CHAPTER – CHAPTER – II INTRODUCTION 1.1 INTRODUCTION OF THE STUDY
Corporate governance is the set of processes, customs, policies, laws, and institutions affecting the way a corporation (or company) is directed, administered or controlled. Corporate governance also includes the relationships among the many stakeholders involved and the goals for which the corporation is governed. In simpler terms it means the extent to which companies are run in an open & honest manner. Corporate governance has three key constituents namely: the Shareholders, the Board of Directors & the Management. Other stakeholders include employees, emplo yees, customers, creditors, suppliers, regulators, and the community at large.
DEFINITION:
The manner in which the stakeholders in a corporation relate to one another. Corporate governance has a positive connotation and a company with "good" corporate governance is said to be a company in which all stakeholders relate to each other in a positive way. Good corporate governance is considered an important quality of sustainable growth for a company; that is, if the shareholders, management, management, and employees all fulfill their fiduciary responsibilities to one another, the corporation is thought to have a greater likelihood of success. Corporate governance is laid out in the corporation's charter corporation's charter and other applicable documents. The frame work of rules and practices by which a board of directors ensures accountability, fairness, and transparency in a company's relationship with its all stakeholders (financiers, customers, management, employees, government, and the community). The corporate governance framework consists of (1) explicit and implicit contracts between the company and the stakeholders for distribution of responsibilities, rights, and rewards, (2) procedures for reconciling the sometimes conflicting interests of stakeholders in accordance with their duties, privileges, and roles, and (3) procedures for proper supervision, control, and information-flows to serve as a system of checks-and balances. 1
The concept of corporate governance identifies their roles & responsibilities as well as their rights in the context of the company. It emphasizes accountability, transparency & fairness in the management of a company by its Board, so as to achieve sustained prosperity for all the stakeholders. Corporate governance is a synonym for sound management, transparency & disclosure. Transparency refers to creation of an environment whereby decisions & actions of the corporate are made visible, accessible & understandable. In the light of originating competition and liberation „Corporate Governance‟ has assumed significance in the public sector undertaking (PSU‟S) The various groups in the ECIL Company Compan y are as follows.
Workers union
Officers Association
Other agency including Government representatives
Need for Transparency is invested in public sector undertaking
Tax payer‟s money is invested in public sector und ertaking
It is also to be noted that accounts are placed in parliament through the parent department of Atomic Energy for discussion. In the light of above, it is felt that the project on Corporate Government can be appropriately under taken for ECIL.
1.2 OBJECTIVES OF THE STUDY
To study the Corporate Governance practices at ECIL.
To analyze the impact of Corporate Governance at ECIL.
To identify the various problems of Corporate Governance.
To draw proper conclusion from the project study.
To make suggestion for improvements.
2
The concept of corporate governance identifies their roles & responsibilities as well as their rights in the context of the company. It emphasizes accountability, transparency & fairness in the management of a company by its Board, so as to achieve sustained prosperity for all the stakeholders. Corporate governance is a synonym for sound management, transparency & disclosure. Transparency refers to creation of an environment whereby decisions & actions of the corporate are made visible, accessible & understandable. In the light of originating competition and liberation „Corporate Governance‟ has assumed significance in the public sector undertaking (PSU‟S) The various groups in the ECIL Company Compan y are as follows.
Workers union
Officers Association
Other agency including Government representatives
Need for Transparency is invested in public sector undertaking
Tax payer‟s money is invested in public sector und ertaking
It is also to be noted that accounts are placed in parliament through the parent department of Atomic Energy for discussion. In the light of above, it is felt that the project on Corporate Government can be appropriately under taken for ECIL.
1.2 OBJECTIVES OF THE STUDY
To study the Corporate Governance practices at ECIL.
To analyze the impact of Corporate Governance at ECIL.
To identify the various problems of Corporate Governance.
To draw proper conclusion from the project study.
To make suggestion for improvements.
2
1.3 SCOPE OF THE STUDY
A study of Corporate Governance involves the process and structure used to direct and manage the business and affairs of the business enterprise with the objective of enh ancing long term value for the shareholders and the financial viability of the business.
The scope of the study is confined to the Corporate Governance practices in ECIL for 3years and encompasses analysis followed by conclusions con clusions and suggestions.
1.4 RESEARCH METHODOLOGY
Data relating to ECIL has been collected through. Primary sources:
Detailed discussions with Mr.J.S.Anand, (G.M-FAG, Finance and Accounts ECIL, Hyderabad).
Discussions with Finance manager and the other members of the Finance department at ECIL. Secondary sources:
Data is collected from the Published Annual reports of the ECIL Company.
It is collected through the internet (web), and newspapers. ne wspapers.
Sample size-3 year‟s data.
1.5 LIMITATIONS OF THE STUDY
Employees had not responded in time due to heavy work
Division-wise practices are not covered due to limited time of the study.
Time limit to do in depth study.
Since ECIL is public sector unit, confidentiality maintained to certain issues which may not cover under project work.
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CHAPTER – II LITERATURE REVIEW
2.1 OVERVIEW OF CORPORATE GOVERNANCE INTRODUCTION:
Corporate governance refers to the set of systems, principles and processes by which a company is governed. They provide the guidelines as to how the company can be directed or controlled such that it can fulfill its goals and objectives in a manner that adds to the value of the company and is also beneficial for all stakeholders in the long term. Stakeholders in this case would include everyone ranging from the board of directors, management, shareholders to customers, employees and society. The management of the company hence assumes the role of a trustee for all the others. Corporate governance is a process, not a state.The field is continually evolving, as the review explains. Its initial focus was on the way in which individual corporations are directed and controlled. This led to the introduction of national codes of best practice. As the wider economic and social significance of corporate governance became apparent, international guidelines were published to advance its cause more broadly. These guidelines reflected the part which good governance can play in promoting economic growth and business integrity. The way ahead lies in ensuring that the fruits of good governance, its ability to add value, are widely and wisely shared, thus playing a positive part in the goal of the developed and developing world to alleviate poverty.
Definition of Corporate Governance
Corporate Governance is the relationship between corporate managers, directors and the providers of equity, people and institutions who save and invest their capital to earn a return .It ensures that the Board of Directors is accountable for the pursuit of corporate objectives and that the corporation itself conforms to the law and regulations. The frame work of rules and practices by which a board of directors ensures accountability, fairness, and transparency in a company's relationship with its all
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stakeholders (financiers, customers, management, employees, government, and the community).The corporate governance framework consists of (1) explicit and implicit contracts between the company and the stakeholders for distribution of responsibilities, rights, and rewards, (2) procedures for reconciling the sometimes conflicting interests of stakeholders in accordance with their duties, privileges, and roles, and (3) procedures for proper supervision, control, and information-flows to serve as a system of checks-and balances. Corporate Governance is the relationship among various participants in determining the direction and performance of corporations. The primary participants are: shareholders; company management; and the Board of Directors. Why do we need corporate governance
With increased global competitiveness, the growing market in Bahrain is faced with the challenge of attracting and retaining investment in order to participate more fully in the global economy and address mounting demographic concerns. Increasing awareness and implementation of good corporate governance practices can improve the investment climate and promote the development of a vibrant private sector and capital market.
2.2 Objectives The Core Objective of Corporate Governance can be defined as under:
Strategic Focus
Predictability
Transparency
Participation
Accountability
Efficiency & Effectiveness
Stakeholder Satisfaction. The Strategy Focus defines the direction the organization should take to meet its goals and to ensure Stakeholder satisfaction.
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The Strategic focus should be based on predictability as the evolution of strategies has to consider the dynamic environment within which it has to operate and hence the challenges from the environment need to be anticipated. A well-designed process to evolve and deploy strategy has to have Transparency for all stakeholders so that there is a commitment and an understanding of the result expected from the operations. For proper execution of any processes aimed at achieving the desired end result, Participation of all stakeholder is important and actually necessary. The participation should have a clear goal of
Efficiency and Effectiveness of the
organization as a whole and this where Accountability is the key. All stakeholders have to have a clear understanding of their accountability for the most effective operations of any Organization. Importance
Fundamentally, there is a level of confidence that is associated with a company that is known to have good corporate governance. The presence of an active group of independent directors on the board contributes a great deal towards ensuring confidence in the market. Corporate governance is known to be one of the criteria that foreign institutional investors are increasingly depending on when deciding on which companies to invest in. It is also known to have a positive influence on the share price of the company. Having a clean image on the corporate governance front could also make it easier for companies to source capital at more reasonable costs. Unfortunately, corporate governance often becomes the centre of discussion only after the exposure of a large scam. Impact of Corporate Governance
The positive effect of good corporate governance on different stakeholders ultimately is a strengthened economy, and hence good corporate governance is a tool for socio-economic development. Parties to corporate governance
The most influential parties involved in corporate governance include government agencies and authorities, stock exchanges, management (including the board of directors and its chair, the Chief Executive Officer or the equivalent, other executives and line 6
management, shareholders and auditors). Other influential stakeholders may include lenders, suppliers, employees, creditors, customers and the community at large. The agency view of the corporation posits that the shareholder forgoes decision rights (control) and entrusts the manager to act in the shareholders' best (joint) interests. Partly as a result of this separation between the two investors and managers, corporate governance mechanisms include a system of controls intended to help align managers' incentives with those of shareholders. Agency concerns (risk) are necessarily lower for a controlling shareholder. A board of directors is expected to play a key role in corporate governance. The board has the responsibility of endorsing the organization's strategy, developing directional policy, appointing, supervising and remunerating senior executives, and ensuring accountability of the organization to its investors and authorities. All parties to corporate governance have an interest, whether direct or indirect, in the financial performance of the corporation. Directors, workers and management receive salaries, benefits and reputation, while investors expect to receive financial returns. For lenders, it is specified interest payments, while returns to equity investors arise from dividend distributions or capital gains on their stock. Customers are concerned with the certainty of the provision of goods and services of an appropriate quality; suppliers are concerned with compensation for their goods or services, and possible continued trading relationships. These parties provide value to the corporation in the form of financial, physical, human and other forms of capital. Many parties may also be concerned with corporate social performance.
2.3 Principles: Key elements of good corporate governance principles include honesty, trust and integrity, openness, performance orientation, responsibility and accountability, mutual respect, and commitment to the organization. Commonly accepted principles of corporate governance include:
Rights and equitable treatment of shareholders :
Organizations should respect the rights of shareholders and help shareholders to exercise those rights. They can help shareholders exercise their rights by openly and 7
effectively communicating information and by encouraging shareholders to participate in general meetings.
Interests of other stakeholders :
Organizations should recognize that they have legal, contractual, social, and market driven obligations to non-shareholder stakeholders, including employees, investors, creditors, suppliers, local communities, customers, and policy makers.
