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Corporate Governance in India – Concepts and Frameworks

Introduction

Corporate Governance is a standard of principles, rules, customs, policies and regulations adopted to regulate and administer a corporation. The hype and demand of good corporate governance and the awareness elevated more with a plethora of corporate scandals and scams, notable of which is the landmark case of Satyam Computer Services Limited. The case apparently pointed out the lacunae in India’s corporate governance. Therefore, albeit having multiple regulatory bodies, India holds a very infirm monitoring system.

Features of A Good Corporate Governance

There are eight significant features of good corporate governance which include:

  1. Accountability,
  2. Transparency,
  3. Effective principles and policies,
  4. Responsiveness,
  5. Participatory decision-making process,
  6. Efficiency,
  7. Consensus oriented operations,
  8. Equitable Administration and in accordance with the rule of law.

Good Corporate Governance aims to minimize corruption by considering the views of the minorities and holding up their voice in the decision-making procedure. Good governance must be dynamic and responsive to the needs of society.[1]

Corporate Governance

Corporate Governance is defined as a standard of conduct prevalent among the shareholders, the Company Board, Management of the company, and other stakeholders. Corporate Governance aims to set up the objectives of the company and demarcate the means of accomplishing those objectives as well as monitoring and coordinating them. The features of good corporate governance shall reflect in the implementation of such features wherein production of proper incentives shall assist the management and the board of a company in achieving the objectives that shall help yield the best interest of the company and its shareholders. Moreover, good corporate governance shall facilitate the firms in guiding through effective use of the resources, thereby encouraging the firms to formulate effective monitoring means to regulate the company’s conduct.[2]

In short, good corporate governance refers to such practices that an organization shall abide by in order to get directed, governed and controlled. It is a means to make sure that the management, board and directors of a company shall function for the best interest of the company and its stakeholders, as also to hold the managers accountable to the capital providers for utilizing the company’s assets. Therefore, to accomplish the objectives of fair corporate governance and to minimize corporate scams, the Government of India has set up a statutory framework that regulates the activities of the corporations and aims to foster the system of good corporate governance.

Legal Framework of Corporate Governance

In India, the corporate governance regulatory framework functions in accordance with the statutory laws as follows, which has been simplified for clear interpretation and to cater to speedy economic growth:

The Companies Act, 2013

The Act dictates the provisions in terms of the board meetings, audit committees, disclosure requirements in financial statements, the constitution of the board, related party transactions. The Companies Act, 2013 is the key legal framework in terms of Corporate Governance in India. Several landmark changes have begun in the arena of corporate governance with the commencement of this Act. Prominent changes could be noted in the provisions relating to the composition of the board of directors that mandated the appointment of at least one resident director, and the nominee directors have been ceased to be treated as independent directors.[3] The Act mandated the listed and specified classes of public companies to appoint independent directors and women directors in their Board of Directors. The Act, for the first time, codified the duties of the directors. Moreover, the Act mandated the constitution of the following committees to effectuate better administration and operability of the companies towards retaining the framework of good governance. The committees are as follows:

  1. Audit Committee
  2. Nomination and Remuneration Committee
  3. Corporate Social Responsibility Committee
  4. Stakeholders Relationship Committee.

Securities and Exchange Board of India (SEBI)

SEBI is a regulatory authority responsible for monitoring and regulating the corporate governance of listed companies by virtue of Clause 49, which has been incorporated in the listing agreement of stock exchanges with companies. SEBI works to ensure the protection of the investors, and it is compulsory for the listed companies to abide by the provisions of Clause 49.[4]

Standard Listing Agreement of Stock Exchanges

Companies have their shares listed in stock exchanges and are popularly known as the ‘listed companies’. Clause 49 is a firm step towards strengthening the corporate governance in India among the listed companies. Clause 49 mandated the constitution of the following procedures that aimed for fair and good governance among the listed companies.

i) The Composition of Board of Directors:

Clause 49 stated that the Board of Directors should comprise a definite number of independent directors. At least one-third of the Board shall be comprised of independent directors wherein the Chairman of the Board is a non-executive director. However, an independent director shall not be an executive director or any relative of a promoter.[5]

ii) The Audit Committee:

