corporate governance essay upsc

GS4 PYQ (Mains Answer Writing): Corporate Governance | UPSC Mains Answer Writing: Practice PDF Download

Q. What do you understand by Corporate Governance? Why is it important for the success and sustainability of an organisation? (150 words)

"Before looking at the solution of this question you may try this question at your own first"

Introduction

• Corporate governance is defined as a set of systems, processes and principles which ensure that a company is governed in the best interest of all stakeholders. It is about promoting corporate fairness, transparency and accountability.
• Corporate governance plays an important role to protect the rights of thousands of shareholders, who have ownership in the company but do not play an active role in governing day to day business activities. It includes both social and institutional aspects.

Body Corporate governance components:

• Open to public Information disclosure, high transparency and accountability are basic important elements of best corporate governance that strives the sustainability of corporations and society.
• To avoid mismanagement, good corporate governance is necessary to enable companies to operate more efficiently, to improve access to capital, mitigate risk and safeguard stakeholders.

Importance of corporate governance:

• Importance of Social Responsibility: Social responsibility is given a lot of importance in the present time. The corporates have to protect the rights of the customers, employees, shareholders, suppliers, local communities, etc. This is possible only if they use corporate governance.
• It is happening in the stock market, banks, financial institutions, companies and government offices. In order to avoid these scams and financial irregularities, many companies need to adopt corporate governance.
• All this requires corporate governance. Without Corporate governance, it is impossible to enter, survive and succeed in the global market.
• Protect the interest of all stakeholders: Today, there are many takeovers and mergers in the business world. Corporate governance is required to protect the interest of all the parties during takeovers and mergers
• A lack of corporate governance can lead to profit loss, corruption and a tarnished image, not only to the corporation, but to the society, or even worse will influence global as a whole.

Suggestions to improve corporate governance in India

• Minimum 6 directors to be on board of listed entities; every listed entity to have at least 1 independent woman director
• More transparency on appointment of independent directors and should play a more active role on the boards.
• Diverse boards are better boards: In this context, ‘diverse’ is all-encompassing, including gender, ethnicity, skills and experience.
• Robust risk management policies: Adoption of effective and robust risk management policies for better decision making as it develops a deeper insight into the risk-reward trade-offs that all Corporations face.
• Effective governance infrastructure:  Policies and procedures which guide ethical behaviour should form the base of any organizational behaviour. Ensure separation of the line of responsibility between board and management.
• The primary objective of a corporation is to increase its brand value in the market i.e. society. Successful corporations must operate within the society; to that end, they must maintain the values and norms of the society in which they operate.
• In Indian corporate policies like protecting small shareholders, preventing frauds and malpractices and promoting corporate social responsibility are some of the examples of good corporate governance.

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What is Corporate Governance?

Corporate Governance is a continuous process of applying the best management practices, ensuring the law is followed the way intended, and adhering to ethical standards by a firm for effective management, meeting stakeholder responsibilities, and complying with corporate social responsibilities.

It contains policies and rules to maintain a strong relationship between the owners of the company (shareholders), the Board of Directors, management, and various stakeholders like employees, customers, Government, suppliers, and the general public. It applies to all kinds of organizations-profit or not-for-profit.

In this article, we shall discuss the definition, significance and objectives of corporate governance. This is an important topic from the UPSC exam and competitive exam perspective. This is an important topic in daily current affairs for UPSC.

Principles of Corporate Governance

The principles of Corporate Governance are:

Accountability

Accountability means to be answerable and be obligated to take responsibility for one’s actions. By doing so, two things can be ensured-

• That the management is accountable to the Board of Directors.
• That the Board of Directors is accountable to the shareholders of the company.

This principle gives confidence to shareholders in the business of the company that in case of any unfavourable situation, the persons responsible will be held in charge.

Fairness gives shareholders an opportunity to voice their grievances and address any issues relating to the violation of shareholder’s rights. This principle deals with the protection of shareholders’ rights, treating all shareholders equally without any personal favouritism, and granting redressal for any violations of rights.

Transparency

Providing clear information about a company’s policies and practices and the decisions that affect the rights of the shareholders represents transparency. This helps to build trust and a sense of togetherness between the top management and the stakeholders. It ensures accurate and full disclosure timely on material matters like financial condition, performance, ownership.

Independence

Independence means the ability to make decisions freely without being unduly influenced. Decisions should be made freely without having any personal interest in the company. It ensures the reduction in conflict of interest. Corporate governance suggests the appointment of independent directors and advisors so that decisions are taken responsibly without influence.

Social Responsibility

Apart from the 4 main principles, there is an additional principle of corporate governance. Company social responsibility obligates the company to be aware of social issues and take action to address them. In this way, the company creates a positive image in the industry. The first step towards Corporate Social Responsibility is to practice good Corporate Governance.

Corporate Governance in India

Candidates should have thorough knowledge about Corporate Governance in India as it is covered under the UPSC Syllabus .

Candidates shall go through the topic and make their UPSC notes accordingly.

• The Ministry of Corporate Affairs (MCA) and Securities and Exchange Board of India ( SEBI ) is responsible for corporate governance initiatives in India. The corporate sector of India faced major changes in the 1990s after liberalization.
• In the 1900s, SEBI regulated corporate governance in India through various laws like the Security Contracts (Regulation) Act, 1956; Securities and Exchange Board of India Act, 1992; and the Depositories Act of 1996.
• In February 2000, SEBI established the first formal regulatory framework for corporate governance in India owing to the recommendations of the Kumar Mangalam Birla Committee. It was undertaken to improve the standards of corporate governance in India. This came to be known as clause 49 of the Listing Agreement.
• A major corporate governance initiative was undertaken in 2002 when the Naresh Chandra Committee on Corporate Audit and Governance furthered their recommendations addressing multiple governance issues.
• MCA and the Government of India have set up multiple organisations and charters like the Confederation of Indian Industry (CII), National Foundation for Corporate Governance (NFCG), and Institute of Chartered Accountants of India (ICAI).

Corporate Governance in India is required for the current affairs section of all civil service examinations.

Aspirants can visit the linked article and get details about the upcoming government exams that comprise current affairs and general awareness as an important topic in the syllabus.

For the best preparation strategy for competitive exams candidates can visit the linked article and get detailed study material and preparation tips to excel in the examination.

Frequently Asked Questions on Corporate Governance

Why is corporate governance important.

Corporate governance is important to improve the integrity and performance of a company. It gives it a sustainable approach to the affairs of the organisation. This provides an upper ground to the company and increases its competitive advantage.

What are the elements of Corporate Governance?

The elements of corporate governance are:

• Transparent disclosure
• Well-defined rights of shareholders
• Internal control environment
• Structured Board practices
• Board commitment

What are the four ‘P’s (Philosophies) of corporate governance?

The four Ps are People, Purpose, Process, and Performance.

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Corporate Governance

• Last Updated : 20-Jan-2023

Corporate governance ensures the following:

Four pillars of corporate governance, the four pillars on which the oecd principles of corporate governance are based may well be the most valuable aspect of corporate governance., stakeholders and agency dilemma in corporate governance, objectives of corporate governance, •    in general, corporate governance aims to achieve the following goals:, prerequisites and constituents of corporate governance, the board of directors, shareholders, and management are the three main components of corporate governance., •    the board's responsibilities are described in the oecd principles of corporate governance (2004), and some of them are summarised below:, corporate governance's underlying principles revolve around three interconnected segments. these are the following:, any suggestions or correction in this article - please click here ( [email protected] ), related posts:, kantian ethics and categorical imperative.

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Governance Previous Year Questions (PYQs) | UPSC Mains Examination

On this page you will find all the updates related to the previous year questions of subject Governance for UPSC IAS Mains examination.

Governance holds a crucial role in the structure of Indian polity, and numerous questions on this subject have been asked in the Main General Studies Paper 2 of the UPSC exam. Therefore, candidates must have a comprehensive grasp of all the facets within the Governance section of the UPSC Syllabus.

Topic: Government policies and interventions for development in various sectors and issues arising out of their design and implementation: 

Q.1) The Gati-Shakti Yojana needs meticulous coordination between the government and the private sector to achieve the goal of connectivity. Discuss. [150 Words] [10 Marks] [2022]

Q.2) ‘Earn while you learn’ scheme needs to be strengthened to make vocational education and skill training meaningful” Comment. [150 Words] [10 Marks] [2021]

Q.3) ‘In the context of neo-liberal paradigm of development planning, multi-level planning is expected to make operations cost effective and remove many implementation blockages.’-Discuss. [250 Words] [15 Marks] [2019]

Q.4) The need for cooperation among various service sector has been an inherent component of development discourse. Partnership bridges bring the gap among the sectors. It also sets in motion a culture of ‘Collaboration’ and ‘team spirit’. In the light of statements above examine India’s Development process. [250 Words] [15 Marks] [2019]

Q.5) “Policy contradictions among various competing sectors and stakeholders have resulted in inadequate ‘protection and prevention of degradation to environment.” Comment with relevant illustrations. [150 Words] [10 Marks] [2018]

Topic: Issues relating to poverty and hunger

Q.1) Can the vicious cycle of gender inequality, poverty and malnutrition be broken through micro financing of women SHGs? Explain with examples. [150 Words] [10 Marks] [2021]

Q.2) “The incidence and intensity of poverty are more important in determining poverty based on income alone”. In this context analyse the latest United Nations Multidimensional Poverty Index Report. [250 Words] [15 Marks] [2020]

Q.3) There is a growing divergence in the relationship between poverty and hunger in India. The shrinking of social expenditure by the government is forcing the poor to spend more on non-Food essential items squeezing their food-budget.Elucidate. [150 Words][10 Marks] [2019]

