“A COMPARATIVE ANALYSIS OF CORPORATE GOVERNANCE

PRACTICES BY PUBLIC AND PRIVATE SECTOR BANKS OF INDIA”

ABSTRACT
In banking parlance, Corporate Governance refers to conducting the affairs of a banking
organisation in a manner that gives a fair deal to all the stakeholders i.e. shareholders,
employee’s regulatory authority, bank customers and society at large. The distinctive features of
the banking sector demands extensive attention on the quality of governance systems. Looking to
the importance of corporate governance, SEBI has mandated corporate governance reporting
practices for all the Indian listed companies vide CLAUSE 49. “Most of the studies on
effectiveness of corporate governance practices excluded banking sectors from their samples. As
a result, there is very little awareness about the effectiveness of banking sector governance
practices.” (Adams and Mehran, 2012, p. 243). This research aims at studying the corporate
governance reporting practices by Private sector banks and Public sector banks in India and to
explore whether there is any significant difference in Corporate Governance Reporting practices
amongst the two. The sample for the study comprises of Public and Private sector banks which
are listed on BSE Sensex and NSE Nifty Index as on 31 st April, 2012-2013. The study is based on
secondary source of data which were collected from bank’s annual report giving a separate
chapter on corporate governance. The findings of the study are analysed using a content
analysis.

Keywords: Corporate Governance, Corporate Governance reporting practices, SEBI’s Clause

49.
1. Introduction
Ever since India opened up its economy to privatization, liberalization and globalization there
has been rapid institutionalization of the corporate sector and private enterprise. The shift to free
market economy system resulted in companies to win over the various stakeholders, to grow and
sustain in a highly competitive and turbulent business environment. Researchers have established
that financial and economic development is largely dependent on investor protection in a country
–“de jure and de facto.” So “Corporate Governance” has become the catchword in the corporate
sector in India. In this changed scenario, the quality of governance has been an important factor
not only for survival of the companies but also for influencing the company’s ability to raise
money from capital market.

In banking parlance, Corporate Governance refers to conducting the affairs of a banking

organisation in such a manner that it gives a fair deal to all the stakeholders i.e. shareholders,
bank customers, regulatory authority, employees and society at large. The system of corporate
governance is important for banks in India because majority of the banks are in public sector,
where they are not only competing with one another but with other players in the banking system
as well as in financial services system including Financial Institutions, Mutual Funds and other
intermediaries. Further, with restrictive support available from the Government for further
capitalization of banks, many banks may have to go for public issues, leading to transformation
of ownership. This paper focuses on corporate governance in banking sector and how they
adhere to Corporate Governance practices. It further indicates the role and relationship of
corporate governance with Indian Banking Sector. Both private and public sector banks are
adhering to mandatory requirements of corporate governance attributes as a result it is bringing
more transparency and minimizing the chances of fraud and malpractices.
2. Theoretical aspects of corporate governance
2.1 Concept of Corporate Governance
Corporate governance has been defined as the set of processes, customs, policies, laws and
institutions affecting the way a company is directed, administered or accountability of certain
individuals in an organization, through mechanisms that tend to reduce or eliminate the
principal-agent problem.

2.2 Corporate Governance in Banking Sector of India

Banks are a critical component of any economy. They provide financing for commercial
enterprises, basic financial services to a broad segment of the population and access to payments
systems. In addition, some banks are expected to make credit and liquidity available in difficult
market conditions. The importance of banks to national economies is underscored by the fact that
banking is virtually universally a regulated industry and that banks have access to government
safety nets. It is of crucial importance therefore that banks have strong corporate governance.

Basel Committee on banking supervisory authorities published a paper on Corporate Governance

for banking organisation’s in September, 1999. The Committee had brought out certain
important principles on corporate governance for banking organisation’s, which more or less has
been adopted in India. The Committee feels that it is the responsibility of the banking supervisors
to ensure that there is effective corporate governance in the banking industry. Sound corporate
governance could also contribute to a collaborative working relationship between bank
managements and bank supervisors.

From the perspective of banking industry, corporate governance also includes in its ambit the
manner in which their boards of directors govern the business and affairs of individual
institutions and their functional relationship with senior management.

3. Research Methodology
3.1 Research method:

The present study attempts to find the difference in the corporate governance disclosures of
private and public sector banks in India for the year ended 2012-2013. A CG Index of 10
parameters has been prepared according to the Clause 49 of the SEBI, Voluntary Guidelines
issued by Ministry of corporate affairs and beyond compliance measures adopted by companies
for stakeholder’s welfare using content analysis.

Equal weightage method has been used for the purpose of CG Analysis. This method has been
used as this is free from the personal biasness. All the items in the checklist were assigned equal
weights, where “1 point” has been assigned for availability of the item and “0” for the non-
availability of the same. This type of criterion has been used by other researchers too like Gupta,
et al. (2003) and Das (2007).

