Introduction Of Corporate Governance

Corporate governance is nothing more than how a corporation is administered or

controlled. Corporate governance takes into consideration company stakeholders as
governmental participants, the principal participants being shareholders, company
management, and the board of directors.

Adjunct participants may include employees and suppliers, partners, customers,

governmental and professional organization regulators, and the community in which
the corporation has a presence.

Because there are so many interested parties, it’s inefficient to allow them to control
the company directly. Instead, the corporation operates under a system of regulations
that allow stakeholders to have a voice in the corporation commensurate with their
stake, yet allow the corporation to continue operating in an efficient manner.

Corporate governance also takes into account audit procedures in order to monitor
outcomes and how closely they adhere to goals and to motivate the organization as a
whole to work toward corporate goals.

By using corporate governance procedures wisely and sharing results, a corporation

can motivate all stakeholders to work toward the corporation’s goals by
demonstrating the benefits, to stakeholders, of the corporation’s success.

Corporate governance may include:

 Control and direction processes

 Regulatory compliance
 Active ownership and investment in a company

Primarily, though, corporate governance refers to the framework of all rules and
relationships by which a corporation must abide, including internal processes as well
as governmental regulations and the demands of stakeholders.

It also takes into account systems and processes, which deals with the daily working
of the business, reporting requirements, audit information, and long-term goal plans.

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Corporate governance provides a roadmap for a corporation, helping the leaders of a
company make decisions based on the rule of law, benefits to stakeholders, and
practical processes. It allows a company to set realistic goals and methodologies for
attaining those goals.

Corporate governance provides a roadmap for a corporation, helping the leaders of a

company make decisions based on the rule of law, benefits to stakeholders, and
practical processes. It allows a company to set realistic goals and methodologies for
attaining those goals.

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What is Corporate Governance?

Corporate Governance refers to the way a corporation is governed. It is the technique

by which companies are directed and managed. It means carrying the business as per
the stakeholders’ desires. It is actually conducted by the board of Directors and the
concerned committees for the company’s stakeholder’s benefit. It is all about
balancing individual and societal goals, as well as, economic and social goals.

Corporate Governance is the interaction between various participants (shareholders,

board of directors, and company’s management) in shaping corporation’s
performance and the way it is proceeding towards. The relationship between the
owners and the managers in an organization must be healthy and there should be no
conflict between the two. The owners must see that individual’s actual performance is
according to the standard performance. These dimensions of corporate governance
should not be overlooked.

Corporate Governance deals with the manner the providers of finance guarantee
themselves of getting a fair return on their investment. Corporate Governance clearly
distinguishes between the owners and the managers. The managers are the deciding
authority. In modern corporations, the functions/ tasks of owners and managers
should be clearly defined, rather, harmonizing.

Corporate Governance deals with determining ways to take effective strategic

decisions. It gives ultimate authority and complete responsibility to the Board of
Directors. In today’s market- oriented economy, the need for corporate governance
arises. Also, efficiency as well as globalization are significant factors urging corporate
governance. Corporate Governance is essential to develop added value to the
stakeholders.

Corporate Governance ensures transparency which ensures strong and balanced

economic development. This also ensures that the interests of all shareholders
(majority as well as minority shareholders) are safeguarded. It ensures that all
shareholders fully exercise their rights and that the organization fully recognizes their
rights.

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Corporate Governance has a broad scope. It includes both social and institutional
aspects. Corporate Governance encourages a trustworthy, moral, as well as ethical
environment.

Benefits of Corporate Governance

1. Good corporate governance ensures corporate success and economic growth.

2. Strong corporate governance maintains investors’ confidence, as a result of
which, company can raise capital efficiently and effectively.
3. It lowers the capital cost.
4. There is a positive impact on the share price.
5. It provides proper inducement to the owners as well as managers to achieve
objectives that are in interests of the shareholders and the organization.
6. Good corporate governance also minimizes wastages, corruption, risks and
mismanagement.
7. It helps in brand formation and development.
8. It ensures organization in managed in a manner that fits the best interests of
all.

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HISTORY OF CORPORATE GOVERNANCE

Corporate governance concept emerged in India after the second half of 1996 due to
economic liberalization and deregulation of industry and business. With the changing
times, there was also need for greater accountability of companies to their
shareholders and customers. The report of Cadbury Committee on the financial
aspects of corporate Governance in the U.K. has given rise to the debate of Corporate
Governance in India.

Need for corporate governance arises due to separation of management from the
ownership. For a firm success, it needs to concentrate on both economical and social
aspect. It needs to be fair with producers, shareholders, customers etc. It has various
responsibilities towards employees, customers, communities and at last towards
governance and it needs to serve its responsibilities at the best at all aspects.

The “corporate governance concept” dwells in India from the Arthshastra time instead
of CEO at that time there were kings and subjects. Today, corporate and shareholders
replace them but the principles still remain same, unchanged i.e. good governance.

20th century witnessed the glossy of Indian Economy due to liberalization,

globalization, and privatization. Indian economy for the 1st time here was together
with world economy for product, capital and lab our market and which resulted into
world of capitalization, corporate culture, business ethics which was found important
for the existence of corporation in the world market place.

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The Objectives Of Corporate Governance

Transparency in corporate governance is essential for the growth, profitability and

stability of any business. The need for good corporate governance has intensified due
to growing competition amongst businesses in all economic sectors at the national, as
well as international level.

The Indian Companies Act of 2013 introduced some progressive and transparent

processes which benefit  stakeholders, directors as well as the management of
companies. Investment advisory services and proxy firms provide concise information
to the shareholders about these newly introduced processes and regulations, which
aim to improve the corporate governance in India.
Corporate advisory services are offered by advisory firms to efficiently manage the
activities of companies to ensure stability and growth of the business, maintain the
reputation and reliability for customers and clients. The top management that consists
of the board of directors is responsible for governance. They must have effective
control over affairs of the company in the interest of the company and minority
shareholders. Corporate governance ensures strict and efficient application of
management practices along with legal compliance in the continually changing
business scenario in India.

Corporate governance was guided by Clause 49 of the Listing Agreement before
introduction of the Companies Act of 2013. As per the new provision, SEBI has also
approved certain amendments in the Listing Agreement so as to improve the
transparency in transactions of listed companies and giving a bigger say to minority
stakeholders in influencing the decisions of management. These amendments have
become effective from 1st October 2014.

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 A Few New Provision for Directors and Shareholders

 One or more women directors are recommended for certain classes of companies
 Every company in India must have a resident directory
 The maximum permissible directors cannot exceed 15 in a public limited
company. If more directors have to be appointed, it can be done only with approval of
the shareholders after passing a Special Resolution
 The Independent Directors are a newly introduced concept under the Act. A code
of conduct is prescribed and so are other functions and duties
 The Independent directors must attend at least one meeting a year
 Every company must appoint an individual or firm as an auditor. The
responsibility of the Audit committee has increased
 Filing and disclosures with the Registrar of Companies has increased
 Top management recognizes the rights of the shareholders and ensures strong co-
operation between the company and the stakeholders
 Every company has to make accurate disclosure of financial situations,
performance, material matter, ownership and governance

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Corporate Governance Structure

The established Corporate Governance Structure (diagram) of HKEX, comprising the

following parties, provides a comprehensive framework to (i) enhance accountability
to shareholders and other stakeholders, (ii) ensure timely and accurate disclosures of
all material matters, (iii) deal fairly with shareholders and other stakeholder interests,
and (iv) maintain high standards of business ethics and integrity. It is specifically
designed to enable HKEX to discharge its statutory duty of ensuring an orderly,
informed and fair market and of ensuring risks are managed prudently, while pursuing
its business objectives, which helps reinforce Hong Kong’s position as an
international finance center
 Board of Directors – is responsible for providing leadership, either directly or
through its committees, to HKEX and its subsidiaries (Group) in order to deliver
long-term value to shareholders and other stakeholders. It also leads and
supervises the Group’s management to act in the interest of the public as well as
its shareholders, but in case of conflict, the former shall prevail. It establishes
corporate policies, sets strategic direction, ensures that an effective internal
control environment is in place, and oversees the management which is
responsible for day-to-day operations. The Board however recognises that
delegating its functions and authorities to its committees and the management
does not absolve its overall responsibility for the sound governance of HKEX.

