Merger: Merger is defined as combination of two or more companies into a single company where one survives and the

others lose their corporate existence. The survivor acquires all the assets as well as liabilities of the merged company or companies. Generally, the surviving company is the buyer, which retains its identity, and the extinguished company is the seller. Merger is also defined as amalgamation. Merger is the fusion of two or more existing companies. All assets, liabilities and the stock of one company stand transferred to transferee company in consideration of payment in the form of !quity shares in the transferee company, "ebentures in the transferee company, #ash, or A mix of the above modes.

Acquisition: Acquisition in general sense is acquiring the ownership in the property. $n the context of business combinations, an acquisition is the purchase by one company of a controlling interest in the share capital of another existing company.

Methods of Acquisition An acquisition may be affected by %a& agreement with the persons holding ma'ority interest in the company management like members of the board or ma'or shareholders commanding ma'ority of voting power( %b& purchase of shares in open market( %c& to make takeover offer to the general body of shareholders( %d& purchase of new shares by private treaty( %e& Acquisition of share capital through the following forms of considerations vi). means of cash, issuance of loan capital, or insurance of share capital. Takeover: A *takeover+ is acquisition and both the terms are used interchangeably. Takeover differs from merger in approach to business combinations i.e. the process of takeover, transaction involved in takeover, determination of share exchange or cash price and the fulfillment of goals of combination all are different in takeovers than in mergers. ,or example, process of takeover is unilateral and the offeror company decides about the maximum price. Time taken in completion of transaction is less in takeover than in mergers, top management of the offeree company being more co-operative. De-merger or corporate splits or division: "e-merger or split or divisions of a company are the synonymous terms signifying a movement in the company.
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What will it take to succeed? ,unds are an obvious requirement for would-be buyers. .aising them may not be a problem for multinationals able to tap resources at home, but for local companies, finance is likely to be the single biggest obstacle to an acquisition. ,inancial institution in some Asian markets are banned from leading for takeovers, and debt markets are small and illiquid, deterring investors who fear that they might not be able to sell their holdings at a later date. The credit squee)es and the depressed state of many Asian equity markets have only made an already difficult situation worse. ,unds apart, a successful Mergers / Acquisition growth strategy must be supported by three capabilities deep local networks, the abilities to manage uncertainty, and the skill to distinguish worthwhile targets. #ompanies that rush in without them are likely to be stumble. Assess target quality: To say that a company should be worth the price a buyer pays is to state the obvious. 0ut assessing companies in Asia can be fraught with problems, and several deals have gone badly wrong because buyers failed to dig deeply enough. The attraction of knockdown price tag may tempt companies to skip crucial checks. #oncealed high debt levels and deferred contingent liabilities have resulted in large deals destroying value. 0ut in other cases, where buyers have undertaken detailed due diligence, they have been able to negotiate prices as low as half of the initial figure. "ue diligence can be difficult because disclosure practices are poor and companies often lack the information buyer need. Moreover, most Asian conglomerates still do not present consolidated financial statements, leaving the possibilities that the sales and the profit figures might be bloated by transactions between affiliated companies. The financial records that are available are often unreliable, with different pro'ections made by different departments within the same company, and different pro'ections made for different audiences. 0anks and investors, naturally, are likely to be shown optimistic forecasts. Purpose of Mergers and Acquisition: The purpose for an offeror company for acquiring another company shall be reflected in the corporate ob'ectives. $t has to decide the specific ob'ectives to be achieved through acquisition. The basic purpose of merger or business combination is to achieve faster growth of the corporate business. ,aster growth may be had through product improvement and competitive position. 1ther possible purposes for acquisition are short listed below (1)Procurement of supplies: 2. To safeguard the source of supplies of raw materials or intermediary product( 3. To obtain economies of purchase in the form of discount, savings in transportation costs, overhead costs in buying department, etc.( 4. To share the benefits of suppliers economies by standardi)ing the materials. ( )!evamping production facilities: 2. To achieve economies of scale by amalgamating production facilities through more intensive utili)ation of plant and resources( 3. To standardi)e product specifications, improvement of quality of product, expanding 4. market and aiming at consumers satisfaction through strengthening after sale 5. services( 6. To obtain improved production technology and know-how from the offeree company 7. To reduce cost, improve quality and produce competitive products to retain and