3.2 Research Sample

The population for the study is private sector and public sector banks in India. On the basis of
convenience sampling, 3 Private sector banks and 3 Public sector banks have been taken as
samples. The private sector banks included in sample are HDFC Bank, ICICI Bank, Kotak
Mahindra Bank. Bank of Baroda, Punjab National Bank and State Bank of India are the sample
banks from public sector for the study.

3.3 Research Objectives

 To review the extent to which Indian listed Banks have complied with the corporate
governance practices with reference to mandatory and non – mandatory disclosures
described by SEBI under Clause 49.

 To examine the adoption of Voluntary Guidelines led down by Ministry of Corporate

Affairs in order to improve governance standards.

 To analyse Corporate Governance Practices adopted by Indian listed companies which

goes Beyond Compliance Level i.e. adopted for the creation of value of all stakeholders.

3.4 Hypothesis of the study:

The following hypothesis is framed & tested with respect to this study:
H0: There is no significant difference between Public sector and Private sector banks in
disclosing corporate governance practices in their annual reports

H1: There is significant difference between public sector and private sector banks in reporting
corporate governance disclosures in their annual reports.

4. Results and Discussion

Having analysed the governance structures, processes and disclosures made on corporate
governance, we came to know what is the standard and quality of governance achieved by HDFC
Bank, ICICI Bank, Kotak Mahindra, Bank of Baroda, Punjab National Bank and State Bank of
Bank.

As mentioned earlier in research methodology, each of these banks has been awarded points on
key governance parameters. These key governance parameters and the criterion for evaluation of
governance standard have been selected on total score of 92 points as shown in table 5.1 below:

TABLE 5.1
CORPOARTE GOVERNANCE SCORE OF BANKING SECTOR
KEY GOVERNANCE PARAMETERS

Kotak
Selected Indian Total HDFC ICICI Bank of
Sr. no Mahindra PNB SBI
Banks score Bank Bank Baroda
bank
Year 2012- 2012- 2012-2013 2012- 2012- 2012-
2013 2013 2013 2013 2013
Criterion for
Evaluation of
Governance
Standard
INDUSTRY AVERAGE:68

ADOPTION OF MANDATORY REQUIREMENTS AS PER CLAUSE 49

BOARD OF
49I
DIRECTORS
Composition of
49(IA) 4 2 3 2 3 2 2
Board
Non-Executive
Directors’
49(IB) 3 2 3 3 2 3 3
Compensation
and Disclosures
49(IC) Other Provisions 4 4 4 4 4 4 4
Codes of
49(ID) 4 3 4 3 3 4 4
Conduct
   (I) 15 11 14 12 12 13 13
AUDIT
49II
COMMITTEE
Qualified and
49(IIA) Independent 6 6 6 6 6 6 5
Audit Committee
Meeting of Audit
49(IIB) 3 3 3 3 3 3 3
Committee
Powers of Audit
49(IIC) 4 0 0 0 0 0 0
Committee
 Role of Audit
49(IID) 15 5 14 12 7 7 10
Committee
Review of
49(IIE) Information by 4 1 3 1 1 1 0
Audit Committee
  (II) 32 15 26 22 17 17 18
SUBSIDIARY
49III * * * * * * *
COMPANIES*

49IV DISCLOSURES
Disclosure of
(49IVA) 2 1 2 2 1 2 2
Related Party
Disclosure of
(49IVB) Accounting 1 0 1 1 0 1 1
Treatment
Board
Disclosures—
(49IVC) 2 2 2 2 2 2 2
Risk
Management
Proceeds from
Public issues,
(49IVD) Right issues, * * * * * * *
Preferential
issues, etc.
Remuneration of
(49IVE) 4 3 3 3 3 3 4
Directors
Management
Discussion and
Analysis of
(49IVF) financial 3 2.63 3.00 2.88 2.88 2.00 3.00
condition and
results of
operations.
Information to
(49IVG) 4 4 4 4 4 4 4
Shareholders
   (III) 16 12.63 15.00 14.88 12.88 14.00 16.00

CEO(Chief
Executive
Officer)/CFO
49V (Chief Financial 1 1 1 1 1 1 1
Officer)/
Auditor's
Certification

Report on
49VI Corporate 4 4 4 4 4 4 4
Governance
 Compliance (As
49VII 1 1 1 1 1 1 1
certified)

ADOPTION OF NON-MANDATORY REQUIREMENTS

(ANNEXURE 1D OF CLAUSE 49)

Constitution of
NMCR Remuneration
3 3 3 3 1 3 3
CI Committee
(IV)

Remuneration
NMRC Committee
2 2 2 2 2 2 2
CI Composition
(V)