 9 Board Committees – assist the Board in focusing on specific matters, fulfil

their roles and responsibilities delegated by the Board, report to the Board on
decisions and actions taken, monitor the management’s performance, and make
any necessary recommendations.
o Audit Committee
o Corporate Social Responsibility Committee
o Executive Committee

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 o Investment Advisory Committee
o Nomination and Governance Committee
o Panel Member Nomination Committee
o Remuneration Committee
o Risk Committee
o Risk Management Committee (statutory)

 Company Secretary – is responsible for facilitating the Board process, as

well as communications among Board members, with our shareholders and the
management, and advising the Board and its committees on all governance and
CSR matters.

 3 Consultative Panels – act as the advisory bodies to the Board and the
management to provide market expertise and advice relating to the Cash Market,
Derivatives Market and clearing business of HKEX respectively.

Management Committee – has delegated authority from the Board for performing
the day-to-day management functions of the business and implementing all
projects and initiatives as approved by the Board.
External auditor and Internal Audit Department – provide assurance on financial
reporting and/or internal controls to ensure accountability and audit quality.

Shareholders – elect their representatives as directors of HKEX (Directors) at

general meetings to oversee the Group’s business.

Other stakeholders – interact with the Group on daily operations. They include
institutional investors, market regulators, government bodies, listed/potential
issuers and market intermediaries, Exchange/Clearing Participants/Members,
Information Vendors and market participants, Mainland exchanges, overseas
exchanges, investing public, media and analysts, non-governmental organisations,
industry associations, professional bodies, market users, suppliers/business
partners and employees.

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The Dimensions of Corporate Governance
The competing ideologies and institutional structures that contest the corporate
governance space are introduced by Bob Tricker (2008), one of the pioneers in this
field.
Historically property rights, managerialist, corporatist, stakeholder and other
conceptions
of the understanding of the corporation, its essential structure and mechanisms, and its
proper role in the economy and society have wielded influence at different times.
Tricker
advances a wide perspective: “The modern enterprise, in reality, is itself loosely
bonded
and involves complex and interacting networks of relationships. It is better perceived
as a
set of dynamic open systems – coalitions of interests between parties…Looking ahead
the
one thing that seems certain is that the existing diversity and complexity of forms of
corporate enterprise will continue and, very probably, increase. Alternative paradigms
of
corporate governance will be needed to improve the effectiveness of governance, to
influence the healthy development of corporate regulation, and to understand the
reality
of the political processes by which companies are governed rather than the structures
and
mechanisms through which governance is exercised.”
As interest in understanding corporate governance has grown, the question of how
this
relates to the institutions and practices of public and global governance has arisen:
while
large corporations are becoming increasingly significant as they operate on a

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multinational basis, public organizations remain influential in many national sectors,
and
the role of global institutions has become more critical both for regulation and
coordination of the world economy. Apreda (2008) provides a unifying view of
governance as a distinctive field of learning and practice identifying interlinked
themes
that arise from corporate, public and global governance, and identifies the core of
governance in all three domains as:
i. a founding constitution
ii. a system of rights and duties;
iii. mechanisms for accountability and transparency;
iv. monitoring and performance measures;
v. stakeholder rights;
vi. good governance standards;
vii. independent gatekeepers.
Returning to specifically corporate governance, Cadbury (2008a) reminds us of the
ethical dimension of corporate values and activity: that firms exist not just for the
profit
of their immediate owners, but to fulfill a wider social responsibility. The boundaries
of
what constitutes corporate governance are greatly extended by Turnbull (2008) from
the
narrow Anglo-American focus on market oriented publicly traded firms. He claims,
“corporate governance includes all types of firms whether or not they are formed
under
civil or common law, owned by the government, institutions or individuals, privately
or
publicly traded.” Agency theory is almost entirely concerned with listed companies
with
unitary boards operating in market systems. However Turnbull illustrates how the
great
majority of companies in most economies are not listed on stock exchanges, have
compound boards representing diverse shareholder and other stakeholder interests,
and

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have an attenuated relationship to the market. Thus the traditional market based
theory of
the firm “becomes less relevant when economic transactions are mediated by cultural
priorities; business related associations, trade, vocational, family, social and political
networks.”

In this context the finance model of the firm in which the central problem of corporate
governance is how to construct rules and incentives to align the behaviour of
managers
with the interests of owners, needs to be supplemented with other models of corporate
control including the stewardship, stakeholder, and political models applying not
simply
financial analysis but a cultural and power analysis among other perspectives. For
example, from a cultural perspective business dealings rather than conducted on the
basis
of purely rational-legal financial considerations, “transactions are conducted on the
basis
of mutual trust and confidence sustained by stable , preferential, particularistic,
mutually
obligated, and legally non-enforceable relationships. They may be kept together either
by
value consensus or resource dependency – that is through ‘culture’ and ‘community’ –
or
through dominant units imposing dependence on others” (Hollingsworth et al 1994:6).
The impressive extent to which principles of robust governance and accountability
have
been diffused around the world and institutionalized in national codes revealed by
Enrione et al (2008), is not matched by confidence that corporate behaviour has
changed
to the same degree (Aguilera and Cuervo-Cazurra 2004).

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The Role of Morals and Ethics in Corporate Governance

“Ethics or simple honesty is the building block upon which our whole society is
based, and business is a part of our society, and it is integral to the practice of being
able to conduct business, that you have a set of honest standards”.   – Kerry Stokes

Corporate governance is an encompassing concept that defines the way a company or

organization is managed and controlled. It prescribes a set of rules which help
companies imbibe and work towards transparency, accountability, honesty and
openness. Good corporate governance provides proper incentives for the board and
management to pursue objectives that best serve the interest of the company and its
shareholders whilst also facilitating effective monitoring. It is now established that the
adoption of good governance best practices largely determines the sustainability of
corporations worldwide.

A review of the different Corporate Governance Codes in Nigeria and codes in other
jurisdictions reveals the respective Codes set out the morally right and acceptable
ways of conducting corporate activities. Within the context of business activities,
morality prescribes proper behavior while ethics is the application of morals in the
conduct of the company’s business. Corporate Governance thus provides a moral and
ethical framework for the governance of companies.

Analyzing the importance of ethical compliance mechanisms, SurendraArjoon, (a

Professor of Business and Professional Ethics at the University of West Indies) made
a distinction between the use of legal compliance and ethical mechanisms as tools for
ensuring good governance. According to Arjoon- when legal mechanisms are
introduced for the purpose of discipline, it can only promote a freedom of indifference
which to the letter of the law may not necessarily inspire or instill excellence.
Conversely, ethical compliance mechanisms promote a freedom for excellence which
corresponds to the spirit of the law. Legal compliance mechanisms may not
necessarily address the real and fundamental issues that inspire ethical behavior.

The range and quantity of business ethical issues in any organization reflect the
interaction of profit maximizing behavior with non-economic concerns or business
ethics. Business ethics is critical to the fabric of any organization and most
organisations today promote their commitment to non-economic values (business
ethics) through clearly defined core values, a Code of Business and Ethical Conduct

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(COBEC) and a Corporate Social Responsibility (CSR) Charter. The Codes of
Corporate Governance in Nigeria all prescribe the adoption of a COBEC and CSR
Charter by the companies.

Typically, a COBEC promotes a culture of ethics and compliance within an

organisation and defines the way and manner in which the company conducts its
business such that its core values are reflected. The World Bank defines Corporate
Social Responsibility as “the commitment of businesses to contribute to sustainable
economic development – working with employees, their families, the local community
and society at large to improve the quality of life, in ways that are both good for
business and good for development”. A CSR Charter is a carefully articulated policy
on how a company seeks to achieve commercial success in ways that promote ethical
values, respect for people, communities and the natural environment. The process
usually involves adopting responsible business practices for the workplace, the
community and the environment.