Role and responsibilities of the board :
The board needs sufficient relevant skills and understanding to review and challenge management performance. It also needs adequate size and appropriate levels of independence and commitment
Integrity and ethical behavior :
Integrity should be a fundamental requirement in choosing corporate officers and board members. Organizations should develop a code of conduct for their directors and executives that promotes ethical and responsible decision making.
Disclosure and transparency :
Organizations should clarify and make publicly known the roles and responsibilities of board and management to provide stakeholders with a level of accountability. They should also implement procedures to independently verify and safeguard the integrity of the company's financial reporting. Disclosure of material matters concerning the organization should be timely and balanced to ensure that all investors have access to clear, factual information Issues involving corporate governance principles include:
Internal controls and the independence of the entity's auditors
Oversight and management of risk
Oversight of the preparation of the entity's financial statements
Review of the compensation arrangements for the chief executive
Officer and other senior executives
There sources made available to directors in carrying out their duties
The way in which individuals are nominated for positions on the board
Dividend policy
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"Corporate Governance" despite some feeble attempts from various quarters has remained ambiguous and often misunderstood phrase. For quite some time it was confined to only corporate management. It is not so. It is something much broader for it must include a fair, efficient and transparent administration to meet certain well defined objectives. Corporate governance also must go beyond law. The quantity, quality and frequency of financial and managerial disclosure, the degree and extent to which the board of Director (BOD) exercise their trustee responsibilities and the commitment to run transparent organization- these should evolve due to interplay of many factors and the role played by more progressive elements within the corporate sector. In India, a strident demand for evolving a code of good practices by the corporate themselves is emerging.
2.4 Mechanisms and controls: Corporate governance mechanisms and controls are designed to reduce the inefficiencies that arise from moral hazard and adverse selection. There are both internal monitoring systems and external monitoring systems.Internal monitoring can be done, for example, by one (or a few) large shareholder(s) in the case of privately held companies or a firm belonging to a business group. Furthermore, the various board mechanisms provide for internal monitoring. External monitoring of managers' behaviour occurs when an independent third party (e.g. the external auditor) attests the accuracy of information provided by management to investors. Stock analysts and debt holders may also conduct such external monitoring. An ideal monitoring and control system should regulate both motivation and ability, while providing incentive alignment toward corporate goals and objectives. Internal corporate governance controls:
Internal corporate governance controls monitor activities and then take corrective action to accomplish organizational goals. Examples include: • Monitoring by the board of directors: The board of directors, with its legal authority
to hire, fire and compensate top management, safeguards invested capital. Regular board meetings allow potential problems to be identified, discussed and avoided. Whilst nonexecutive directors are thought to be more independent, they may not always result in more effective corporate governance and may not increase performance. Different board 9
structures are optimal for different firms. Moreover, the ability of the board to monitor the firm's executives is a function of its access to information. Executive directors possess superior knowledge of the decision-making process and therefore evaluate top management on the basis of the quality of its decisions that lead to financial performance outcomes, ex ante. It could be argued, therefore, that executive directors look beyond the financial criteria. • Internal control procedures and internal auditors: Internal control procedures are
policies implemented by an entity's board of directors, audit committee, management, and other personnel to provide reasonable assurance of the entity achieving its objectives related to reliable financial reporting, operating efficiency, and compliance with laws and regulations. Internal auditors are personnel within an organization who test the design and implementation of the entity's internal control procedures and the reliability of its financial reporting. • Balance of power: The simplest balance of power is very common; require that the
President be a different person from the Treasurer. This application of separation of power is further developed in companies where separate divisions check and balance each other's actions. One group may propose company-wide administrative changes, another group review and can veto the changes, and a third group check that the interests of people (customers, shareholders, employees) outside the three groups are being met. • Remuneration: Performance-based remuneration is designed to relate some proportion
of salary to individual performance. It may be in the form of cash or non-cash payments such as shares and share options, superannuation or other benefits. Such incentive schemes, however, are reactive in the sense that they provide no mechanism for preventing mistakes or opportunistic behavior, and can elicit myopic behavior.
External corporate governance controls :
External corporate governance controls encompass the controls external stakeholders exercise over the organization. Examples include: • Competition • Debt covenants 10
• Demand for and assessment of performance information (especially financial
statements) • Government regulations • Managerial labour market • Media pressure • Takeovers Role of the accountant
Financial reporting is a crucial element necessary for the corporate governance system to function effectively. Accountants and auditors are the primary providers of information to capital market participants. The directors of the company should be entitled to expect that management prepare the financial information in compliance with statutory and ethical obligations, and rely on auditors' competence. Current accounting practice allows a degree of choice of method in determining the method of measurement, criteria for recognition, and even the definition of the accounting entity. The exercise of this choice to improve apparent performance (popularly known as creative accounting) imposes extra information costs on users. In the extreme, it can involve non-disclosure of information. One area of concern is whether the accounting firm acts as both the independent auditor and management consultant to the firm they are auditing. This may result in a conflict of interest which places the integrity of financial reports in doubt due to client pressure to appease management. The power of the corporate client to initiate and terminate management consulting services and, more fundamentally, to select and dismiss accounting firms contradicts the concept of an independent auditor. Changes enacted in the United States in the form of the Sarbanes-Oxley Act (in response to the Enron situation as noted below) prohibit accounting firms from providing both auditing and management consulting services. Similar provisions are in place under clause 49 of SEBI Act in India. The Enron collapse is an example of misleading financial reporting. Enron concealed huge losses by creating illusions that a third party was contractually obliged to pay the amount of any losses. However, the third party was an entity in which Enron had
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a substantial economic stake. In discussions of accounting practices with Arthur Andersen, the partner in charge of auditing, views inevitably led to the client prevailing. However, good financial reporting is not a sufficient condition for the effectiveness of corporate governance if users don't process it, or if the informed user is unable to exercise a monitoring role due to high costs. Corporate governance models around the world
Although the US model of corporate governance is the most notorious, there is a considerable variation in corporate governance models around the world. The intricated shareholding structures of keiretsus in Japan, the heavy presence of banks in the equity of German firms, the chaebols in South Korea and many others are examples of arrangements which try to respond to the same corporate governance challenges as in the US. The World Business Council for Sustainable Development WBCSD has done work on corporate governance, particularly on accountability and reporting, and in 2004 created an Issue Management Tool: Strategic challenges for business in the use of corporate responsibility codes, standards, and frameworks. This document aims to provide general information, a "snap-shot" of the landscape and a perspective from a think-tank/professional association on a few key codes, standards and frameworks relevant to the sustainability agenda.
Codes and guidelines
Corporate governance principles and codes have been developed in different countries and issued from stock exchanges, corporations, institutional investors, or associations (institutes) of directors and managers with the support of governments and international
organizations.
As
a
rule,
compliance
with
these
governance
recommendations is not mandated by law, although the codes linked to stock exchange listing requirements may have a coercive effect. For example, companies quoted on the London, Toronto and Australian Stock Exchanges formally need not follow the recommendations of their respective codes. However, they must disclose whether they follow the recommendations in those documents and, where not, they should provide explanations concerning divergent 12
practices. Such disclosure requirements exert a significant pressure on listed companies for compliance. One of the most influential guidelines has been the OECD Principles of Corporate Governance published in 1999 and revised in 2004. The OECD guidelines are often referenced by countries developing local codes or guidelines. Building on the work of the OECD, other international organizations, private sector associations and more than 20 national corporate governance codes formed the United Nations Intergovernmental Working Group of Experts on International Standards of Accounting and Reporting (ISAR) to produce their Guidance on Good Practices in Corporate Governance Disclosure.[32] This internationally agreed[33] benchmark consists of more than fifty distinct disclosure items across five broad categories. • Auditing • Board and management structure and process • Corporate responsibility and compliance • Financial transparency and information disclosure • Ownership structure and exercise of control rights
The World Business Council for Sustainable Development (WBCSD) has done work on corporate governance, particularly on accountability and reporting, and in 2004 released Issue Management Tool: Strategic challenges for business in the u se of corporate responsibility codes, standards, and frameworks. This document offers general information and a perspective from a business association/think-tank on a few key codes, standards and frameworks relevant to the sustainability agenda.
Corporate governance and firm performance
In its 'Global Investor Opinion Survey' of over 200 institutional investors first undertaken in 2000 and updated in 2002, McKinsey found that 80% of the respondents would pay a premium for well-governed companies. They defined a well-governed company as one that had mostly out-side directors, who had no management ties, undertook formal evaluation of its directors, and was responsive to investors' requests for information on governance issues. The size of the premium varied by market, from 11%
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for Canadian companies to around 40% for companies where the regulatory backdrop was least certain (those Morocco, Egypt and Russia). Other studies have linked broad perceptions of the quality of companies to superior share price performance. In a study of five year cumulative returns of Fortune Magazine's survey of 'most admired firms', Antunovich et al found that those "most admired" had an average return of 125%, whilst the 'least admired' firms returned 80%. In a separate study Business Week enlisted institutional investors and 'experts' to assist in differentiating between boards with good and bad governance and found that companies with the highest rankings had the highest financial returns. On the other hand, research into the relationship between specific corporate governance controls and firm performance has been mixed and often weak. Board composition
Some researchers have found support for the relationship between frequency of meetings and profitability. Others have found a negative relationship between the proportion of external directors and firm performance, while others found no relationship between external board membership and performance. In a recent paper Bagahat and Black found that companies with more independent boards do not perform better than other companies. It is unlikely that board composition has a direct impact on firm performance. SEBI committee on Corporate Governance
Report of SEBI committee on Corporate Governance defines corporate governance as 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 & corporate funds in the management of a company. Issues involving corporate governance principles include:
Internal controls and internal auditors.
The independence of the entity's external auditors and the quality of their audits.
Oversight of the preparation of the entity's financial statements.
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Review of the compensation arrangements for the chief executive officer and other senior executives. arch
To analyze corporate governance practice of BSE-30 companies for last five years with reference of mandatory disclosure described by SEBI for Indian companies.
To find out importance of corporate governance in Indian companies from the view point of the Company Secretary.
To find out the awareness of functioning of Corporate Governance amongst investors who are fundamental analyst. To evaluate the importance of corporate governance as a parameter for investor before investing.
2.5 There are four broad theories to explain and elucidate corporate governance. These are:
Agency theory
Stewardship theory
Stakeholder theory
Sociological theory
Agency theory:
Recent thinking about strategic management and business policy has been influenced by agency cost theory, though the roots of the theory can be traced back to Adam Smith who identified an agency problem in the joint stock company. The fundamental theoretical basis of corporate governance is agency costs. Shareholders are the owners of any joint stock, limited liability Company, and are the principals of the same. By virtue of their ownership, the principals define the objectives of the company. The management, directly or indirectly selected by the shareholders to pursue such objectives, are the agents. While the principals generally assume that the agents would invariably carry out their objectives, it is often not so. In many instances, the objectives of managers are at variance from those of the shareholders. Such mismatch of objectives is called the agency problem; the cost inflicted by such dissonance is the agency cost. The core of corporate governance is designing and putting in place disclosures, monitoring,
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oversight and corrective systems that can align the objectives of the two sets of players as closely as possible and hence minimize agency costs.