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8. To improve market share. (") Market e#pansion and strategy: 2. To eliminate competition and protect existing market( 3. To obtain a new market outlets in possession of the offeree( 4. To obtain new product for diversification or substitution of existing products and to enhance the product range( 5. 9trengthening retain outlets and sale the goods to rationali)e distribution( 6. To reduce advertising cost and improve public image of the offeree company( 7. 9trategic control of patents and copyrights. ($) %inancial strengt&: 2. To improve liquidity and have direct access to cash resource( 3. To dispose of surplus and outdated assets for cash out of combined enterprise( 4. To enhance gearing capacity, borrow on better strength and the greater assets backing( 5. To avail tax benefits( 6. To improve !:9 %!arning per 9hare&. (') (eneral gains: 2. To improve its own image and attract superior managerial talents to manage its affairs( 3. To offer better satisfaction to consumers or users of the product. ()) *+n developmental plans: The purpose of acquisition is backed by the offeror company+s own developmental plans. A company thinks in terms of acquiring the other company only when it has arrived at its own development plan to expand its operation having examined its own internal strength where it might not have any problem of taxation, accounting, valuation, etc. but might feel resource constraints with limitations of funds and lack of skill managerial personnel+s. $t has to aim at suitable combination where it could have opportunities to supplement its funds by issuance of securities, secure additional financial facilities, eliminate competition and strengthen its market position. (,) -trategic purpose: The Acquirer #ompany view the merger to achieve strategic ob'ectives through alternative type of combinations which may be hori)ontal, vertical, product expansion, market extensional or other specified unrelated ob'ectives depending upon the corporate strategies. Thus, various types of combinations distinct with each other in nature are adopted to pursue this ob'ective like vertical or hori)ontal combination. (.) /orporate friendliness: Although it is rare but it is true that business houses exhibit degrees of cooperative spirit despite competitiveness in providing rescues to each other from hostile takeovers and cultivate situations of collaborations sharing goodwill of each other to achieve performance heights through business combinations. The combining corporates aim at circular combinations by pursuing this ob'ective. (0) Desired level of integration: Mergers and acquisition are pursued to obtain the desired level of integration between the two combining business houses. 9uch integration could be operational or financial. This gives birth to conglomerate combinations. The purpose and the requirements of the offeror company go a long way in selecting a suitable partner for merger or acquisition in business combinations. Types of Mergers: Merger or acquisition depends upon the purpose of the offeror company it wants to achieve. 0ased on the offerors+ ob'ectives profile, combinations could be vertical, hori)ontal, circular and conglomeratic as precisely described below with reference to the purpose in view of the offeror company. (A) 1ertical com2ination:
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A company would like to takeover another company or seek its merger with that company to expand espousing backward integration to assimilate the resources of supply and forward integration towards market outlets. The acquiring company through merger of another unit attempts on reduction of inventories of raw material and finished goods, implements its production plans as per the ob'ectives and economi)es on working capital investments. $n other words, in vertical combinations, the merging undertaking would be either a supplier or a buyer using its product as intermediary material for final production. The following main benefits accrue from the vertical combination to the acquirer company i.e. %2& it gains a strong position because of imperfect market of the intermediary products, scarcity of resources and purchased products( %3& has control over products specifications. (3) 4ori5ontal com2ination: $t is a merger of two competing firms which are at the same stage of industrial process. The acquiring firm belongs to the same industry as the target company. The mail purpose of such mergers is to obtain economies of scale in production by eliminating duplication of facilities and the operations and broadening the product line, reduction in investment in working capital, elimination in competition concentration in product, reduction in advertising costs, increase in market segments and exercise better control on market. (/) /ircular com2ination: #ompanies producing distinct products seek amalgamation to share common distribution and research facilities to obtain economies by elimination of cost on duplication and promoting market enlargement. The acquiring company obtains benefits in the form of economies of resource sharing and diversification. (D) /onglomerate com2ination: $t is amalgamation of two companies engaged in unrelated industries like "#M and Modi $ndustries. The basic purpose of such amalgamations remains utili)ation of financial resources and enlarges debt capacity through reorgani)ing their financial structure so as to service the shareholders by increased leveraging and !:9, lowering average cost of capital and thereby raising present worth of the outstanding shares. Merger enhances the overall stability of the acquirer company and creates balance in the company+s total portfolio of diverse products and production processes. Advantages of Mergers and Takeovers: Mergers and takeovers are permanent form of combinations which vest in management complete control and provide centrali)ed administration which are not available in combinations of holding company and its partly owned subsidiary. 9hareholders in the selling company gain from the merger and takeovers as the premium offered to induce acceptance of the merger or takeover offers much more price than the book value of shares. 9hareholders in the buying company gain in the long run with the growth of the company not only due to synergy but also due to ;boots trapping earnings<. Motivations for mergers and acquisitions Mergers and acquisitions are caused with the support of shareholders, manager+s ad promoters of the combing companies. The factors, which motivate the shareholders and managers to lend support to these combinations and the resultant consequences they have to bear, are briefly noted below based on the research work by various scholars globally. (1) %rom t&e standpoint of s&are&olders
