{"id":169990,"date":"2022-02-21T19:00:23","date_gmt":"2022-02-21T13:30:23","guid":{"rendered":"https:\/\/blog.forumias.com\/?p=169990"},"modified":"2022-02-21T18:33:02","modified_gmt":"2022-02-21T13:03:02","slug":"corporate-governance-in-india-explained-pointwise","status":"publish","type":"post","link":"https:\/\/forumias.com\/blog\/corporate-governance-in-india-explained-pointwise\/","title":{"rendered":"Corporate Governance in India – Explained, pointwise"},"content":{"rendered":"\n\n\n\n
For\u00a07PM Editorial<\/strong>\u00a0Archives click\u00a0HERE <\/a>\u2192<\/strong><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n
Introduction<\/h5>\n

Corporate Governance involves a set of comprehensive rules to deal with the affairs of a corporation. A lapse in corporate governance is detrimental to the interests of all stakeholders including the investors, the shareholders, the general public and the Government. A lapse in Corporate Governance was observed recently in the conduct of Chitra Ramkrishna, former Nanaging Director of National Stock Exchange (NSE) from 2013-2016. The agencies scrutinizing the affairs at India\u2019s largest stock exchange include the Ministry of Corporate Affairs, Income Tax Department and the Securities and Exchange Board of India (SEBI). They have now widened the probe against Chitra Ramkrishna to include her frequent visits to tax havens and governance lapses during her tenure as the managing director of the NSE.\u00a0<\/span><\/p>\n

\r\n\tForumIAS is now in Hyderabad<\/span>. Click here<\/b><\/a> to know more<\/span>\r\n<\/div>\n
What is the meaning of Corporate Governance?<\/h5>\n

Sir Adrian Cadbury had defined (in the Cadbury Committee Report) Corporate Governance as the system by which companies are directed and controlled. <\/span>It is the system of rules, practices and processes by which a firm is governed.\u00a0<\/span><\/p>\n

It essentially involves balancing the interests of a company\u2019s many stakeholders<\/strong>, such as shareholders, management, customers, suppliers, financiers, government and the community. Corporate Governance ensures that the business of a firm is conducted in an ethical manner<\/strong> in compliance with the laws, rules and regulations and the industry best practices.<\/span><\/p>\n

A company\u2019s corporate governance is important to investors since it shows a company’s direction and business integrity. Good corporate governance helps companies build trust with investors and the community.<\/span><\/p>\n

The Cadbury Committee had defined the roles to ensure proper Governance. Boards of Directors are responsible for the governance of their companies. The shareholders\u2019 role in governance is to appoint the Directors and the auditors. The responsibilities of the Directors include (a)<\/strong> Setting the company\u2019s strategic aims; (b)<\/strong> Providing the leadership to put them into effect; (c)<\/strong> Supervising the management of the business; (d)<\/strong> Reporting to shareholders on their stewardship.<\/p>\n

What is the structure of Corporate Governance in India?<\/span><\/h5>\n

The Companies Acts 2013:<\/b> The Act provides a formal structure for corporate governance by providing disclosures, reporting, transparency and compliance norms. It has provisions concerning Independent Directors, Board Constitution, General meetings, Board meetings, Board processes, Related Party Transactions, Audit Committees, etc.<\/span><\/p>\n

Other Legislations<\/b>: The Competition Act 2002; the Foreign Exchange Management Act,1999; the Industries (Development and Regulation) Act, 1951; and other legislations also have a bearing on the corporate governance principles.<\/span><\/p>\n

SEBI (Securities and Exchange Board of India) Guidelines: <\/b>SEBI ensures the protection of investors and has mandated the companies to adhere to the best practices mentioned in various guidelines released and amended from time to time.<\/span><\/p>\n

Accounting Standards issued by the ICAI:<\/b> Institute of Chartered Accountants of India is an autonomous body that issues accounting standards. The disclosure of financial statements is also made mandatory by the ICAI backed by the Companies Act 2013.<\/span><\/p>\n

Standard Listing Agreement of Stock Exchanges<\/b>: They apply to the companies whose shares are listed on various stock exchanges. The Agreement contains elaborate provisions related to audits, disclosure of information, publication of Annual Statements etc.<\/span><\/p>\n

Secretarial Standards Issued by the ICSI<\/b>: Institute of Company Secretaries of India issues standards on \u2018Meetings of the board of Directors\u2019, General Meetings\u2019, etc. <\/span><\/p>\n