Organisations are the most significant nucleus of modern economic activity and
though formed for economic purposes, they have a responsibility to ensure that they
pursue and achieve these purposes in an ethical and sustainable manner. This
responsibility requires a moral commitment at a subjective and a collective level.
While it may be argued that determining what is right or wrong is subject to cultural
and individual relativism and that what is considered ethical is a product of an
individual’s moral perspective, the failure or collapse of organisations in recent times
indicate that, irrespective of our relative ideas on the concepts of morality and ethics,
the absence of business ethics in economic activities will prevent companies from
acting or taking decisions that will best serve the interest of all stakeholders.

The Core Principles Of Good Corporate Governance

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 The Cadbury Reportwhich was released in the UK in 1991 outlined that "Corporate
governance is the system by which businesses are directed and controlled." Good
corporate governance is a key factor in underpinning the integrity and efficiency of a
company. Poor corporate governance can weaken a company’s potential, can lead to
financial difficulties and in some cases can cause long-term damage to a company’s
reputation.

A company which applies the core principles of good corporate governance; fairness,
accountability, responsibility and transparency, will usually outperform other
companies and will be able to attract investors, whose support can help to finance
further growth.

This blog will briefly outline the role of each principle.

Fairness

Fairness refers to equal treatment, for example, all shareholders should receive equal
consideration for whatever shareholdings they hold. In the UK this is protected by
the Companies Act 2006 (CA 06).

Accountability

Corporate accountability refers to the obligation and responsibility to give an

explanation or reason for the company’s actions and conduct.

In brief:

 The board should present a balanced and understandable assessment of the

company’s position and prospects;
 The board is responsible for determining the nature and extent of the significant
risks it is willing to take;
 The board should maintain sound risk management and internal control systems;

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 The board should establish formal and transparent arrangements for corporate
reporting and risk management and for maintaining an appropriate relationship with the
company’s auditor, and
 The board should communicate with stakeholders at regular intervals, a fair,
balanced and understandable assessment of how the company is achieving its business
purpose.

Responsibility

The Board of Directors are given authority to act on behalf of the company. They
should therefore accept full responsibility for the powers that it is given and the
authority that it exercises. The Board of Directors are responsible for overseeing the
management of the business, affairs of the company, appointing the chief executive
and monitoring the performance of the company. In doing so, it is required to act in
the best interests of the company.

Accountability goes hand in hand with responsibility. The Board of Directors should
be made accountable to the shareholders for the way in which the company has
carried out its responsibilities.

Transparency

A principle of good governance is that stakeholders should be informed about the

company’s activities, what it plans to do in the future and any risks involved in its
business strategies.

Transparency means openness, a willingness by the company to provide clear

information to shareholders and other stakeholders. For example, transparency refers
to the openness and willingness to disclose financial performance figures which are
truthful and accurate.

Disclosure of material matters concerning the organisation’s performance and

activities should be timely and accurate to ensure that all investors have access to
clear, factual information which accurately reflects the financial, social and

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environmental position of the organisation. Organisations should clarify and make
publicly known the roles and responsibilities of the board and management to provide
shareholders with a level of accountability.

Transparency ensures that stakeholders can have confidence in the decision-making

and management processes of a company.

There are many theories of corporate governance which addressed the challenges of
governance of firms and companies from time to time. The Corporate
Governance is the process of decision making and the process by which decisions are
implemented in large businesses is known as Corporate Governance. There are
various theories which describe the relationship between various stakeholders of the
business while carrying out the activity of the business.

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THEORIES OF CORPORATE GOVERNANCE

We will discuss the following theories of corporate governance:

 Agency Theory
 Stewardship Theory
 Resource Dependency Theory
 Stakeholder Theory
 Transaction Cost Theory
 Political Theory

Agency Theory

Agency theory defines the relationship between the principals (such as shareholders
of company) and agents (such as directors of company). According to this theory, the
principals of the company hire the agents to perform work. The principals delegate the
work of running the business to the directors or managers, who are agents of
shareholders. The shareholders expect the agents to act and make decisions in the best
interest of principal. On the contrary, it is not necessary that agent make decisions in
the best interests of the principals. The agent may be succumbed to self-interest,
opportunistic behavior and fall short of expectations of the principal. The key feature
of agency theory is separation of ownership and control. The theory prescribes that
people or employees are held accountable in their tasks and responsibilities. Rewards
and Punishments can be used to correct the priorities of agents.

Stewardship Theory

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The steward theory states that a steward protects and maximises shareholders wealth
through firm Performance. Stewards are company executives and managers working
for the shareholders, protects and make profits for the shareholders. The stewards are
satisfied and motivated when organizational success is attained. It stresses on the
position of employees or executives to act more autonomously so that the
shareholders’ returns are maximized. The employees take ownership of their jobs and
work at them diligently.

StakeholderTheory

Stakeholder theory incorporated the accountability of management to a broad range of

stakeholders. It states that managers in organizations have a network of relationships
to serve – this includes the suppliers, employees and business partners. The theory
focuses on managerial decision making and interests of all stakeholders have intrinsic
value, and no sets of interests is assumed to dominate the others

Resource Dependency Theory

The Resource Dependency Theory focuses on the role of board directors in providing
access to resources needed by the firm. It states that directors play an important role in
providing or securing essential resources to an organization through their linkages to
the external environment. The provision of resources enhances organizational
functioning, firm’s performance and its survival. The directors bring resources to the
firm, such as information, skills, access to key constituents such as suppliers, buyers,
public policy makers, social groups as well as legitimacy. Directors can be classified

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into four categories of insiders, business experts, support specialists and community
influentials.

Transaction Cost Theory

Transaction cost theory states that a company has number of contracts within the
company itself or with market through which it creates value for the company. There
is cost associated with each contract with external party; such cost is called
transaction cost. If transaction cost of using the market is higher, the company would
undertake that transaction itself.

Political Theory

Political theory brings the approach of developing voting support from shareholders,
rather by purchasing voting power. It highlights the allocation of corporate power,
profits and privileges are determined via the governments’ favor

We hope you liked this article. Here are few useful articles for you to read next:

 Corporate Governance Models: Anglo-American, German

 Corporate Governance and Agency Problem
 Three Levels of Management: Top, Middle and Operational

Corporate Governance Framework In India

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Ever since India's biggest-ever corporate fraud and governance failure unearthed at
Satyam Computer Services Limited, the concerns about good Corporate Governance
have increased phenomenally.

Internationally, there has been a great deal of debate going on for quite some time.
The famous Cadbury Committee defined "Corporate Governance" in its Report
(Financial Aspects of Corporate Governance, published in 1992) as "the system by
which companies are directed and controlled".

The Organisation for Economic Cooperation and Development (OECD), which, in

1999, published its Principles of Corporate Governance gives a very comprehensive
definition of corporate governance, as under:

"a set of relationships between a company's management, its board, its shareholders
and other stakeholders. Corporate governance also provides the structure through
which the objectives of the company are set, and the means of attaining those
objectives and monitoring performance are determined. Good corporate governance
should provide proper incentives for the board and management to pursue objectives
that are in the interests of the company and shareholders, and should facilitate
effective monitoring, thereby encouraging firms to use recourses more efficiently."

Generally, Corporate Governance refers to practices by which organisations are

controlled, directed and governed. The fundamental concern of Corporate Governance
is to ensure the conditions whereby organisation's directors and managers act in the
interest of the organisationand its stakeholders and to ensure the means by which
managers are held accountable to capital providers for the use of assets. To achieve
the objectives of ensuring fair corporate governance, the Government of India has put
in place a statutory framework.

Regulatory framework on 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

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governance mechanism for companies in India is enumerated in the following
enactments/ regulations/ guidelines/ listing agreement:

1. The Companies Act, 2013 inter alia contains provisions relating to board

constitution, board meetings, board processes, independent directors, general
meetings, audit committees, related party transactions, disclosure requirements in
financial statements, etc.