Stewardship theory:
The stewardship theory of corporate governance discounts the possible conflicts between corporate management and owners and shows a preference for board of directors made u primarily of corporate insiders. This theory assumes that managers are basically trustworthy and attach significant value to their own personal reputations. The market for managers with strong personal reputations serves as the primary mechanism to control behavior, with more reputable managers being offered higher compensation packages.
Stakeholder theory:
The stakeholder theory is grounded in many normative, theoretical perspectives including ethics of care, the ethics of fiduciary relationships, social contract theory, theory of property rights, and so on. While it is possible to develop stakeholder analysis from a variety of theoretical perspectives, in practice much of stakeholder analysis does not firmly or explicitly root itself in a given theoretical tradition, but rather operates at the level of individual principles and norms for which it provides little formal justification. Stakeholder theory is often criticized, mainly because it is not applicable in practice by corporations.
Sociological theory:
The sociological approach has focused mostly on board composition and implications for power and wealth distribution in the society. Under this theory, board composition, financial reporting, and disclosure and auditing are of utmost importance to realize the socio-economic objectives of corporations.el This is also known as unitary board model, in which all directors participate in a single board comprising both executive and non-executive directors in varying proportions. This approach to governance tends to be shareholder oriented. It is also called the 'Anglo-Saxon' approach to corporate governance being the basis of corporate
16
governance in America, Britain, Canada, Australia and other Commonwealth law countries including India.
The major features of this model are as follows :
The ownership of companies is more or less equally divided between individual shareholders and institutional shareholders.
Directors are rarely independent of management.
Companies are typically run by professional managers who have negligible ownership stake. There is a fairly clear separation of ownership and management.
A CASE STUDY ON INFOSYS
The case, 'Corporate Governance at Infosys‟ talks about the corporate governance practices at Infosys, one of India's largest software companies. Till late 1990s, corporate governance did not have much significance in India. In 1999, two committees (Confederation of Indian Industries, CII and the Kumar Mangalam Birla Committee) were set up to recommend good governance norms. These committees came out with several recommendations, which were made mandatory for the companies to adhere to by 2001. Infosys was one of the first companies in India which had complied with the recommendations made by the committees. The case discusses in detail, the corporate governance practices at Infosys, which complied with most of the recommendations made by the committees. By the late 1990s, Infosys Technologies Limited (Infosys)1 had clearly emerged one of the best managed companies in India. Its corporate governance practices seemed to be better than those of many other companies in India. Because of its good governance practices, Infosys was the recipient of many awards. In 2001, Infosys was rated India's most respected company by Business World2. Infosys was also ranked second in corporate governance among 495 emerging companies in a survey conducted by Credit Lyonnais Securities Asia (CLSA) Emerging Markets. It was voted India's best managed company five years in a row (1996-2000) by the Asiamoney poll. 17
Code of Corporate Governance
In the late 1990s, the Confederation of Indian Industries (CII) published a code of corporate governance (Refer Exhibit II for the highlights of the report). In 1999, the Securities and Exchange Board of India (SEBI) appointed a committee under the Chairmanship of Kumar Mangalam Birla5 to recommend a code of corporate governance.
Corporate Governance-The Infosys Way
Infosys had accepted the recommendation of both the CII and the Kumar Mangalam Birla Committee. This section provides an overview of corporate governance practices followed
by
Infosys.
Infosys had an executive chairman and chief executive officer (CEO) and a managing director, president and chief operating officer (COO). The CEO was responsible for corporate strategy, brand equity, planning, external contacts, acquisitions, and board matters. The COO was responsible for all day-to-day operational issues and achievement of the annual targets in client satisfaction, sales, profits, quality, productivity, employee empowerment and employee retention. The CEO,COO, executive directors and the senior management made periodic presentations to the board on their targets, responsibilities and performance.
Infosys-A Benchmark for Corporate Governance:
Some analysts felt that Infosys‟ corporate governance practices offered many lessons to corporate India. Infosys had shown that increasing shareholder wealth and safeguarding the interests of other stakeholders was not incompatible. Infosys had given its non-executive directors the mandate to pass judgement on the efficacy of its business plans. Every non-executive director not only played an active role in decision making, but also led or served on at least one of the three (Nomination, Compensation and Audit) committees
.
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CHAPTER – III COMPANY PROFILE 3.1 INTRODUCTION
Electronics Corporation of India Limited (ECIL) is a wholly owned Government of India enterprise under the Department of Atomic Energy. Established in 1967 primarily to meet the control and instrumentation requirements of India‟s nuclear power
program, ECIL has played a pioneering role in spurring the growth of indigenous electronics industry in the country. Spanning from miniature components to mammoth systems and encompassing control, communication and computer technologies, ECIL, today is a multi-product, multi-technology organization providing cutting-edge technology solutions in the strategic areas of Atomic Energy, Defence, Aerospace, Integrated Security and IT & e-Governance. HISTORY:
Ayyagari Sambasiva Rao, the founder Managing Director of the Electronics Corporation of India Limited (ECIL), died on Friday night at Nims after a prolonged illness, family sources said. He was 89.He is survived by his wife, four sons and three daughters. Rao, born in Mogallu in West Godavari district in 1914, obtained his engineering degree from Stanford University in 1947 and joined the Department of Atomic Energy as a nuclear physic is to work with the likes of HomiJBhabha. He was the director of radiation health protection and electronics groups at Bhabha Atomic Research Centre (Barc) and later played a key role in setting up ECIL in the city in 1967 when the DAE decided to go commercial in its electronics research. Performance in 2011-12:
During the year, the company posted a turnover of Rs. 1474 Crores which is 14% higher than the turnover of the previous year. The major contribution of 48% came from the e-Governance sector, 35% from the Defence sector, 12% from the nuclear sector and balance 5% from supplies to other sectors in the Government domain. The company has earned a Profit Before Tax of Rs. 55 Crores as compared to Rs.22 Crores during the previous year. 19
The order book stood at Rs.2425 Crores at the beginning of 2012-13 as compared to Rs.1150 Crores at the beginning of 2011-12. Welfare Activities:
The employees were provided all benefits and facilities under the provisions of Social Welfare and Industrial Acts. Some of the statutory measures were also extended to the Contract Labour. The children of 30 workmen received merit scholarships under AP Labour Welfare Fund 1987. Under the Workers. Education Programme, 5 women workers were sponsored for Trainers‟ Training
Course. 5 male workers were also sponsored to Worker Teachers programme under the same scheme. Various social security insurance schemes were extended to the employee‟s viz., Janata Insurance Policy, Group Personal Accident Policy for the
employees proceeding on official tours. Under Group Savings Linked Insurance cum Retirement Benefit Scheme, 23 employees who expired while in service were provided with insurance amount of Rs. 1.00 lakh each and an additional payment of Rs.10,000/ per employee from management side. As per the scheme of promoting small family norms, 21 employees who have undergone Tubectomy/ Vasectomy operations were given one increment as personal pay. Research and Development:
In addition to in-house R&D activities, ECIL adopts the basic designs developed by Bhabha Atomic Research Centre and Nuclear Power Corporation of India Limited and engineers them into products and systems for industrial use. Recently, the company signed a Strategic MoU with IGCAR (Indira Gandhi Centre for Atomic Research) to meet the C&I requirements for Fast Reactors, Fuel Cycle Projects etc. and also for High Performance Computer Systems and Security. Technology Planning, Identification of Projects/Projects/Solutions, Funding and Project Monitoring happen through Technology Development Council (TDC), an institutional mechanism to promote actionable R&D and timely product ionization to support the ambitious programmes and expansion plans of the Department of Atomic Energy.
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Research and Development holds the key to the future business and competitiveness of the company. The management has devoted
focused
attention on
R&D activities which has resulted in a number of new products being introduced apart from adding features to existing products. 3.2 Products and Services
ECIL supplied hard wired relay logic systems for older power generating plants like those in Rajasthan and Tamilnadu. As newer technologies became available, ECIL graduated to supply partly computerized systems for plants at Narora and Kakrapara. ECIL provides Programmable Logic Controller and Computer based Control and Information systems for the newer power generating units at Tarapur, Kaiga and Rawatbhata, Rajasthan. ECIL manufactures and supplies a wide range of equipment which include:
1.
Control Room Panels
2.
Operator Information Systems
3.
Programmable Controllers
4.
Operator Training Simulators
5.
Dual Processor Hot Standby Systems (DPHS) and many more.
Products:
Present product range of ECIL includes: • Nuclear sector : Control and instrumentation products for nuclear power plants;
Integrated security systems for nuclear installations; Radiation monitoring instruments; Secured network of all Department of Atomic Energy (India) units via satellite. • Defence Sector : Various types of fuses; V/UHF Radio communication equipment;
Electronics warfare systems and derivatives; Thermal batteries and special components for missile projects; Precision servo components like gyros; Missile support control and command systems; Training simulators; Stabilized antenna and tracking for Light Combat Aircraft; Detection and pre-detonation of explosive devices; Jammers with direction finding abilities. 21
• Commercial Sector: Electronic voting machines; Wireless local loop (WLL) systems;
Antenna products; Electronic Energy Meters or Electricity Meter; X-Ray baggage inspection system for airports; Computer hardware, software and services; Computer education services. Corporate Governance
The company continues to take several measures to enhance the openness and transparency of all its operations. Joint venture:
The Joint Venture, ECIL- Rapiscan Limited registered a total income of Rs.30.20 crore during 2005-06 by way of supply of Multi-energy X-Ray machines etc. to Indian Airlines, Ship Building Centre, Police Department & Prison of various States, Tihar Jail, Cochin International Airport, etc. JV have supplied computer hardware to ECIL for their Maharashtra State Government E-governance Project worth about Rs.3.00 crore and earned around Rs.10 crore from maintenance income during the year. The total income has increased by 24% as compared to the previous year due to receipt of good orders. Provisional profit before tax for the year is Rs.6 crore, the profit before tax has gone up by Rs.1.00 crore, a growth of 20% over the previous year. The income target set for the year 2006-07 is Rs.35 crore and the JV Company is confident of achieving it considering the requirement of security products in the country due to threat from terrorists and introduction of large cargo scanning machines. Financials:
The company has a turnover of around
14 billion (US$254.8 million) and
overall profit of around 220 million (US$4 million) for the financial year 2010 – 11.