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$nvestment made by shareholders in the companies sub'ect to merger should enhance in value. The sale of shares from one company+s shareholders to another and holding investment in shares should give rise to greater values i.e. the opportunity gains in alternative investments. 9hareholders may gain from merger in different ways vi). from the gains and achievements of the company i.e. through %a& reali)ation of monopoly profits( %b& economies of scales( %c& diversification of product line( %d& acquisition of human assets and other resources not available otherwise( %e& 0etter investment opportunity in combinations. 1ne or more features would generally be available in each merger where shareholders may have attraction and favour merger. ( ) %rom t&e standpoint of managers Managers are concerned with improving operations of the company, managing the affairs of the company effectively for all round gains and growth of the company which will provide them better deals in raising their status, perks and fringe benefits. Mergers where all these things are the guaranteed outcome get support from the managers. At the same time, where managers have fear of displacement at the hands of new management in amalgamated company and also resultant depreciation from the merger then support from them becomes difficult. (") Promoter6s gains Mergers do offer to company promoters the advantage of increasing the si)e of their company and the financial structure and strength. They can convert a closely held and private limited company into a public company without contributing much wealth and without losing control. ($) 3enefits to general pu2lic $mpact of mergers on general public could be viewed as aspect of benefits and costs to %a& #onsumer of the product or services( %b& =orkers of the companies under combination( %c& General public affected in general having not been user or consumer or the worker in the companies under merger plan. /onsideration for Merger and Takeover: Mergers and takeovers are two different approaches to business combinations. Mergers are pursued under the #ompanies Act, 2>67 vide sections 4>2?4>5 thereof or may be envisaged under the provisions of $ncome-tax Act, 2>72 or arranged through 0$,. under the 9ick $ndustrial #ompanies Act, 2>@6 whereas, takeovers fall solely under the regulatory framework of the 9!0$ .egulations, 2>>8. Minority shareholders rights 9!0$ regulations do not provide insight in the event of minority shareholders not agreeing to the takeover offer. Aowever section 4>6 of the #ompanies Act, 2>67 provides for the acquisition of shares of the shareholders. According to section 4>6 of the #ompanies Act, if the offerer has acquired at least >BC in value of those shares may give notice to the non-accepting shareholders of the intention of buying their shares. The >BC acceptance level shall not include the share held by the offerer or it+s associates. The procedure laid down in this section is briefly noted below. 2. $n order to buy the shares of non-accepting shareholders the offerer must have reached the >BC acceptance level within 5 months of the date of the offer, and notice must have been served on those shareholders within 3 months of reaching the >BC level.

3. The notice to the non-accepting shareholders must be in a prescribed manner. A copy of a notice and a statutory declaration by the offerer %or, if the offerer is a company, by a director& in the prescribed form confirming that the conditions for giving the notice have been satisfied must be sent to the target. 4. 1nce the notice has been given, the offerer is entitled and bound to acquire the outstanding shares on the terms of the offer. 5. $f the terms of the offer give the shareholders a choice of consideration, the notice must give particulars of options available and inform the shareholders that he has six weeks from the date of the notice to indicate his choice of consideration in writing. 6. At the end of the six weeks from the date of the notice to the non-accepting shareholders the offerer must immediately send a copy of notice to the target and pay or transfer to the target the consideration for all the shares to which the notice relates. 9tock transfer forms executed on behalf of the nonaccepting shareholders by a person appointed by the offerer must also be sent. 1nce the company has received stock transfer forms it must register the offerer as the holder of the shares. 7. The consideration money, which is received by the target, should be held on trust for the person entitled to shares in respect of which the sum was received. 8. Alternatively, if the offerer does not wish to buy the non-accepting shareholder+s shares, it must still within one month of company reaching the >BC acceptance level give such shareholders notice in the prescribed manner of the rights that are exercisable by them to require the offerer to acquire their shares. The notice must state that the offer is still open for acceptance and specify a date after which the right may not be exercised, which may not be less than 4 months from the end of the time within which the offer can be accepted. $f the offerer fails to send such notice it %and it+s officers who are in default& are liable to a fine unless it or they took all reasonable steps to secure compliance. @. $f the shareholder exercises his rights to require the offerer to purchase his shares the offerer is entitled and bound to do so on the terms of the offer or on such other terms as may be agreed. $f a choice of consideration was originally offered, the shareholder may indicate his choice when requiring the offerer to acquire his shares. The notice given to shareholder will specify the choice of consideration and which consideration should apply in default of an election. >. 1n application made by an happy shareholder within six weeks from the date on which the original notice was given, the court may make an order preventing the offerer from acquiring the shares or an order specifying terms of acquisition differing from those of the offer or make an order setting out the terms on which the shares must be acquired. $n certain circumstances, where the takeover offer has not been accepted by the required >BC in value of the share to which offer relates the court may, on application of the offerer, make an order authori)ing it to give notice under the #ompanies Act, 2>@6, section 53>. $t will do this if it is satisfied that a. The offerer has after reasonable enquiry been unable to trace one or more shareholders to whom the offer relates( b. The shares which the offerer has acquired or contracted to acquire by virtue of acceptance of the offerer, together with the shares held by untraceable shareholders, amount to not less than >BC in value of the shares sub'ect to the offer( and c. The consideration offered is fair and reasonable.

