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CORPORATE GOVERNANCE RATING

Dr. H Das

Meaning and Functions


Department of Company Affairs(DCA) has setup an institute to rate corporate excellence similar to credit rating agencies such as CRISIL.

Functions
To undertake research in the area of corporate

governance with a view to:1. To improve the overall legal framework. 2. To advise companies and Directors on how to take corporate excellence forward. 3. To make available to investors, lenders and the public the corporate excellence rating documents/ information. 4. To fund from the penalties paid by the companies for violating the provisions of the Companies Act.

Cont.
5. To prepare a comprehensive instrument for rating the good corporate governance practices of listed Companies. 6. To enable the securities market regulated to judge the compliance status of corporate on the assigned parameters. 7. To ensure effective creation, management and distribution of investors wealth. 8. To carry out periodic reviews of the ratings already granted.

CRISIL and ICRAs Rating Methodology


Investment Information and Credit Rating Agency (ICRA) Credit Rating Information Services of India Ltd(CRISIL) Following are the methodologies adopted by CRISIL and ICRA : Shareholding structure Governance structure and management process Board structure and process Examining stakeholders relations Transparency and Disclosures Financial Discipline

Shareholding Structure
To adopt a transparent Shareholding structure where the

key shareholders are clearly identifiable. To adopt a transparent Shareholding structure where the clear cross holdings are visible eg. Birlas, TATAs. To examine the possible impact of cross holdings on to the shareholders. To explore the intention of cross holdings having impact on to stakeholders eg. Satyam Computers, Ultratech Cement.

Governance Structure and Management Process


To focus on the internal decision making process.

To see the quality and nature of information presented to

the Companys Board. To look into the decision making process. To view how responsibilities are delegated. To find how accountability is ensured. To ensure laid down procedures are actually practiced. To see quality of information submitted to the board is already told to the board well in advance. To make available of the information on matters of inter corporate loans, related party transactions, diversification, mergers and acquisitions.

Board Structure and Process


To examine the composition of the Board and its

workings. To see whether the Board is only a rubber stamps or really working e.g. Reliance Communication. To look into the size of the Board and its criteria of its selection. To ensure appointment of Independent Directors for their competency of expertise. To find out the rationality of compensation policy for Directors. To examine the nature of constituted committees and their attendance. To keep record of frequency of Board meetings

Examining Stakeholders Relations


To take into account the rights of shareholders and the

duty of the company to service them all. To look into the interest of financial shareholders such as Banks, Financial Institutions and Fixed deposit holders. To protect not only the interest of the owners but also shareholders. To protect the interest of the workers. To protect the interest of the Customers. To ensure the interest of the society at large.

Transparency and Disclosures


To find out- that better run companies disclose more than

they are required by the law. To emphasize how materialistic the disclosures are. To ensure whether the disclosures really shed light or hide more than they reveal.

Financial Discipline
To determine financial ratings of the company.

To determine not the financial rating alone but the

corporate governance rating. To maximize shareholders value is the rule of the game for financial discipline. To maximize not only the shareholders value but also the value of workers and the society at large.

Conclusion
Credit rating for debt management is the consideration

for excellent management of the corporate organization today e.g. selling of cement unit at Gujarat by JP Associates to Ultratech Cement Satyam Computers Suzlon