Corporate Governance Practices of Indian Companies

corporeal Goernance Practices of Indian CompaniesThe account uses divine revelation heaps to quiz collective arrangement practices of Indian listed companies. A field epitome of 50 companies listed on the NSE has been carried out. A apocalypse indi fuckt compiled by SP has been demonstrable to determine how much(prenominal) listed Indian companies disclose. This prove reveals that Indian companies argon kind of transparent. The interrogation findings sh only enable the investors in estimating how much divine revelation listed Indian companies excite. It lead to a fault add to the increasingly inadequate belles-lettres relating to somatic political science and manifestation practices in downstairsdeveloped countries. This study though has limitations since the focus lies nevertheless on 50 companies listed on the NSE which are the greatst and most imitateed stocks and may non represent all Indian companies.Chapter 1 IntroductionIntroduction somatic ecesis has received add-ond impressiveness in the aftermath of collapses of large companies worldwide much(prenominal)(prenominal) as Enron and WorldCom. Economies worldwide are now realizing the importance of good authorities (Standard Poors 2008).The developed countries realized the importance of g everywherenance in the main(prenominal) pursuance(a) corporate scandals of the west (Reed, 2002). In around berths these scandals led to a direct response e.g. the Cadbury Report (Boyd, 1996 cited in Reed, 2002, p.228). On the other hand, in exploitation countries such as Brazil and India, poor economic writ of execution had often led to economic crisis. Consequently, these countries came under the control of bodies such as International M onetary Fund and World bevel. These bodies impose many regulations which exact increased attention to governance issues (Reed, 2002).As opposed to developed countries, ontogeny countries stipendiary no attention to governance issues until th e pecuniary crisis of eastside Asia in the new-made 90s (Oman C., 2003, Mangena and Tauringana, 2007). However, Sobhan and Werner (2003) panorama that these countries pay backed giving importance to governance issues not because of the East Asian financial crisis but by problems in their own financial market places. Goswami (2003) reiterates this by writing that corporate governance movement began in India receivable to just about corporate scandals that came to the forefront during the first phase of economic rest in the country in 1991. foil and disclosure are at the face of corporate governance. Transparency and disclosure helps reduce the entropy disruption among the management of a company and its shareholders and thus helps resolving effect issues in corporate governance (Patel, Balic and Bwakira, 2002).BackgroundFig. 1 below depicts all the agency that India ranks quite high among the developing countries with respect to its governance practices next never theless to South Africa and Poland.Figure Governance Ratings of Developing Countries, 2008 (Source Governance Metrics International)Corporate Governance in IndiaAs opposed to developed countries, developing countries paid no attention to governance issues until the financial crisis of East Asia in the late 90s (Oman C., 2003, Mangena and Tauringana, 2007). However, Sobhan and Werner (2003) view that these countries started giving importance to governance issues not because of the East Asian financial crisis but by problems in their own financial markets. Goswami (2003) reiterates this by writing that corporate governance movement began in India due to some corporate scandals that came to the forefront during the first phase of economic liberalization in the country in 1991.One of these was a study securities scam of over Rupees 35 billion (Rupee 1 = 0.0125, approx.) that was un surmounted in April 1992 which involved a diversion of funds from the banking system to stock brokers f or financing their operations. Bank executives, brokers and change surface politicians came under the scanner. The stock market had to be shut down for an increase period. Investors and brokers panicked. This led to the first step towards corporate governance in India when the Securities and swap plug-in of India (SEBI) was created by an act of Parliament to protect the interest of investors in the securities market and to regulate the stock market (Goswami, 2003).In 1998, the Confederation of Indian Industry (CII), an industry association published Indias initial corporate governance code, the implementation of which was voluntary by companies and thus very few companies espouse it. Until 2000, the CII Code was Indias only corporate governance guideline. In 1999 the Securities and Exchange Board of India (SEBI), constituted a committee to promote and raise the standards of corporate governance in India which was patterned on UKs 1992 Cadbury Report. On the recommendations of t his committee, a new article 49 was incorporated in the Stock Exchange lean Agreements (Listing Agreements?). Since 2001, the CII Code has been supplemented by Clause 49 of the Listing Agreement (SEBI, 2003). These corporate governance requirements are applicable to all listed companies in India (Government of India, 2009 and SEBI, 2009).Aims, Objectives and inquiry QuestionsThe beat back of the query is to develop an understanding of the practices of corporate governance in developing economies by investigating the disclosure practices of Indian listed companies. This study will cover 50 companies listed on the National Stock Exchange (NSE) which comprise the dandy which is the benchmark might of the NSE. SP CNX nifty is a well diversified index comprised of 50 stocks across 23 sectors of the economy.The objectives of this study areTo develop an understanding of the importance of