“Department of Industrial Policy & Promotion (DIPP)” for “simplification of Land Acquisition Act”, in India | ET Retail

The Department of Industrial Policy and Promotion (#DIPP) will pitch for simplification of the #LandAcquisitionAct to facilitate investment and manufacturing in the economy by doing away with the cumbersome rules and procedures in the legislation..

Commerce and industry minister Nirmala Sitharaman, will likely take the matter up with her rural development counterpart Gopinath Munde…DIPP will likely propose ” doing away with the social impact assessment process in the Act, which is a pre-requisite for public-private partnership (PPP) and private entities to acquire land”.

” Land Act in the present form has stalled industrial activity and suitable amendments are urgently needed to spur manufacturing in the economy…. There is no land acquisition taking place. We have taken up the matter with the minister,” said an official…



Act stipulates establishment of a state social impact assessment unit, the office of a commissioner, rehabilitation and resettlement, and a state-level monitoring committee by each state government. The Act has nearly brought acquiring land to a halt, impacting large projects hitting manufacturing growth, which contracted by 0.7% in 2013-14.

Besides, the commerce and industry ministry may also recommend empowering of district collectors of each state to authorise providing of up to 500 acres for small-scale industrial projects. Investment and infrastructure reforms are one of the 10 point agenda of Prime Minister Narendra Modi unveiled on Thursday… Rural development minister Gopinath Munde ruled out scrapping of the land acquisition act, however, called for a need to amend it….

Ms. Sitharaman has emphasised on bolstering manufacturing in the economy. Munde was recently reported as saying that the rules of the Act have made the implementation difficult. “There is no question of repealing the Act, as we supported it in Parliament; it is a good law. I have taken up the Act as my first issue with officials in this ministry… I must say I agree with the rates of compensation in the Act,” he said.

Any amendment the Act will need to go through the Parliament. The Act has made it mandatory to get the consent of at least 70% of the affected people for acquiring land for PPP projects and 80% for acquiring land for private companies.

DIPP secretary Amitabh Kant had said in his interview to ET last month that the law had to be redrafted and simplified keeping in mind that a fair price is paid to the farmer.

“We need to un-shackle controls. It provides for too many committees and too many approvals. It will be too time-consuming a process,” he had said..

The ” New Law provides compensation FOUR Times the Market-price for Rural-Land and up-to TWICE the value of Urban-land for acquiring for public works or industrial activities”…!!

“Corporate-Governance Reform in India”: Gauging Impact on Investors | Aligning Listing, with Companies Act 2013 | CFA Institute

Approval of all material related-party transactions by independent share-holders (i.e., related parties have to abstain from voting) is standard in many markets around the world and considered a best practice. Now, listed companies in India will abide by this rule beginning in October 2014 as part of a slew of corporate governance reforms announced recently, by the Securities and Exchange Board of India (SEBI). Will these new measures bring much-needed relief to minority shareholders, or is it just old wine in a new bottle ??

SEBI consulted industry participants in January 2013 to revise and overhaul Clause 49 of the Equity Listing Agreement that deals with the corporate governance norms for listed companies in India….CFA Institute, in conjunction with the Indian Association of Investment Professionals (IAIP), officially responded to the consultation by highlighting our policies and global best practices. The recently revised SEBI norms are expected to enhance the corporate governance framework to reflect global best practices. The requirements in certain areas, including independent directors and related-party transactions, are more stringent than the new Companies Act 2013.

Some of the significant changes are discussed below : 


Aligning Listing Agreement with the Companies Act 2013 – Companies Act requirements on issuing a formal letter of appointment, performance evaluation, and conducting at least one separate meeting of the independent directors each year and providing suitable training to them are now included in the revised norms of SEBI. Independent directors are not entitled to any stock option, and companies must establish a whistle-blower mechanism and disclose it on their websites.

Restricting Number of Independent Directorships – Per Clause 49, the maximum number of boards a person can serve as independent director is seven, and three in cases of individuals also serving as a full-time director in any listed company. The Companies Act sets the maximum number of directorships at 20, of which not more than 10 can be public companies. There are no specific limits prescribed for independent directors in the Companies Act.

