Authored by- Aryan Rawal
What is Corporate Governance?
The system of governance that deals with the methodology of governing a corporate entity are known as corporate governance. It comprises Rules, Regulations[1], and Bylaws by which a corporate firm is governed, managed, run, and controlled. It works on the principle of balance of interests, balancing the interest of the company, stakeholders, customers, suppliers, financiers, government, and shareholders on one hand and the community at large on the other hand.
Why is Corporate Governance needed?
Corporate Governance is required due to the changing ownership structure. Due to the widespread of investors present and corporate scams or scandals happening there is a greater expectation from the corporate sector which mandates the need for corporate governance, also because of the hostile takeovers, a huge increase in top management compensation, globalization, deregulation, and capital market integration the need of corporate governance has increased.[2]
Development of Corporate Governance as a system in India
The development of Corporate Governance in India can be studied under two broad timelines
- Pre- Liberalization Era
- Post- Liberalization Era
Pre-Liberalization Era
During that time, the corporate governance practices were based upon the Gandhian Principles of Trusteeship and directives from the Indian Constitution. One of the landmarks rises from such a system of corporate governance included the emergence of JRD Tata and TATA Groups.
Post Liberalization Era
The Era of Liberalization gave vast changes to the working of the principles of Corporate Governance. The most important development that facilitated the working of corporate governance, by protecting the rights of the minority investors, during this era was the establishment of the Security and Exchange Board of India (1992).
The next landmark development in the area came after the Satyam Scam of 2007, after which came a series of regulations for Auditors, Directors, Independent Directors, Promoters, and Regulators.[3]
Indian Legislations governing the system of Corporate Governance
The current laws and provisions directly or indirectly dealing with the concept and working of Corporate Governance may be provided as follows:
The SEBI Act, 1992: The Act establishes SEBI as an autonomous and independent body regulating the capital market. SEBI, by the authority conferred by this Act, has provided certain guidelines for the regulation of corporate governance and firms. For the companies whose shares are listed on the stock exchange, SEBI has provided for Standard Listing Agreement for Stock Exchange.
Apart from the guidelines of SEBI, there lies Accounting Standards issued by the Institute of Chartered Accountants of India, which is again an autonomous body. The guidelines provide for the disclosure of financial information. In addition, the Secretariat standards issued by the Institute of Company Secretaries in India, again an autonomous body, facilitate the process.
The Companies Act, 2013: The major overhaul in the area of Corporate Governance, done by the new act is permitting the maximum limit of the number of shareholders in a private limited company to rise from 50 to 200. Other important provisions and concepts include Section 135 of the Act, FastTrack Merger, NCLT, Etc.
Important Committees formed for facilitating Corporate Governance in India
Rahul Bajaj Committee (1995): The Committee was set up by CII, it came up with a voluntary code called “Desirable Corporate Governance” in 1998.
Kumar Mangalam Birla Committee (2000): This committee was set up by SEBI and covered issues such as protection of investor’s interests, transparency enhancement, building international standards for the disclosure of information. The SEBI, in consonance with the recommendation of the committee, enacted Clause 49.
Naresh Chandra Committee Report: It exclusively covered the relationship between the auditor and the company.
- Narayan Murthy Committee (2003): It was also set up by SEBI to review the ongoing standards and working of Corporate Governance Practices back then.
Uday Kotak Panel: This was also selected by SEBI in the light of Tata and Infosys episodes with the purpose to enhance Corporate Governance in India.
Key Recommendations of The Uday Kotak Panel
- There should be at least 6 onboard Directors in a listed company.
- At least 1 independent director should be a woman.
- All the Directors should attend at least half of the Board Meetings every financial year. In case of failure, they would require the shareholder’s consent to continue as the director.
- The maximum age limit for being a non-executive director should be 75 years and the companies should make the relevant skills of the director public.
- A non-executive director should be the chairperson of a listed company to maintain non-prejudiced
- An independent director cannot hold the post for more than 8 listed companies and the managing director can act as the independent director only for three listed companies.
- There should be 5 meetings in a year.
- Every board meeting must require the presence of the Independent Director.
- The number of independent directors on a board should be increased from 33% to 50%.
- In case of the resignation of an independent director, detailed reasons must be furnished.
- Audit committees must be appointed in every company.
- SEBI should have clear authority against the auditors to the security board.
- For government companies, the board, and not the nodal ministry should have the power to decide upon the number of independent directors.
Challenges faced by the Indian system of Corporate Governance
- The friends and the family members of the promoters to the company are generally appointed as the board members without paying heed to their credentials.
- The identity of the Founder and the company is often merged, without realizing that the company is a separate legal entity, having nothing to do with the founder.
- Women directors appointed to the board are generally from the family members of the founders, which negates the whole purpose of their appointment.
- The appointment of Independent Directors is always questionable as it is generally, never the case that the independent director goes against the company to protect the rights of minority shareholders. E.g., Tata Case.
- An independent director gets easily removed by the board of directors or the promoters.
- In this era of digitalization, there lies extreme unawareness about the issues of data protection amidst the directors and the shareholders.
- The approach towards CSR by the board lies to be meager and insensitive.
- There is the continued prevalence of the internal conflict of interests. E.g., ICICI Bank Conflict.
Prominent examples showcasing the failure of Corporate Governance in India
Harshad Mehta Case
Satyam Case
Tata Case
PNB Fraud
ICICI Bank conflict
Infosys case
What can be done the way ahead?
The following steps and approaches may have opted for the promotion of good corporate governance in the country:
- There should be a paradigm shift of focus from independent directors to limiting the powers of the promoters.
- Women from different backgrounds should be encouraged to be the directors rather than taking women from the family to that stop.
- SEBI, ICAI, and ICSI should be provided with more autonomy and power to deal with corporate failures. There should not be periodic interference by the courts as seen in the Sahara Case.
- There should be more interest and vigor towards maintaining and enhancing CSR practices.[4]
- Adequate monetary and logistic resources should be used to create awareness and facilitate the process of data protection.
- A robust risk mitigation mechanism should be developed to avoid fiascos like Kingfisher.
Footnotes:
[1] James Chen, What Corporate Governance Means for the Bottom Line, Investopedia (2021), https://www.investopedia.com/terms/c/corporategovernance.asp (last visited Jun 14, 2021).
[2]Corporate Governance: Purpose, Examples, Structures And Benefits: e-CSR, Youmatter (2020), https://youmatter.world/en/definition/corporate-governance-definition-purpose-and-benefits/ (last visited Jun 14, 2021).
[3] Jean Zhang, What is corporate governance and why is it important?Accru (2019), https://www.accru.com/2019/06/what-is-corporate-governance/ (last visited Jun 14, 2021).
[4]Principles of Corporate GovernanceThe Harvard Law School Forum on Corporate Governance (2016), https://corpgov.law.harvard.edu/2016/09/08/principles-of-corporate-governance/ (last visited Jun 14, 2021).