Corporate Governance in India

INTRODUCTION

Corporate Governance (CG) is a framework of rules, regulations, practices and processes which are used to run a Company. A Company's board of directors is the primary force for influencing CG. CG covers the areas of environmental awareness, ethical behaviour, corporate strategy, compensation and risk management. The Indian Government introduced several regulations to provide for CG in India. CG can be found in Companies Act, 2013 and some SEBI regulations for the purpose of increasing the transparency and accountability in a company. 

CORPORATE GOVERNANCE UNDER INDIAN LAWS

The following are the laws which govern corporate governance in India:-

1. ICSI's (Institute of Company Secretaries of India) Secretarial Standards

ICSI was created by Company Secretaries Act, 1980 for the purpose of regulating the profession of Company Secretaries in India. The following standards state as follows:-

a. Secretarial Standard 1 prescribes principles for conducting meeting of Board of Directors which are equally applicable to the committees' meetings as well. This standard is applicable to all companies except one person company.

b. Secretarial Standard 2 talks about a set of principles for the conduct of general meetings. This standard also talks about the procedure for conducting e-voting and postal ballot. This standard also does not apply to one person company and is applicable to meetings of creditors and debenture holders. Any meeting creditors or debenture-holders of a company under Company Law Board, National Company Law Tribunal or any other authority will be governed by this standard.

2. Securities and Exchange Board of India (SEBI)

SEBI prescribes the following clauses which ensure corporate governance:-

a. Companies are required to get shareholders' approval for related party transactions and have at least one woman director in the Board and also a provision for whistle blowing.

b. Clause 35B of the Listing Agreement states that listed companies will provide e-voting to its shareholders on all general meetings. Those who do not have access to e-voting are required to have access to voting in postal ballot. 

c. Clause 49 forbids independent directors from being eligible for stock option in the Company. Whistle blower policy is also mentioned in this clause wherein directors and employees can report unethical behavior or fraud or violation of any regulations of the Company.

3. Standard Listing Agreement of Stock Exchanges

The Listing Agreement is a document executed between companies and the Stock Exchange when companies are listed on the stock exchange. This agreement is entered into for the purpose of ensuring that the companies are incorporating corporate governance failing which such companies will face disciplinary actions, suspension and delisting of securities.

4. The Companies Act, 2013

The following provisions provide for corporate governance structure in a company:-

a. Section 134- This section mandatorily states that a report should be attached to every Financial Statement by Board of Directors which will contain all the details which include the statement containing director's responsibility.

b. Section 177-  This section states that Board of Directors of every listed company or any other class of committee for constituting an Audit Committee. 

c. Section 184- This section states that the Director will disclose his interest in any company and such disclosure will be made in the first meeting of the board and if there is any change then the first meeting will be held after such change.

5. Accounting Standards issued by Institute of Chartered Accountants of India (ICAI)

ICAI is a statutory body established by Chartered Accountants Act, 1949. It issues accounting standards for disclosure of financial information as per the following:-

a. Section 129 of Companies Act, 2013 states that financial statements will comply with accounting standards as per Section 133 of the Companies Act, 2013. 

b. Section 133 of the Companies Act, 2013 states that Central Government may prescribe accounting standards as per ICAI. Some of the accounting standards issued by ICAI are as follows:-

• Disclosure of accounting policies while preparing Financial Statement.
• Determination of values wherein inventories are mentioned in a financial statement.
• Standard prescribing accounting treatment of cost and revenue associated with construction contracts.
• Standard to ensure the appropriate measurement are applied to provisions.
• Cash flow statements for assessing an entity's ability to generate cash.

CHALLENGES IN CORPORATE GOVERNANCE IN INDIA

Despite so many laws related to corporate governance in India, there are some challenges which have to be faced in implementing those laws:-

a. Compensation-  Many companies have to offer a huge compensation to attract talent to their team subject to the stakeholder's scrutiny. 

b. Risk Management- The board of directors only oversees the company's affairs, implementation of risk and management policy. As per law, Indian companies should include a statement in its report to shareholders mentioning the risk management policy of the company.

c. Conflict of Interest- This situation is arrested when a person/entity promotes his interest at the cost of the Company. Identification and removal of conflict of interest is not always easy when the law requires that conflict of interest be avoided.

d.  Disclosure and Transparency- All material issues should be disclosed in a timely manner to the Company's stakeholders. Sometimes Companies do not make complete disclosures about some important affairs of the Company. Transparency is very important element for promoting Corporate Governance.

e. Separation between ownership and management- Ownership and management are two different functions and should not reside in same type of individuals. Lack of separation between ownership and management will lead to sub-standard functioning of the management.

f. Composition of Board- While the composition of board has been given in law and regulations, the Board should make a balance with the right executives and non-executives and diverse set of skills, experience, expertise, gender, age and geography. The Board should be composed based on the requirements of the Company.

g. Independence of the Board- For the Board to function properly, it should be independent. If the Board is not independent then it would end up rubberstamping management proposals. True independence is a state of mind. An independent Board is necessary to hold management accountable.

h. Board Committees- The Board's work should be done by committees since the Board does not have ample time to delve into individual things. It is important for the Board level committees to be composed for the purpose of meeting with the frequency required for fulfillment of objectives.

CONCLUSION

Corporate Governance is dependent on total transparency, integrity and responsibility of the administration and the Board of Directors. Corporate Governance is a means not an end, Corporate Excellence should be the end. Corporate Governance helps making a good brand image for the Company. Corporate Governance should be embraced because it has much to offer to the Public Sector. Good Corporate Governance, Good Government and Good Business go hand in hand.