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All About Corporate Governance in India

Corporate Governance

WHAT IS CORPORATE GOVERNANCE IN INDIA?

The Institute of Company Secretaries of India defines corporate governance as follows:

“Corporate Governance is the application of the best management practices, compliance of law in true, letter and spirit of adherence to ethical standards for effective management  and distribution of wealth and discharge of social responsibility for the sustainable development of all stakeholders.”

Corporate Governance refers to an established framework of rules, values, morals, and principles based on which a company is governed. A company is a commercial or industrial enterprise constituting an association of people. The stakeholders of a corporation would include shareholders, employees, suppliers, customers and the whole society in general.

HISTORY OF CORPORATE GOVERNANCE IN INDIA

The concept of corporate governance emerged in the 1990s after the economy of India opened up to the foreign markets; in the era of Economic Liberalization, Privatization and Globalization. Industry Association Confederation of Indian Industry (CII) publicly introduced the code of Corporate Governance in 1998 that was to be followed by Indian Companies (listed), whether they belonged to the private or public sector including Banks and Financial Institutions.

Committee Recommendations

In 2000, The Securities and Exchange Board of India (SEBI) which is the body responsible for market regulation in India introduced Clause 49 in “the Listing Agreement of the Stock Exchanges”. The Clause was added after the recommendations from various committees.

The Birla Committee was set up in 1999. Some of the key Birla Committee recommendations which were adopted by the SEBI:

  1. The Board of Directors should have a reasonable combination of Executive and Non-Executive Directors.
  2. There should be Audit Committees with at least 3 independent directors. One of them should have knowledge of accounting and finance.
  3. The company has to prepare an analysis report covering industry structure, the risks and threats, outlook, and internal control system for external review. Similarly, the Board has to conduct meetings in the gap of four months for the internal review of the Company.

The Department of Company Affairs (DCA) appointed the Naresh Chandra Committee in August 2002 to analyze various corporate governance issues. The recommendations touched on independent auditing and board oversight of management as well as financial and non-financial disclosures. It gave suggestions regarding the grounds of disqualifying auditors, and the compulsory rotation of audit partners.

SEBI set up the Narayana Murthy Committee in 2003 to review Clause 49  and to suggest ways to improve it. The Murthy Committee focused on the responsibilities of the audit committee, codes of conduct and financial disclosures and risk management.

Clause 49

SEBI announced the clause on 29th October 2004 after further recommendations. Clause 49  placed all the Listed Companies with a net worth of Rs 25 crore or more or paid-up capital of 3 crores or more as of 31st March 2003 under the Clause.  The Clause contains eight sections; concerning the Board of Directors, the Audit Committee, Remuneration Committees, Management, Shareholders, Board Procedure, Report on Corporate Governance and Compliance. It was ratified by the SEBI and acquired a mandatory status and was to be complied with by 31st December 2005.

In 2009, The Ministry of Corporate Affairs released a set of voluntary guidelines for corporate governance issues like the independence of the board of directors, mechanisms to protect whistleblowing, the audit committee, and secretarial audits. However, there was a shift to a more voluntary approach instead of the earlier mandatory approach.

Companies Bill (2008-2012)

In order to bring corporate governance in the fold of legislation instead of leaving it under the Listing Agreement, there was an effort to redraft the Companies Act, 1956. The government established an Expert Committee on Company Law on 2nd December 2004 to review the earlier Act. The Companies Act, 2008 was introduced in the Parliament based on the recommendations of the Expert Committee. However, the bill lapsed because of the dissolution of the Fourteenth Session of Lok Sabha. The same bill was introduced as Companies Bill, 2009 in the next session. The bill received many recommendations from the Parliamentary Standing Committee on Finance, as a result, the bill was withdrawn. The Bill met the same fate when it was introduced in the 2011 session.

Companies Act, 2013

After many rounds of redrafting, the Companies Bill was finally signed as Companies Act 2013 on 29th August 2013 by the Parliament. The Ministry of Corporate Affairs (MCA) administers the Act.  Some of the key features of the Companies Act, 2013 are as follows:

  1. National Company Law Tribunal (NCLT), a tribunal to listen to cases related to Indian companies was introduced.
  2.  Companies not engaging in business for consecutive two years can be declared dormant.
  3. Companies are required to maintain documents electronically.
  4. The Act empowered single entrepreneurs to start a company with limited liability protection as a One Person Company (OPC)
  5. The company should have at least one woman director if it is a listed company with its securities listed on any stock exchange and/or if it is a company with a paid-up capital of 100 crores or more and a turnover for 300 crores or more.
  6. The company must appoint an independent director, i.e someone who is not a promoter of the company or any of its subsidiaries and is not related to the directors or promoters of the company or any of its subsidiaries.
  7. A Company must take an initiative to form a Corporate Social Responsibility (CSR) Committee and Policy and invest at least 2% of the average net profits of the three preceding financial years.
  8.  A search and seizure order can be implemented against any company under investigation without an order form the Magistrate.
  9. The Act also proposed to establish a National Financial Reporting Authority (NFRA) to assess the work of auditors and enforce accounting and auditing standards.Read Also: The 2018 Amendment to The Companies Act, 2013

PRINCIPLES AND OBJECTIVES OF CORPORATE GOVERNANCE

Corporate Governance tries to uphold a set of ideas and principles which are important for the health of any company as well as society:

All the corporate reforms and recommendations always try to increase transparency between the Corporation and its shareholders, investors and the society at large. It ensures the disclosure of financial information and management decisions especially in relation to the shareholders.

Corporate Governance upholds Independence of the Board of Directors who can make independent decisions for the good of the company as well as the investor. At the same time, it also holds them accountable to its investors.

Corporate Governance allows the Company to self-evaluate their practices in their internal board meetings to rectify their mistakes to avoid regulatory fines. An Independent Board is able to point out any potential dangers in the Company’s Management.

It is a known fact that the companies which follow the code of corporate governance are more successful in increasing premiums attached to their shares. It leads to an increase in the shareholder’s wealth as well as the Company’s positive presence in the market.

WHY IS CORPORATE GOVERNANCE IMPORTANT IN INDIA

There are many factors which make corporate governance a necessary tool for the economic growth of society as a whole.

In today’s era of globalization, a company might have shareholders spread over the whole country or the world. The unorganized nature of the shareholders calls for protecting their interests through a standard legal framework.

Mutual funds, as well as institutional investors (national as well as international), have become the largest shareholders in the present day. This change in the pattern of corporate ownership has also forced the hand of the corporate management to adhere to code to uphold their image.

In the eyes of the investors and the public, there is a lack of confidence in corporate regimes because of the ever-growing corporate scams. Some of the biggest names involved are Shara group’s chairman Subrata Roy who failed to pay over 20,000 crores to its more than 30 million small investors.  Diamond Jewellery designer Nirav Modi, who is currently an international fugitive is charged with committing 1.8 billion dollar fraud.

The monetary compensation of the Top Level Corporate Executives has increased a lot. The huge amount of compensation comes out of corporate funds which belong to the shareholders. This makes a code of corporate governance important to contain the indulgence of top-level management. Finally, the desire for companies for recognition in the international market makes the need for corporate governance greater.

Corporate Governance is not only a standard for a healthy society but also the very foundation of economic growth by keeping a check on an excess of wealth with a few. The society expects more from the corporate sector and to meet those social expectations, corporate governance is necessary.

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