CHAPTER I

INTRODUCTION
Corporate governance is the new buzzword or rather a concept in corporate management that
is yet to catch up in India but that has the potential to significantly improve corporate
performance. In the case of corporate governance shareholders is considered as god. Corporate
governance has assumed significance in India because it has been given importance by
institutions like, World Bank.
The focus on improving corporate governance and enhancing shareholder wealth is relatively
new in India. Earlier, the managements were least concerned with how the shareholders were
benefited from the companys performance. The role of company was to pay dividends and hold
annual general meeting. There was minimum communication between company management
and shareholders. Investors had to depend on news reports to get information about their
companies. But all these have changed now.
Corporate governance has succeeded in attracting a good deal of public interest because of its
apparent importance for the economic health of corporations and society in general. However,
the concept of corporate governance is poorly defined because it potentially covers a large
number of distinct economic phenomenon. As a result different people have come up with
different definitions that basically reflect their special interest in the field. It is hard to see that
this 'disorder' will be any different in the future so the best way to define the concept is perhaps
to list a few of the different definitions rather than just mentioning one definition.
Corporate Governance is the system, set of processes, customs, policies, and laws by which
business corporations are directed and controlled. The corporate governance structure specifies
the distribution of rights and responsibilities among different participants in the corporation, such
as, the board of directors management, shareholders and other stakeholders (include employees,
suppliers, customers, banks and other lenders, regulators, the environment and the community at
large) and spells out the rules and procedures for making decisions on corporate affairs. By doing
this, it also provides the structure through which the company objectives are set and the means of
attaining those objectives and monitoring performance.
1

Corporate Governance issues are receiving greater attention in both developed and developing
countries as a result of the increasing recognition that a firm's corporate governance affects both
its economic performance and its ability to access long-term, low-cost investment capital.
Numerous high-profile cases of corporate governance failure have focused the minds of
governments, companies and the general public on this issue.
Moreover, the whole issue of corporate governance became a matter of concern especially
because of major shifts in public opinion and societal change on an international scale, together
with the strategic requirements of newly emergent forms of business structure, new technologies,
globalization and new forms of competition and particularly the investment by the foreign
financial institutions in the emerging markets. In other words, when investments take place
across national borders, the investors want to be sure that not only is their capital handled
effectively and adds to the creation of wealth, but the business decisions are also taken in a
manner which is not illegal or involving moral hazard.
Corporate governance therefore calls for four factors:
a) To build up an environment of trust and confidence amongst those having competing and
conflicting interest
b) Transparency in decision-making
c) Accountability which follows from transparency because responsibilities could be fixed easily
for actions taken or not taken, and
d) The accountability is for the safeguarding the interests of the stakeholders and the investors in
the organization.
Thus, Corporate Governance is a set of rules stipulated for according due weight-age to foster
ethical behavior which would help in enhancing the reputation. Thus the code of Governance is
as applicable to individuals; the same is also applicable to Corporate.

Definition Of 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.
In A Board Culture of Corporate Governance business author Gabrielle O'Donovan defines
corporate governance as 'an internal system encompassing policies, processes and people, which
serves the needs of shareholders and other stakeholders, by directing and controlling
management activities with good business savvy, objectivity and integrity. Sound corporate
governance is reliant on external marketplace commitment and legislation, plus a healthy board
culture which safeguards policies and processes'.
O'Donovan goes on to say that 'the perceived quality of a company's corporate governance can
influence its share price as well as the cost of raising capital. Quality is determined by the
financial markets, legislation and other external market forces plus the international
organizational environment; how policies and processes are implemented and how people are
led. External forces are, to a large extent, outside the circle of control of any board. The internal
environment is quite a different matter, and offers companies the opportunity to differentiate
from competitors through their board culture. To date, too much of corporate governance debate
has centered on legislative policy, to deter fraudulent activities and transparency policy which
misleads executives to treat the symptoms and not the cause.
Report of SEBI committee (India) on Corporate Governance defines corporate governance as the
acceptance by management of the inalienable rights of shareholders as the true owners of the
corporation and of their own role as trustees on behalf of the shareholders. It is about
commitment to values, conduct and about making a distinction between personal & corporate
3

funds in the management of a company. The definition is drawn from the Gandhian principle of
trusteeship and the Directive Principles of the Indian Constitution. Corporate Governance is
viewed as ethics and a moral duty.
History
In the 19th century, state corporation lawless 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 20th century in the immediate aftermath of the Wall Street Crash of 1929 legal scholars
such as Adolf Augustus Berle, Edwin Dodd, and Gardiner C. Means pondered on the changing
role of the modern corporation in society. Berle and Means' monograph "The Modern
Corporation and Private Property" (1932, Macmillan) continues to have a profound influence on
the conception of corporate governance in scholarly debates today.
From the Chicago school of economics, Ronald Coase's "Nature of the Firm" (1937) introduced
the notion of transaction costs into the understanding of why firms are founded and how they
continue to behave. Fifty years later, Eugene Fama and Michael Jensen's "The Separation of
Ownership and Control" (1983, Journal of Law and Economics) firmly established agency theory
as a way of understanding corporate governance: the firm is seen as a series of contracts. Agency
theory's dominance was highlighted in a 1989 article by Kathleen Eisenhardt (Academy of
Management Review).
US expansion after World War II through the emergence of multinational corporations saw the
establishment of the managerial class. Accordingly, the following Harvard Business School
management professors published influential monographs studying their prominence: Myles
Mace (entrepreneurship), Alfred D. Chandler, Jr. (business history), Jay Lorsch (organizational
4