The court will not make such an order unless it considers that it is 'ust and equitable to do so, having regarded in particular, to the number of shareholder who has been traced who did accept the offer. Alternative modes of acquisition The terms used in business combinations carry generally synonymous connotations and can be used interchangeably. All the different terms carry one single meaning of ;merger< but each term cannot be given equal treatment in the discussion because law has created a dividing line between *take-over+ and acquisitions by way of merger, amalgamation or reconstruction. :articularly the takeover .egulations for substantial acquisition of shares and takeovers known as 9!0$ %9ubstantial Acquisition of 9hares and Takeovers& .egulations, 2>>8 vide section 4 excludes any attempt of merger done by way of any one or more of the following modes %a& 0y allotment in pursuant of an application made by the shareholders for right issue and under a public issue( %b& :referential allotment made in pursuance of a resolution passed under section @2%2A& of the #ompanies Act, 2>67( %c& Allotment to the underwriters pursuant to underwriters agreements( %d& $nter-se-transfer of shares amongst group, companies, relatives, $ndian promoters and ,oreign collaborators who are shareholders?promoters( %e& Acquisition of shares in the ordinary course of business, by registered stock brokers, public financial institutions and banks on own account or as pledges( %f& Acquisition of shares by way of transmission on succession or inheritance( %g& Acquisition of shares by government companies and statutory corporations( %h& Transfer of shares from state level financial institutions to co-promoters in pursuance to agreements between them( %i& Acquisition of shares in pursuance to rehabilitation schemes under 9ick $ndustrial #ompanies %9pecial :rovisions& Act, 2>@6 or schemes of arrangements, mergers, amalgamation, "e-merger, etc. under the #ompanies Act, 2>67 or any other law or regulation, $ndian or ,oreign( %'& Acquisition of shares of company whose shares are not listed on any stock exchange. Aowever, this exemption in not available if the said acquisition results into control of a listed company( %k& 9uch other cases as may be exempted from the applicability of #hapter $$$ of 9!0$ regulations by 9!0$. The basic logic behind substantial disclosure of takeover of a company through acquisition of shares is that the common investors and shareholders should be made aware of the larger financial stake in the company of the person who is acquiring such company+s shares. The main ob'ective of these .egulations is to provide greater transparency in the acquisition of shares and the takeovers of companies through a system of disclosure of information. Escrow account To ensure that the acquirer shall pay the shareholders the agreed amount in redemption of his promise to acquire their shares, it is a mandatory requirement to open escrow account and deposit therein the required amount, which will serve as security for performance of obligation. The !scrow amount shall be calculated as per the manner laid down in regulation 3@%3&. Accordingly ,or offers which are sub'ect to a minimum level of acceptance, and the acquirer does want to acquire a minimum of 3BC, then 6BC of the consideration payable under the public offer in cash shall be deposited in the !scrow account.
