Corporate Governance and Shareholders Rights – Governance, Risk Management, Compliances and Ethics Important Questions
Question 1.
Briefly comment on the following :
i. Protection of shareholder’s rights is sacrosanct for good corporate governance.
ii. Investors relations can be referred to as ‘financial public relations’ or ‘financial communication’
Answer:
i. Protection of shareholder rights is sacrosanct for good corporate H governance. It is one of the pillars of corporate governance. For the p efficient functioning of the capital market, the fundamental requirement is that the investor rights are well protected.
The Preamble to Securities and Exchange Board of India Act, 1992 reads as under:
“An Act to provide for the establishment of a Board to, protect the interests of investors in securities and to promote the development of, and to regulate the securities market and for matters connected there with or incidental thereto.”
The central element in corporate governance is the challenges arising out of separation of ownership and control. The shareholders are the true owners of a corporate and the governance function controls the operations of the corporate. There is a strong likelihood that there is a mismatch between the expectations of the shareholders and the actions of the management. Therefore there is a need to lay down clearly the rights of the shareholders and that of the management.
In the Indian context, the SEBI Act, 1992, the various SEBI Regulations and Guidelines and the Companies Act, 2013 enables the empowerment of shareholder rights.
ii. Investor Relations (IR) is a strategic management responsibility that integrates finance, communication, marketing and securities law compliance to enable the most effective two-way communication be-tween a company, the financial community and other constituencies, which ultimately contributes to a company’s securities achieving fair valuation.
Typically, investor relation is a department or person reporting to the Chief Financial Officer. In some companies, investor relation is managed by the public relations to as “financial public relations” or “financial communications”.
Question 2.
What is meant by investor protection? Discuss the investor protection measures taken by Securities and Exchange Board of India (SEBI)
OR
Investors must be safeguarded not only against frauds and cheating but also against the losses arising out of unfair practices. What are the SEBI’s B regulations for investors’ protection in India?
Answer:
Securities and Exchange Board of India (SEBI) is the capital market S regulator and nodal agency in India who regulates the security market. One of the objectives of the SEBI is to provide a degree of protection to the investors and to safeguard their rights, steady flow of savings into market and to promote the development of and regulate the securities market. Investors should be safeguarded not only against frauds and cheating but also against the losses arising out of unfair practices. Such practices may include:
- Deliberate misstatement in offer statements to investors
- Price manipulations
- Insider trading
SEBI has issued many guidelines and regulations to regulate the capital market and to protect the investors. Some of these guidelines are:
| SEBI (Ombudsman) Regulations, 2003 – designed to redress the investor’s grievance against listed companies or intermediaries or both for amicable settlement. | SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 – to prohibit any fraudulent and unfair Trade Practices relating to securities market. |
| SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009. | SEBI (Investor Protection and Education Fund) Regulations, 2009 to establish an Investor Protection and Education Fund which will be used inter-alia, for “aiding investors” |
| SEBI (Prohibition of Insider Trading) Regulations, 2015 – The basic objective is to prohibit persons who have more access to company’s information which can be used to benefit the individual or group of individual or agency. | SEBI has also set up a separate cell to address the grievances of investors. |
Question 3.
Write short note on the following; Institutional investors.
Answer:
Institutional investors are organizations which pool large sums of money and invest those sums in companies. Their role in the economy is to act as highly specialized investors on behalf of others. In India, there are broadly the following typed of institutional investors:
- Development oriented financial institutions such as IFCI, IDBI and state financial corporations.
- Insurance Companies – LIC, GIC and other subsidiaries.
- Banks.
- All mutual funds and including UTI.
- Pension Funds.
Question 4.
Highlight the role of institutional investors in promoting good corporate governance.
OR
Write short note on the following; Role of institutional investors in corporate governance.
OR
Briefly comment on the following statement; institutional investors have a crucial role to play in ensuring good corporate governance.
Answer:
Most of the reports on corporate governance have emphasized on the role of institutional investors in promoting good corporate governance. The Kumar Mangalam Birla committee on corporate governance emphasizes that the institutional shareholders can play effective role in the corporate governance system of a company because of following reasons –
- Institutional shareholders have acquired a large stake in equity share capital of listed companies.
