CORPORATE GOVERNANCE RATING 2012

Analytical Contacts: Likhitha L Priyadarshini likhi.priya72@gmail.com 11BSPHH010430 Keerthi R Varma Keerthi.r.varma@gmail.com 11BSPHH010394 Madhavi Singh Sengar madhavi.s.sengar@gmail.com 11BSPHH010438 Relationship Contacts:

Mitesh Shah
Mitesh02@gmail.com 11BSPHH010479

Corporate Governance Rating CGR2 (pronounced C G R Two) rating assigned to the Corporate Governance (CG) practices of Bank of Baroda (BoB). This is on a rating scale of CGR1 to CGR6 where CGR1 denotes the highest rating. The CGR2 rating implies (according to ICRA rating criteria)i, the rated bank has adopted and follows such practices, conventions and codes as would provide its financial stakeholders a high level of assurance on the quality of corporate governance. In case of banks, it is important to consider financial stakeholders to include both shareholders and depositors. Justification: we feel CGR2 would be proper rating as BOB has one loop whole which is most common in case of PSBs is minority stakeholders right is suppressed in terms of appointing BOD( Board of Directors) for BOB as GOI holds almost 54% stake in the company. It is this loop hole which restricted us from giving CGR1 rating for BOB though it has almost excellent Corporate Governance. Disclaimer: Our opinion and grading, however, is not a certificate of statutory compliance or a comment on the rated banks future financial performance, credit rating or stock price.

CORPORATE GOVERNANCE RATING 2012

Key positive factors of BOBs CG: Majority stake holder Government of India ownership ensures transparency of ownership and management Elaborate audit function carried out both by its own inspection division and external auditors Transparent process in appointment of directors and board functioning as this is closely monitored by the regulator and the owner. Well defined executive management functioning with responsibilities clearly defined at each level Progress in compliance with building risk management systems as required by the RBI.

Possible Areas of Concern Systemic issues related to composition and functioning of Board and Board Committees limits progress in adopting best-practices with respect to Board functioning; limits rights of minority shareholders Lack of flexibility in employee compensation could constrain the ability of the bank to attract and retain talent Lags behind private and foreign banks in technology adoption

CORPORATE GOVERNANCE RATING 2012

Key Analytical Variables:

Shareholding/ ownership structure Governance structure and management processes Executive management and strategic initiatives Board structure and processes Stakeholder relations Transparency and disclosure Financial discipline Bank profile

SHAREHOLDING (OWNERSHIP) STRUCTURE Bank Of Barodas dominant shareholders are easily identifiable, with GOI holding the major stake of (54.31% as of March 2012). As table 1 mentions the BOBs shareholding pattern is transparent. As GOI is itself the promoter of BOB it is quite clear the promoter group holds majority stake. Apart from GOI, the other major shareholders are FIIs ( with 13.54% as of March 2012), Mutual funds (with 7.51% as of March 2012), Insurance companies(with 10.55% as of March 2012) and they have remained quite stable. Taking into consideration the Banking Companiesii(acquisition and transfer of undertakings) Act, 1970 (in one of its provision relating to cap on voting rights for minority shareholders) GOI holding majority stake could adversely impact minority shareholders rights in key decisions taken by the bank. But this structural issue is common in most of the PSB (Public Sector Banks). Further at BOB key executives are appointed by GOI, the largest shareholder and minority stake holders have no say in this issue.

CORPORATE GOVERNANCE RATING 2012

Table 1: Shareholding Pattern (%) Government Of India FIIs Mutual funds/ UTI Financial Institution/ Banks Insurance companies Indian public Bodies corporate Other(including non resident Indians, overseas corporate bodies, trusts & clearing members) Total 100 100 March 2011 57.03 16.56 8.78 0.15 7.06 5.13 4.70 0.59 March 2012 54.31 13.54 7.51 2.44 10.55 4.77 6.24 0.64

Source: www.bseindia.comiii

GOVERNANCE STRUCTURE AND MANAGEMENT PROCESSES: Governance structure: With reference to corporate governance reportiv we can see that BoB is a multi layered governance structure. BOB has made significant progress in operational risk management risk management through business process restructuring (BPR) aided by professional consultants mainly with a view to adopt advanced approaches under Basel IIv as and when allowed by RBI. We can also see that at every level the role and responsibilities are also well defined. It is also clear on how many time each committee has met in a FY.

