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Corporate Governance.

Corporate governance is the set of processes, customs, policies, laws and institutions affecting the way a corporation is directed, administered or controlled. Corporate governance also includes the relationships among the many stakeholders involved and the goals for which the corporation is governed. The principal stakeholders are the shareholders, management and the board of directors. Other stakeholders include employees, suppliers, customers, banks and other lenders, regulators, the environment and the community at large.

Corporate governance is a multi-faceted subject. An important part of corporate governance deals with accountability, fiduciary duty, disclosure to shareholders and others, and mechanism of auditing and control. In this sense, corporate governance players should comply with codes to the overall good of all constituents. Another important focus is economic efficiency, both within the corporations such as the best practice guidelines as well as externally national institutional frameworks. In this economic view, the corporate governance system should be designed in such a way as to optimize results, as well as to detect and prevent frauds. Some argue that the firm should act not only in the interest of the shareholders but also off all the other stakeholders.

Governance makes decisions that the define expectations, grant power, or verify performance. It consists either of a separate process or of a specific part of the management or leadership processes. Sometimes people setup a government to administer these processes and systems.


The word Governance derives from Latin origins that suggest the notion of steering. One can contrast this sense of steering a group or society wi th the traditional Top-Down approach of governments driving society. Distinguish between governances power to and governments power over.

Corporate Governance deals with the ways in which suppliers of finance to corporations assure themselves of getting a return on their investment (Shleifer and Vishny) Corporate Governance is about is about promoting corporate fairness, transparency and accountability. (J Wolfensohn) (President of the World Bank quoted by an article in Financial Times, June 21st, 1991) Corporate Governance is the system by which companies are directed and controlled (Cadbur Report (UK),1992) To do with Power and Accountability who exercises power, on behalf of whom, how the exercise of power is controlled. (Sir Adrian Cadbury, in Reflections on Corporate Governance, Ernest Sykes Memorial Lecture, 1993)

The process and structure to direct and manage the business and affairs of the corporation with the objective of enhancing shareholder value, which includes ensuring the financial viability of the business. (Where were the Directors? Guidelines for Improve of Corporate Governance in Canada, TSE, 1994) Corporate governance involves a set of relationships between a companys management, its board, its shareholders and other stakeholders also the structure through which objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined. Preamble to the OECD Principles of Corporate Governance, 2004 Fundamental objective of corporate governance is the enhancement of the long term shareholder value while at the same time protecting the interests of other stakeholders. SEBI (Kumar Mangalam Birla) Report on Corporate Governance, January, 2000 A Gandhian definition Trusteeship obligations inherent in company operations, where assets and resources are pooled and entrusted to the managers for optimal utilization in the stakeholders interests.

1.4 History
In the 19th century, state corporation laws enhanced the rights of corporate boards to govern without unanimous consent of shareholders in exchange for statutory benefits like appraisal rights, to make corporate governance more efficient. Since that time, and because most large publicly traded corporations in the US are incorporated under corporate administration friendly Delaware law, and because the US's wealth has been increasingly securitized into various corporate entities and institutions, the rights of individual owners and shareholders have become increasingly derivative and dissipated. The concerns of shareholders over administration pay and stock losses periodically has led to more frequent calls for corporate governance reforms. In the early 2000s, the massive bankruptcies of Enron and Worldcom, as well as lesser corporate debacles, such as Adelphia Communications, AOL, Arthur Andersen, Global Crossing, Tyco, and, more recently, Fannie Mae and Freddie Mac, led to increased shareholder and governmental interest in corporate governance. This culminated in the passage of the Sarbanes-Oxley Act of 2002. But, since then, the stock market has greatly recovered, and shareholder zeal has waned accordingly.


Corporate governance is typically perceived by academic literature as dealing with problems that result from the separation of ownership and control. From this perspective, corporate governance would focus on the internal structure of Board of Directors, the creation of independent committees rules fo r disclosures of information to shareholders and creditors, and control of the management.

The recommendations include the responsibility of the BOD, role and responsibility of independent and non- executive directors, fit and proper norms for nomination of directors in private sector banks, etc.

Transparency and disclosures standards are also important constituents of a sound corporate governance mechanism. Transparency and accounting standards in India have been enhanced to align with international best practices .However; there are many gaps in the disclosures in India vis-a-vis the international standards, particularly in the areas of risk management strategies and practices, risk parameters, risk concentrations, performance measures, component of capital structure, etc. Hence, the disclosure standards need to be further broad-based in consonance with improvements in the capability of market players to analyze the information objectively.

