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Financial Accounting Project

Topic : Corporate Governance Analysis

Submitted by -: GROUP -8
Tanvi gupta
Parth Sarthy Garg
Saad Farees (251047)
Charuvi Singhal
Sanat Pandey (251054)

Acknowledgement-:

We would like to thank all of our friends for coming out and giving their individual view
of analysis that could be done to enhance the productivity of this project . Getting time off from their
work and giving us suggestions is highly appreciated

During the course of this project all the help that we have received from our friends, colleagues, teachers
and seniors was truly overwhelming for us as a group. We would like to thank each and every individual
that helped us in any way possible during the course of the project.

BY -:
Group 8

Table of Contents -:
S. No.

Description

Page Number

Introduction

4-5

1.1

Principles of Corporate Governance

5-6

1.2

Key legal framework for corporate governance in India

6-9

1.3

Significance of Corporate Governance

1.4

Objectives of Corporate Governance

10

1.5

Purpose of the Study

11

1.6

Brief outline of chapters

11

Analysis

12

2.1

Findings of the project

12 13

2.2

Excel for Analysis

13

References

14

Chapter 1: INTRODUCTION
Financial accounting (or financial accountancy) is the field of accounting concerned with the
summary, analysis and reporting of financial transactions pertaining to a business. This involves
the preparation of financial statements available for public consumption. Stockholders, suppliers,
banks, employees, government agencies, business owners, and other stakeholders are examples
of people interested in receiving such information for decision making purposes.
Financial accountancy is governed by both local and international accounting standards.
Generally Accepted Accounting Principles (GAAP) is the standard framework of guidelines for
financial accounting used in any given jurisdiction. It includes the standards, conventions and
rules that accountants follow in recording and summarising and in the preparation of financial
statements. On the other hand, International Financial Reporting Standards (IFRS) is a set of
passionable accounting standards stating how particular types of transactions and other events
should be reported in financial statements. IFRS are issued by the International Accounting
Standards Board (IASB).
Financial accounting and financial reporting are often used as synonyms
1. According to International Financial Reporting Standards, the objective of financial reporting
is:
To provide financial information about the reporting entity that is useful to existing and potential
investors, lenders and other creditors in making decisions about providing resources to the entity.
2. According to the European Accounting Association:
Capital maintenance is a competing objective of financial reporting.

The communication between a company and the environment is an integral part of corporate
governance, which takes place largely through financial and nonfinancial reporting. It appears,
therefore, that the information presented by companies in the annual reports is the main bond of
accounting and corporate governance. It has been noted in the literature that nowadays a reliable
financial statement becomes a heart of corporate governance.

CORPORATE GOVERNANCE
Corporate governance broadly refers to the mechanisms, processes and relations by which
corporations are controlled and directed. Governance structures and principles identify the
distribution of rights and responsibilities among different participants in the corporation (such as
the board of directors, managers, shareholders, creditors, auditors, regulators, and other
stakeholders) and includes the rules and procedures for making decisions in corporate affairs.
Corporate governance includes the processes through which corporations' objectives are set and
pursued in the context of the social, regulatory and market environment. Governance
mechanisms include monitoring the actions, policies, practices, and decisions of corporations,
their agents, and affected stakeholders.

1.1 Principles of Corporate Governance


Shareholder recognition is key to maintaining a company s stock price. More often than not,
however, small shareholders with little impact on the stock price are brushed aside to make way
for the interests of majority shareholders and the executive board. Good corporate governance
seeks to make sure that all shareholders get a voice at general meetings and are allowed to
participate.
Stakeholder interests should also be recognized by corporate governance. In particular, taking the
time to address non-shareholder stakeholders can help your company establish a positive
relationship with the community and the press.
Board responsibilities must be clearly outlined to majority shareholders. All board members
must be on the same page and share a similar vision for the future of the company.
Ethical behavior violations in favor of higher profits can cause massive civil and legal problems
down the road. Underpaying and abusing outsourced employees or skirting around lax
environmental regulations can come back and bite the company hard if ignored. A code of
conduct regarding ethical decisions should be established for all members of the board.
Business transparency is the key to promoting shareholder trust. Financial records, earnings
reports and forward guidance should all be clearly stated without exaggeration or creative
accounting. Falsified financial records can cause your company to become a Ponzi scheme, and
will be dealt with accordingly.
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1.2 Key legal framework for corporate governance in India


The Companies Act, 2013
The Government of India has recently notified Companies Act, 2013 ("New Companies Act"),
which replaces the erstwhile Companies Act, 1956. The New Act has greater emphasis on
corporate governance through the board and board processes. The New Act covers corporate
governance through its following provisions:

New Companies Act introduces significant changes to the composition of the boards of
directors.

