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Asia Pacific Journal of Marketing & Management Review_________________________________________ ISSN 2319-2836
Vol.1 (4), December (2012)
Online available at indianresearchjournals.com
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STRENGTHENING CORPORATE GOVERNANCE OF MFIS LOOMS
OPPURTUNITIES OF CULTIVATING NEW FAITH IN FINANCIAL
SECTORS
MISS. HEMA SATAGOPAN*; PROF. DR.G.RAVINDRAN**
*Consultant (APT SOURCE CORPORATE PRIVATE LIMITED)
& RESEARCH SCHOLAR:
PhD Management at Dravidian University,
Kuppam, Andhra Pradesh.
** Reader in Commerce S.I.V.E.T College, Chennai,
Adjunct Faculty in ISBR Business School
Member of the Senate Madras University
ABSTRACT
Corporate governance in the Indian context spells out clearly that ethics and values form the
bases of corporate governance, while adherence to the legal framework is the minimum
requirement. Improvements on Corporate Governance have been made through better financial
disclosures and making non financial disclosures mandatory. Non Executive Directors also play
a role which enables Investors to have effective involvement in the management and conduct of
the affairs of the company. It also facilitates free playoff market forces in securing a change of
management. Major companies consider India as the third most favourable for investment after
China and United States. Monitoring the effectiveness of Corporate Governance is the key
concept emerging in India. The impact of corporate Governance is seen from the allocation of
capital. It encourages higher level of efficiency, quality and competitiveness throughout the
country. Further it boosts private sector development, creates more jobs, and improves the
quality of living and poverty alleviation of a nation. This article is limited to secondary data only
and a few case studies which show strengthening corporate governance looms opportunities and
nurtures faith in the Micro Finance Institution even if they are small and new.
KEY WORDS: Board, CEO, Good Governance, Regulation, Regulator, Transparency.
India a good potential for oversea Investments
India is believed to be a good investment destination by the rest of the World with its mammoth
man power resources and flourishing economic conditions. In spite of political uncertainty,
technical hassles, shortages of power and infrastructural deficiencies, the corporate world in
India is conquering the world through Mergers and Acquisitions. India presents a vast potential
for overseas investment and is actively encouraging the entrance of foreign players into the
market. The Corporate Affairs Minister M .Veerappa Moily on June 6th
2012 emphasized the
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importance of good corporate governance, particularly in the context of inclusive growth. He
said, "Measures such as adopting the culture of good corporate governance which includes
sustainable reporting are necessary steps towards this direction. This creates challenges for
traditional governance structures which can be met by bringing in creativity in the corporate
governance system."
"India needs to deal with the malice of corruption and improve governance in Asia's third-
largest30 economy." Prime Minister Manmohan Singh said on March 18, 2011. India is
currently ranked third in Asia for the overall quality of corporate governance. Manoj
Kumar18reports that "Compared to many other places, India is doing better in terms of growth…
global investors were looking at the long term prospects and wide market in Asia's third largest
economy.‖ In India trade and commerce has been given importance as read from our ancient
Epics34like the Ramayana, Mahabharata, and manuscripts like Bhagavad Gita and Kautilya
Arthasastra4. These books have given great importance on good governance. ―Most importantly,
the corporate governance landscape3 in the country has been changing fast over the past decade;
particularly with the enactment of Sarbanes- Oxley type measures … India should have the
quality of corporate governance necessary to sustain its impressive current growth rates.‖ In the
last six years 30India has faced a lot of crisis staring with Krishna crisis (2007-2008) which was
termed localized29 affair limited to Krishna & Guntur Districts of A.P, followed by Kolar crisis
(2008-2009) when achieving scale rapidly became the most important factor. The symptoms
were tackled but inherent causes were forgotten. Client level controls were forgotten41 and
decentralized /agency model was adopted and thirdly by Andra Pradesh18 where large and
multiple loans created the crisis. Everywhere there was quantity aimed not quality leading to,
non repayment and hence harassment leading to suicidical death. This called for regulators
intervention to protect the poor. Further the Global Scam of Sathyam the giant IT Company
became a global issue of corporate scam. This brought about lack of faith and need for better
regulation.
Other Countries
In the UK and the US, corporate governance mechanisms emphasize the relationship between
shareholder and management. In countries such as France, Germany and the Netherland, the
corporate governance mechanisms take a stakeholders‘ approach to governance, aiming to
balance the interests of owners, managers, major creditors and employees. When compared with
corporate governance in countries like Brazil, China or Russia, it is noted that in the UK and
USA the corporate system and structure is characterized by distributed ownership and
shareholding, as a large percentage of shares is subscribed by the public. They have a well
developed capital market with active shareholder participation. Firms are subject to strict
disclosure norms and investor protection. The focus of good governance in these countries „is
the code of best practices.‟ However, the Japanese and German models are somewhat different.
There is a close association between the financial institutions and the firms, as with the
predominant shareholders, have close relationship towards their commitment to a philosophy of
lifetime association. ―Good governance is central to institutional strengthening efforts and should
be integrated with ongoing technical assistance and training initiatives. Building51 good
corporate governance is a continuous process that requires a long term vision.‖ According to a
2002 McKinsey2 investor opinion survey, investors who were open to paying premiums were, on
average, willing to pay a 25% premium for well-governed Chinese firms and a 23% premium for
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well-governed Indian firms (Barton, Coombes, & Wong, 2004). Randall K. Morck20, Lloyd Steir
(2005) discussed historical developments21 that impact the overall scope of the corporate
governance in different countries. The financial disasters of France disrupted the French
confidence in financial securities and set the corporate governance in the country on a different
equality from that of Britain where similar disturbances had occurred. ―Similarly48 historical
developments such as imperial domination in China that was evident in the late 19th century,
large scale trading networks belonging to particular communities and ethnic groups and sectarian
groups in India, family and bank controlled pyramidal groups in Germany, Zeibatsu and Keiratsu
in Japan and Chaebols in Korea etc., have influenced the process of growth of corporate
governance in the respective countries.‖ A few common features prevalent to all countries
contributing to Corporate governance norms include -Accidents of history, ideas, families,
business groups, trust, law, origins, evolution, transplants, large outside shareholders,
financial development, politics and entrenchment, etc.