behavior) and Elizabeth MacIver (organizational behavior). According to Lorsch and MacIver
"many large corporations have dominant control over business affairs without sufficient
accountability or monitoring by their board of directors."
Since the late 1970s, corporate governance has been the subject of significant debate in the U.S.
and around the globe. Bold, broad efforts to reform corporate governance have been driven, in
part, by the needs and desires of shareowners to exercise their rights of corporate ownership and
to increase the value of their shares and, therefore, wealth. Over the past three decades, corporate
directors duties have expanded greatly beyond their traditional legal responsibility of duty of
loyalty to the corporation and its shareowners.
In the first half of the 1990s, the issue of corporate governance in the U.S. received considerable
press attention due to the wave of CEO dismissals (e.g.: IBM, Kodak, Honeywell) by their
boards. CALPERS led a wave of institutional shareholder activism (something only very rarely
seen before), as a way of ensuring that corporate value would not be destroyed by the now
traditionally cozy relationships between the CEO and the board of directors (e.g., by the
unrestrained issuance of stock options, not infrequently back dated).
In 1997, the East Asian Financial Crisis saw the economies of Thailand, Indonesia, South Korea,
Malaysia and The Philippines severely affected by the exit of foreign capital after property assets
collapsed. The lack of corporate governance mechanisms in these countries highlighted the
weaknesses of the institutions in their economies.

CHAPTER II

COMPANY PROFILE
INDIA INFOLINE LTD.
The India Infoline group, comprising the holding company, India Infoline Limited and its
wholly-owned subsidiaries, straddle the entire financial services space with offerings ranging
from Equity research, Equities and derivatives trading, Commodities trading, Portfolio
Management Services, Mutual Funds, Life Insurance, Fixed deposits, GoIe bonds and other
small savings instruments to loan products and Investment banking. India Infoline also owns and
manages the websites www.indiainfoline.com and www.5paisa.com

The company has a network of 758 business locations (branches and sub-brokers) spread across
346 cities and towns. It has more than 800,000 customers.
India Infoline Limited is listed on both the leading stock exchanges in India, viz. the Stock
Exchange, Mumbai (BSE) and the National Stock Exchange (NSE) and is also a member of both
the exchanges. It is engaged in the businesses of Equities broking, Wealth Advisory Services and
Portfolio Management Services. It offers broking services in the Cash and Derivatives segments
of the NSE as well as the Cash segment of the BSE. It is registered with NSDL as well as CDSL
as a depository participant, providing a one-stop solution for clients trading in the equities
market. It has recently launched its Investment banking and Institutional Broking business.

A SEBI authorized Portfolio Manager; it offers Portfolio Management Services to clients. These
services are offered to clients as different schemes, which are based on differing investment
strategies made to reflect the varied risk-return preferences of clients.

India Infoline Media and Research Services Limited.

The content services represent a strong support that drives the broking, commodities, mutual
fund and portfolio management services businesses. Revenue generation is through the sale of
content to financial and media houses, Indian as well as global.
It undertakes equities research which is acknowledged by none other than Forbes as 'Best of the
Web' and 'a must read for investors in Asia'. India Infoline's research is available not just over
the internet but also on international wire services like Bloomberg (Code: IILL), Thomson First
Call and Internet Securities where India Infoline is amongst the most read Indian brokers.

India Infoline Commodities Limited.

India Infoline Commodities Pvt Limited is engaged in the business of commodities broking. Our
experience in securities broking empowered us with the requisite skills and technologies to allow
us offer commodities broking as a contra-cyclical alternative to equities broking. We enjoy
memberships with the MCX and NCDEX, two leading Indian commodities exchanges, and
recently acquired membership of DGCX. We have a multi-channel delivery model, making it
among the select few to offer online as well as offline trading facilities.

India Infoline Marketing & Services

India Infoline Marketing and Services Limited is the holding company of India Infoline
Insurance Services Limited and India Infoline Insurance Brokers Limited.
(a) India Infoline Insurance Services Limited is a registered Corporate Agent with the Insurance
Regulatory and Development Authority (IRDA). It is the largest Corporate Agent for ICICI
Prudential Life Insurance Co Limited, which is India's largest private Life Insurance Company.
India Infoline was the first corporate agent to get licensed by IRDA in early 2001.

(b) India Infoline Insurance Brokers Limited India Infoline Insurance Brokers Limited is a newly
formed subsidiary which will carry out the business of Insurance broking. We have applied to
IRDA for the insurance broking license and the clearance for the same is awaited. Post the grant
of license, we propose to also commence the general insurance distribution business.

India Infoline Investment Services Limited

Consolidated shareholdings of all the subsidiary companies engaged in loans and financing
activities under one subsidiary. Recently, Orient Global, a Singapore-based investment institution
invested USD 76.7 million for a 22.5% stake in India Infoline Investment Services. This will
help focused expansion and capital raising in the said subsidiaries for various lending businesses
like loans against securities, SME financing, distribution of retail loan products, consumer
finance business and housing finance business. India Infoline Investment Services Private
Limited consists of the following step-down subsidiaries.
(a) India Infoline Distribution Company Limited (Distribution of Retail Loan Products)
(b) Money line Credit Limited (Consumer Finance)
(c) India Infoline Housing Finance Limited (Housing Finance)

IIFL (Asia) Pte Limited

IIFL (Asia) Pte Limited is wholly owned subsidiary which has been incorporated in Singapore to
pursue financial sector activities in other Asian markets. Further to obtaining the necessary
regulatory approvals, the company has been initially capitalized at 1 million Singapore dollars.

