Corporate governance is the collection of policies and procedures that guide and regulate how businesses are run. Corporate governance has evolved as a vital topic of concern for stakeholders, regulators, and corporations in India. Effective corporate governance guarantees openness, accountability, and equity in a business's interactions with shareholders, employees, and the general public. Recent corporate scandals and the growing call for responsibility in the business sector have increased the importance of corporate governance in India. Corporate governance standards in India are majorly governed by the Companies Act of 2013 and regulatory frameworks issued by organisations such as the Securities and Exchange Board of India (SEBI).
Are you interested in pursuing a career in Law? The Legal School in collaboration with IndusLaw has created unique programs for a Certification in Mergers & Acquisitions, Private Equity and Venture Capital Laws & Certification in Mergers & Acquisitions for fresh law graduates as well as professionals looking to advance in their careers! Enquire now for details!
Corporate Governance's Historical Development in India
Over time, corporate governance in India has witnessed significant development. The idea became more significant in the 1990s as India chose to liberalize its economy. It resulted in more foreign investment. This further led to the requirement for a strong governance framework. The following significant legislative turning points have played a vital role in the evolution of corporate governance in India:
1. Companies Act 1956:
The Companies Act of 1956 established the foundational legal framework for corporate governance in India. However, it lacked explicit provisions addressing modern governance challenges. To bridge this gap, additional regulations were introduced, such as the Securities and Exchange Board of India (SEBI) guidelines and the Listing Agreement requirements, which mandated disclosures, board composition standards, and audit committee formations.
These supplementary measures aimed to enhance transparency, accountability, and investor protection, thereby strengthening the corporate governance landscape beyond the Act's original scope.
2. Birla Committee of Kumar Mangalam (1999):
The 1999 Kumar Mangalam Birla Committee made pivotal recommendations to enhance corporate governance in India. Key proposals included:
Board Composition: Ensuring a balanced mix of executive and non-executive directors, with a requisite number of independent board of directors.
Audit Committees: Establishing audit committees comprising independent directors to oversee financial reporting and disclosures.
Disclosure Practices: Mandating transparent and timely disclosures of financial and non-financial information to stakeholders.
Shareholder Rights: Strengthening mechanisms to protect shareholder interests and facilitate their active participation.
3. Narayan Murthy Committee (2003):
The Narayana Murthy Committee (2003) introduced significant reforms to enhance corporate governance in India. Key recommendations included:
Strengthening Audit Committees: Mandating that audit committees comprise independent directors with financial expertise to oversee financial reporting and disclosures.
Enhancing Financial Disclosures: Requiring detailed reporting of related party transactions and the utilization of funds from public issues to improve transparency.
Implementing a Whistleblower Policy: Encouraging companies to establish mechanisms for employees to report unethical practices without fear of retaliation.
Defining Independent Directors' Roles: Clarifying the responsibilities and qualifications of independent directors to ensure their effectiveness in corporate governance.
4. Companies Act 2013:
The Companies Act, 2013 marked a pivotal shift in India's corporate governance landscape by introducing several key provisions:
Board Composition: Mandated a balanced mix of executive and non-executive directors, including the appointment of at least one woman director for certain classes of companies.
Independent Directors: Required the inclusion of independent directors to ensure unbiased decision-making and enhance board objectivity.
Audit Committees: Established audit committees comprising a majority of independent directors to oversee financial reporting and disclosures.
5.SEBI’s Listing Obligations and Disclosure Requirements (LODR) Regulations 2015:
The Securities and Exchange Board of India (SEBI) introduced the Listing Obligations and Disclosure Requirements (LODR) Regulations, 2015 to consolidate and streamline corporate governance norms for listed entities. These regulations aim to enhance transparency, accountability, and investor protection by establishing a comprehensive framework for disclosure and compliance. Key provisions include:
Board Composition and Functioning: Mandating a balanced mix of executive and non-executive directors, including independent directors, to ensure effective oversight.
Audit Committees: Requiring the formation of audit committees with specified roles and responsibilities to oversee financial reporting and disclosures.
Disclosure Requirements: Outlining detailed obligations for timely and accurate disclosure of material events and financial information to stakeholders.
Know about the Functions of Corporate Governance in India!
Principles of Corporate Governance
The fundamental principles of corporate governance are based on developing a set of regulations that guarantee moral behavior, openness, and responsibility in businesses. These ideas are included in a number of Indian legal frameworks, including the SEBI regulations and the Companies Act of 2013. The key principles of corporate governance are:
1. Transparency:
It is crucial to make sure that shareholders and the general public are well informed about the company's operations in a timely, accurate, and comprehensive manner. To encourage openness in listed firms, SEBI's LODR laws in India require specific disclosures.
2. Accountability:
Directors and executives are answerable to the company's shareholders and other stakeholders in accordance with corporate governance. The board of directors is required by Indian law to act in the company's and its shareholders' best interests.
3. Fairness:
All stakeholders, including minority shareholders, should be treated equitably. SEBI’s regulations ensure that minority shareholders are protected, especially in cases of mergers, acquisitions, and related-party transactions.