―Corporate governance2 in India does not compare unfavorably with any of the other major
emerging economies: Brazil, China and Russia. India ranks high on the ease of getting credit,
and has a well-functioning banking sector with one of the lowest proportions of nonperforming
assets.‖ The World Bank‘s Doing Business 2008 publication gives India an investor protection
score of 6, ahead of each of the other BRIC countries2. An extremely important aspect of
investor protection in any country is securities markets regulation. Using the framework of La
Porta28, etal (2006)--which focuses on disclosure and liability requirements as well as the quality
of public enforcement of the regulations controlling securities markets--India scores an
impressive 0.92 in the index of disclosure requirements, which is the third highest after the
United States and Singapore. India embarked on liberalization in the early 1990s and has been
increasingly integrated into the global economy. ―Globalization23 not only heightens the business
risks, but also compels the organization to adopt norms of transparency & good governance. The
concept of Corporate Governance and Corporate Social Responsibility have been emerging as a
response to corporate failure and also as response to lack of due diligence and care in supervising
executives & offices.‖
Good Corporate Governance
Foreign Investors hold higher standards of corporate Governance in their home countries and
find that in the emerging economies Corporate Governance is weak. Therefore they require
higher governance to maintain their global authenticity. Hence they try to avoid involving
directly or indirectly with local firms whose reputation is scandalous. Further foreigners are wary
of investing in a firm in which the managers are also its controlling shareholders since foreign
investors fear that these ―insiders51‖ may not act in the investors‘ best interest Additionally when
they invest in emerging economies they have the ability to enforce governance rules because of
the governance expertise, extensive experience and better monitoring at reduced costs. As
observed by Karin Finkelstein, Associate Director, East Asia and the Pacific, at the International
Finance Corporation15 (IFC), ―Everyone seems to think our name can be helpful. But there's a lot
of work involved in getting our name attached to the company.‖ Fredrick Lipman52 and Keith
Lipman (2006) were of the view that ―Good corporate governance helps to prevent corporate
scandals, fraud, and potential civil and criminal liability of the organization. It is also good
business. A good corporate governance image enhances the reputation of the organization and
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makes it more attractive to customers, investors, suppliers and, in the case of nonprofit
organizations, contributors. A key approach to addressing the corruption issue is improving
transparency. Without greater transparency new governance laws and codes will do little to
improve governance in China and India. Despite the encouraging changes in India‘s governance
laws, key parties (e.g., regulatory bodies, boards of directors/supervisors, management) do not
yet possess compelling incentives to implement these changes. Dinesh Unnikrishnan8 has stated
in his article of June 2012 that ―Investors across the globe have conveyed the message to
MFIs in strong words and some even want legal agreements to ensure these firms meet
their social objectives and implement fair corporate governance practices in letter and
spirit.‖ Further Lok Capital8 has invested in Bhartiya Samruddhi Finance Ltd, Ujjivan
Financial Services Pvt. Ltd and Spandana Sphoorty Financial Ltd. Investors typically pick up
stakes of up to 35% in MFIs they put their money into. In2011 Oikocredit8 in its Social
responsibility performance report has disclosed some Indian MFIs are ―seeking easy money
without a genuine social mission or sufficient respect for their clients‖ for the current plight of
the sector. With reference to Private Limited Companies Gary Hamel32 states ―Transparency is
often just as effective as a rigidly applied rule book and is usually more flexible and less
expensive to administer.‖ Alok Prasad15CEO of MFIN stated ―The micro-finance industry,
which reported revenues of over Rs.26, 000 crore during its peak time, is expecting to see a
growth between 25 and 30% this year outside Andhra Pradesh.‖ Investors45 are particularly
concerned about the quality of management and standards of corporate governance, given that
most approach microfinance projects with a long-term perspective.
Micro Finance
Microfinance is a general term to describe financial services to low-income individuals or to
those who do not have access to typical banking services. It is also a means for low-income
individuals who are capable of lifting themselves out of poverty if given access to financial
services. But it should never be seen as the only tool for ending poverty. Those Institutions
which give such micro financial services are Micro Finance Institutions (MFIs). India has around
800 49MFIs, which operate in the form of non-banking financial companies (NBFCs), trusts, co-
operative societies and nongovernmental organizations (NGOs). NBFC-MFIs account for 80%
of the industry in terms of assets. India ranked high on ease of getting credit as well as
functioning banking system that has one of the lowest percentage of non-performing assets16. As
regards other factors of institutional framework, India ranked 72nd
out of 180 countries on
Corruption Perception Index with an absolute score that suggested corruption being perceived as
a 'serious challenge. In India, the question of corporate Governance has come up with the wake
of economic liberalization5 and deregulation of industry and business as the demand for a new
corporate ethos and stricter compliance with the law of the land. In the context of the unique
situation in India where the financial institutions hold substantial stakes in companies, the
accountability of the directors, including nonexecutive directors and nominees, has come into
sharp focus. In 2005, there were an estimated one million microloans outstanding in India‘s
Andhra Pradesh state; by 2010 that number skyrocketed to an estimated 25-27 million
microloans outstanding, valued at about $4 billion23, SKS30 issued the initial first Public offer
(―SKS Microfinance IPO sees strong demand,‖. The Wall Street Journal10 in October 2010
reported on stories being circulating in reputable media about clients committing suicide due to
an inability to repay their loans, the question of whether MFIs in Andhra Pradesh maintain
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lending discipline and enforce ethical conduct came suddenly into the limelight. The 2011
Banana Skins report ranked corporate governance the fourth highest risk both by itself and as an
issue deeply embedded in each of the top three risks cited: client credit risk, industry reputation,
and competition.. The difficulty of finding new clients and managing larger client loads pushes
loan officers toward circulating more and more loans among established clients rather than
growing clientele23.In 2010, MIX reported that MFI clients and depositors have been growing
about 20 percent a year worldwide – with$65 23billion in loans outstanding and a total deposit
value of about $30 billion. Seven Companies have received private investments in the fiscal year
2011-2012 as affirmed by Alok Prasad15 CEO MFIN to The Hindu who substantiated “After a
challenging year in 2011, we see the industry slowly moving towards normalization. With the
support from RBI and the ministry of finance, we see an improvement in the business in non-AP
states. However, in AP, the business continues to remain zero,‖ Namrata Acharya21 details of
―Firms replacing microfinance industry are raising large amounts from PE investors & issuing
new loans.” She further speaks of the new MFIs as rainmakers (major PE deals after 2010)
mentioning MFIs received private equity funds worth Rs 423 crore. India needs 'game-
changers' for microfinance ( refer case study Anjali below.)
