CORPORATE GOVERNANCE PRACTICES OF INDIAN BANKS: A COMPARATIVE STUDY OF SBI& HDFC BANK

GE-International Journal of Management Research Vol. 5, Issue 4, April 2017 ISSN(O): 2321-1709, ISSN(P): 2394-4226 Impact Factor- 5.779 © Associated Asia Research Foundation (AARF) Website: www.aarf.asia Email : editor@aarf.asia , editoraarf@gmail.com CORPORATE GOVERNANCE PRACTICES OF INDIAN BANKS: A COMPARATIVE STUDY OF SBI& HDFC BANK *Dr. YashashviRajpara, Asst. Professor, SEMCOM, VallabhVidynagar, Gujarat-388120 **Dr. KomalMistry, Asst. Professor, SEMCOM, VallabhVidynagar, Gujarat-388120 ABSTRACT Corporate Governance has assumed greater importance with the series of corporate failings and scandals after which the markets, investors and society have begun to lose faith in the infallibility of these systems. Corporate Governance focuses on the three aspects viz fairness, transparency and accountability. Corporate governance is a multi-faceted subject. According to principles of Corporate Governance, institutions must prioritize the interest of all the stakeholders namely employees, suppliers, customers as these are the ones who in turn would provide the strengthening affect to the firm from within, but in reality institutions fail to prove themselves on this part. This creates a need to study the prevailing way of Corporate Governance in banks and assess how far the improvements made in past have made it credible in eyes of the stakeholders. The present study is concerned with evaluating the performance of two banks representing the Public and Private Sector namely SBI&HDFC Bank in terms of their code of conduct and applicability in Corporate Governance. SBI and HDFC Bank are the leading banks in theirrespective sectors. Key Words: Corporate Governance, Indian Banks, SBI, HDFC Introduction Corporate Governance plays a pivotal role in the success of any company irrespective of the kind and nature of business. Corporate governance is of great importance to financial institutes as it is A Monthly Double-Blind Peer Reviewed Refereed Open Access International e-Journal - Included in the International Serial Directories. GE-International Journal of Management Research (GE-IJMR) ISSN: (2321-1709) 73 | P a g e treated as the back bone of financial system. The essential four pillars of strong corporate governance are responsibility, fairness, accountability and transparency. Corporate governance helps in establishing system in which directors are entrusted with the duties and responsibilities of the company‟s affairs. Cadbury Committee (1992) has defined corporate governance as the system in which companies need to be directed and controlled. Investors from are challenging that Indian companies should follow best practices which is emphasizing upon corporate governance. The current requirements for disclosures of Corporate Governance practices in India have developed from a reform process that began in the late 1990s. (Cited by Sharma S., 2014) Banks deal in people‟s funds and should therefore act as the trustees of the depositor‟s money. The economic policy of the government of India during 1990‟s announced as liberalization and deregulation. It allowed the establishment of private sectors banks in the nation. The involvement of leading private sector bank in the stock market scam has got the wrong impressionthat private sector banks are representing good governance. Therefore regulators all over the world identified the weakness in managerial mishap of banks and therefore have been regulating banks more tightly than other corporate. Basel committee in the year 1999 had come up with some important principles on corporate governance for banking organizations. But a milestone in the field of corporate governance came with the Clause 49 of the listing agreement in the field of corporate governance. It highlights and contains the contents that are required to be disclosed by the every corporate including bank in their Annual report. These contents have been framed keeping in mind a focus of having a complete and comprehensive disclosure of the required information by the companies. The Clause 49 contents are based on several parameters such as related to Board composition, disclosures, audit committee, etc. which are required to be disclosed by the companies. For instance, Clause 49 regarding Disclosure and Transparency states that the Company should ensure timely and accurate disclosure of information to its shareholders and that information should be prepared and disclosed in accordance with the prescribed standards and moreover the channels for dissemination of information should provide for equal, timely and cost efficient access to the users. Review of Literature In banking sector, Board of Directors are governing the business and institutional affairs relating to corporate governance. Banks are playing a role of agents / intermediaries between the A Monthly Double-Blind Peer Reviewed Refereed Open Access International e-Journal - Included in the International Serial Directories. GE-International Journal of Management Research (GE-IJMR) ISSN: (2321-1709) 74 | P a g e depositor and the borrower. The banking business is unique in nature as they are dealing with the money of public. The objective of Corporate Governance in banks should first be protection of depositor‟s interests and then be to optimize the shareholder‟s interests. For the purpose of the study following researches were reviewed Bhasin (2010)studied Annual Report of Reliance Industries Limited for the financial year 20082009to ascertain how far the company is compliant of Corporate Governance standards. A pointvalue-system has been applied which shown very good performance, with an overall score of 85 