Corporate Governance in India

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Corporate Governance in India

Written by: Ms Nikita Kumari

INTRODUCTION

Corporate Governance is a set of internal controls, strategies, and measures that form the basis of operations of the company and it deals with many stakeholders such as clients, management, workers, administration and engineering bodies. The context of such policies should be such as to sustain the principles of transparency, honesty, morals, and trustworthiness. Corporate Governance is the soul of an association and must be followed while indulging in any business practices. Corporate governance is a portion of the Indian corporate sector since the beginning but the corporate governance fiasco and fraud of Satyam Computer Services Limited improve the anxieties about corporate governance in India. The legal agenda of corporate governance can be modified to fit the particular choice of each wearer.

Corporate governance is a set of principles or guidelines on which a company is governed. It ensures that the corporate works in a way it is supposed to work to achieve the desired goals. It makes the companies answerable to each & every stakeholder including, management, shareholders, workers, clients, etc. The term governance itself clarifies the meaning that it is an act of dealing with a corporate entity. The object of a corporation is distinct from its representatives which makes corporate governance an important topic for education. Corporate governance plays a vital role to defend the rights of shareholders at a large, who have proprietorship in the company but do not play a vigorous role in leading the day-to-day business activities.

Corporate governance is to a vast degree, a lot of machinery through which outsider financial specialists protect themselves from seizure by insiders. The theme of corporate governance has reached fame mainly since the 1980s and moreover after the code of corporate administration issued by the Cadbury advisory group. The famous Cadbury Committee considered “corporate governance” in its report of Financial Aspects of Corporate Governance, distributed in 1992 as the basis by which the administrations are synchronized and controlled. Corporate governance denotes the accountability of the Board of Directors to all the stakeholders of the company i.e., dealers, shareholders, workers, clients, and society in general; towards giving the company an impartial, effective, and crystal-clear administration.

The primary sources of law, guidelines, and repetition relating to the corporate governance

The Companies Act, which swapped the former Companies Act, 1956 on 30 August 2013, and the guidelines issued by the Securities and Exchange Board of India (SEBI) are the primary sources of the Indian corporate governance regime. The provisions of the Companies Act have been alerted in a phased manner.

The provisions of the Companies Act must be read with guidelines, announcements, instructions, bills, and forms issued under the Companies Act by the Ministry of Corporate Affairs (MCA), Government of India. Unlisted and closely held Indian companies are subject to the corporate governance models confined in the Companies Act. Schedule IV of the Companies Act contains a code for the professional conduct of independent directors (IDs), which applies to all public listed companies and certain classes of public companies. Acquiescence with the corporate governance provisions must be counted in the report issued by the board.

The SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (the Listing Regulations) lay down the obligations of listed entities, it includes not only those entities that have listed their equity shares, but also those that have listed other instruments, including non-convertible debt securities, non-convertible redeemable preference shares, perpetual debt instruments, perpetual non-cumulative preference shares, Indian depository receipts, securitized debt instruments and units issued by mutual funds. The Listing Regulations set off the corporate governance principles valid for listed entities.

The following laws deal with corporate governance ingenuities:

  • Securities Contracts (Regulation) Act, 1956;
  • Securities and Exchange Board of India Act, 1992;
  • Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011;
  • Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015;
  • Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009;
  • Depositories Act, 1996;
  • Corporate Governance Voluntary Guidelines, 2009;
  • National Voluntary Guidelines on Social, Environmental and Economic Responsibilities of Business, 2011; and
  • Guidelines on Corporate Social Responsibility and Sustainability for Central Public Sector Enterprises issued by the Department of Public Enterprises, Ministry of Heavy Industries and Public Enterprises.

A committee was created by SEBI under the chairmanship of Mr. Uday Kotak, Executive Vice Chairman, and Managing Director, Kotak Mahindra Bank (the Kotak Committee) in June 2017 to improve standards of corporate governance of listed companies in India. The Kotak Committee was wished to make recommendations to SEBI on the following issues:

  • Ensuring independence in the spirit of IDs and their active participation in the functioning of the company;
  • Improving safeguards and disclosures about RPTs;
  • Issues in accounting and reviewing practices by listed companies;
  • Improving the effectiveness of Board evaluation practices;
  • Addressing issues handled by investors on voting and involvement in general meetings;
  • Disclosure and transparency-related issues, if any; and
  • Any other matter, as the committee deemed fit about corporate governance in India.