CORPORATE GOVERNANCE RATING 2012

S. No. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13.

Name of Committee Management Committee of the Board Credit Approval Committee of the Board Audit Committee of the Board Shareholders / Investors Grievances Committee Share Transfer Committee Subcommittee of the Board on ALM & Risk Management Customer Service Committee Remuneration Committee Nomination Committee Committee of Directors Committee on High Value Frauds IT Strategy Committee of the Board Steering Committee of the Board on HR

Total no. Of meetings held in FY 11-12 29 2 11 4 56 4 4 1 2 6 3 1 1

[Note: On 27 October 2011, Khandelwal Committee, Ministry of Finance, Government of India recommended that a Steering Committee of the Board on HR issues to be constituted with Government Director and two outstanding HR professionals, apart from Chairman and Managing Director and Executive Directors and BoB in its next meeting which was held on 27 February 2012 had the steering committee, which is commendable at the companys part to form a committee in such a short span of time.] Risk management and Audit committee: The Risk management framework is governed by the Audit Committee of the Board (ACB) comprising 6 members and chaired by an Independent Director with strong audit experience besides having other professionally qualified directors as its members. An effective way to
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mitigate credit risks is to identify potential risks in a particular asset, maintain a healthy asset quality and at the same time impart flexibility in pricing assets to meet the required risk-return parameters as per the banks overall strategy and credit policy. The banks robust credit risk rating system is based on internationally adopted frameworksvi) and global best practices and assists the bank in determining the probability of Default and the severity of default, among its loan assets and thus allow the bank to build systems and initiate measures to maintain its asset quality. The inspection and audit department of the bank directly reports to the ACB. BoB has adopted RBIs guidance on Risk Based Internal Audit (RBIA) and as such, follows a system of assigning risk based rating to branches based on a matrix of inherent business and control risks. This allows for a more focused approach in identifying and rectifying key risk areas for each category of branches. In addition, concurrent audits of branches by independent auditors and RBIs AFI also provide comfort on the audit processes of the bank

EXECUTIVE MANAGEMENT AND STRATEGIC INITIATIVES:

Human Resource Initiative: Bank of Baroda is a PSU Bank hence performance based compensation and succession planning are not under its control. But one of the strategic initiatives with respect to Human Resource that has been unique and path-breaking for the entire Public Sector Banking system in the nation has been the setting up of Baroda Manipal School of Banking which is expected to provide a batch of around 180 fully trained officers per quarter with effect from Sept, 2012 onwards who shall be deployed against the Banks requirement of specific profiles of officers. Sparsh Project: This project has been undertaken to revamp existing HR processes, structures and policies in order to support the technology and business transformation by taking up initiatives such as scientific staffing, succession planning, talent management,etc.

CORPORATE GOVERNANCE RATING 2012

Business Process Reengineering: A BPR project called Navnirmaan has been launched to cover both Business Process Reengineering and Organization Re-structuring, aimed at transforming the Banks branches into sales and service centres through sustained centralization. This is expected to yield sound sales growth, superior customer experience and alternate channel migration. Technology: Technology initiatives taken up include expanding Disaster Recovery Centre, windows server virtualisation, desktop virtualisation and backup consolidation for uniterrupted services and improve operational efficiency. Additional facilities have been added to both the Internet and Mobile banking channels. A central database has been created for the employees. Retail Business: New deposit schemes and product combo offers have been created for the convenience of customers. Sales operating model has been developed to generate business leads through transitioning service requests to sales conversation and data mining of existing/new profitable customers. Priority Sector and Financial Inclusion and in MSME sector: During FY12, the Bank has opened ten more Baroda Swarojgar Vikas Sansthan (BSVS), the institutes for training the youth and imparting knowledge and skills required for taking up selfemployment ventures. As many as 22 area specific schemes were formulated to increase agricultural lending. It opened ten New SME Loan Factories and eight New SME Specialized Branches during FY12. Income Stream Diversification: The bank has been providing various third party products in Life Insurance, Non Life Insurance including Health Insurance, Mutual Funds & Equity Trading under tie-up arrangements with different partners.