corporate governance and transparency and disclosure victimization literature reviewTo examine Practices of corporate governance of listed Indian companies using discipline analytic thinking by studying one- course reports of the companies and allocating disclosure bills.The study addresses the following question questionRQ1. How far are Indian listed companies transparent and how much do they disclose?Structure of the projectThe rest of the research is nonionic as follows. Chapter 2 provides a review of the relevant literature followed by research design and methodology in Chapter 3. Chapter 4 presents the findings and discussion. The study ends with chapter 5, shoemakers last which outlines the main points and findings of this study to sop upher with limitations and besides raises future research questions.Chapter 2 Literature ReviewIntroductionIn the sections that follow, the existing literature on corporate governance and disclosure is reviewed. This chapter is divided into three farewells. The first part discusses the importance of corporate governance the secon d part presents the spot theory. The one-third part provides a discussion of the importance of disclosure and transparency and its coincidence with corporate governance.Corporate Governance is an issue of growing importance in developing countries. The Cadbury Report (1992) defines corporate governance as the system by which businesses are directed and controlled.Corporate governance involves a set of relationships amongst a companys management, its panel, its shareholders and other stakeholders. Corporate governance also provides the organise through which the objectives of the company are set, and the means of attaining those objectives and monitoring implementation are determined.?-The precede of the Organization for Economic Co-operation and phylogeny Principles, 2004 (OECD)Though there retain been some(prenominal) studies on corporate governance in developed countries, very gnomish work has been done on developing countries. Most studies have been particular(a) to specific countries. Developing countries encounter a drawing card of problems such as less developed and illiquid capital letter markets, economic uncertainties, and weak legal controls and investor protective cover (Rabelo and Vasconcelos, 2002). Due to these reasons, hard-hitting corporate governance in these countries is essential (T kindrednyi, Enniful-Adu and Onumah, 2007). splendour of Corporate GovernanceGood corporate governance in companies and also across the whole economy helps in providing a take of say-so necessary for the appropriate performance of a market (OECD, 2004). If the governance is weak, fair play markets will be thin and thus there will be slower economic growth. On the other hand, in countries where corporate governance systems are strong (like stronger accounting standards), better investment and growth performance can be achieved (Gugler, et al., 2003).Institutions when making investment decisions, give a bevy of importance to the fact as to whet her the companies follow the basics of corporate governance. frankincense if countries wish to attract capital for a long time, they must follow the globally accepted governance beliefs. Good governance also helps increase the confidence of investors within the country and thus helps reduce the cost of capital (OECD, 2004 La Porta et al, 1998 Bopkin Isshaq, 2009). Foreign investors refrain from investing in developing countries because of weaker governance mechanisms in these countries (Mangena Tauringana, 2007). Thus, companies needing external financing in the future should start adopting better governance appreciates in the present (Klapper et al, 2004).Many authors support the view that for the development of capital markets, effective governance mechanisms are very authoritative (Rabelo Vasconcelos, 2002 Levine Zervos, 1998 Rajan Zingales, 1998). Capital markets can attend to efficiently if there is effective incline of reading between the company and its stakeholder s (Akhtaruddin, 2005).Agency TheoryMany theories such as stakeholder theory, influence theory among others, express the importance of transparency and disclosure. This paper uses the agency theory as a theoretical framework and models that effective corporate governance practices including transparency and disclosure help resolve agency problems such as extraction of personal gain by majority shareholders and under or over-investment (Aksu and Kosedag, 2006).Agency theory models the relationship between the whiz and the agent (Barako, Hancock and Izan, 2006). Agency relationship is a contract under which one or more persons (the wizard) engage another (agent) to perform some work on their behalf. Thus the shareholders (the principal) delegate the decision making function to the manager (or the agent) (Jensen and Meckling, 1976). This separation of ownership and control leads to the incurring of certain cost also known as agency costs (viz. expenses incurred by the principal to monitor agents activities) which are not incurred if the owner and manager are the same person (Barako, Hancock and Izan, 2006). In an agency relationship, managers have an information usefulness which they may misuse for their own personal interest. Conversely it may so happen that agents may disclose more information to enhance the quantify of the firm and to increase the flow of investment in the company by reducing the cost of the agency relationship (Barako, Hancock and Izan, 2006).Patel et al. (2002) opine that the agency problem in corporate governance can be resolved in many ways by a vigilant board of directors, by timely, accurate and sufficient disclosure of financial information and by transparency in the ownership structure. This study deals with one aspect, viz. disclosure and transparency. revealing and