ownership patters and clause 49

8/7/2019 Ownership Patters and Clause 49

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OWNWERSHIP PATTERNS ANDTHE EFFECTIVENESS OF

CLAUSE 49

Dr S.N.V. Siva kumar

Dr Shanti Suresh


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Objectives:

To analyze the ownership patters in Fivesectors of the Indian Economy.

To study the norms of corporate

governance as prescribed by Clause 49. To validate the effectiveness of the

existing norms to instill good governance

in Listed companies .


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Structure of the Indian Business Sector

Most of the large listed corporate are Familyowned businesses.

The other large business organizations are thePublic sector companies in which the

government owns a majority.

The third group consists of SME s which

function as subsidiaries and are unlisted on any

stock exchange .


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The World Bank

Defines: Corporate Governance as the blend oflaw, regulation, and appropriate voluntary

private section practices which enables the

corporation to attract financial and human

capital, perform efficiently and therebyperpetuate it by generating long term economic

value for its shareholders, while respecting the

interests of stakeholders and the society as awhole.


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The emerging operational definition

Corporate governance for the purpose of thisstudy is defined as all the corporate deliverables

that are able to create and sustain the value

created for its stakeholders, that is the creationof valuable surpluses in terms of

Consumer surplus - for the customers

Shareholder surplus - for the shareholders

Societal surplus - for the society as a wholeEmployee surplus - for the employees


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1.Growth in Gross Domestic Product


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2001 2002 2003 2004 2005 2006 2007 2008

National Stock Exchange

India 1,041 916 911 957 1,034 1,156 1,330 1,406

Bombay SE 0 0 0 4,730 4,763 4,796 4,887 4,921

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

Growth in the number of listed

companies on the national exchanges


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0

10000

20000

30000

40000

50000

60000

70000

80000

90000

2000-

2001

2001-

2002

2002-

2003

2003-

2004

2004-

2005

2005-

2006

2006-

2007

2007-

2008

Total Amount 6108 7543 4070 23272 28256 27382 33508 87029

Rights Amount 729 1041 431 1007 3616 4088 3711 32518

IPOs Amount 2722 1202 1039 3434 13749 10936 28504 42595

Amount mobilised by corporate entities


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0

10

0

30

40

50

0

70

0

90

100

00 007 00 005 004 003

HKG 95 93 93 9 91 90

IDN 47 4 43 37 41 34

JPN 8

9 90 918

98

986

KOR 86 88 86 82 80 80

MYS 84 84 82 79 81 80

PAK 26 31 34 34 34 35

SGP 100 100 100 99 99 99

CHN 64 62 59 53 55 56

IND 54 56 57 52 53 56

Government Effectiveness in Asian Nations


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01020

30405060708090

100

2008 2007 2006 2005 2004 2003HKG 100 99 100 100 99 98

IDN 45 44 43 36 26 26

JPN 86 83 86 86 81 79

KOR 73 79 71 73 75 71MYS 60 67 66 66 67 70

PAK 35 29 36 28 18 22

SGP 100 99 98 100 99 99

CHN 46 46 42 46 45 39

IND 47 47 47 47 40 41

Regulatory quality in Asian countries


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ORGANISATIONAL PERFORMANCE

Defined as:

1. Ability to create value forshareholders.

2. Ability to create value for customers.

3.Ability to create value for employees.

4.Ability to create value for society at

large.

(all that gets measured gets done)


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Literature Review

The subject of corporate governance hasbeen extensively researched in the UnitedStates and the European nations, however inIndia the area is still unexplored.

The areas of research heavily explored are:

Agency theory

Ownership Patterns Board performance

Economic development & legislature


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Few of the Seminal works

Theoretical underpinnings for the existing

research in corporate governance come from the

classic thesis, The Modern Corporation and

Private Property by Berle & Means (1932).The thesis describes a fundamental agency

problem in modern firms where there is

separation of ownership and control.


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Some International studies

The agency theory was first proposed by Jensen and

Meckling (1976) in the ground breaking article

Theory of the firm. Agency relationship is a contract

under which one or more persons (principal) engage

another person (agent) to perform some service on

their behalf, which involves delegating some decision-

making authority to the agent . Jensen, M. C. &

Fama, E. F.Separation ofOwnership and Control, Journal of Law

and Economics, Vol. 26, 1983, pp. 3 1-3 5.


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The US: Gompers, Ishii and Metrick (2 3) The

most celebrated governance-ranking study, whichsupports the proposition that there is a link

between the quality of corporate

governance, measured in terms of shareholder

rights, and performance.

Findings: The research also supported the

proposition that companies with a goodgovernance ranking were higher valued and had

higher profits than those with a bad ranking.


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Contemporary Indian Studies

India: Bhattacharyya, Ray Chaudhuri & Rao(2 8)

Using event study methodology with quasi-experimental research design, Bhattacharyya etal. (2 8) find that increased informationdisclosure and better corporate governancemechanism resulting from the regulation

enforced by the Securities and Exchange BoardofIndia (SEBI) reduce cost of capital ofIndianlisted companies.


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Hypothesis

There exists no co relation between

financial performance and corporate

governance. There exists no co relation between

compliance and good governance.


