Corporate Governance Mechanism

 INTRODUCTION

The 21st century is viewed as an age for accomplishing governance and all the more specifically good governance in the corporate sector as opposed to a focusing in on the business profits & developments. The loopholes in the law in exploited by individuals attempting to profit benefit in the business. In the ongoing occasions the banking sector frauds and scams have begun to increment in a quicker movement while these banks add to a bigger bit of economic development in the country.

One such scam is the Punjab National bank scam which came into light a year ago. Indeed, it very well may be because of the fact that banks have begun to turn out to be more “corporatized” or “monetarily inspired” to submit to such defaults. Also, that is the place the possibility of corporate governance comes to picture. The structure and connections in the organization characterize the corporate course and performances[1]. The investors of the organization are wide spread the world over henceforth the directors of the company stand as a unified body in maintaining he management of the company.

The core pillars of good governance is in the hands of the Directors of the organization. Directors are the essential parts in keeping up the transparency of the affairs of the business. Aside from that, the lower level management is the executer of the transparency system in the organization. It is in fact might be right to say that the shareholder’s activism[2] has led to the significance of the corporate governance in today’s era. Power full corporate governance requires a clear understanding of the particular roles of the board, lower level management, shareholders, their relationships with each other, and their relationships with other corporate stakeholders. Following this line of argument, the paper tires to draw an emphasis on the importance of Corporate governance in India.

A more prominent inspiration to prevail in the market rivalry makes the business organisations to utilize exploitative approaches to succeed which leads to the scams and frauds, one like PNB. A fruitful business can be distinguished through numerous elements. One such significant factor is to see how great the corporate governance systems are being followed. So as to draw in solid investors to the business or to mobilise capitals from people in general, it is significant to follow the corporate administration guidelines.

There can be lot of reasons for the failure of corporate governance like financial reason or duty the legislative norms and burdens etc. The obligation of keep up good governance in an association begins with distinguishing who holds the force in the organization and how it is designated and how it is controlled[3]. The extent of obligation and value can likewise add to the variables impacting corporate governance. Next the legitimate and political system inside with which the organization runs is likewise a significant supporter of the corporate governance in an organisation.

Further, the standards and requirements that is continued in an organization can direct them through good corporate governance. The paper tried to focus specifically on such a failure of corporate governance in the Punjab National Bank in the year 2019. The core idea and object of this paper is to bring about an understanding as to why such failures take place and what are the legal regulations and disclosure mechanisms exist to prevent the collapse of corporate governance. The paper also tried to put forth certain suggestions in relation to Corporate governance mechanisms.

CORPORATE GOVERNANCE FAILURE IN BANKING SECTOR

The monetary Sector isn’t actually totally corporate. Some bit of it is, clearly, yet a part of banks is by and large government guaranteed as legitimate organizations or run as cooperatives Banking as a fragment has been stand-out and the premium of different financial backers appear more basic to it than in the instances of non-banking and non-account areas.

Among various highlights of banking area, the main one is the way that banks structure an essential part of the economy of the country, and any disappointment in a bank may have a prompt bearing on the monetary prosperity of the country. Banks, help in channelizing people’s reserve funds. The second huge driver of a decent corporate administration comes from their underlying models. Banks, by their fundamental definition are significantly from a solid monetary foundation, with the values of the financial backers being diminished to a miniscule degree of credit capital through getting and stores from clients of the bank.

Subsequently, the stakeholders in banks, have a legitimate case of responsibility from the banks and their management. With financial institutions being under serious watch of the Reserve Bank of India just as other administrative bodies, it is a typical perception, that almost all frauds and scans in banks have happened because of consistence Compliance and disclosure failures. Around 4/5th of the financial business in India is heavily influenced by the Public sector banks. This factor convolutes the corporate governance as the power to manage the affairs of the bank vests with the government, while higher level administration and boards of the banks work simply as puppets.

From a financial industry point of view, corporate governance includes the way the board of directors and senior administration manage the business and undertakings of individual banks, influencing the way they set their corporate goals, manage everyday tasks, considering the interests of various investors, align and adjust the corporate functions and operate the business in a way has sound compliance to the laws and regulations[4].  The audit committee, compensation committee and nominating committee ought to be made of all independent & outside directors of the bank who operate separately from any influence from the stakeholders. This independence in the internal management of the bank will ensure against any inclination or bad influence in the audit committee’s decisions.

Furthermore, the “Joint parliamentary Committee on the Stock Market Scams[5]”, in its report has opined that the Ministry of finance also takes a significant role standing as the custodian for regulating the financial institutions in the country. Also given the fact that SEBI has been given powers to undertake investor’s redressal or grievances, it can be positively said that the goal for achieving good Corporate governance is not a far research target.