Although SEBI reforms seem to be moving in the right direction, these limits may initially pose challenges in sourcing qualified independent directors for listed companies.

Maximum Tenure of Independent Directors – Based on the Companies Act as well as the new Equity Listing Agreement, an independent director can serve a maximum of two consecutive terms of five years each (aggregate tenure of 10 years). These directors are eligible for reappointment after a cooling-off period of THREE years.

Can a director who has served two five-year terms be considered independent after a cooling period of three years ? CFA Institute recommends that board members limit their length of service on a specific company board to no more than 15 years to ensure new board members with fresh insights and ideas are elected.

Board-Mix Criteria Redefined – Per Clause 49 of the Equity Listing Agreement, 50% of the board should be made up of independent directors if the board chair is an executive director. Otherwise, one-third of the board should consist of independent directors. Additionally, the board of directors of a listed company should have at least one female director.

While it is a welcome change that SEBI mandates a female director, will it make a huge difference to the effectiveness of boards ?

CFA advocates that diversity should be embraced from all angles, such as diversity of backgrounds, expertise, and perspectives, including an increased investor focus to improve the likelihood that the board will act independently and in the best interest of shareholders.

Role of Audit Committee Enhanced – The SEBI reforms call for two-thirds of the members of the audit committee to be independent directors, with an independent director serving as the committee’s chairman. While the Companies Act requires the audit committee to be formed with a majority of independent directors, SEBI has gone a step further to improve the independence of the audit committee.

The role of the audit committee also has evolved to incorporate additional themes from the Companies Act, such as reviewing and monitoring auditor independence, approval of related-party transactions (RPTs), scrutiny of inter-corporate loans, valuations, and evaluations of internal financial controls and risk management systems.

More Stringent Rules for Related-Party Transactions – The scope of the definition of RPTs has been broadened to include elements of the Companies Act and accounting standards :

  • All RPTs require prior approval of the audit committee.
  • All material RPTs must require shareholder approval through special resolution, with related parties abstaining from voting.
  • The threshold for determining materiality has been defined as any transaction with a related party that exceeds 5% of the annual turnover or 20% of the net worth of the company based on the last audited financial statement of the company, whichever is higher.

Since SEBI Clause 49 requires shareholder approval for all material RPTs, with no exception for transactions in ordinary course of business or at arms-length, companies feel that this will result in practical difficulties (i.e., compliances costs and delays), particularly for those that regularly transact business with subsidiaries.

The ultimate effectiveness of such legislation will depend upon the degree and quality of enforcement, or the monitoring capabilities of the regulator.

Improved Disclosure Norms – In certain areas, SEBI resorts to disclosure as an enforcement tool. Listed companies are now required to disclose in their annual report granular details on director compensation (including stock options), directors’ performance evaluation metrics, and directors’ training. Independent directors’ formal letter of appointment/resignation, with their detailed profiles and the code of conduct of all board members, must now be disclosed on companies’ websites and to stock exchanges.

E-voting Mandatory for All Listed Companies – Until now, resolutions at shareholder meetings in listed Indian companies were usually passed by a show of hands (except for those that required postal ballot). This means votes were counted based on the physical presence of shareholders. SEBI also has changed Clause 35B of its Equity Listing Agreement to provide e-voting facility for all shareholder resolutions.

We think this is a pertinent change as it will allow minority shareholders to express their voices at shareholder meetings without having a physical presence. CFA Institute has advocated for company rules that ensure each share has one vote.

Enforcement – SEBI is setting up the infrastructure to assess compliance with Clause 49 to ensure effective enforcement. Companies need to buckle up and assess the impact of these reforms and step up compliance.

Industry Impact – I asked Navneet Munot, CFA, CIO of SBI Mutual Fund and advocacy director for IAIP, to gauge industry reactions. Mr. Munot was optimistic about SEBI boosting investor confidence through these sweeping changes, especially the potential to empower minority shareholders through e-voting, enhanced disclosures on remuneration that is aligned with global best practices, and by requiring independent share-owner approval for related-party transactions. Given India’s humongous need for risk capital, regulatory reforms and better enforcement are critical for market integrity and building investor trust, he said.