Fig 1.1- Role of Corporate Governance.


It will certainly not be out of place here to recount how issues relating to corporate governance and corporate control have come to the fore the world over in the recent past. The seeds of modern corporate governance were probably sown by the Watergate scandal in the USA. Subsequent investigations by US regulatory and legislative bodies highlighted control failures that had allowed several major corporations to make illegal political contributions and bribe government officials.

While these developments in the US stimulated debate in the UK, a spate of scandals and collapses in that country in the late 1980s and early 1990s led shareholders and banks to worry about their investments. Several companies in UK which saw explosive growth in earnings in the 80s ended the decade in a

memorably disastrous manner. Importantly, such spectacular corporate failures arose primarily out of poorly managed business practices.

This debate was driven partly by the subsequent enquiries into corporate governance (most notably the Cadbury Report) and partly by extensive changes in corporate structure. In May 1991, the London Stock Exchange set up a Committee under the chairmanship of Sir Arian Cadbury to help raise the standards of corporate governance and the level of confidence in financial reporting and auditing by setting out clearly what it sees as the respective responsibilities of those involved and what it believes is expected of them. The Committee investigated accountability of the Board of Directors to shareholders and to the society. It submitted its report and the associated code of best practices in December 1992 wherein it spelt out the methods of governance needed to achieve a balance between the essential powers of the Board of Directors and their proper accountability. Being a pioneering report on corporate governance, it would perhaps be in order to make a brief reference to its recommendations which are in the nature of guidelines relating to, among other things, the Board of Directors and Reporting & Control.

1.7 Parties to corporate governance

Parties involved in corporate governance include the regulatory body e.g. the Chief Executive Officer, the board of directors, management and shareholders. Other stakeholders who take part include suppliers, employees, creditors, customers and the community at large. All parties to corporate governance have an interest, whether direct or indirect, in the effective performance of the organisation. Directors, workers and management receive salaries, benefits and reputation, while shareholders receive capital return. Customers receive goods and services; suppliers receive compensation for their goods or services. In return these individuals provide value in the form of natural, human, social and other forms of capital. A key factor in an individual's decision to participate in an organisation e.g. through providing financial capital and trust that they will receive a fair share of the organisational returns.

Fig.1.2 Corporate Governance Framework

1.8 Principles of corporate governance

Contemporary discussions of corporate governance tend to refer to principles raised in three documents released since 1990: The Cadbury Report UK, 1992, the Principals of Corporate Governance OECD, 1998 and 2004, the Sarbanes-Oxley Act of 2002 US, 2002. The Cadbury and OECD reports present general principals around which businesses are expected to operate to assure proper governance. The Sarbanes-Oxley Act, informally referred to as Sarbox or Sox, is an attempt by the federal government in the United States to legislate several of the principals recommended in the Cadbury and OECD reports.

Rights and equitable treatment of shareholders

Organizations should respect the rights of shareholders and help shareholders to exercise those rights. They can help shareholders exercise their rights by openly and effectively communicating information and by encouraging shareholders to participate in general meetings.

Interests of other stakeholders

Organizations should recognize that they have legal, contractual, social, and market driven obligations to non-shareholder stakeholders, including employees, investors, creditors, suppliers, local communities, customers, and policy makers.

Role and responsibilities of the board

The board needs sufficient relevant skills and understanding to review and challenge management performance. It also needs adequate size and

appropriate levels of independence and commitment to fulfill its responsibilities and duties.

Integrity and ethical behaviour

Integrity should be a fundamental requirement in choosing corporate officers and board members. Organizations should develop a code of conduct for their directors and executives that promotes ethical and responsible decision making.

Disclosure and transparency

Organizations should clarify and make publicly known the roles and responsibilities of board and management to provide stakeholders with a level of accountability. They should also implement procedures to independently verify and safeguard the integrity of the company's financial reporting. Disclosure of material matters concerning the organization should be timely and balanced to ensure that all investors have access to clear, factual information.

1) Enhancing overall companys performance.

2) Preparing a small enterprise growth so helping to secure new business opportunities when they arise

3) Increasing attractiveness to investors and lenders which enables faster growth.

4) Increasing companys ability to identify and mitigate the risk, manage crisis and respond to changing market trend.

5) Increasing market confidence as a whole.

6) All company suffers from corporate scandals which scare potential investor away from the market.