What is the recent controversy related to the NSE?<\/h5>\n

The events at India\u2019s largest stock exchange surfaced in February 2022 with the ongoing SEBI probe.\u00a0<\/span><\/p>\n

The probe found that Ms. Ramkrishna shared the exchange\u2019s <\/span>confidential information with an unidentified spiritual guru during her tenure as MD and CEO of NSE <\/b>from April 2013 to December 2016. She<\/span> hired a little-known public sector executive, Anand Subramanian, first as an adviser and then promoted him as chief operating officer (COO) at the guru\u2019s behest.<\/span><\/p>\n

Ms. Ramkrishna also allegedly <\/span>relied on the guru\u2019s advice on crucial decisions about running the exchange <\/b>and went on holidays to tax havens such as Seychelles.<\/span><\/p>\n

This isn\u2019t the first allegation of corporate governance lapses that have played out at NSE.\u00a0<\/span><\/p>\n

There were allegations that it provided unfair access to some high-frequency traders<\/strong> by allowing them to host co-location servers at the exchange premises to speed up algorithmic trading. This preferential access gave them unfair advantage over other traders by allowing them execute their orders ahead of others and thus making profits.<\/span><\/p>\n

What is the need of robust Corporate Governance?<\/span><\/h5>\n

Curbing the prevalence of Scams<\/b>: India has witnessed many scams like Satyam Scam, Harshad Mehta Scam etc. that erodes faith of people in the markets and the corporate sector. Such scams can be mitigated by appropriate governance norms.<\/span><\/p>\n

Protection of Minority Shareholders<\/b>: Without robust corporate governance provisions like mandatory appointment of independent directors, it is almost impossible to protect the interests of small investors.<\/span><\/p>\n

Too big to fail:<\/b> Big corporations and industrial conglomerates possess such a big influence on the Indian Economy that their failure would produce massive adverse impact on millions of Indians.<\/span><\/p>\n

Sustenance of Competition<\/b>: New players are able to enter and compete with the existing big giants only when there are robust laws. They enable their entry and forbid big players from abusing their dominant position.<\/span><\/p>\n

Globalization<\/b>:\u00a0 The world is getting globalized and there is a rapid flow of investments. <\/span>In such a scenario a robust corporate governance structure is a sine qua non for attracting foreign capital to India.<\/span><\/p>\n

Which committees were set-up to improve Corporate Governance in India?<\/span><\/h5>\n

Rahul Bajaj committee (1995):<\/b> The Confederation of Indian Industries (CII) had set up a task force under Rahul Bajaj. The CII came up with a voluntary code called ‘Desirable Corporate Governance<\/strong>‘ in 1998.<\/span><\/p>\n

Kumar Mangalam Birla committee report (2000):<\/b> It focused on issues such as protection of investor interest<\/strong>, promotion of transparency<\/strong>, building international standards in terms of disclosure of information<\/strong>. The SEBI implemented the recommendations of the Birla committee through the enactment of Clause 49 of the Listing Agreement<\/strong>.<\/span><\/p>\n

Naresh Chandra Committee Report (2002):<\/b> It extensively covered the Corporate Audits and the Auditor-Company relationship.<\/span><\/p>\n

Narayana Murthy Committee (2003<\/b>)<\/strong>: The committee was set up by SEBI to review the performance of corporate governance in India and make appropriate recommendations.<\/span><\/p>\n

Uday Kotak Committee (2017)<\/b><\/a>: In light of Tata and Infosys corporate governance episodes, SEBI appointed a Committee under Uday Kotak to enhance corporate governance in India. It recommended that a listed company should have at least six directors on its board. Further, at least one independent director should be a woman<\/strong>. The report contained recommendations related to disclosures pertaining to Related Party Transactions<\/strong>, ensuring independence in spirit of Independent Directors<\/strong> etc.<\/span><\/p>\n

What are the challenges in ensuring effective Corporate Governance?<\/span><\/h5>\n

Dereliction of Duty:<\/b> In the ongoing NSE case, the independent directors (called Public Interest Directors or PIDs in case of exchanges) were severely lacking in their duties.\u00a0<\/span><\/p>\n

They failed to take any action against Ms. Ramkrishna when they knew about the lapses in the hiring of\u00a0 Mr. Subramanian. Further, they were aware that key information pertaining to the exchange was being shared with an unknown third party<\/strong>.<\/span><\/p>\n