points and conclude that RIL group was following best Corporate Governance practices in India. Bhrahmbhatt et al. (2012) studied major difference between Corporate Governance practices in Public Sector and Private Sector banks as well as relation between norms and growth of banks. Parameters based score had been maintained for comparative analysis, on the basis of clause 49 under listing agreement. It was found from the study that public sector banks were performing better with respect to Governance practices. Deb (2013) examined the status of corporate Governance practices in Indian Banking Sector and assessed the decisive action to be taken by both public sector and private sector banks in India with regard to corporate governance. The study found that complex banking issues can be handled through proper corporate governance and that will create transparent economic environment globally. Tyagi et al. (2013) analyzed corporate governance practices in four banks i.e., State Bank of India, Bank of India, ICICI Bank and HDFC Bank. The study found that corporate governance practices were more satisfactory in private banks as compared to public sector banks. Chilumuri (2013) evaluated the corporate governance practices in banking sector through a case study of State Bank of India. The study analyzed the practices of corporate governance of State Bank of India with the help of elements like Board practices, Stakeholders and Transparent disclosure of information, and concluded that SBI should improve for appropriate internal control system, better credit risk management and adequate automation in order to achieve excellence, transparency and Share Holder‟s wealth maximization. Research Methodology For the purpose of the study Descriptive Research Design has been used. Study includes two major banks, i.e. State Bank of India (from Public Sector Banks) and HDFC Bank (Private A Monthly Double-Blind Peer Reviewed Refereed Open Access International e-Journal - Included in the International Serial Directories. GE-International Journal of Management Research (GE-IJMR) ISSN: (2321-1709) 75 | P a g e Sector Bank). The study is based on secondary data collected for the year 2015 – 16, from annual reports and websites of the banks, RBI Website and other related literate available on publications relating to Corporate Governance. Parameter based score has been adopted for comparative analysis on the basis of revised Clause 49 under listing agreement norms of SEBI. A score on „1‟ has been awarded for the item that has been disclosed and „0‟ for an item that has not been disclose. Objective of the Study The aim of this study is to understand the need of Corporate Governance and to study the Clause 49 of the Listing Agreement which covers the parameters required to be disclosed by companies into their Annual Report. Further, the study is focusing on corporate governance practices of SBI (i.e. Public Sector Bank) and HDFC (i.e. Private Sector Bank). Analysis and Interpretation To identify weather selected banks follow and apply different mandatory and non-mandatory parameters of Corporate Governance described in revised Clause 49 of listing agreement, comparative tablesareprepared.A score on „1‟ has been awarded for the item that has been disclosed and „0‟ for an item that has not been disclose. 1. Disclosure in relation to Philosophy on Corporate Governance: Table 1 shows the disclosure practice of banks in relation to philosophy of corporate governance. It can be seen that both the banks have met requirement regarding this disclosure. Table 1: Disclosure in relation to Philosophy on Corporate Governance Bank Score State Bank of India 1 HDFC Bank 1 2. Disclosure in relation to Board of Directors: The disclosure requiring board of directors shows that both the banks have provided information regarding all parameters as laid down by Clause 49. A Monthly Double-Blind Peer Reviewed Refereed Open Access International e-Journal - Included in the International Serial Directories. GE-International Journal of Management Research (GE-IJMR) ISSN: (2321-1709) 76 | P a g e Table 2: Disclosure in relation to Board of Directors Sub Contents SBI HDFC Composition of board 1 1 Non-executive directors‟ compensation and disclosure 1 1 Independent Director 1 1 Board Procedure 1 1 Code of Conduct 1 1 5 5 Total 3. Disclosure in relation to audit committee” Another important parameter that is required to be disclosed by banks is in relation to disclosure of audit committee. Table 3 shows that powers of the audit committee are not been disclosed by both the banks. Thus, the banks should specifically disclose the role and functions of audit committee. Table 3Disclosure in relation to audit committee Sub Contents SBI HDFC Qualified & Independent audit committee 1 1 Meeting of audit committee 1 1 Powers of audit committee 0 0 Role of audit committee 1 1 Review of information by audit committee 1 1 4 4 Total 4. Disclosure in relation to audit reports and audit qualifications: Audit reports and audit qualifications are also important parameter for the disclosure. It is observed from Table 4 that both the banks have included this parameter in their annual report with specifying qualifications report given by the auditors. Table 4: Disclosure in relation to audit reports and audit qualifications Bank Score State Bank of India 1 HDFC Bank 1 A Monthly Double-Blind Peer Reviewed Refereed Open Access International e-Journal - Included in the International Serial Directories. GE-International Journal of Management Research (GE-IJMR) ISSN: (2321-1709) 77 | P a g e 5. Disclosure in relation to Whistle blower policy: Whistle blower policy is most important parameter regarding the disclosure of companies. This