Know the Recent Mergers & Acquisitions In India
4. Responsibility:
Corporate governance also focuses on the importance of directors and senior management in taking responsibility for the company’s actions and ensuring compliance with laws and regulations. In India, independent directors play a critical role in ensuring that management adheres to the law.
Regulatory Authorities for Corporate Governance
In India, corporate governance is supervised by a number of regulatory authorities. They make sure that the laws governing businesses are followed. Among these bodies are:
The Securities and Exchange Board of India (SEBI): It is the main regulatory agency in charge of India's listed corporations. Regulations relating to corporate governance, such as compulsory disclosures and board composition, might be issued by it.
Ministry of Corporate Affairs (MCA): The MCA is responsible for carrying out the Companies Act 2013. It makes sure businesses follow the rules regarding corporate governance.
NCLT: National Company Law Tribunal (NCLT) is a quasi-judicial organization that addresses conflicts related to company law. The major areas are corporate governance issues, including shareholder rights, mergers, and acquisitions.
Important Provisions in Indian Laws
In India, the Companies Act of 2013 and SEBI's rules are the key provisions that regulate corporate governance. Important clauses include:
1. Section 149 of Companies Act 2013 (Board Composition):
In order to ensure board independence and accountability, the Section 149 of Companies Act 2013 requires that specific kinds of corporations must have a predetermined number of independent directors.
2. Section 177 of the Companies Act of 2013 (Audit Committees):
Under the Section 177 of the Companies Act of 2013, businesses are required to set up audit committees. They are in charge of managing internal controls, financial reporting, and audits.
3. Section 166 of the Companies Act of 2013 (Director's Duties):
Section 166 of the Companies Act of 2013 states the fiduciary duties of directors. It includes acting diligently, carefully, and in the company's best interests.
4. Whistleblower Protection Act 2014
Securities and Exchange Board of India's (SEBI) Listing Obligations and Disclosure Requirements (LODR) Regulations require businesses to have a whistleblower policy. In order to safeguard workers who expose unethical activity.
Corporate Governance Issues in India
Even with strong legal frameworks, establishing efficient corporate governance presents a number of challenges for Indian businesses. Among these challenges are:
1. Issues relating to Compliance:
Due to a lack of funding and experience, many Indian businesses, particularly smaller ones, find it difficult to follow the strict corporate governance guidelines.
2. Independence of Board:
In Indian corporate governance, ensuring the independence of board members—especially independent directors—has been a persistent problem. The effectiveness of independent supervision is diminished. The reason for it is because the promoters continue to control a large number of boards.
3. Openness:
Despite legal requirements for comprehensive disclosures, some Indian corporations struggle to provide disclosures of insufficient quality, which undervalues investor confidence and openness.
4. Corporate Scandals:
There are many famous scandals that have damaged corporate governance in India.
Learn What are the Important Pillars of Corporate Governance in India
Recent Incidents Reflecting Principles of Corporate Governance
Improving accountability and transparency are the main goals of recent advancements in Indian corporate governance. For example, SEBI has strengthened the role of independent directors in listed businesses. It imposed more strict standards for related-party transactions.
The Securities and Exchange Board of India has barred Anil Ambani for five years from the securities market for serious lapses in corporate governance at Reliance Home Finance Limited. Along with the ban, it has imposed a penalty of Rs 25 crore on him. This action comes after an investigation where it was revealed that the funds that were to be used in supporting RHFL were advanced as loans to firms, which were financially insecure entities close to Ambani. Apart from violating some forms of corporate governance regulations, the management had a net effect of incurring great losses to the business entities. The shareholders got a hit as the equity was affected by the falls recorded by the company, putting it at a hit from more than 900,000 shareholders.
Satyam scandal: The Indian government changed regulatory frameworks, including the Companies Act 2013, after the Satyam scandal in 2009, which highlighted serious shortcomings in corporate governance.
Tata-Mistry Case: The conflict between Tata Sons and its former chairman, Cyrus Mistry, brought to light issues with governance with regard to the protection of minority shareholders and the role of independent directors.
Get detailed insights on How Corporate Lawyers Played a Major Role in the Zomato-Blinkit Merger
Conclusion
Over the past 20 years, corporate governance in India has experienced tremendous change. This is a result of regulatory actions taken by agencies such as SEBI and legislative reforms. Long-term business performance depends on following corporate governance concepts like responsibility, openness, and fairness. Even if there are still issues, recent legislative actions and regulatory initiatives have reinforced the governance structure. It increases stakeholder and investor trust.
FAQs about Principles of Corporate Governance
Q1. What are India's primary corporate governance laws?
The Companies Act of 2013 and SEBI's Listing Obligations and Disclosure Requirements (LODR) Regulations are the primary laws governing corporate governance in India.
Q2. How does SEBI contribute to corporate governance?
SEBI regulates listed firms' corporate governance procedures, guaranteeing openness, equitable disclosures, and safeguarding the interests of investors.
Q3. How has the Companies Act 2013 influenced corporate governance?
The Companies Act 2013 introduced several provisions for improving corporate governance. It includes compulsory board committees, independent directors, and enhanced accountability measures for directors.
Q4. Why is board independence important in corporate governance?
Board independence ensures that decisions are made in the best interest of all stakeholders. With the help of reducing the risk of conflicts of interest and promoting accountability.