Corporate Governance Definition:
According to Dr. Yilmaz Arguden15, ―The essence of good corporate governance is ensuring
trustworthy relations between the corporation and its stakeholders... Good corporate governance
is a culture and a climate of Consistency, Responsibility, Accountability, Fairness,
Transparency, and Effectiveness that is Deployed throughout the organisation (the ‗CRAFTED‘
principles of governance).‖
As per Thierry Buchs23, (SECO), "Good corporate governance is the glue that holds together
responsible business practices, which ensures positive workplace management, marketplace
responsibility, environmental stewardship, community engagement, and sustained financial
performance. This is even truer now as we work worldwide to restore confidence and promote
economic growth." Quoting Hurst16 (2004) "Corporate governance refers to the broad range of
policies and practices that stockholders, executive managers, and boards of directors use to (1)
manage themselves and (2) fulfill their responsibilities to investors and other stakeholders."
Shleifer and Vishny33 state that ―Corporate governance deals with the ways in which suppliers of
finance to corporations assure themselves of getting a return on their investment." The Narayan
Murthy report, (2003) has a comprehensive definition: "Corporate governance is the acceptance
by management of the inalienable rights of shareholders as the true owners of the corporation
and of their own role as trustees on behalf of the shareholders. It is about commitment to values,
about ethical business conduct and about making a distinction between personal and corporate
funds in the management of a company."
These definitions reflect the Indian culture of corporate governance as articulated by Mahatma
Gandhi in his writings. He believed that management is a trustee of shareholders capital and
business is a trustee of all resources, including the environment. Liberalization of the Indian
economy began in 1991. Since then, we have witnessed wide-ranging changes in both laws and
regulations, and a major positive transformation of the corporate sector and the corporate
governance landscape.
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Table No.1: Brief History of Corporate Governance in India at a glance
YEAR Committee Report
1950
an Act was passed for the registration of companies with
limited liability
1953-
1954
The Bhabha Committee recommended as upper limit of20 directorships which
was incorporated into Companies Act 1956
1991 Cadbury Committee U.K.
1996 First Formal Corporate
Governance Committee
chaired by a leading Indian industrialist, Rahul Bajaj,
submitted its
recommendations in April 1998.
1998 The Confederation of
Indian Industries (CII)
A code of Corporate Governance
SEBI Several Committees to make reports which created
landmarks
1999 The Kumaramangalam
Birla Committee
Was instrumental in the addition of a new Clause 49 to
the listing agreement with the Stock Exchanges. Its
major contribution was in recommending the
constitution of the Board of Directors (specifying the
minimum number of independent directors and board
procedures); the Audit Committee (including the
mandatory requirement of an audit committee);
Disclosures (mandatory Management Discussion and
Analysis section in Annual Reports + other disclosures).
For the first time in the history of corporate India,
specific corporate governance processes and disclosures
were mandated under the listing agreement with the
stock exchanges
2002 Naresh Chandra
Committee
The committee recommended best practices regarding
the statutory relationship between auditors and
companies and set the highest standards for the role of
audit committees. It recommended that all members of
the audit committee should be independent directors,
thereby plugging the loophole that could make it
possible for a promoter-director without an executive
role in the company becoming a member of the audit
committee
2003 The N.R.Narayana
Murthy Committee
Several of its recommendations, concerning related
party transactions and qualifications of audit committee
members were accepted by SEBI and made mandatory
under Clause 49
2004 JJ Irani Committee Reformed Companies Act 1956and recommended 15 as
maximum Directorship
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Corporate Governance started as a self-regulatory move from the industry rather than the rule of
law.