The constitution of the Audit Committee shall be comprised of at least 3 directors as members, and two-third of such shall be the independent directors.[6]

iii) Mandatory Disclosure of Financial Information:

The system of periodical disclosure of the financial and commercial information relating to the specified transactions and the details of the remuneration of the directors is to facilitate and ensure transparency in regulating the administration of the corporations.[7]

iv) The CEO/ CFO Certification:

The certification is mandatory to ensure that the financial statements have been duly reviewed and the same are in compliance with the laws and regulations and therefore are responsible for accepting the internal control system of the company.

v) The Report and Compliance:

It is a separate section in the annual report which states that the company rules and standards are in compliance with Corporate Governance. The compliance officer or the CEO signs the quarterly compliance report to the stock exchange. Moreover, the company shall disclose in the annual reports the compliance with the non-mandatory requirements.

Institute of Chartered Accountants of India (ICAI)

ICAI of India is India’s second-largest accounting body, which is responsible for issuing guidelines and standards, thereby directing the pathway of disclosing the financial data. It is to be stated in such reference that Section 129 of The Companies Act, 2013 states that the financial statement of a company shall reflect the true state of its affairs and shall comply with the standards of accounting as has been set up under Section 133 of The Companies Act, 2013. Further, the components stated in the financial statement shall comply with the standard of accounting.

Institute of Company Secretaries of India (ICSI)

ICSI is a premier national secretarial body responsible for issuing the secretarial standards primarily in terms of “Board of Directors Meetings” and “General meetings.” In such a reference, Section 118(10) of The Companies Act, 2013 states that other than one person company, every company shall abide by the secretarial standards issued by the ICSI in regard to the general meetings and board meetings.

Necessity of Corporate Governance In India

1) Shareholders in a corporation possess different opinions and attitudes towards corporate affairs. However, a sound and effective corporate governance stressing the shareholder’s interest could bind the shareholders in a single tune.

2) Effective corporate governance could guide a company in a situation where the large corporate investors influence the internal decision-making of the company, thereby posing the biggest challenge for the company.

3) A plethora of corporate scams in contemporary times has immensely affected the confidence of a large number of investors. Therefore, effective corporate governance could help in reverting the public trust over the corporate sector.

4) Good corporate governance could do away with the takeovers of the corporate entities, which affects the right of the stakeholders in a company, thereby helping the company in meeting several social expectations.

5) In the era of globalization, several Indian companies are listed with the international stock exchange, which mandates the requirement of effective corporate governance.

6) An effective code of corporate conduct is much needed to regulate the management of Indian Corporates, which gets primarily affected consequent to an abundant flow discharge of international capital in the Indian Companies.

Conclusion

The primary regulatory authority, The Ministry of Corporate Affairs (MCA), is responsible for promoting a transparent, accountable and efficient form of corporate governance. The MCA, in collaboration with National Foundation for Corporate Governance (NFCG), ICAI and ICSI, has set up a platform where stress is laid on issues relating to good governance, therefore to spread the awareness of good governance among the corporate leaders, policymakers, law enforcing authorities and other non-governmental organizations and to foster the sense of voluntary compliance and effective participation of the stakeholder. Therefore, it is to create a practical regulatory framework comprised of ethics and best practices which is immensely indispensable to strike a remarkable difference in the Indian corporate sector by uplifting the standard of corporate governance and progress towards the steps of growth and stability. Therefore, the actions of the regulatory bodies must take into account the dynamicity of the corporate sector, which shall be in tune with the economic trends that encourage the protection of investors and the interests of the stakeholders.[8]

A close nexus lies between risk mitigation, governance and compliance. Therefore, if the components of good governance as discussed in the earlier paragraphs prevails in a company having sound and effective principles, and the functionality of such company ensures due compliance with the statutory laws and regulations, the company shall be ever ready to face the uncertainties and other political, economic and technological turmoils with its effective risk mitigation mechanisms. Therefore, such practices, in turn, will gain better shareholders satisfaction and reliance. Henceforth, good corporate governance enhances the valuation of a company and helps in maximizing the shareholders’ interests.