THE PUNJAB NATIONAL BANK’S SCAM

About PNB

Punjab National Bank (insinuated as PNB) is one of the noticeable banks in India and offers a wide combination of banking organizations, which consolidate corporate and singular banking, provincial cash, financing of exchange and worldwide banking. Among the clients of the Bank are Indian totals, medium and little modern organizations, exporters, non-tenant Indians and MNCs. Punjab National Bank was combined in the year 1895. Since its beginning over hundred years earlier, the bank has created in stature to get one of the fundamental monetary associations in India. PNB is the second greatest PSU bank in India with an overarching presence all over India.

PNB Scam – Long story Short

The Scam came into lime light when in the year 2018. The issue began when one of the accused’s firm introduced a set for import archives to the PNB bank as a trade-off for an acknowledge to the abroad as business. This credit was given to Letter of Understanding to an unfamiliar bank. The most astonishing piece of the trick is that there was no guarantee submitted for the credit taken. These exchange didn’t go to the consideration for senior level administration of the bank in light of the ” Society for Worldwide Interbank Financial Telecommunication (SWIFT)” is an informing framework utilized by the banks to impart. The center financial worker didn’t enlist the exchange. Punjab National Bank enlisted a FIR against Nirav Modi and Mehul Choksi for cheating the bank by plotting with some bank authorities.

Aftermath of the Scam

One of the reasons the fraud was not detected was because the SWIFT mechanism was not interlinked to the servers of the core banking systems. After the PNB scam the Reserve bank of India linked the banking systems to the SWIFT mechanism so as to keep a track on the transactions that take places through the SWIFT[6]. The positive side of the scam is that the Fugitive economic offenders Act, 2018 which was brought into force after Kingfisher scam helped the government to confiscate Nirav modi’s assets. He was second person to be declared as fugitive economic offender after Vijay Mallya.

Corporate Government Mechanism and Disclosure

Prudential Norms

A financial framework in a country will in general be exceptionally formed and overseen by the “prudential standards”. This is on the grounds that, the blunder of one bank or may have an incredible effect bringing about the disappointment of different banks or areas in the economy. Fundamentally, monetary establishments should work in a way that advances “responsibility and straightforwardness” to its financial backers and clients. Great corporate administration and administrative activities fit each another.

The partners rely upon the capability of the board and trust them for their work. The Prudential standards have been embraced for money acknowledgment, resource grouping, and capital ampleness and the Non-performing resources have been given due thought and 90-day technique have been very much received.

Risk Management Practices

The Reserve Bank of India has mandated the bank to inculcate an organised structure for the risk management[7]. The policies adopted for the risk management should be standard with the wide business strategies and adequate liquidity strength. The banks should layout strategies and procedures for controlling the crisis. The Central banks have also mandated a periodical reviews and evaluations of the organisation structure as a part of risk management.

The RBI has suggested in an association the danger level advisory group ought to be utilized to evaluate the dangers of the association. The item for this significant level board will be to draw in with full obligation of evaluating overall risks looked by the bank and choosing the level of perils which will be to the best benefit of the bank. Further, it additionally imperative to take note of that there can be no uniform strategy or design of hazard the executives in an association and this will be in explicit to the specific banks dependent available.

Off-site surveillance

The Banking regulation Act, 1941 grants power to the Central Government to control and supervise the banks in India. In order to effectively attain this goal, the central bank does certain on-site and off-site surveillance[8]. The focused “off-site surveillance” was started in the year 1995 for governing the activities of the banks[9]. The essential target of the off-site surveillance is to screen the monetary wellbeing of the banks under the watch if Reserve bank of India between two on location reviews, distinguishing banks which show money related decay and would be a hotspot for administrative concerns.

This goes about as a trigger for convenient healing activity. The off-site surveillance on the Reserve bank of India facilitates transparent and efficient monitoring of all compliances of supervised entities through a web-based interface, automate the inspection planning process. Further the system also ensures efficient collection of data.

Prompt corrective action

The Prompt Corrective Action or PCA is nothing but a regulatory frame work which prescribes certain thresholds or trigger points after which the bank will come under the watch of RBI. Parameters like “capital to risk weighted assets ratio” (CRAR), Non-performing assets (NPA) and Return on Assets are looked into while considering the threshold. This in fact will help banking sector from being defrauded by the multi-billionaires. The banks are under strict in this mechanism with respect to NPAs and decreed-debts.