2. Securities and Exchange Board of India (SEBI) Guidelines: SEBI is a regulatory

authority having jurisdiction over listed companies and which issues regulations, rules
and guidelines to companies to ensure protection of investors.

3. Standard Listing Agreement of Stock Exchanges : For companies whose shares are
listed on the stock exchanges.

4. Accounting Standards issued by the Institute of Chartered Accountants of India

(ICAI): ICAI is an autonomous body, which issues accounting standards providing
guidelines for disclosures of financial information. Section 129 of the New
Companies Act inter alia provides that the financial statements shall give a true and
fair view of the state of affairs of the company or companies, comply with the
accounting standards notified under s 133 of the New Companies Act. It is further
provided that items contained in such financial statements shall be in accordance with
the accounting standards.

5. Secretarial Standards issued by the Institute of Company Secretaries of India

(ICSI): ICSI is an autonomous body, which issues secretarial standards in terms of the
provisions of the New Companies Act. So far, the ICSI has issued Secretarial
Standard on "Meetings of the Board of Directors" (SS-1) and Secretarial Standards on
"General Meetings" (SS-2). These Secretarial Standards have come into force w.e.f.
July 1, 2015. Section 118(10) of the New Companies Act provide that every
company (other than one person company) shall observe Secretarial Standards
specified as such by the ICSI with respect to general and board meetings.

Key legal framework for corporate governance in India

The Companies Act, 2013

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The Government of India has recently notified Companies Act, 2013 ("New
Companies Act"), which replaces the erstwhile Companies Act, 1956. The New Act
has greater emphasis on corporate governance through the board and board processes.
The New Act covers corporate governance through its following provisions:

 New Companies Act introduces significant changes to the composition of the

boards of directors.
 Every company is required to appoint 1 (one) resident director on its board.
 Nominee directors shall no longer be treated as independent directors.
 Listed companies and specified classes of public companies are required to
appoint independent directors and women directors on their boards.
 New Companies Act for the first time codifies the duties of directors.
 Listed companies and certain other public companies shall be required to
appoint at least 1 (one) woman director on its board.
 New Companies Act mandates following committees to be constituted by the
board for prescribed class of companies:

o Audit committee
o Nomination and remuneration committee
o Stakeholders relationship committee
o Corporate social responsibility committee

Listing agreement – Applicable to the listed companies

SEBI has amended the Listing Agreement with effect from October 1, 2014 to align it
with New Companies Act.

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. Broadly, cl 49 provides for the following:

1. Board of Directors

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The Board of Directors shall comprise of such number of minimum independent
directors, as prescribed. In case where the Chairman of the Board is a non-executive
director, at least one-third of the Board shall comprise of independent directors and
where the Chairman of the Board is an executive director, at least half of the Board
shall comprise of independent directors. A relative of a promoter or an executive
director shall not be regarded as an independent director.

2. Audit Committee

The Audit Committee to be set up shall comprise of minimum three directors as

members, two-thirds of which shall be independent.

3. Disclosure Requirements

Periodical disclosures relating to the financial and commercial transactions,

remuneration of directors, etc, to ensure transparency.

4. CEO/ CFO Certification

To certify to the Board that they have reviewed the financial statements and the same
are fair and in compliance with the laws/ regulations and accept responsibility for
internal control systems.

5. Report and Compliance

A separate section in the annual report on compliance with Corporate Governance,

quarterly compliance report to stock exchange signed by the compliance officer or
CEO, company to disclose compliance with non-mandatory requirements in annual
reports.

Need for Corporate Governance:

The need for corporate governance is highlighted by the following
factors:

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(i) Wide Spread of Shareholders:
Today a company has a very large number of shareholders spread all over the nation
and even the world; and a majority of shareholders being unorganised and having an
indifferent attitude towards corporate affairs. The idea of shareholders’ democracy
remains confined only to the law and the Articles of Association; which requires a
practical implementation through a code of conduct of corporate governance.

(ii) Changing Ownership Structure:

The pattern of corporate ownership has changed considerably, in the present-day-
times; with institutional investors (foreign as well Indian) and mutual funds becoming
largest shareholders in large corporate private sector. These investors have become
the greatest challenge to corporate managements, forcing the latter to abide by some
established code of corporate governance to build up its image in society..

(iii) Corporate Scams or Scandals:

Corporate scams (or frauds) in the recent years of the past have shaken public
confidence in corporate management. The event of Harshad Mehta scandal, which is
perhaps, one biggest scandal, is in the heart and mind of all, connected with corporate
shareholding or otherwise being educated and socially conscious.

The need for corporate governance is, then, imperative for reviving investors’
confidence in the corporate sector towards the economic development of society.

(iv) Greater Expectations of Society of the Corporate Sector:

Society of today holds greater expectations of the corporate sector in terms of

reasonable price, better quality, pollution control, best utilisation of resources etc. To
meet social expectations, there is a need for a code of corporate governance, for the
best management of company in economic and social terms.

(v) Hostile Take-Overs:

25
Hostile take-overs of corporations witnessed in several countries, put a question mark
on the efficiency of managements of take-over companies. This factors also points out
to the need for corporate governance, in the form of an efficient code of conduct for
corporate managements.

(vi) Huge Increase in Top Management Compensation:

It has been observed in both developing and developed economies that there has been
a great increase in the monetary payments (compensation) packages of top level
corporate executives. There is no justification for exorbitant payments to top ranking
managers, out of corporate funds, which are a property of shareholders and society.

This factor necessitates corporate governance to contain the ill-practices of top

managements of companies.

(vii) Globalisation:

Desire of more and more Indian companies to get listed on international stock
exchanges also focuses on a need for corporate governance. In fact, corporate
governance has become a buzzword in the corporate sector. There is no doubt that
international capital market recognises only companies well-managed according to
standard codes of corporate governance.

26
Need for corporate governance- at a glance

Principles of Corporate Governance:(or major issues involved in corporate

governance)

The fundamental or key principles of corporate governance are described below:

(i) Transparency:

Transparency means the quality of something which enables one to understand the
truth easily. In the context of corporate governance, it implies an accurate, adequate
and timely disclosure of relevant information about the operating results etc. of the
corporate enterprise to the stakeholders.

In fact, transparency is the foundation of corporate governance; which helps to

develop a high level of public confidence in the corporate sector. For ensuring
transparency in corporate administration, a company should publish relevant
information about corporate affairs in leading newspapers, e.g., on a quarterly or half
yearly or annual basis.

(ii) Accountability:

Accountability is a liability to explain the results of one’s decisions taken in the

interest of others. In the context of corporate governance, accountability implies the
responsibility of the Chairman, the Board of Directors and the chief executive for the
use of company’s resources (over which they have authority) in the best interest of
company and its stakeholders.

(iii) Independence:

27
Good corporate governance requires independence on the part of the top management
of the corporation i.e. the Board of Directors must be strong non-partisan body; so
that it can take all corporate decisions based on business prudence. Without the top
management of the company being independent; good corporate governance is only a
mere dream.

SEBI Code of Corporate Governance:

To promote good corporate governance, SEBI (Securities and Exchange Board of

India) constituted a committee on corporate governance under the chairmanship of
Kumar Mangalam Birla. On the basis of the recommendations of this committee,
SEBI issued certain guidelines on corporate governance; which are required to be
incorporated in the listing agreement between the company and the stock exchange.

An overview of SEBI guidelines on corporate governance is given below, under

appropriate heads:

(a) Board of Directors:

Some points in this regard are as follows:

(i) The Board of Directors of the company shall have an optimum combination of
executive and non-executive directors.

(ii) The number of independent directors would depend on whether the chairman is
executive or non-executive.In case of non-executive chairman, at least, one third of
the Board should comprise of independent directors; and in case of executive
chairman, at least, half of the Board should comprise of independent directors.

The expression ‘independent directors’ means directors, who apart from receiving
director’s remuneration, do not have any other material pecuniary relationship with
the company.

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(b) Audit Committee:

Some points in this regard are as follows:

(1) The company shall form an independent audit committee whose constitution
would be as follows:

(i) It shall have minimum three members, all being non-executive directors, with the
majority of them being independent, and at least one director having financial and
accounting knowledge.