22
INDUSRY PROFILE ECIL is a multi-product and multi-disciplinary organization providing key technology inputs, system integration and system solutions in the areas of Information Technology,
Strategic
Electronics,
Communications,
Control
and
Automation,
Instrumentation and Components The Telecommunications Industry produces technologies and services that are used to facilitate people's communication. Major products include cell phones, chipsets, wireless and landline infrastructure equipment, digital subscriber-line (DSL) and cable modems, and networking devices, such as routers and switches. The industry's customer base is highly diversified, including multi-national corporations, telephone companies, governments, universities, institutions, commercial businesses and consumers. Competitive Landscape:
Competition among companies in this industry can be intense. Most products are technologically advanced, entailing significant research and development. This, and the need for great economy-of-scale and international distribution facilities, creates a high barrier to entry. Market Influences:
Telecom services companies still depend on landline business for cash flow. When economic times are tough, customers tend to disconnect these lines and rely more on wireless and broadband communications. Also, consumers will gravitate to the most economical voice and Internet plans. Financial Considerations:
The Telecom Equipment Industry is fairly cyclical, conforming to the multiyear boom and bust swings of the economy. Typical network infrastructure contracts, though, are long-term, thereby lending stability to operating results. The degree to which its products are technically advanced determines an equipment maker's pricing power. Hitech offerings allow for higher prices and improved cost absorption.
23
Electronics Industry Analysis:
The Electronics Industry in India took off around 1965 with an orientation towards space and defence technologies. This was rigidly controlled and initiated by the government. This was followed by developments in consumer electronics mainly with transistor radios, Black & White TV, Calculators and other audio products.1985 saw the advent of Computers and Telephone exchanges, which were succeeded by Digital Exchanges in 1988.In1997 the ITA agreement, was signed at the WTO where India committed it self to total elimination of all customs duties on IT hardware by 2005. In the subsequent years, a number of companies turned sick and had to be closed down. Current Scenario:
In recent years the electronic industry is growing at a brisk pace. It is currently worth US$ 32Billion and according to industry estimates it has the potential to reach US$ 150 billion by 2010. The electronic industry in India constitutes just 0.7 per cent of the global electronic industry. Hence it is miniscule by international comparison. However the demand in the Indian market is growing rapidly and investments are flowing in to augment manufacturing capacity. The output of the Electronic Hardware Industry in India is worth US$11.6 Billion at present. Electronic Manufacturing Services:
India is well-known for its software prowess. But on the hardware front, the progress is rather slow. However, the country has h as been making gains in this sector also. Already, 50 Electronics Manufacturing Services (EMS)/Original Design Manufacturers (ODMs) providers are operating in India, ranging from global players including Flextronics and Solectron to indigenous firms including Deltron, TVS Electronics and Sahasra. India‟s contract-manufacturing business is expected to nearly triple in revenue
over the next five years, a development that will present both opportunities and potential pitfalls for the worldwide electronics supply chain. Revenue generated by Electronics Manufacturing Services (EMS) providers and Original Design Manufacturers (ODMs) in India will expand to $2.03 billion in 2009, rising at a CAGR of 21per cent from $774 million in 2004. Indian EMS/ODM revenue grew by 20.8 per cent to reach $935 million in 2005. 24
CHAPTER – CHAPTER – IV IV DATA ANALYSIS AND INTETPRETATION Corporate Governance practices at ECIL are reflected through the annual director‟s comments and replies and accounting policies. 4.1 ANNUAL REPORT FOR THE YEAR 2009-2010
The company continues to take several measures to enhance the openness and transparency of all its operations. Board of Directors
In terms of Sec 617 of the Companies Act, 1956, ECIL is a Government company. The entire paid up capital of the company is held by the President of India, including the 3 shares held by his nominees. The Board, as on date comprised of seven Directors - Chairman & Managing Director, one Whole-time Director and five Non-Executive Non -Executive Directors. The Board meets at regular intervals and is responsible for the proper direction and management of the Company. During the financial year, six Board Meetings were held on 21.04.2009, 28.05.2009, 04.07.2009, 18.09.2009, 14.12.2009, and 02.03.2010. The composition of the Directors, their attendance at the Board Meetings during the financial year and at the last Annual General Meeting , etc., The remuneration
The remuneration of whole-time Directors is fixed by the Government of India. Dr M J Zarabi is an Independent Director and is paid Rs 3,000 as sitting fee per attendance. All other Part-time Directors on Board are officials from Government / other PSUs and therefore, are not paid any sitting fees for the meetings attended. Audit Committee
The Audit Committee comprises of Shri Umesh Chandra, Shri V R Sadasivam and Shri Y S Mayya, Director (T) (up to 30.4.2009). Shri J K Ghai, Director (Finance), 25
NPCIL is a special spe cial invitee for all the meetings. Shri Umesh Chandra is the th e Chairman of the Committee. During the year, five meetings were held on 21.04.09, 03.07.09, 18.09.09, 30.12.09 and 02.03.10. The Audit Committee reviewed the implementation of Accounting Standards and Audit Programmes and Internal Audit Reports. The Committee perused the Annual Financial Statements and interacted with the Statutory Auditors for improvement in the system for maintaining financial records as well as the data under Cost Accounting Record Rules. Corporate Management Committee
The Corporate Management Committee is a high level policy making body at the Corporate level which is headed by the Chairman & Managing Director. The Committee consists of all Functional Directors, Executive Directors, General Managers and Heads of Divisions. The Committee meets regularly and deliberates upon the major policy issues including performance of the Company. The President and General Secretary of ECEU and President and Secretary of ECOA are the th e special invitees. General Body Meetings
The details of the last three Annual General Meetings Meetin gs of the Company are given below: Year
Date
Time
Venue
2006-07
26.9.2007
14.00 hrs
Registered office:
ECIL Post Office , 2007-08
29.9.2008
12.00 hrs Hyderabad –
2008-09
18.9.2009
14.00 hrs
500062
The Company has obtained a Compliance Certificate from M/s K K Rao & Associates Company Secretaries. Secretaries.
26
4.1.2 AUDITORS‟ REPORTS AND COMPANY REPLIES ON ECIL
AUDITORS REPORT
COMPANY‟S REPLIES
To The Members of Electronics Corporation of India Limited Hyderabad. We have audited the attached Balance Sheet of Electronics Corporation of India Limited (ECIL), Hyderabad, as at 31st March, 2010 and the related Profit & Loss Account and the Cash Flow Statement for the year ended on that date annexed thereto. These
financial
responsibility
statements of
the
are
the
Company‟s
management. Our responsibility is to express an opinion on these financial statements based on our audit. A) We conducted our audit in accordance
with
the
auditing
standards
generally
accepted in India. These standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant
27
estimates made by the management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. B) As required by the Companies (Auditor‟s
Report) Order,2003 issued by the Central Government of India in terms of Section 227(4A) of the Companies Act, 1956 and on the basis of such checks as we considered appropriate and according to the information and explanations given to us, we annex hereto a statement on the matters specified in paragraphs 4 and 5 of the said order. Further to our comments in the annexure referred to in paragraph (B) above, attention is invited to the following: i) Note No: 2 in Schedule „Q‟ During the year
the company has changed Accounting Policy on liquidated damages which has resulted in increase
of
contingent
liabilities
by
Rs.1222.59 Lakhs and thereby increase in Profit by the same amount. ii) Note No: 9 In Schedule „Q‟ regarding
Recognition of Revenue on provisional basis
The Company has been receiving in full the amount of revenue recognized.
/ pending recommendation of the final price by the Price Review Committee in respect of Electronic Voting Machines at Rs.8670 per unit for supplies. iii) Note no.10 in Schedule „Q‟ regarding
R&D expenditure has been identified
reclassification of expenditure of Rs.2091.66 and reclassified and the practice is Lakhs from primary heads to functional heads being followed consistently. 28
under in house R&D expenditure. We have relied on the information given by the management and accepted the same for the disclosure purpose. iv) Note No 15 (i) in Schedule „Q‟ regarding
The note referred to by the Statutory
Deposit of Rs.128.64 Lakhs received from Auditors
is
factual
and
self-
NFC for the purpose of Investment in explanatory. APGPCL. Pending settlement of issues between
NFC
and
the
Company
with
reference to investment in shares and its ownership, the amount deposited has been exhibited under “Current Liabilities”. v) Note No 5 in Schedule „Q‟ regarding
deviations from the Guidance Note issued by The note referred is self-explanatory. It Institute of Chartered Accountants of India has no financial impact on the results for the year.
for VAT accounting. D)Our
comments
on
the
Financial
Statements 2009-10 are as under : 1. Accounting Recognition”
Policy
A
on
“Revenue
a) Refer Note No 8(i), the Company has the practice
of
recognizing
the
sales
on
retention basis which is retained at the request of the customer in the custody of the company, the Risk & Rewards for which are not passed to the customer. The same in our opinion is not in accordance with the Accounting Standard (AS)-9 and by which the revenue and debtors are overstated
by
Rs
918.96
Lakhs,
expenditure and liabilities are overstated by
Rs
98.42
Lakhs,
inventory
is 29
All the items were customer specific and inspected wherever pre-inspection clause is applicable and ready for delivery.
They
were
retained
on
customers‟ specific requests. Since the
customer has specifically requested for retention, it amounts to transfer of significant risks and rewards to the buyer. Further, as these are produced against specific orders, there is no uncertainty in taking delivery by the customer. As on date, out of the total
Lakhs.
retention sales recognized, an amount
Consequential increase of PBT by Rs
of Rs.953 lakhs have already been
143.83 Lakhs.
dispatched.
understated
by
Rs
676.71
The company is having the stock in its custody which are sold on retention basis for financial year 2002-03 (Rs 1517.40 Lakhs); 2003-04 (Rs 1040.92 Lakhs); 2004-05 (Rs 344.88 Lakhs); 2007-08 (Rs.200.80 Lakhs) 2008-09 (Rs.191.90 Lakhs)- aggregating to Rs. 3295.90 Lakhs,awaiting dispatch as on 31.03.2010. b) The company bifurcated the work orders
received into construction contracts (AS7) and supply of products/ services (AS9), We have relied on the percentage completion of the projects under AS-7 as certified by the management. 2. The balances appearing under Sundry
Debtors, Sundry Creditors, Advances to The Company has a practice of issuing Suppliers, Advances from Customers, EMDs letters for confirmation of balances of and Security Deposits, claims recoverable Sundry Debtors. There is a review and other amounts paid/ received are long mechanism in place for outstanding pending and subject to confirmation and Sundry
Debtors,
Creditors
and
reconciliation and consequential adjustments. Liquidated Damages etc. and necessary In view of same we are unable to comment actions have been taken. During the on the recoverability/ liability on account of year, apart from the confirmation same and the impact of the same on the profit
letters to Sundry Debtors, letters for
and Loss statement.
confirmation of balances in respect of
3. Refer Note No. 15(vi) of schedule
Sundry Creditors, Advances paid to
„Q‟regarding disclosure as per section 22 of
suppliers and Advances received from
the Micro, Small and Medium Enterprises Customers were sent with a request to 30
Development Act, 2006, we have relied on send the confirmations directly to the the information given by the management and statutory auditors. Replies received accepted the same for the disclosure purpose. 4. Considering
the
substantial
amounts
involved in disputes at different levels particularly relating to Income Tax, Sales Tax, excise, service tax, etc, we are not in a position to comment on the ultimate liability that may devolve on the company and as such the treatment given by the company showing Contingent Liability has been relied upon by us, as the issues are sub-judice. E) Subject to our above comments, we report that: a. We have obtained all the information and
explanations which to the best of our knowledge and belief were necessary for the purposes of our audit; b. In our opinion, proper books of account as
required by law have been kept by the Company, so far as appears from our examination of those books; c. The Balance Sheet, the Profit & Loss
account and Cash Flow statement dealt with by this report are in agreement with the books of account; d. In our opinion, the Balance Sheet, the
Profit and Loss Account and the Cash Flow statement dealt with by this report comply with the Accounting Standards referred to in sub-section 3C of Section 211 of the 31
have been properly dealt with.
