prohibit any insider trading by company directors or key managerial personnel by treating such activities as a criminal offence.
The objections to it have centered around foreign multinationals swallowing up mom-and-pop stores, which have on the whole functioned rather inefficiently but do provide a living to large numbers of people. It has also been argued that in time leading foreign brands — that dispense a range of goods of everyday use — would come to enjoy near monopolistic advantage in price negotiations with farmers. There may well be something in these suggestions, but all things considered there appears to be a fear of the unknown in the political class in regard to foreign investments.No proper calculations are made in gauging the employment effect of the entry of foreign capital, but it is evident foreign stores will hire Indian hands to run retail chains supplying quality goods at better prices to consumers. Some of these are likely to be the present family-run stores in which workers are poorly paid. In any case, it is hard to foresee a complete end to small family-run kirana stores.
Creation of Jobs and Investments
The present decision would lead to creation of 10 million jobs and billions of dollars in investments during the next three years.
Brushing aside the criticism by the Opposition parties, including from key UPA ally Trinamool Congress, that necessary guidelines and press note would be issued by next week giving details of the approved policy. “Our initial estimates are that it will create over 4 million jobs in the small and medium industries and another 5-6 million jobs in the logistics sector in the coming three years.
Significant Gain
Undoubtedly, a significant gain from the entry of global retailers could be the strengthening of supply chains. Because of poor storage, air-conditioning and transportation a huge amount of food grains and perishables like fruits and vegetables go waste. This may stop.
The FDI will help build infrastructure apart from providing support to the rupee. Farmers will be able to access world markets too. Effective producer-seller linkages will eliminate middlemen like arhtiyas, who exploit small farmers no less. If an effective monitoring mechanism is put in place, prices too may fall since waste and inefficiencies in supplies will get eliminated.
Advantage Small Farmers
The operations of domestic fresh food supermarkets in India have not made any difference to the producer’s share in the consumer’s rupee so far (one of the arguments of the DIPP discussion paper for permitting FDI in retail) other than lowering the cost of marketing of the producers as supermarkets have collection centers in producing areas unlike the Agricultural Produce Market Committee (APMC) markets (mandis) which are in distant cities.
But these supermarkets will buy only ‘A ‘grade produce, that too on open market-based prices, and only a part of the output of farmers, who end up going to an APMC mandi to dispose of the remaining/rejected produce. The chains procure from “contact” farmers without any commitment to buy regularly as they do not want to share the risk of growers. Thus, the involvement of supermarket chains with producers is low and there is no delivery of supply chain efficiency as many of them have already wound up e.g., in Gujarat.
Supermarket Expansion
The supermarket expansion also leads to employment loss in the value chain as compared to 18 jobs created by a street vendor, 10 by a traditional retailer and eight by a shop vendor in Vietnam, a supermarket like Big C needed just four persons for the same volume of produce handled. Metro Cash & Carry employed 1.2 workers per ton of tomatoes sold in Vietnam compared with 2.9 persons employed by traditional wholesale channel for the same quantity sold. The spread of supermarkets led to 14% reduction in the share of “mom and pop” stores in Thailand within four years of FDI permission. In India 33-60% of the traditional fruit and vegetable retailers reported 15-30% decline in footfalls, 10-30% decline in sales and 20-30% decline in incomes across the cities of Bangalore, Ahmedabad and Chandigarh, the largest impact being in Bangalore, which is one of the most supermarket penetrated cities in India.
Rate of Inflation
So far as the role of FDI-driven food supermarkets in containing food inflation is concerned, the evidence from Latin American (Mexico, Nicaragua, Argentina), African (Kenya, Madagascar) and Asian countries (Thailand, Vietnam, India) shows that the supermarket prices for fruits and vegetables and other basic foods were higher than those in traditional markets.
Also, the lower procurement prices through direct procurement from farmers need not lead to lower consumer prices in supermarket chains as procurement prices are more about the bargaining power of buyers and suppliers. Even if it is accepted that supermarkets are able to offer lower prices, the low-income households may face higher food prices because of reasons of distance from supermarkets, and higher prices charged by supermarkets in low-income areas. Thus, there is no direct correspondence between modern retail and lower food prices and, thus, better food security of the poor consumers. Therefore, the inflation containment logic for FDI in food retail does not stand ground given the empirical evidence from across the globe.
India has put out its own policy on FDI in multi-brand retail with 51 per cent limit. China, Indonesia, Russia, Thailand, South Africa, Argentina and Chile have allowed 100 per cent FDI in multi-brand retail. We are not following any nation but guided by national interest.
Cash and Carry Trade
Until now only 51% FDI in single-brand retail and 100% FDI in wholesale cash and carry trade was allowed. The paper put up by the Department of Industrial Policy and Promotion (DIPP) for public discussion and comments in mid-2010 and the Economic Survey for 2010-11 had argued for FDI in food retail trade in India. In mid-2011 an inter-ministerial group also recommended FDI in retail to control food inflation. The following policy initiatives can be taken to safeguard the interests of local stake-holders:
* Slow down food supermarket expansion through mechanisms like zoning, business licenses and trading restrictions.
* Strengthen competition laws and regulation of supermarkets
* Give legal protection to farmers and suppliers as is done in Japan
* Permit only formal contract farming, not ‘contact’ farming
* Set up an independent retail commission to supervise and regulate supermarkets to protect interests of suppliers, consumers and labor and support to local retailers and farmers
* Establish multi-stakeholder initiatives in food value chains and provide support to small producers and traditional food retailers.
* Producers’ organizations and the Non-Governmental Organizations (NGOs) need to monitor and negotiate more equitable supply contracts with the supermarkets.
* The government should encourage producer companies and farmers’ co-operatives for collective bargaining with supermarkets

Campaign Launched
The government has launched a campaign to sell advantages of FDI in multi-brand retail. The Commerce and Industry Ministry said that FDI in multi-brand retail will help farmers, create more jobs and benefit consumers.

On the other hand, the reality is that domestic retailers will benefit from sourcing their requirements from wholesale cash and carry store at a discount, it said.
The government said in countries like China, Thailand, Indonesia, Brazil and Singapore, where there are no caps on FDI, small retail stores have flourished.The government advertisement said that there is another myth that FDI in multi-brand may result in job losses.