Introduction
Corporate governance in India is the structure of rules and powers that are used in the management of corporate organizations. Investor interest and regulatory scrutiny continue to escalate, so companies can no longer overlook governance frameworks.
Dos and Don’ts of Corporate Governance:
Over the years, there have been many corporate scandals that emphasized the need for good governance practices. This article discusses the fundamentals of corporate governance in India, the roles played by various regulatory bodies, industry-specific governance frameworks, and the future of governance in India. Whether you are a corporate lawyer, investor, or business professional, these concepts are fundamental for building trust and driving sustainable growth.
Corporate governance is a framework that outlines the relationship between a company’s management, its board, its shareholders, and other stakeholders. It enables businesses to function honestly, openly, and responsibly, creating a culture of trust.
Corporate Governance in India: Definition, Scope & Importance
Definition and Scope
Corporate governance essentially means the set of laws, processes, and practices that govern how a company runs and makes decisions. It helps to ensure that a company’s management acts in the best interests of its shareholders and other stakeholders. This framework of governance serves both to dictate how power is managed within the corporation and to articulate the ethical conduct and legal “rules of the road” upon which the corporation will operate.
Evolution of Corporate Governance in India
The journey of corporate governance in India began during the early 1990s when the country was undergoing economic liberalization. Before liberalization, Indian businesses were predominantly family-owned or state-owned; their governance practices tended to be informal and sometimes opaque. But globalization also meant closer scrutiny from foreign investors, which demanded higher governance standards.
Important events in the history of corporate governance include:
- 1992: SEBI is established to regulate and develop a market for securities in India.
- 2000: SEBI introduced clause 49, requiring governance norms for listed companies.
- 2013: Implementation of the Companies Act, 2013, which brought in holistic governance reform.
- 2015: SEBI replaces Clause 49 with very rigorous governance norms under its LODR Regulations.
Importance of Corporate Governance
There are many reasons why good corporate governance is important:
- Investor Trust: Transparent governance practices help to attract investors and build trust among the investors.
- Risk Management: Good governance helps to identify and manage risks, which reduces the risk of fraud.
- Long-Term Character: Companies that have robust governance frameworks are generally more resilient and sustainable.
- Governance Norms: By conforming to governance standards, organizations can ensure compliance with laws and regulations, thereby mitigating legal risks.
Key Principles of Corporate Governance in India (Accountability, Transparency)
A set of core principles underlies corporate governance, serving as a moral compass for companies:
Accountability
Accountability mandates that the leaders of a corporation to whom the power of the corporation has been entrusted are answerable to those who have entrusted it to them. Certainly, the board of directors and management should be accountable to shareholders, making decisions in the best interest of the company.
Transparency
Transparency in financial reporting refers to the accurate and honest disclosure of financial and operational information. Stakeholders can only make informed decisions when companies give them timely and accurate information.
For example, transparency can mean:
- Audited financial statements published regularly.
- Key business risk disclosures.
- Reporting such events from time to time or on a timely basis.
Fairness
Fairness demands that all stakeholders, minority shareholders, employees, and customers are treated equally. To maintain trust, companies need to avoid favoritism and conflicts of interest.
Responsibility
Responsibility is the ethical obligation of a business towards society and the environment. Businesses are meant to behave socially responsibly and make positive donations to the environment in which they work.
SEBI Guidelines on Corporate Governance
The Securities and Exchange Board of India (SEBI) also contributes to the formation & enforcement of corporate governance norms for listed companies.
SEBI guidelines for better governance
Over the years, SEBI has released myriad guidelines to enhance corporate governance standards.
Key Provisions of SEBI’s LODR Regulations
- Board Composition: Listed firms are required to maintain an overall balance between executive and non-executive directors on the board with at least one-third of the board consisting of independent directors.
- Independent Directors: A company should not have any material or monetary relationship with the independent directors so that the independent directors can make decisions without any bias.
- Audit Committees: Every listed company is required to have an audit committee to supervise financial reporting as well as internal controls.
- Stakeholder Relationship Committee: Companies should set up a committee to look into complaints from shareholders and other stakeholders.
- Disclosure requirements: Timely and accurate Radical Disclosure in terms of material events, financial results, shareholding patterns, etc.
Such provisions ensure that the companies function transparently and are also answerable to their investors.
Corporate Governance Reforms in India: Post-2013 Changes
The passage of the Companies Act, 2013 was a historic milestone in the evolution of corporate governance in India. This wide-ranging piece of legislation brought in new concepts and enhanced existing corporate governance standards.
Other Changes Under the Companies Act, 2013
- Mandatory Appointment of Independent Directors: Mandatory appointment of independent directors by companies above certain thresholds, ensuring neutral oversight.
- Corporate Social Responsibility (CSR): Section 135 of the Act requires companies meeting certain financial conditions to spend a minimum percentage of their profits on social responsibility activities. It means that businesses take part in societal well-being.
- Responsibilities of Directors: The Act prescribes certain obligations that directors owe to the company and other stakeholders, thereby reiterating their fiduciary responsibilities.
- Board Committees: Companies are mandated not only to form key committees, including the audit committee, nomination, and remuneration committee but they are also mandated to have a CSR committee in place.
Have well strengthened the governance framework for accountability and transparency.
Board of Directors: Roles and Responsibilities
At the core of corporate governance is the board of directors. It is responsible for determining a company’s strategic direction and making sure management acts in shareholders’ best interests.