Every company is required to appoint 1 (one) resident director on its board.

Nominee directors shall no longer be treated as independent directors.

Listed companies and specified classes of public companies are required to appoint
independent directors and women directors on their boards.

New Companies Act for the first time codifies the duties of directors.

Listed companies and certain other public companies shall be required to appoint at least
1 (one) woman director on its board.

New Companies Act mandates following committees to be constituted by the board for
prescribed class of companies:

o Audit committee
o Nomination and remuneration committee
o Stakeholders relationship committee
o Corporate social responsibility committee
o Listing agreement Applicable to the listed companies

SEBI has amended the Listing Agreement with effect from October 1, 2014 to align it with New
Companies Act.
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Clause 49 of the Listing Agreement can be said to be a bold initiative towards strengthening
corporate governance amongst the listed companies. This Clause intends to put a check over the
activities of companies in order to save the interest of the shareholders. Broadly, Clause 49
provides for the following:

1. Board of Directors
The Board of Directors shall comprise of such number of minimum independent directors, as
prescribed. In case where the Chairman of the Board is a non-executive director, at least onethird of the Board shall comprise of independent directors and where the Chairman of the Board
is an executive director, at least half of the Board shall comprise of independent directors. A
relative of a promoter or an executive director shall not be regarded as an independent director.

2. Audit Committee
The Audit Committee to be set up shall comprise of minimum three directors as members, twothirds of which shall be independent.

3. Disclosure Requirements
Periodical disclosures relating to the financial and commercial transactions, remuneration of
directors, etc, to ensure transparency.

4. CEO/ CFO Certification


To certify to the Board that they have reviewed the financial statements and the same are fair and
in compliance with the laws/ regulations and accept responsibility for internal control systems.

5. Report and Compliance


A separate section in the annual report on compliance with Corporate Governance, quarterly
compliance report to stock exchange signed by the compliance officer or CEO, company to
disclose compliance with non-mandatory requirements in annual reports.

A Few New Provisions for Directors and Shareholders

One or more women directors are recommended for certain classes of companies

Every company in India must have a resident directory

The maximum permissible directors cannot exceed 15 in a public limited company. If


more directors have to be appointed, it can be done only with approval of the
shareholders after passing a Special Resolution

The Independent Directors are a newly introduced concept under the Act. A code of
conduct is prescribed and so are other functions and duties

The Independent directors must attend at least one meeting a year

Every company must appoint an individual or firm as an auditor. The responsibility of the
Audit committee has increased

Filing and disclosures with the Registrar of Companies has increased

Top management recognizes the rights of the shareholders and ensures strong cooperation between the company and the stakeholders

Every company has to make accurate disclosure of financial situations, performance,


material matter, ownership and governance

Additional Provisions

Related Party Transactions A Related Party Transaction (RPT) is the transfer of


resources or facilities between a company and another specific party. The company
devises policies which must be disclosed on the website and in the annual report. All
these transactions must be approved by the shareholders by passing a Special Resolution
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as the Companies Act of 2013. Promoters of the company cannot vote on a resolution for
a related party transaction.

Changes in Clause 35B The e-voting facility has to be provided to the shareholder for
any resolution is a legal binding for the company.

Corporate Social Responsibility The company has the responsibility to promote social
development in order to return something that is beneficial for the society.

Whistle Blower Policy This is a mandatory provision by SEBI which is a vigil


mechanism to report the wrong or unethical conduct of any director of the company.

1.3 Significance of Corporate Governance


Corporate governance is of paramount importance to a company, it is intended to increase the
accountability of your company and to avoid massive disasters before they occur. Failed
energy giant Enron, and its bankrupt employees and shareholders, is a prime argument for the
importance of solid corporate governance. When executed effectively, it can prevent
corporate scandals, fraud and the civil and criminal liability of the company. It also enhances
a company image in the public eye as a self-policing company that is responsible and worthy
of shareholder and debt holder capital. It dictates the shared philosophy, practices and culture
of an organization and its employees. A corporation without a system of corporate
governance is often regarded as a body without a soul or conscience. Corporate governance
keeps a company honest and out of trouble. If this shared philosophy breaks down, then
corners will be cut, products will be defective and management will grow complacent and
corrupt. The end result is a fall that will occur when gravity - in the form of audited financial
reports, criminal investigations and federal probes - finally catches up, bankrupting the

company overnight. Dishonest and unethical dealings can cause shareholders to flee out of
fear, distrust and disgust.