Products and Services

We are a one-stop financial services shop, most respected for quality of its advice, personalized
service and cutting-edge technology.
Equities
India Infoline provided the prospect of researched investing to its clients, which was hitherto
restricted only to the institutions. Research for the retail investor did not exist prior to India
Infoline. India Infoline leveraged technology to bring the convenience of trading to the investors
location of preference (residence or office) through computerized access. India Infoline made it
possible for clients to view transaction costs and ledger updates in real time.
PMS
Our Portfolio Management Service is a product wherein an equity investment portfolio is created
to suit the investment objectives of a client. We at India Infoline invest your resources into stocks
from different sectors, depending on your risk-return profile. This service is particularly
advisable for investors who cannot afford to give time or don't have that expertise for day-to-day
management of their equity portfolio.
Research
Sound investment decisions depend upon reliable fundamental data and stock selection
techniques. India Infoline Equity Research is proud of its reputation for, and we want you to find
the facts that you need. Equity investment professionals routinely use our research and models as
integral tools in their work.
Commodities
India Infolines extension into commodities trading reconciles its strategic intent to emerge as a
one-stop solutions financial intermediary. Its experience in securities broking has empowered it
with requisite skills and technologies. The Companys commodities business provides a contracyclical alternative to equities broking. The Company was among the first to offer the facility of
commodities trading in Indias young commodities market (the MCX commenced operations
only in 2003). Average monthly turnover on the commodity exchanges increased from Rs. 0.34
9

bn to Rs 20.02 bn. The commodities market has several products with different and noncorrelated cycles. On the whole, the business is fairly insulated against cyclical gyrations in the
business.
Mortgages
During the year under review, India Infoline acquired a 75% stake in Money tree Consultancy
Services to mark its foray into the business of mortgages and other loan products distribution.
The business is still in the investing phase and at the time of the acquisition was present only in
the cities of Mumbai and Pune. The Company brings on board expertise in the loans business
coupled with existing relationships across a number of principals in the mortgage and personal
loans businesses. India Infoline now has plans to roll the business out across its pan-Indian
network to provide it with a truly national scale in operations.
Invest Online
India Infoline has made investing in Mutual funds and primary market so effortless. All you have
to do is register with us and thats all. No paperwork no queues and No registration charges.
INVEST IN MF
India Infoline offers you a host of mutual fund choices under one roof, backed by in-depth
research and advice from research house and tools configured as investor friendly.
APPLY IN IPOs
You could also invest in Initial Public Offers (IPOs) online without going through the hassles of
filling ANY application form/ paperwork.
SMS
Stay connected to the market
The trader of today, you are constantly on the move. But how do you stay connected to the
market while on the move? Simple, subscribe to India Infoline's Stock Messaging Service and
get

Market

on

your

Mobile!
10

There are three products under SMS Service:

Market on the move.
Best of the lot.
VAS (Value Added Service

Insurance
An entry into this segment helped complete the clients product basket; concurrently, it graduated
the Company into a one-stop retail financial solutions provider. To ensure maximum reach to
customers across India, we have employed a multi pronged approach and reach out to customers
via our Network, Direct and Affiliate channels. Following the opening of the sector in 19992000, a number of private sector insurance service providers commenced operations aggressively
and

helped

grow

the

market.

The Companys entry into the insurance sector derisked the Company from a predominant
dependence on broking and equity-linked revenues. The annuity based income generated from
insurance intermediation result in solid core revenues across the tenure of the policy.
Wealth Management Service
Imagine a financial firm with the heart and soul of a two-person organization. A world-leading
wealth management company that sits down with you to understand your needs and goals. We
offer you a dedicated group for giving you the most personal attention at every level.
Newsletters
The Daily Market Strategy is your morning dose on the health of the markets. Five intra-day
ideas, unless the markets are really choppy coupled with a brief on the global markets and any
other cues, which could impact the market. Occasionally an investment idea from the research
team and a crisp round up of the previous day's top stories. That's not all. As a subscriber to the
11

Daily Market Strategy, you even get research reports of India Infoline research team on a priority
basis.
The India Infoline Weekly Newsletter is your flashback for the week gone by. A weekly outlook
coupled with the best of the web stories from India Infoline and links to important
Investment ideas, Leader Speak and features are delivered in your inbox every Friday evening.

Multi-channel delivery model:

The Company is among the few financial intermediaries in India to offer a complement of online
and offline broking. The Companys network of branches also allows customers to place orders
on phone or visit our branches for trading.
Integrated middle and back office:
The customer can trade on the BSE and NSE, in the cash as well as the derivatives segment all
through the available multiple options of Internet, phone or branch presence.