CFA Institute, along with the IAIP, is currently working on an investor’s guide to shareholder meetings in India to help retail and institutional investors understand the rights, role, and responsibilities of shareholders…

“Fighting Corporate Hubris”: FOUR Steps of the “Perpetuity Principle”|by:Hans-Paul Bürkner | BCG

Massive corporate fraud, the dot-com bubble, the worst economic crisis since the 1930s—these events have undermined many companies and leaders over the past 15 years. As CEOs begin to absorb the lessons of this turbulent period, they should be careful not to overlook one significant contributory factor: hubris, the pride that comes before a fall.

In a corporate setting, “Hubris” can take many forms, such as :

  • Creating grandiose strategies that find their way into glossy brochures, new advertising campaigns, and rhetorical conference speeches—but never get implemented
  • Launching high-profile moves into new, exciting, international markets in a costly and flamboyant way—but failing to create competitive advantage
  • Pursuing big mergers and acquisitions that deliver scale, bold headlines, and large bonuses for the management team—but no long-term value
  • Completing dubious financial transactions that undermine transparency—and serve only to show that the company isn’t addressing the fundamentals of business

Time and again, these activities have led companies to overextend themselves, to falter, and—all too often—to fail. CEOs should guard against them at all costs.

Hubris and Its Nemesis: The Perpetuity Principle – 

The CEO and the executive committee play a critical role in the fight against hubris. They do, by their conduct, set the boundaries and norms of behavior for the rest of the company. Today, the best managers follow what we call the perpetuity principle, serving as stewards of their companies and, by doing so, developing profitable, sustainable, and trusted businesses. They focus on results, ensure that substance triumphs over style, and champion a true humility—one that prioritizes ethical behavior, respect for others, modesty, and diligence. To adhere to this principle, CEOs should take the following steps.

1. Renew the focus on delivering long-term value. It is all too easy to shrug off a sluggish performance as evidence that the market misunderstands the company’s terrific work or to point to a great quarter or two as a reason for ignoring any deterioration in the business fundamentals. But before castigating critics or declaring victory, the prudent leader should take a long, hard look in the mirror: knowing what creates value—and what destroys value—for customers, shareholders, and other stakeholders are core competencies of the CEO.

On a routine basis, the CEO and his or her team should embark on an unsentimental, even ruthless, review of the company’s portfolio to identify any under-performing business units or decline in the key drivers of value, such as market share, gross margin, and pricing power.

At the same time, they should pursue strategies to deliver top-line growth. But they must be wary of tempting proposals for fast-tracking growth—such as buying and selling businesses—just to please the markets. Though such strategies have their place, big splashy acquisitions that promise much but turn out to be poorly thought-out, badly executed, and deeply damaging to the long-term health of the company occur all too often. In fact, according to BCG analysis across all industries, more than half of all public-to-public deals between 1988 and 2010 actually destroyed shareholder value.

Ultimately, a company will thrive only if it offers differentiated products or services to its customers and delivers them well. Leaders should never forget this—no matter how much pressure they feel from the financial markets.

2. Foster an open and questioning culture, and encourage the company’s major decision makers to challenge conventional wisdom. Of course, this is not easy to do; for CEOs, encouraging others to question their carefully worked plans can be an uncomfortable process. But cultivating an environment in which executives feel free to articulate their views without fear of retribution is necessary—and usually the company is stronger for it.

There are a number of ways to foster an unfettered dialogue. The most effective is when a CEO initiates the discussion by challenging the existing business model. Another is to conduct an exercise in which one group of executives takes a contrarian view, playing devil’s advocate.

A third approach is to develop a series of scenarios, or mental “boxes,” that give members of the executive board a chance to gain a fresh perspective on their strategic plan. This is not some tired recommendation to engage in scenario planning or to think outside the box. Rather, it is an exhortation to think in newboxes—to question everything, to think the unthinkable.