Q.4) How far do you agree with the view that the focus on lack of availability of food as the main cause of hunger takes the attention away from ineffective human development policies in India? [250 Words] [15 Marks] [2018]

Q.5) ‘Poverty Alleviation Programmes in India remain mere show pieces until and unless they are backed by political will’. Discuss with reference to the performance of the major poverty alleviation programmes in India. [250 Words] [15 Marks] [2017]

Q.6) Though there have been several different estimates of poverty in India, all indicate reduction in poverty over time. Do you agree. Critically examine with reference to urban and rural poverty indicators. [200 Words] [12.5 Marks] [2015]

Topic: Important aspects of governance, transparency and accountability, e-governance applications,models, successes, limitations, and potential; citizens charters, transparency & accountability and institutional and other measures:

Q. Discuss the contribution of civil society groups for women’s effective and meaningful participation and representation in state legislatures in India. [15 Marks] [2023]

Q.1) Has digital literacy, particularly rural areas, coupled with lack of information and Communications  Technology (ICT) accessibility hindered socio-economic development? Examine with justification. [250 Words] [15 Marks] [2021]

Q.2) “The emergence of Fourth Industrial Revolution (Digital Revolution) has initiated e-Governance as an integral part of government”. Discuss. [150 Words] [10 Marks] [2020]

Q.3) Implementation of information and Communication Technology (ICT) based Projects /Programmes usually suffers in terms of certain vital factors. Identify these factors, and suggest measures for their effective implementation. [150 Words] [10 Marks] [2019]

Q.4) e-governance in not only about utilization of the power of new technology, but also much about critical importance of the ‘use value’ of information. Explain. [150 Words] [10 Marks] [2018]

Q.5) The Citizen’s Charter is an ideal instrument of organisational transparency and accountability, but it has its own limitations. Identify the limitations and suggest measures for greater effectiveness of the Citizen’s Charters. [250 Words] [15 Marks] [2018]

Q.6) Hunger and Poverty are the biggest challenges for good governance in India still today. Evaluate how far successive governments have progressed in dealing with these humongous problems.Suggest measures for improvement. [150 Words] [10 Marks] [2017]

Q.7) “In the Indian governance system, the role of non-state actors has been only marginal.” Critically examine this statement. [200 Words] [12.5 Marks] [2016]

Q.8) “Effectiveness of the government system at various levels and people’s participation in the governance system are inter-dependent/” Discuss their relationship in the context of India. [200 Words] [12.5 Marks] [2016]

Q.9) In the light of Satyam Scandal (2009), discuss the changes brought in the corporate governance to ensure transparency and accountability. [200 Words] [12.5 Marks] [2015]

Q.10) Though Citizens’ charters have been formulated by many public service delivery organizations,there is no corresponding improvement in the level of citizens’ satisfaction and quality of services being provided Analyse. [200 Words] [10 Marks] [2013]

Topic: Role of civil services in a democracy: 

Q.1) “Institutional quality is a crucial driver of economic performance”. In this context suggest reforms in Civil Service for strengthening democracy. [150 Words] [10 Marks] [2020]

Q.2) Initially Civil Services in India were designed to achieve the goals of neutrality and effectiveness,which seems to be lacking in the present context. Do you agree with the view that drastic reforms are required in Civil Services. Comment. [250 Words][15 Marks] [2017]

Q.3) “Traditional bureaucratic structure and culture have hampered the process of socio-economic development in India.” Comment. [200 Words] [12.5 Marks] [2016]

Q.4) Has the Cadre based Civil Services Organization been the cause of slow change in India? Critically examine. [200 Words] [12.5 Marks] [2014]

Trend of governance Previous Year Questions (PYQs) For UPSC Mains

Governance as a subject carry huge weightage in Mains examination. Since last 4-5 years, around 3-4 questions are asked from this section.

Because of the trend in UPSC Mains Governance Previous Year Questions (PYQs), candidates are suggested to keep themselves updated of current affairs. It is recommended for candidates preparing for the UPSC Civil Services Exam to regularly practice governance Mains Questions, assess the difficulty level, and formulate their preparation strategy accordingly.

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Corporate Governance

Corporate governance and its different models and how it is a must to improve business ethics in the contemporary era of competitiveness

Introduction  

Corporate governance is defined as a set of rules, practises, or regulations that govern how organisations are run, regulated, and controlled. Internal and external factors affecting the interests of a company’s stakeholders, including shareholders, customers, suppliers, government regulators, and management, are referred to as “internal and external factors.” The board of directors is in charge of developing a corporate governance framework that best matches business behaviour with objectives.

Action plans, performance measurement, transparency standards, CEO compensation decisions, dividend policies, methods for reconciling conflicts of interest, and explicit or implicit contracts between the company and stakeholders are all examples of corporate governance processes.

A well-defined and enforced organisation that works for the advantage of everyone involved by ensuring that the firm complies with acknowledged ethical standards, best practises, and formal regulations is an example of good corporate governance. Bad corporate governance, on the other hand, is characterised by a lack of structure, ambiguity, and compliance, all of which can harm a company’s reputation and financial health.

Main Principles of corporate governance

While the structure of corporate governance differs, most firms have the basic elements:

Everyone in the company should be treated equally and fairly. Making sure shareholders are informed of their rights and how to exercise them is a big part of that. Non-shareholder  stakeholders have legal, contractual, and social obligations that must be met. This includes sharing important information with employees, investors, vendors, and community members at all times. Within corporate governance, the board of directors must retain a commitment to ensuring accountability, justice, diversity, and openness. Members of the board must also have the required abilities to evaluate management practises.

Organisations should establish a code of conduct for board members and executives, and new members should only be appointed if they fulfil that level. All  corporate governance policies and procedures should be transparent or made available to interested parties.

Importance of conflict management in corporate governance

One goal of corporate governance is to set up a system of checks and balances to prevent conflicts of interest. Conflicts usually emerge when two parties engaged have competing views on how the business should be run. Corporate governance is a non-biased technique to tackle conflict because a board of directors is often made up of people who are both internally and externally involved.

When executives and stockholders disagree, conflicts may arise. For example, stockholders will normally want to pursue just profit-generating activities, whereas the CEO may want to invest in stronger employee engagement efforts. If numerous stockholders disagree with one other, another sort of conflict may occur. Corporate governance would be in charge of determining how these issues are resolved.

Fundamental  objectives of Corporate Governance 

• Aligning the corporate and stakeholder aims (society, shareholders, etc.)
• To boost corporate functioning and discourage mismanagement by investing in profitable investment outlets 
• To achieve corporate goals by investing in profitable investment outlets
• To define the B.O.D.’s and managers’ responsibilities to achieve good corporate performance

The goal of ‘excellent’ corporate governance is to maximise long-term shareholder value, according to a global consensus. Corporate governance is a method of structuring, operating, and controlling a business with the following specific goals: 

•  Achieving the owners’ long-term strategic goals
• Safeguarding the interests of employees
•  Environmental and community concerns
• Maintaining excellent customer and supplier relationships

Need for Corporate Governance

Corporate governance is required to establish a transparent, accountable, and transparent corporate culture. It refers to adherence to all moral and ethical norms, as well as the legal framework and voluntary behaviours that have been embraced. Customer happiness, shareholder value, and wealth are all improved as a result of this.

Corporate Performance

Improved governance structures and processes, regardless of the type of organisation or its sources of money, help promote quality decision-making, foster good succession planning for top management, and boost long-term profitability. This has been connected to increased company performance, both in terms of stock price and profitability.

Investor Trust

When evaluating organisations for investing, investors place equal weight on corporate governance as they do on financial performance. Investors who are given a lot of information and transparency are more willing to invest openly in those companies. Global institutional investors are willing to pay a premium of up to 40% for shares in companies with excellent corporate governance procedures, according to a poll conducted by McKinsey.

Better access to the global markets

Good corporate governance systems attract investment from global investors, resulting in increased financial sector efficiencies.

Combating Corruption

Transparent companies with strong systems that give complete disclosure of accounting and auditing procedures, as well as transparency in all business activities, create an environment where corruption will most likely fade away. Corporate governance enables a company to compete more effectively while also preventing fraud and misconduct.

Models of Corporate Governance  

Canadian model.

Canada has a history of colonisation by the French and the British. Those cultures were passed down to the industry. In many industries, the cultural background had an impact on later developments. French mercantilism has had a significant impact on the country. In the last four decades there has been a change in industries in Canada in the areas:

• Family-owned companies are on the increase.
• Use of new technologies.
• More entrepreneurial activities.

Models of the United Kingdom and the US

The Sarbanes Oxley Act (SOX) was passed by the US Congress in July 2002, to make US firms more open and accountable to their stakeholders. The Act aims to restore investor confidence by establishing good corporate governance practices to prevent corporate scams and frauds, improve accuracy and transparency in financial reporting, accounting services for publicly traded companies, and strengthen corporate responsibility and independent auditing.

The Act’s reach is not limited to publicly traded businesses in the United States, but also includes other units registered with the Securities Exchange Commission. However, there is a common thread that runs through them all: governance is important. Effective governance cannot be achieved unless corporate governance is integrated with strategic planning and shareholders are willing to endure the additional costs. The preceding events aided the creation of the current scenario, in which various facets of the Sarbanes Oxley Act, including its consequences, restrictions, and internal control after the act was passed, as well as what lies beyond its compliance, are discussed. The act’s various applications in sectors such as IT, the Big Four accounting firms’ fee structure, mid-size accounting firms’ fee structure, supply chain management, and insurance are also covered.

German Model

Since the beginning of the nineteenth century, Germany has been known for its industrialization. Germany has been a major exporter of complex machinery over the past five decades. Wealthy German families, small shareholders, banks, and foreign investors fund the industries. Large private bankers who invested in the industry had a greater say in how such businesses were operated, and as a result, performance was subpar.