Portfolio Management Services

You get recessions. You have stock market declines. If you don't understand that's going to
happen, then you're not ready; you won't do well in the markets. No need to worry. We at India
Infoline would take care of all issues related to managing your hard earned money.
Our Portfolio Management Service is a product wherein an equity investment portfolio is created
to suit the investment objectives of a client. We at India Infoline invest your resources into stocks
from different sectors, depending on your risk-return profile. This service is particularly
advisable for investors who cannot afford to give time or don't have that expertise for day-to-day
management of their equity portfolio.
It is all about your money, being managed by the experts, while you continue with your routine
life. Isn't it simple and totally hassle free.
12

What's more, you can keep track of your dividends / bonus / rights issues with paperless
tracking. So you always know how fast your investment is growing. It basically means assigning
the right job to the right person.
Salient Features of India Infoline PMS:

Expert team of Research Analysts

Stock Picking done by the Investment Committee

Dedicated Relationship Manager

Technology:
The Company has extended the trading terminal to the investors home/workplace reinforced
with real-time commodity information and ledger position.
Rates:
The Company harnessed technology to offer services at among the lowest rates in the business.
Membership: The Company widened client reach in trading on the domestic and international
exchanges.
*Key Features
Enjoys memberships with the MCX and NCDEX, two leading Indian commodities
exchanges.
Recently acquired membership of the DGCX.
Multi-channel delivery model, making it among the select few to offer online as well
as offline trading facilities.
Extended commodity trading to retail investors, among the few Indian financial
intermediaries to do so.
Online business at 80% of revenues dominates commodities trading revenues.
Provides regular commodity updates pertaining to the Indian and international
environment.

13

CHAPTER III : CORPORATE GOVERNANCE

Corporate Governance Framework
The Board of Directors is responsible for management oversight, supervising the business
execution functions of the Management Council, an executive organ under its authority. The
Management Council deliberates upon fundamental policies and strategy regarding business
management, as well as makes decisions on important matters regarding operational execution.
Issues discussed by the Management Council and a summary of its discussions are reported to
the Board of Directors, which makes decisions on items of particular importance. In principle,
the Management Council meets three times a month, but meetings may be convened whenever
necessary. The auditing function is carried out by statutory auditors (Board of Statutory
Auditors), who review the Board of Directors as well as operational execution functions, and
attend important meetings, including meetings of the Board of Directors as well as the
Management Council.

14

Requirement Of Good Corporate Governance

According to the Australian standard on corporate governance (AS8000, 2003), it requires a
structural component requiring identification of requirements, requirements of laws, codes, best
practice, links to risk-requirement, and reporting, so as to create a functioning series of systems
and a maintenance component requiring education and training, communications monitoring,
assessment, review, liaison and accountability. But, note that corporate governance has neither a
static, nor a prescribed form. The Australian standard says, "there is no single model of corporate
governance" (AS8000, 2003). The OECD principles of corporate governance (OECD, 2004) says
"To remain competitive in changing world, corporations must innovate and adapt their corporate
governance practices so that they can meet new demands and grasp new opportunities.
The Nation Archives of Australia is a leader in developing records management procedures,
particularly in e-records. One that is of particular interest deals with source records that have
been copied converted or migrated. This policy allows Commonwealth agencies to dispose of
source records that have been copied or converted if proper processes are in place. But the
procedure also requires, importantly, that the policy can be put in place only. If it has been
implemented with the "explicit agreement" of the head of the agency. This means that the agency
head must be satisfied of the integrity of the IT and administrative systems in place for the
copying of the source records before the policy is adopted and source records are destroyed.
Boards and other governing bodies for records management throughout an organization should
also undertake such high level sign off on records management policies. So requirement of
good corporate governance may be summarized as follows:

due process doing things in an agreed, documented, controlled and appropriate way.
transparency- doing things in a way which is open to appropriate way.
Accountability- having to answer for the things one does.
compliance- having systems to ensure that things are done properly.
laws- meeting applicable legal obligations.
Security- having systems to ensure protection of information
15

Purpose Of Corporate Governance

1. Protecting shareholders wealth.
2

Enhancing the wealth through proper utilization of assets.

Maintenance of that wealth and not frittering away in unconnected and non profitable
venture.

through expropriation, and above all safeguarding he interests of the shareholders.

The main objective behind corporate governance is to protect long term share holder value along
with the other stakeholders. It is the foundation to build market confidence and encouraging
stable and long term investment flows. Corporate institutions should have a sound frame work
for their operation to achieve their objective and creating wealth for the welfare of the society as
a whole. Corporate governance is very wide term, which covers a wide range of activities that
relate to the way business organization is directed and governed. It deals with the policies and
practices that directly impact on the organizations performance, stewardship sand its capacity to
be accountable to its various stakeholders.
Over all objectives of corporate governance are as follows :
1. Enhancement of shareholder value, keeping in view the interest of other stakeholder.
2. follow provisions of the companies Act, FEMA factory Act and other statutes .
3. deloy the funds of the company in attaining institutional goal as enshrined in the
memorandum.
4. utilize funds taken from financial institutions and the capital market for the purposes for which
they were intended.
5. develop core competence to effectively manage its diversifications.

16

6. manage and check the diversification of funds by the way of loans, advances or investment to
subsidiary or investment companies.
7. control over the bad practices .
8. conduct ethical and fair practices towards its share holders, customers, suppliers, employees
and the public at large.
9. provide complete information to the directors on the working of the company.
10.motivate institutional and non executive directors to play active role in the functioning of the
company.
11.make internal control sound and powerful.
12. adopt transparent financial reporting and audit practices and the accounting practices.
Business Goal & Corporate Governance
Corporate governance is also related to corporate financial goals. It is a nave assumption that
such goals are culture free. Wimer (1995) interviewed Dutch, German, and U.S business
executives. Besides making profits, the Dutch talked about assets, the German about
independence from banks and the American about shareholder value. This reflects the
institutional differences among the countries but also the prevailing ideologies.
Some people assume that globalization and acquisition of companies across borders will wipe
out such differences and thus business leaders will become like the Americans. Others argue that
these differences are rooted in national cultures that have centuries old roots, which make such
convergence unlikely.
The studies here were based on a comparison of institutions across countries. Another approach
is to focus on the persons of the business leaders and to compare the goals they are seen to
pursue.