Independent Directors

The main significance behind the appointment of independent directors[10] in the company is their capability of decision-making without any influence form the other stake holders. This leads to a higher level of transparency in the organization. It also leads to an effective composition of the board with independent judgement makers who do not hold any secret interest in the firm’s business. After the recommendations by the Kumar Birla committee[11] and recommendations of Narayan Murthy Committee[12], the Clause 49 was amended so as to include the independent director in the m (Birla, 1999) major decision-making process of the management of affairs of the banks and institutions.

Clause 49 of SEBI Listing Agreement

Clause 49[13] of the SEBI Listing Agreement mandates the companies to follow certain disclosures regarding the affairs of the company.  In the year 2003, the SEBI introduced major amendments to the Clause 49 of the Listing Agreement. In Clause 49 of the SEBI listing agreement, the corporate governance and compliance part has been categorised into various heads like the composition of the Board, Audit committee powers, the role of Audit committee, disclosure regulations, meeting of the various committee and few other compliances. Clause 49 II (D) explains that the Audit committee has to “oversight company’s financial reporting process and the disclosure of its financial information to ensure that the financial statement is correct, sufficient and credible”. In theory in its understood that the non-executive directors play a crucial role in bringing up an effective management in the bank. Like in the Case of PNB, the composition of the Board was at fault and audit committee was snot headed by a person with expertise in finance in my opinion. Further the Claude 49 has two types of items i.e. 1.) Mandatory filing items 2) Non-mandatory filing items. The mandatory filing items are to be filed along with the Annual general report.

CONCLUSION & SUGESSTION

The Significant thought of banking foundations requires an extensive viewpoint on corporate administration where rule of banking practices is expected to get financial backers. In created economies, confirmation of financial backers in a freed climate is consistently given by a plan of prudential rules, yet in making economies such security is disrupted by the shortfall of solid and steady chiefs, inadequate exposure requirements, the cost of raising bank capital and the presence of distributional cartels.

As a result of excellent nature of the activities carried on by the banks, they face a lot of issues the degree that the district of corporate administration is concerned. Furthermore, in the Indian circumstance, due to the extraordinary thought of bank assets there are a huge load of inserted conflicts. There exists a vulnerability concerning what standard should be applied while maintaining corporate administration in banks[14]. Regardless, the Central bank holds a huge part in guidelines of these banks and corporate administration in the financial area. Given every one of these realities, information and end, I comprehend that there is as yet an impressive extension for additional examination regarding the part of corporate administration in different locales like US, UK and to relatively break down something similar with that of Indian subcontinent

Suggestion are put forth herewith.

• The awareness about the importance of appointing independent director needs to be spread among the shareholders.
  • All the mandatory filing items contains items like attendance of each director, number of AGMs held, composition of the committees, location and time where the last three AGMs held etc. While the items like mechanism of evaluating non- executive member of the board, whistle blower mechanism are not mandatory items. The whole idea of bringing corporate governance into the existence was to have better transparency and professional ethics but when the company is not mandated to file such items like evaluation methods and whistle blower mechanism before the SEBI there is quite a possibility that a company might try to get away with improper mechanism. Hence these things needed to be brought under the purview of mandatory filings under Clause 49 of the SEBI listing agreement to have a better governance framework.

References:

[1] Singh, J. P. (2007, Jul). Improving the Quality of Corporate Governance in India. Source: Indian Journal of Industrial Relations, Vol. 43., pp. 113-123.

[2] (Mahajan, 2016 Vol.16 Issue 1)

[3] Mahajan, D. N. (2016 Vol.16 Issue 1). Strategies that Led to Failure – Case Study of Corporate Governance. Global Journal of Management and Business Research – Interdiciplinary, pp. 7-10.

[4] Sarkar, J. (2009, Apr). Board Independence & Corporate Governance in India: Recent Trends & Challenges Ahead. Source: Indian Journal of Industrial Relations , Vol – 44, pp. 576-592.

[5] (JOINT COMMITTEE ON STOCK MARKET SCAMS AND MATTERS RELATING THEREETO , 2002)

[6] Jindal, M. S. (2014, , June). Corporate Governance Practices in Banking Sector: A Case Study of Punjab National Bank . International Journal of Engineering and Management Research. Vol.4 Issue. 3, pp. 412-420

[7] (RBI, 2002)

[8] Reserve Bank of India – Off-site Surveillance, About Us.

[9] hosh, A. D. ( 2004). Corporate Governance in Banking System: An Empirical Investigation. Economic & Political Weekly, 1263 – 1266.

[10] Section 149, Companies Act, 2013

[11] (Birla, 1999)

[12] (Murthy, 2003)

[13] Clause 49, SEBI Listing agreement.

[14] Mitra, N. (2014, Oct). CORPORATE GOVERNANCE: A SOJOURN TO FIND A YARDSTICK. Source: Journal of the Indian Law Institute Vol. 56 , pp. 437-462.