NMWB Whistle Blower

1 1 1 1 1 1 1
P Policy (VI)

VOLUNTARY GUIDELINES,2009 (NON-MANDATORY)

Remuneration
of Non-
executive
NMVG Directors
5 5 5 5 5 5 5
RI (NEDs) and
Independent
Directors (IDs)
(VII)
Secretarial
NMVG
Audit Index 3 0 1 0 0 0 0
SAI
(VIII)

ADDITIONAL COMPLIANCE FOR STAKEHOLDER'S INTERESTS

Incentive
through
ACITE Employee Stock
1 1 1 1 0 1 1
SOPS Options Scheme
(ESOPS)
(IX)

ACSRHQR&DIDWEECE
HS
CSR Corporate 1 1 1 1 1 1 1
social
 responsibility in
AR
Human
resource
development
initiative (HRD)
- Training for
HR employees, 1 1 1 1 1 1 1
other
stakeholders,
Performance
improvement
programs
Quality
improvement
Q programs and 1 1 1 1 1 1 1
certifications in
AR
Research and
development
R&D for public and 1 0 0 0 0 0 0
consumers
benefits in AR
Resolution of
ID Industrial 1 0 0 0 0 0 0
Disputes in AR
Women's
WE Security and 1 1 1 1 1 1 0
Empowerment
Energy
Conservation in
EC AR / not 1 0 0 0 0 0 0
applicable to
bank
Environment,
Health and
EHS 1 1 1 1 1 1 1
Safety Measure
(EHS)
(X) 9 6 6 6 5 6 5
Total
92.00 61.63 79.00 71.88 61.88 67.00 69.00
Score
RANK VI I II V IV III
After determining the total score based on these parameters, the banks has been evaluated on five
point scale as stated in table 5.2
TABLE 5.2
SCORE RANGE RANK
81-92 Excellent
70-80 Very good
60-69 Good
50-59 Average
Below 49 Poor

The governance standard attained (based on assigned points) by the sample banking companies
for the year 2012 is as shown in table 5.3 below:

TABLE 5.3
Governance Standard attained based on assigned points
SR. NAME OF BANKS INDIVIDUAL RANKS GRADE
NO. SCORE

1. ICICI 79.00 1 Excellent

2. Kotak Mahindra Bank 71.88 2 Very good

3. State Bank of India 69.00 3 Good

4. Punjab National Bank 67.00 4 Good

5. Bank of Baroda 61.88 5 Good

6. HDFC 61.63 6 Good

Table 5.3 shows that the highest score is obtained by ICICI Bank , BSE Sensex and NSE Nifty
listed Bank (ranked excellent), followed by Kotak Mahindra Bank, State Bank of India, Punjab
National Bank and Bank of Baroda . The Lowest score is obtained by HDFC Bank.

Fig. 1
Graph presenting the corporate governance score of selected banks
 Corporate governance Score of Selected Banks
90.00
80.00
70.00
60.00
50.00
40.00 Company Score
30.00 Industry Average
20.00
10.00
0.00

da
a
I

I
B
FC

SB
IC

dr

PN
HD

IC

ro
in

Ba
ah
kM

of
nk
ta

Ba
Ko

PERCENTAGE OF CORPORATE GOVERNANCE DISCLOSURE

The following table shows the percentage of disclosures made by the individual sample banks
compared to the total disclosure required.

TABLE 5.4
Percentage of Disclosures made by the Individual Sample Banks
PERCENTAGE PERCENTAGE
PRIVATE BANKS PUBLIC BANKS
(%) (%)
HDFC Bank 66.98 Bank of Baroda 67.26
ICICI Bank 85.87 Punjab National Bank 72.83
Kotak Mahindra Bank 78.13 State Bank of India 75.00
MEAN SCORE 76.99 MEAN SCORE 71.70

From the above table 5.4, it can be interpreted that ICICI Bank Ltd. has been occupying the first
rank by disclosing 85.87% of items of governance checklist. The second rank has been occupied
by Kotak Mahindra bank Ltd by disclosing 78.13% of items. HDFC Bank ltd has minimum
disclosure score of 66.98% amongst all the 6 sampled banking companies. The private sector
banks have an average disclosure of 76.99% whereas public sectors banks have a average
disclosure of 71.70% in corporate governance. Though on the whole there exists very little
difference in the reporting of the public sector and the private sector banks. A summary of
average scores including all key corporate governance parameters of both the sectors of banks is
shown in the below table 5.5