CORPORATE GOVERNANCE RATING 2012

International Business Initiatives: The International Operations of your Bank are keeping pace with the fast changing environment to become increasingly more competitive in global terms and aiming for higher growth with quality. It continued its Branch Expansion Plan during the year to take advantage of the growing business opportunities.

BOARD STRUCTURE AND PROCESSESS

Structural aspect and effectiveness of board: [Composition] Nine out of twelve directors on BOBs board, including 3 whole time directors including 1 director nominated by RBI, are appointed by GOI. Considering the varied experiences each shareholder elected directors has (as mentioned in the corporate governance report of 2012vii) it is favorable with respect to their contribution to banks strategy. Independent directors are also well represented in the sub committees of the board. One more committee has been added for the year 2011-12 namely IT strategy committee which has 6 members who holds experiences favorably as much as previous ones.

Effectiveness of the board: Board meetings: BOBs board met 17 times (refer Annexure 1) during financial year 2011-12 as against minimum of 6 meetings prescribed under clause 12 The Nationalized Banks (Management and Miscellaneous Provisions) Scheme, 1970viii which is commendable. Attendance: The board meetings on an average had 85.88% (refer annexure 2)ix directors attendance.

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Quality of Agenda papers and circulation aspects: The agenda papers are normally circulated to directors well in advance, although routine items are circulated up to 1day before the meeting. Owing to statutory requirements, most of the agenda items relate to routine administrative matters; however, the Board attempts to spend more time in deliberating key issues. While viewing all the parameters like the timeliness of agenda papers, the frequency of meetings and the attendance track record of directors and members of sub-committees are satisfactory. While BOB did not have a formal induction program for new inducts onto its Board, the new directors are provided with the business model of the Bank, latest annual reports, and the Code of conduct, but new induction program is recommendable. Compliance of accounting standards and other compliances: The accounting compliance of BOB is in accordance with ICAI and GAAPx. The departmentxi is ensuring strict observance of all statutory provisions contained in various legislations such as Banking Regulation Act, Reserve Bank of India Act, Foreign Exchange Management Act, Prevention of Money Laundering Act etc. as well as to ensure observance of other regulatory guidelines issued from time to time; standards and codes prescribed by Banking Codes & Standards Board of India, IBA, Foreign Exchange Dealers Association of India (FEDAI), Fixed Income Money Market Derivatives Association of India (FIMMDA), KYC Norms/ Guidelines and also each bank's internal policies and fair practices code. Compliance laws, rules and standards generally cover matters such as observing proper standards of market conduct, managing conflicts of interest, treating customers fairly, and ensuring the suitability of customer advice.

CORPORATE GOVERNANCE RATING 2012

Functioning of board committees: Among the Board Committees, the Audit Committee is clearly the most important in terms of scope of activities. A properly functioning Audit Committee has the potential to improve the quality of financial reporting, strengthen the position of auditors, and ensure that effective internal audit and internal control/risk management systems are in place. Composition of audit committeexii: The Bank of Baroda, in consonance with the fundamentals of Corporate Governance and in pursuance of directives of the Reserve Bank of India, has constituted an Audit Committee of the Board comprising of Six Directors. A Non-Executive Director, who is a Chartered Accountant, is the Chairman of the Committee. It reviews and recommends to the Management the quarterly / annual financial statements before their submission to the Board. The Audit Committee of BOB provides clear directions and oversees the operations of total audit functions of the Bank including the organization, operation and quality control of internal audit, internal control weaknesses and inspection within the Bank and follow-up of the suggestions of Statutory/External audit of the Bank and RBI inspections. The Committee also reviews the adequacy of internal control systems, structure of internal audit department, its staffing pattern and hold discussions with the internal auditors / inspectors on any significant finding and follow-up action thereon. It further reviews the financial and risk management policies of the Bank. As for Statutory Audit, the Audit Committee interacts with the Statutory Central Auditors before finalization of Quarterly / Year to date / Annual Financial Results and Reports. It also maintains follow up on various issues raised in the Long Form Audit Report (LFAR)