Companies Act, 1956 except to the extent of the deviations expressed in paragraphs C and D above in so far as they relate to changes in accounting
policies,
AS-9
on
Revenue
Recognition. e. As
per
circular
No.8/2002,
dated
22.03.2002 issued by the Ministry of Law, Justice & Company Affairs, the provisions of section 274 (1)(g) of the Companies Act, 1956 are not applicable to the Company, as it is a Government Company. f. According to our information, the Central
Government has not issued any Notification for the purpose of levy and collection of cess under section 441A of the Companies Act, 1956. g. We report that without considering items 2,
3 and 4 of Para-D above, the impact of which could not be determined or where we have relied on the information given by the management, had the other observations made by us under 1 of Para-D above been considered; •
The
gross
sales
would
have
been
Rs.117821.28 Lakhs instead of Rs.118740.24 Lakhs; •
Total
expenditure
would
have
been
Rs.108623.12 Lakhs instead of Rs.108721.54 Lakhs; • Profit before tax for the year would have
been Rs.5297.97 Lakhs instead of Rs.5441.80 32
Lakhs; •
Sundry
Debtors
would
have
been
Rs.140825.91Lakhs as against Rs.141744.87 Lakhs; •
Current
liabilities
would
have
been
Rs.128623.91 Lakhs as against Rs.128722.33 Lakhs; • Inventories on 31.03.2010 would have been
Rs.20144.58 Lakhs instead of Rs.19467.87 Lakhs. h) In our opinion and to the best of our
opinion and according to the explanations given to us, the said accounts read together with the accounting policies and notes forming part of accounts, further, read with our comments in the Annexure referred to in paragraph B and subject to our comments given in paragraph D and the cumulative consequent effect thereof on the accounts to the extent quantified, as stated in paragraph E(g) above, give the information as required by the Companies Act, 1956 in the manner so required and give a true and fair view in conformity with the accounting principles generally accepted in India: a) In the case of the Balance Sheet, of the state of affairs of the Company as at 31.03.2010. b) In case of the Profit and Loss Account, of
the profit for the year ended on that date; and c) In the case of the Cash Flow Statement, of
the cash flows for the year ended on that date. 33
4.1.3 COMMENTS OF THE COMPTROLLER AND AUDITOR GENERAL OF INDIA UNDER SECTION 619(4) OF THE COMPANIES ACT 1956 ON THE ACCOUNTS OF ELECTRONICS CORPORATION OF INDIA LIMITED,HYDERABAD FOR THE YEAR ENDED 31 MARCH 2010.
The preparation of financial statements of Electronics Corporation of India Limited, Hyderabad for the year ended on 31 March 2010 in accordance with the financial reporting framework prescribed under the Companies Act, 1956 is the responsibility of the management of the Company. The statutory auditor appointed by the Comptroller and Auditor General of India under Section 619(2) of the Companies Act, 1956 is responsible for expressing opinion on these financial statements under Section 227 of the Companies Act,1956 based on the independent audit in accordance with the auditing and assurance standards prescribed by their professional body, the Institute of Chartered Accountants of India. This is stated to have been done by them vide their Audit Report dated 29 June 2010.
I, on the behalf of the Comptroller and Auditor General of India, have conducted a supplementary audit under Section 619(3)(b) of the Companies Act, 1956 of the financial statements of Electronics Corporation of India Limited, Hyderabad for the year ended on 31 March 2010. This supplementary audit has been carried out independently without access to the working papers of the statutory auditors and is limited primarily to inquiries of the statutory auditor and company personnel and a selective examination of some of the accounting records. On the basis of my audit, nothing significant has come to my knowledge, which would give rise to any comment upon or supplement to Statutory Auditor's report under Section 619(4) of the Companies Act, 1956.
34
4.2 ANNUAL REPORT FOR THE YEAR 2010-2011
The company continues to take several measures to enhance the openness and transparency of all its operations. Board of Directors:
In terms of Sec 617 of the Companies Act, 1956, ECIL is a Government company. The entire paid up capital of the company is held by the President of India, including the 3 shares held by his nominees. The
board as on date, comprises of ten - Directors, Chairman & Managing
Director three whole-time Directors and 6 (Six) Non- Executive Directors. The Board meets at regular intervals and is responsible for the proper direction and management of the Company. During the financial year, 8 (eight) Board Meetings were held on 24th May,
2010, 9th June, 2010, 13th August, 2010, 27th September, 2010, 8th November,2010, 28th
January, 2011, 1st
March, 2011 and 14th
March, 2011. The composition of
Directors, their attendance at the Board Meetings during the financial year and at the last Annual General Meetings etc. The remuneration:
The remuneration of whole-time Directors is fixed by the Government of India as the company is a Government company in terms of section 617of the Companies Act, 1956. At present, all the part time Directors except Dr. M J Zarabi , are Government officials from other PSUs and therefore, are eligible for sitting fee for the meetings attended by them. Dr. MJ Zarabi, who is an Independent Director, is being paid Rs. 2500 as sitting fee per attendance. Audit Committee:
A three-member Audit Committee was constituted by the board in March 2 0 0 1 comprising of two Non-Executive Directors and a whole time Director. With regard to terms of reference, powers and functions of the committee, the Board suggested
35
that the provisions in Clause 49 of Listing Agreement prescribed by SEBI as applicable to listed Companies are to be followed as guidelines. The Audit Committee presently comprises of two Non-Executive Directors, Sri Rahul Asthana, (up to 26.03.2007) and Sri Umesh Chandra and one whole time Director (Technical) of the company, Sri G.N.V. Satyanarayana. Sri Rahul Asthana is the chairman of the committee. During the year, four meetings of the committees were held on 09.02.2006, 27.07.2006, 08.11.2006 and 01.03.2007. The Audit committee reviewed the implementation of Accounting Standards and Audit Programmes. The committee reviewed the Internal Audit Reports and also the report on Fixed Assets Physical Verification. The committee pursued the Annual Financial Statements and interacted with the Statutory Auditors for improvement in the system for maintaining financial records as well as the data under Cost Accounts Record Rules. Board‟s Sub-Committee on Capital Projects:
The
Board
reconstituted
the
sub-committee
on
Capital
Projects
on
29.3.2003consisting of Sri V.P.Raja, Non-Executive Director, Sri A .Murugesan, Director (Finance) and Sri.G.N.V.Satyanarayana, Director (Technical) to scrutinize the capital proposals and recommend to the Board for its approval. Investments Committee:
The Board constituted an Investment Committee on 17.12.2003 consisting of Chairman & Managing Director, Director (Finance), General Manager (Accounts) and are preventative from Corporate Planning and Projects Monitoring Division. This committee will consider the proposals for investment of surplus funds in nationalized banks or sound rated scheduled banks at the highest and competitive rates as per DPE guidelines. Corporate Management Committee:
The Corporate Management Committee is a high level policy making body at the Corporate level which is headed by the Chairman & Managing Director. The Committee consists of all Functional Directors, Executive Directors, General Manager and Heads 36
of Divisions.
The
Committee
meets
deliberates on
the
major
policy
issues
including performance of the company. The President and General Secretary of ECEU and President and Secretary of ECOA are the special invitees. Apex Committee:
The Apex Committee is constituted under the scheme of Workers‟ Participation in
Management. The Committee is headed by Chairman & Managing Director and other members include Functional Directors on the Board, Executive Directors, General Manager (HR), President and General Secretary of ECEU and President and Secretary of ECOA. General Body Meetings:
The details of the last three Annual General Meetings of the Company are given below:
Year
Date
Time
Venue
2007-08
29.09.2008
12.00 hrs
Registered office, ECIL Post
2008-09
18.09.2009
14.00 hrs
Office , Hyderabad – do-
500062 2009-10
13.08.2010
14.00 hrs
37
4.2.1 AUDITORS‟ REPORTS AND COMPANY REPLIES ON ECIL
AUDITORS REPORT
COMPANY‟S REPLIES TO AUDITORS
To The Members of Electronics Corporation of India Limited Hyderabad. We have audited the attached Balance Sheet of Electronics Corporation of India Limited (ECIL), Hyderabad, as at March, 2011 and the related Profit & Loss Account and the
Cash Flow Statement for the year ended on that date annexed thereto. These financial
statements are the responsibility of the Company‟s management. Our responsibility is to express an opinion on these financial
statements based on our audit. A)We conducted our audit in accordance with the auditing standards generally accepted in India. These standards require that we plan and perform the audit to obtain reasonable assurance
about
whether
the
financial
statements are free of material misstatement. An audit
includes
examining, on a
test
basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made
by the management, as well as evaluating the
38
overall financial statement presentation.We believe that our audit provides a reasonable basis for our opinion. B)
As
required
by
the
Companies
(Auditor‟s Report) Order, 2003 issued by the
Central Government of India in terms of Section 227(4A) of the Companies Act, 1956 and on the
basis of such checks as we
considered appropriate and according to the information and
explanations given to us,
we annex hereto a statement on the matters specified in paragraphs 4 and 5 of the said
order. C) Further
to
our
comments
in
the
annexure referred to in paragraph (B) above, attention is invited to the following
1) Note No:7 In Schedule „Q‟ regarding Recognition
of
Revenue
on
provisional
The Company has been receiving in full the amount of revenue recognized.
basis / pending recommendation of the final price by the Price Review Committee in
respect of Electronic Voting Machines at Rs.8670 per unit for supplies. 2) Note no. 8 in Schedule „Q‟ regarding re of Rs.2696.85 R&D expenditure has been identified and Lakhs from primary heads to functional reclassified and the practice is being followed classification of expenditure
heads under in-house R&D expenditure. We consistently. have relied
on the information given by
the management and accepted the same for
39
the disclosure purpose. 3) Note No 13 (i) in Schedule „Q‟ regarding The note referred to by the Statutory Auditors is
Deposit of Rs.128.64 Lakhs received from factual and self-explanatory. NFC for the purpose of Investment in APGPCL.Pending between
NFC
settlement
and
the
of
Company
issues with
reference to investment in shares and its ownership, the amount deposited has been exhibited under “Current Liabilities”. 4) Note No 3 in Schedule „Q‟ regarding The note referred is self-explanatory. It has no
deviations from the Guidance Note issued by financial impact on the results for the year. Institute of Chartered Accountants of India for VAT accounting. 5) Note No. 6: The company is having the
stock in its custody which are sold on retention basis for financial year 2002-03 (Rs 1517.40 Lakhs); 2003-04 (Rs 1040.92 Lakhs); 2004-05 (Rs 344.88 Lakhs); 2009-10 (Rs.143.12
Lakhs)
2010-11
(Rs.641.38
Lakhs)- aggregating to Rs.3687.70Lakhs, awaiting
dispatch
(Accounting
Policy
as A
on on
31.03.2011 “Revenue
Recognition”) 6) The company bifurcated the work orders
received into construction contracts (AS-7) and supply of products/ services (AS-9), we have relied on the percentage completion of the projects under AS-7 as certified by the management.