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Research Methodology

1.Survey method- Questionnaire toevaluate the perception of variousstakeholders to governance of the

selected sample corporate.

2 .Statistical model developed to evaluate

the impact of corporate governancecompliance on financial performance onlisted Indian corporate.


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Methodology adopted for Survey

Determining the data set The Nifty as acomposite Index was selected for the following

reasons :

1.Represents the entire gamut of listed companiesof corporate India.

2. It is the most comprehensive group covering

companies from several sectors.

3.Companies with large Market Cap.

4.The governance of these companies have an

impact on a wide section of stakeholders


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Methodology for survey

Five officials responsible for the

governance functioning were identified

from each of the listed companies, from

various levels of management, andindividuals providing professional

services.

Questionnaires were sent to 25

respondents , who had consented to

participate in the survey


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The various sections of managerial personnel

selected for the survey were as follows :

Profile of respondents.

CEOs , CFO, Executive Directors, IndependentDirectors, Auditors Chartered Accountants

,Company Secretaries, Legal Professionals

A questionnaire comprising of2 parts A, Bwas prepared .


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A questionnaire comprising of2 parts A,

B was prepared .

Part A tested for the perception of the

governance professional in the area of

compliance with clause 49.

Part B tested the respondents forperception on the importance of other

stakeholders in the governance functioning


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Responses from the respondents

92 valid responses were received .Profile of respondents

CEOs 1 %

CFO 1 %

Executive Directors 1 %

Independent Directors 5%

Auditors/ Chartered Accountants 25%

Company Secretaries 25%

Legal Professionals 1 %

Other s 5%


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The highlights of the perception study are as follows

1. The stakeholder concept is fast catching up , as over

the concept of shareholder concept.

2. Corporate India is not yet ready for self regulation

, enforcement is the only solution to responsible

corporate conduct.3. 75% of Indian corporate professionals believe the

amended clause 49 has brought a major improvement

in the governance of companies

4. 71% of the respondents believe that globalisation hascontributed to the contribution of international practices

of good governance

5. Only 54% of the respondents opine that Indian CG is

better than other Asian Countries


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Survey results (contd.)

6. 51% opine that Increases emphasis on monitoring increasesthe cost of compliance for business.

7. 77% strongly opine that increased transparency would defeat

the competitive strength of companies.

8. 64% of the respondents strongly feel Good Corporategovernance merely means complete compliance (the tick box

method ).

9. 7 % strongly opine that the existing regulation is adequate for

regulating corporate governance.

1 . Professional bodies like ICAI&ICSI have contributed towards

improving Corporate governance in India.

11. Companies listed overseas (NYSE& Nasdaq)have better

governance than companies listed in domestic markets


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Survey Results

17.Measures taken by SEBI are adequate for improving

investor education and activism.

18.The CEO & CFO certification of the Financial

Statements have gone a long way towards improved

financial reporting.19.The Whistle Blower policy should be made

mandatory requirement of clause 49.

2 .Implementation of mandatory requirements will

improve with increase in penal provision and criminalliability.

21.Insider trading can be effectively controlled by

making code formulation and implementation mandatory


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Data Analysis Part II

Statistical modelling and corporate

governance index.

The purpose of the study was to find whether

consistent practices and compliance withclause 49 regulations aimed at improving

corporate governance resulted in improved

financial performance. 5 indicators of good governance practices

were identified and pooled into three categories

namely Cg1, Cg2, Cg3.


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Data Analysis Part II

Statistical modelling and CG-Index.

The purpose of the study was to find whether

consistent practices and compliance with clause 49

regulations aimed at improving corporate governanceresulted in improved financial performance.

5 indicators of good governance were identified and

pooled into three categories namely Cg1, Cg2, Cg3.

Cg1-Commitment to Governance .

Cg2-Board practices, and procedures.

Cg3- Transparency and disclosure


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The Sub Indices CG1, CG2, CG3

1. Commitment to governance-hereinreferred to as cg1-comprised of 10indicators.

2. Board practices and procedures-hereinreferred to as cg2-comprised of 20indicators.

3. Transparency and disclosure-hereinreferred to as cg3-comprised of 20indicators.


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Data set

Annual reports of the Nifty fifty companieswere surveyed for a period of five years from

2 3-2 4 to 2 7-2 8.

Compliance with the mandatory requirements of

the clause49 was verified, using the 1 and 0

for compliance and non compliance

respectively.

The sub indices score were calculated cg1-10points, cg2-20 points and cg3-20 points


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Methodology (cont)

The total scores representing CG1, CG2, andCG3 were summed to get the cumulative score

for each company for each year for the period

2003-2008.

The correlation between the composite score

and the financial parameters identified was

ascertained .

Followed by a t test to verify the strength of

correlation .


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The Financial parameters considered

for the study are as follows: ROA: Return on Assets calculated as

Net Profit /Total Assets.

ROCE: Return on Capital Employedcalculated as

Net Profit.

RONW: Return on Net Worth-calculated as Net

Profit after Interest and Taxes/Total share holders

funds


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EPS: Earnings Per Share-calculated asNet profit after

interest and taxes/Number of outstanding equity shares.