Key Responsibilities of the Board of Directors
- Long-term Planning: The board establishes long-term goals and ensures that the management has a clear plan to achieve them.
- Oversight: The board reviews management performance and makes sure that operations reflect the goals of the company.
- Risk Management: The role of the board is to identify areas of potential risk and ensure appropriate risk management measures are in place.
- Legal Compliance: Ensure the company adheres to laws and regulations.
Board Committees
To improve its governance, the board delegates certain responsibilities to committees. These include:
- Audit Committee: Oversees financial reporting and determines the integrity of financial statements.
- Nomination and Remuneration Committee: Reviews board appointments and executive rewards.
- CSR Committee: This committee ensures that the company fulfills all its CSR obligations.
While there are no guarantees in governance, a functioning board helping to in still trust and accountability is a foundation for success.
Role of Regulatory Bodies in Ensuring Corporate Governance
Regulatory Bodies Regulating Corporate Governance in India:
- Securities and Exchange Board of India (SEBI): Regulates listed companies & enforces corporate governance norms through its LODR regulations.
- Ministry of Corporate Affairs (MCA): Oversees Companies Act, 2013 and its compliance.
- Reserve Bank of India (RBI): It supervises the governance of banks and financial organizations.
- Institute of Chartered Accountants of India (ICAI): Setting accounting and auditing standards to ensure financial transparency.
These agencies are instrumental in ensuring companies meet high standards of corporate governance.
Case Studies: Corporate Governance System
Looking into real-world examples of corporate governance practices offers an important lesson:
Good Practices for Corporate Governance
- Infosys: Known for transparent governance practices and focus on shareholder communication. This is an important aspect of business as Infosys has always upheld high standards of ethical conduct and independence of the board.
- The company’s whistleblower policy asks employees to come forward when they see unethical practices and assures them that they won’t face retaliation for doing so.
- The board of Infosys has an overwhelming number of independent directors to retain ‘independent’ oversight.
- Tata Group: The Tata Group (Tata Sons), which has a rich legacy of ethical business practices, has kept its corporate governance frameworks strong throughout diverse business holdings.
- The group’s governance framework highlights the responsibility of independent directors and transparency in reporting.
- The Tata Sons holding company has a system of governance that finds a balance between various stakeholders.
The Corporate Governance Practices That Failed Us
- Satyam Computer Services: In 2009, the Satyam scandal uncovered significant failures in governance, including fraudulent financial reporting and lack of board oversight. This case had huge reforms for corporate governance in India.
- They did this with no oversight because they didn’t bother to set up an audit committee.
- This scandal underscored the importance of more robust, independent oversight and transparent financial reporting.
- Crisis of IL&FS: The Infrastructure Leasing & Financial Services (IL&FS) crisis brought to the fore issues of corporate governance failure & mismanagement leading to a financial meltdown of massive proportions.
- Failures of governance included poor risk management and lack of accountability.
- The crisis highlighted the need for regulatory scrutiny and board accountability.
Analyzing these cases can provide companies with valuable insights and help prevent repeating mistakes from the past.
FAQ: Common Questions About Corporate Governance in India
1. What is corporate governance?
Corporate governance essentially means the set of laws, processes, and practices that govern how a company is operated and makes decisions. It helps ensure that a company’s management acts in the best interests of its shareholders and other stakeholders. This framework of governance serves both to dictate how power is managed within the corporation and to articulate the ethical conduct and legal “rules of the road” upon which the corporation will operate.
2. What is corporate governance in auditing?
In auditing, corporate governance is the practice of making sure a company’s financial reporting process is not compromised. Auditors (internal and external) ensure the accuracy of financial statements, the effectiveness of risk management practices, and compliance with regulatory and legal requirements.
3. What Is Corporate Governance in Business Ethics?
Corporate governance in business ethics applies ethical principles and values to organizational decision-making. It helps companies to act responsibly, and fairly, and by-laws and regulations — and builds trust and goodwill among stakeholders.
4. Who is responsible for corporate governance?
The Board of Directors ‘induction must be responsible for corporate governance. They set policies, guide management, and ensure that the company complies with legal, ethical, and regulatory expectations. Important factors include executive directors, independent directors, audit committees, and regulatory bodies (SEBI, MCA, etc).
5. Is corporate governance a legal requirement?
Yes, corporate governance is mandated by law in India as regards listed companies and certain other entities, under the Companies Act, 2013 as well as the SEBI (LODR) Regulations, 2015. Failure to comply can lead to fines, loss of reputation, and loss of investor confidence.
6. What are the 4 P’s of corporate governance?
The 4 P’s of Corporate Governance are:
- People: Right people in place, including board and management
- Process: Implementing effective processes for decision-making compliance
- Performance: Monitoring the company’s performance against the objectives and maintaining ethical conduct
- Purpose: Establishing the business’s mission, vision, and values and aligning governance practices accordingly
Conclusion
Corporate governance in India is a dynamic process in a country like India, with business needs growing dynamically. This goes beyond mere compliance, as strong governance not only positions a company within legal bounds but also enhances its reputation and attractiveness to investors, ultimately fuelling sustainable growth. By understanding the core principles, following the regulatory frameworks, and adopting best practices, organizations would be able to enhance a culture of trust and transparency.
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