40
All the items were customer specific and inspected wherever pre-inspection clause is applicable and ready for delivery. They were retained on customers‟ specific requests. As on
date,out of the total retention sales recognized, an amount of Rs.641.38 lakhs have already been dispatched.
7) The balances appearing under Sundry The
Company
has
developed
a
review
to mechanism for outstanding dues and periodical
Debtors, Sundry Creditors, Advances
Suppliers, Advances from Customers, EMDs review is taken up with all the heads and and Security Deposits, claims recoverable and marketing In-charges of the Divisions for other
amounts
paid/
received
are
long review,
confirmation
and
collection
of
pending. We are unable to comment on the outstanding dues. recoverability/ liability and the impact of the same on the profit and Loss statement. 8) Refer N o t e
No.
13(vi) of
schedule
„ Q ‟ regarding disclosure as per section 22
of the Micro, Small and Medium Enterprises Development Act, 2006, we have relied on the information given by the management and accepted the same for the disclosure purpose. 9) Considering
the
substantial
amounts
involved in disputes at different levels particularly relating to Income Tax, Sales Tax, excise, service tax, etc, we are not in a position to comment on the ultimate liability that may devolve on the company and as such the treatment given by the company showing Contingent Liability has been relied upon by us, as the issues are sub-judice.
D) Further to the above, our comments on the Financial Statements of 2010-11 are
Consequent to the amendment to The Payment of Gratuity Act, 1972 increasing the ceiling
as under. 1.Note No: 2(B)(i) in Schedule „Q‟ The
limit from Rs. 3.5 lakhs to Rs. 10 lakhs with
Company has charged an amount of
effect from 24th May, 2010, the total amount
Rs.26.80 Crores only against the total
chargeable to Profit & Loss Account, as per
gratuity liability amount of Rs.133.99
actuarial valuation, as on 31st March, 2011 is
41
Crores
to
Accounting
be
provided
Standard
15
as
per
the
(Employee
Benefits) issued by ICAI. Had the entire
Rs.133.99 crores. As the substantial increase in liability
pertains
to
the
services
of
the
employees of earlier years and the said
amount been charged to the Profit and provision is too huge to be met in a single Loss Account, the profit before tax of
financial year, drawing analogy from RBI &
Rs.22.36 Crores would have become a
IRDA guidelines to Banks
Loss of Rs.84.83 Crores.
Companies liability over 2011
and
Insurance
respectively, to amortise the five years beginning March,
the Company has charged one fifth of
the gratuity liability during the
current
financial year, since the scenario of Banks and
Insurance Companies with respect of Gratuity is
same with that of the Company and the
accounting treatment should remain same
conceptually
irrespective of the nature of
industry, i.e., Companies incorporated under Companies Act, 1956 or otherwise. E)
Subject to our above comments, we
report that:
a. We have obtained all the information and explanations which to the best of our knowledge and belief were necessary for the purposes of our audit; b. In our opinion, proper books of account as required by law have been kept by the Company, so far as appears from our examination of those books, c. The Balance Sheet, the Profit & Loss
account and Cash Flow statement dealt with by this report are in agreement with the books of account;
42
d. In our opinion, the Balance Sheet, the
Profit and Loss Account and the Cash
Flow statement dealt with by this report comply
with
the
Accounting
Standards
referred to in sub-section 3C of Section 211 of the Companies Act, 1956 except to the extent
of
the
deviations
expressed
in
paragraph D above. e. As
per
circular
No.8/2002,
dated
22.03.2002 issued by the Ministry of Law, Justice & Company Affairs, the provisions of section 274 (l)(g) of the Companies Act, are not applicable to the Company, as it is a Government Company. f. According to our information, the Central
Government has not issued any Notification for the purpose of levy and collection of cess under section 441A of the Companies Act, 1956. g. We
report
that
without
considering
items 5 to 9 of Para-C above, the impact of which could not be determined or where we have relied on the information given by the management, had the other observations made by us under Para D above been considered; Total
expenditure
would
have
been
Rs.132797.04 Lakhs instead of Rs.122077.54 Lakhs; Profit before tax for the year would have been Rs.(8482.82)
Lakhs
instead
of
Rs.2236.68 Lakhs; 43
Current liabilities &Provisions would have been
Rs.137740.35
Lakhs
as
against
Rs.127020.85 Lakhs; h. In our opinion and to the best of our
opinion and according to the explanations given to us, the said accounts read together with the accounting policies and notes forming part of accounts, further, read with our comments in the Annexure referred to in paragraph B and subject to our comments given in paragraph D and the cumulative consequent effect thereof on the accounts to the extent quantified, as stated in paragraph E(g) above, give the information
as required by the Companies Act, 1956 in the manner so required and give a true and fair view in conformity with the
accounting
principles generally accepted in India: a) In the case of the Balance Sheet, of the
state of affairs of the Company as at 31.03.2011. b)In case of the Profit and Loss Account, of
the profit for the year ended on that date; and c) In the case of the Cash Flow Statement, of
the cash flows for the year ended on that date.
44
4.2.2 COMMENTS OF THE COMPTROLLER AND AUDITOR GENERAL OF INDIA UNDER SECTION 619(4) OF THE COMPANIES ACT, 1956 ON THE ACCOUNTS OF ELECTRONICS CORPORATION OF INDIA LIMITED, HYDERABAD FOR THE YEAR ENDED 31 MARCH 2011
The preparation of financial statements of Electronics Corporation of India Limited, Hyderabad for the year ended 31 March 2011 in accordance with the financial
reporting framework prescribed under the Companies Act, 1956 is the responsibility of the management of the Company. The statutory auditor appointed by the Comptroller and Auditor General of India under Section 619(2) of the Companies Act, 1956 is responsible for expressing opinion on these financial statements under Section 227 of the Companies
Act, 1956 based on independent audit in accordance with the auditing and assurance standards prescribed by their professional body, the Institute of Chartered Accountants of India. This is stated to have been done by them vide their Audit Report dated 29 June 2011. I, on the behalf of the Comptroller and Auditor General of India, have conducted a supplementary audit under Section 619(3)(b) of the Companies Act, 1956 of the financial statements of Electronics Corporation of India Limited, Hyderabad for the year
ended 31 March 2011. This supplementary audit has been carried out independently without access to the working papers of the statutory auditors and is limited primarily to enquiries of the statutory auditor and Company personnel and selective examination of some of the accounting records. On the basis of my audit, nothing significant has come to
my knowledge which would give rise to any comment upon or supplement to Statutory Auditor‟s report under Section 619(4) of the Companies Act, 1956 .
45
4.3 ANNUAL REPORT FOR THE YEAR 2011-2012
The company continues to take several measures to enhance the openness and transparency of all its operations. Board of Directors:
In terms of Sec 617 of the Companies Act, 1956, ECIL is a Government company. The entire paid up capital of the company is held by the President of India, including the 3 shares held by his nominees. The
board as on date, comprises of ten - Directors, Chairman & Managing
Director three whole-time Directors and 6 (Six) Non- Executive Directors. The Board meets at regular intervals and is responsible for the proper direction and management of the Company. During the financial year, 8 (eight) Board Meetings were held on 24th May,
2010, 9th June, 2010, 13th August, 2010, 27th September, 2010, 8th November,2010, 28th
January, 2011, 1st
March, 2011 and 14th
March, 2011. The composition of
Directors, their attendance a t the Board Meetings during the financial year and at the last Annual General Meetings etc., The remuneration:
The remuneration of whole-time Directors is fixed by the Government of India as the company is a Government company in terms of section 617of the Companies Act, 1956. At present, all the part time Directors except Dr. M J Zarabi , are Government officials from other PSUs and therefore, are eligible for sitting fee for the meetings attended by them. Dr. MJ Zarabi, who is an Independent Director, is being paid Rs. 2500 as sitting fee per attendance. Audit Committee:
A three-member Audit Committee was constituted by the board in March 2 0 0 1 comprising of two Non-Executive Directors and a whole time Director. With regard to terms of reference, powers and functions of the committee, the Board suggested
46
that the provisions in Clause 49 of Listing Agreement prescribed by SEBI as applicable to listed Companies are to be followed as guidelines. The Audit Committee presently comprises of two Non-Executive Directors, Sri Rahul Asthana, (up to 26.03.2007) and Sri Umesh Chandra and one whole time Director (Technical)of the company, Sri G.N.V. Satyanarayana. Sri Rahul Asthana is the chairman of the committee. During the year, four meetings of the committees were held on 09.02.2006, 27.07.2006, 08.11.2006 and 01.03.2007. The Audit committee reviewed the implementation of Accounting Standards and Audit Programmes. The committee reviewed the Internal Audit Reports and also the report on Fixed Assets Physical Verification. The committee pursued the Annual Financial Statements and interacted with the Statutory Auditors for improvement in the system for maintaining Financial records as well as the data under Cost Accounts Record Rules. Board‟s Sub-Committee on Capital Projects:
The
Board
reconstituted
the
sub-committee
on
Capital
Projects
on
29.3.2003consisting of Sri V.P.Raja, Non-Executive Director, Sri A .Murugesan, Director (Finance) and Sri.G.N.V.Satyanarayana, Director(Technical) to scrutinize the capital proposals and recommend to the Board for its approval. Investments Committee:
The Board constituted an Investment Committee on 17.12.2003 consisting of Chairman & Managing Director, Director (Finance), General Manager (Accounts) and are preventative from Corporate Planning and Projects Monitoring Division. This committee will consider the proposals for investment of surplus funds in nationalized banks or sound rated scheduled banks at the highest and competitive rates as per DPE guidelines.
47
Corporate Management Committee:
The Corporate Management Committee is a high level policy making body at the Corporate level which is headed by the Chairman & Managing Director. The Committee consists of all Functional Directors, Executive Directors, General Manager and Heads of Divisions.