Whether or not these new scenarios are plausible is beside the point. What’s important is that each box be sufficiently provocative to enable the CEO and the executive team to test the merits of their preferred approaches in different boxes and, in doing so, to break out of a tunneled managerial perspective.

As well as creating new visions of the future, CEOs must address, in a very practical sense, the way they manage and organize work. All too often, a CEO orders a reorganization of the company that, despite the best of intentions, leads only to a costly and over-complicated proliferation of structures, processes, and systems. This is why what we call “smart simplicity”—minimizing structures, processes, and systems while maximizing leadership, cooperation, and engagement—is so important. It avoids the illusion of superficial change, which actually inhibits real transformation, and forces leaders instead to consider some key questions: Are we really going to change what happens, what we do, and the way we work together?

3. Develop a role as stewards of the company, guiding it toward a prosperous future with a respected place in society. Companies play an important role in society, and their leaders can be significant local, national, and international citizens. CEOs, therefore, should be conscious of their role in the community, set an example through their behavior, and strive both to do well and to do good, today and for tomorrow. A narrow focus on short-term profitability, coupled with excessive bonus payments for top management, undermines the very existence of a company—especially during a time of austerity in the West and widening gaps in wealth around the world.

To set the best example, CEOs should ask themselves this question: “Is my compensation in line with performance?” If the answer is no—then that’s a problem. Certainly the best-performing executives should be well compensated. But those who have poorly served—or even defrauded—their shareholders, customers, and local communities should face negative consequences rather than be rewarded with golden handshakes.

CEOs should also ask themselves, “Is my company making an appropriate contribution to society ? ” With the rising importance of citizenship, trust, sustainability, and reputation, leaders cannot fixate solely and selfishly on the company. They have a role in shaping a more resilient and responsible future for society at large.

Companies can contribute to the well-being of local communities through their products and services, job creation, education, and skills training. They should also pay an appropriate level of corporate tax. Of course, it is the duty of each company to take every legal step to minimize its tax burden. But going too far risks a serious backlash—not least from consumers and especially at a time of large government deficits, which are partly due to tax evasion and poor collection. This risk holds equally true when it comes to labor laws, environmental regulations, and quality standards.

4. Ensure a regular change of leadership. CEOs should conduct a periodic shake-up of those around them, including their loyal lieutenants. It is lonely at the top—and never more so than when reshuffling the executive pack. But this is a task that CEOs must not shirk: they cannot afford to surround themselves with a cadre of people who stop challenging the status quo (now that they are the status quo), who put career before company, and who stay silent when they should speak out.

In general, CEOs themselves should have time-limited tenures, too. No one is above the company, not even its highest officer. In my experience, most CEOs, in the true spirit of a steward, should step aside after no more than ten years. Now, some leaders may read this and think that a decade in the top job is the kind of corporate eternity they can only dream about. The fact is, however, that some companies are nominally led by people who no longer actually lead.

So why deprive the company of a top leader who has built up a wealth of experience? The answer is straightforward: Over time, it gets progressively more difficult to bring about necessary change. Of course, it is not hard to point to the exceptions that prove the rule—the extraordinary CEOs who defy the years and continue to generate value over decades. But, too often, long-serving CEOs are wedded to ways of doing things that quickly become outmoded in today’s fast-changing and volatile world. And while success can certainly breed success, it can also breed complacency and failure.

Knowing when to hang up one’s boots is notoriously difficult, whether in business, politics, or sport. The most successful leaders, wary of destroying the legacy they have built, understand that they should never think they are indispensable.

The CEO’s Core Task : Putting the “Execute” Back into “Executive”…

Over the past two decades, too many CEOs lost focus: to use the language of sport, they took their eyes off the ball. Today they have a second chance.

The essential purpose of a company is to deliver value to its customers and profits to its shareholders on a sustainable basis—and this means that the organization needs to be a good citizen in the communities where it does business. So the task of the CEO, as the leader of the company, is to make this happen, to get things done, to execute—hence the name, “chief executive officer.”