- They have a special responsibility given the weightage of their votes and have a bigger role to play in corporate governance as retail investors look upon them for positive use of their voting rights.
Question 5.
“Institutional Investors play an important role in promoting good governance, however, this notion has its own pros and cons”. What are these pros and cons? Explain.
Answer:
Institutional investors are financial institutions that accept funds from third parties for investment in their own name but on such parties’ behalf. They include pension funds, mutual funds and insurance companies.
Institutional investors are organizations which pool large sums of money and invest those sums in companies. Their role in the economy is to act as highly specialized investors on behalf of others.
The Pros and Cons on the role of the institutional investors in promoting the good corporate governance may be listed as under:
| Pros | Cons |
| The institutional investors have significant stakes in the companies and so of the voting power. | Mutual Fund Investors have the short-term vision hence their performance measurement may not be a significant evaluation in assessing the corporate governance while making the investment decision. |
| They are in better position to have the access of the information about the company. | The investment objectives are also a deciding factor while making the investment decision. |
| The stock market performance can vis-ualised with the adoption of the better corporate governance. | Institutional investors may off load the holding if there is mis-matching in their asset liability/liquidity position. |
| They may influence in attracting the Foreign Direct Investment in India. | A common man’s investment portfolio is affected with the decision of the in-vestment by the institutional investors. |
Based on the experience of countries where shareholders activism is vibrant, such as for example Australia, France, the UK, or the United States, it is reasonable to expect that Indian institutional investor should use their ownership rights more actively.
Question 6.
How the institutional investors assess the health of a company before making the investment decision?
OR
“The institutional investors use different tools to assess the health of a company before investing resources in it”. Elaborate
OR
Describe the tools used by the institutional invertors to assess the health of a company before investing resources in it.
OR
“The institutional investors use different tools to assess the health of a company before investing of funds. Discuss some of the important tools used by the institutional investors for this purpose.
Answer:
Institutional investors use different tools to assess the health of Company before investing resources in it. Some of the important tools are discussed as under:
1. One-to-one meeting – The meetings between institutional investors and companies are extremely important as a means of communication between the two parties, and a tool to assess the health of companies. Company usually arrange such meeting with its largest institutional investors and not with other investors.
2. Voting – The right to vote can be seen as fundamental tool for some element of control by shareholders. The institutional investors can register their views by postal voting, or, vote electronically where this facility is available. By voting, institutional investors can build pressure on management of the corporation. Most of the large institutional investors now have a policy of trying to vote on all issues which may be raised at their investee company’s AGM.
3. Focus lists – A number of institutional investors have established ‘focus lists’ whereby they target under performing companies and include them on a list of companies which have under performed a main index. After being put on the focus list, the companies often receive unwanted, attention of the institutional investors who may seek to change various directors on the board.
4. Corporate governance rating systems – With the increasing emphasis on corporate governance across the globe, it is perhaps not surprising that a number of corporate governance rating systems have been developed. Some institutional investors have developed corporate governance rating systems. A corporate governance rating could be a powerful indicator of the extent to which a company currently is adding, or has the potential to add in the future, shareholders value.
Question 7.
Elucidate the following; Corporate governance rating systems.
Answer:
With the increasing emphasis on Corporate Governance across the globe, it is perhaps not surprising that a number of Corporate Governance Rating Systems have been developed such as Deminor, Standard and Poor’s, and Governance Metrics International (GMI).
Advantages of Corporate Governance ratings
- It is a powerful indicator of the extent to which a company currently is adding, or has the potential to add in the future, shareholder value. This is because a company with good Corporate Governance is generally perceived as more attractive to investors than one without.
- Provides a useful indication of the CG environment in specific countries, and in individual companies within those countries.
- These rating systems will provide a useful “benchmarks” for the majority of investors who identify good CG with a well-run and well-managed , company.
- The ratings will also be useful to Governments in identifying perceived levels of Corporate Governance in their country compared to other countries in their region, or outside it, whose companies may be competing for limited foreign investment.
Question 8.
Discuss the activities for which financial sanctions can be provided under Investor’s Education and Protection Fund.
Answer:
Schedule II to the Investor Education and Protection Fund Authority (Appointment of Chairperson and Members, holding of Meetings and provisions for Offices and Officers) Rules, 2016 stipulate the broad functional divisions of the Authority including sanctioning grants to the registered entities for seminars, programmes, projects or activities in the field of Corporate Governance, Investors’ Education and Protection fund including research activities.