Since the second part of the nineteenth century, Germany has been studying effective corporate governance measures. The German company legislation of 1870 established a dual board structure to protect small investors and the public. In 1884, the business law established disclosure and transparency as a central concept. The rule also required a minimum turnout for any company’s initial shareholders meeting.

Conclusion  

Society has higher expectations of corporations; they expect corporations to care about the environment, pollution, the quality of goods and services, and long-term development, among other things. To meet all of these expectations, a corporate code of conduct is necessary. In the past, corporate takeovers have caused a slew of issues. It has an impact on the rights of the company’s numerous stakeholders. This aspect also contributes to the country’s demand for corporate governance. Moreover, Because of the ease with which communication and transportation between countries have become easier and more regular as a result of globalisation, many Indian companies are now listed on international stock exchanges, necessitating the need for corporate governance in India.

Frequently asked questions

Get answers to the most common queries related to the UPSC Examination Preparation.

What impact does corporate governance have on a company's financials?

What is corporate governance's principal purpose, what role does conflict management play in the workplace, what is the purpose of corporate governance, what is the 2002 sarbanes-oxley act, what is the german corporate governance model.

A firm with strong, transparent corporate governance makes ethical decisions that benefit all of its stakeholders, allowing it to position itself as an appealing investment option if its financials are in good shape. Bad corporate governance causes a company’s collapse, which often results in scandals and bankruptcy.

The basic goal of corporate governance is to protect the interests of stakeholders. The Board of Directors, senior management, creditors, suppliers, shareholders, consumers, employees, the government, banks, and society are all included in this. It guarantees that the board is diverse.

Every employee feels indispensable to the workplace in this manner, and he works hard to meet the expectations of his coworkers, therefore contributing to the business in the best possible way. Conflict management minimises stress and tensions among employees by preventing confrontations to a large extent.

As a result, corporate governance is critical for restoring investor confidence in the business sector and contributing to society’s economic prosperity. In terms of affordable price, better quality, pollution control, best resource utilisation, and so on, today’s society has higher expectations of the corporate sector.

The Sarbanes-Oxley Act was enacted in the United States in 2002. Congress passed the Sarbanes Oxley Act in 2002 in response to corporate failures and fraud that resulted in significant financial losses to institutional and individual investors. The Act comprises provisions that impact public businesses’ corporate governance, risk management, auditing, and financial reporting.

Model from Germany Workers are considered to be one of the company’s most important stakeholders, and they should have the right to participate in its management. The two-tier board model is named after the fact that corporate governance is carried out by two boards.

Table of Contents

Governance (UPSC Mains) – Previous Year Questions

• The Gati-Shakti  Yojana  needs  meticulous  coordination   between   the government and the private sector to achieve the goal of connectivity. Discuss.
• The increase in life expectancy in the country has led to newer health challenges in the community. What are those challenges and what steps need to be taken to meet them?
• Reforming the government delivery system through the Direct Benefit Transfer Scheme is a progressive step, but it has its limitations too. Comment.
• The jurisdiction of the Central Bureau of Investigation (CBI) regarding lodging an FIR and conducting probe within a particular State is being questioned by various States. However, the power of the States to withhold consent to the CBI is not absolute. Explain with special reference to the federal character of India.
• Though the Human Rights Commissions have contributed immensely to the protection of human rights in India, yet they have failed to assert themselves against the mighty and powerful. Analyzing their structural and practical limitations, suggest remedial measures.
• “Recent amendments to the Right to information Act will have profound impact on the autonomy and independence of the Information Commission”. Discuss.
• “Institutional quality is a crucial driver of economic performance”. In this context suggest reforms in Civil Service for strengthening democracy.
• “The emergence of Fourth Industrial Revolution (Digital Revolution) has initiated e-Governance as an integral part of government”. Discuss.
• Implementation of information and Communication Technology (ICT) based Projects / Programmes usually suffers in terms of certain vital factors. Identify these factors, and suggest measures for their effective implementation.
• “Policy contradictions among various competing sectors and stakeholders have resulted in inadequate ‘protection and prevention of degradation’ to environment.” Comment with relevant illustrations.
• E-governance is not only about utilization of the power of new technology, but also much about critical importance of the ‘use value’ of information. Explain.
• The Citizens’ Charter is an ideal instrument of organizational transparency and accountability, but it has its own limitations. Identify the limitations and suggest measures for greater effectiveness of the Citizens’ Charter.
• “The local self-government system in India has not proved to be effective instrument of governance.” Critically examine the statement and give your views to improve the situation. (150 words)
• How do pressure groups influence Indian political process? Do you agree with this view that informal pressure groups have emerged as powerful than formal pressure groups in recent years?  (150 words)
• Hunger and Poverty are the biggest challenges for good governance in India still today. Evaluate how far successive governments have progressed in dealing with these humongous problems. Suggest measures for improvement.  (150 words)
• ‘The emergence of Self Help Groups(SHGs) in contemporary times points to the slow but steady withdrawal of the state from developmental activities’. Examine the role of the SHGs in developmental activities and the measures taken by the Government of India to promote the SHGs. (250 words)
• Initially Civil Services in India were designed to achieve the goals of neutrality and effectiveness, which seems to be lacking in the present context. Do you agree with the view that drastic reforms are required in Civil Services. Comment (250 words)
• “In the Indian governance system, the role of non-state actors has been only marginal.” Critically examine this statement.
• “Effectiveness of the government system at various levels and people’s participation in the governance system are inter-dependent.” Discuss their relationship with each other in context of India.
• In the integrity index of Transparency International, India stands very low. Discuss briefly the legal, political, economic, social and cultural factors that have caused the decline of public morality in India.
• Has the Indian governmental system responded adequately to the demands of Liberalization, Privatization and Globalization started in 1991? What can the government do to be responsive to this important change?
• “Traditional bureaucratic structure and culture have hampered the process of socio-economic development in India.” Comment.
• In the light of the Satyam Scandal (2009), discuss the changes brought in corporate governance to ensure transparency, accountability.
• If amendment bill to the Whistleblowers Act, 2011 tabled in the Parliament is passed, there may be no one left to protect.” Critically evaluate.
• “For achieving the desired objectives, it is necessary to ensure that the regulatory institutions remain independent and autonomous.” Discuss in the light of the experiences in recent past.
• Examine critically the recent changes in the rules governing foreign funding of NGOs under the Foreign Contribution (Regulation) Act (FCRA), 1976.
• The size of the cabinet should be as big as governmental work justifies and as big as the Prime Minister can manage as a team. How far the efficacy of a government then is inversely related to the size of the cabinet? Discuss.
• Has the Cadre based Civil Services Organisation been the cause of slow change in India? Critically examine.
• National Human Rights Commission (NHRC) in India can be most effective when its tasks are adequately supported by other mechanisms that ensure the accountability of a government. In light of the above observation assess the role of NHRC as an effective complement to the judiciary and other institutions in promoting and protecting human rights standards.
• Though 100 percent FDI is already allowed in non-news media like a trade publication and general entertainment channel, the Government is mulling over the proposal for increased FDI in news media for quite some time. What difference would an increase in FDI make? Critically evaluate the pros and cons.
• The setting up of a Rail Tariff Authority to regulate fares will subject the cash strapped Indian Railways to demand subsidy for obligation to operate non-profitable routes and services. Taking into account the experience in the power sector, discuss if the proposed reform is expected to benefit the consumers, the Indian Railways or the private container operators.
• Though Citizen’s charters have been formulated by many public service delivery organizations, there is no corresponding improvement in the level of citizens’ satisfaction and quality of services being provided. Analyze.
• ‘A national Lokpal, however strong it may be, cannot resolve the problems of immorality in public affairs’. Discuss.
• Pressure group politics is sometimes seen as the informal face of politics. With regards to the above, assess the structure and functioning of pressure groups in India.
• The legitimacy and accountability of Self Help Groups (SHGs) and their patrons, the micro-finance outfits, need systematic assessment and scrutiny for the sustained success of the concept. Discuss.

Corporate governance

In current business world, many people are aware of the standards on Corporate Governance. The effectiveness of the Corporate Governance has become a global concern. Mainly after many corporate collapse (e.g. Enron, Boeing etc), fraud cases (e.g. Lehman Brothers), shareholder suits (Sun Hung Kai Properties between Chairman Walter Kwok Ping-sheung and his younger brothers) or questionable strategic decisions are drawing attention to the top level decision-making body of the corporation and the board of directors.

The term, ‘corporate governance’, defines the processes by which organisations are directed, controlled and held to account. It holds authority, accountability, stewardship, leadership, direction and control exercised within the organisation. Numerous management theorists have elaborated the concept of corporate governance. Corporate governance is a system by which companies can relay to run, at the centre of the system is the board of director whose actions are subject to the law, regulations and the shareholders in general meetings. Shareholders in turn are responsible for appointing the directors and the auditors and it is up to them that the board of directors reports on its stewardship at the annual general meeting.

Margaret Blair defines corporate governance as a set of policies, way of life measures proportionately more than is customary. This measurement and others are deliberate, using specifications that anticipate your paper as one part of the entire proceedings, and not as an independent document (Cornelius & Kogut, 2003). In another definition by Organization for Economic Co-operation Development - OECD (2005), corporate governance is the way and methods by which organizations are directed and controlled. Corporate governance spells out the rights and responsibilities among the member of an organization and also the regulations and methods for making decision (Co-operation & Development, 2005).