” To be truly successful in a game-changing way : CEOs must adhere to the “Perpetuity Principle”, leading from the front and engaging in a relentless fight against corporate hubris—whether this manifests itself as greed, self-promotion, or ducking the hard realities of the world “.

“Start-up’s in India can list without IPO’s”: Angel Funds can invest only in start-up’s up to 3 years old|by: Sainul K Abudheen | VC Circle

Securities market regulator, SEBI (Securities and Exchange Board of India) has come with significant guidelines for the “Start-up Ecosystem in India”, boosting liquidity prospects for early-stage investors by allowing start-ups to list without IPOs but has proposed certain restrictions on angel funds which may affect their investments.

The proposals, some of which have been talked about for a while, were cleared in a board meeting of SEBI on Tuesday. However, SEBI did not give a timeline for the implementation of the new decisions.


Start-up listing :

SEBI noted that lack of exit opportunities for the existing investors and restricted access to new investors is one of the problems faced by start-up’s and SMEs. To provide liquidity for angel investors, VC firms and others, it approved the proposal to amend regulations to permit listing of start-up’s and SMEs in a separate Institutional Trading platform (ITP) without having to file for IPOs.

This would be different from the existing SME exchange platforms of BSE and NSE which allow firms to list with relatively laxer regulations. SEBI said such firms shall be accessible for investment to the ‘informed investors’ only and it marked the minimum amount for trading or investment on the ITP as Rs 10 lakh. These companies shall also be exempted from the requirements to offer up to 25 per cent of their stake to public through an offer document in order to get listed. This would allow such firms to list without IPOs and do away with the expenses associated with it.

However, SEBI added that such companies will be able to only make private placements and not public issues. This would create an institutional trading market for shares and other convertibles of startups, which can potentially bring more investors beyond angel investors and VC firms who have access to investments in such firms.

Standardised norms of entry for companies, eligibility criteria, continuous disclosure requirements, simplified exit rules and corporate governance norms will be prescribed separately, SEBI said.

According to Sanjay Vijayakumar, an angel investor and co-founder of MobMe Wireless (which is in the process of listing in an SME exchange), the decisions will help bring in more financial discipline much early on for entrepreneurs.

“In my opinion, along with HNIs, the platform should be open to working professionals as well since there are many young professionals who understand the Internet/mobile medium but are not HNIs. The next generation of youth has a higher risk appetite and they would be willing to invest under Rs 5 lakh in a startup,” he said.

Vijayakumar said the current SME exchanges call for 25 per cent of equity dilution which was a dampener. “In most cases, the startups would want to dilute less, raise what is needed, increase the valuation and then raise more money,” he said.

Vijayakumar explained that a positive spin to listing is that it can assign a market cap for the company and the shares can then be used as collateral as well. “This will help in unlocking value of shares in early stage itself as government funds give out loans at soft interest rates with shares as collateral, he said.

One of the key features of an IPO-less listing would be cost saving from the process of going through an IPO. This additional platform may also put pressure on the associated costs of listing on an SME exchange.

Mahesh Murthy of Seedfund said, in theory the SEBI proposal to allow startups and SMEs to list on an ITP without an IPO is great as it allows firms to divest less than 25 per cent and discover a price for their stock so that raising the next round though private placement will have fewer debates on pricing and valuation.

“But in practice, I’d like to see this market of HNIs and others on the ITP. I am not sure it’s a big market of buyers right now. For an ecosystem to work it needs not just sellers but buyers too. There will be hundreds of sellers. But where are the buyers?,” he asked.

Angel funds : 

The market regulator also came up with guidelines for angel funds and angel pools, bringing them under the ambit of Alternative Investment Funds (AIF) regulations. Given the smaller size of such funds compared with other VC firms, it categorised them as separate from VC firms but put such early stage investment funds under category I of AIF regulations.

SEBI said individual angel investors shall be required to have early stage investment experience/experience as serial entrepreneurs/be senior management professionals with 10 year experience. They shall also be required to have net tangible assets of at least Rs 2 crore ($330,000) while the corporate angel investors shall be required to have Rs 10 crore net worth or be a registered AIF/VCF.