(ii)The Chairman of the committee will be an independent director.

(iii)The Chairman shall be present at the Annual General Meeting to answer

shareholders’ queries.

(2) The audit committee shall have powers which should include the following:

1.To investigate any activity within its terms of reference

2.To seek information from any employee

3. To obtain outside legal or other professional advice

4. To secure attendance of outsiders with relevant expertise, if considered necessary.

(3) The role of audit committee should include the following:

(i) Overseeing of the company’s financial reporting process and the disclosure of its
financial information to ensure that the financial statement is correct, sufficient and
credible.

29
(ii) Recommending the appointment and removal of external auditor.

(iii) Reviewing the adequacy of internal audit function

(iv) Discussing with external auditors, before the audit commences, the nature and
scope of audit; as well as to have post-audit discussion to ascertain any area of
concern.

(v) Reviewing the company’s financial and risk management policies.

(c) Remuneration of Directors:

The following disclosures on the remuneration of directors shall be made in the

section on the corporate governance of the Annual Report:

(i) All elements of remuneration package of all the directors i.e. salary, benefits,
bonus, stock options, pension etc.

(ii) Details of fixed component and performance linked incentives, along with
performance criteria.

(d) Board Procedure Some Points in this Regards are:

(i) Board meetings shall be held at least, four times a year, with a maximum gap of 4
months between any two meetings.

(ii) A director shall not be a member of more than 10 committees or act as chairman
of more than five committees, across all companies, in which he is a director.

(e) Management:

30
A Management Discussion and Analysis Report should form part of the annual report
to the shareholders; containing discussion on the following matters (within the limits
set by the company’s competitive position).

(i) Opportunities and threats

(ii) Segment-wise or product-wise performance

(iii) Risks and concerns

(iv) Discussion on financial performance with respect to operational performance

(v) material development in human resource/industrial relations front.

(f) Shareholders:

Some points in this regard are:

(i) In case of appointment of a new director or reappointment of a director,

shareholders must be provided with the following information:

1.A brief resume (summary) of the director

2.Nature of his expertise

3. Number of companies in which he holds the directorship and membership of

committees of the Board.

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(ii) A Board Committee under the chairmanship of non-executive director shall be
formed to specifically look into the redressing of shareholders and investors’
complaints like transfer of shares, non-receipt of Balance Sheet or declared dividends
etc. This committee shall be designated as ‘Shareholders / Investors Grievance
Committee’.

(g) Report on Corporate Governance:

There shall be a separate section on corporate governance in the Annual Report of the
company, with a detailed report on corporate governance.

(h) Compliance:

The company shall obtain a certificate from the auditors of the company regarding the
compliance of conditions of corporate governance. This certificate shall be annexed
with the Directors’ Report sent to shareholders and also sent to the stock exchange.

Corporate governance concept emerged in India after the second half of 1996 due to
economic liberalization and deregulation of industry and business. With the changing
times, there was also need for greater accountability of companies to their
shareholders and customers. The report of Cadbury Committee on the financial
aspects of corporate Governance in the U.K. has given rise to the debate of Corporate
Governance in India.

Need for corporate governance arises due to separation of management from the
ownership. For a firm success, it needs to concentrate on both economical and social
aspect. It needs to be fair with producers, shareholders, customers etc. It has various
responsibilities towards employees, customers, communities and at last towards
governance and it needs to serve its responsibilities at the best at all aspects.

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The “corporate governance concept” dwells in India from the Arthshastra time instead
of CEO at that time there were kings and subjects. Today, corporate and shareholders
replace them but the principles still remain same, unchanged i.e. good
governance.20th century witnessed the glossy of Indian Economy due to
liberalization, globalization, and privatization. Indian economy for the 1st time here
was together with world economy for product, capital and lab our market and which
resulted into world of capitalization, corporate culture, business ethics which was
found important for the existence of corporation in the world market place.

Importance of Corporate Governance: A good system of corporate

governance is important on account of the following:

1. Investors and shareholders of a corporate company need protection for their

investment due to lack of adequate standards of financial reporting and accountability.
It has been noticed in India that companies raised capital from the market at high
valuation of their shares by projecting wrong picture of the company’s performance
and profitability. The investors suffered a lot due to unscrupulous management of
corporate that performed much less than reported at the time of raising capital. “Bad

33
governance was also exemplified by allotment of promoters’ share at preferential
prices disproportionate to market value affecting minority holders interest”.

There is increasing awareness and consensus among Indian investors to invest in

companies which have a record of observing practices of good corporate governance.
Therefore, for encouraging Indian investors to make adequate investment in the stock
of corporate companies and thereby boosting up rate of growth of the economy, the
protection of their interests from fraudulent practices of corporate of boards of
directors and management are urgently needed.

2. Corporate governance is considered as an important means for paying heed to

investors’ grievances. Kumar Manglam Birla Committee on corporate governance
found that companies were not paying adequate attention to the timely dissemination
of required information to investors in by India.

Though some measures have been taken by SEBI and RBI but much more required to
be taken by the companies themselves to pay heed to the investors grievances and
protection of their investment by adopting good standards of corporate governance.

3. The importance of good corporate governance lies in the fact that it will enable the
corporate firms to (1) attract capital and (2) perform efficiently. This will help in
winning investors confidence. Investors will be willing to invest in the companies
with a good record of corporate governance.

New policy of liberalization and deregulation adopted in India since 1991 has given
greater freedom to management which should be prudently used to promote investors’
interests. In India there are several instances of corporate’ failures due to lack of
transparency and disclosures and instances of falsification of accounts. This
discourages investors to make investment in the companies with poor record of
corporate governance.

4. Global Perspective. The extent to which corporate enterprises observe the basic
principles of good corporate governance has now become an important factor for
attracting foreign investment. In this age of globalisation when quantitative
restrictions have been removed and trade barriers dismantled, the relationship

34
between corporate governance and flows of foreign investment has become
increasingly important.

Studies in India and abroad show that foreign investors take notice of well- managed
companies and respond positively to them, capital flows from foreign institutional
investors (FII) for investment in the capital market and foreign direct investment
(FDI) in joint ventures with Indian corporate companies will be coming if they are
convinced about the implementation of basic principles of good corporate
governance.

Thus, “International flows of capital enable companies to access financing from a

large pool of investors. If countries are to reap the full benefits of the global capital
markets, and if they are to attract long-term capital, corporate governance
arrangements must be credible and well understood across borders”. The large inflows
of foreign investment will contribute immensely to economic growth.

5. Indispensable for healthy and vibrant stock market. An important advantage of

strong corporate governance is that it is indispensable for a vibrant stock market. A
healthy stock market is an important instrument for investors protection. A bane of
stock market is insider trading. Insider trading means trading of shares of a company
by insiders such directors, managers and other employees of the company on the basis
of information which is not known to outsiders of the company.

It is through insider trading that the officials of a corporate company take undue
advantage at the expense of investors in general. Insider trading is a kind of fraud
committed by the officials of the company. One way of dealing with the problem of
insider trading is enacting legislation prohibiting such trading and enforcing criminal
action against violators.

In India, insider trading has been rampant and therefore it was prohibited by SEBI.
However, the experience shows prohibiting insider trading by law is not the effective
way of dealing with the problem of insider trading because legal process of providing
punishment is a lengthy process and conviction rate is very low.
According to Sandeep Parekh, an advocate (Securities and Financial Regulations), the
effective way of tackling the problem is by encouraging the companies to practice self
regulation and taking prophylactic action. This is inherently connected to the field of
corporate governance.

35
 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. In addition to
prohibiting inappropriate actions (which might not necessarily be prohibited) self-
regulation is also considered an effective means of creating shareholders value.
Companies can always regulate their directors/officers beyond what is prohibited by
the law”.

Additional Provisions

Related Party Transactions – A Related Party Transaction (RPT) is the transfer of
resources or facilities between a company and another specific party. The company
devises policies which must be disclosed on the website and in the annual report. All
these transactions must be approved by the shareholders by passing a Special
Resolution as the Companies Act of 2013. Promotors of the company cannot vote on
a resolution for a related party transaction.