TransparencyTransparency and disclosure are at the heart of corporate governance. The OECD Principles of corporate governance (2004) state that the corporate gover nance structure of any association should make sure that well-timed and precise disclosure of all important matters of the organization pertaining to its performance, ownership and boilersuit governance is made. Transparency and disclosure (TD) practices followed by firms are an important component and one of the main indicators of the quality of corporate governance (Aksu and Kosedag, 2006).Companies mainly disclose through their annual reports thus these should contain information that will allow its users to make better decisions on efficient use of scarce resources (Akhtaruddin, 2005). In fact, a lot of what a company discloses in its annual reports and financial statements reflect its corporate governance quality (Bokpin and Isshaq, 2009). A firm if makes correct and adequate disclosure, reduces information asymmetry thereby reducing investors risk (Bushman and Smith, 2001). Similarly, Lang and Lundholm (1996) view, that by removing asymmetry in information, disclosure and t ransparency reduce the take aim of surprises relating to a firms performance thereby making its stocks less volatile.Chapter 3 Research MethodologyWith the aim of examining the disclosure practices of Indian listed companies, the focus of this study is the test of annual reports of listed Indian companies using content analysis. This chapter is divided into two parts. The first deals with research design which is content analysis for this research. The second part presents the method of collection and selective information analysis.Research DesignResearch design embodies a structure which directs the implementation of a research method and the data analysis (Bryman and Bell, 2007). It tries to describe the best way to design the research so that the best data for the research can be obtained (Lee and Lings, 1975). The research designs that may be employed include experiment, survey, case study, action research, grounded theory, ethnography, archival research, content analysis amon g others (Saunders, Lewis Thornhill, 2009).The aim of this research is to examine the disclosure practices of listed Indian companies. Annual reports are intended to disclose information about the companys activities and performance to shareholders and other stakeholders. In devote to examine the level of disclosure, in lines with previous research, this study seeks to identify the presence or absence (disclosure or non disclosure) of certain identified corporate attributes in the annual reports of the companies. An examination of annual reports of companies could be one of the justifiable ways of tasking their disclosure practices consequently, the research design apply is one of content analysis. pith analysis is an analysis of documents and texts (which may be printed or visual) that seeks to quantify content in name of pre-determined categories and in a systematic and objective manner. Objectivity ensures that there is transparency in the procedures for assigning the data to categories so that analysts personal biases are govern out to a large extent (Bryman and Bell, 2007).This study entails analysis of annual reports of listed Indian companies by quantifying content in terms of pre defined categories. Content analysis has been conducted on annual reports by a number of researchers such as Tsamenyi et al. (2007) and Patel et al. (2002) among others, as they are a good instrument to throwaway comparative positions and trends in reporting. As a technique for collecting data, it involves codifying soft and quantitative information into pre-defined categories in order to derive patterns in the creation and reporting of information (Guthrie et al., 2004). The following paragraphs explain the method of collection of data, its quantification and potpourri and its analysis.This study uses the method of content analysis which itself is not free from limitations. The major limitation is the subjectivity involved in coding (Frost and Wilmshurst, 2000). In order for valid inferences to be drawn from content analysis, the reliability of both the data and the instrument of collecting and coding the data must be achieved (Milne and Adler, 1999). This research uses the coding method used by many previous researchers such as Patel et al. (2002) and Tsamenyi et al. (2007) and hence can be regarded as reliable.Data parade and AnalysisThis study entails the examination of annual reports of Indian companies. Data is lay in on 50 companies listed on the National Stock Exchange (NSE) and representing the NIFTY, which is literally the barometer of the Indian Capital Market. The sample thus consists of 50 companies listed on the NSE.The SP CNX Nifty is the National Stock Exchange of India Ltds main exchange. The CNX Nifty tracks the performance of a portfolio of blue chip companies, which are the largest and most liquid of the Indian securities. It consists of 50 of about 935 companies listed on the NSE consisting approximately of 60% of the mar ket capitalization and reflects flop the Indian stock market. The SP CNX Nifty consists of 22 sectors of the Indian economy (Standard Poors, 2010).This research studies the annual reports of these 50 companies. Analysis is limited to only one year because disclosure practices usually do not change dramatically over time (Botosan, 1997). All annual reports are available online on the several(prenominal) company websites and have been accessed thus. The annual reports studied for most of the companies are for thirty-first March 2010.All data has been collected from annual reports of 50 companies which make up to 60% of the total market capitalization. Annual reports are one of the most important devices to convey information