Table No.2: The key mandatory features of Clause 49 regulations
Table No. 3: The areas where Clause 49 stipulates specific corporate disclosures
Sl .No. Areas of Specific corporate disclosures
i. related party transactions
ii. accounting treatment
iii. risk management procedures
iv. proceeds from various kinds of share issues
v. remuneration of directors
vi. a Management Discussion and Analysis section in the annual report discussing
general business conditions and outlook
vii. a Management Discussion and Analysis section in the annual report discussing
general business conditions and outlook
Further requirement of Board Committee to address Grievance of Shareholders /Investors and
the process of share transfer be expedited through delegation of authority to an officer or
committee. There were several incidents of companies allotting preferential shares to their
promoters at highly discounted prices, as well as several instances of ―start-up12‖ companies that
simply disappeared with their investors' money.‖ (Goswami, 2002).The important pillars of
Corporate governance are given in Figure No.1
Further requirement of Board Committee to address Grievance of Shareholders /Investors and
the process of share transfer be expedited through delegation of authority to an officer or
committee. There were several incidents of companies allotting preferential shares to their
promoters at highly discounted prices, as well as several instances of ―start-up12‖ companies that
simply disappeared with their investors' money.‖ (Goswami, 2002).The important pillars of
Corporate governance are given in Figure No.1
Sl. No. Key Mandatory Features
i. composition of the board of directors
ii. the composition and functioning of the audit committee
iii. governance and disclosures regarding subsidiary companies
iv. disclosures by the company
v. CEO/CFO certification of financial results;
vi. reporting on corporate governance as part of the annual report
vii. certification of compliance of a company with the provisions of Clause 49
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FIG.No.1: The Four Pillars of Corporate Governance
Source: Corporate Governance Beyond letters Pg1.13)
All parties to corporate governance have an interest Directors, management and workers receive
salaries, benefits and reputation. Shareholders receive capital return. Customers receive goods
and services. Suppliers receive compensation for their goods and services (Refer to Fig No2.)
FIG. No.2: The Various Stake Holders affected by Corporate Governance of the
Company (Source: Corporate Governance Beyond letters Pg1.13)
Corporate Governance principles have been associated increasingly with issues of competitive,
corporate citizenship and social and environmental responsibility, transparency, accountability
and corruption free processes. Principles of Corporate Governance have become conventional
wisdom with realization that it is necessary tool for the economic health of accompany and more
importantly, for society at large (Refer Case study on Anajali)
Transparency Fairness in Action Accountability Responsibility
Corporate Governance
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FIG No.3: Ranjanna Kumar 27(2007) lists the following Essential Principles of Governance
Source: (Jitendra Shrimali16 &Dr.Harshita Shrimali)
REGULATION
Regulation is an authoritative role ―a principle or condition that customarily governs behaviour‖
rules verses principals enforcement action beyond obligation. Regulation and supervision44 of the
formal banking institutions is well organized under various Acts, viz. B.R Act, RRBs Act,
Cooperative Societies Acts, and RBI Act. While the RBI supervises commercial and urban
cooperative banks and NBFCs, NABARD has been authorized to supervise RRBs and
cooperative banks on behalf of RBI. As regards MFIs, none except those registered as NBFCs
and cooperatives are presently treated as part of the financial sector. Finacle from Infosys43 states
―Gone are the days when MFIs were viewed as a loss making charitable institutional exercise.
More and more countries are enabling, empowering supporting the MFIs with regulations and
legislations. Exclusive central regulatory bodies, specific legislations, effective support and
grievance redressal mechanism are gradually being put in place by governments worldwide.‖ It
also reports that, South Africa has formed a Microfinance Regulatory Council to monitor the
MFIs. In Kenya the Microfinance Unit of Ministry of Finance regulates the MFIs. The National
Commission of Banks and Securities supervises the operations of MFI in Mexico. In almost all
the other countries the respective central banks are the regulatory authority for the MFIs. Islamic
MFIs follow the Shariah Supervisory Board (SSB) in the respective region. Different countries
have passed or are proposing to pass exclusive regulations pertaining to the MFIs.
In India the Company Finance Bill was introduces in Lok Sabha in 2009. The Bill was
withdrawn following the recommendations of the Parliamentary Standing Committee on
Finance. Revised Bill was once again introduced in December 201113but was sent back for
consideration of the Standing Committee once again on December 22nd
2011. It is now awaiting
approval in this Monsoon season. In 2009, Ministry of Corporate Affairs (MCA) issued
voluntary guidelines for Corporate Social Responsibility (CSR). The guidelines11 discuss key
aspects of governance practices that business organizations need to focus on. The policy covers
six aspects: 1) Care of all stakeholders; 2) Ethical functioning; 3) Respect for workers‘ rights
and welfare; 4) Respect for human rights; 5) Respect for environment; and 6) Activities of social
and inclusive development. The policy requires that business entities should provide an
implementation strategy covering projects, timelines, resource allocation etc. Organizations to
communicate their commitment to CSR can put the policy on their website with each locations
implementation strategy. This will help communicate organizations ethical stance to all third
parties wishing to do business with it. Regulators should monitor systems for recruitment, training,
and supervision of field staff 22. Good governance ensures that stakeholders with a relevant
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interest in the company‘s business are fully taken into account. In addition, good governance can
make a significant contribution to the prevention of malpractice and fraud, although it cannot
prevent them absolutely. Transparency, accountability, reciprocity, participation, rule of law,
oversight, incentives, elimination of price controls, and simplification of procedures. The Indian
regulatory framework has ensured that the interests of stakeholders are well protected, though
ultimately, the prime responsibility of good governance lies within an organization and not
outside it. CEO of MFIN Mr. Alok Prasad stated, “After a challenging year in 201119, we see the
industry slowly moving towards normalization. With the support from RBI and the ministry of
finance, we see an improvement in the business in non-AP states. However, in AP, the business
continues to remain zero.‖ Regulatory agencies27 are trying their best not only in the legal,
effective and credible enforcement but also in safeguarding the interests of the investors and the
economy as a whole from any kind of disturbance. The Ministry of Corporate Affairs (MCA)
had set up a National Foundation for Corporate Governance (NFCG) in association with the
Confederation of Indian Industries (CII), Institute of Chartered Accountants of India (ICAI) and
other National level organization as a not-for-profit trust to provide a platform to deliberate on
issues relating to good corporate governance, to sensitize corporate leaders on the importance of
good corporate governance practices as well as to facilitate exchange of experiences and ideas
amongst corporate leaders, policy makers, regulators, law enforcing agencies and non-
government organizations . Gradually more of the Indian companies are recognizing the
challenge of going global and are using the voluntary reporting approach as a market-based
instrument during the last five to six years ago. For almost all of these companies, the GRI
Guidelines is the reference point against which reports are being prepared. .The largest MFIs in
India get most of their equity from commercial sources and can leverage that equity with
borrowing from banks relatively easily. The Reserve Bank of India (the Indian central bank)
regulates banks and NBFCs that engage in microfinance activities. It is now essential to describe
the role of Independent Director and Executive Director a much debatable subject of today. The
Reserve Bank of India (RBI) in April 2012 49asked microfinance institutions (MFIs) to improve
their corporate governance and rationalize compensation packages to bring a semblance of order
to the crisis-ridden sector. Ernst &Young 50(E&Y) Fraud Investigation& Dispute services (FIDS)
report, ―The need of the hour is for legislative to draw line between ID&EDs by defining their
functional responsibilities and demarcating their liabilities…In the Corporate Governance
Changing Regulatory Scenario and Role of Independent Directors …the Companies Act 1956
does not make any distinction between the accountability of ID &ED. The Act gives immunity to
ID as against EDs.‖
Transparency: In September 2010, Oikocredit‘s Indian subsidiary, Maanaveeya Holdings Pty
Ltd, brought together representatives of more than 80 MFIs from all over the country for a two-
day conference on social performance management. The conference highlighted the necessity for
partners to adhere to client protection principles, which include transparent and fair pricing,
ethical collection practices and avoiding over-indebtedness. ―Now, transparency rules46.