Corporate governance is the way a by which company polices itself. Briefly, it is a technique of governing the company like a sovereign state, instating its own customs, policies and laws to its employees from the highest to the lowest levels. Corporate governance is intended to increase the accountability of company and to avoid massive disasters before they occur. Failure of energy giant Enron, and its bankrupt employees and shareholders, is major debate for the importance of corporate governance. Well-executed corporate governance should be similar to a police department’s internal affairs unit, weeding out and removing problems. A company can also hold meetings with internal members, such as shareholders and debt holders as well as suppliers, customers and community leaders, to address the request and needs of the affected parties.

Objectives of corporate governance:

• To build up an environment of trust and confidence amongst those having competing and conflicting interest.
• To enhance the shareholders’ value and protect the interest of other stakeholders by enhancing the corporate performance and accountability.
• Transparency in Board’s processes and independence in the functioning of Boards. The Board should offer effectual leadership to the company and management for achieving sustained wealth for all stakeholders. It should provide independent judgment for achieving company's objectives.
• Accountability to stakeholders with a view to serve the stakeholders and account to them at regular intervals for actions taken, through strong and sustained communication processes.
• Impartiality to all stakeholders.
• Social, regulatory and environmental concerns.
• Clear and unambiguous legislation and regulations are fundamentals to effective corporate governance.
• A healthy management environment that includes setting up of clear objectives and appropriate ethical framework, establishing due processes, clear enunciation of responsibility and accountability, sound business planning, establishing clear boundaries for acceptable behaviour, establishing performance evaluation measures.
• Explicitly prescribed norms of ethical practices and code of conduct are communicated to all the stakeholders, which should be clearly understood and followed by each member of the organization.
• The objectives of the company must be clearly documented in a long-term corporate strategy including an annual business plan together with achievable and measurable performance targets and milestones.
• A well composed Audit Committee to work as liaison with the management, internal and statutory auditors, reviewing the adequacy of internal control and compliance with significant policies and procedures, reporting to the Board on the key issues.
• Risk is an important element of corporate functioning and governance, which should be clearly identified, analysed for taking appropriate remedial measures. For this purpose the Board should formulate a mechanism for periodic reviews of internal and external risks.
• A clear Whistle Blower Policy whereby the employees may without fear report to the management about unethical behaviour, actual or suspected frauds or violation of company’s code of conduct. There should be some mechanism for adequate safeguard to employees against victimization that serves as whistle-blowers.

Principles of Corporate Governance:

Shareholder recognition is major factor to maintaining a company’s stock price. Small shareholders with little impact on the stock price are brushed aside to make way for the interests of majority shareholders and the executive board. Good corporate governance seeks to ensure that all shareholders get a voice at general meetings and are allowed to partake.

Stakeholder interests should also be acknowledged by corporate governance. In particular, taking the time to address non-shareholder, stakeholders can help company to establish a positive relationship with the community and the press.

Board responsibilities must be clearly delineated to majority shareholders. All board members must be on the same page and share a similar vision for the future of the company.

Ethical behaviour violations in favour of higher profits can cause massive civil and legal problems down the road. Underpaying and abusing outsourced employees or skirting around lax environmental regulations can come back and bite the company hard if ignored. A code of conduct regarding ethical decisions should be established for all members of the board.

Business transparency is the key to promote shareholder trust. Financial records, earnings reports and forward guidance should all be clearly stated without exaggeration or "creative" accounting. Falsified financial records can cause your company to become a Ponzi scheme, and will be dealt with accordingly.

Corporate Governance as Risk Mitigation:

Corporate governance is of vital importance to a company and is almost as important as its primary business plan. When executed successfully, it can prevent corporate scandals, fraud and the civil and criminal liability of the company. It also improves a company’s status in the public opinion as a self-policing company that is responsible and worthy of shareholder and debt holder capital. It commands the shared philosophy, practices and culture of an organization and its employees. Firm without a system of corporate governance is often regarded as a body without a soul or conscience. Corporate governance enables a company honest and free from trouble. If this shared attitude breaks down, then corners will be cut, products will be defective and management will grow complacent and corrupt. The end result is a fall that will occur when gravity in the form of audited financial reports, criminal investigations and federal probes finally catches up, destroying the company instantaneously. Deceitful and unethical dealings can cause shareholders to escape out of fear, distrust and disgust.

Plethora of research has revealed that good corporate governance can result in improved share price performance. It is well established in management reports that there is a great potential for good performance by companies, which have got good corporate governance mechanism and the greatest benefit is in developing companies. Studies have showed that investors are enthusiastic to invest in a better-governed company. Corporate Governance can be strong mechanism for development especially in country like India.

• The rights and obligation of shareholders.
• Impartial treatment of all stakeholders.
• The role of all stakeholders clearly defined and the linkage for corporate governance established.
• Transparency, disclosure of information and audit.
• The role of board of directors clearly defined.
• The role of non-executive members of the board clearly defined.
• Executive management and compensation and performance clearly defined.

Theories of corporate governance:

• Agency Theory: Agency theory is major theory in the theoretical framework of Corporate Governance (Kholeif, 2009). The theory placed shareholders as significant stakeholder (Lan & Heracleous, 2010). According to Chartered Institute of Management Accountants (CIMA), Agency theory as premise surrounding the relationships that exist between the owners (principals) of organizations and the managers or directors (agents) of organizations. The interest of agents might be in conflict with the interest of principal in achieving the organizational goal.
• Shareholder Theory: Shareholder theory as evolved by Milton Friedman proclaim that corporate organizations’ social responsibility is to use its resources and invest in business that will maximize its profits so far that, the business is open and free competition and with no deception or fraud (Lee, 2008). Milton Friedman contended that if business firms were to be ethically responsible then, their moral obligations or social responsibilities will be nothing, other than shareholders wealth maximization. Shareholders deliver their capital to organizations’ managers, they are expected to use the capital for only organizations’ purpose to increase shareholders returns (Dittmar, Mahrt-Smith, & Servaes, 2003).
• Stakeholder Theory: Stakeholders are described by management experts as any person or company who is affected by organization’s decisions or activities (Bryson, 2004). They are groups or individuals that benefit or harmed, and whose rights are violated or respected by organization operations (Freeman, 2010). Stakeholder theory states that business organizations should be concerned about the interest of other stakeholders when taking strategic decisions (Mainardes, Alves, and Raposo, 2011). In contrast to shareholder theorists that called for shareholder wealth maximization, stakeholder theorists canvassed for satiating stakeholders interests. From stakeholder viewpoint, shareholders are one of the important members of stakeholder. Shareholders have stake and are affected by organization’s operations and achievement, same with other stakeholders such as employees, customers, suppliers, and environment. The stakeholder theorists appealed that, as business owes special and particular duties to shareholders, it also has various responsibilities towards other stakeholders (Heath and Norman, 2004).

Mechanism and control for corporate governance:

• Monitoring the Role/effectiveness of the Board of Directors.
• Remuneration of the Board Members and other employees in the company.
• Responsibilities and accountability for Audit Committees financial reporting process, monitoring the choice of accounting policies and principles, monitoring internal control process and policy decisions for hiring and performance of the external auditors.
• Issues and concerns of Government Regulations.
• Understand the strategic issues of the competition.
• Management labour market and concerns of control mechanisms.

It is established that Good corporate governance standards are necessary for the integrity of corporations, financial institutions and markets and have a bearing on the growth and stability of the economy. In India, good governance is practiced from ancient time from third century B.C. where Chanakya (Minister of Parliputra) expounded fourfold duties of a king viz. Raksha, Vriddhi, Palana and Yogakshema. It means that Substituting the king of the State with the Company CEO or Board of Directors the principles of Corporate Governance refers to shielding shareholders wealth (Raksha), increasing the wealth by proper utilization of assets (Vriddhi), maintenance of wealth through profitable ventures (Palana) and protecting the interests of the shareholders (Yogakshema or safeguard).

• It improves strategic thinking at the top by inducting independent directors who bring a wealth of experience, and a host of new ideas.
• It rationalizes the management and monitoring of risk that a firm faces globally.
• It limits the liability of top management and directors, by carefully articulating the decision making process.
• It assures the integrity of financial reports.
• It has long term reputational effects among key stakeholders, both internally and externally.

The Corporate sector operated generally on a beliefs of cost of production plus in the protected economy. Since they were not exposed to any serious competition, Indian industries continued with existing technologies and remained insensitive about technological developments and happening. But this trend is changing in many corporate firms in due course of the time and the companies in India, some of them are becoming very much competitive and are harnessing technological, process and product innovation to become global players in their field. All such companies in India have given huge importance to the issue of corporate governance.

The major corporate governance initiatives launched in India since the mid-1990s are as under:

1. The CII Code: On account of the interest generated by Cadbury Committee Report of UK, the Confederation of Indian Industry (CII) took special initiative with the aim to develop and promote a code of Corporate Governance to be espoused and followed by Indian Companies both in private & public sector, Banks and Financial Institutions. The final draft of the code was circulated in 1997 and the final code called ‘Desirable Corporate Governance Code’ was released in April 1998. The Committee was driven by the conviction that good corporate governance was essential for Indian Companies to access domestic as well as global capital at competitive rates. The code was voluntary, contained detailed provisions with focus on listed companies.

2. Kumar Mangalam Birla Committee Report: While the CII code was well established by corporate area and some advanced companies also adopted it. It was realized that under Indian conditions, a statutory rather than a voluntary code would be more meaningful. Subsequently, the second major initiative was undertaken by the Securities and Exchange Board of India (SEBI) which set up a committee under the chairmanship of Kumar Mangalam Birla in 1999 which has prime objective of promoting and raising of standards of good corporate governance.

