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Evolution of Corporate Governance in India

Institute of Company Secretaries of India defines Corporate Governance as, Corporate Governance is the application of best management practices, compliances of law in true letter and spirit and adherence to ethical norms & standards for effective management and distribution of wealth and discharge of social responsibility for sustainable development of all stakeholders.

Principles of Corporate Governance

Corporate governance has evolved around certain important principles, which form the base of rules and guidelines set for the corporate:

1. Transparency

Disclosure of the information about corporate in timely and accurate manner is mandatory. It helps stakeholder to know their rights and day to day exertion of the corporate.

2. Accountability/Responsibility

It ensures the liability of the person who takes decision for the interest of the others. Hence persons like moderators, managers, chairmen, directors and other officers should be held accountable to other stakeholders of the corporate.

3. Independence

Independence of top manager is important for smooth functioning of the corporate. Board of Director must work without the hinderance of any interested party in the corporate.

In order to give due elevation to the principles of Corporate Governance:

  • Confederation of Indian Industry (CII)
  • Associated Chambers of Commerce and Industry (ASSOCHAM)
  • Securities and Exchange Board of India (SEBI)

They constituted committees to recommend initiatives in Corporate Governance. The report of various committees helped a lot to streamline the corporates in India.

Committees on Corporate Governance

1. Cadbury England 1992
2. King Committee South of Africa 1994 & 2002
3. CII India 1996
4. Hampel England 1998
5. Kumar Mangalam Birla India 2000
6. SEBI India 2000
7. Narayana Murty India 2003

CADBURY COMMITTEE 1992

Recommendations

  • The board of management of all listed companies should comply with the code of best practice set out by the committee.
  • As numerous companies as possible should aim at meeting its requirements.
  • The listed companies reporting at the ending on or after 31 December, 1992, should make a statement about their compliance with the law in the report and accounts and give certain reasons for any areas of non-compliance.
  • Companies should publish their statement of compliance only after they have been the subject of review by the audit committee.

Code of Best Practice

The recommendations largely reflected perceived best practice at the time. It included:

  • Separating the roles of CEO and chairman, If the two roles are combined in one person, it represents a considerable concentration of power. It was thus recommended that there should be clearly accepted division of responsibilities at the head of a company, which will ensure a balance of power and authority, such that no one individual has unfettered powers of decision. (arbitrariness).
  • Having a minimum of three non-executive directors on the board.
  • The formulation of audit committees.
  • A more active role be taken by institutional investors in the development of good practice in corporate governance.

According to the committee report, Corporate Governance is the system by which companies are directed and controlled. It encompasses the entire mechanics of the functioning of a company and attempts to put in place checks and balances between the shareholders, employees, directors, auditors and the management.

The Cadbury committee report in a way kickstarted the corporate governance debate in India as well.

In 1998 the Desirable Code of Corporate Governance was published. It was a voluntary code/norms published by the CII, and the first formal regulatory framework for listed companies specifically for corporate governance, established by the SEBI. It was made in February 2000, following the recommendations of the Kumarmangalam Birla Committee Report. It was with this that the corporate governance initiatives in India began.

SEBI Committee / Narayana Murthy Committee 2003

In order to meliorate the condition of investor protection the Securities and Exchange Board of India (“SEBI”) constituted a committee under the chairmanship of Narayan Murthy.

The Committee’s recommendations in the final report were selected based on parameters including their relative significance, fairness, and accountability, and transparency, ease of implementation, verifiability and enforceability.

Gave two kinds of recommendations, mandatory and non-mandatory:

  • Mandatory Recommendations
    The important mandatory recommendations focus on strengthening the responsibilities of audit committees; improving the quality of financial disclosures, requiring corporate executive boards to assess and disclose business pitfalls in the annual reports of companies; introducing responsibilities on boards to adopt formal codes of conduct; clearly defining the position of nominee directors; and stock holder approval and improved disclosures relating to any kind of compensation paid to non-executive directors.
  • Non-Mandatory Recommendations
    These include moving to a governance where corporate financial statements are not qualified; constituting a system of training of board members; and the evaluation of performance of board members.

Naresh Chandra Committee 2002

While SEBI was making efforts to introduce corporate governance norms among Indian corporates, the Department of Company Affairs took another initiative in corporate governance. The Committee was appointed as a high-level committee to examine various corporate governance issues by the Department of Company Affairs on 21 August, 2002.

Mandatory recommendation:

Management of operation should provide a clear description in plain English of each material contingent liability and its pitfalls, which should be accompanied by the auditor’s clearly worded comments on the management’s view.

This is important because investors and shareholders should obtain a clear view of a company’s contingent arrears as these may be significant risk factors that could adversely affect the company’s future financial condition and results of operations.

CEO / CFO Certification: Mandatory recommendation:

For all listed companies, there should be a certification by the CEO (either the Executive Chairman or the Managing Director) and the CFO (whole-time Finance Director or other person discharging this function) which should state that, to the best of their knowledge and belief:

  • They have reviewed the balance sheet and profit and loss account and all its schedules and notes on accounts, as well as the cash flow statements and the Directors’ Report.
  • These statements do not contain any material untrue statement or omit any material fact nor do they contain statements that might be misleading.
  • These statements together present a true and fair view of the company, and are in compliance with the existing accounting norms and / or applicable laws/ regulations

Corporate Governance Ratings:

It was suggested that corporate governance practices followed by companies should be rated using standing models. It was also suggested that companies should be rated based on parameters of wealth generation, maintenance and sharing, as well as on corporate governance.

Corporate Governance Framework in India

The Indian framework on Corporate Governance has been extensively in sync with the international norms. Astronomically, it can be described in the following:

1. The Companies Acts 2013 [1]

It has vittles concerning Independent Directors, Board Constitution, General meetings, Board meetings, Board processes, Related Party Transactions, Audit Committees, etc.

2. SEBI (Securities and Exchange Board of India) Guidelines

It ensures the protection of investors and have mandated the companies to adhere to the best practices mentioned in the guidelines.

3. Accounting Standards issued by the ICAI (Institute of Chartered Accountants of India)
Wherein the ICAI is an independent body and issues accounting norms. The disclosure of financial statements is also made mandatory by the ICAI backed by “the Companies Act 2013, Sec. 129”.[2]

4. Standard Listing Agreement of Stock Exchanges

It applies to the companies whose shares are listed on various stock exchanges.

5. Secretarial Standards Issued by the ICSI (Institute of Company Secretaries of India)

It issues norms on ‘Meetings of the board of Directors’, General Meetings’, etc. The companies Act 2013 empowers this independent body to provide norms which each and every company is required to adhere to so that they are not penalized under the Companies Act itself.

Reference:
1.The Companies Act 2013, Ministry of Corporate Affairs https://www.mca.gov.in/Ministry/pdf/CompaniesAct2013.pdf (Visited on June 25th, 08:54 PM).
2.Financial Statements, The Companies Act 2013, The Companies Act Integrated Ready Reckoner (CAIRR) https://ca2013.com/129-financial-statement/ (Visited on June 25th, 09:36 PM).

About the Author:-

This Article has been written by Aryan Sinha, 4th Year law (BBA+LLB(H) student at Galgotias University, Greater Noida.

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