The
Committee
meets
deliberates
on
the
major
policy
issues
including performance of the company. The President and General Secretary of ECEU and President and Secretary of ECOA are the special invitees. Apex Committee:
The Apex Committee is constituted under the scheme of Work ers‟ Participation in Management. The Committee is headed by Chairman & Managing Director and other members include Functional Directors on the Board, Executive Directors, General Manager (HR), President and General Secretary of ECEU and President and Secretary of ECOA. General Body Meetings
The details of the last three Annual General Meetings of the Company are given below:
Year
Date
Time
Venue
2007-08
29.09.2008
12.00 hrs
Registered office, ECIL Post
2008-09
18.09.2009
14.00 hrs
Office , Hyderabad – do-
500062 2009-10
13.08.2010
14.00 hrs
48
4.3.1 AUDITORS‟ REPORTS AND COMPANY REPLIES ON ECIL
AUDITORS REPORT
COMPANY‟S REPLIES TO AUDITORS
To The Members of Electronics Corporation of India Limited Hyderabad. We have audited the attached Balance Sheet of Electronics Corporation of India Limited (ECIL), Hyderabad, as at 31st March, 2012 and the related Profit & Loss Account and the Cash
Flow Statement for the year ended on that date annexed thereto. Management‟s Responsibility for the Financial Statements :
Management is responsible for the preparation of these financial statements that give a true and fair view
of
the
financial
position,
financial
performance and cash flow of the Company in accordance
with
the
Accounting
Standards
referred to in sub-section (3c) of Section 211 of the Companies Act, 1956(“the Act”). This
responsibility
includes
the
design,
implementation and maintenance of internal control relevant to the preparation and fair presentation of the financial statements that are free from material misstatement, whether due to fraud or error. Auditor‟s Responsibility:
Our responsibility is to express an opinion on 49
these financial statements based on our audit.We conducted our audit in accordance with the Standards of Auditing issued by the Institute of Chartered Accountants of India. Those Standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor‟s
judgment, including the assessment of the risks of
material
misstatement
of
the
financial
statements, whether due to fraud or error. In making those risk assessments, the auditor considers
internal
control
relevant
to
the
Company‟s preparation and fair presentation of
the financial statements in order to design audit procedures
that
are
appropriate
in
the
circumstances. An audit also includes evaluating the appropriateness of accounting polices used and
the
reasonableness
of
the
accounting
estimates made by management, as well as evaluating
the
overall
presentation
of
the
financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our qualified audit opinion. Basis for Qualified Opinion:
Consequent to the amendment to the Payment Consequent 50
to
the
amendment
to
The
of Gratuity Act, 1972 enhancing the ceiling for Payment of Gratuity Act, 1972 increasing the payment of gratuity from Rs.3.50 lakhs to Rs.10 ceiling limit from Rs. 3.5 lakhs to Rs. 10 lakhs
per
employee,
the
total
expenditure lakhs with effect from 24th May, 2010, the
chargeable to the statement of profit and Loss for
total amount chargeable to Profit & Loss
the year 2010-11 was Rs.13399.37 Lakhs. Account, as per actuarial valuation, as on 31st However the company has not charged the entire March, 2011 is Rs.13399.37 lakhs. As the amount during the year 2010-11 and has been substantial increase in liability pertains to the amortising the said amount in five equal annual services of the employees of earlier years and installments
of
Rs.
2679.87
Lakhs
each the said provision is too huge to be met in a
commencing from the year 2010-11, which single financial year, drawing analogy from constitutes a departure from the Accounting RBI & IRDA guidelines to Banks and Standards referred in Sec 211(3)(c) of the Act. Accordingly
Rs.2679.87
Lakhs
has
Insurance
been amortize
Companies the
liability
respectively, over
five
to years
charged by the company to the statement of beginning March, 2011; the Company has Profit and Loss of the year under audit and the un charged one fifth of the gratuity liability for amortised amount as at 31st March 2012 is the financial year 2011- 12 also, since the Rs.8039.63 Lakhs. As a result the profit for the scenario of Banks and Insurance Companies year is understated by an amount of Rs.2679.87 with respect of Gratuity is same with that of lakhs. further the Reserves and surplus are over the Company and the accounting treatment stated by Rs.8039.63 lakhs and the current should conceptually remain same irrespective liabilities are under stated by an equal amount.
of the nature of industry, i.e., Companies incorporated under Companies Act, 1956 or otherwise.
2.The
balances
appearing
under
Trade Present
review
Receivables, Sundry Creditors Advances to strengthened
for
mechanism reviewing
will the
be long
Suppliers, Advances from Customers, EMDs and outstanding dues. Confirmation of balances Security Deposits, claims recoverable and other for customers/ suppliers will be sent for the amounts aid/received include certain of amounts balances outstanding as on 30th September, as which
are
long
outstanding.
Pending against the present practice of 31st December
confirmations, econciliations and consequent and will be followed up. 51
adjustments, if any, of such balances, the impact of the same on the Statement of Profit and Loss and Balance Sheet, is not quantifiable.
Opinion:
In our opinion and to the best of our information and according to the explanation given to us, except for the effects of the matter described in the „Basis for Qualified Opinion‟ paragraph, the
financial statements give the information required in the Act in the manner so required and give a true and fair view in conformity with the accounting principles generally accepted in India. a) in the case of the Balance Sheet, of the state of
affairs of the Company as at 31.03.2012. b) in case of the Statement of Profit and Loss, of
the profit for the year ended on that date;and c) in the case of the Cash Flow Statement,of the
cash flows for the year ended on that date.
Report on Other Legal and Regulatory Requirements 1. As required by the Companies (Auditor‟s
Report) Order, 2003 read with Companies (Auditor‟s Report) (Amendment) Order, 2004
issued by the Central Government of India in terms of Section 227(4A) of the Act, we annex hereto a statement on the matters specified in paragraphs 4 and 5 of the said order. 2. As required by Section 227(3) of the Act, we
report that: 52
a. We have obtained all the information and
explanations which to the best of our knowledge and belief were necessary for the purposes of our audit; b. In our opinion, proper books of account as
required by law have been kept by the Company so far as appears from our examination of those books, c. The Balance Sheet, the Statement of Profit &
Loss and Cash Flow statement dealt with by this report are in agreement with the books of account and with the returns received from branches not visited by us; d. Except for the effects of the matter described
in the „Basis of Qualified Opinion‟ paragraph, in
our opinion, the Balance Sheet,the Statement of Profit and Loss and the Cash Flow statement dealt with by this report comply with the Accounting Standards referred to in subsection 3C of Section 211 of the Act. e. As per circular No.8/2002, dated 22.03.2002
issued by the Ministry of Law, Justice & Company Affairs, the provisions of section 274(1)(g) of the Act, are not applicable to the Company, as it is a Government Company. f. Since the Central Government has not issued
any notification as to the rate at which the cess is to be paid under section 441A of the Act nor has it issued any rules under the said section, prescribing the manner in which such cess is to be paid, no dues payable by the Company. 53
4.3.2 COMMENTS OF THE COMPTROLLER AND AUDITOR GENERAL OF INDIA UNDER SECTION 619(4) OF THE COMPANIES ACT, 1956 ON THE ACCOUNTS OF ELECTRONICS CORPORATION OF INDIA LIMITED, HYDERABAD FOR THE YEAR ENDED 31 MARCH 2012
The preparation of financial statements of Electronics Corporation of India
Limited, Hyderabad for the year ended 31 March 2012 in accordance with the financial reporting framework prescribed under the Companies Act, 1956 is the responsibility of the management of the Company. The statutory auditor appointed by the Comptroller and Auditor General of India under Section 619(2) of the Companies Act, 1956 is responsible for expressing opinion on these financial statements under Section 227 of the Companies
Act, 1956 based on independent audit in accordance with the auditing and assurance standards prescribed by their professional body, the Institute of Chartered Accountants of India. This is stated to have been done by them vide their Audit Report dated 29 June 2012 I, on the behalf of the Comptroller and Auditor General of India, have conducted a supplementary audit under Section 619(3)(b) of the Companies Act, 1956 of the financial statements of Electronics Corporation of India Limited, Hyderabad for the year
ended 31 March 2012. This supplementary audit has been carried out independently without access to the working papers of the statutory auditors and is limited primarily to enquiries of the statutory auditor and Company personnel and selective examination of some of the accounting records. On the basis of my audit, nothing significant has come to
my knowledge which would give rise to any comment upon or supplement to Statutory Auditor‟s report under Section 619(4) of the Companies Act, 1956 . 4.4 ACCOUNTING POLICIES Basis of Accounting:
The financial statements are prepared and presented under the historical cost convention, in accordance with Generally Accepted Accounting Principles in India (IGAAP) and the provisions of the Companies Act, 1956.
54
Use of Estimates:
The preparation of financial statements requires estimates and assumptions (including revisions, if any) that affect the reported amount of assets and liabilities on the date of financial statements and the reported amount of revenues and expenses during reporting period. Differences between the actual results and estimates are recognized in the period in which the results are known / materialized. A) Recognition of Revenue: (i) Sales include Excise Duty and exclude Sales Tax / Value Added Tax and Service Tax
and revenue is recognized on accrual basis inter-alia in the following cases : a) In case of FOR destination cases, Revenue is recognized on dispatch if there is
reasonable expectation of the goods reaching the destination within the accounting period. b) In case of Ex-works, FOT works, FOR Works contracts, revenue is recognized when
the goods are handed over to the carrier for transmission to the buyer. c) In respect of composite contracts involving supply and services where price breakup is
available, revenue in respect of supplies are recognized when goods are delivered to customers unconditionally and service income is recognized based on completion of services. And where price break-up is not available, revenue is recognized as per contract value duly providing for services on estimated basis for the supplies made unconditionally. d) Revenue is recognized in respect of services/software against completion of
milestones/ acceptance/ acknowledgement, where break-up values for each system/ package are available in contract or based on technical estimates where such break up values are not available. e) If the sale price is pending finalization, revenue is recognized on the basis of price
expected to be realized. (ii) On transfer of items (for Defence) to the bonded stores awaiting field-testing.