Afterwards, SEBI notified the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) (Amendment) Regulations, 2018 on 9th of May, 2018, and issued a circular on 10th of May, 2018 to contrivance the endorsements of the Kotak Committee. Except where the specific dates are provided in the Amendment Regulations, the Amendment Regulations came into force on the 1st of April, 2019.

Need for Corporate Governance:

  • Wide Spread of Shareholders – A corporate has a lot of shareholders with different attitudes towards corporate affairs, corporate governance protects the shareholder democracy by implementing it through its code of conduct.
  • Changing ownership structure -The form of corporate ownership has altered significantly, in the present-day-times; with institutional investors (foreign as well Indian) and mutual funds fetching the largest shareholders in the large corporate private sector. Large corporate investors are fetching a challenge to the management of the company because they are manipulating the verdict of the company. Corporate governance established the code to handle such situations.  
  • Corporate scams and scandals – Corporate governance is necessary to build public confidence in the corporation which was shaken due to numerous corporate frauds in recent years. It is imperative for bracing the self-confidence of investors. The incident of the Harshad Mehta scandal, which is maybe, the major scandal, is in the heart and mind of all who has linked with corporate shareholding or otherwise being educated and socially conscious.
  • Greater expectations of society of the corporate sector – Society having greater expectations from corporate, they expect that corporates take care of the environment, pollution, quality of goods and services, sustainable development, etc. code to deportment corporate is important to achieve all these opportunities.
  • Hostile take-overs – Hostile take-overs of corporations witnessed in several countries, put a question mark on the effectiveness of management of take-over companies. These aspects also point out the necessity for corporate governance, in the form of a resourceful code of conduct intended for corporate management.
  • Huge increase in top management compensation – The huge flow of international capital in Indian companies is also affecting the management of Indian Corporates which require a code of corporate conduct.
  • Globalization – Globalization made the communication and transport between countries easy and frequent, so many Indian companies are listed with international stock exchange which also triggers the need for corporate governance in India.

The fundamental principle of corporate governance:

  • Transparency – Transparency means the eminence of something which allows one to recognize the truth easily. In the milieu of corporate governance, it suggests an accurate, satisfactory, and timely disclosure of related evidence about the effective results, etc, of the corporate enterprise to the stakeholders.
  • Accountability – It ensures the liability of the person who takes decisions for the interest of others. Hence persons such as managers, chairmen, directors, and other officers of the company should be accountable to other stakeholders of the corporate.
  • Independence – The Independence of the top manager is important for the smooth functioning of the corporate. The Board of Directors must work without the interference of any interested party in the corporate.
  • The Companies Act, 2013 – Consists of law provisions regarding the constitution of the board, audit committees, board meetings, independent directors, general meetings, board processes, party transactions, revelation necessities in the fiscal statements, etc.
  • SEBI Guidelines – SEBI is a leading authority having jurisdiction and power over listed companies and which issues protocols, instructions, guidelines, rules, and regulations to companies to certify the protection of investors.
  • Standard Listing Agreement of Stock Exchanges – It is for those companies whose shares are listed on the stock exchanges.
  • Accounting Standards Issued by the Institute of Chartered Accountants of India (ICAI) – ICAI is an independent body, which issues accounting standards providing guidelines for disclosures of financial information. In the new Companies Act, 2013 Section 129 deals with the financial statements would give a fair view of the state of affairs of the companies, following the accounting values given under Section 133 of the Companies Act, 2013. It is further given that the things contained in such financial statements should comply with the accounting standards.
  • Secretarial Standards issued by the Institute of Company Secretaries of India (ICSI) – ICSI is an independent body, which has secretarial standards in terms of the provisions of the new Companies Act. ICSI has issued secretarial values on “Meetings of the Board of Directors” and secretarial values on “General Meetings”. Given accounting standards have come into force from 1st of July, 2015. Companies Act, 2013, Section 118(10) provides that every company (other than the one-person company) shall observe secretarial standards specified as such by the ICSI concerning general and Board meetings.

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