OBJETIVOS Y PRIORIDADES EN LA INSPECCIÓN a) Objetivos

i. The Concept: Corporate governance is a dynamic concept involving promotion of corporate fairness, transparency and accountability in the interest of shareholders, employees, customers and other stakeholders. It is a concept of recent origin. However, there is considerable divergence in the understanding and practice of corporate governance across different jurisdictions. The concept has evolved since the first major study by the Cadbury Committee in 1992. The DECO principles of corporate governance published in 1999, the first international code of good corporate governance approved by governments, was revised in 2004. Corporate governance can be seen as kthe way in

which boards oversee the running of a company by its managers, and how board members are in turn accountable to shareholders and the company* and it has implications for company behaviour towards employees, shareholders, customers, banks and other stakeholders. Further, good corporate governance plays a vital role in ensuring the integrity and efficiency of financial markets and the

lack of it can pave the way for financial difficulties and sometimes even fraud.

ii. OECD Principles of Corporate Governance, 2004: The OECD principles of corporate governance, 2(X)4 stipulate what the corporate governance framework should ensure, which is briefly as under: (a) Ensuring the basis for an effective corporate governance framework: To promote transparent and efficient markets which are consistent with the rule of law. Also, to articulate clearly the division of responsibilities among the different supervisory, regulatory and enforcement authorities.

(b) The rights of shareholders and key ownership functions: To protect and facilitate the exercise of shareholders' rights.

(c) The equitable treatment of shareholders: In the equitable treatment of shareholders are included the minority and foreign shareholders. Further, all shareholders should have the opportunity to obtain an effective redress for violation of their rights.

(d) The role of stakeholders in corporate governance: To recognise the rights of stakeholders, established by law or through mutual agreements and encourage active cooperation between the corporations and stakeholders in creating wealth, jobs, and the sustainability of financially sound enterprises.

(e) Disclosure and transparency: Timely and accurate disclosures made on all material matters, regarding the corporation, including the financial situation, performance, ownership, and governance of the company.

(f) The responsibilities of the board: Strategic guidance of the company, effective monitoring of management by the board and the board's accountability to the company and the shareholders are the important aspects. These principles are applicable to all types of companies including banks.

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iii. Corporate Governance and Banks: Banks hold a special position in corporate governance as they accept and deploy large amounts of public funds in fiduciary capacity and also leverage such funds through credit creation. The position of banks is also important for the smooth functioning of the payment system. Accordingly, legal prescriptions for ownership and governance of banks laid down in the statutes are supplemented by regulatory prescriptions. The Basel Committee on Banking Supervision has issued guidance (February 2006) for promoting the adoption of sound practices of corporate governance by banking institutions. This guidance, entitled Enhancing Corporate Governance for Banking Organisations, highlights the importance of:

• the roles of boards of directors (with a focus on the role of independent directors) and senior management

• effective management of conflicts of interest

• the roles of internal and external auditors, as well as internal control functionaries

• governing in a transparent manner, especially where a bank operates in jurisdictions, or through structures, that may impede transparency

• the role of supervisors in promoting and assessing sound corporate governance practices.(See, http://www.bis.org/press/p060213.htm).

Apart from the fiduciary role of banks, their cross-border operations add a special dimension. This provides an added impetus for convergence in standards internationally. In almost all countries, the policy framework with regard to corporate governance involves a multiplicity of agencies. In India, the Department of Company Affairs, Securities and Exchange Board of India (in respect of listed entities) are involved apart from the Reserve Bank in respect of banks.

iv. Reserve Bank's approach: Following the formal policy announcement in regard to corporate governance, in the mid term Review of the Monetary and Credit Policy, in October, 2001, the Reserve bank constituted a Consultative Group in November, 2001 under the chairmanship of Dr. A.S. Ganguly with a view to strengthen the internal supervisory role of the boards of banks. The report of the group was transmitted to all the banks for their consideration in June, 2002 and simultaneously to the Government of India for consideration. Earlier, an advisory group on corporate governance under the chairmanship of Dr. R.H. Patil had submitted its report in March, 2001

which examined the issues relating to corporate governance in banks in India, including the public sector banks and made recommendations to bring the governance standards in India on par with the best international standards. There were also some relevant observations by the advisory group on banking supervision under the chairmanship of Shri M.S. Verma which submitted its report in January, 2003. Keeping all these recommendations in view and the cross-country experience, the Reserve Bank initiated several measures to strengthen the corporate governance in the Indian banking sector, including the concept of 4fit and proper* criteria for directors of banks which

included the process of collecting information, exercising due diligence and constitution of a nomination committee of the board to scrutinise the declarations made by the bank directors. The RBI guidelines on ownership and governance in the private sector banks released on February 28, 2005 (Paras 5 and 6) provide as under:

Shareholding

(i) The RBI guidelines on acknowledgement for acquisition or transfer of shares issued on 3 February, 2004 will be applicable for any acquisition of shares of five per ccnt and above of the paid-up capital of the private sector bank.

(ii) In the interest of diversified ownership of banks, the objective will be to ensure that no single entity or group of related entities has shareholding or control, directly or indirectly, in any bank in excess of ten per ccnt of the paid-up capital of the private sector bank. Any higher level of

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