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Payment of consideration #onsideration may be payable in cash or by exchange of securities. =here it is payable in cash the acquirer is required to pay the amount of consideration within 32 days from the date of closure of the offer. ,or this purpose he is required to open special account with the bankers to an issue %registered with 9!0$& and deposit therein >BC of the amount lying in the !scrow Account, if any. Ae should make the entire amount due and payable to shareholders as consideration. Ae can transfer the funds from !scrow account for such payment. =here the consideration is payable in exchange of securities, the acquirer shall ensure that securities are actually issued and dispatched to shareholders in terms of regulation 3> of 9!0$ Takeover .egulations. (a) /onsumers The economic gains reali)ed from mergers are passed on to consumers in the form of lower prices and better quality of the product which directly raise their standard of living and quality of life. The balance of benefits in favour of consumers will depend upon the fact whether or not the mergers increase or decrease competitive economic and productive activity which directly affects the degree of welfare of the consumers through changes in price level, quality of products, after sales service, etc. (2) 7orkers community The merger or acquisition of a company by a conglomerate or other acquiring company may have the effect on both the sides of increasing the welfare in the form of purchasing power and other miseries of life. Two sides of the impact as discussed by the researchers and academicians are firstly8 mergers with cash payment to shareholders provide opportunities for them to invest this money in other companies which will generate further employment and growth to uplift of the economy in general. -econdly8 any restrictions placed on such mergers will decrease the growth and investment activity with corresponding decrease in employment. 0oth workers and communities will suffer on lessening 'ob opportunities, preventing the distribution of benefits resulting from diversification of production activity. (c) (eneral pu2lic Mergers result into centrali)ed concentration of power. !conomic power is to be understood as the ability to control prices and industries output as monopolists. 9uch monopolists affect social and political environment to tilt everything in their favour to maintain their power ad expand their business empire. These advances result into economic exploitation. 0ut in a free economy a monopolist does not stay for a longer period as other companies enter into the field to reap the benefits of higher prices set in by the monopolist. This enforces competition in the market as consumers are free to substitute the alternative products. Therefore, it is difficult to generali)e that mergers affect the welfare of general public adversely or favorably. !very merger of two or more companies has to be viewed from different angles in the business practices which protects the interest of the shareholders in the merging company and also serves the national purpose to add to the welfare of the employees, consumers and does not create hindrance in administration of the Government polices. !everse Merger: Generally, a company with the track record should have a less profit earning or loss making but viable company amalgamated with it to have benefits of economies of scale of production and marketing network, etc. As a consequence of this merger the profit earning company survives and the loss making company extinguishes its existence. 0ut in many cases, the sick company+s survival becomes more important for many strategic reasons and to conserve community interest. The law provides encouragement through tax relief for the companies that are profitable but get merged with the loss making companies. $nfact this type of merger is not a normal or a routine merger. $t is, therefore, called as a !everse Merger9 Procedure for Takeover and Acquisition:
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Public announcement: To make a public announcement an acquirer shall follow the following procedure 19 Appointment of merc&ant 2anker: The acquirer shall appoint a merchant banker registered as category D $ with 9!0$ to advise him on the acquisition and to make a public announcement of offer on his behalf. 9 :se of media for announcement: :ublic announcement shall be made at least in one national !nglish daily one Aindi daily and one regional language daily newspaper of that place where the shares of that company are listed and traded. "9 Timings of announcement: :ublic announcement should be made within four days of finali)ation of negotiations or entering into any agreement or memorandum of understanding to acquire the shares or the voting rights. $9 /ontents of announcement: :ublic announcement of offer is mandatory as required under the 9!0$ .egulations. Therefore, it is required that it should be prepared showing therein the following information %2& :aid up share capital of the target company, the number of fully paid up and partially paid up shares. %3& Total number and percentage of shares proposed to be acquired from public sub'ect to minimum as specified in the sub-regulation %2& of .egulation 32 that is a& The public offer of minimum 3BC of voting capital of the company to the shareholders( b& The public offer by a raider shall not be less than 2BC but more than 62C of shares of voting rights. Additional shares can be had E 3C of voting rights in any year. %4& The minimum offer price for each fully paid up or partly paid up share( %5& Mode of payment of consideration( %6& The identity of the acquirer and in case the acquirer is a company, the identity of the promoters and, or the persons having control over such company and the group, if any, to which the company belong( %7& The existing holding, if any, of the acquirer in the shares of the target company, including holding of persons acting in concert with him( %8& 9alient features of the agreement, if any, such as the date, the name of the seller, the price at which the shares are being acquired, the manner of payment of the consideration and the number and percentage of shares in respect of which the acquirer has entered into the agreement to acquirer the shares or the consideration, monetary or otherwise, for the acquisition of control over the target company, as the case may be( %@& The highest and the average paid by the acquirer or persons acting in concert with him for acquisition, if any, of shares of the target company made by him during the twelve month period prior to the date of the public announcement( %>& 1b'ects and purpose of the acquisition of the shares and the future plans of the acquirer for the target company, including disclosers whether the acquirer proposes to dispose of or otherwise encumber any assets of the target company :rovided that where the future plans are set out, the public announcement shall also set out how the acquirers propose to implement such future plans( %2B& The *specified date+ as mentioned in regulation 2>( %22& The date by which individual letters of offer would be posted to each of the shareholders( %23& The date of opening and closure of the offer and the manner in which and the date by which the acceptance or re'ection of the offer would be communicated to the share holders( %24& The date by which the payment of consideration would be made for the shares in respect of which the offer has been accepted(