concept has been given importance to encourage employees to raise their voice for any type of complaint regarding malpractices or problems. It gives them protection against victimization of for making such disclosure. It is found from Table 5 that both the banks are fulfilling this parameter. Table 5: Disclosure in relation to Whistle blower policy Bank Score State Bank of India 1 HDFC Bank 1 6. Disclosure in relation to subsidiary companies: Table 6 indicates disclosure regarding subsidiaries and it is found that both the banks have made disclosures like requirement of having at-least one independent director on board of the holding company to be a director on the board of directors of a non listed Indian subsidiary company, has been disclosed by the banks. Table 6: Disclosure in relation to subsidiary companies Bank Score State Bank of India 1 HDFC Bank 1 7. Disclosure in relation to Contingent Liabilities: Table 7 displays scores regarding disclosure of contingent liabilities of bank. It is found that both the banks has a score of one which indicates complete disclosure of their contingent liabilities in annual report Table 7: Disclosure in relation to Contingent Liabilities Bank Score State Bank of India 1 HDFC Bank 1 A Monthly Double-Blind Peer Reviewed Refereed Open Access International e-Journal - Included in the International Serial Directories. GE-International Journal of Management Research (GE-IJMR) ISSN: (2321-1709) 78 | P a g e 8. Disclosure of information by the banks: Table 8 shows different disclosures that are required to be made by the banks in their corporate governance report which forms the part of the annual report. It is found from the table that both the banks scored 1 in all the related party disclosure, shareholder information, remuneration to directors and disclosure of information regarding management. Table 8: Disclosure of information by the banks Sub Contents SBI HDFC Related party transactions 1 1 Board disclosures – Risk Management 1 1 Remuneration of directors 1 1 Management 1 1 Stake holders 1 1 5 5 Total 9. Disclosure regarding CEO/CFO certification: This disclosure by bank look forward for a certification by the CEO or CFO of the bank regarding the compliance of different norms and provisions relating to banks and both the banks have received certification from the CEO/CFO regarding the compliance. Table 9: Disclosure regarding CEO/CFO certification Bank Score State Bank of India 1 HDFC Bank 1 10. Disclosure in relation to compliance: Table 10 shows that both the banks have disclosed about their statutory and regulatory compliance in the corporate governance report. Table 10: Disclosure in relation to compliance Bank Score State Bank of India 1 HDFC Bank 1 A Monthly Double-Blind Peer Reviewed Refereed Open Access International e-Journal - Included in the International Serial Directories. GE-International Journal of Management Research (GE-IJMR) ISSN: (2321-1709) 79 | P a g e 11. Disclosure in relation to means of communication: Table 11 displays scores of banks regarding their disclosure of information about means of communication. It is seen that both the banks are showing full disclosures regarding their communication of results, publications, use websites for passing information and submitting relevant information to stock exchange. ButHDFC bank has not given information about the institutional investors/analysts. Table 11:Disclosure in relation to means of communication Sub Contents SBI HDFC Communication of quarter / half yearly results 1 1 News paper publications 1 1 Communication through Bank‟s website 1 1 Presentation for institutional Investors / Analysts 1 0 Submission of information to stock exchange 1 1 Press Notification / News release 1 1 6 5 Total Conclusion Good corporate governance cannot be achieved by only compliance of disclosure requirements. If the Indian Banking Companies have to survive and succeed in the environment of increasing competition globally, it can only be through transparency in operations. To accurately evaluate a bank‟s disclosures about its financial position and financial performance and its risks and risk management strategies, market participants and supervisors need fundamental information about the bank‟s business, management and corporate governance. The Clause 49 of the Listing Agreement is most timely and provides much needed disclosure requirements for banks. Here it has been seen that State Bank of India (Public Sector Bank) and HDFC Bank(Private Sector Bank) is making the most disclosures and thus are complying with the Clause 49 to a great extent regarding the disclosure of important parameters in their corporate governance report. In real terms, the concept of corporate governance should be of faith not force, and balance between conformation and performance. A Monthly Double-Blind Peer Reviewed Refereed Open Access International e-Journal - Included in the International Serial Directories. GE-International Journal of Management Research (GE-IJMR) ISSN: (2321-1709) 80 | P a g e References Bhasin.MadanLal,(2010) “Corporate Governance Disclosure Practices: The Portrait of a Developing Country” International Journal of Business and Management, Vol. 5.No.4 150-167 Brahmbhatt et al. (2012). 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Web References  https://www.sbi.co.in/portal/web/corporate-governance/annual-report-2016  www.hdfcbank.com/aboutus/cg/annual_reports.htm  https://www.rbi.org.in/scripts/BS_ViewMasCirculardetails.aspx?id=8987 A Monthly Double-Blind Peer Reviewed Refereed Open Access International e-Journal - Included in the International Serial Directories. GE-International Journal of Management Research (GE-IJMR) ISSN: (2321-1709) 82 | P a g e