AMC: Average market Capitalization-The cumulativeannual average of the market capitalization

Excess of returns over nifty: The excess of market

returns of the individual stock, over the returns of the

Market Index

Annualized yield: The annual return of the individual

stock on the market price i.e. Total returns

Debt Equity: Total Borrowed funds /Total Owned Funds.


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Interest Cover: Net profit before interest and taxes/Total

Interest obligations.

Total Assets: The Cumulative assets at the end of theyear.

P/E ratio: Price Earnings Ratio-calculated as Market Price

/ Earnings per share.

P/B ratio: Price to book value Calculated as market price

/Book Value of the Share.

Sales: The annual average sales of the individual

companies. BKV: Book value of the share-calculated as the total

assets/no. of equity shares issued.


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CG12003/04 CG2 2003/04 CG3 2003/4

DE_56 -0.031 -0.308 -0.092

IC_56 0.144 -0.020 -0.063

ROA_56 0.174 0.169 -0.070

RNW_56 -0.092 -0.024 -0.278

RCE_56 0.032 0.043 -0.179

EPS_56 0.339 0.030 0.236

AMC_56 0.233 0.243 0.239

ER_56 0.064 -0.332 -0.140

AY_56 -0.156 -0.042 -0.273

TA_56 0.173 0.150 0.159

AY_56 -0.156 -0.042 -0.273


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CG1-2003/04 CG2-2003/04 CG3-2003/04

DE_45 -0.214 -0.108 -0.091

IC_45 0.171 -0.136 0.013

ROA_45 0.234 0.186 0.012

RNW_45 -0.047 0.093 -0.147

RCE_45 0.094 0.057 -0.070

ER_45 0.022 -0.161 0.057

EPS_45 0.276 0.070 0.214

TA_45 0.168 0.184 0.166

AY_45 -0.051 -0.172 -0.130

AMC_45 0.237 0.242 0.218


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CG1 2004/05 CG2 2004/05 CG3 2004/05

DE_67 0.030 -0.365 0.053

IC_67 0.061 -0.059 -0.220

ROA_67 0.089 0.390 0.058

RNW_67 0.010 -0.177 0.049

RCE_67 -0.019 0.225 -0.089

ER_67 0.137 -0.300 0.248

EPS_67 0.317 0.028 0.248

AMC_67 0.347 0.367 0.318

AY_67 -0.226 0.194 -0.374

TA_67 0.236 0.104 0.077


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CG1 2004/05 CG2 2004/05 CG3 2004/05

DE_56 -0.056 -0.346 0.165

IC_56 0.090 -0.057 -0.179

ROA_56 0.254 0.328 -0.080

RNW_56 -0.021 0.171 -0.152

RCE_56 0.101 0.269 -0.217

ER_56 -0.029 -0.416 0.156

EPS_56 0.387 0.024 0.100

TA_56 0.204 0.107 0.051

AY_56 -0.266 0.035 -0.423

AMC_56 0.304 0.359 0.200


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CG12005/06 CG2 2005/06 CG3 2005/06

DE_670.128

-0.082 0.014

IC_67 0.211 -0.280 -0.111

ROA_67 -0.038 0.233 -0.003

RNW_67 0.136 -0.041 -0.013

RCE_67 -0.011 0.028 -0.097

ER_67 0.224 0.011 0.173

EPS_67 0.128 -0.020 0.177

TA_67 0.424 0.303 0.118

AY_67 -0.231 0.149 -0.325

AMC_67 0.454 0.410 0.313


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Cg1 2006/07 Cg2 2006/07 Cg3 2006/07

DE_78 0.232 -0.183 -0.072

IC_78 0.135 -0.130 -0.312

ROA_78 -0.026 -0.047 0.289

RNW_78 0.084 -0.292 0.052

RCE_78 -0.045 -0.201 0.091

ER_78 -0.051 0.066 -0.072

EPS_78 0.181 0.183 0.037

TA_78 0.402 0.131 0.086

AY_78 -0.175 -0.374 0.120

AMC_78 0.436 0.288 0.135


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Recommendations

There needs to be a unitary in command between theregulatory authorities mandating corporate

governance.

The provisions of clause 49 of the listing agreement

must be extended to subsidiaries and other non listed

entities in order to improve the governance of the

corporate India.

Aligning the interests of the dominant shareholderwith that of the minority shareholder.

The training and education ofIndependent Directors

should be made mandatory


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Recommendations

The rigour on evaluation of performance ofthe independent directors should be stepped

up.

The disclosure of related party transactionsshould be made more stringent

Disclosure of subsidiaries and cross holdings

in subsidiaries.


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LIMITATIONS OF THE STUDY:

The number of years that could be taken for the

study, to find the impact.

The Data from Annual Reports used for the

statistical analysis cannot be taken prima facie.

The study sample size of50 companies with

large market cap,

In the process of constructing the corporate

governance index, the summing and averagingprocess could have shadowed some vital

elements


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LIMITATIONS OF THE STUDY:

The process of quantifying good practices is

very subjective and hence could vary indegrees.


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THANK YOU

ownership patters and clause 49

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