Question 8(A).
The Board of directors of your company intends to formulate corporate communication policy. As a Company Secretary, you are required to prepare a qualitative note highlighting the areas on which communication policy may specifically focus.
Answer:
To
The Board of Directors ABCD Limited
Subject: Corporate Communication Policy
Dear Sir,
Corporate Communication Policy defines the role and responsibilities of the employees in the communication structure of the company.
Corporate Communication Policy may specifically focus on:
(a) Information to Employees – Internal Communications:
All the relevant information should be communicated to the employees through internal channels.
(b) Media Relations: This involves building and maintaining a positive relationship with the media.
(c) External Event: Could involve vendor/supplier/distributor meets, channel partner meetings, event related to product launches, important initiatives etc.
(d) Investor Communication: Investor relation cell can held responsible for coordinating communications with investors.
(e) Brand Management: Maj or responsibility of corporate communication is image or brand building.
(f) Legal Communication: Regulators are the external players having considered role in communication by the company. At various points communication are to be made to the stock exchange, government and judicial authorities. Secretarial and legal department may be held responsible for timely and accurate communication.
Question 9.
Answer the following; Discuss Steward Theory of Corporate Governance.
Answer:
The word ‘steward’ means a person who manages another’s property or estate. Here, the word is used in the sense of guardian in relation to a corporation. The Steward Theory of Corporate Governance is value based.
Managers and employees are to safeguard the resources of corporation and its property and interest when the owner is absent. They are like a caretaker. They have to take utmost care of the corporation. They should not use the property for their selfish ends. This theory makes use of the social approach to human nature.
The managers should manage the corporation as if it is their own corporation. They are not agents as such but occupy a position of stewards. The managers are motivated by the principal’s objective and the behaviour pattern is collective, pro-organizational and trustworthy. Thus, under this theory:
- First of all values as standards are identified and formulated.
- Second step is to develop training programmes that helps to achieve excellence.
- Thirdly, moral support is important to fill any gaps in values.
Question 10.
Discuss briefly the following; shareholder activism.
OR
Briefly explain the following terms and their relevance to good corporate governance practices; shareholder activism.
OR
Elucidate the following; Shareholder activism.
OR
“Shareholders can ensure that the company follows good corporate governance practices and implements beneficial policies.” Discuss shareholder’s activism.
Answer:
Shareholder activism means :
- Establishing dialogue with the management on issues that concern.
- Influencing the corporate culture.
- Using the corporate democracy provided by law.
- Increasing general awareness on social and human rights issues concerning the organization.
Shareholder activism refers to the active involvement of stockholders in their organization. Active participation in company meetings is a healthy practice. They can resolve issues laid down in the annual and other general meetings and can raise concerns over financial matters or even social causes such as protection of the environment.
Shareholder activists include public pension funds, mutual funds, unions, religious institutions, universities, foundations, environmental activists and human rights groups. A share in a company is not only a share in profits but also a share in ownership. Shareholders must realize that their active participation in the company’s operations ensures:
- Better Management
- Less Frauds
- Better Governance
Question 11.
Explain briefly the following; UN Principle Responsible Investment.
Answer:
Principles for Responsible Investment encourages investors to use responsible investment to enhance returns and better manage risks, but does not operate for its own profit; it engages with global policy makers but is not associated with any government; it is supported by, but not part of, the United Nations.
The six Principles for Responsible Investment are a voluntary and aspirational set of investment principles that offer a menu of possible actions for incorporating ESG issues into investment practice.
The Principles were developed by investors, for investors which are as follows:
- Principle 1: We will incorporate ESG issues into investment analysis and decision-making processes.
- Principle 2: We will be active owners and incorporate ESG issues into ownership policies and practices.
- Principle 3: We will seek appropriate disclosure on ESG issues by the entities in which they invest.
- Principle 4: We will promote acceptance and implementation of the Principles within the investment industry. We will promote acceptance and implementation of the Principles within the investment industry.
- Principle 5: We will work together to enhance effectiveness in implementing the Principles.
- Principle 6: We will each report on their activities and progress towards implementing the Principles.