Good Governance can be understood as a set of 8 major characteristics


Consensus orientation

Equity and inclusiveness

Rule of law

Effectiveness and Efficiency





Internal corporate governance controls monitor activities and then take corrective action to accomplish organizational goals. Examples include:

Monitoring by the board of directors The board of directors, with its legal authority to hire fire and compensate top management, safeguards invested capital. Regular board meetings allow potential problems to be identified, discussed and avoided. Whilst non-executive directors are thought to be more independent, they may not always result in more effective

corporate governance and may not increase performance. Different board structures are optimal for different firms.

Remuneration Performance-based remuneration is designed to relate some proportion of salary to individual performance. It may be in the form of cash or non-cash payments such as shares and share options, superannuation or other benefits. Such incentive schemes, however, are reactive in the sense that they provide no mechanism for preventing mistakes or opportunistic behaviour.


External corporate governance controls encompass the controls external stakeholders exercise over the organization.

Examples include:



Debt covenants

Media pressure

Government regulations

Managerial labour market

Demand for and assessment of performance information

1.12 Good Corporate Governance Practices

Each member of the Board of Directors and Core Management of the Bank should adhere to the following so as to ensure compliance with good Corporate Governance practices.

Attend Board meetings regularly and participate in the deliberations and discussions effectively.

Study the Board papers thoroughly and enquire about follow-up reports on definite time schedule.

Involve actively in the matter of formulation of general policies.

Be familiar with the broad objectives of the Bank and policies laid down by the Government and the various laws and legislations.

Ensure confidentiality of the Bank's agenda papers, notes and minutes.

Do not interfere in the day to day functioning of the Bank.

Do not reveal any information relating to any constituent of the Bank to anyone. Do not display the logo / distinctive design of the Bank on their personal visiting cards / letter heads.

Do not sponsor any proposal relating to loans, investments, buildings or sites for Bank's premises, enlistment or empanelment of contractors, architects, auditors, doctors, lawyers and other professionals etc.

Do not do anything, which will interfere with and/ or be subversive of maintenance of discipline, good conduct and integrity of the staff.

The Financial services sector in India is blooming and has become one of the lucrative areas to professionalism. The sector has undergone metamorphosis since 1990. Indian economy got liberalized during 1991 and the financial sector was kept open for private and foreign players. During the late eighties, the financial services industry in India was dominated by commercial banks and other financial institutions governed by the Central Government. The economic liberalization has brought in a complete transformation in the Indian financial services industry. Prior to the economic liberalization, the Indian financial service sector was characterized by various other factors, which was related to the growth of this sector. MEANING OF FINANCIAL SERVICES The term financial services in its broader sense refers to mobilizing and allocation of savings. It is identified as all those activities involved in the process of converting savings into investment. Financial services can be defined as the products and services offered by institutions like banks of various kinds for the facilitation of various financial transactions and other related activities in the world of finance like loans, insurance, credit cards, investment opportunities and money management as well as providing information on the stock market and other issues like market trends Financial services refer to services provided by the finance industry. The finance industry encompasses a broad range of organizations that deal with the management of money. Among these organizations are banks, credit card companies, insurance companies, consumer finance companies, stock brokerages, investment funds and some government sponsored enterprises. Financial services

also include FINANCIAL INTERMEDIARIES such as Merchant Bankers, Venture capitalists, Commercial banks, Insurance Companies Mutual fund etc. Definition Services and products provided to consumers and businesses by financial

institutions such as banks, insurance companies, brokerage firms, consumer finance companies, and investment companies all of which comprise the financial services industry.

NATURE AND CHARACTERSTICS OF FINANCIAL SERVICES Portfolio management of large public sector undertakings Recommending suitable changes in the management structure and management style envisaging achieving better results. Acting as trustees to the debenture holders Directing corporate customers in capital restructuring Planning for mergers and acquisitions and assisting for their smooth carry out. Rendering project advisory services, right from the preparation of the project report till the raising of funds for starting the project Assisting in the process of obtaining government Clarence.


There are a lot of investment avenues available today in the financial market for an investor with an investable surplus. He can invest in Bank Deposits, Corporate Debentures, and Bonds where there is low risk but low return. He may invest in Stock of companies where the risk is high and the returns are also proportionately high. The recent trends in the Stock Market have shown that an average retail investor always lost with periodic bearish tends. People began opting for portfolio managers with expertise in stock markets who would invest on their behalf. Thus we had wealth management services provided by many institutions. However they proved too costly for a small investor. These investors have found a good shelter with the mutual funds.