17

Corporate governance practices have become an essential prerequisite for the ability to acquire
and retain financial resources necessary for restructuring long-term investment and sustainable
growth.

Principles Of Corporate Governance

Key elements of good corporate governance principles include honesty, trust and integrity,
openness, performance orientation, responsibility and accountability, mutual respect, and
commitment to the organization.
Of importance is how directors and management develop a model of governance that aligns the
values of the corporate participants and then evaluate this model periodically for its
effectiveness. In particular, senior executives should conduct themselves honestly and ethically,
especially concerning actual or apparent conflicts of interest, and disclosure in financial reports.

Commonly accepted principles of corporate governance include

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 effectively communicating information that is
understandable and accessible and encouraging shareholders to participate in general
meetings.

Interests of other stakeholders: Organizations should recognize that they have legal and
other obligations to all legitimate stakeholders.

Role and responsibilities of the board: 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. It needs to be of sufficient size and have

18

an appropriate level of commitment to fulfill its responsibilities and duties. There are
issues about the appropriate mix of executive and non-executive directors.

Integrity and ethical behavior: Ethical and responsible decision making is not only
important for public relations, but it is also a necessary element in risk management and
avoiding lawsuits. Organizations should develop a code of conduct for their directors and
executives that promotes ethical and responsible decision making. It is important to
understand, though, that reliance by a company on the integrity and ethics of individuals
is bound to eventual failure. Because of this, many organizations establish compliance
and ethics programs to minimize the risk that the firm steps outside of ethical and legal
boundaries.

Disclosure and transparency: Organizations 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 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.

TRANSPARENCY-: This means accurate, adequate and timely disclosure of relevant

information to the stakeholders. It is not at all possible to make any progress towards
better governance without transparency. But it is seen that information sharing is
hindered under the excuse of confidentiality. There is need to move towards international
standards in terms of disclosure of information by the corporate sector and through this
the companies develop a high level of public confidence in business. The scenario at
international level makes transparency and disclosure the key pillars of corporate
governance.

Issues involving corporate governance principles include

19

oversight of the preparation of the entity's financial statements

internal controls and the independence of the entity's auditors

review of the compensation arrangements for the chief executive officer and other senior
executives

the way in which individuals are nominated for positions on the board

the resources made available to directors in carrying out their duties

oversight and management of risk

dividend policy.

3.5 Importance Of Corporate Governance

* Corporate governance has succeeded in attracting a good deal of public interest because of its
apparent importance for the economic health of corporations and society in general.

* Corporate governance provides the structure through which the objectives of the company are
set, and the means of attaining those objectives and monitoring performance are determined.
* Corporate governance provides proper incentives for the board and management to pursue
objectives that are in the interests of the company and shareholders and should facilitate effective
monitoring, thereby encouraging firms to use resources more efficiently
* Corporate governance is used to monitor whether outcomes are in accordance with plans and to
motivate the organization to be more fully informed in order to maintain or alter organizational
activity. Corporate governance is the mechanism by which individuals are motivated to align
their actual behaviors with the overall participants.

20

* Corporate governance is a tool for competitive advantage. Normally when we look at the issue
of competitive advantage from a managerial point of view, we can look at those factors, which
are within the control of the enterprise. This relates to the focus on quality, productivity as well
as innovation, which are the basic requirements, in a highly competitive environment. This is
needed for getting the competitive edge in a market where the customer is king.
* The corporate governance framework should ensure the equitable treatment of all shareholders,
including minority and foreign shareholders. All shareholders should have the opportunity to
obtain effective redress for violation of their rights.
* The corporate governance framework recognizes the rights of stakeholders as established by
law and encourage active co-operation between corporations and stakeholders in creating wealth,
jobs, and the sustainability of financially sound enterprises.
* The corporate governance framework ensures the timely and accurate disclosure of all material
matters regarding the corporation, including the financial situation, performance, ownership, and
governance of the company. A strong disclosure regime can help to attract capital and maintain
confidence in the capital markets. Disclosure also helps improve public understanding of the
structure and activities of enterprises, corporate policies and performance with respect to
environmental and ethical standards, and companies' relationships with the communities in
which they operate.

Corporate Values
In recent years, There is a explosion of interest in corporate values like share holder value ,
stakeholder value customer value , business ethics Corporate social responsibility by and large,
new value systems have been marketed as general solutions applicable to all kinds of business.
These values are building blocks of corporate image. Corporate values are based on high ethical
standards of managers and other employees. The firm values must ultimately be derived from the
preferences or values of its stakeholders. In other words, corporate values are created when
companies internalize the values of salient stakeholders. Stakeholders can influence a company
21

directly through market transactions and contracts without imposing their values on the
company, but transactional costs and information problems set a limit to use of contractual
mechanisms. Internalization of stakeholder preference takes place in a hypothetical three-stage
process

as

follows:

1. Allocation of ownership rights.

2. Board of composition.
3. The influence of important stakeholders

Related 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.
A Board of Directors often plays a key role in corporate governance. It is their responsibility to
endorse the organization's strategy, develop directional policy, appoint, supervise and remunerate
senior executives and to ensure accountability of the organization to its owners and authorities.
All parties to corporate governance have an interest, whether direct or indirect, in the effective
performance of the organization. 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.

