INVESTORS’ PROTECTION UNDER CORPORATE

GOVERNANCE

SOUMITRA CHAWATHE
Company Secretary, Pune

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 INTRODUCTION
Investors invest their hard earned money

Assurance about safety

Are investors innocent?

Past events have shook investor confidence

Increased need for corporate governance

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THE NEED FOR INVESTOR PROTECTION
Corporate Scams and Accounting Scandals
Insider Trading
Non-disclosure of material facts
Vanishing Companies – Taking investors’ money and
disappearing
Terrorist funding
Money laundering

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 EVOLUTION OF CORPORATE
GOVERNANCE

• Corporate Governance principles by sages and hermits in

ancient India – Have we forgotten these values?

• Kautilya has elaborated on four fold duties of a king

• Duties- Raksha (protection), Vrudhi (enhancement), Palana

(maintenance), Yogakshema (safeguard)

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 CORPORATE GOVERNANCE -
WHAT DOES IT MEAN
 The social, legal & economic process in which Companies
function and are accountable

 Conducting the affairs of the company in a manner that ensures

fairness to the stake holders, i.e.
Customers
Employees
Investors
Lenders and institutions
Vendors
The Government, and
The Society as a whole
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ELEMENTS OF GOOD CORPORATE
GOVERNANCE
• Transparency
• Disclosures
• Accountability
• Equity
• Compliance
• Ethics
• Share holder’s value

THE SEVEN COMMANDMENTS 6

 MODERN DAY PRINCIPLES OF
CORPORATE GOVERNANCE
Solid Foundations for management and oversight

Structure the Board to add value

Promote ethical and responsible decision making

Safeguard integrity in financial reporting

Timely & Balanced Disclosure

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 MODERN DAY PRINCIPLES OF
CORPORATE GOVERNANCE
Protection of stakeholders’ rights

Encourage and enhance performance

Recognize and manage risk

Remunerate fairly

Recognize legitimate interests of shareholders

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 INVESTOR PROTECTION VIS-À-VIS
CORPORATE GOVERNANCE

Investor Protection – Most important, yet neglected

Professional Ethics & Responsibility

Role of Market Regulators

Shareholders Activism – Healthy trend for Corporate

Governance
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 INVESTOR PROTECTION MEASURES IN
INDIA

SEBI ESTABLISHED IN 1992

FUNCTIONS OF SEBI

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 MEASURES INITIATED BY SEBI
Vetting Offer Documents Securities Appellate Tribunal
and Prospectus
Disclosure of NAV of Mutual
Advertising Code for issues Funds daily

IPO Grading Publications / Awareness

Programmes
Improve functioning of
Stock Exchanges Stringent requisites for an
intermediary

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 EXPERT COMMITTEE
(DR. J.J. IRANI COMMITTEE)
As per the new company law by the Expert Committee
training of directors should be aimed at better discharge of
fiduciary duties and value enhancing board activities

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 KUMAR MANGALAM BIRLA
COMMITTEE
Clause 49 was introduced in the Listing Agreement pursuant
to the recommendations of the report of Committee

Constituted by SEBI in May 1999

Large number of complaints from the investors prompted the

constitution

Recommended appointment of minimum number of

independent directors in board
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 I. Board of Directors

a) Composition of Board of Directors

b) Non Executive Director’s Compensation & Disclosures

c) Other Provisions as to Board of Directors

d) Code of Conduct

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 II. Audit Committee
a) Qualified & Independent Committee

b) Meeting

c) Powers

d) Role

e) Review of information
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 III. Subsidiary Companies
a) At least One Independent Director of holding Company
on the Board of materially non listed subsidiary
company

b) Audit Committee of Listed Company should also review

the financial results of Materially non listed subsidiary
company

c) Minutes of the non listed subsidiary company be placed

and before the board of the listed company
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 IV. Disclosures
a) Related Party Transactions
b) Accounting Treatment
c) Board Disclosures
d) Proceeds from public/ right issue/ preferential
allotments etc.
e) Remuneration of Directors
f) Management
g) Shareholders

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 V. CEO/ CFO Certification
a) Review and Declarations of Financial Results

b) Declaration as to no transactions of fraudulent, illegal

or violative of code of conduct, are entered by the
Company

c) Responsibility for establishing and maintaining internal

controls for financial reporting

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 VI. Report On Corporate Governance
a) Separate section in Annual Report of the Company with
detailed report on compliance of corporate governance

b) Quarterly Compliance Report to be submitted to the

Stock Exchange within 15 days of close of quarter.

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 VII. Compliance
Companies to obtain certificate from Auditors or PCS
regarding compliance of conditions of Corporate
Governance as stipulated in this Clause.

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Shareholder Activism – Healthy trend for
Corporate Governance
Shareholder Activism means the active involvement of
stockholders in their Organization

Involvement can be done in various ways :

Establishing dialogue with the management on issues that
concern you.
Influencing the corporate culture.
Using the corporate democracy provided by law.
Increasing general awareness on social and human rights issues
concerning the organization. Internet and mass media are
effective tools in building up pressure on the management.
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Shareholder Activism – Healthy trend for
Corporate Governance

• Participation in the meetings

• Concern over the financial matters
• Proxy Battles
• Publicity Campaigns
• Shareholder Resolution
• Litigation and Negotiation with the management

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 IMPORTANCE OF CORPORATE
GOVERNANCE
• Enhances the ethical value system

• Protects the rights of the shareholders by ensuring

equitable treatment.

• Cope with the challenges of liberalization, privatization

and globalization.

• Timely and accurate disclosure on all materials matters

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IMPORTANCE OF CORPORATE
GOVERNANCE
• Corporate Excellence Through Transparency,
Accountability and Responsibility.

• Compliance of All the Relevant Law and

Regulations.

• Best Business Ethical Practices and Value Based

System.

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 ROLE OF COMPANY SECRETARIES
• Governance architecture
• Board/Committee meeting
• Compliance officer: Ensure compliance of clause 49 and
report to the Stock Exchanges.
• Annual Reports : Compile various reports and make
necessary disclosure in Annual reports.
• Proactive initiative in good governance and monitoring
governance practices
• Role of a Practicing Company Secretary
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Consequences of Investors Protection
Two broad areas in which investor protection has an impact :
 Financial Markets
The most basic prediction of the legal approach is that
investor protection encourages the development of financial
markets. When investors are protected from expropriation,
they pay more for securities, making it more attractive for
entrepreneurs to issue these securities.

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Consequences of Investors Protection
Real Consequences
Through its effect on financial markets, investor protection influences the
real economy. Financial development can accelerate economic growth in
three ways :

  Enhance savings.
 It can channel these savings into real investment and thereby foster
capital accumulation.
To the extent that the financiers exercise some control over the investment
decisions of the entrepreneurs, financial development improves the
efficiency of resource allocation, as capital flows toward the more
productive uses. All three channels can in principle have large effects on
economic growth.

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 CONCLUSION

• Corporate governance should not be followed just as set of

rules and procedures.

• Can not be the same all the time.

• Well defined and well accepted accounting practices are pre-

requisites in corporate governance.

• Corporate Governance is the key to Corporate Excellence

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 NEVER MAKE A NEGLIGENCE

IN GOOD CORPORATE GOVERNANCE

IT REALLY MAKES TRUE SENSE

TO ACHIEVE CORPORATE EXCELLENCE

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