The Committee in its Report observed “the strong Corporate Governance is vital to resilient and vibrant capital market and is an important instrument of investor protection. In the beginning of 2000, the SEBI Board accepted and ratified the key recommendations of this committee and these were incorporated into Clause - 49 of the Listing Agreement of the Stock Exchanges. These recommendations, aimed at providing the standards of corporate governance, are divided into mandatory and non-mandatory recommendations. The recommendations have been made applicable to all listed companies with the paid-up capital of Rs. 3 crore and above or net worth of Rs.25 crore or more at any time in the history of the company. The decisive responsibility of putting the recommendations into practice rests directly with the Board of Directors and the management of the company.

3. Report of Task Force: In May 2000, the Department of Corporate Affairs (DCA) set up a broad based study group under the chairmanship of Dr. P.L. Sanjeev Reddy, Secretary of DCA. The group was given the determined task of examining ways to “operationalise the concept of corporate excellence on a sustained basis” so as to “sharpen India’s global competitive edge and to further develop corporate culture in the country”. In November 2000, the Task Force on Corporate Excellence set up by the group produced a report containing a numerous recommendations for raising governance standards among all companies in India. It also recommended setting up of a Centre for Corporate Excellence.

4. Naresh Chandra Committee Report: A committee was appointed by Ministry of Finance and Company Affairs in August 2002 under the chairmanship of Naresh Chandra to scrutinize and recommend inter alia amendments to the law involving the auditor-client relationships and the role of independent directors. The committee made recommendations in two key aspects of corporate governance, financial and non-financial disclosures, and independent auditing and board oversight of management.

5. Central Coordination and Monitoring Committee: A high level Central Coordination and Monitoring Committee (CCMC) co-chaired by Secretary, Department of Corporate Affairs’ and Chairman, SEBI was set up by the Department of Corporate Affairs to monitor the action taken against the disappearing companies and dishonest promoters who misused the funds raised from the public. It was decided by this committee that seven Task Forces be set up at Mumbai, Delhi, Chennai, Kolkata, Ahmedabad, Bangalore and Hyderabad with Regional Directors/Registrar of Companies of respective regions as convener, and Regional Offices of SEBI and Stock Exchanges as Members. The main task of these Task Forces was to identify the companies, which have disappeared, or which have mutualised the funds mobilized from the investors and suggest appropriate action in terms of Companies Act or SEBI Act.

Bhattacharya, CB. et al in McKinsey Report (2011) talks about how companies can use Corporate Responsibility towards stakeholders as a conduit for furthering its goals. Ultimately stakeholders prefer companies which produce tangible and psychological benefits which favour good Corporate Governance. Better governance reforms reduce uncertainty and are engines of stability and continued progress has helped Asian Corporates to transform themselves during the period of globalization, as per report by Asian Productivity Organization, Tokyo in 2004.

The private corporate such as the Tata Group, Aditya Birla Group, Infosys Technologies, Wipro Technologies, Godrej Group, Mahindra & Mahindra Group and Larson & Toubro (L&T.), of companies are giving more importance to the issue of corporate governance.

To summarize, Corporate Governance is the application of best management practices, compliance in true spirit and adherence to ethical standards for effective management and distribution of wealth and discharge of social responsibility for sustainable development of all stakeholders. Fundamentally, its process and structure by which the business and affairs of the company are directed and managed in order to enhance long term shareholder value through enhancing corporate performance and accountability, whilst taking into account the interests of other stakeholders. In India, though it was old age concept and adopted in the realm of Chanakya’ time, but Indian companies adopted the principle of corporate governance after 1990. Good corporate governance is important for overall market confidence, the efficiency of capital allocation, the growth and development of countries’ industrial bases, and ultimately the nations’ overall prosperity and wellbeing.

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• December 22, 2021
• Posted by: OptimizeIAS Team
• Category: DPN Topics

Subject – Economy

Context – The National Stock Exchange (NSE) has launched a new corporate governance initiative – ‘NSE Prime’

• The National Stock Exchange (NSE) has launched a new corporate governance initiative – ‘NSE Prime’, a framework that prescribes higher standards of corporate governance for listed companies than those required by regulations.
• All the NSE-listed companies can adopt NSE Prime voluntarily.
• Listed companies that voluntarily choose to be part of NSE Prime will need to comply with pre-defined norms on an ongoing basis, which will be monitored by NSE.
• The initiative will raise the bar for corporate governance standards in India, enable investors to identify companies that have voluntarily signed up for higher standards of corporate governance, broaden the quality of investors in listed companies and further strengthen trust in Indian capital markets.
• The world’s largest derivatives exchange by trading volume, the NSE is ranked 4th in the world in the cash equities by a number of trades.

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Non-Banking Financial Company (NBFC)

Last updated on June 6, 2024 by ClearIAS Team

A Non-Banking Financial Company (NBFC) is a financial institution that offers various banking services but does not hold a banking license. Read here to learn more about NBFCs.

Unlike traditional banks, NBFCs cannot accept demand deposits and are not part of the payment and settlement system.

However, they play a crucial role in the financial system by providing credit and other financial services.

Table of Contents

A Non-Banking Financial Company (NBFC) is registered under the Companies Act, 1956.

• It is engaged in the business of loans and advances, acquisition of shares/stocks/bonds/debentures/securities issued by Government or local authority or other marketable securities of a like nature, leasing, hire-purchase, insurance business, chit business.
• But it does not include any institution whose principal business is agriculture activity, industrial activity, purchase or sale of any goods (other than securities), or providing any services and sale/purchase/construction of immovable property.
• A non-banking institution which is a company and has the principal business of receiving deposits under any scheme or arrangement in one lump sum or instalments by way of contributions or in any other manner is also a non-banking financial company (Residuary non-banking company).

Types of Non-Banking Financial Company

NBFCs in India can be classified based on their activities, liabilities, and size. Here are some common types:

• Asset Finance Company (AFC) : Finishing physical assets supporting productive/economic activities, such as machinery, automobiles, etc.
• Investment Company (IC) : Primarily involved in the acquisition of securities.
• Loan Company (LC) : Provides loans and advances other than those related to asset financing or investment in securities.
• Infrastructure Finance Company (IFC) : Invests at least 75% of its total assets in infrastructure loans and has a minimum net-owned fund of ₹300 crores.
• Core Investment Company (CIC) : Holds at least 90% of its net assets in the form of investments in equity shares, preference shares, bonds, debentures, debt, or loans in group companies.
• Microfinance Institution (MFI) : Provides financial services to low-income groups, particularly in rural and semi-urban areas.
• Housing Finance Company (HFC) : Specializes in providing finance for housing.
• NBFC-Factors : Engages in the business of factoring, which involves purchasing receivables from companies at a discount.
• Peer-to-Peer (P2P) Lending Platforms : Facilitate direct lending between individuals and businesses through an online platform.

Examples of NBFC in India

Some of the examples of Non-Banking Financial Companies in India that offer investment options, loans, fund transfer services, leasing, and hire-purchase options are:

• Bajaj Finserv
• Power Finance Corporation Limited
• Mahindra & Mahindra Financial Service
• Shriram Transport Finance Company
• Muthoot Finance Ltd, etc.

Differences Between Banks and a Non-Banking Financial Company

• Banks : Can accept demand deposits (e.g., savings and current accounts).
• NBFCs : Cannot accept demand deposits.
• Banks : Part of the payment and settlement system, enabling them to issue cheques, and participate in clearing and settlement.
• NBFCs : Not part of the payment and settlement system and cannot issue cheques.
• Banks : Regulated by the Reserve Bank of India (RBI) under the Banking Regulation Act, 1949.
• NBFCs : Regulated by the RBI under the Reserve Bank of India Act, 1934, and specific guidelines issued by the RBI.
• Banks : Must maintain Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR).
• NBFCs : Do not have to maintain CRR and SLR.
• The deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available to depositors of NBFCs, unlike in the case of banks.

Role and Significance of NBFCs

• Credit Access : Non-Banking Financial Companies provide credit to underserved and unbanked segments of the population, including small and medium enterprises (SMEs), rural areas, and low-income households.
• Financial Inclusion : They play a critical role in promoting financial inclusion by offering a wide range of financial products such as personal loans, vehicle loans, housing finance, and microfinance.
• Flexibility and Innovation : NBFCs are often more flexible and innovative compared to traditional banks. They offer tailored financial products and services to meet the specific needs of their customers.
• Complementary to Banks : NBFCs complement the banking sector by providing alternative financing options and catering to niche markets that may not be served by banks.
• Economic Growth : By facilitating credit flow to various sectors of the economy, NBFCs contribute to economic growth and development.

Regulation and Supervision

• Registration : NBFCs must register with the RBI to operate legally. They are required to have a minimum net owned fund of ₹2 crore (₹5 crore for NBFC-MFIs ).
• Prudential Norms : NBFCs must adhere to prudential norms, including capital adequacy requirements, provisioning norms, and asset classification standards.
• Corporate Governance : The RBI mandates robust corporate governance practices for NBFCs to ensure transparency, accountability, and sound management.
• Periodic Reporting : NBFCs are required to submit periodic reports to the RBI on their financial health, compliance with regulations, and other operational aspects.
• Risk Management : NBFCs must implement effective risk management systems to manage credit risk, market risk, and operational risk.

Which Companies are Exempt from RBI Registration?

Certain entities are involved in the business of financial activities but do not require obtaining a registration with the Reserve Bank of India (RBI).

As these entities are regulated by other financial sector regulators, they do not need either the NBFC registration or the NBFC regulations of RBI.