Players In Corporate Governance

Corporate governance systems vary across countries and these differences directly affect both
the process for developing global strategies that can be adopted. Global strategic decision poses a
very tough test for the effectiveness of corporate governance system. They seek maximize profit
22

and

global

competitiveness.

There are five critical stakeholder players that affect the company's decision. They are
(1)

Employees

(2)

(3)

Shareholders

(4)

The management teams

Board

of

directors

(5)

Government

Employees: The main variable differentiates employees as a collective group across countries.
The country's labour market will influence the flexibility and mobility of employees. Country
such as the U.S that have employment at will where by a contract can be terminated at any time
are likely to have flexible labour market and short term labour commitment. In more rigid labour
markets such as Germany and Japan companies invest a great deal in bespoke in house training
that tends to result in more highly skilled labour forces and company specific skills. These in
turns are less transferable from one company to another. For example in France, the union rights
are extended to all employees regardless of union affiliation. Here unionization will have greater
influence on corporate decision making than in U.S or U.K where only union members benefits
from collective bargaining agreements. Japanese companies tend to have enterprise unionism,
which leads to collective bargaining at company level, and grant a strong voice to employees. In
2004 for example employee opposition to job losses prevented the restructuring via. Merger with
a foreign partner of France who is financially troubled Alston, a major producer of ships and
trains. In the same year Volkswagen despite suffering from very high labour cost had to promise
its Western Germany employees job security until 2011 in exchange for a wage freeze until 2007
and more flexible working hours. The company workers wield considerable power partly through
co-determination rights that require employees to be consulted on corporate decision.

Top Management Teams: Managers in U.S and U.K tend to have professional background and
strong functional background in finance or marketing. This is not the case in Germany where
managers are more technical oriented. There is also variation in the international experience and
background of managers. Managerial career mobility tends to be very fluid in U.S and U.K due

23

to open labour markets. In Japan and France managers tend to remain with a company for a long
period of time. There is also wide acceptance of leaders from across boarders in the U.K

Shareholders: Countries vary in their mix types of shareholders. At one extreme the U.S and
U.K have mostly arms length, natural shareholders who are focused on shareholder value
maximization. Employee shareholders typically use their ownership to block the global
relocation of jobs. This applies even in the U.S where united Airlines provide a rare example of a
large public company with majority ownership (55 percent owned by an employee stock
ownership plan). This employee stake and hence control have greatly constrained the ability of
the Airline to relocate job overseas.
Government: Government intervention is usually in the form of market regulation. A
representative measure for government intervention in the economy is regulation around
takeovers. In countries such as France, Germany, Italy and Japan government intervention often
provide strong takeover barrier such as golden shares, which bestow on the holder veto power
over changes to the company's charter. The variation hindrance to hostile takeovers in many
continental European countries continues to make it difficult for foreign companies to make
acquisition across border in Europe. In 2001 plans for a European takeover code, which would
guarantee the right of shareholder to be consulted during bids were shelved following objection
from German government. The previous year Vodafone, the U.K telecoms company made a
successful hostile bid for Mannesmann, a German telecoms company and the German
government was worried that other local companies might fall into foreign land. For example
Volkswagen is protected from takeover by special law. Sweden, which fall in the continental
governance model that use multiple voting rights to help and prevent its companies from
becoming vulnerable to takeover. France is also particularly active in preserving national
ownership of major companies. In 2004 the French government brokered the takeover of Aventis
a French Germany pharmaceutical company by France's Sanofi-synth and Laboratories.

24

CONTROL AND MANAGEMNT

Mechanisms and controls
Corporate governance mechanisms and controls are designed to reduce the inefficiencies that
arise from moral hazard and adverse selection. For example, to monitor managers' behavior, an
independent third party attests the accuracy of information provided by management to investors.
An ideal control system should regulate both motivation and ability.
Internal corporate governance controls
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 nonexecutive 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. Moreover, the ability of the board to monitor
the firm's executives is a function of its access to information. Executive directors
possess superior knowledge of the decision-making process and therefore evaluate top
management on the basis of the quality of its decisions that lead to financial performance
outcomes, ex ante. It could be argued, therefore, that executive directors look beyond the
financial criteria.

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, and can elicit myopic behaviour.

25

External corporate governance controls

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

demand for and assessment of performance information (especially financial statements)

debt covenants

government regulations

media pressure

takeovers

competition

managerial labour market

telephone tapping

Role Of The Accountant

Financial reporting is a crucial element necessary for the corporate governance system to
function effectively. Accountants and auditors are the primary providers of information to capital
market participants. The directors of the company should be entitled to expect that management
prepare the financial information in compliance with statutory and ethical obligations, and rely
on auditors' competence.
Current accounting practice allows a degree of choice of method in determining the method of
measurement, criteria for recognition, and even the definition of the accounting entity. The
26