Corporations must establish new systems of accountability, and encourage long-term
participation in decision-making by both shareholders and staff. Those that succeed will be better
equipped to create wealth, solve complex problems, and compete in global markets.‖ It means
keeping to rules and regulation in the enforcement of decisions taken as well as making
information freely available and directly accessible to those who will be affected by the decision
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and their enforcement. Also it involves the provision of information in an easily understandable
form and median. (refer Case Study on Equitas )
Fig No.4: CEO Highest Rank
The CEO31is the highest ranking executive in a company, whose main responsibilities include
developing and implementing high-level strategies, making major corporate decisions, managing
the overall operations and resources of a company, and acting as the main point of
communication between the board of directors and the corporate operations. The CEO will often
have a position on the board, and in some cases is even the chair. Dilip Kumar Sen7 identifies
that the Indian Corporate Sector has companies often run as if they were the managing directors
or CEO‘s personal freedom. The interest of principal shareholders is often fully taken care of
before benefit of other shareholders. Further majority of Directors are ignorant that they are
agents of shareholders and their position is one of trust and faith. The participation of non-
executive directors in meetings whether of the board or any committee ―thereof is inversely
proportional to the health of the bottom line—better the bottom line lesser the participation.‖ The
Directors fail to update themselves on changes of law and regulations. The members of the
Board seldom raise relevant questions. Except under crises the Nominee Directors also play a
passive role. Infosys 33Technologies is considered the benchmark of good corporate governance;
its CEO was recently fined by its audit committee for neglect inadvertently failing to disclose
certain transactions within the24 hour time set for such disclosure. In most of the MFIs in India,
it was observed that the promoter/chairperson/CEO is the same person that in real terms hampers
44 the basic chemistry of the Governance architecture and transparency of operation.
Transparency is easily brought about when the responsibilities are split between the chairman
and the CEO.
Relationship between the Board and the CEO26: Board members and the CEO must maintain
a degree of distance. Loyalty to the CEO, rather than to the organization, will not allow directors
to make independent, responsible decisions, particularly on issues such as management
performance and compensation. This issue is predominantly pertinent to many nonprofit MFIs in
which the CEO/founder has specially selected the board. In brief, the board‘s role is to provide
guidance to management in the overall strategic direction of the organization, leaving the CEO to
actually manage the institution. If the board loses confidence in the CEO, its role is not to step in,
but to replace the CEO and manage the smoothest transition possible for the organization. The
role of CEO is to constantly improve what is essential to human progress by mastering science
and technology. It has been reported that “In times of crisis, a key differentiator is the quality of
leadership and the governance structures. ―Many MFIs, including Ujjivan and Janalakshmi,
have had strong promoter CEOs, resilient management teams and an undiluted mission
focus. These factors have allowed them to stay ahead in the game,” says Alok Prasad21, chief
executive officer, Microfinance Institutions Network (MFIN). The study by Roy Mersland47 and
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Rediar Oystein Strom (2007) show that the overall financial performance (ROA) is improved
when the roles of CEO and chairman are split, when the CEO is a woman, and when loans are
made to individuals. Stronger competition reduces operational costs, portfolio yield and return on
assets. Oxelheim and Randoy (2003) found that firm performance was better in firms with
international directors. International board members may be seen as an indication of
independence. Normally the MFIs target Female customers (Armendariz de Aghion and
Morduch, 2005). Presumably, having a high fraction of women on the board would help the MFI
understand its customers better; whom we expect would translate into better firm performance.
―Good governance6 is integral to the very existence of a company. It inspires and strengthens
investor‘s confidence by ensuring company‘s commitment to higher growth and profits.‖
SYSTEM OF RATINGS
The Board/Management of the MFIs should insists for rating of their organization by the external
rating agencies (e.g. CRISIL-leading rating agency in India and M-CRIL, a specialized rating
agency for the MFIs) at a regular interval to assess different aspects of their operation and to
improve their operational efficiency. It‘s evident from CRISIL‘s assessments that the majority of
MFIs in India are still below the norm, if measured against the standard of acceptable corporate
governance standards–whether it pertains to management structures and control, management
information systems, disclosure standards, or board composition. The Commercial banks in India
which happens to be the major source of funds, appraise the MFIs based on certain factors and
governance has been given maximum (>60%) weight age for sanctioning of loans. Even the
small MFIs are getting better ratings by the rating tools adopted by the banks due to their
governance structure. In Standard & Poor report (Nov 2008) Venkataraman and Raj Sekhar of
CRISIL termed governance-related issues are the biggest challenge to the sustainability of Indian
MFIs and point out that NGO-MFIs are likely to be floundering on this front, in their quest to
balance the transition from a charitable entity to a commercial one(SRM_KIT)
FIG .No.5: DIFFERENT TYPES OF BOARDS
.
