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Capital Markets : Best Practices India CFO Summit 2005 – Mumbai 25 Nov Alok Misra, Group CFO MphasiS BFL
Confidential © MphasiS 2 Corporatization Corporatization is a form of economic reform which takes services from the direct control of the government, and places them in the control of government-owned corporations. This is often seen as a step towards full-scale privatization Impacts Unlock value Introduction of higher standards of corporate governance Capital market behavior Better regulation of commercial and business transactions Consumer protection. These steps will all contribute to the nourishment and strengthening of the private sector Examples VSNL / BSNL ONGC & other Oil PSUs Maruti
Confidential © MphasiS 3 Demutualization The process of changing corporate structure from a mutual fund company to some other form, such as a limited liability or corporation Demutualization in exchanges refers to the change in the legal status of the exchange from a mutual association with having one vote per member (with possibly consensus based decision making) into a company limited by shares, with one vote per share (with majority based decision making) Demutualization also offers potential opportunities for strengthening governance offering alternate business models of exchanges raising capital and improving operational efficiency Challenges Regulatory framework Conflicts of interests
Confidential © MphasiS 4 Demutualization Asian Stock Exchanges corporate structure Stock ExchangesDemutualization in AustraliaOct-98 SingaporeDec-99 Hong KongMar-00 PhilippinesAug-01 TokyoNov-01 NationalNov-94 Bombay2005
Confidential © MphasiS 5 Demutualization Market data NSE 19952005 Traded quantity (lakhs)1353,150 Traded Volume (Rs. Cr.)1965,549
Confidential © MphasiS 6 The India Feel Good Factor Capital markets & foreign investments free currency flows foreign investments for Indian companies regulatory nuisance factors a capital markets Code of Conduct Accounting and taxation essentials Accounting standards Presentation and disclosure of financials Taxation of foreign companies Taxation of foreign investments Corporate governance & the pivotal role of the Board
Confidential © MphasiS 7 Board Structures* ParameterIndia (Nifty Fifty Co.)US (top 50 out of NYSE 100 index) Ownership pattern 48% of Indian companies have largest shareholder holding > 50% Largest shareholder holds less than 10% in all cases Board size Largest Board size: 17, smallest: 5 44% have more than 12 directors Largest Board size: 18, smallest: 10 66% have more than 12 directors Board Independence 58% of companies have board majority of independent directors 12% have less than 1/3 rd of the directors independent All companies have a board majority of independent directors Executive directors on board In 35 companies 50% of the directors-or-more-are executive directors 49 companies have less than 25% executive directors Chairman & CEO In 60% companies, roles are separate 80% have same person for the two roles Lead Independent Director Only 3 companies have it20 companies have it
Confidential © MphasiS 8 Board Structures* ParameterIndia (Nifty Fifty Co.)US (top 50 out of NYSE 100 index) Board Committees All companies have audit committees, 54% have fully independent Audit Committees 33 companies have remuneration committees- of these 14 are fully independent and 16 have majority independent 9 companies have nomination committees – 6 are fully independent and 3 have majority independent committees All companies have fully independent audit, remuneration and nomination committees * Crisil Ratings
Confidential © MphasiS 9 Integration of Stock exchanges / Regionalisation The challenge for each capital market: Increase of liquidity, avoid marginalisation. Preconditions: Economic stability, economic growth, issuers, company structure, governance and results Remote members and cross membership & Cross listing Linked trading systems and Links on execution side (clearing, settlement, registry) Regulatory framework supervision, transparency & Role of market participants The benefits of a regional integration of stock exchanges : Diversified risk in a wider market More efficient and competitive markets – larger players Lower costs & higher returns by increased cross border capital flows By pooling the resources of fledgling and fragmented capital markets, regionalization could boost liquidity and the ability of these markets to mobilize local and international capital for private-sector and infrastructural development Investors would gain access to a broader range of shares; issuers would gain access to a larger number of investors Prevent large capital outflows from the region
Confidential © MphasiS 10 Working with shareholders and management Disclosures Financial Statements Clause 35 Clause 41 Transparency / Governance Clause 49 Governance rating Accountability / Internal Control CEO/CFO Certification Enterprise Risk Management SOX-ing the Listing Agreement Compliance Internal audits Statutory Compliance processes - global Issues Company Law v SEBI Guidelines v Listing Agreements
Confidential © MphasiS 11 The Way Forward For India A single regulator for Banking Securities/stocks Insurance Asset management With a thematic approach to eCommerce the impact of the Internet the foreign investor the growing retail investor
Confidential © MphasiS 12 ?
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