55
(iii) On completion of customer‟s prior inspection and acceptance in case the contract so
provides, even if the goods are retained in the custody of the Company at the request of the customer. (iv) In case of turnkey/composite contracts of complex equipment/ systems, where the
normal cycle time for completion is more than 12 months, subject to provision of anticipated losses, revenue is recognized (excluding taxes and duties) based on percentage completion method based on the percentage of actual cost incurred up to the reporting date to the total estimated cost of the contract. B. Internal Capitalization and Inter-Group Transfers: i) Internal Capitalization: Equipment manufactured for internal use is capitalized at
cost. ii) Inter-Group Transfers: Inter and Intra group transfers are made at agreed transfer
price. However, unutilized stock of such items at the yearend lying as inventory is valued at cost or NRV whichever is lower. C. Inventory: i) Raw materials, stores and spares and components are valued at cost (net of
CENVAT/VAT) by using weighted average cost formula or NRV whichever is lower. Inventories which are non-moving for more than 3 years and which may not be required for further use are suitably provided and in the case of inventories which are less than 3 years old, provision is made as assessed technically. ii) Work in progress of products / projects is valued at Factory Cost or NRV whichever is
lower and such valuation is based on technical estimate as to the stage of progress. iii) Finished goods are valued at “factory cost” or “net realizable value” whichever is
lower. D. Fixed Assets and Depreciation of Assets: i) a) fixed Assets are stated at historical cost net of CENVAT/VAT, if an y. b) Assets are depreciated on straight line method and depreciation is charged on monthly
prorate basis for the additions / deletions during the year. The rates of depreciation 56
adopted by the Company are as per Schedule XIV of the Companies Act, 1956, except in the following cases: (i) Where the cost of the asset is Rs.10,000/- or below (for assets acquired after 01.04.2003) depreciation is at 100% of the cost retaining Re.1/- in the net block. (ii) Computer Systems acquired by Computer Education Division (CED) and systems sent on hire or for demonstration or for use outside factory is depreciated @ 50%. (iii) Assets acquired by Electronic Manufacturing Services Division under the heads o f (i) Plant and Machinery and (ii) Electronic Testing and Measuring Equipment which are depreciated at the rate of 50%. (iv) Structures, erections, warehouses, Electrical installations and other similar enabling works at projects / sites are depreciated considering the tenure of th e contracts. (v) Data processing equipment acquired for execution of NPR & SECC project is Depreciated @ 50%. ii) Impairment of Assets: As at the end of each Balance Sheet date, the carrying amount
of assets is assessed as to whether there is any indication of impairment. If the estimated recoverable amount is found less than its carrying amount, the impairment loss is recognized and assets are written down to their recoverable amount. E. Prepaid Expenses and Prior Period Expense / Income:
Prepaid expenses and prior period expenses / income of items of Rs.1,00,000 and below are charged to natural heads of accounts. F. Technical Knowhow:
Expenditure on Technical Knowhow (TKH) fees, Software, Training of Personnel etc., are charged off to revenue on incurrence. However, in case of TKH charges incurred for new product lines or up gradations expenditure is amortised,based on technical assessment over the life cycle of the Project not exceeding 5 years.
57
G. Demurrages and Wharfages:
Expenditure on demurrages and/or wharfages on all imports, whether capital or otherwise, is charged off to revenue. H. Foreign Currency Transactions and Exchange Variation:
Transactions in foreign currencies are accounted at the exchange rate prevailing on the date of transactions. Gains / losses arising out of the fluctuations in the exchange rate are recognized in the profit & loss account in the period in which they arise. The foreign currency fluctuations relating to monetary items at the year ending are accounted as gains / losses in the profit & loss account. I. Government Grants:
Govt. grants related to specific fixed assets are shown as a deduction from the gross value of the assets concerned and those related to Revenue are deducted from the relevant expense accounts in the year in which the expenditure is incurred. Subject to the conditions of the Grants, fully funded assets are shown at nominal value, while partially funded assets are shown after reduction of the grant amount. J. Research & Development Expenditure:
Research and development expenditure of revenue nature is charged off to revenue when incurred; while of capital nature is capitalized. K. Employee Benefits: i) Provisions for gratuity and leave encashment liability to employees are made on the
basis of actuarial valuation as at the year end. Actuarial gains and losses are recognized in the statement of profit and loss as income or expense. ii) Compensation under VRS is charged off to revenue in the year of incurrence. L. Borrowing Costs:
Borrowing costs, directly attributable to the acquisition, construction or production of qualifying assets are capitalized till the month in which the asset is ready to
58
use as part of the cost of that asset. Other borrowing costs are recognized as an expense in the period in which these are incurred. M. Deferred Taxes:
Deferred Income Tax is provided using the liability method on all temporary timing differences at the Balance Sheet date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the asset is realized or the liability settled, based on tax rates (and the tax laws) that have been enacted upto the date of approval of the financial statements. N. Investments:
Long term investments are carried at cost. Provision is made for dimunition, other than temporary, in the value of such investments. O. Leases: a) Assets given on operating lease are capitalized. The related lease income is recognized
as income, over the lease period, on accrual basis. In respect of lease and sublease arrangement, the lease rental received and payable are recognized as income and expenditure respectively in the Profit & Loss Account on accrual basis. b) Assets given on finance lease are recognized as sale at normal sale price/fair value/Net
Present Value. Finance income is recognized over the lease period. Initial direct costs are expensed in the year of incurrence. In respect of assets taken on finance lease and subsequently sub-leased, the Accounting Policy for finance lease, as stated is applicable. P. Liquidated Damages:
Claims for liquidated damages against the company are considered, to the extent revenue recognized except those which are considered by the management as negotiable and not payable. However, the same are treated as contingent liability.
59
Q. Provisions, Contingent Liabilities and Contingent Assets:
Provisions involving substantial degree of estimation in measurement are recognized when there is a present obligation as a result of past events and it is probable that there will be an outflow of resources. Contingent Liabilities are not recognized but are disclosed in the notes. Contingent Assets are neither recognized nor disclosed in the financial statements.
4.5 PROBLEMS OF CORPORATE GOVERNANCE
1. Control:
a) Advisers: Problems regularly arise for which the enterprise does not have the internal skills selecting the right advisers for each stage of development will be a vital first stage in best practice and one that will have to be regularly reviewed.
b) Articles of Association/Company statutes: Defining what the enterprise can do is another vital first stage in development – one that tells management what is permitted and what is not. Standard terms and conditions exist which function for the early stage organization, but which again will need to be regularly reviewed.
c) Shareholders agreement:
In small organizations, with a limited shareholder base,
conflicts can easily arise. Documenting how shares can be transferred, what rights each shareholder has, and how they are valued, is important in reducing the potential impact of disputes. This shareholder agreement will no longer be valid once the shares are more widely traded.
d) Record keeping: Best practice insists that the enterprise should maintain comprehensive records, both financial and non – financial. Computerization provides both advantages and disadvantages, but which need to be backed up digitally and with hard copy.
e) Conservative accounting: Many of the problems of “public” Corporate Governance develop as a result of “creative” accounting approaches. Establishing Conservative
accounting guidelines at an early stage and maintaining them throughout the development of the enterprise will control this tendency.
60
2. Encouraging and maintaining diversity
a) Separation of powers : with the increasing workload of the growing company – strategic, operational, personnel considerations and stakeholder relationships, the separation of powers between a chief executive and a chairman is both important to provide a check and balance within the organization, but also to improve operational performance.
b) Directors trained in corporate requirements: with the growing complexity of the business, it becomes more important that the
Board of
Directors has a clear
understanding of corporate governance and the actions that need to be taken to ensure best practice. Most directors lack this expertise and require relevant training.
c) Compliance officer : The wider number of stakeholders involved with the medium sized enterprise suggests that the appointment of a corporate governance Compliance officer is a sensible measure, with regular (at least six monthly) reports on the quality of corporate governance.
3. Centralization vs. decentralization:
Simple structure consistent with operational requirements. Complex structures produce opaque reporting and control.
a) Profit centre emphasis on corporate governance: Think global, but act local. Maintaining responsibility for the majority of corporate governance activity at the local level will both improve the responsiveness of the entire organization but ensure that key activities are modified for local legal and stakeholder requirements, while meeting ov erall corporate guidelines.
b) Succession planning: With the devolution of power into profit centers, an emphasis on Succession planning and corporate governance training will be required to create the pool of staff able to manage the increasingly complex enterprise relationships.
61
4. Stabilizing stakeholder relationships
a) Management team and development: Decision making requires diversity and depth improving the management team will be a priority for the growing enterprise which tends to be relatively narrowly based in terms of expertise.
b) Standard operating procedures: With the increased size of the organization, it becomes important to both standardize procedures in many areas, but also to incorporate experience and to provide training, all of which are part of the creation of Standard operating procedure.
c) Regular formal reviews: As the number and importance of decisions grow, the formalization of the reporting system needs to increase. To improve control, management meetings needs to include formal agenda, supporting documentation, formal voting and records of the meeting decisions. This will often need to include for major projects an investment and risk appraisal.
d) Internal audit: With increasing complexity of control, an Internal audit system, which reviews procedures will become a steadily more important element in corporate governance and control.
62
CHAPTER-V FINDINGS & SUGGESTIONS
FINDINGS:
It is found that E.C.I.L maintained the accounting procedures as per Accounting Standards which is appreciable.
It is found that the company is not dealing in or trading in shares, securities, debentures and other investments.
It is found that the company has taken several measures to enhance the openness and transparency of all its operations.
It is found that the audit conducted is in accordance with the auditing standards generally accepted in India.
Proper records are maintained showing full particulars of fixed assests with a phased programme of their physical verification.
The company is maintaining proper records of inventory.
The internal control procedure for purchase of stores, raw materials including components and for sale of goods is adequate.
Reasonable records are maintained for the sale and disposal of the scrap.
The provident fund dues were deposited regularly with the appropriate authorities.
63
SUGGESTIONS:
Include self-audit on Corporate Governance.
Implementation of audit committee suggestions.
Recruiting Professionals for certifying Corporate Governance.
Foreign investment and foreign firms would raise standards of Corporate Governance.
Rating companies on the basis of Corporate Governance.
As new talents are emerging day by day, ECIL should restructure the organization by recruiting the new talent.
Generate ideas for new products and services.
Various training programme should be conducted for management and staff
regarding
various Corporate Governance.
The company should work towards empowering women and children sustainable community development programme. The company should take part in community development.
64
CONCLUSIONS:
1. Effective Corporate Governance is more than just putting in place structure, such as
committees and reporting mechanisms, to achieve desired results. Such structure is only a means for developing a more creatable Corporate Governance framework and is not ends in them. That is, there must be more emphasis on the substance rather than the form of good Corporate Governance and to the confidence and assurance of stakeholders. 2. Corporate Governance as practiced in Electronic Corporation Of India Limited is a
voluntary basis as the same is not mandatory. The reason is ECIL is not listed company and is wholly owned by Central Government. 3. It is observed that ECIL is people oriented and operations are labour intensive in day-to-
day operations any minor deviation can be interpreted in different ways ready to lessen unrest. In the contest transparency which is a corner stone of Corporate Governance is must. Hence a foundation is laid for practicing good Corporate Governance principles. 4. On the audit side, a perusal of Accounting policies & Auditors would reveal various
Auditing practices of ECIL to the information of one and all. 5. Apart from various audit committees, committees like Government committee and their
activities are reported in Annual report. This is another feature of good Corporate Governance principles.
65