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Table 2: xiii Committee Management committee on the board Audit committee Shareholders & Investors grievances committee Share transfer committee Customer service committee IT strategy committee 3 5 6 CMD CMD Non executive director 6 6 Non-executives Director Non-executive Director Members 7 Chairman CMD

Source: www.bankofbaroda.com

STAKEHOLDER RELATIONS

Shareholders Shareholders relations are managed by the Secretarial department headed by the Company Secretaryxiv. Queries and investor grievances are initially addressed to M/s Karvy Compushare Pvt Ltd, the Registrars and Transfer Agents (RTA) xvappointed by BoB, who resolves routine investor issues. Issues which cannot be resolved by the RTA are passed on to the Company Secretary. Share transfer requests and other investor queries have been resolved within the prescribed time limits. AGM notices, EGM notices and other communications were found to be sent within the prescribed time limitxvi.

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Depositors As per the instructions of the Reserve Bank of Indiaxvii for strengthening the corporate governance structure, the Bank has set up a Standing Committee on Customer Servicesxviii having 4 General Managers of the Bank and 3 other eminent public personalities as members. The Executive Director of the Bank chairs the Committee. Pursuant to the RBI's directives, the Bank has further constituted a sub-committee of Board, known as 'Customer Service Committee of the Board'. The Committee is chaired by the Chairman and Managing Director or in his absence, by the Executive Director. The sub-committee mainly focuses on suggesting and implementing measures for enhancing the quality of customer service for all the categories of clientele. TRANSPARENCY AND DISCLOSURExix: Bob has provided disclosures which are mostly as per requirement of RBI. Bob provide a detailed discloser about its risk governance structure, Capital and Investment structure. Apart from these BOB as appointed a transparency officerxx as per guidelines of CIC (Central Information Commissioner). It even full fills the key parameters laid down for assessing the transparency and disclosure by ICRA as: Bob accounting practices are in compliances with ICAI and GAAP. Disclosure is provided on companys Repo Transaction, Non-SLR Investment Portfolio, disclosures of derivatives, Asset Quality, Details on non- performing asset bought/purchased Information on accounts restructured. Exposure of Bob to Real estate, Capital Market, etc. Information on amount of unsecured advances given by Bob and contingent liabilities. Company also provides disclosure on no. of complaint they have by the customer with a year. Disclosure on transactions with subsidiaries, associates, Joint venture, etc. Income earned from marketing third party products.
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They even provide information on employee benefits, gratuity, pensions along with the new pension scheme introduced by them.

FINANCIAL DISCIPLINE:

The bank has shown good results even though it had to face stress of the macro environment of India. The global business has posted a growth of 25.9% (y-o-y) and attained the level of Rs 6,72,248crore. Within this, its Global Loan-book expanded by 25.7% (y-o-y) to Rs 2,87,377crore.xxi Under Basel II norms prescribed Capital Adequacy Norm in case of Scheduled Commercial Banks CAR= 9%. For Bank of Baroda the capital adequacy ratio was 14.67% hence this shows that the bank has the capacity to meet time liabilities and risks such as credit risk, operational risk etc. implying that the bank is capable of protecting its depositors and lenders. Asset quality of banks is one of the most important indicators of their financial health. BOBs strong Asset Quality management is reflected in its gross NPA ratio = 1.53% and Net NPA ratio = 0.54% during the financial year 2011-2012 one of the lowest in the large-sized banking segment of the country. This can be attributed to a robust IT and MIS system/mechanism. It also reflects the efficiency of the banks credit risk management and the recovery environment. The Perpetual Bonds and the Upper Tier II Bonds have been given CARE (Credit Analysis and Research Limited) "AAA" rating on May 31st 2011.xxii Brickwork has given "BWR AAA+" for Bank of Barodas Upper Tier II Bonds Issue of INR 10 billion. xxiii Brickwork ratings BWR AAA+ stands for an instrument that is considered to offer the BEST credit quality in terms of timely serving of debt obligations. The rating factored higher operating profits, improving asset quality, well diversified credit deployment, comfortable capital