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"isclosure to the effect that firm arrangement for financial resources required to implement the offer is already in place, including the details regarding the sources of the funds whether domestic i.e. from banks, financial institutions, or otherwise or foreign i.e. from Fonresident $ndians or otherwise( %26& :rovision for acceptance of the offer by person who own the shares but are not the registered holders of such shares( %27& 9tatutory approvals required to obtained for the purpose of acquiring the shares under the #ompanies Act, 2>67, the Monopolies and .estrictive Trade :ractices Act, 2>84, and?or any other applicable laws( %28& Approvals of banks or financial institutions required, if any( %2@& =hether the offer is sub'ect to a minimum level of acceptances from the shareholders( and %2>& 9uch other information as is essential fort the shareholders to make an informed design in regard to the offer. '9 *ffer Price The acquirer is required to ensure that all the relevant parameters are taken into consideration while determining the offer price and that 'ustification for the same is disclosed in the letter of offer. )9 Disclosure The offer should disclose the detailed terms of the offer, identity of the offerer, details of the offerer+s existing holdings in the 1fferee #ompany etc and information should be made available to all the shareholders. 8. 1ffer "ocument The offer document should contain the offers financial information, its intention to continue the offeree company+s business and to make ma'or change and long term commercial 'ustification for the offer. ;egal Procedures: Permission of merger: Two or more companies can amalgamate only when amalgamation is permitted under their memorandum of association. Also, the acquiring company should have the permission in its ob'ect clause to carry on the business of the acquired company. $n the absence of these provisions in the memorandum of association, it is necessary to seek the permission of shareholders, board of directors and the company law board before affecting the merger. <nformation to t&e stock e#c&ange: The acquiring and the acquired companies should inform the stock exchanges where they are listed about the merger. Approval of 2oard of director: The boards of the directors of the individual companies should approve the draft proposal for amalgamation and authori)e the managements of companies to further pursue the proposal. Application in t&e &ig& court: An application for approving the draft amalgamation proposal duly approved by the boards of directors of the individual companies should be made to the high court. The high court would convene a meeting of the shareholders and creditors to approve the amalgamation proposal. -&are&olders and creditors meetings: The individual companies should hold separate meeting of their shareholders and creditors for approving the amalgamation scheme. -anction 2y t&e &ig& court: After the approval of shareholders and creditors on the petitions of the companies, the high court will pass order sanctioning the amalgamation scheme after it is satisfied that the scheme is fair and reasonable. %iling of court order: #ertified true copies of court orders will be filed with the registrar of companies. Transfer of assets and lia2ilities: The assets and liabilities of the acquired company will be transferred to the acquiring company in accordance with the approved scheme, with effect from the specified date. 1alue 3ased Management and /orporate (overnance /orporate (overnance: #orporate governance is the set of processes, customs, policies, laws and institutions affecting the way in which a corporation is directed, administered or controlled. #orporte governance also
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includes the relationships among the many players involved and the goals for which the corporation is governed. Definition: /orporate governance is a field in economics that investigates how to secure?motivate efficient management of corporations by the use of incentive mechanisms, such as contracts, organi)ational designs and legislation. This is often limited to the question of improving financial performance, for example, how the corporate owners can secure?motivate that the corporate managers will deliver a competitive rate of return 4istory of corporate governance: $n 2>th century, state corporation law enhanced the rights of corporation boards to govern without unanimous consent of shareholders in exchange of statutory benefits like appraisal rights, in order to make coporate governance more efficient. 9ince that time, and because most large publicly traded corporations in america are incorporated under corporate administration friendly delaware law, and because americas wealth has been increasingly securiti)ed into various corporte entities and institutions, the rights of individual owners and sharehoders have become increasingly derivative and dissipated. The concerns of share holders over administration, pay and stock losses periodically have led to more frequent calls for corporte governance reforms. $n the 3Bth century immediately after wall street crash of 2>3>, legal scholars pondred on changing role of the modern corporation in society. American expansion after world war $$ through the emergence of multinational corporations saw the establishment of managerial class. Many large corporations have dominent control over business affairs without sufficient accoutability or monitoring by their board of directors. #urrent preoccupation of corporate governance can be pinpointed at two events The !ast Asian crisis of 2>>8 saw the economies of Thailand, $ndonesia, 9outh Gorea, Malaysia and The philippines severly affected by the exit of foreign capital after property assets collapsed. The lack of corporte governance mechanisms in those countires highlited the weakness of institutions in their economies. The second event was the american corporate crisis of which saw the collapse of two big corporations !nron and =orld #om. :rinciples of corporate governance ? 