For angel funds, the regulator prescribed a minimum corpus of at least Rs 10 crore (against Rs 20 crore for other AIFs) and minimum investment by an investor into that fund to be Rs 25 lakh (may be accepted over a maximum period of three years) against Rs 1 crore for other AIFs (such as larger VC firms and private equity firms). It added that the continuing interest by sponsor/manager in the Angel Fund shall be not less than 2.5 per cent of the total corpus or Rs 50 lakh, whichever is lesser.

SEBI also put separate riders for angel investments: they shall invest in firms incorporated in India and are not more than three years old; have a turnover not exceeding Rs 25 crore ($4.2 million); are unlisted, not promoted, sponsored or related to an industrial group whose turnover is in excess of Rs 300 crore and have no family connection with the investors proposing to invest in the company.

Further, investment in an investee company by an angel fund shall be not less than Rs 50 lakh and not more than Rs 5 crore and shall be required to be held for a period of at least 3 years.

This makes the guidelines restrictive which may affect such investments. This is especially so with respect to the requirement that angel funds to limit their investments to firms which are up to three years old. Though much of such investments happen in the early life cycle of a firm, it would take out access to such angel funds by firms whose founders managed to bootstrap for the initial years.

Such Start-up’s would need to pitch to larger VC firms

What “India’s Union-Budget 2013” means for Startups, Incubators, Angel-Investors | by:Sainul K Abudheen |VC Circle

Small and medium enterprises (SMEs) have always been a focus of the Union Budgets in India. However, this year’s budget had a surprise element for the Indian start-up ecosystem (mainly dominated by tech enterprises or new age companies rather than traditional SMEs). This also has a bearing on the start-up incubators, and also the angel investment ecosystem.

Here’s a quick take on “what the budget means for each of these stakeholders in the Indian start-up ecosystem ??…..” 

Startup’s : 

The finance minister has opened a backdoor listing route for SMEs including startups and they can now list at the two SME exchanges in the country. The proposal will allow such startups to list without going through the elaborate process of an initial public offering (IPO).

However, such firms’ shares will be open for subscription only for a set investor base. A clear picture regarding the modalities is yet to emerge, but it is likely to be in the form of an institutional placement while providing liquidity on the exchanges.

Sanjay Vijayakumar, CEO of MobMe Wireless and chairman of Kochi-based incubator Startup Village, said, “This is a great move because SMEs can now monetise their shareholding and leverage the same as collateral to get money from institutions like the Technology Development Board, where loans can be raised at 5 per cent simple interest rate.”

MobMe is the first tech startup which has already applied to get listed on the SME Exchange in India for its IPO.

Jade Magnet co-founder Sitashwa Srivastava said, “This will open up a genuine fundraising avenue for young companies.” Bangalore-based Jade Magnet offers a design crowdsourcing platform.

“This will potentially create an excellent platform for venture capital and private equity players to deal in their unlisted portfolio companies without having to go through a lengthy and expensive listing process. This can also serve as an alternative and tax-efficient exit route for the funds from their illiquid portfolio companies,” observed Siddharth Shah, partner at the law firm Khaitan & Co.


Tech-Incubators : 

The government has said that funds given by companies to support tech incubators within academic institutions and approved by the Ministry of Science and Technology or the Ministry of MSME (Micro, small and medium enterprises) will qualify as corporate social responsibility (CSR) expenditure. Although this will not directly affect the growing number of private incubators, it is expected to generate more funds for institutions like the CIIIE (Centre for Innovation, Incubation and Entrepreneurship) which runs iAccelerator and is associated with IIM Ahmedabad.

The companies contributing to such incubators will be able to show those expenses as CSR expense, which is part of the mandatory CSR spend under the new Companies Bill.

“The biggest challenge for incubators is that the funds allocated for its operations are very low,” said Vijayakumar. “So the inclusion of 2 per cent of CSR funds as expenditure for incubators will be a game-changer,” he added.