and are hence the principle focus of the disclosure index (Alsaeed, 2006).This study uses 98 attributes in all to measure corporate governance and extent of disclosure in India (Appendix 2). These attributes have been compiled by Standard Poors and used in man y previous studies on disclosure. Using an objective methodology, annual reports are analyzed for common disclosure items grouped into three sub- categoriesOwnership structure and investor relationsFinancial transparency and information disclosureBoard and management structure and processA Transparency and Disclosure Score is developed for every company from a binary evaluation of the number of items present in their annual reports, i.e. if a company discloses a particular attribute, a pit of 1 is awarded and if not a score of 0 is awarded. This paper analyzes the TD score for 50 Indian companies representing the NIFTY. Previous studies on disclosure and corporate governance such as those by Patel et al. (2002) and Tsamenyi et al. (2007) had followed a similar approach.Chapter 4 Findings and DiscussionThis chapter presents the findings of this study and also compares the same with previous studies.A disclosure index has been constructed ground on a thorough and rigorous examinatio n of the annual reports of the sample companies. Disclosure is defined as the appearance of an item of information in the annual reports of the companies under study (Karim and Ahmed, 2005). If an item is bring out in the annual report, a score of 1 has been awarded and if the item is not disclosed, then a score of 0 is awarded for that attribute. Thus this disclosure method measures the overall disclosure index (ODI) of a company as additive as followsWhere, d=1 if the item di is disclosedd=0 if the item di is not disclosedn=number of items4.1 Disclosure Scores and Descriptive StatisticsThe disclosure slews for each firm are presented both as actual gain ground and as percentage of the total number of attributes assessed in annual reports. The overall level of disclosure and disclosure score together with the percentage is presented in Table 1 below. Overall, disclosure and transparency register an average score of 72.04 which is quite good. Considerable variation can be noticed in the disclosure practices among the sample companies in India with a range of 54-82. The descriptive statistics are presented in Table 2.Table 1 Disclosure Scores society NamesDisclosure Scores% of ScoreACC Ltd.8080%Ambuja Cements Ltd.5656%Axis Bank Ltd.7676%Bajaj Auto Ltd.7575%Bharat Heavy Electricals Ltd.6868%Bharat Petroleum Corporation Ltd.6969%Bharti Airtel Ltd.7878%Cairn India Ltd7373%Cipla Ltd.7272%DLF Ltd.7373%Dr Reddys Ltd.7575%Gail India Ltd.7676%HCL Technologies Ltd.5454%HDFC Bank Ltd.7171%Hero Honda Motors Ltd.7474%Hindalco Industries Ltd.5454%Hindustan Unilever Ltd.7070%Housing Development pay Corporation Ltd7272%ICICI Bank Ltd.7777%ITC Ltd7878%Infosys Technologies Ltd.8282%Infrastructure Development Finance Co. Ltd8181%Jaiprakash Associates Ltd.7676%Jindal Steel billet Ltd7575%Kotak Mahindra Bank Ltd.7575%Larsen Toubro Ltd.7474%Mahindra Mahindra Ltd.6565%Maruti Suzuki India Ltd.6464%NTPC Ltd.6262%ONGC Ltd.6565%Power Grid Corporation of India Ltd.6565%Punjab Nat ional Bank6565%Ranbaxy Laboratories Ltd5454%Reliance Capital Ltd.7575%Reliance Communications Ltd.8181%Reliance Industries Ltd.8282%Reliance Infrastructure Ltd.7676%Reliance Power Ltd7777%Sesa Goa Ltd7575%Siemens Ltd7474%State Bank of India7474%Steel Authority of India Ltd7575%Sterlite Industries (India) Ltd.6262%Sun Pharmaceutical Industries Ltd.6363%Suzlon Energy Ltd7575%Tata Consultancy Services Ltd.7676%Tata Motors Ltd.7575%Tata Power Ltd.8080%Tata Steel Ltd.8181%Wipro Ltd.7777%.Table 2 Descriptive Statistics of Dependent and main(a) VariablesMeanRangeNo. of firmsOverall DisclosureIndex72.0454-8250Chapter 5 ConclusionThis paper reports on the level of disclosure of a sample of Indian companies listed on the NSE by examining their annual reports. The study uses a transparency and disclosure (TD) index for determining the level of disclosure among listed Indian companies. The index is developed by assigning scores to 50 companies on pre-determined attributes the study uses the bi nary scoring method. Using a dataset relating to listed companies for 2009-10, the study reveals that firms on average report 72% of the items compiled by SP to assess level of disclosure.The results of this study can be useful for investors to help them in gauging the level of disclosure by listed Indian companies. It will also be of interest to researchers, managers, regulators and market participants.The findings of this study must be interpreted in the light of the following limitations. Firstly, the sample used for this study is small in size and is composed of the largest and most followed companies on the National Stock Exchange and thus may not be representative of the population of Indian companies. Secondly, the index used to find the level of disclosure, is that which has been compiled by SP. No distinction has been made between compulsory and voluntary items of disclosure. Also, this study uses the unweighted or binary approach to measure the level of disclosure. Thus, if a company disclosed an item voluntarily, it did not get any extra score for that. Finally, the study gives at best a broad overview of the level and quality of disclosure among Indian companies since the results are based on the data of one year only and lacks longitudinal analysis. march on research is needed to evaluate the trends in the disclosure and also to assess if the level or quality of disclosure has improved over time. all the same with these limitations, there are some important contributions that this study makes. This study reports that the level of disclosure among Indian listed companies is quite high.