CONCEPT OF MUTUAL FUND: A mutual fund is a common pool of money into which investors place their contributions that are to be invested in accordance with a stated objective. The ownership of the fund is thus joint or mutual; the fund belongs to all investors. A single investors ownership of the fund is in the same proportion as the amount of the contribution made by him or her bears to the total amount of the fund. Mutual Funds are trusts, which accept savings from investors and invest the same in diversified financial instruments in terms of objectives set out in the trusts deed with the view to reduce the risk and maximize the income and capital appreciation for distribution for the members. A Mutual Fund is a corporation and the fund managers interest is to professionally manage the funds provided by the investors and provide a return on them after deducting reasonable management fees. The objective sought to be achieved by Mutual Fund is to provide an

opportunity for lower income groups to acquire without much difficulty financial assets. They cater mainly to the needs of the individual investor whose means are small and to manage investors portfolio in a manner that provides a regular income, growth, safety, liquidity and diversification opportunities.

DEFINITION: Mutual funds are collective savings and investment vehicles where savings of small (or sometimes big) investors are pooled together to invest for their mutual benefit and returns distributed proportionately. A mutual fund is an investment that pools your money with the money of an unlimited number of other investors. In return, you and the other investors each own shares of the fund. The funds assets are invested according to an investment objective into the funds port folio of investments. Aggressive growth funds seek long-term capital growth by investing primarily in stocks of fast-growing smaller companies or market segments. Aggressive growth funds are also called capital appreciation funds.


The mutual fund industry in India started in 1963 with the formation of Unit Trust of India, at the initiative of the Government of India and Reserve Bank. The history of mutual funds in India can be broadly divided into four distinct phases. FIRST PHASE 1964-87: Unit Trust of India (UTI) was established on 1963 by an Act of Parliament. It was set up by the Reserve Bank of India and functioned under the Regulatory and administrative control of the Reserve Bank of India. In 1978 UTI was de-linked from the RBI and the Industrial Development Bank of India (IDBI) took over the regulatory and administrative control in place of RBI. The first scheme launched by UTI was Unit Scheme 1964. At the end of 1988 UTI hadRs.6, 700 crores of assets under management. SECOND PHASE 1987-1993 (ENTRY OF PUBLIC SECTOR FUNDS): 1987 marked the entry of non- UTI, public sector mutual funds set up by public sector banks and Life Insurance Corporation of India (LIC) and General Insurance Corporation of India(GIC). SBI Mutual Fund was the first non- UTI Mutual Fund established in June 1987 followed by Can bank Mutual Fund (Dec 87), Punjab National Bank Mutual Fund (Aug 89), Indian Bank Mutual Fund (Nov 89), Bank of India (Jun 90), Bank of Baroda Mutual Fund (Oct 92). LIC established its mutual fund in June 1989 while GIC had set up its mutual fund in December1990. At the end of 1993, the mutual fund industry had assets under management of Rs.47, 004 crores. THIRD PHASE 1993-2003 (ENTRY OF PRIVATE SECTOR FUNDS): With the entry of private sector funds in 1993, a new era started in the Indian mutual fund industry, giving the Indian investors a wider choice of fund families. Also, 1993 was the year in which the first Mutual Fund Regulations came into being,

under which all mutual funds, except UTI were to be registered and governed. The erstwhile Kothari Pioneer (now merged with Franklin Templeton) was the first private sector mutual fund registered in July 1993. The 1993 SEBI (Mutual Fund) Regulations were substituted by a more comprehensive and revised Mutual Fund Regulations in 1996. The industry now functions under the SEBI (Mutual Fund) Regulations 1996. The number of mutual fund houses went on increasing, with many foreign mutual funds setting up funds in India and also the industry has witnessed several mergers and acquisitions. FOURTH PHASE SINCE FEBRUARY 2003: In February 2003, following the repeal of the Unit Trust of India Act 1963 UTI was bifurcated into two separate entities. One is the Specified Undertaking of the Unit Trust of India with assets under management of Rs.29,835 crores as at the end of January 2003, representing broadly, the assets of US 64 scheme, assured return and certain other schemes. The Specified Undertaking of Unit Trust of India, functioning under an administrator and under the rules framed by Government of India and does not come under the purview of the Mutual Fund Regulations. The second is the UTI Mutual Fund Ltd, sponsored by SBI, PNB, BOB and LIC. It is registered with SEBI and functions under the Mutual Fund Regulations. With the bifurcation of the erstwhile UTI which had in March 2000 more than Rs.76,000 crores of assets under management and with the setting up of a UTI Mutual Fund, conforming to the SEBI Mutual Fund Regulations, and with recent mergers taking place among different private sector funds, the mutual fund industry has entered its current phase of consolidation and growth. As at the end of September, 2004, there were 29 funds, which manage assets of Rs.153108 crores under 421schemes.