Changes in Clause 35B – The e-voting facility has to be provided to the shareholder
for any resolution is a legal binding for the company.

 Corporate Social Responsibility – The company has the responsibility to

promote social development in order to return something that is beneficial for the
society.

 Whistle Blower Policy – This is a mandatory provision by SEBI which is a

vigil mechanism to report the wrong or unethical conduct of any director of the
company.

Why is Corporate Governance in India Important?

A company that has good corporate governance has a much higher level of confidence
amongst the shareholders associated with that company. Active and independent
directors contribute towards a positive outlook of the company in the financial
market, positively influencing share prices. Corporate Governance is one of the
important criteria for foreign institutional investors to decide on which company to
invest in.

36
The corporate practices in India emphasize the functions of audit and finances that
have legal, moral and ethical implications for the business and its impact on the
shareholders. The Indian Companies Act of 2013 introduced innovative measures to
appropriately balance legislative and regulatory reforms for the growth of the
enterprise and to increase foreign investment, keeping in mind international practices.
The rules and regulations are measures that increase the involvement of the
shareholders in decision making and introduce transparency in corporate governance,
which ultimately safeguards the interest of the society and shareholders.

Corporate governance safeguards not only the management but the interests of the
stakeholders as well and fosters the economic progress of India in the roaring
economies of the world.

CORPORATE FRAUDS IN INDIA

A corporate fraud occurs when a company or an entity deliberately changes and

conceals sensitive information which then apparently makes it look healthier.
Companies adopt various modus-operandi to commit such corporate frauds, which
may include miss-information in the prospectus, manipulation of accounting records,
debt hiding etc. The aspect of falsification of financial information includes false
accounting entries, false trades for inflation of profits, disclosure of price sensitive

37
information which comes under the ambit of insider trading and showing false
transactions which result in attracting more investors and lenders for funding.

There can be several reasons cited for which companies commit such frauds like
making more falsified money, creating a false image of the company for the market
scenario and misguiding Governmental authorities for tax evasion. In India, the
Commission on 'Prevention of Corruption', in its report, observed, "The advancement
of technological and scientific development is contributing to the emergence of mass
society with a large rank in file and a small controlling elite, encouraging the growth
of monopolies, the rise of a managerial class and intricate institutional mechanisms.
There is a necessity for a strict adherence to high standards of ethical behavior for
even the honest functioning of the new social, political and economic processes. The
report of the Vivian Bose Commission inquiring into the affairs of the Dalmia Jain
group of companies in 1963, highlighted as to how the big industries indulge in
frauds, falsification of accounts and record tampering for personal gains and tax
evasion etc.

The first successful trial of a financial scandal in independent India was the Mundhra
Scam, in which Hon'ble Justice M.C. Chagla made certain critical observations about
the big business magnate Mundhra who wanted to build an industrial empire entirely
out of dubious means.

TYPES OF FRAUD:

There are many types of frauds like Fraudulent Financial Statements, Employee
Fraud, Vendor Fraud, Customer Fraud, Investment Scams, Bankruptcy frauds and
miscellaneous. Some of the common types of frauds are:

38
 1. Financial frauds - Manipulation, falsification, alteration of accounting
records, misrepresentation or intentional omission of amounts, misapplication
of accounting principles, intentionally false, misleading or omitted disclosures.
2. Misappropriation of Assets - Theft of tangible assets by internal or external
parties, sale of proprietary information, causing improper payments.
3. Corruption - making or receiving improper payments, offering bribes to
public or private officials, receiving bribes, kickbacks or other payments,
aiding and abetting fraud by others.

The financial and corporate frauds or scams like Harshad Mehta case, Satyam fiasco,
Sahara case required the attention of law makers. Such frauds made it imperative to
evaluate the standards set in corporate governance and stringent methods were needed
to be implemented to tackle corporate frauds.

CORPORATE FRAUDS UNDER COMPANIES ACT, 2013

The Companies Act, 2013, is the legislation which focusses on issues related to
corporate frauds. Fraud in relation to affairs of a company or any corporate body as
defined in S.447 of the Companies Act 2013, includes any act, omission, concealment
of any fact or abuse of position committed by any person or any other person with the
connivance in any manner, with intent to deceive, to gain undue advantage from, or to

39
injure the interests of the company or its shareholders or its creditors or any other
person, whether or not there is any wrongful gain or wrongful loss.

In order to amount to Fraud, an act must be confined to acts committed by a party to

contract with an intention to deceive another party or his agent or to induce him to
enter into a contract. Fraud, which vitiates the contract, must have a nexus with the
acts of the parties entering into the contract. This definition highlights the
precondition to prove the intention of the person who has committed fraud. If that
person has willingly committed a fraud, then he will be punished. Here the person
means himself or his agent. The acts which include fraud are wrong suggestions or
concealment of facts or false promises or any fraudulent act to deceive others.

PUNISHMENT FOR FRAUD (S.447)

Any person who is found guilty of fraud shall be punishable with imprisonment for a
term which shall not be less than six (06) months but which may extend to ten (10)
years and shall also be liable to fine which shall not be less than the amount involved
in the fraud, but which may extend to three (03) times the amount involved in the
fraud. Where the fraud in question involves public interest, the term of imprisonment
shall not be less than three (03) years.

PUNISHMENT FOR FALSE STATEMENT (S.448)

If in any return, report, certificate, financial statement, prospectus, statement or other

document required by, or for the purposes of any of the provisions of this Act or the
rules made thereunder, any person makes a statement —

 which is false in any material particulars, knowing it to be false; or

 which omits any material fact, knowing it to be material

PUNISHMENT FOR FALSE EVIDENCE (SECTION 449)

If any person intentionally gives false evidence –

 upon any examination on oath or solemn affirmation; or

40
  in any affidavit, deposition or solemn affirmation in or about winding up of
any company under this Act, or otherwise in or about any matter arising under
this Act,
 he shall be punishable with imprisonment for a term which shall not be less
than three (03) years but which may extend to seven years (07) and with fine
which may extend to ten lakh rupees (Rs. 10 Lacs).

PUNISHMENT WHERE NO SPECIFIC PENALTY OR PUNISHMENT

IS PROVIDED (SECTION 450)

If a company or any officer of a company or any other person contravenes any of the
provisions of this Act, or the rules made thereunder and for which no penalty or
punishment is provided elsewhere in the Act, they shall be punishable with fine which
may extend to ten thousand rupees (Rs. 10,000) and where the contravention is
continuing one, with a further fine which may extend to one thousand rupees (Rs.
1,000) for every day after the first during which the contravention continues.

PUNISHMENT IN CASE OF REPEATED DEFAULT (SECTION 451)

If a company or an officer of a company commits an offence punishable either with

fine or with imprisonment and where the same offence is committed for the second or
subsequent occasions within a period of three (03) years, then, that company and
every officer thereof who is in default shall be punishable with twice the amount of
fine for such offence in addition to any imprisonment provided for that offence. This
section is not applicable to the offence repeated after a period of three (03) years from
the commitment of first offence.

ADJUDICATION OF PENALTIES (SECTION 454)

The Central Government, may by an order published in the official gazette appoint
adjudicating officers for adjudicating penalty under this Act. The Central Government
shall also specify their jurisdiction. The adjudicating officer may, by an order, impose
penalties on the company and the officer who is in default, stating any non –

41
compliance of default under the relevant provision of the Act. Any person aggrieved
by an order made by the adjudicating officer may prefer an appeal to the regional
director having jurisdiction in the matter.