These entities are as follows:

• Insurance Companies that are regulated by the Insurance Regulatory and Development Authority of India (IRDAI)
• Housing Finance Companies which are regulated by the National Housing Bank
• Stock Broking Companies which are regulated by the Securities and Exchange Board of India
• Merchant Banking Companies which are regulated by the Securities and Exchange Board of India
• Mutual Funds which are regulated by the Securities and Exchange Board of India
• Venture Capital Companies are regulated by the Securities and Exchange Board of India
• Companies that run Collective Investment Schemes which are regulated by the Securities and Exchange Board of India
• Chit Fund Companies which are regulated by the respective State Governments
• Nidhi Companies which are regulated by the Ministry of Corporate Affairs (MCA)

Challenges Facing NBFCs

• Liquidity Issues : Non-Banking Financial Companies often face liquidity challenges due to their reliance on market borrowings and the lack of access to demand deposits.
• Regulatory Arbitrage : Differences in regulatory frameworks between banks and NBFCs can lead to regulatory arbitrage, impacting the competitive landscape.
• Asset Quality : Maintaining asset quality is a significant challenge, especially in sectors like microfinance and small business lending.
• Funding Costs : Higher funding costs compared to banks can affect the profitability and sustainability of NBFC operations.

Non-Banking Financial Companies play a vital role in the Indian financial system by providing credit and financial services to sectors and populations that are often underserved by traditional banks.

While they face several challenges, effective regulation and prudent management can help NBFCs continue to contribute to financial inclusion and economic growth in India.

Related articles:

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• Differentiated banks

-Article by Swathi Satish

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• General mental ability.
• Basic numeracy (numbers & their relations, orders of magnitude, etc.) (Class X level), Data interpretation (charts, graphs, tables, data sufficiency, etc. – Class X level)

CSAT is a qualifying paper with minimum qualifying marks fixed at 33%. It is mandatory for a candidate to appear in both the Papers of the IAS Prelim Exam for the purpose of evaluation.

UPSC Mains Syllabus

Civil Services Main Examination consists of written examination and interview (personality test). Civil Services Main Examination consists of following papers divided into 2 categories – qualifying & papers to be counted for merit.

Important Points:

• The papers on Indian languages and English (Paper A and paper B) will be of qualifying nature and the marks obtained in these papers will not be counted for ranking.
• The papers on Indian languages and English (Paper A and paper B) will be of Matriculation or equivalent standard.
• The papers on Essay, General Studies and Optional Subject of only such candidates will be taken cognizance who attain 25% marks in ‘Indian Language’ and 25% in ‘English’ as minimum qualifying standards in these qualifying papers.
• Marks obtained by the candidates for the Paper I-VII only will be counted for merit ranking.
• The question papers for the main examination will be of conventional (essay) type and each paper will be of 3 hour duration.
• Candidates will have the option to answer all the question papers, except the Qualifying Language Papers, Paper-A and Paper-B, in any one of the languages included in the Eighth Schedule to the Constitution of India or in English.
• The question papers (other than the literature of language papers) will be set in Hindi and English only.
• Compensatory time of twenty minutes per hour shall be permitted for the Blind candidates and the candidates with locomotor disability and cerebral palsy where dominant (writing) extremity is affected to the extent of slowing the performance of function (minimum of 40% impairment) in both the Civil Services (Preliminary) as well as in the Civil Services (Main) Examination.

UPSC Syllabus for Qualifying Papers (Indian Languages and English)

The pattern of questions would be broadly as follows:

English Language:

• Comprehension of given passages.
• Precise Writing.
• Usage and Vocabulary.
• Short Essays.

Indian Languages:

• Translation from English to the Indian Language and vice-versa.

UPSC Essay Syllabus

Candidates may be required to write essays on multiple topics.

They will be expected to keep closely to the subject of the essay to arrange their ideas in orderly fashion, and to write concisely. Credit will be given for effective and exact expression.

UPSC GS 1 Syllabus

Indian Heritage and Culture, History and Geography of the World and Society.

• Indian culture will cover the salient aspects of Art Forms, literature and Architecture from ancient to modern times.
• Modern Indian history from about the middle of the eighteenth century until the present- significant events, personalities, issues.
• The Freedom Struggle — its various stages and important contributors/contributions from different parts of the country.
• Post-independence consolidation and reorganization within the country.
• History of the world will include events from 18th century such as industrial revolution, world wars, redrawal of national boundaries, colonization, decolonization, political philosophies like communism, capitalism, socialism etc.— their forms and effect on the society.
• Salient features of Indian Society , Diversity of India .
• Role of women and women’s organization, population and associated issues, poverty and developmental issues, urbanization, their problems and their remedies.
• Effects of globalization on Indian society.
• Social empowerment, communalism , regionalism & secularism .
• Salient features of world’s physical geography.
• Distribution of key natural resources across the world (including South Asia and the Indian sub-continent); factors responsible for the location of primary, secondary, and tertiary sector industries in various parts of the world (including India).
• Important Geophysical phenomena such as earthquakes, Tsunami, Volcanic activity, cyclone etc., geographical features and their location-changes in critical geographical features (including water-bodies and ice-caps) and in flora and fauna and the effects of such changes.

UPSC Syllabus for Mains GS Paper 2

Governance, Constitution, Polity, Social Justice and International relations.

• Indian Constitution—historical underpinnings, evolution, features, amendments, significant provisions and basic structure .
• Functions and responsibilities of the Union and the States, issues and challenges pertaining to the federal structure, devolution of powers and finances up to local levels and challenges therein.
• Separation of powers between various organs dispute redressal mechanisms and institutions.
• Comparison of the Indian constitutional scheme with that of other countries.
• Parliament and State legislatures—structure, functioning, conduct of business, powers & privileges and issues arising out of these.
• Structure, organization and functioning of the Executive and the Judiciary—Ministries and Departments of the Government; pressure groups and formal/informal associations and their role in the Polity.
• Salient features of the Representation of People’s Act .
• Appointment to various Constitutional posts, powers, functions and responsibilities of various Constitutional Bodies.
• Statutory, regulatory and various quasi-judicial bodies.
• Government policies and interventions for development in various sectors and issues arising out of their design and implementation.
• Development processes and the development industry —the role of NGOs, SHGs, various groups and associations, donors, charities, institutional and other stakeholders.
• Welfare schemes for vulnerable sections of the population by the Centre and States and the performance of these schemes; mechanisms, laws, institutions and Bodies constituted for the protection and betterment of these vulnerable sections.
• Issues relating to development and management of Social Sector/Services relating to Health, Education, Human Resources.
• Issues relating to poverty and hunger.
• Important aspects of governance, transparency and accountability, e-governance- applications, models, successes, limitations, and potential; citizens charters, transparency & accountability and institutional and other measures.
• Role of civil services in a democracy.
• India and its neighborhood- relations.
• Bilateral, regional and global groupings and agreements involving India and/or affecting India’s interests.
• Effect of policies and politics of developed and developing countries on India’s interests, Indian diaspora.
• Important International institutions, agencies and fora - their structure, mandate.

UPSC GS 3 Syllabus

Technology, Economic Development, Bio diversity, Environment, Security and Disaster Management

• Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment.
• Inclusive growth and issues arising from it.
• Government Budgeting.
• Major crops-cropping patterns in various parts of the country, - different types of irrigation and irrigation systems storage, transport and marketing of agricultural produce and issues and related constraints; e-technology in the aid of farmers.
• Issues related to direct and indirect farm subsidies and minimum support prices; Public Distribution System-objectives, functioning, limitations, revamping; issues of buffer stocks and food security; Technology missions; economics of animal-rearing.
• Food processing and related industries in India- scope’ and significance, location, upstream and downstream requirements, supply chain management.
• Land reforms in India.
• Effects of liberalization on the economy, changes in industrial policy and their effects on industrial growth.
• Infrastructure: Energy, Ports, Roads, Airports, Railways etc.
• Investment models.
• Science and Technology- developments and their applications and effects in everyday life.
• Achievements of Indians in science & technology ; indigenization of technology and developing new technology.
• Awareness in the fields of IT, Space, Computers, robotics , Nano-technology , bio-technology and issues relating to intellectual property rights .
• Conservation, environmental pollution and degradation, environmental impact assessment.
• Disaster and disaster management.
• Linkages between development and spread of extremism.
• Role of external state and non-state actors in creating challenges to internal security.
• Challenges to internal security through communication networks, role of media and social networking sites in internal security challenges, basics of cyber security; money-laundering and its prevention.
• Security challenges and their management in border areas - linkages of organized crime with terrorism.
• Various Security forces and agencies and their mandate.

GS Paper 4 Syllabus

Ethics, Integrity and Aptitude

This paper will include questions to test the candidates’ attitude and approach to issues relating to integrity, probity in public life and his problem solving approach to various issues and conflicts faced by him in dealing with society.

Questions may utilise the case study approach to determine these aspects.

The following broad areas will be covered:

• Ethics and Human Interface: Essence, determinants and consequences of Ethics in-human actions; dimensions of ethics; ethics - in private and public relationships. Human Values - lessons from the lives and teachings of great leaders, reformers and administrators; role of family society and educational institutions in inculcating values.
•  Attitude: content, structure, function; its influence and relation with thought and behaviour; moral and political attitudes; social influence and persuasion.
• Aptitude and foundational values for Civil Service, integrity, impartiality and non-partisanship, objectivity, dedication to public service, empathy, tolerance and compassion towards the weaker-sections.
• Emotional intelligence-concepts, and their utilities and application in administration and governance.
• Contributions of moral thinkers and philosophers from India and world.
• Public/Civil service values and Ethics in Public administration: Status and problems; ethical concerns and dilemmas in government and private institutions; laws, rules, regulations and conscience as sources of ethical guidance; accountability and ethical governance; strengthening of ethical and moral values in governance; ethical issues in international relations and funding; corporate governance.
• Probity in Governance: Concept of public service; Philosophical basis of governance and probity; Information sharing and transparency in government, Right to Information, Codes of Ethics, Codes of Conduct, Citizen’s Charters, Work culture, Quality of service delivery, Utilization of public funds, challenges of corruption.
• Case Studies on above issues.