The following are the major advantages offered by mutual funds to all investors: 1. Portfolio Diversification: Each investor in the fund is a part owner of all the funds assets, thus enabling him to hold a diversified investment portfolio even with a small amount of investment that would otherwise require big capital. 2. Professional Management: Even if an investor has a big amount of capital available to him, he benefits from the professional management skills brought in by the fund in the management of the investors portfolio. The investment management skills, along with the needed research into available investment options, ensure a much better return than what an investor can manage on his own. Few investors have the skill and resources of their own to succeed in todays fast moving, global and sophisticated markets. 3. Reduction/Diversification of Risk: When an investor invests directly, all the risk of potential loss is his own, whether he places a deposit with a company or a bank, or he buys a share or debenture on his own or in any other from. While investing in the pool of funds with investors, the potential losses are also shared with other investors. The risk reduction is one of the most important benefits of a collective investment vehicle like the mutual fund. 4. Reduction of Transaction Costs: What is true of risk as also true of the transaction costs. The investor bears all the costs of investing such as brokerage or custody of securities. When going through a fund, he has the benefit of economies of scale; the funds pay lesser costs because of larger volumes, a benefit passed on to its investors. 5. Liquidity: Often, investors hold shares or bonds they cannot directly, easily and quickly sell. When they invest in the units of a fund, they can generally cash their investments any time, by selling their units to the fund if open-ended, or selling

them in the market if the fund is close-end. Liquidity of investment is clearly a big benefit. 6. Convenience and Flexibility: Mutual fund management companies offer many investor services that a direct market investor cannot get. Investors can easily transfer their holding from one scheme to the other; get updated market information and so on. 7. Tax Benefits: Any income distributed after March 31, 2002 will be subject to tax in the assessment of all Unit holders. However, as a measure of concession to Unit holders of open-ended equity-oriented funds, income distributions for the year ending March 31, 2003, will be taxed at a concessional rate of 10.5%. In case of Individuals and Hindu Undivided Families a deduction upto Rs. 9,000 from the Total Income will be admissible in respect of income from investments specified in Section 80L,including income from Units of the Mutual Fund. Units of the schemes are not subject to Wealth-Tax and Gift-Tax. 8. Well Regulated: All Mutual Funds are registered with SEBI and they function within the provisions of strict regulations designed to protect the interests of investors. The operations of Mutual Funds are regularly monitored by SEBI.


1. No Control over Costs: An investor in a mutual fund has no control of the overall costs of investing. The investor pays investment management fees as long as he remains with the fund, albeit in return for the professional management and research. Fees are payable even if the value of his investments is declining. A mutual fund investor also pays fund distribution costs, which he would not incur indirect investing. However, this shortcoming only means that there is a cost to obtain the mutual fund services. 2. No Tailor-Made Portfolio: Investors who invest on their own can build their own portfolios of shares and bonds and other securities. Investing through fund means he delegates this decision to the fund managers. The very-high-net-worth individuals or large corporate investors may find this to be a constraint in achieving their objectives. However, most mutual fund managers help investors overcome this constraint by offering families of funds- a large number of different schemes- within their own management company. An investor can choose from different investment plans and constructs a portfolio to his choice. 3. Managing a Portfolio of Funds: Availability of a large number of funds can actually mean too much choice for the investor. He may again need advice on how to select a fund to achieve his objectives, quite similar to the situation when he has individual shares or bonds to select. 4. No Control: Unlike picking your own individual stocks, a mutual fund puts you in the passenger seat of somebody else car.


Wide variety of Mutual Fund Schemes exists to cater to the needs such as financial position, risk tolerance and return expectations etc. thus mutual funds has Variety of flavors, Being a collection of many stocks, an investors can go for picking a mutual fund might be easy. There are over hundreds of mutual funds scheme to choose from. It is easier to think of mutual funds in categories, mentioned below.