1!#" principles of corporate governance ? !lements of corporate governance Among the various attempts to evaluate best global standards, the principles evolved by organisation for !conomic #ooperation and "evelopment %1!#"& released in 2>>> have been accepted as an international benchmark. The 1!#" principles protect the interests of share holders as well as stake holders like employees, creditors, suppliers, customers and environment. 19 T&e rig&ts of s&are&olders: .ights of shareholder mentioned in the 1!#" report cover the registration of right to ownership with the company, conveyance or transfer of shares, obtain relevant information from the company on a timely and regular basis, participate and vote in general share holders meetings, elect members of the board and share in the profits of the company. 9 T&e equita2le treatment of s&are&olders: All shareholders should be treated equitably and the law should not make any distinction among different shareholders holding a given class or types of shares. Any changes in voting rights of common shareholders can be done with the consent of those shareholders. "9 T&e role stake&olders: The rights of stakeholders as established by law should be recogni)ed ans active cooperation between corporations and stakeholders in creating wealth, 'obs and sustainabiity of functionally sound enterpreses should be encouraged. =hile the share holders re the true oweners, the functioning of a company is affected by several other economic players in the society. There is a significant synergetic relationship between the company and its employees. $9 Disclosure and transperancy: 1rganisations should clarify and make publicly known the roles and responsibilities of board and management to provide shareholders with a level of accountability. They should also implement procedures to independenly verify and safeguard the integrity of the companys financial
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reporting. "isclosure of material matters concerning the organisation should be timely and balanced to ensure that all investors have access to clear, factual information. '9 !oles and responsi2ilities of 2oard: The board needs a range of skills and understanding to be able to deal with various business issues and have the ability to review and challenge management performance. $t nees to be of sufficient si)e and have appropriate level of commitment to fulfil its responsibilites and duties. )9 <ntegrity and et&ical 2e&aviour: 1rganisations should develop a code of conduct for their directors and executives that promotes ethical and responsible decision making. $nternal corporate governance controls Monitoring by board of directors .emuneration "isclosure !xternal corporate governance controls Government regulations Media pressure Takeovers Managerial labour market Telephone tapping /orporate governance models: Anglo american model: There are many different models of corporate governance around the world. These differ according to the variety of capitalism in which they are embeded. The liveral model that is common in anglo american countries tends to give priority to the interests of shareholders. The coordinated model that one finds in continental europe and 'apan also recogni)es the interests of workers, managers, suppliers, customers and the community. The liveral model of corporate govenance encourages radical innovation and cost competition, whereas the coordinated model of corporte governance facilitates incremental innovation and quality competition. $n the united states, a corporation is governed by a board of directors, which has the power to choose chief executive officer. The #!1 has broad power to manage the corporation on a daily basis, but needs to get approval for certain ma'or actions such as raising money, acquiring another company, and other expensive pro'ects. 1ther duties of the board may include policy setting, decision making, monitiring managements performance or corporate control. The HG has pioneered a flexible model of regulation of corporate governance known as ;to comply or explain< code of governance. This is a principle based code that lists a do)en of recommended practices, such as the seperation of #!1 and chairman of the board, the introduction of a time limit for #!1+s contracts, the introduction of a minimum number of non executive directors, independent directors, the formation and composition of remuneration, audit and nomination committees. Iisted companies in the HG have to apply those principles, if they choose not to apply those principles they have to explain in their annual reports why they dicided not to do so. The monitoring of these explanations is left to shareholders themselves. =on-anglo american model: $n !ast asian counties family owned companies dominate corporate assests. $n countries such as :akistan, $ndonesia and the :hilippines, the top 26 families controlled over 6BC of publicly owned corportion through a system of family cross-holdings, thus dominating capital markets. ,amily companies also dominate the Iatin model of corporate governance that is companies in Mexico, $taly, 9pain, ,rance, 0ra)il, Argentina and tother countries in south america. /orporate (overnance in <ndia: $n $ndia, the #onfederation of the $ndian $ndustry %#$$& took the lead in framing a desirable code of #orporate Governance in April 2>>@. This was followed by the recommendations of Gumaramangalam 0irla #ommittee