Source: Principles &practice of Micro Finance Governance 25(pg3to5)
Effective Governance
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As the Board governs management25 ―Effective governance strikes the appropriate balance in
the relationship between boards of directors and management in their combined efforts to move
the institution forward. Each brings unique skills to this joint effort and views the institution
from a different lens. Together they add value precisely because they are complementary.”
As detailed by PRISMS242005 , “ Good Governance is important because it helps the institution
to prevent fraud and mismanagement , Promote sound decision making, Avoid costly fines and
litigation, Create/maintain a positive corporate image, Attract and retain clients, Attract and
retain financing and investment (from commercial banks),the interplay between board and
management centers on this relationship between strategy and operation, both of which are
essential for the successful evolution of the institution.‖ The authority of the Board is made clear
through CASS: compliance, accountability, strategic direction and self assessment.
Fig. No: 6 Corporate Development
Framework
An effective corporate governance framework (refer Fig. No.7) needs to be flexible
to respond to changing market dynamics, yet it must be unwavering as regards its
values and ethics. (refer case study Anjali )
Case Studies:
Fonkoze Financial Services
Fonkoze1 founded by a catholic priest is ―Haiti‘s Alternative Bank for the Organized Poor.‖ It
is the largest microfinance institution (MFI) in Haiti, serving more than 56,000 women
borrowers, most of who live and work in the countryside of Haiti, and more than 250,000 savers.
With its network of 46 branches covering every region of Haiti, it is also the only MFI that is
truly national in scope. The name of this institution is Bank Fonkoze; S.A. In the interim period
till commercial banking license from the Central Bank was obtained, Fonkoze Financial Services
incorporated in 2004 undertook operations of the bank .It has 38 branches with 99percent female
solidarity loans having 50,718 active clients with outstanding portfolio$9,505,179 and savings of
$20,927,815from savings account 222,850. Fonkoze1 is an example of an MFI taking
corporate governance seriously and a powerful illustration of how strong corporate governance
allows an MFI to withstand an earthquake, whether geophysical or financial. Fonkoze, Haiti‘s
largest MFI, uses a heterodox client-member model22 of corporate governance that was crucial in
maintaining lending discipline while innovating in response to client needs in the aftermath of
the tremendous and tragic January 2010 earthquake. Fonkoze has both for-profit and nonprofit
arms registered in Haiti, yet they are governed in practice as a single body under one corporate
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governance structure. The culture of corporate governance22at Fonkoze is strong enough that the
institution is able to serve as a consistent and transparent medium for millions of dollars in
additional post-earthquake grants and aid flows as a substitute to government channels. Going
forward15, better corporate governance at MFIs will only become more important due to the
growing movement towards savings-led microfinance and micro insurance, where deposits or
premiums from the poor themselves are leveraged as microcredit or even larger investments –
turning MFIs into real financial intermediaries22.
Casphor Micro Credit
CASPHOR Micro Credit40 is a poverty focused, not for profit Company that provides
microfinance exclusively to Below Poverty Line women in eastern U.P. and Bihar. Casphor
Micro Credit is a section 25company, started micro Finance in 1998with headquarters in
Varanasi and has 269 branches and staff of 1139 in 2010. It is a profitable Micro Finance
Company but does not distribute dividends and so fails to attract commercial venture. It was the
first Micro Finance Company to receive investment from pedigree investor Vinod Khoshla of
Sun Micro Systems .The company works in a focused manner in the poorest areas of Bihar and
Uttar Pradesh charging very low interest without hidden charges. The management team of
Casphor is very talented under the guidance of Mr. David Gibbson the founder. The employees
are motivated as seen from the low attrition reports. Further the company has never defaulted on
any financial institutional credit so far. Above all, Cashpor is sincere, fair, transparent and ethical
with all its stakeholders – Employees, Clients, Investor, Bank, Regulator and the Indian
Microfinance Sector. In 2009 CRISIL ranked it as 8th
in the list of top 50Micro Finance
companies by loan amount outstanding. While MIX in 2009 ranked it as fourth in the world. Ala
Tom Cruise and Nichole Kidman in their film ―far and away” show that Cashpor has strictly
maintained its radius not giving in to temptations. It uses poverty measurement tool Casphor
housing index. It has built good relations with 36 banks and financial institutions .In 2011 Dr.
David Gibbson has received the Micro Finance India Award for contribution to the sector.
Equitas Private Limited Micro Finance India
Equitas Private Limited Micro Finance India 39a start up micro finance company in 2007 was
ranked the Top 2 in Indian companies by MIX in 2009 on basis of high quality financial data. It
has been provided with a3star rating for its financials .As per Mr. Chuck Waterfield (founder of
mftransparency.org,) Equitas is probably the only MFI in the world to declare their true
interest rate to their clients. It operates in Tamil Nadu and expects to spread to other states in
the south. Equitas created a ―Responsible Microfinance‖ model, which would address the issues
and challenges faced by this sector while being mindful of creating a workforce of ―Trustworthy
Employees.‖ Equitas though an unlisted privately owned company, the Managing Director from
inception of the company had decided to abide by regulations applicable to public listed
companies. Therefore the company has a strong Governance process with one third as
independent Directors. The Managing Director is very transparent and shares the details of his
compensation with employees. The Company has a robust risk management system which has
different mechanisms to check the quality of service provided to its customer base. There is a
Managing Committee with people from different heads meeting weekly to review performance.