OFFENCE OF FRAUD NON-COMPOUNDABLE

As the punishment for fraud is both imprisonment and fine, it is considered a non-
compoundable offence. It shows that, the commission of fraud has become a serious
offence in the eyes of law. The Act has provided punishment for fraud under section
447 and about 20 sections of the Act talk about fraud committed by the directors, key
managerial personnel, auditors and/or officers of company. Thus, the new Act goes
beyond professional liability for fraud and extends it to personal liability, if a
company contravenes such provisions. Here, the contravention of the provisions of
the Act with an intention to deceive are also considered as fraud; to name a few acts
amounting to fraud:

Section Fraud Defaulter

7(5) Furnishing false information or suppressing Any person who does so
material information
8 Affairs of the company conducted fraudulently Every officer in default
34 Mis-statements in prospectus Every person who
authorizes the issue of
prospectus
36 Fraudulently inducing persons to invest money Any person who does so
38 Personation for acquisition, etc. of securities Any person who does so
46(5) Issuance of duplicate certificate of shares Every officer who defaults
75(1) Company fails to repay deposits/ interests Every officer of the
company
206 Business  being carried out for fraudulent or Every officer who defaults
unlawful purpose
229 Person required to provide an explanation or Person who was required
make a statement during an investigation to provide the explanation
furnishes false statement or destroys or make the statement

42
 documents
251 Application is made for removal of name from Persons in charge of
register with the object of evading liabilities or management of the
deceiving or defrauding the creditors company
266 If Tribunal concludes that an employee during the Any person who is found so
period of his employment with a company was guilty
guilty of any misfeasance, malfeasance or non-
feasance in relation to the sick company
448 A person who makes a false statement or omits a Person who makes such
material fact in any return, report, certificate,   statement
financial statement, prospectus

CORPORATE GOVERNANCE IN INDIA PAST, PRESENT &

FUTURE

Good corporate governance in the changing business environment has emerged as

powerful tool of competitiveness and sustainability. It is very important at this point
and it needs corporation for one and all i.e. from CEO of company to the ordinary
staff for the maximization of the stakeholders’ value and also for maximization of
pleasure and minimization of pain for the long term business.

Global competitions in the market need best planning, management, innovative ideas,
compliance with laws, good relation between directors, shareholders, employees and

43
customers of companies, value based corporate governance in order to grow, prosper
and compete in international markets by strengthen their strength overcoming their
weaknesses and running them effectively and efficiently in an efficient and
transparent manner by adopting the best practices.

Corporate India must commit itself as reliable, innovative and prompt service
provider to their customers and should also become reliable business partners in order
to prosper and to have all round growth.

Corporate Governance is nothing more than a set of ideas, innovation, creativity,

thinking having certain ethics, values, principles etc which gives direction and shape
to its people, employees and owners of companies and help them to flourish in global
market.

Indian Corporate Bodies having adopted good corporate governance will reach
themselves to a benchmark for rest of the world; it brings laurels as a way of
appreciation. Corporate governance lays down ethics, values, and principles,
management policies of a corporation which are inculcated and brought into practice.
The importance of corporate governance lies in promoting and maintains integrity,
transparency and accountability throughout the organization.

Corporate governance has existed since past but it was in different form. During
Vedic times kings used to have their ministers and used to have ethics, values,
principles and laws to run their state but today it is in the form corporate governance
having same rules, laws, ethics, values, and morals etc which helps in running
corporate bodies in the more effective ways so that they in the age of globalization
become global giants.

Several Indian Companies like PepsiCo, Infuses, Tata, Wipro, TCS, and Reliance are
some of the global giants which have their flag of success flying high in the sky due
to good corporate governance.

Toady, even law has a great role to play in successful and growing economy.
Government and judiciary have enacted several laws and regulations like SEBI,

44
FEMA, Cyber laws, Competition laws etc and have brought several amendments and
repeal the laws in order that they don’t act as barrier for these corporate bodies and
developing India. Judiciary has also helped in great way by solving the corporate
disputes in speedy way.

Corporate bodies have their aim, values, motto, ethics and principles etc which guide
them to the ladder of success. Big and small organizations have their magazines
annual reports which reflect their achievements, failure, their profit and loss, their
current position in the market. A few companies have also shown awareness of
environment protection, social responsibilities and the cause of upliftment and social
development and they have deeply committed themselves to it. The big example of
such a company can be of Deepak Fertilizers and Petrochemicals Corporation Limited
which also bagged 2nd runner up award for the corporate social responsibility by
business world in 2005.

Under the present scenario, stakeholders are given more importance as to

shareholders, they even get chance to attend, vote at general meetings, make
observations and comments on the performance of the company.

Corporate governance from the futuristic point of view has great role to play. The
corporate bodies in their corporate have much futuristic approach. They have vision
for their company, on which they work for the future success. They take risk and
adopt innovative ideas, have futuristic goals, motto, and future objectives to achieve.

With increase in interdepence and free trade among countries and citizens across the
globe, internationally accepted corporate governance standards are of paramount
importance for Indian Companies seeking to distinguish themselves in global
footprint. The companies should always keep improving, enhancing and upgrading
themselves by bringing more reliable integrated product and service quality. They
should be more transparent in their conduct.

Corporate governance should also have approach of holistic view, value based
governance, should be committed towards corporate social upliftment and social
responsibility and environment protection. It also involves creative, generative and

45
positive things that add value to the various stakeholders that are served as customers.
Be it finance, taxation, banking or legal framework each and every place requires
good corporate governance.

Hence corporate governance is a means and not an end, corporate excellence should
be end.

Evolution of Corporate Governance in India

The need for corporate governance standards was realized soon after the economic
reforms of 1991. In 1998, the Confederation of Indian Industries (CII) came out with
a voluntary code on corporate governance titled "Desirable Corporate Governance",
based on the recommendations of a task force under Rahul Bajaj. In 2000, the SEBI
came up with Clause 49of the Listing Agreement, which all the listed companies on a
stock exchange need to sign, that dealt with the issues of corporate governance based
on the recommendations of Kumaramangalam Birla Committee.

46
The Clause initially dealt with issues such as protection of investors' interests,
promoting transparency, adhering to international standards of information disclosure
etc. among others. It was subsequently amended under the recommendations of
various expert committees. For instance, based on Naresh Chandra
Committee recommendations - the procedure for appointing auditors, the norms
dealing with the relationship between auditor firm and the company etc. were
amended. Later, based on Narayana Murthy Committee recommendations, the quality
of financial disclosure, the responsibility of the audit committee were amended.

In 2013, the government introduced the new Companies Act which deals with
corporate governance in a comprehensive manner.

Why are Corporate Governance norms needed in India?

Many companies in India, including the large corporate groups, were born as family-
owned enterprises. Family members occupied managerial positions in such companies
and took all the key business decisions. This practice had blurred the distinction
between company's finances and that of family owners. With the evolution of equity
markets, many such family-run businesses listed themselves on the stock markets.
This led to a separation of the ownership from the management of firms. Despite this,
the Promoters continue to wield disproportionate influence over company decisions.

Corporate Governance norms are needed to ensure that a company is run in the
interest of all the stakeholders, without the promoters and the management lining their

47
own pockets. Moreover, a company with good corporate governance standards enjoys
greater investor confidence, adding value to its share price in the stock markets.
Foreign Institutional/Portfolio Investors (FII/FPI) prefer to invest in those companies
with good corporate governance.

India has a history of high profile scams like the stock market scams (of Harshad
Mehta, Ketan Parekh), UTI scam, Satyam scandal etc. which were termed as the
outcomes of failed corporate governance. Hence, there is a need to institutionalize
stringent norms surrounding corporate governance to prevent their recurrence.

Issues in Corporate Governance in India

 Stressed balance sheets - The bad debt problem (NPAs), which has affected
the corporate sector, is as much an outcome of bad corporate governance as it
is due to the vagaries of the business cycle. Many expensive acquisitions
were made in the last decade by companies without a proper approval from
the shareholders. As a result, few of them paid off for the shareholders.

 The composition of the Board - The Companies Act, 2013 introduced several
good corporate governance provisions such as, one-third of the company
board should comprise of Independent Directors, the board should have at
least one woman Director, the constitution of Audit Committee within the
board etc. However, several companies still haven't appointed woman

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 directors in their boards while some of them have named the women family
members or friends of promoters as directors.