A).BY STRUCTURE 1. Open - Ended Schemes: An open-end fund is one that is available for subscription all through the year. These do not have a fixed maturity. Investors can conveniently buy and sell units at Net Asset Value("NAV") related prices. The key feature of open-end schemes is liquidity. 2. Close - Ended Schemes: A closed-end fund has a stipulated maturity period which generally ranging from 3 to 15years. The fund is open for subscription only during a specified period. Investors can invest in the scheme at the time of the initial public issue and thereafter they can buy or sell the units of the scheme on the stock exchanges where they are listed. In order to provide an exit route to the investors, some close-ended funds give an option of selling back the units to the Mutual Fund through periodic repurchase at NAV related prices. SEBI Regulations stipulate that at least one of the two exit routes is provided to the investor. 3. Interval Schemes: Interval Schemes are that scheme, which combines the features of open-ended and close-ended schemes. The units may be traded on the

stock exchange or may be open for sale or redemption during pre-determined intervals at NAV related prices. (B) BY NATURE 1. Equity Fund: These funds invest a maximum part of their corpus into equities holdings. The structure of the fund may vary different for different schemes and the fund managers outlook on different stocks. The Equity Funds are sub-classified depending upon their investment objective, as follows: Diversified Equity Funds Mid-Cap Funds Sector Specific Funds Tax Savings Funds (ELSS) Equity investments are meant for a longer time horizon, thus Equity funds rank high on the risk-return matrix. 2. Debt Funds: The objective of these Funds is to invest in debt papers. Government authorities, private companies, banks and financial institutions are some of the major issuers of debt papers. By investing in debt instruments, these funds ensure low risk and provide stable income to the investors. Gilt Funds Income Funds MIPs C).BY INVESTMENT OBJECTIVE: Growth Schemes: Growth Schemes are also known as equity schemes. The aim of these schemes is to provide capital appreciation over medium to long term. These

schemes normally invest a major part of their fund in equities and are willing to bear short-term decline in value for possible future appreciation. Income Schemes: Income Schemes are also known as debt schemes. The aim of these schemes is to provide regular and steady income to investors. These schemes generally invest in fixed income securities such as bonds and corporate debentures. Capital appreciation in such schemes may be limited. Balanced Schemes: Balanced Schemes aim to provide both growth and income by periodically distributing apart of the income and capital gains they earn. These schemes invest in both shares and fixed income securities, in the proportion indicated in their offer documents (normally 50:50). Money Market Schemes: Money Market Schemes aim to provide easy liquidity, preservation of capital and moderate income. These schemes generally invest in safer, short-term instruments, such as treasury bills, certificates of deposit, commercial paper and inter-bank call money. Load Funds: A Load Fund is one that charges a commission for entry or exit. That is, each time you buy or sell units in the fund, a commission will be payable. Typically entry and exit loads range from 1% to 2%. It could be worth paying the load, if the fund has a good performance history. No-Load Funds: A No-Load Fund is one that does not charge a commission for entry or exit. That is, no commission is payable on purchase or sale of units in the fund. The advantage of a no load fund is that the entire corpus is put to work.

Corporate Governance in Mutual Fund

SEBI clears new norms on corporate governance; mutual fund policy

Among other major decisions, SEBI board also cleared the much-awaitedlong term policy for mutual funds, which includes various proposals including potential tax benefits, for the future growth of the sector

Market regulator Securities and Exchange Board of India (SEBI) on Thursday cleared new norms for corporate governance and a long term policy with various proposals, including potential tax benefits, for mutual funds.




for corporate

governance require




justify salaries paid to its chief executives, put in place a whistle-blower policy and have orderly succession plans.

The new norms were cleared by the SEBI board in Delhi and the relevant provisions would be incorporated in the listing agreement soon, SEBI chairman UK Sinha said.

Speaking to the reporters after the board meeting Sinha also said that any decision on the lapsed ordinance that granted greater powers to SEBI needs to be taken by the government.

Among other major decisions, SEBI board also cleared the much-awaited long term policyfor mutual funds, which includes various proposals including potential tax benefits, for the future growth of the sector.

"The long term policy includes all aspects - including enhancing the reach and promoting financial inclusion, tax treatment and obligation of various stakeholders to deal with the public policy objectives of achieving sustainable growth of the mutual fund industry and mobilisation of household savings for the growth of the economy. The recommendations of long term policy has been bifurcated in two buckets, tax incentive related proposals and non-tax related proposals," SEBI said in a release.

The recommended tax incentives for mutual fund schemes are... 1. A long term product such as Mutual Fund Linked Retirement Plan (MFLRP) with additional tax incentive of Rs50,000 under 80C of Income Tax Act may be introduced.