exercise of this choice to improve apparent performance imposes extra information costs on
users. In the extreme, it can involve non-disclosure of information.
One area of concern is whether the accounting firm acts as both the independent auditor and
management consultant to the firm they are auditing. This may result in a conflict of interest
which places the integrity of financial reports in doubt due to client pressure to appease
management. The power of the corporate client to initiate and terminate management consulting
services and, more fundamentally, to select and dismiss accounting firms contradicts the concept
of an independent auditor. Changes enacted in the United States in the form of the SarbanesOxley Act (in response to the Enron situation as noted below) prohibit accounting firms from
providing both auditing and management consulting services. Similar provisions are in place
under clause 49 of SEBI Act in India.
The Enron collapse is an example of misleading financial reporting. Enron concealed huge losses
by creating illusions that a third party was contractually obliged to pay the amount of any losses.
However, the third party was an entity in which Enron had a substantial economic stake. In
discussions of accounting practices with Arthur Andersen, the partner in charge of auditing,
views inevitably led to the client prevailing.
However, good financial reporting is not a sufficient condition for the effectiveness of corporate
governance if users don't process it, or if the informed user is unable to exercise a monitoring
role due to high costs.
Role Of Institutional Investors
Many years ago, worldwide, buyers and sellers of corporation stocks were individual investors,
such as wealthy businessmen or families, who often had a vested, personal and emotional interest
in the corporations whose shares they owned. Over time, markets have become largely
institutionalized buyers and sellers are largely institutions
The rise of the institutional investor has brought with it some increase of professional diligence
which has tended to improve regulation of the stock market (but not necessarily in the interest of
the small investor or even of the nave institutions, of which there are many). Note that this
27

process occurred simultaneously with the direct growth of individuals investing indirectly in the
market (for example individuals have twice as much money in mutual funds as they do in bank
accounts). However this growth occurred primarily by way of individuals turning over their
funds to 'professionals' to manage, such as in mutual funds. In this way, the majority of
investment now is described as "institutional investment" even though the vast majority of the
funds are for the benefit of individual investors.]
Unfortunately, there has been a concurrent lapse in the oversight of large corporations, which are
now almost all owned by large institutions. The Board of Directors of large corporations used to
be chosen by the principal shareholders, who usually had an emotional as well as monetary
investment in the company (think Ford), and the Board diligently kept an eye on the company
and its principal executives (they usually hired and fired the President, or Chief executive officer
CEO).

Management & Corporate Governance

Top managers need to recognize that they are not in sole charge. Global strategy is an
equilibrium game among corporate governance players. Managers need to work on building
coalition and aligning interest behind a common approach.
In the continental system managers have to align trade off and meet other stakeholders' interest
halfway. They have to craft their language and rhetoric to meet the other players' expectations.
The main things here are consensus and social cohesion.
In the extended (Japanese) system companies have generally capitalized in their export oriented
model and high innovation driven employees loyalty. But because of rigid of their corporate
governance system, they have not exploited as much as they could different dimension of global
strategy. So the system must be open in term of the diversity of the top management team and
more flexible in their governance by introducing leaner boards as well as allowing greater levels
of shareholder activism. If government care to sustain national competitiveness and to help their
companies to

28

globalize, then they should assess the degree to which the players in their corporate governance
system are aligned with each other and with their intended global strategy. Government policies
should become less inimical to foreign owners and use such capital to provide the much needed
global knowledge. This can only be accomplished if the right mechanisms are in place to give a
voice to these foreign owners. The government has the responsibility as well as the policy tools
to gear the country's corporate governance system so that it enhances national competitiveness.
Shareholders
The shareholders are the owners of the company and as such they have certain rights and
responsibilities. But in reality companies cannot be managed by shareholder referendum. The
shareholders are not expected to assume responsibility for the management of corporate affairs.
A companys management must be able to take business decisions rapidly. The shareholders have
therefore to necessarily delegate many of their responsibilities as owners of the company to the
directors who then become responsible for corporate strategy and operations. The
implementation of this strategy is done by a management team. This relationship therefore brings
in the accountability of the boards and the management to the shareholders of the company. A
good corporate framework is one that provides adequate avenues to the shareholders for effective
contribution in the governance of the company while insisting on a high standard of corporate
behaviour without getting involved in the day to day functioning of the company.

Responsibilities of shareholders

The Committee believes that the General Body Meetings provide an opportunity to the
shareholders to address their concerns to the board of directors and comment on and demand any
explanation on the annual report or on the overall functioning of the company. It is important that
the shareholders use the forum of general body meetings for ensuring that the company is being
properly stewarded for maximizing the interests of the shareholders. This is important especially
in the Indian context. It follows from the above, that for effective participation shareholders must
maintain decorum during the General Body Meetings.
29

The effectiveness of the board is determined by the quality of the directors and the quality of the
financial information is dependent to an extent on the efficiency with which the auditors carry on
their duties. The shareholders must therefore show a greater degree of interest and involvement
in the appointment of the directors and the auditors. Indeed, they should demand complete
information about the directors before approving their directorship.
Shareholders rights
1. The basic rights of the shareholders include right to transfer and registration of shares,
obtaining relevant information on the company on a timely and regular basis, participating and
voting in shareholder meetings, electing members of the board and sharing in the residual profits
of the corporation.
2. The Committee therefore recommends that as shareholders have a right to participate in, and
be sufficiently informed on decisions concerning fundamental corporate changes, they should not
only be provided information as under the Companies Act, but also in respect of other decisions
relating to material changes such as takeovers, sale of assets or divisions of the company and
changes in capital structure which will lead to change in control or may result in certain
shareholders obtaining control disproportionate to the equity ownership.
3. The Committee recommends that information like quarterly results, presentation made by
companies to analysts may be put on companys web-site or may be sent in such a form so as to
enable the stock exchange on which the company is listed to put it on its own web-site.
4. The Committee recommends that the half-yearly declaration of financial performance
including summary of the significant events in last six-months, should be sent to each household
of shareholders.
5. A company must have appropriate systems in place which will enable the shareholders to
participate effectively and vote in the shareholders meetings. The company should also keep the
shareholders informed of the rules and voting procedures, which govern the general shareholder
meetings.