Question 12.
Discuss the salient features of CalPERS. What are the main drivers of their corporate engagement programme?
Answer:
California Public Employees’ Retirement System (CalPERS) manages retirement benefits for more than 1.6 million California public employees, retirees, and their families. The corporate governance team at CalPERS challenges companies and the status quo; vote proxies; work closely with regulatory agencies to strengthen financial markets; and invest with partners that use corporate governance strategies to add value to the fund by turning around ailing companies.
As a strategy CalPERS invest in sick and ailing companies where it employs good governance practices to improvise company’s overall performance. CalPERS corporate engagement process has the overarching objective of improving alignment or interest between providers of capital and company management. It is CalPERS view that improved alignment of interest will enable the fund to fulfil its fiduciary duty to achieve sustainable risk adjusted returns.
The main drivers in the corporate engagement program are –
- Financial Performance – company engagement to address persistent, relative value destruction, through the Focus List Program.
- Value Related Risk – material environmental, social and governance factors, such as reputational risk, climate change, board diversity and key accountability measures such as majority voting.
- Compliance – in response to State or Federal legislation.
Question 13.
“The central element in corporate governance is the challenges arising out of separation of ownership and control. The shareholders are the true owners of a corporate and the governance function controls the operations of the corporate. There is a strong likelihood that there is mismatch between the expectations of the shareholders and the actions of management”.
In the light of above statement, enumerate the core principles of accountable corporate governance.
Answer:
Following are the core principles of accountable corporate governance are-
| PRINCIPLES | MEANING |
| Sustainability | Companies and external managers are expected to optimize operating performance, profitability and investment returns in a risk-aware manner and with a responsible conduct. |
| Director Accountability | Directors should be accountable to shareowners, and management accountable to directors. |
| Transparency | Operating, financial, and governance information about the companies must be readily transparent to permit accurate market comparisons. |
| One-share/One-vote | All investors must be treated equitably and upon the principle of one-share/one vote. |
| Proxy Materials | Proxy materials should be written in a manner designed to provide shareowners with the information necessary to make informed voting decisions. |
| Code of Best Practices | Code of Best Practices should be followed to promote transparency of information, prevention of harmful labor- practices, investor protection, and corporate social responsibility. |
| Long-term Vision | Corporate directors and management should have a long-term strategic vision that, at its core, emphasizes sustained shareowner value and effective management of both risk and opportunities in the oversight of financial, physical, and human capital. |
| Access to Director Nominations | Shareowners should have effective access to the director nomination process. |
| Political Stability | Progress toward the development of basic democratic institutions and principles, including such things as: a strong and impartial legal system; and, respect and enforcement of property and shareowner rights. |
Question 14.
The big investors, FIIs etc. engages the Proxy Advisory Firms to get the important information and recommendations which lead the protection of their interest and safeguard of their fund. Prepare a brief note on reasons for engaging the Proxy Advisory Firms.
Answer:
Proxy advisory firms are independent research outfits that evaluate the pros and cons of corporate matters such as mergers, acquisitions, top appointments and CEO pay, which shareholders are expected to vote on in AGMs, EGMs or court-convened meetings.
Following are few reasons why institutional investors engage proxy advisors:
i. Proxy advisors generally offer variety of services consisting of both, analyzing the proposals at general meetings and recommending voting decisions.
ii. The recommendations of proxy advisors help the investors to obtain a more considered understanding of different agenda items and to arrive at an informed voting decision, allowing them to optimise their own limited resources and cast their votes in a timely and informed manner.
iii. Considering that institutional investors invest in multiple companies in different industry range and across the globe, it may not be feasible for those investors to have informed knowledge of the corporate governance specifications of that country and hence there may be an inability to understand the need and impact of a particular agenda item. Proxy advisors help to combat this issue as well through their informed consultancy.
iv. Apart from the above, general meetings across the globe may be concentrated during a certain period of the year and therefore the investors may not be in a position to gather information and knowledge about all the companies and hence, may not be in a position to take informed decision while voting. Proxy services firms play an important role in the proxy voting system.
v. Proxy advisers also influence boards’ decision making. They do a good job of policing the boards and governance records of the firms they track, and nudging institutional investors to take a stand on governance issues.
Question 15.