2. Alternatively, the limit of section 80C of the Income Tax Act, 1961, may be enhanced from Rs1 lakh to Rs2 lakh to make mutual funds products (ELSS and MFLRP) as priority for investors among the different investment avenues. RGESS may also be brought under this enhanced limit.

3. Similar to merger/ consolidation of companies, the merger/ consolidation of equitymutual funds schemes also may not be treated as transfer and therefore, may be exempted from capital gain taxation.

SEBI board also decided to ensure that mutual funds achieve a reasonable size and play an important role in financial inclusion, while enhancing transparency. Here are the objectives decided by SEBI for this...

(i) Capital Adequacy i.e. minimum networth of the asset management companies (AMC) be increased to Rs50 crore.

(ii) The concept of seed capital to be introduced i.e. 1% of the amount raised (subject to a maximum of Rs50 lakh) to be invested by AMCs in all the open ended schemes during its life time.

(iii) EPFOs be allowed to invest upto 15% of their corpus in Equities and Mutual Funds. Further, the members of EPFOs who are earning more than Rs6500 per month be offered an option for a part of their corpus to be invested in a Mutual Fund product of their choice.

(iv) Presently, Navratna and Miniratna Central Public Sector Enterprises (CPSEs) are permitted to invest in public sector mutual funds regulated by SEBI. It has been recommended that all CPSEs be allowed to choose from any of the SEBI registered Mutual Funds for investing their surplus funds.

(v) In order to enhance transparency and improve the quality of the disclosures, it has been decided that AUM from different categories of schemes such as equity schemes, debt schemes, etc., AUM from B-15 cities, contribution of sponsor and its associates in AUM of schemes of their mutual fund, AUM garnered through sponsor group/ non-sponsor group distributors etc. are to be disclosed on monthly basis on respective website of AMCs and on consolidated basis on website of


(vi) In order to improve transparency as well as encourage Mutual Funds to diligently participate in corporate governance of the investee companies and exercise their voting rights in the best interest of the unit holders, voting data along with rationale supporting their decision (for, against or abstain) be disclosed on quarterly basis on their website.

This is to be certified by Auditor annually and reviewed by board of AMC and Trustees.

(vii) Towards achieving the goal of financial inclusion, a gradual approach to be taken such that initially the banked population of the country may be targeted with respect tomutual funds investing. SEBI will work towards achieving the goal that the basics of capital markets and financial planning may be introduced as core curriculum in schools and colleges. Printed literature on mutual funds in regional languages be mandatorily made available by mutual funds. Investor awareness campaign in print and electronic media on mutual funds in regional languages to be introduced.

(viii) In order to develop and enhance the distribution network PSU banks may be encouraged to distribute schemes of all mutual funds. Online investment facility need to be enhanced to tap the internet savvy users to invest in mutual funds. Also, the burgeoning mobile-only internet users need to be tapped for direct distribution of mutual funds products.

The SEBI board also cleared new KYC registration agency (KRA) regulations that would make it easier for the investors to comply with know your client (KYC) requirements across various segments of the capital markets.

The approval by SEBI board to the new corporate governance norms follows months-long discussion among various stakeholders on draft regulations released last year.

The new norms seek to check excessive salaries paid to top executives of listed companies by requiring them to justify such payments, as also all related party transactions with entities linked to promoters and directors.

The companies would also need to adopt a whistle-blower policy for employees, while the number of directorship a person can hold on company boards would be capped, among various other measures to safeguard the interest of minority shareholders.

The new norms provide for greater oversight by minority shareholders and independent directors and check any unjustifiable payments to related parties.

They also seek to bring in a greater alignment of CEO salaries with the performance and goals of the company, while requiring disclosure of ratio of remuneration paid to each of their directors and their median staff salary.

Similar provisions have been made in the new Companies Act.

SEBI had earlier said that "on average, the remuneration paid to CEOs in certain Indian companies are far higher than the remuneration received by their foreign counterparts and there is no justification available to that effect".

Through these measures, SEBI is seeking to adopt better global practices without increasing the cost of compliances, so that confidence of the investors is brought back to market.

Overview of Mutual Fund Governance

A. Fund Boards Follow Strong Governance Practices to Best Serve Shareholders

Fund boards are robustly independent. Federal securities laws require that at least 40 percent of the directors on a fund board be independent, as defined by SEC rule. In practice, the proportion of independent directors is significantly higher throughout the industry. In more than 90 percent of fund complexes, 75 percent or more of fund directors are independent. Moreover, 97 percent of independent directors have never been employed by the fund complex.