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adequacy and low cost deposits, healthy earning assets, profitable overseas operation, and the Government of Indias equity stake. Bank of Baroda topped the BT-KPMG Best Banks Survey of 2011.xxiv The criteria was how (in a challenging environment) banks made efficient use of capital, wrote good quality assets, rewarded shareholders, and played an integral role in India's economic development. Moody's Investors Service has affirmed Bank of Baroda's deposit and debt ratings, with a stable outlook.xxv This indicates strong financial position of Bank of Baroda. The financial performance of the subsidiaries of the bank has been satisfactory. Ex: The subsidiary has seen a six-month net income surge i.e. 40 percent from a year earlier as loans and deposits grew. Profit rose to 17.9 billion shillings ($7.2 million) from 12.8 billion shillings a year earlier.xxvi

BANK PROFILExxvii Majorly owned by the GoI, BOB is one of the largest bank in the country with an asset base of Rs. 3.5 lakh crore and a network of 3418 branches and 1,315 ATMs in India as on March 31, 2012 and number of employees are 40046. BoB has a large overseas presence through its 78 offices located across 25 countries. The banks asset quality has remained stable in H1FY2012, with Gross NPA at 1.43% as on March, 2012 (1.36% as on March 31, 2011) and net NPA percentage at 0.40% as on march 31, 2012 (0.34% as on March 31, 2011). The regulatory capital adequacy ratio stood at 14.52%% as on March 31, 2011xxviii. During H1FY11-12, BoB reported a net profit of Rs. 4241 crore on a total income of Rs. 21885 crore as compared to net profit of Rs.3058 crore on a total income of Rs. 16698 crore during first half of FY2011-12.

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SUGGESTION:

Prudent and honest individuals should be part of the top management. The methodology of rating a company should also include the analysis of the legal track records of the management, board of directors especially for public sector enterprises where appointment of the top management is done by the government directly.

The methodology should also include the way in which the management has reacted to adverse or hostile or unpleasant circumstances/situations like lockouts, strikes, employee suicides, political disturbances/pressures etc

END NOTES

ii

http://www.icra.in/Content.aspx?cid=YFUQR68A67F692QNE1B08GOEIYE0RKKIKV0P9UR033XMDEDIFF

http://www.pnbindia.in/Upload/En/Banking%20Companies%20Act%201970.pdf Document Banking companies Act(Acquisition and Transfer of undertakings) Act, 1970 iii http://www.bseindia.com/shareholding/shareholdingPattern_60.asp?scripcd=532868&qtrid=73. 00 author subash setia, company secretary iv http://www.bankofbaroda.com/corpgovernance.asp v www.rbi.org.in Basel 2 norms (capital adequacy ratio) vi Disclosures under Pillar 3 in terms of New Capital Adequacy Framework (Basel II) of Reserve Bank of India vii http://www.bankofbaroda.com/corpgovernance.asp Document :Report on corporate governance 2011-2012 dated 15th may 2012 Board structure heading. viii http://www.pnbindia.in/Upload/En/Nationalised%20bank%20scheme%201970.pdf Document: The Nationalized Banks (Management and Miscellaneous Provisions) Scheme, 1970 ix http://www.bankofbaroda.com/corpgovernance.asp x www.bankofbaroda.com xi http://www.bankofbaroda.com/corpgovernance.asp xii http://www.bankofbaroda.com/corpgovernance.asp Audit committee of BOB