UPSC Optional Syllabus

Optional Subject Papers I & II:

A candidate may opt for any one Optional Subject from the following:

• UPSC Agriculture Syllabus
• Animal Husbandry and Veterinary Science
• Anthropology Syllabus for UPSC
• Civil Engineering
• UPSC Commerce and Accountancy Syllabus
• UPSC Economics Syllabus
• Electrical Engineering
• Geography Syllabus for UPSC
• UPSC Geology Syllabus
• UPSC History Syllabus
• UPSC Law Optional Syllabus
• UPSC Maths Optional Syllabus
• Mechanical Engineering
• UPSC Medical Science Syllabus
• UPSC Philosophy Syllabus
• UPSC Physics Optional Syllabus
• PSIR Optional Syllabus
• UPSC Psychology Syllabus
• Public Administration Optional Syllabus
• Sociology Optional Syllabus
• Literature of any one of the following languages: Assamese, Bengali, Bodo, Dogri, Gujarati, Hindi, Kannada, Kashmiri, Konkani, Maithili, Malayalam, Manipuri, Marathi, Nepali, Odia, Punjabi, Sanskrit, Santhali, Sindhi, Tamil, Telugu, Urdu and English.

Each Optional Subject has 2 compulsory papers.

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The Making and Meaning of ESG

U of Penn, Inst for Law & Econ Research Paper No. 22-23

European Corporate Governance Institute - Law Working Paper No. 659/2022

Harvard Business Law Review, Forthcoming

53 Pages Posted: 15 Sep 2022 Last revised: 8 Apr 2024

Elizabeth Pollman

University of Pennsylvania Carey Law School; Co-Director, University of Pennsylvania Carey Law School - Institute for Law and Economics; European Corporate Governance Institute

Date Written: October 31, 2022

ESG is one of the most notable trends in corporate governance, management, and investment of the past two decades. It is at the center of the largest and most contentious debates in contemporary corporate and securities law. Yet few observers know where the term comes from, who coined it, and what it was originally aimed to mean and achieve. As trillions of dollars have flowed into ESG-labeled investment products, and companies and regulators have grappled with ESG policies, a variety of usages of the term have developed that range from seemingly neutral concepts of integrating “environmental, social, and governance” issues into investment analysis to value-laden notions of corporate social responsibility or preferences for what some have characterized as “conscious” or “woke” capitalism. This Article makes three contributions. First, it provides a history of the term ESG that was coined without precise definition in a collaboration between the United Nations and major players in the financial industry to pursue wide-ranging goals. Second, it identifies and examines the main usages of the term ESG that have developed since its origins. Third, it offers an analytical critique of the term ESG and its consequences. It argues that the combination of E, S, and G into one term has provided a highly flexible moniker that can vary widely by context, evolve over time, and collectively appeal to a broad range of investors and stakeholders. These features both help to account for its success, but also its challenges such as the difficulty of empirically showing a causal relationship between ESG and financial performance, a proliferation of ratings that can seem at odds with understood purposes of the term ESG or enable “sustainability arbitrage,” and tradeoffs between issues such as carbon emissions and labor interests that cannot be reconciled on their own terms. These challenges give fodder to critics who assert that ESG engenders confusion, unrealistic expectations, and greenwashing that could inhibit corporate accountability or crowd out other solutions to pressing environmental and social issues. These critiques are not necessarily fatal, but are intertwined with the characteristic flexibility and unfixed definition of ESG that was present from the beginning, and ultimately shed light on obstacles for the future of the ESG movement and regulatory reform.

Keywords: environmental, social, governance, ESG, sustainability, corporate social responsibility, corporate purpose, stakeholder capitalism, socially responsible investment, impact investing, corporate law, securities regulation, SEC, climate disclosure, board diversity, human capital management

JEL Classification: D21, G39, K22, L21

Suggested Citation: Suggested Citation

Elizabeth Pollman (Contact Author)

University of pennsylvania carey law school; co-director, university of pennsylvania carey law school - institute for law and economics; european corporate governance institute ( email ).

3501 Sansom Street Philadelphia, PA 19104 United States

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The state of AI in early 2024: Gen AI adoption spikes and starts to generate value

If 2023 was the year the world discovered generative AI (gen AI) , 2024 is the year organizations truly began using—and deriving business value from—this new technology. In the latest McKinsey Global Survey  on AI, 65 percent of respondents report that their organizations are regularly using gen AI, nearly double the percentage from our previous survey just ten months ago. Respondents’ expectations for gen AI’s impact remain as high as they were last year , with three-quarters predicting that gen AI will lead to significant or disruptive change in their industries in the years ahead.

About the authors

This article is a collaborative effort by Alex Singla , Alexander Sukharevsky , Lareina Yee , and Michael Chui , with Bryce Hall , representing views from QuantumBlack, AI by McKinsey, and McKinsey Digital.

Organizations are already seeing material benefits from gen AI use, reporting both cost decreases and revenue jumps in the business units deploying the technology. The survey also provides insights into the kinds of risks presented by gen AI—most notably, inaccuracy—as well as the emerging practices of top performers to mitigate those challenges and capture value.

AI adoption surges

Interest in generative AI has also brightened the spotlight on a broader set of AI capabilities. For the past six years, AI adoption by respondents’ organizations has hovered at about 50 percent. This year, the survey finds that adoption has jumped to 72 percent (Exhibit 1). And the interest is truly global in scope. Our 2023 survey found that AI adoption did not reach 66 percent in any region; however, this year more than two-thirds of respondents in nearly every region say their organizations are using AI. 1 Organizations based in Central and South America are the exception, with 58 percent of respondents working for organizations based in Central and South America reporting AI adoption. Looking by industry, the biggest increase in adoption can be found in professional services. 2 Includes respondents working for organizations focused on human resources, legal services, management consulting, market research, R&D, tax preparation, and training.

Also, responses suggest that companies are now using AI in more parts of the business. Half of respondents say their organizations have adopted AI in two or more business functions, up from less than a third of respondents in 2023 (Exhibit 2).

Gen AI adoption is most common in the functions where it can create the most value

Most respondents now report that their organizations—and they as individuals—are using gen AI. Sixty-five percent of respondents say their organizations are regularly using gen AI in at least one business function, up from one-third last year. The average organization using gen AI is doing so in two functions, most often in marketing and sales and in product and service development—two functions in which previous research  determined that gen AI adoption could generate the most value 3 “ The economic potential of generative AI: The next productivity frontier ,” McKinsey, June 14, 2023. —as well as in IT (Exhibit 3). The biggest increase from 2023 is found in marketing and sales, where reported adoption has more than doubled. Yet across functions, only two use cases, both within marketing and sales, are reported by 15 percent or more of respondents.

Gen AI also is weaving its way into respondents’ personal lives. Compared with 2023, respondents are much more likely to be using gen AI at work and even more likely to be using gen AI both at work and in their personal lives (Exhibit 4). The survey finds upticks in gen AI use across all regions, with the largest increases in Asia–Pacific and Greater China. Respondents at the highest seniority levels, meanwhile, show larger jumps in the use of gen Al tools for work and outside of work compared with their midlevel-management peers. Looking at specific industries, respondents working in energy and materials and in professional services report the largest increase in gen AI use.

Investments in gen AI and analytical AI are beginning to create value

The latest survey also shows how different industries are budgeting for gen AI. Responses suggest that, in many industries, organizations are about equally as likely to be investing more than 5 percent of their digital budgets in gen AI as they are in nongenerative, analytical-AI solutions (Exhibit 5). Yet in most industries, larger shares of respondents report that their organizations spend more than 20 percent on analytical AI than on gen AI. Looking ahead, most respondents—67 percent—expect their organizations to invest more in AI over the next three years.

Where are those investments paying off? For the first time, our latest survey explored the value created by gen AI use by business function. The function in which the largest share of respondents report seeing cost decreases is human resources. Respondents most commonly report meaningful revenue increases (of more than 5 percent) in supply chain and inventory management (Exhibit 6). For analytical AI, respondents most often report seeing cost benefits in service operations—in line with what we found last year —as well as meaningful revenue increases from AI use in marketing and sales.

Inaccuracy: The most recognized and experienced risk of gen AI use

As businesses begin to see the benefits of gen AI, they’re also recognizing the diverse risks associated with the technology. These can range from data management risks such as data privacy, bias, or intellectual property (IP) infringement to model management risks, which tend to focus on inaccurate output or lack of explainability. A third big risk category is security and incorrect use.

Respondents to the latest survey are more likely than they were last year to say their organizations consider inaccuracy and IP infringement to be relevant to their use of gen AI, and about half continue to view cybersecurity as a risk (Exhibit 7).

Conversely, respondents are less likely than they were last year to say their organizations consider workforce and labor displacement to be relevant risks and are not increasing efforts to mitigate them.

In fact, inaccuracy— which can affect use cases across the gen AI value chain , ranging from customer journeys and summarization to coding and creative content—is the only risk that respondents are significantly more likely than last year to say their organizations are actively working to mitigate.

Some organizations have already experienced negative consequences from the use of gen AI, with 44 percent of respondents saying their organizations have experienced at least one consequence (Exhibit 8). Respondents most often report inaccuracy as a risk that has affected their organizations, followed by cybersecurity and explainability.

Our previous research has found that there are several elements of governance that can help in scaling gen AI use responsibly, yet few respondents report having these risk-related practices in place. 4 “ Implementing generative AI with speed and safety ,” McKinsey Quarterly , March 13, 2024. For example, just 18 percent say their organizations have an enterprise-wide council or board with the authority to make decisions involving responsible AI governance, and only one-third say gen AI risk awareness and risk mitigation controls are required skill sets for technical talent.