30

6. The annual general meetings of the company should not be deliberately held at venues or the
timing should not be such which makes it difficult for most of the shareholders to attend. The
company must also ensure that it is not inconvenient or expensive for shareholders to cast their
vote.
7. Currently, although the formality of holding the general meeting is gone through,in actual
practice only a small fraction of the shareholders of that company do or can really participate
therein. This virtually makes the concept of corporate democracy illusory. It is imperative that
this situation which has lasted too long needs an early correction. In this context, for
shareholders who are unable to attend the meetings, there should be a requirement which will
enable them to vote by postal ballot for key decisions. This would require changes in the
Companies Act. The Committee was informed that SEBI has already made recommendations in
this regard to the Department of Company Affairs.
8. The Committee recommends that a board committee under the chairmanship of a nonexecutive director should be formed to specifically look into the redressing of shareholder
complaints like transfer of shares, non-receipt of balance sheet, non-receipt of declared dividends
etc. The Committee believes that the formation of such a committee will help focus the attention
of the company on shareholders grievances and sensitize the management to redressed of their
grievances.
9. The Committee further recommends that to expedite the process of share transfers the board of
the company should delegate the power of share transfer to an officer, or a committee or to the
registrar and share transfer agents. The delegated authority should attend to share transfer
formalities at least once in a fortnight.

31

CHAPTER IV
SWOT ANALYSIS OF INDIA INFOLINE LTD
Strengths:
1.Price competitiveness ( E.g.: No brokerage is charged, Annual maintenance charges are least)
2.India Infoline is able to respond very quickly as we have no red tape, no need for higher
management approval, etc.
3.India Infoline is able to give really good customer care, as the current small amount of work
means we have plenty of time to devote to customers
4.Their lead consultant has strong reputation within the market
5.They change direction quickly if our approach isnt working
6.Management philosophy and commitment to maximize shareholders returns of

India

Infoline.
7.Ongoing activities of the company to support up gradation of operational
Performance.
.
8.Team of talented and committed professionals available to improve companys performance.

Weaknesses
1. New entrant in the market which is dominated by big brand names like ICICI, Reliance
Money etc.

32

2.Company has a small staff with a shallow skills base in many areas.
Opportunities
1. The share trading sector is expanding, with many future opportunities for success.
2. The competitors may be slow to adopt new technologies.
Threats
1. Developments in technology will change the share market beyond the ability to adapt.
2.A small change in focus of a large competitor is a threat for the market position.
3.Constant pressure to be cost competitive to meet customer expectations.
4.Relentless pressure to maintain profitability due to rising input/raw material prices.

33

CHAPTER V
FINDINGS AND CONCLUSION
findings
1. According to the study most of the customers of Infoline Ltd agrees that it is pocket friendly.
2. Coming to faith 70% say IndiaInfoline Ltd is better than others stock brokers due to customers
satisfaction.
3. Lack of promotional activities undertaken by IndiaInfoline securities Ltd. in Pune Region.
4. Main purposes of investments are returns & liquidity.
5. Investors take risk as well as returns into their mind while making the investment.
6. Businessmen are more interested in the stock market than the others.
7. Commodity market is less preferred by the investors, might because of less awareness about
commodity market.
8. People want to invest their money in the security market but they have not the proper
knowledge.
9. People pay more emphasis on brokerage than service provided by brokerage houses.
10. 3 elements affects the economy of any country:1) GOLD, 2) CRUDE OIL, 3) U.S DOLLAR

34

conclusion
Today with the growing competition it is very important to be intact. E Broking in India is
going to flourish as today we have a large number of people using the internet, we have will
flourished infrastructure, more and more people are getting educated due to which there will be a
boom in the E Broking service.
But then there are also factors which may have a negative effect on E- Broking like the market
conditions etc. ignoring the risks involved, one might be drowned while sailing the in the ocean.
But then it is more convenient for the people. The customers are getting a lot of comfort level
and their work gets much simpler and online broking is much cheaper to than going to a broker
to get your trades booked. And the most important thing is the increase and penetration of online
use in the India which has increased the potential market size for online broking on an annual
basis. A large share of the expected growth in Internet can be attributed to the increase in the
online population and thus online trading too. Internet-based stock trading, while still in its
infancy in the country, has the potential to really benefit the investor, with its ability to offer
greater speed and transparency at a much lower cost. The essential component of Internet-based
trading is the interface between broker, bank and depository participant, and as Net-based trading
becomes a reality this interface will develop.
The advent of Internet-based trading in the country will change the face of the Indian capital
market very soon in terms of the volume of transactions, the nature and settlement of trade, and
the profile of market participants. I personally dont think many of our colleagues in the business
have really understood the impact the Net can have on the broking business. The growth of
Internet-based trading as a mass trading technique in the country is unstoppable, going by the
indicators available and the signals for the future. When it ultimately gathers momentum, the
biggest beneficiary will be the investor, who will be able to trade with greater speed and
transparency, and at lower costs.

35