Periodical Reviews
Post implementation, reviews are normally conducted by FIs to seek information for compilation of statistics and internal studies. This is done largely by the All India Financial Institutions in case of the large companies. The State Financial Institutions, which cater to the small and medium businesses generally do not review cases that are regular. Only in cases where the loan becomes non-performing, efforts are initiated to address the problem either by providing adequate ‘breathing time’ through formal/ informal reschedulement or by other intensive recovery measures.

Corporate Governance
In case of medium and large businesses the Financial Institutions have nominees on the Board of Directors. Earlier these nominees used to involve themselves only in matters pertaining to the dealings with Financial Institutions. The need to protect the interests of the institutions and other stakeholders, such as small shareholders in ensuring that the promoters manage the business in a responsible manner, has led to these directors playing a more effective role on the aspect of Corporate Governance.

These businesses would also need to adhere to the code of corporate governance set by these institutions. Nominee directors are appointed on corporate boards by these institutions to monitor compliance. The guidelines address most of the concerns voiced by the minority and majority shareholders of the Indian corporate sector and seek to prevent a wide range of practices. Some of these practices while being legal under the law have not always served investor interests.

Guidelines on Corporate Governance
The institutions have defined corporate governance as a philosophy by which owners and managers are expected to be perennially responsible to other stakeholders such as minority shareholders, promoters, institutional shareholders, deposit-holders, creditors, consumers and the institutional lenders. The areas where the nominee directors are expected to play an effective role include crucial pre-defined areas such as investments in subsidiaries and loans, awards of contracts, mergers and acquisitions, expansion and diversification, dividend, accounting policy, subsidiarisation and desubsidiarisation.

• Well defined dividend policies

According to the guidelines, companies should have well defined and declared long-term dividend policies with deviations immediately being brought to the notice of the boards.
 
• Consistent and transparent accounting policies

Accounting policies of a company, particularly relating to the methods of charging depreciation, should be examined by the nominees, as also any changes in them.
 
• Investment in subsidiaries

Cracking down on investments in non-productive assets by business houses, the guidelines say that if subsidiaries are to be carved out by investment of funds, the rationale behind its creation ought to be carefully examined.
 
• Loans and Investments to Unlisted companies

Investments in the form of loans at concessional rates of interest must be examined. Likewise, investments in unlisted companies in which promoters of companies are interested ought to be carefully examined. The guidelines also put a check on reckless resource raising in the form of equity or loans unless required for expansion and long-term working capital needs.

• Expansions, Diversifications & Corporate Restructuring

Expansions and diversifications will now come under examination. Expansions of capacities through subsidiary company or joint ventures should be carefully examined too. Transfers or hiving of profitable divisions and transfer of non-profitable divisions should be allowed after detailed examination of valuation reports by the nominees.

Recognizing the uniqueness of brand-driven companies, the guidelines say that in transfer of divisions relating to consumer durables, proper value ought to be assigned to brand name and distribution networks. When a corporate merges into another or follows the acquisition route, institutions will have to examine the impact of merger on the equity shareholding pattern as well as the impact on promoter holdings. Nor should the cost of acquisition be disproportionate to the earnings of the acquired company.

• Diligence in expenditures

For the first time, perhaps, CEOs will have to account for their luxury expenditure. Companies should not indulge in avoidable and extravagant, which is detrimental to shareholders.
 
• Managerial Remuneration & Award of Contracts

The guidelines require changes in managerial remuneration and commissions payable to directors to be carefully examined and increases related to the financial position of the company. Utilization of properties should be examined carefully, while contracts awarded to companies in which directors of the company are interested ought to be examined in detail. In other words, no more sea-face properties or plum contracts to nephews!

Terms of the contracts should be examined and it should not be detrimental to the company’s interests. Equity dilutions to promoters on preferential basis should be within institutional guidelines, while at the same time, offerings should not be made only for increasing equity of promoters directly or indirectly, unless warranted.

Audit review committee reports, tender award committees and concurrent audit reports should be closely scrutinized by institutional nominees while the action taken or compliance with reports should be examined.
 

• Acquisitions & Sale of Investments

Finally, acquisition of shares for the purpose of acquiring management control of companies are to be examined. Nominees should ensure that the cost of acquisition is not detrimental to the company. Likewise, disposing of investments consisting of equity should be carefully effected.

Application and Preliminary Scrutiny
Appraisal and Sanction
Disbursement and Monitoring
Post Implementation Review

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