Lack of Monitoring<\/b>: This enables the companies to disobey the established norms e.g., the re-designation of Mr. Subramanium as COO was not tabled to the then NRC (Nomination and Remuneration Committee).\u00a0<\/span><\/p>\n

Under the provisions of the Companies Act, 2013 Mr. Subramanium would have been a KMP (Key Managerial Personnel), and his re-designation needed approval from NRC.<\/span><\/p>\n

Inadequate punishments<\/b>: The quantum of punishments given to violators are often inadequate and <\/span>fails to create effective deterrence <\/b>for future discourse.\u00a0<\/span><\/p>\n

In the ongoing NSE case, a penalty of INR2 crore on NSE and a restriction on launching any new products for the next six months has been imposed. This is not adequate as per the opinion of various financial experts.<\/span><\/p>\n

Challenge posed by Tax Havens<\/b>: They provide a foreign corporation with a low taxation regime and often keeps their financial secrets intact which hinders corporate governance in the domestic nation.<\/span><\/p>\n

The income tax department is probing a possible fund diversion to three foreign jurisdictions in case of NSE scam. The tax department has found frequent visits to Singapore, Mauritius and Seychelles by Ms. Ramkrishna.<\/span><\/p>\n

Concentration of powers<\/b>: Ownership of corporations in India, is still held in a few hands. A single shareholder or family controls a large group of companies. This leads to several governance related challenges and has often led to poor decision making that harms company\u2019s profits. <\/span><\/p>\n

SEBI had made a rule to separate the roles of the Chairperson and the CEO\/MD (i.e., the same person can’t hold both roles) based on Uday Kotak Panel recommendations, but has made this rule ‘voluntary’ now. The Rule kicks in from April 01, 2022.<\/span><\/p>\n

What steps can be undertaken to further improve Corporate Governance?<\/h5>\n

First<\/b>, the <\/span>forensic auditing ecosystem <\/b>in the country should be augmented so as to effectively investigate and prosecute violators. <\/span>A forensic audit examines and evaluates a firm’s or individual’s financial records to derive evidence used in a court of law or legal proceeding.<\/span><\/p>\n

Second<\/b>, the <\/span>double taxation avoidance treaties should be regularly updated<\/b>. Any loophole that enables a nation to be used merely as a tax haven should be rectified with robust data sharing based on mutual consent.<\/span><\/p>\n

Third<\/b>, for good corporate governance the <\/span>focus should be shifted from independent directors to limiting the power of promoters<\/b>.<\/span><\/p>\n

Fourth<\/b>, the board must invest a reasonable amount of time and money in order to ensure the goal of <\/span>data protection<\/b> is achieved.<\/span><\/p>\n

Fifth<\/b>, <\/span>strengthening the power of SEBI, ICAI, and ICSI<\/b> is desirable to handle corporate failure in order to reduce the need for court intervention. For example, in the Sahara case, the court had to intervene to bring justice.<\/span><\/p>\n

The Government needs to take a plethora of steps in order to improve the status of corporate governance in India and regain the lost trust due to various scams. Every step should be aimed towards the vision of making corporate governance – inclusive, efficient, consensus oriented and based on rule of law.<\/span><\/p>\n","protected":false},"excerpt":{"rendered":"

For\u00a07PM Editorial\u00a0Archives click\u00a0HERE \u2192 Introduction Corporate Governance involves a set of comprehensive rules to deal with the affairs of a corporation. A lapse in corporate governance is detrimental to the interests of all stakeholders including the investors, the shareholders, the general public and the Government. A lapse in Corporate Governance was observed recently in the… Continue reading Corporate Governance in India – Explained, pointwise<\/span><\/a><\/p>\n","protected":false},"author":10322,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"jetpack_post_was_ever_published":false,"footnotes":""},"categories":[130,9],"tags":[],"class_list":["post-169990","post","type-post","status-publish","format-standard","hentry","category-7-pm","category-public","entry"],"jetpack_featured_media_url":"","views":{"total":16,"cached_at":"","cached_date":1698471954},"jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/169990","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/users\/10322"}],"replies":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/comments?post=169990"}],"version-history":[{"count":0,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/169990\/revisions"}],"wp:attachment":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/media?parent=169990"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/categories?post=169990"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/tags?post=169990"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}