1.4 Objectives of Corporate Governance


Transparency in corporate governance is essential for the growth, profitability and stability of
any business. The need for good corporate governance has intensified due to growing
competition amongst businesses in all economic sectors at the national, as well as international
level. The Indian Companies Act of 2013 introduced some progressive and transparent processes
which benefit stakeholders, directors as well as the management of companies. Investment
advisory services and proxy firms provide concise information to the shareholders about these
newly introduced processes and regulations, which aim to improve the corporate governance in
India.
Corporate advisory services are offered by advisory firms to efficiently manage the activities of
companies to ensure stability and growth of the business, maintain the reputation and reliability
for customers and clients. The top management that consists of the board of directors is
responsible for governance. They must have effective control over affairs of the company in the
interest of the company and minority shareholders. Corporate governance ensures strict and
efficient application of management practices along with legal compliance in the continually
changing business scenario in India.
Corporate governance was guided by Clause 49 of the Listing Agreement before introduction of
the Companies Act of 2013. As per the new provision, SEBI has also approved certain
amendments in the Listing Agreement so as to improve the transparency in transactions of listed
companies and giving a bigger say to minority stakeholders in influencing the decisions of
management.

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1.5 Purpose of the Study


Purpose of the study is compare different companies on the basis of various parameters of
corporate governance. It will be studies why corporate governance is important for the company
and stakeholders. It will also be studied how companies differ in their corporate governance
practices. It is also important to study how what are guidelines that companies have to follow
while preparing the financial statements and disclosure of the relevant facts in the annual report
to increase the involvement of shareholders and introduce transparency in corporate governance,
which ultimately safeguards the interest of the society and shareholders.

1.6 Brief outline of chapters


The study of comparison of companies on the basis of corporate governance parameters has been
divided into 2 chapters. The first chapter is Introduction which consists of the principles, legal
framework, significance, purpose, objectives of corporate governance and brief outline of
chapters. Chapter 2 is of Analysis of the study which consists of findings of the study.

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Chapter 2: ANALYSIS
This chapter will analyse the corporate governance practices amongst the sensex companies and
small cap companies which is being done on the basis of collection secondary data.

This chapter focuses mainly on the in-depth analysis of the comparison between sensex
companies and small cap companies based on corporate governance parameters which is based
on the information taken from the annual report of the companies given on their respective
official websites.

2.1 Findings of the study

Less likely to include a woman on the board Both Small Cap as well as sensex
companies have very less percentage of women in the board. The average percentage of
women in the board comes to about 16%. And it is also evident that about 10% of the
small cap companies have no woman director.

Sensex Companies have more Committees On an average Sensex companies have


about 8 committees while small cap companies on the other hand have only 4
committees. 60% of the small cap companies have only 3 committees. This shows that
Sensex Companies can deal with a complex scenario in a more efficient and
comprehensive manner.

CEO is not an Independent Director None of the companies, whether small cap or
sensex company, has CEO as an independent director.

Size of Board Sensex companies have a larger board size as compared to small cap
companies. The average number of board members in a sensex company is 12 compared
to 8 in case of a small cap company.

Executive Director Executive Directors comprise of a quarter of the total size of the
board i.e. both in case of a small cap as well as a sensex company the average size of the

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executive directors is 25%. Only 30-40% of the companies have more than 25% of the
board members as the executive directors.

Percentage of Shares held by Promoters Sensex companies on an average have


higher percentage of shares held by the promoters than in the case of small cap
companies. Only 30% and 40% of the sensex and small cap companies respectively have
more than 50% of the shares held by the promoters.

Independent Director- Independent directors in sensex companies are approximately


20% higher than in the case of small cap companies. Also in 50% of the sensex
companies the number of independent directors is more than half of the total size of the
board.

OthersSensex companies on an average hold 7-8 board meetings in a year and small
companies hold around 6 of them a year. Also during the study, it was discovered that
most of the directors had missed at least one board meeting.

2.2 Attaching the excel that we have worked on for analysis part -:

Analysis
Working.xlsx

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References -:
We have collected the information from the annual reports of the companies which
were available on their respective websites , the websites are as follows -:
1- http://www.aimcopesticides.com
2- http://www.carysilkitchens.com
3- http://www.dabur.com
4- http://www.larsentoubro.com
5- http://www.52weeksentertainment.com/
6- http://www.aarccl.in
7- http://www.icicibank.com
8- https://www.onlinesbi.com
9- http://www.aartidrugs.co.in
10-

http://aryaglobal.net

11-

http://www.cipla.com/en

12-

http://www.hdfcbank.com

13-

http://www.kelltontech.com

14-

http://www.jmtauto.com

15-

https://www.infosys.com

16-

http://www.adaniports.com

17-

http://www.atfoods.com

18-

http://www.adityaispat.com

19-

https://www.hul.co.in

20-

http://www.tatasteel.com

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