Capital Markets : Best Practices

India CFO Summit 2005 – Mumbai 25 Nov Alok Misra, Group CFO MphasiS

BFL

2Confidential © MphasiS

Corporatization

• Corporatization is a form of economic reform which takes services from the direct control of the government, and places them in the control of government-owned corporations.

• This is often seen as a step towards full-scale privatization

• Impacts Unlock value Introduction of higher standards of corporate governance Capital market behavior Better regulation of commercial and business transactions Consumer protection. These steps will all contribute to the nourishment and strengthening of the private sector

• Examples VSNL / BSNL ONGC & other Oil PSUs Maruti

3Confidential © MphasiS

Demutualization

• The process of changing corporate structure from a mutual fund company to some other form, such as a limited liability or corporation

• Demutualization in exchanges refers to the change in the legal status of the exchange from a mutual association with having one vote per member (with possibly consensus based decision making) into a company limited by shares, with one vote per share (with majority based decision making)

• Demutualization also offers potential opportunities for strengthening governance offering alternate business models of exchanges raising capital and improving operational efficiency

• Challenges Regulatory framework Conflicts of interests

4Confidential © MphasiS

Demutualization

• Asian Stock Exchanges corporate structure

Stock ExchangesDemutualization

in

Australia Oct-98

Singapore Dec-99

Hong Kong Mar-00

Philippines Aug-01

Tokyo Nov-01

National Nov-94

Bombay 2005

5Confidential © MphasiS

Demutualization

• Market data

NSE

  1995 2005

Traded quantity (lakhs) 135 3,150

Traded Volume (Rs. Cr.) 196 5,549

6Confidential © MphasiS

The India Feel Good Factor

• Capital markets & foreign investments free currency flows foreign investments for Indian companies regulatory nuisance factors a capital markets Code of Conduct

• Accounting and taxation essentials Accounting standards Presentation and disclosure of financials Taxation of foreign companies Taxation of foreign investments

• Corporate governance & the pivotal role of the Board

7Confidential © MphasiS

Board Structures*

Parameter

India (Nifty Fifty Co.) US (top 50 out of NYSE 100 index)

Ownership pattern

48% of Indian companies have largest shareholder holding > 50%

Largest shareholder holds less than 10% in all cases

Board size •Largest Board size: 17, smallest: 5

•44% have more than 12 directors

•Largest Board size: 18, smallest: 10

•66% have more than 12 directors

Board Independence

•58% of companies have board majority of independent directors

•12% have less than 1/3rd of the directors independent

All companies have a board majority of independent directors

Executive directors on board

In 35 companies 50% of the directors-or-more-are executive directors

49 companies have less than 25% executive directors

Chairman & CEO

In 60% companies, roles are separate

80% have same person for the two roles

Lead Independent Director

Only 3 companies have it 20 companies have it

8Confidential © MphasiS

Board Structures*

Parameter

India (Nifty Fifty Co.) US (top 50 out of NYSE 100 index)

Board Committees

•All companies have audit committees, 54% have fully independent Audit Committees

•33 companies have remuneration committees- of these 14 are fully independent and 16 have majority independent

•9 companies have nomination committees – 6 are fully independent and 3 have majority independent committees

All companies have fully independent audit, remuneration and nomination committees

* Crisil Ratings

9Confidential © MphasiS

Integration of Stock exchanges / Regionalisation

• The challenge for each capital market: Increase of liquidity, avoid marginalisation. Preconditions: Economic stability, economic growth, issuers, company

structure, governance and results Remote members and cross membership & Cross listing Linked trading systems and Links on execution side (clearing, settlement,

registry) Regulatory framework supervision, transparency & Role of market

participants

• The benefits of a regional integration of stock exchanges : Diversified risk in a wider market More efficient and competitive markets – larger players Lower costs & higher returns by increased cross border capital flows By pooling the resources of fledgling and fragmented capital markets,

regionalization could boost liquidity and the ability of these markets to mobilize local and international capital for private-sector and infrastructural development

Investors would gain access to a broader range of shares; issuers would gain access to a larger number of investors

Prevent large capital outflows from the region

10Confidential © MphasiS

Working with shareholders and management

• Disclosures Financial Statements Clause 35 Clause 41

• Transparency / Governance Clause 49 Governance rating

• Accountability / Internal Control CEO/CFO Certification Enterprise Risk Management SOX-ing the Listing Agreement

• Compliance Internal audits Statutory Compliance processes - global

• Issues Company Law v SEBI Guidelines v Listing Agreements

11Confidential © MphasiS

The Way Forward For India

• A single regulator for

Banking Securities/stocks Insurance Asset management

• With a thematic approach to eCommerce the impact of the Internet the foreign investor the growing retail investor

12Confidential © MphasiS

?