Write a brief note on the following; Promoter.
Answer:
According to Sec. 2(69) of Companies Act, 2013 a “promoter” means a person:
- Who has been named as such in a prospectus or is identified by the company in the annual return referred to in section 92.
- Who has control over the affairs of the company, directly or indirectly whether as a shareholder, director or otherwise.
- In accordance with whose advice, directions or instructions the Board of Directors of the company is accustomed to act:
Provided that nothing in sub-clause (c) shall apply to a person who is acting merely in a professional capacity. “Control” has been defined by section 2(27) in the Companies Act, 2013 which reads as under:
“control” shall include the right to appoint majority of the directors or to control the management or policy decisions exercisable by a per¬son or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders agreements or voting agreements or in any other manner.
Question 16.
Write a note on the following; promoter group.
Answer:
As per Regulation 2(l)(pp) of the SEBI Regulations, 2018, ‘promoter group’ includes:
1. The promoter
2. An immediate relative of the promoter (i.e. any spouse of that person, or any parent, brother, sister or child of the person or of the spouse).
3. in case promoter is a body corporate:
A. A subsidiary or holding company of such body corporate.
B. Anybody corporate in which the promoter holds twenty per cent or more of the equity share capital; and/or anybody corporate which holds twenty per cent or more of the equity share capital of the promoter.
C. Anybody corporate in which a group of individuals or companies or combinations thereof acting in concert, which hold twenty per cent or more of the equity share capital in that body corporate and such group of individuals or companies or combinations thereof also holds twenty per cent or more of the equity share capital of the issuer and are also acting in concert.
4. In case the promoter is an individual:
A. Anybody corporate in which twenty per cent or more of the equity share capital is held by the promoter or an immediate relative of the promoter or a firm or Hindu Undivided Family in which the promoter or any one or more of their relative is a member.
B. Anybody corporate in which a body corporate as provided in (A) above holds twenty per cent or more, of the equity share capital.
C. Any Hindu Undivided Family or firm in which the aggregate share of the promoter and their relatives is equal to or more than twenty per cent of the total capital.
5. All persons whose shareholding is aggregated under the heading “shareholding of the promoter group”.
Question 17.
“The IEPF Authority is entrusted with the responsibility of administration of the Investor Education Protection Fund (IEPF), make refunds of shares, unclaimed dividends, matured deposits/debentures etc. to g investors and to promote awareness among investors.” In the light of the aforesaid statement answer the following:
(i) What are the amounts credited to the fund? Name any five.
(ii) For what purposes such funds may be utilized?
Answer:
(i) As per Section 125(2) of the Companies Act, 2013, following shall be credited to the Fund :
(a) The amount given by the Central Government by way of grants after due appropriation made by Parliament by law in this behalf for being utilised for the purposes of the Fund.
(b) Donations given to the Fund by the Central Government, State Governments, companies or any other institution for the purposes of the Fund.
(c) The amount in the Unpaid Dividend Account of companies transferred to the Fund under sub-section (5) of section 124.
(d) The amount in the general revenue account of the Central Government which had been transferred to that account under sub-section (5) of section 205A of the Companies Act, 1956, as it stood immediately before the commencement of the Companies (Amendment) Act, 1999, and remaining unpaid or unclaimed on the commencement of this Act.
(e) The amount lying in the Investor Education and Protection Fund under section 205C of the Companies Act, 1956.
(f) The interest or other income received out of investments made from the Fund.
(g) The amount received under sub-section (4) of section 38.
(Note: This list is inclusive and not exhaustive)
(ii) Section 125(3) of Companies Act, 2013, provides that the Fund shall be utilised for –
a. The refund in respect of unclaimed dividends, matured deposits, matured debentures, the application money due for refund and interest thereon.
b. Promotion of investors education, awareness and protection.
c. Distribution of any disgorged amount among eligible and identifiable applicants for shares or debentures, shareholders, debenture-holders or depositors who have suffered losses due to wrong actions by any person, in accordance with the orders made by the Court which had ordered disgorgement.
d. Reimbursement of legal expenses incurred in pursuing class action suits under sections 37 and 245 by members, debenture-holders or depositors as may be sanctioned by the Tribunal.
e. Any other purpose incidental thereto, in accordance with such rules as may be prescribed.