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Repayment of loans is assured because of joint liability system .The Company has designed a
pricing policy based on philosophy of fairness. The company believes in charging the right
rates of interest rather than interest lower than market rate. The clients are mostly illiterate and
therefore the company ensures transparency by printing every transaction in the customer‘s
passbook. This includes the interest rate, reducing balance, Internal Rate of Return, and
administrative charges which most MFIs do not disclose to consumers. Equitas believes in
―Treat your employees the way you want them to treat your best customers” which has
given importance to quality of life. Equitas has industrial associations with Sadhan which
promotes the service to low income households; Equitas is the founder member of MFIN which
promotes financial inclusion goals and BWTP network to improve quality of life of the
members.
Janalakshmi Financial Services
Janalakshmi42 means People‘s wealth. It is a social business designed in a2 tier structure namely
i) for profit operating company NBFC and ii) Section 25 called Janalakshmi Social Services .
The NBFC serves urban undeserved with promoter stake held in not for profit entity. It is the
only NBFC so structured in India with deliberate interest in keeping the social spirit. The
company has 66 branches spread over 10 States - Punjab , Haryana , new Delhi , Uttar Pradesh ,
Madhya Pradesh ,Rajasthan ,Gujarat ,Maharashtra , Karnataka and Tamil nadu . Though it is a
Private Limited Company it has displayed details on its web. Grievance mechanism, internal
guidelines for corporate governance, Fair Practice Code, Auditors Report and Financials proving
to be very transparent . In March 2010, Janalakshmi also reportedly raised $10 million in a round
led by Treeline Asia Master Fund. Other investors included Narayan Ramachandran, former
country head of Morgan Stanley India, Bellwether Microfinance Fund, Lok Capital and the
Michael and Susan Dell Foundation. The Investors have faith in the Company as seen from the
Economic Times report of July 2012- ―In what is the second-largest risk capital investment in the
Indian microfinance sector in 2012, urban-focused micro-lender Janalakshmi Financial Services
has raised Rs 80 crore to complete a third round of financing. Bangalore-based microfinance
institution (MFI) Janalakshmi Financial Services has raised INR1.45 billion ($26.4 million) in a
Series C round of funding from a group of investors.‖
The capital comes in two tranches. The first, led by Citi Venture Capital International (CVCI), is
worth INR650 million and was completed in June 2011. The second, led by India Financial
Inclusion Fund and GAWA Microfinance Fund, contributed another INR800 million, closing last
month. CVCI and hedge fund Tree Line Asia Master Fund also participated in the second
tranche. Unitus Capital served as financial advisor for the transaction. As read in Micro Focus
July 2012 Eric Savage, Co-Founder & President of Unitus Capital has spoken very high of
Janalakshmi which has raised Rs.145 crores from top global investors . This is a signal of the
end of Indian Micro Finance catastrophe. The Internal guidelines for Corporate Governance
has the following objectives :i) Adoption of best corporate practices to increase the confidence of
investors and other stakeholders. ii) Ensure adherence with all the applicable statutory
regulations relating to Corporate Governance. Further the company has the following committees
–Audit Committee, Nomination Committee, and Asset Liability Management Committee. All
related party transactions are subject to Committee approval.
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Bandhan Financial Services38
Bandhan22 has showed itself as an example of new breed of firms has taken its place, raising
large amounts from private equity investors and issuing record amounts of new loans, while
signaling a way forward for the industry. It has attracted PE investors and is issuing new loans.
Bandhan received 135crores from International Finance Corporation35 private investment arm
of World Bank in September 2011. As per the views of Mr. Abhijit Ray co founder of Unitus
funds have been denied to Andra Pradesh because of the results of crisis. But the investors are
“now looking at fundamentals like strong corporate governance, operations, strong management,
rather than just profitability,‖ Bandhan is a perfect example of how crisis rose in West-Bengal
based institution to the top rung between March and December, 2011, Bandhan‘s loan portfolio
grew by 34 per cent. But Bandhan had been choosy in diluting equity stake, except for IFC and
SIDBI. It made a very smart move in May2010, just four months before the AP crisis, by
voluntarily slashing the lending rates by nearly five percentage points to 19.1 per cent from 24
per cent on a reducing balance. This brought Bandhan to the limelight when crisis hit the sector ,
Bandhan posted net profit of Rs 117 crore, compared to Rs 74 crore a year before. Bandhan had
not showed itself in list of 3 Top Micro Finance Companies in 2010, it was less than half of SKS
but in 2011 it has almost doubled that of SKS. Bandhan Chairman and Managing Director
Chandra Shekhar Ghosh38 told this correspondent, after announcing the IFC deal, that the
organisation had a fair presence in the tribal belts in West Bengal, Jharkhand, Chhattisgarh and
Madhya Pradesh. ―We will increase our outreach and recovery is good in these areas,‖ he said.
Indonesia had sought technical assistance from Bandhan for capacity-building at its own
microfinance institution MBK.As IFC was becoming their equity holder Bandhan would have to
further tone up its internal corporate governance.
Anjali Micro Finance
Anjali Micro Finance 37 is an NBFC registered with Reserve Bank of India a company promoted
by Mr. John Mayne with Leverage Capital Group and Mr.Jayaraj. The company has a
geographical spread over four states of Assam, West Bengal, Tripura and Bihar with around 17
branches and recording repayment rate of 98.32 percent covering portfolio of Rs.126667000.
