Governance · Law · Public Policy

Corporate Governance in India: Challenges and Responsibilities

When the Indian economy was liberalized in the 1990s, it created greater opportunities for private and foreign investment within the country. In the background of an expanding economy and an increasing level of domestic and foreign players, a need for regulation of economic activities was required. In this context, corporate governance reforms were seen to be as essential and mandatory requisites. The term ‘Corporate Governance’ refers to a system that ensures the regulation of companies in India, for the benefit of its stakeholders, and aims in bringing about transparency and accountability in its performance. The element of transparency is usually with respect to information shared by the companies to its stakeholders. Accountability, on the other hand, ensures the precision of audits performed by such companies. A situation of dilemma may arise whereby the interests of the owner-managers and the stakeholders are at conflict with each other or the basic norms of professional ethics are not followed. In this light, good corporate governance aims at creating a board of directors who do not jeopardize the interests of their shareholders in the name of increasing their assets. At all times in dealing with the various affairs of the company, ethical principles such as fairness, trust and confidence need to be strictly adhered to.

India’s largest business association, the ‘Confederation of Indian Industry’ (CII) came up with a corporate governance code in the year 1998 for listed companies in the country. According to this code, “Indian companies, banks and financial authorities can no longer afford to ignore better corporate practices. As India gets integrated in the world market, Indian as well as international investors will demand greater disclosure, more transparent explanation for major decisions and better shareholder value”.[1] Thus, with the increasing degree of integration of the Indian corporate sector with the global market, came about the need for higher accountability. However, this beneficial code was only adopted by a handful of companies and did not create a transformation with respect to corporate practices. With time, large corporate firms and industry groups in India lobbied for legislative changes that could bring forth a cumulative improvement in practices of investment. In 1999, Security and Exchange Board of India (SEBI) appointed the ‘Birla Committee on Corporate Governance’, which emphasized on two tenets in its report. First, was to improve the structure of board of directors. Second, was to introduce corporate practices that would result in greater disclosure of information to stakeholders, so as to ensure the sustenance of their interest in the companies. For the latter, they even suggested the inclusion of a Management Discussion and Analyst section as a part of the annual reports of companies. This report was implemented in February 2000, the year when ‘Clause 49’ also came into existence. Thus, after a decade of unprecedented economic activity, SEBI introduced corporate governance reforms within listed companies via ‘Clause 49’ of the Listing Agreement of Stock Exchanges. Some of the important requirements as per Clause 49 are ensuring the independence of the Board of Directors, specifying the constitution of the audit committees, periodical disclosure of financial matters and making an annual status report with regard to compliance with corporate governance norms. In 2005, the Irani Committee was constituted with the objective of proposing amendments to the Companies Act 1956 (before the Companies Act 2013 came into picture), the supreme authority governing legal behavior of companies across the country, listed or otherwise. Such a framework was hailed by many as balancing international commercial practices with the unique needs of the Indian economy.

The Satyam scandal of 2009 resulted in drastically changing the corporate game for many. The scandal broadly operated in a two-fold manner. For one, there was the illusory Matyas transaction, an acquisition that was suggested in order to manipulate the balance sheet of the company. Secondly, the then managing director of Satyam, Ramalinga Raju, confessed to modifying the financial statements of the company and committing fraud upon his shareholders. Thus, the amendments in the Companies Bill of 2009 sought to rectify the existing loopholes within the existing framework of corporate governance. One of its provisions was to have an independent director acting as the head of the audit committee, thereby leaving no room whatsoever for bias towards the managers or the shareholders.

One of the most popular corporate scams of India was the Saradha Chit Fund scam of 2013, which lured millions of investors and promised them abnormally high returns. The arrest of three leaders from Trinamool Congress by the Central Bureau of Investigation displays the intricate level of political involvement in the said scandal. Such ‘Ponzi Schemes’, which are fraudulent investment operations whereby the operators pay the investors with money that has been invested by the new investors instead of profit, are a common avenue to commit corporate fraud nowadays. Despite the strict regulations brought on paper by the MCA and the SEBI, such illegal transactions pollute the atmosphere of investment in reality. The issue is not whether it should be made more cumbersome for companies to carry out their day-to-day processes. The challenge at hand is to ensure a systematic and efficient regulation of the same. For example, the recently proposed budget for the year 2015 includes a cut in corporate tax and has been hailed as creating a beneficial environment for the corporate sector. Thus, in this sense, the economic development of the country cannot be sacrificed in the name of protecting the interests of the public and the shareholders. The shareholders need to play a more active role in the management of the affairs of the company. Not only should they be aware of the financial transactions but also about the profit and the losses that the company may incur. Apart from the creation of a substantive framework by means of implementation of committee reports or legislative amendments, the procedural implementation of such provisions need to be better emphasized for keeping a check on the abuse of power within the corporate sector.

REFERENCES

  1. https://www.conference-board.org/retrievefile.cfm?filename=DN-020-101.pdf&type=subsite
  2. http://business.gov.in/corporate_governance/prerequisites_constituents.php

[1] Desirable Corporate Governance, Confederation of Indian Industry, 1998.

About the Author

Geetanjali KamatGeetanjali R Kamat is currently pursuing her B.A LLB (Hons.) from National Law Institute University, Bhopal. Her hobbies include blogging, creative writing and sketching. She is passionate about writing research articles and papers on national and international legal issues that promote debate and discussion. Her other areas of interest lie in Constitutional Law and Criminal Law.

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