MEAN/AVERAGE SCORES OF THE PARAMETERS OF CORPORATE

GOVERNANCE REPORTING

TABLE 5.5
Mean Average Scores of the Corporate Governance Parameters

SR.NO. MAIN PARAMETERS PRIVATE PUBLIC

1 Board of directors 2.47 2.53
2 Audit Committee 1.97 1.63
3 Disclosures 2.66 2.68
4 Constitution of Remuneration
3.00 2.33
Committee
5 Remuneration Committee
3 3
Composition
6 Whistle Blower Policy 3 3
7 Remuneration of Non-executive
Directors (NEDs) and Independent 3 3
Directors (IDs)
8 Secretarial Audit Index 0.33 0
9 Incentive through Employee Stock
3 2
Options Scheme (ESOPS)
10 Additional Compliances 2 1.78

6. Testing of hypothesis

The following hypothesis is framed & tested with respect to this study:

Null hypothesis:
H0: There is no significant difference between Public sector and Private sector banks in
disclosing corporate governance practices in their annual reports

Alternate hypothesis:
H1: There is significant difference between public sector and private sector banks in reporting
corporate governance disclosures in their annual reports

T-test has been use to test the hypothesis

Output 1:
Table 6.1
Output of T-test

GROUP STATISTICS
BANKS N Mean Std. Deviation Std. Error Mean
PRIVATE 3 70.8367 8.73187 5.04135
CORPSCORE
PUBLIC 3 65.9600 3.67217 2.12013

This table describes the mean and standard deviation of each group: Private and Public sector
banks. The mean represent the average disclosures scores of both the groups of banks. The
average score of public sector bank is 70.83, whereas for private sector banks it is 65.96. From
this data we cannot arrive at any conclusion that private sector bank has adopted corporate
governance practices more significantly than public sector banks without examining the
statistical significance of the result. i.e. without applying t-test.

Output 2:

INDEPENDENT SAMPLES TEST

Levene's Test t-test for Equality of Means
for Equality of
Variances
 F Sig. t Df Sig. Mean Std. Error 95% Confidence
(2- Difference Difference Interval of the
tailed) Difference
Lower Upper
Equal variances
CORP 1.584 .277 .892 4 .423 4.87667 5.46902 -10.30776 20.06109
assumed
SCOR
Equal variances
E .892 2.686 .445 4.87667 5.46902 -13.73790 23.49124
not assumed

After testing the null hypothesis, we conclude that the hypothesis cannot be rejected. Hence,
there is no statistical significant difference between public sector and private sector banks in
reporting corporate governance disclosures practices, considering all the 10 parameters of the
Corporate Governance disclosure Index.

In other words we can say, that t test has failed to reveal a statistically reliable difference
between the mean number of Private sector bank has (M = 70.8367, s = 8.73187) and that Public
sector bank has (M = 65.9600, s = 3.6721), t (4) = .892, p = .423, α = .05.

7. Conclusion
The research on corporate governance in Indian Banking Sector produced some important
results. Banking has become complex and it has been recognized that there is a need to attach
more importance to qualitative standards such as internal controls and risk management,
composition and role of the board and disclosure standards. The success of corporate governance
rests on the awareness on the part of the banks of their own responsibilities. While law can
control and regularize certain practices, the ultimate responsibility of being ethical and moral
remains with the banks.

The outcome of the present study in achieving the objectives of the research establishes some
important facts: The objective of the research was to review the extent to which selected Indian
listed banks have complied with corporate governance with reference to mandatory and non –
mandatory disclosures described by SEBI under Clause 49, Voluntary guidelines led down by
Ministry of Corporate Affairs and beyond compliance measures. The outcome of the study
indicated that corporate governance on Indian Banking Sector is at formative stage compared to
developed nations. There should be more transparency and disclosure mechanism in order to
avoid even the small possibility of financial scam. So far as economic growth is concerned, there
is certainly economic growth registered by private sector in terms of penetration and share price
rise and establishing strong footing in banking sector. The compliance of certain non-mandatory
requirements and beyond compliance measures by ICICI, Kotak Mahindra Bank and State Bank
of India justifies that they are quite serious in bringing about the effectiveness of implementation
of corporate governance attributes.

8. Suggestions
From the above microanalysis and the study of annual reports of HDFC, ICICI, Kotak Mahindra
Bank, BOB, PNB and SBI for the year 2012 it appears that there is ample of scope for
improvement in the level of corporate governance standards and quality of disclosures to be
practiced in theses organisations. Besides, these banks should ensure more transparency and
disclosures norms to be applied in their annual reports particularly in those items in regards to
which there is no violation of respective statutes and guidelines issued by regulatory authorities.
In short, whereever guidelines of regulatory authorities are silent on particular governance issue;
the banks should comply with Clause 49 of the listing agreement and disclose such issues in
detail in annual reports.
At macro level it is suggested that all the present enactment and regulations pertaining to the
banking sector should be synchronized expeditiously and brought within the purview of single
Act, which shall prescribe various corporate governance codes to be followed by one and all.
RBI/Government of India should work on this direction.

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