Eighty-eight percent of fund boards have an independent director serving as the boards chair or as lead independent director. There is no legal requirement for a board to have an independent chair or independent lead director.

New independent directors of a fund board are selected and nominated by the existing independent directors on the board, not by the funds adviser. A funds adviser cannot fire or otherwise remove an independent director. Independent directorsnot the funds adviserset their own compensation.
B. Independent Directors Protect the Interests of Fund Shareholders by Serving as Independent Watchdogs

In broad terms, independent directors oversee the management and operations of the fund and are not involved in its day-to-day management. A critical component of a boards oversight responsibility is to protect the funds shareholders against potential conflicts of interest between the fund and its service providers, including the adviser.

Independent directors have a fiduciary duty to protect the interests of fund shareholders. In addition, directors must perform all their duties in an informed and deliberate manner. Directors devote substantial time and consider large amounts of information related to various aspects of fund operations and management. This process provides fund directors with the depth of understanding that ultimately allows them to make informed decisions and fulfill their duties and responsibilities.

C. Independent Directors Rigorously Review the Advisory Contract Every Year

In addition to their general oversight responsibilities, fund directors have specific and significant responsibilities under the federal securities laws, ranging from

overseeing the funds compliance program to approving the fees paid to the funds adviser.

Independent directors are required to approve the funds advisory fees annually. Directors exercise this responsibility with the utmost diligence and care, often consulting with independent counsel and third party consultants, reviewing hundreds if not thousands of pages of detailed information, and participating in numerous meetings throughout the year.

Directors are not required to negotiate for the absolute lowest rate with the adviser. Instead, there is broad recognition by regulators and the courts that directors must balance a number of considerations, including the nature, extent, and quality of the services provided by the adviser. Good performance, which is ultimately what shareholders are seeking, may best be achieved by paying the adviser a competitive rate, rather than the lowest possible fee. In the fee approval process, however, directors do often require the adviser to take steps to bring fees downsteps such as breakpoints at specified asset levels, fee waivers, outright fee reductions, or service enhancements.

Fund performance is an important component and focus of extensive board oversight. In fulfilling their oversight responsibilities, directors seek to ensure that the adviser is managing the fund in a manner consistent with the funds stated investment objectives. Quarterly reviews with the adviser keep attention focused on performance issues until they are resolved.

Directors have many means to carry out their duty to forcefully represent shareholders interests and effect changes in their funds best interests. For example, directors can require the adviser to increase the quality of its services or to take appropriate steps to improve its performance, such as by hiring a new

portfolio manager for the fund, increasing the advisers investment research capability, retaining a subadviser, or merging the fund.

The fact that directors typically do not fire the funds adviser does not indicate that directors do not forcefully represent shareholders interests. Such a drastic step would be costly, disruptive, and, importantly, contrary to the funds shareholders express intention to invest with a particular money manage r. Replacing the adviser is not comparable to replacing a CEO and one or two other top members of management at an operating companyit is more like replacing an operating companys entire operational staff. Because a funds shareholders have deliberately chosen that fund on the basis of its adviser and the other reasons noted above, directors should consider replacing a funds adviser only as a last resort, as in the case of fraud.

D. Mutual Funds Boards are Uniquely Different from Corporate Boards

Directors of mutual fund boards and corporate boards both oversee management and operations and have a fiduciary duty to protect the interests of shareholders. The focus of fund directors, however, is different, due to the unique structure of mutual funds. Because a fund has no employees and relies on the adviser and other service providers to carry out the funds day-to-day operations, the board focuses on the performance of these entities under their respective contracts and monitors the potential conflicts of interest that can arise between them and the fund. A mutual fund board is not the board of the funds adviser. Thus, while the fund board oversees the services the adviser provides to the fund, it does not oversee the management or operations of the adviser. Decisions regarding, for example,

the hiring, firing, and compensation of the advisers employees should be left solely to the adviser.

Most mutual fund boards employ governance models that reflect the unique structure of funds and fund complexes. Because all of the funds within a fund complex usually receive necessary services from the same entities, are served by common personnel, and are organized around common operating features, fund boards employ a unitary board model (a single board overseeing all funds in the complex) or a cluster board model (two or more separate boards each overseeing a group of funds with the complex) to oversee multiple funds. These governance models allow directors to provide efficient and effective oversight on behalf of fund shareholders.