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in #orporate Governance appointed by the 9ecurities and !xchange 0oard of $ndia %9!0$& the recommendations were accepted by 9!0$ in "ecember 2>>> and are now enshrined in #lause 5> of the Iisting Agreement of every $ndian stock exchange. #orporate Governance can be defined as a systematic process by which companies are directed and controlled to enhance their wealth generating capacity. 9ince large corporate employs a vast quantum of societal resources, the governance process should ensure that these resources are utili)ed in a manner that meets stakeholders aspirations and societal expectations. Thus, corporate governance structure, system and process are based on two core principles 2. Management must have excutive freedom to drive the enterprese forward without undue restraints. 3. This freedom of management should be exercised within a framework of effective accountability. /<< /ode of Desira2le /orporate (overnance: 2. As the key to good corporate governance lies with effective functioning of the board of directors, the full board should meet at intervals of two months and atleast 7 times a year. 3. The non executive directors should at least be 4BC of the board. 4. Fo individual should be director on the boards for more than 2B companies at any given time. 5. Fon executive directors must be active, have defined responsibiity and be conversant with profit and loss account, balance sheet, cash flow statement, financial ratios and have some knowledge of company law. 6. Fon executive directors should be paid commission and offered stock option for their professional inputs besides their sitting fees. 7. "irectors who have not been present for at least 6BC of the board meetings should not be reappointed. 8. The board should be informed of the operating plans and budgets, long term plans, quarterly divisional results and internal audit reports. @. "etails of defaults, payments for intangibles and foreign exchange exposures should be reported to access to all financial information. >. $ncase, multiple credit ratings are obtained, all the ratings should be disclosed with comparisions explaining their significance. 2B. Ma'or $ndian stock exchanges should gradually insist upon compliance certificate signed by #!1 and #,1 clearly stating that accounting policies and standards have been followed. 22. The government must allow for greater funding to the corporate sector against the security of shares and other papers. 23. #ompanies that default on fixed deposits should not be permitted to accept further deposits, make intercorporate loans or investments and declare dividens until the default is made good. !ecommendations of 3irla /ommittee: 2. 0oard of "irectors There should be a combination of executive and non executive directors. The board should consist of not less than 4BC of non executive directors. 3. Audit #ommittee a. The board should appoint a qualified and independent audit committee. The committee should have minimum three members all being non executive directors with ma'ority being independent and at least one director having financial and accounting knowledge. b. The chairman of committee should be an independent director and should be present at the companies annual general meeting. c. The chairman should invite finance director, head of internal audit and representatives of external auditor for committee meetings. The company secretary should act as secretary of the committee. 4. :owers of the audit committee The audit committee should look into the rasons for substantial default to depositors, creditors, debenture holders and shareholders.
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5. ,requency of the meetings and quorum The committee should meet at least thrice a year, once before finali)ation of annual accounts and once compulsority every 7 months. Juorum should be either two members or 2?4rd of audit committee, which ever is higher. 6. .emuneration of non executive directors a. The board of directors should decide remuneration of non executive directors. b. All elements of the package inclusive of salary benefits, bonuses, stock options, etc. should be disclosed. 7. #ommittee membership of directos "irectors should not be members of more than ten committees and chairman of not more than 6 committees. "irectors need to disclose about their membership with other committees, to the company. 8. 9hareholders committee This committee would be framed to attend to shareholders grievances and board of directors should delegete power of checking share transfer to either officer or committee or to registrar and share transfer agent. Iist of items to be included in the report on #orporate Governance 2. A brief statement on companies philosophy on code of governance. 3. 0oard of "irectors a. #omposition and category of directors b. Attendance of each director at the 0oard of "irectors meetings and the last Annual General Meeting c. Fumber of other 0oard of "irectors or 0oard #ommittees in which he?she is a member. d. Fumber of 0oard of "irectors meetings held, dates on which held. 4. Audit #ommittee a. 0rief description of terms of reference b. #omposition, name of members and chairperson c. Meetings and attendance during the year. 5. .emuneration #ommittee a. 0rief description of terms of reference b. #omposition, name of members and chairperson c. Attendance during the year d. .emuneration policy e. "etails of remuneration to all the directors, as per format in main report. 6. 9hareholders #ommittee a. Fame of non executive director heading the committee b. Fame and designation of compliance officer c. Fumber of shareholders complaints received so far. d. Fumber not solved to the satisfaction of shareholders. e. Fumber of pending complaints. 7. General 0ody Meetings a. Iocation and time, where last three AGM+s held b. =hether any special resolution passed last year through postal ballot c. :erson who conducted the postal ballot exercise d. :rocedure of postal ballot 8. "isclosures a. "isclosures on materially significan related party transactions that may have potential conflict with the interests of company at large. b. "isclosures of accounting treatment with explanation c. "etails of non compliance by the company, penalties imposed on company by stock exchange or 9!0$ or any statutory authority on any matter relating to capital markets. @. Means of communication
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a. Aalf yearly report sent to each household of shareholder b. Juarterly results c. Fewspapers wherein results normally published. d. Any website, where displayed e. =hether it also displays official news releases f. The presentations made to institutional investors or to the analysts >. General shareholder information a. AGM date, time, venue b. ,inancial calander c. "ate of book closure d. "ividend payment date e. Iisting on stock exchanges f. 9tock code g. Market price data 2B. :erformance in comparision to broad based indices such as 09! 9ensex, #.$9$I, etc. a. .egistrar and Transfer Agents b. 9hare transfer system c. "istribution of shareholding d. "emateriali)ation of shares and liquidity e. :lant locations f. Address for correspondence

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