A single corporate scam holds enough capability to wipe out the goodwill and the long earned value of a company. Therefore, effective internal control is necessary to cater for the sense of good corporate governance.[9] Inherent good governance is necessary to gain the trust of the shareholders. Moreover, industrial competitiveness, utilization of company resources, service and product innovation primarily gets affected by corporate governance. Enhanced corporate performances come with good governance that yields better financial results. Restructuring events such as mergers and acquisitions largely get impacted due to corporate governance. Mergers and Acquisitions, besides being a determinant of good and bad deals, also affects the interest of the stakeholders. The stakeholder better accepts a merger and acquisition by a company possessing good corporate governance in the market.

However, it is pertinent to mention that mergers and acquisitions hold immense power to bring about an effective positive change in good corporate governance in an organization. However, the leading companies nowadays choose monetary gain over corporate governance, thereby negating the latter. Corporate governance’s value gets elevated when the commercial market gets into tough times rather than in smooth durations. Albeit, corporate governance in India shall consistently hold a specific value. Thereafter, the approach of formulating rules and policies for good governance shall be construed with the intention of striking a balance between extreme rigidity and excessive flexibility with consideration to the interest of the stakeholders.

In India, corporate governance mandates the companies to audit their operations and provide the shareholders with a more trustable outlook as their actions have moral and legal implications. The much effective rules and regulations subsequent to the Companies Act 2013 are well balanced and equally innovative. These norms have catered for the economic growth of Indian Companies in accordance with international standards. Participatory actions of the shareholders in the decision-making process of the companies and adoption of a plethora of safeguards considering the interest of the shareholders and the society reflects a transparent and much compelling picture of good governance. Corporate Governance caters for a culture of much required transparency in the corporates. Therefore, embracing effective corporate governance could drastically elevate the economic standard of a country’s corporate sector.[10]

[1] Aggarwal P (2013) Impact of sustainability performance of company on its financial performance: a study of listed Indian companies.

[2] Arora A, Bodhanwala S (2018) Relationship between corporate governance index and firm performance: Indian evidence. Glob Bus Rev 19(3):675–689.

[3] Aggarwal, R., & Ghosh, A. (2015). Director’s remuneration and correlation on firm’s performance. International Journal of Law and Management, 57(5), 373–399.

[4] Akbar, M., & Khan, A. (2008). Corporate governance and the role of institutional investors in India corporate governance and the role of institutional investors in India. Journal of Asia-Pacific Business, 7(2), 37–41.

[5] Almaskati, N., Bird, R., & Lu, Y. (2020). Corporate governance, institutions, markets, and social factors. Research in International Business and Finance, 51(2020101089), 1–20.

[6] Ashfaq, K., & Rui, Z. (2019). The effect of board & audit committee effectiveness on internal control disclosure under different regulatory environments in South Asia. Journal of Financial Reporting and Accounting, 17(2), 170–200.

[7] Al‐Mudhaki, J., & Joshi, P. L. (2004). The role and functions of audit committees in the Indian corporate governance: Empirical findings. International Journal of Auditing, 8(1), 33–47.

[8]Arora, A., & Sharma, C. (2016). Corporate governance and firm performance in developing countries : Evidence from India. Corporate Governance, 16(2), 420–436.

[9] Bachmann, S., & Pereira, V. (2014). Corporate human rights responsibility and multinationality in emerging markets – A legal perspective for corporate governance and responsibility. International Journal of Business Governance and Ethics, 9(1), 52–67.

[10] Black, B. S., & Khanna, V. S. (2007). Can corporate governance reforms increase firm market values? Event study evidence from India. Journal of Empirical Legal Studies, 4(4), 749–796.

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Amrapali Mukherjee

I have completed my Masters in Commercial and Corporate Law from the Queen Mary University of London with upper merit and a distinction in the dissertation, currently, I am working as a Legal Advisor for a partnership firm at Kolkata.


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