By Arushi Sralech
Corporate governance is a means of self-governance by companies whereby a company increases its ‘firm value’ by higher and qualitatively superior disclosure as well as more responsible action and includes reporting requirements, confidentiality norms, code of conduct and specific rules for the conduct of its directors and employees and other insiders. It is a means by which the company signals to the market that effective self-regulation is in place and that investors are safe to invest in their securities. Organizations can simply direct their executives past what is denied by the law. Further, companies are mandated to disclose accurate information on matters like performance and financial position within time by way of various filings with the regulatory authorities of India.
It is pertinent to mention that broadly the applicable corporate governance norms are most stringent in cases of listed companies but are comparatively relaxed for public unlisted companies and are most relaxed for private companies.
In India, accountability, transparency and equality of treatment for all stakeholders are recognised as the key principles of corporate governance. Generally, the shareholders of a company, the board of directors and the management are identified as the three constituents of corporate governance. The Indian statutory framework has, by and large, been in consonance with the international best practices of corporate governance. Broadly speaking, the corporate governance mechanism for companies in India is enumerated in the following enactments/ guidelines/ listing agreement:
In pursuance of the general principles of corporate governance in India, the board owes a fiduciary duty to the company and is expected to act in good faith and exercise reasonable skill and care to promote the best interests of the shareholders and other stakeholders.
The legal and regulatory framework of corporate governance in India is based on various principles like primacy of interest of the company and its shareholders, fiduciary duties of directors, fairness and transparency.
The Companies Act, 2013. The Government of India notified Companies Act, 2013, which replaced the erstwhile Companies Act, 1956. The New Act has greater emphasis on corporate governance through the board and board processes, like composition of Board of Directors, admitting Woman Director, admitting Independent Director, Directors Training and Evaluation, constitution of Audit Committee, Internal Audit, Risk Management Committee, Subsidiaries Companies Management, Compliance Centre, etc. All such provisions of new Company Law are instrumental in providing a good Corporate Governance structure.
Securities and Exchange Board of India (SEBI) Guidelines. The regulatory framework relating to corporate governance is governed by a host of statutes and accordingly there are multiple authorities who are in charge of enforcing the corporate governance norms.
Under the Companies Act, the Registrar of Companies and the SFIO, a multi-disciplinary organisation under the Ministry of Corporate Affairs (for detecting and prosecuting white-collar crimes/frauds, now incorporated under the Companies Act) are the authorities responsible for enforcing corporate governance norms in India. In case of listed companies, in addition to the above, SEBI and the stock exchanges on which the company is listed, are the first level of regulatory compliance mechanism for enforcing the corporate governance norms.
SEBI is a regulatory authority having jurisdiction over listed companies and which issues regulations, rules and guidelines to companies to ensure protection of investors. It was established with the main purpose of curbing the malpractices and protecting the interest of its investors. Its main objective is to regulate the activities of Stock Exchange and at the same time ensuring the healthy development in the financial market. In order to ensure good corporate governance SEBI came up with detailed Corporate Governance Norms.
The Companies Act imposes both civil and criminal liabilities on directors and officers in default depending on specific violations. It covers a wider ambit of persons than just officers in default for the purposes of violation of various provisions of the Act. The Companies Act 2013 also imposes criminal liability in terms of imprisonment and monetary penalties on any person who is found guilty of any conduct that amounts to fraud under the Act.
Apart from the Companies Act, every listed company needs to comply with the provisions of the SEBI Act and the Securities Contracts (Regulation) Act, 1956 and the regulations framed thereunder. Non-compliance of the same may lead to delisting, monetary penalties and depending upon the gravity of the offence, even imprisonment in certain cases.
SEBI had amended the Listing Agreement with effect from October 1, 2014 to align it with Companies Act, 2013. It is applicable to companies whose shares are listed on the stock exchanges. Clause 49 of the Listing Agreement can be said to be a bold initiative towards strengthening corporate governance amongst the listed companies. This Clause intends to put a check over the activities of companies in order to save the interest of the shareholders. The revised clause forbids the independent directors from being eligible for any kind of stock option. Whistle blower policy is also added in the revised clause whereby the directors and employees can report any unethical behaviour, any fraud or if there is violation of Code of Conduct of the company.
Now as per the amended clause, listed companies are required to provide the option of e-voting to its shareholders on all proposed or passed at general meetings.
Development of rules and norms is an important step but only the first step to ensure good corporate governance. Journey is long but serious efforts from Indian government and SEBI will always remain instrumental in dealing with Corporate Governance in India.