Ravi Kiran, co-founder of VentureNursery, an angel-backed startup accelerator programme, said that the move to allow investment in technology business incubators (TBIs) as CSR investment is a good step. “I hope it comes with a mechanism to establish accountability of such investments. Also, the government needs to recognise private accelerators’ role in the entrepreneurial ecosystem as well,” he said.

Angel Investors : 

Angel investments, which have become a key part of early-stage funding in India in the last two years, got a shocker in last year’s budget because of a proposal, which in effect, amounted to taxing such investments. Although the government was expected to make some clarifications, the latest budget is a win some-lose some scenario for angels.

The finance minister has said that market regulator SEBI will prescribe requirements for ‘angel investor pools’ by which they can be recognised as Category I AIF venture capital funds and thereby, get tax benefit. It is not immediately clear if this represents ‘angel funds’ or ‘angel networks’ or both.

In either case, this may leave out individual angel investment, which is done outside the angel networks such as Indian Angel Network (IAN), Mumbai Angels, Chennai Angels, etc. This may help consolidate such investments while making it tough for those individual angel investors to support the startups in early years.

Padmaja Ruparel of IAN said, “We are happy that the finance minister has recognised genuine angel investing and that this activity should be encouraged. We will work with the SEBI to see how the rule can be applied to angel investors.”

According to Ravi Gururaj, co-founder of HBS Alumni Angels (India Chapter), the new AIF class of investment vehicle will be helpful if it helps catalyse the growth of many new micro funds where investors syndicate to pool in their resources.

“However, I hope the new regulation does not hinder the existing regular angel investing activities, dominated by individuals making investments in their own personal capacity and selectively investing in startups. Such individual activity, which forms the bulk of the current angel activity in India today, should not be adversely impacted by these new norms,” he noted.

“Internal Audit (IA) & Risk Management” need Increased Collaboration, NOT Re-organization | by: Chris Bart & Elliot Schreiber


Having robust Internal Audit (IA) and Risk Management functions with an organization are essential to a strategy’s successful execution. However, there are increasing signs that IA and Risk Management need to work much more closely together. A new KPMG Study found some startling issues for both the risk and IA communities.

For Risk Management, strategy execution is being threatened because : 

  • Only one-third of companies felt that their Risk Management programs were robust enough to keep up with the changing risk environment; Only 52% of board members were satisfied that management had identified the risks to business growth. 
  • This is a bit startling since a McKinsey study a few years ago found that it was the CEOs who felt that the board did not understand the company’s risks.  So, neither the board nor the CEO is comfortable with one of the most important oversight responsibilities of the board. 
  • For Internal Audit, a strategy’s successful execution is being undermined because: Less than one-half of companies felt that IA delivered real value to the company – and most likely due to an overemphasis on compliance versus execution; About one-half do not believe that IA properly focuses on the company’s strategy. 
  • The real issue is that both IA and Risk Management exist to not only find problems, but also to recommend changes – “opportunities” – that could benefit the firm.  However, according to Archie Thomas, a consulting IA and former Chief Audit Executive, many IAs do not understand the strategy of their company.  Thomas believes that internal auditors should be attuned to the strategy since they should be evaluating how well the company has done at implementing that strategy. This, he sees, is a major gap in IA. 

We’ve heard the same issue from risk managers we know.  They note that many risk managers are more focused on compliance or “checking the box” than they are with strategic a risk, which has been found to account for nearly 70% of risks and which cause the greatest loss of value.

We believe that it is time that IA and risk management begin to work more closely together or we may see companies make some rash organizational changes that negatively impact both functions and further blind a company’s ability to identify and mitigate gaps in their strategy’s execution..  Already in Australia, about 65% of companies have either linked IA and Risk under a common executive or put IA under risk management.  This is too new to know what the implications of such changes might be.

As we’ve noted previously, the Audit Committee should be asking both IA and risk management to provide a strategy execution audit in addition to their normal work.  Also, since there seems to be discontent with what each group has been doing independently, we believe that an alignment council of IA and Risk should be formed to determine how they could better work together to meet the needs and demands of both the board and top management.