Bringing gen AI capabilities to bear

The latest survey also sought to understand how, and how quickly, organizations are deploying these new gen AI tools. We have found three archetypes for implementing gen AI solutions : takers use off-the-shelf, publicly available solutions; shapers customize those tools with proprietary data and systems; and makers develop their own foundation models from scratch. 5 “ Technology’s generational moment with generative AI: A CIO and CTO guide ,” McKinsey, July 11, 2023. Across most industries, the survey results suggest that organizations are finding off-the-shelf offerings applicable to their business needs—though many are pursuing opportunities to customize models or even develop their own (Exhibit 9). About half of reported gen AI uses within respondents’ business functions are utilizing off-the-shelf, publicly available models or tools, with little or no customization. Respondents in energy and materials, technology, and media and telecommunications are more likely to report significant customization or tuning of publicly available models or developing their own proprietary models to address specific business needs.

Respondents most often report that their organizations required one to four months from the start of a project to put gen AI into production, though the time it takes varies by business function (Exhibit 10). It also depends upon the approach for acquiring those capabilities. Not surprisingly, reported uses of highly customized or proprietary models are 1.5 times more likely than off-the-shelf, publicly available models to take five months or more to implement.

Gen AI high performers are excelling despite facing challenges

Gen AI is a new technology, and organizations are still early in the journey of pursuing its opportunities and scaling it across functions. So it’s little surprise that only a small subset of respondents (46 out of 876) report that a meaningful share of their organizations’ EBIT can be attributed to their deployment of gen AI. Still, these gen AI leaders are worth examining closely. These, after all, are the early movers, who already attribute more than 10 percent of their organizations’ EBIT to their use of gen AI. Forty-two percent of these high performers say more than 20 percent of their EBIT is attributable to their use of nongenerative, analytical AI, and they span industries and regions—though most are at organizations with less than $1 billion in annual revenue. The AI-related practices at these organizations can offer guidance to those looking to create value from gen AI adoption at their own organizations.

To start, gen AI high performers are using gen AI in more business functions—an average of three functions, while others average two. They, like other organizations, are most likely to use gen AI in marketing and sales and product or service development, but they’re much more likely than others to use gen AI solutions in risk, legal, and compliance; in strategy and corporate finance; and in supply chain and inventory management. They’re more than three times as likely as others to be using gen AI in activities ranging from processing of accounting documents and risk assessment to R&D testing and pricing and promotions. While, overall, about half of reported gen AI applications within business functions are utilizing publicly available models or tools, gen AI high performers are less likely to use those off-the-shelf options than to either implement significantly customized versions of those tools or to develop their own proprietary foundation models.

What else are these high performers doing differently? For one thing, they are paying more attention to gen-AI-related risks. Perhaps because they are further along on their journeys, they are more likely than others to say their organizations have experienced every negative consequence from gen AI we asked about, from cybersecurity and personal privacy to explainability and IP infringement. Given that, they are more likely than others to report that their organizations consider those risks, as well as regulatory compliance, environmental impacts, and political stability, to be relevant to their gen AI use, and they say they take steps to mitigate more risks than others do.

Gen AI high performers are also much more likely to say their organizations follow a set of risk-related best practices (Exhibit 11). For example, they are nearly twice as likely as others to involve the legal function and embed risk reviews early on in the development of gen AI solutions—that is, to “ shift left .” They’re also much more likely than others to employ a wide range of other best practices, from strategy-related practices to those related to scaling.

In addition to experiencing the risks of gen AI adoption, high performers have encountered other challenges that can serve as warnings to others (Exhibit 12). Seventy percent say they have experienced difficulties with data, including defining processes for data governance, developing the ability to quickly integrate data into AI models, and an insufficient amount of training data, highlighting the essential role that data play in capturing value. High performers are also more likely than others to report experiencing challenges with their operating models, such as implementing agile ways of working and effective sprint performance management.

About the research

The online survey was in the field from February 22 to March 5, 2024, and garnered responses from 1,363 participants representing the full range of regions, industries, company sizes, functional specialties, and tenures. Of those respondents, 981 said their organizations had adopted AI in at least one business function, and 878 said their organizations were regularly using gen AI in at least one function. To adjust for differences in response rates, the data are weighted by the contribution of each respondent’s nation to global GDP.

Alex Singla and Alexander Sukharevsky  are global coleaders of QuantumBlack, AI by McKinsey, and senior partners in McKinsey’s Chicago and London offices, respectively; Lareina Yee  is a senior partner in the Bay Area office, where Michael Chui , a McKinsey Global Institute partner, is a partner; and Bryce Hall  is an associate partner in the Washington, DC, office.

They wish to thank Kaitlin Noe, Larry Kanter, Mallika Jhamb, and Shinjini Srivastava for their contributions to this work.

This article was edited by Heather Hanselman, a senior editor in McKinsey’s Atlanta office.

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UPSC Static Quiz – Environment : 11 June 2024

UPSC Static Quiz –Environment : 11 June 2024 We will post 5 questions daily on static topics mentioned in the UPSC civil services preliminary examination syllabus. Each week will focus on a specific topic from the syllabus, such as History of India and Indian National Movement, Indian and World Geography, and more.

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1 . Question

Which one of the following statements is not correct for National Income Accounting for India?

• a) Imports are subtracted in calculating Gross Domestic Product
• b) Inventories are included in Gross Domestic Capital Formation
• c) Purchase and Sale of second-hand goods are not included in Gross Domestic Product
• d) Net factor payments earned from abroad are included in Gross Domestic Product

Solution: d)

• National income of a country means the sum total of incomes earned by the citizens of that country during a given period, over a year.
• National income accounting refers to the set of methods and principles that are used by the government for measuring production and income, or in other words economic activity of a country in a given time period.
• The various measures of determining national income are GDP (Gross Domestic Product), GNP (Gross National Product), and NNP (Net National Product) along with other measures such as personal income and disposable income.
• It should be noted that national income is not the sum of all incomes earned by all citizens, but only those incomes which accrue due to participation in the production process.
• Individuals participate in the production process by supplying factors of production which they possess.
• According to Marshall: “The labour and capital of a country acting on its natural resources produce annually a certain net aggregate of commodities, material and immaterial including services of all kinds. This is the true net annual income or revenue of the country or national dividend.” In this definition, the word ‘net’ refers to deductions from the gross national income in respect of depreciation and wearing out of machines. And to this, must be added income from abroad.

National income accounting equation is an equation that shows the relationship between income and expense of an economy and other categories. It is represented by the following equation:

Y = C + I + G + (X – M)

Y = National income

C = Personal consumption expenditure

I = Private investment

G = Government spending

X = Net exports

M = Imports

2 . Question

Which of the following are included in M1 definition of money for the Indian economy?

• Demand Deposits
• Time Deposits

Select the correct answer code:

Solution: c)

M1 is the money supply that is composed of currency, demand deposits , other liquid deposits—which includes savings deposits. M1 includes the most liquid portions of the money supply because it contains currency and assets that either are or can be quickly converted to cash.

3 . Question

Which of the following components of Central Government taxes on petroleum products is/are not sharable with the States?

• Basic Excise Duty
• Additional Excise Duty
• Special Additional Excise Duty

Excise duty and VAT on fuel constitute an important source of revenue for both the Centre and the states.  Petroleum taxes with states are shared out of basic excise duty . The Centre also levies additional excise duty and cesses on petroleum products.

4 . Question

Along with the Budget and Demands for Grants, which of the following document is presented by the GoI before the Parliament in each financial year:

• Fiscal Policy Strategy Statement
• Monetary Policy Strategy Statement
• Medium Term Fiscal Policy Statement
• Macroeconomic Framework Statement
• Fiscal responsibility framework statement

How many of the above statements is/are correct?

• a) Only two
• b) Only three
• c) Only four
• d) All five

Solution: b)

Statements 1, 3 and 4 are correct.

Fiscal Reforms and Budget Management Act (FRBMA):

The FRBM Bill, 2000 was passed by the Parliament in 2003. It was considered as a watershed in the area of fiscal reforms in the country.

As per the provision of FRBMA, 2003, the GoI to lay following three

statements before the Parliament along with the Budget and Demands for Grants in each financial year:

(a) Fiscal Policy Strategy Statement (FPSS);

(b) Medium Term Fiscal Policy Statement (MTFPS);

(c) Macroeconomic Framework Statement (MFS).

5 . Question

Consider the following statements

• The deficit requirements for lower revenue expenditures and higher capital expenditures are the best situation for deficit financing.
• High domestic borrowing by the government for increasing capital expenditure would impart a ‘crowding-in effect’ spurring more investment.

Which of the above statements is/are incorrect?

• c) Both 1 and 2
• d) Neither 1 nor 2

Composition of Fiscal Deficit

Out of the two broad expenditure obligations of a government—revenue expenditure and capital expenditure—the following combinations of expenditure composition are suggested:

A fiscal deficit with a surplus revenue budget or a zero-revenue expenditure is the best composition of fiscal deficit and the most suitable time for deficit financing.

The deficit requirements for lower revenue expenditures and higher capital expenditures are the next best situation for deficit financing , provided revenue deficit is eliminated soon.

The last could be the situation when major part of deficit financing is to fulfil revenue expenditures and a minor part to go for capital expenditures. The total money of the deficit might go to fulfil revenue expenditure, which could be the worst form of it.

Crowding out effect: –

as per Economic survey in a developing country like India: –

Concerns about high government borrowings crowding out the private sector’s fund-raising efforts were misplaced and not based on evidence,

“It’s a very tempting argument to make but the data does not support it,”

On the contrary, the government’s increased capital spending would impart a ‘crowding-in effect’ spurring more investment .

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