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http://www.bankofbaroda.com/corpgovernance.asp Document :Report on corporate governance 2011-2012 dated 15th may 2012 xiv http://www.bankofbaroda.com/fin/investor_services.asp Document: investor service department xv http://www.bankofbaroda.com/fin/investor_rsta.asp Document: registrar and share transfer agent xvi www.bankofbaroda.com xvii http://rbidocs.rbi.org.in/rdocs/notification/PDFs/56LD300611FL.pdf
xviii

xiii

http://www.bankofbaroda.com/download/MODEL%20POLICY%20FOR%20GRIEVANCE%20 REDRESSAL.pdf Document : grievance redressal policy of BOB xix http://www.bankofbaroda.com/fin/fin_fy2012_notes.asp xx http://www.bankofbaroda.com/corpgovernance.asp Document: transpareny officer, his duties, responsibilities. xxi http://www.bankofbaroda.com/fin/fin_chairmanspeech.asp, Document: Chairmans (Shri M D Mallya) speech at the 16th Annual General Meeting of the Shareholders at Vadodara, 28th June, 2012 xxii http://www.careratings.com/Portals/0/Rating%20Reckoner/May2011.pdf, Document: Rating Reckoner, Update on CARE ratings, Volume 18 No. 2, Dated: May 2011 xxiii http://www.brickworkratings.com/press-pdf/bank-of-baroda_rationals_tier-2-bond10billion.pdf, Document: Rating Rationale for Bank of Barodas Upper Tier II Bonds Rating xxiv http://businesstoday.intoday.in/story/best-banks-2011-bankingindia/1/19742.html,Document:India's Best Banks 2011, By: Anand Adhikari, Dated: 27th November,2011 xxv http://www.indiainfoline.com/Markets/News/Moodys-affirms-ratings-and-outlook-of-Bankof-Baroda/5337129567, Document: Moody's affirms ratings and outlook of Bank of Baroda, Dated:Jan 20, 2012 xxvi http://www.bloomberg.com/news/2012-08-31/bank-of-baroda-uganda-six-month-net-climbs40-as-loans-increase.html, Article: Bank of Baroda Uganda Six-Month Net Climbs 40% as Loans Increase, By: Fred Ojambo, Dated: 31st August 2012 xxvii http://www.bankofbaroda.co.in/download/annualreport.pdf xxviii http://www.bankofbaroda.com/hindi/fin/fin_keyfinratios.asp, Document: Key Financial Ratios

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ANNEXURES: ANNEXURE 1 DATES WHEN BOARD OF BOBS BOARD MET DURING FINANCIAL YEAR 2011-12
27.04.2011 27.07.2011 12.11.2011 27.02.2012 28.04.2011 27.08.2011 22.12.2011 19.03.2012 27.05.2011 29.09.2011 29.12.2011 04.07.2011 21.10.2011 24.01.2012 20.07.2011 31.10.2011 25.01.2012

Source: www.bankofbaroda.com ANNEXURE 2

Name of the Director Shri M. D. Mallya Shri Rajiv Kumar Bakshi Shri N. S. Srinath Shri Alok Nigam Shri Sudarshan Sen Shri Vinil Kumar Saxena Shri V. B. Chavan Shri Ajay Mathur Dr. (Smt.) Masarrat Shahid Shri Satya Dev Tripathi Shri Maulin Arvind Vaishnav Shri Maulin Arvind Vaishnav Shri Surendra S. Bhandari Shri Rajib S. Sahoo Shri R. Gandhi Dr. Dharmendra Bhandari Dr. Deepak B. Phatak Period 01.04.2011 to 31.03.2012 01.04.2011 to 31.03.2012 01.04.2011 to 31.03.2012 01.04.2011 to 31.03.2012 30.05.2011 to 31.03.2012 25.07.2011 to 31.03.2012 01.04.2011 to 31.03.2012 01.04.2011 to 31.03.2012 01.04.2011 to 31.03.2012 01.04.2011 to 31.03.2012 01.04.2011 to 23.12.2011 24.12.2011 to 31.03.2012 24.12.2011 to 31.03.2012 24.12.2011 to 31.03.2012 01.04.2011 to 29.05.2011 01.04.2011 to 23.12.2011 01.04.2011 to 23.12.2011 Meetings held during their tenure 17 17 17 17 14 12 17 17 17 17 12 5 5 5 3 12 12 Meetings attended 17 16 17 6 13 12 17 17 12 14 12 5 5 4 2 7 10

Source: www.bankofbaroda.com

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