 Role of Independent Directors - Independent Directors were supposed to

enhance the accountability of the board to the shareholders. As part of the
Audit Committees, they were to ensure that the financial disclosure process
was carried out as per the law. However, it was observed that they had failed
to make their mark on company boards. Many of them fail to stand up to
promoters' decisions if they find it to be against the interest of all the
stakeholders. The main reason for their weakness is their removal process -
they can be easily removed by the promoters or majority shareholders,
affecting their independence.

 The conflict between promoters and management - since many companies

are family owned enterprises, the promoters as majority shareholders
continue to exercise disproportionate influence over business decisions. This
sometimes leads to a conflict between the promoters and the management,
which is responsible for the day-to-day functioning of the company. Recent
instances of ousting of Tata group chairman by Tata Sons, and the forced exit
of the CEO of Infosys, both due to differences between the top management
and the promoters, have highlighted the weaknesses in our corporate
governance norms. This conflict has also reflected the weaknesses in
succession planning by the founders/promoters, many of them inherent
inhibitions to let go of control over their companies.

 Executive Compensation - According to the new Companies Act, the

nomination and remuneration committee of the Board (comprising a majority
of independent directors) is to decide on the compensation to key employees.
This needs to be approved by the shareholders. However, the top employees
are paid exorbitant remuneration in certain instances where they allow a
significant say to the promoters as quid pro quo. On the other hand, many
small companies fail to offer competitive remuneration to attract talented
professionals. Sometimes, exorbitant remuneration to the top employees can
become an issue of conflict between promoters and management, like the
case of Infosys.

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Reforms needed
In 2012, SEBI constituted a committee under Adi Godrej and based on its
recommendations, it has amended the Clause 49 of Listing Agreement. Some new
norms were introduced such as

 separate meetings of Independent Directors.

 performance evaluation for all Directors, including Independent Directors.

 compulsorily putting in place a whistleblower mechanism.

 constitution of a Risk Management Committee

Recently, the UdayKotak committee constituted by SEBI submitted its report which

recommended several reforms to improve corporate governance in India such as,

 at least half of the board members should be independent directors, and there
must be at least one woman independent director.

 detailed reasons must be given for the removal of independent directors. This
can significantly enhance their independent functioning.

 separating the roles of chairperson and managing director, and the chairperson
should be a non-executive director.

 significant improvements in disclosure such as - providing financial

information on their websites in a manner that is easily accessible to
investors, all listed companies should publish their cash flow statements on a
half-yearly basis etc.

Good Corporate Governance standards are essential to ensure significant value

enhancement to all the stakeholders of a company, including the minority
shareholders, the government and the economy. India has always stood at the top in

50
protecting the interests minority shareholders (at 4th place in Ease of Doing Business
Report 2018 by World Bank) and this has been attributed to positive corporate
governance norms that have been put in place by the government and SEBI.

Conclusion:
It is evident from above that it is essential that good governance practices must be
effectively implemented and enforced preferably by self-regulation and voluntary
adoption of ethical code of business conduct and if necessary through relevant
regulatory laws and rules framed by Government or its agencies such as SEBI, RBI.

The effective implementation of good governance practices would ensure investors

confidence in the corporate companies which will lead to greater investment in them
ensuring their sustained growth. Thus good corporate governance would greatly
benefit the companies enabling them to thrive and prosper.

Further, in the context of liberalization and globalisation there is growing realization

in the emerging economies including India that a country’s business environment
must be maintained and operated in a manner that is conducive to investors’
confidence so that both domestic and foreign investors are induced to make adequate
investment in corporate companies. This will be conducive to rapid capital formation
and sustained growth of the economy.

Some persons regard certain good corporate practices as ‘irritants’ to the growth of
their businesses since they require the implementation of minimum standards of
corporate governance. However, fact of the matter is that the observance of practices
of good corporate governance will ensure investors’ confidence in the companies
which have record of good corporate governance.

Further, it needs to be emphasized that practices and principles of good corporate

governance have been evolved which stimulate business rather than stifle it. In fact in
good corporate governance structure what is ensured is that companies must
preferably follow voluntarily ethical code of business conduct which are conducive to

51
the expansion of investment in them and ensure good outcome in terms of rates of

return.

Research Analysis
Introduction
The research work done by survey and with the personals meet with the bank
official and made is available as follow:
I also visited Corporation Bank , Yogi-Nager,Borivali(W)to get the information
related to Corporate Governance and their I meet Mr. Amar Nath Gupta (Manager)
who gave me sufficient information related with the project According to him he has
explained me the procedure of the Corporate Governance for the company employees,
small employees are not require to insurance employees.

I visited to HDFC Banklocated at Yogi-Nager, Borivali(W) I Meet Mrs. Shubhangi

Zagade (Teller Authorisor) Respected Official guided me with their valuable
knowledge about terrorism insurance. She also started their views and experience and
helped me by giving answer to the questionnaires.

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 Questionnaire
Questionnaire -I

Q1. What is Corporate Governance?

Ans: Corporate Governance refers to the way a corporation is governed. It is the
technique by which companies are directed and managed. It means carrying the
business as per the stakeholders’ desires. It is actually conducted by the board of
Directors and the concerned committees for the company’s stakeholder’s benefit.

Q2. What are the objective of Corporate Governance?

Ans: Transparency in corporate governance is essential for the growth, profitability
and stability of any business. The need for good corporate governance has intensified
due to growing competition amongst businesses in all economic sectors at the
national, as well as international level.

Q3. What are the benefit of Corporate Governance?

Ans: Good corporate governance ensures corporate success and economic
growth.Strong corporate governance maintains investors’ confidence, as a result of
which, company can raise capital efficiently and effectively.It lowers the capital cost.

Q4. What is the basic principle of Corporate Governance?

Ans: A company which applies the core principles of good corporate governance; fairness,
accountability, responsibility and transparency, will usually outperform other companies and
will be able to attract investors, whose support can help to finance further growth.

Q5. What are the framework of Corporate Governance?

Ans: The Government of India has recently notified Companies Act, 2013 ("New
Companies Act"), which replaces the erstwhile Companies Act, 1956.

Questionnaire

53
Questionnaire -II
Q1. What is Corporate Governance?
Ans: Corporate Governance refers to the way a corporation is governed. It is the
technique by which companies are directed and managed. It means carrying the
business as per the stakeholders’ desires. It is actually conducted by the board of
Directors and the concerned committees for the company’s stakeholder’s benefit.

Q2. What are the objective of Corporate Governance?

Ans: Transparency in corporate governance is essential for the growth, profitability
and stability of any business. The need for good corporate governance has intensified
due to growing competition amongst businesses in all economic sectors at the
national, as well as international level.

Q3. What are the benefit of Corporate Governance?

Ans: Good corporate governance ensures corporate success and economic
growth.Strong corporate governance maintains investors’ confidence, as a result of
which, company can raise capital efficiently and effectively.It lowers the capital cost.

Q4. What is the basic principle of Corporate Governance?

Ans: A company which applies the core principles of good corporate governance; fairness,
accountability, responsibility and transparency, will usually outperform other companies and
will be able to attract investors, whose support can help to finance further growth.

Q5. What are the framework of Corporate Governance?

Ans: The Government of India has recently notified Companies Act, 2013 ("New
Companies Act"), which replaces the erstwhile Companies Act, 1956.

54
 Appendix
Questionnaire:
Q1. What is Corporate Governance?

Ans: -------------------------------------------------------------------------------------------

Q2. What are the objective of Corporate Governance?

Ans: -------------------------------------------------------------------------------------------

Q3. What are the benefit of Corporate Governance?

Ans: -------------------------------------------------------------------------------------------

Q4. What is the basic principal of Corporate Governance?

Ans: --------------------------------------------------------------------------------------------

Q5. What are the framework of Corporate Governance?

Ans: -------------------------------------------------------------------------------------------

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 BIBLOGRAPHY

 Chandra Hariharan Iyer

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 WEBLOGRAPHY

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 WWW.RESEARCHGATE.NET
 WWW.ALLRESEARCHJOURNAL.COM
 WWW.OECD.ORG
 WWW.CITETHISFORME.COM

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