The company has built a strong management team comprising of professionals with expertise in
the respective areas of operation. The management team has the experience of having managed
large organisations and can handle scale up very well. It aims at dual objective of serving poor
and providing handsome returns for investors. The management team , a conglomerate of
likeminded individuals from various spheres of expertise but guided by one common goal, has
drawn up the business plan which includes geographical expansion of branch network ,
innovative products , technology driven software solution and plans for attracting and retention
of talent . India needs “game changers „for microfinance. Anjali Microfinance proposes to
change the dynamics of the game and serve the country in its poverty alleviation endeavor.
The company is committed to building profitable and inclusive growth strategies geared to
doubting the income and assets of over one million poor people by 2015
In 2010 December it was recognized as pioneer in micro finance industry for transparency in
pricing awarded by mftransparency.org. The company has adopted a special process for
redressing member‘s grievance. The company has endorsed the Smart Campaign on client
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protection, avoiding over indebtedness, transparency in pricing, appropriate collection process,
ethical staff behaviour, mechanism for redress of grievance and privacy of client data. MIX has
awarded Silver as Social Performance Rating Award. The News on the Website of the company
flashes: one time settlement of Insurance claims, Anjali Initiative for Social Development has
started working for impacting underserved people, Employment generation for the youth through
Parivar Mitra, Corporate governance to create and measure impact, Govt. of India has entrusted
Anjali for SHG promotion at Tripura under NRLM, Signed MF Transparency Endorsement
Statement. This shows the transparency observed by the company.
Arman Financial Services Limited
Arman Financial Services Limited36 was incorporated as far back as 1992as Arman Lease
&Financial Pvt. Ltd. It is registered as an NBFC with RBI as Class A, deposit taking NBFC .It
mainly lends for two wheelers, auto rickshaws and micro finance loans. The Joint liability Group
model is being adopted and much focus is on Women borrowers. The Company believes in
conducting its affairs in a fair, transparent and professional manner and maintaining the
good ethical standard in its dealing with all its constituents. Corporate Governance is
followed, the policies include having professionals as Directors adopting practical policies and
effective systems and procedures subjecting business processes to Audits and checks measuring
upto required Standards. The directing force behind the company management is ―Tomorrow‗s
progress Today.‖ and baked by a culture of high technology and quality.‖ Further the company
believes ―to satisfy customer needs and retain leadership by delivering quality services through
continuous improvement by motivated employees.‖The company believes the philosophy that
―Corporate Governance is an important tool for shareholder protection and maximization of long
term values.‖Having 21branches which keep increasing as need arises. It is noted that Arman has
been attracting Foreign Investment interest. In 2011 November Arman got Rs. 15 Cr. Geert
Peetermans9 Chief Investment officer of Incofin Investment management states that they are
ready to assist Arman ―not only by this capital infusion but also technical assistance.‖The
company had been rated by ICRA at ―7‖ which was an indication of safe borrowing from the
bank. Moreover the company has been rated by M‘CRIL several times and has come out with
flying colours with „Alfa” an investment grade. The company concentrates in semi urban areas
and township. The company has a well constituted Board of 8members with 3 independent
Directors all well qualified and experienced. Growth is enabled by a good MIS, simple and
sound free control perspective and accounting. Professionals of Micro Finance are consulted to
review system, model, products and provide comprehensive guidance thereby transferring it to
effective Micro Finance service provider. Aditya Bhandari9 (Regional Director, Incofin South
Asia) stated. ―Arman is a solid company with an attractive business mix of secured and
unsecured products… a long standing positive track record and is now ready to leverage its
regional strengths for a strong business footing…We are delighted to join hands‖. Arman has
been appreciated as an ―upcoming leader‖. Eric Savage, Co-Founder & President of Unitus
Capital speaking of Arman said that ―It is one of the few MFIs in India listed on the BSE and
having the support of a global microfinance stalwart like Incofin; Arman is poised to shine in the
coming years.‖
FINDINGS The relation between corporate governance and organizational performance is of
fundamental importance. The specific detail that corporate governance requirements and
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practices differ in different parts of the world is conspicuous. Corporate Governance practices
exert great influence on the performance of the company. To survive in a competitive field the
organisation needs value based governance system. Effective corporate governance can be
achieved by adopting a set of principles and best practices Further it reduces perceived risks,
consequently reduces cost of capital; it also enables board of directors to take quick and better
decisions which ultimately improves bottom line of the Corporates. Companies which are having
good governance practices have good image among the investors and public as a whole. Three
areas of importance as revealed through research are responsibility management accountability,
strategic planning and policy-making, and Self-regulation. An effective corporate governance
system should provide mechanisms for regulating directors' duties in order to restrain them from
abusing their powers and to ensure that they act in the best interests of the company in its broad
sense. Higher impact is brought about by Linking of Directors compensation to risk and
responsibility. Good corporate governance results from a combination of legal framework and
voluntary commitment. Those selected to the board must have a high motivation to support the
social component of the MFI industry especially that of poverty alleviation. The Chairman
selected is to be a very skillful and talented person to conduct effective meetings Knowledge
spread and education of Corporate Governance to Board and staff is a must to ensure the context
of improving the overall corporate governance environment for microfinance. The CEO and
managing Director should be different and their roles specified so as to perform efficiently. Creating
and using Board Committees /sub committees for different aspects of work reflects the
management‘s efficiency of control. Global investors now stipulate that MFIs follow good
governance practices and binds the company with agreements to enforce the same so as to
implement client protection principles and good governance practices. Organizations however
can voluntarily take the initiative to adopt best practices. Codes of Conduct and whistle blower
policy have been introduced but there is a need to introduce ethical values and enhance integrity.
Representation of women members on Board was very low at 4.6% for the past four years
compared to countries like Canada, the US, the UK, Australia and Hong Kong, where the ratio of
women directors ranges between 8% and 15%. Good governance leads to good performance
and create a positive impact on corporate performance & National Economy. Corporate
Governance is an important tool for shareholder protection and maximization of long term
values. This improves confidence of third parties and creates brand reputation.
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