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Evolution Of Corporate Governance In India

Corporate governance is typically perceived by academic literature as dealing with problems that result from separation of ownership and control From this perspective , corporate governance would focus on :The internal structure and rules of board if directors, the creation of independent audit committees , rules for disclosure of information of information to shareholders and creditors, control of the management. Corporate was defined by Sir Adrian Cadbury, chairman of the Cadbury Committee as "Corporate governance is defined as holding the balance between economic and social goals and also between individual and communal goals

Experts at the Organization of Economic Co-operation and Development (OECD) have defined corporate governance as "the system by which business corporations are directed and controlled." According to them, "the corporate governance structure specifies the distribution of rights and responsibilities among different participants in the corporation, such as, the Board, managers, shareholders and other stakeholders, and spells out the rules and procedures for making decisions on corporate affairs" (OECD, April 1999). By doing this, it provides the structure through which the company objectives are set, and also provides the means of attaining those objectives and monitoring performance.

OECD's definition, incidentally is consistent with the one presented by Cadbury Committee.

All these definitions which are shareholder-centric capture some of the most important concerns of governments in particular and the society in general.

These are: (i) management accountability, (ii) providing adequate investments to management, (iii) disciplining and replacement of bad management, (iv) enhancing corporate performance, (v) transparency, (vi) shareholder activism, (vii) investor protection, (viii) improving access to capital markets, (ix) promoting long-term investment, and (x) encouraging innovation.[1]

Objectives:
  1. Pillar and principles of corporate governance
  2. Theories of corporate governance
  3. To know the evolution of corporate governance.
  4. The Present paper is basically concerned with the various committee formed for the problem of corporate governance in Indian Companies for Corporate Governance in India.
  5. The paper also analyses the legislative framework provided for corporate governance in India

Research Methodology
Looking into the objectives stated above the research methodology is descriptive in nature. The data used for research is provided in various books, articles and websites that were availed at the discretion of the researcher .

Pillars Of Corporate Governance

The principles/ pillars of corporate governance are:
  1. Accountability
    It is a liability to explain the results of one's decision taken in the interest of others. In the context of corporate governance ,accountability implies responsibility of chairman, Board of Directors and the chief executive for the use of company resources(over which they have authority) in the best interest of the company and its stakeholders.
     
  2. Transparency
    It means the quality of disclosure of clear information to shareholders and stakeholders which enables them to know and understand the truth easily. So in the context of corporate governance , it implies timely , accurate and adequate disclosure pf all relevant information material matters, including the financial situation and performance of the company to the stakeholders of the company. To ensure transparency , financial statements are prepared in accordance with financial standard(IFRS)[2].High quality annual reports are published to make sure that all investors are given clear factual information that precisely reflects the financial and environmental position of the organisation.
     
  3. Fairness
    Impartially or lack of bias to all shareholders in proportion to their respective shareholding, Fairness refers merely to the way companies and their officers treat stakeholders , employees, foreign investors against the dominant players as majority shareholders. Provide effective v redress for violation and employees, public official should be treated fairly by the company.
     
  4. Independence
    Good corporate governance requires independence on the part of the top management of the corporation that is, the Board of Directors must be strong non partisan body, so that it can take all corporate decisions based on business prudence. Thus to insure independence , procedures and standards are set in place to minimise or avoid conflicts of interests and the Board has independent non- executive members and advisors to ensure this independence.


Theories Of Corporate Governance

  1. Agency theory-Defines the relationship between the principle and the agents. According to this theory the principals of the company hire the agents to perform their work. The principals delegate the work of running the business to the directors or managers , who are the agents of shareholder. The shareholders expect to act and make decision in the best interest of the principal. The key feature of agency theory is separation of ownership and control.
     
  2. Shareholder theory-It is the corporation which is considered as the property of the shareholder, they can dispose off their property as they like .The owner seeks return on their investment and that is why they invest in corporation .But this narrow role has expanded in overseeing the operations of the corporation and it manages to ensure that corporations is in compliance with ethical and legal standards set by the government. The directors are responsible for any damage or harm done to their corporation i.e., corporation.
     
  3. Stewardship theory ´┐Ż It states that a steward protects and maximises shareholders wealth through firm performance. Here 'stewards' are company executives and managers working for the shareholders , protects and make profits for the shareholders. It stresses on the position of employees or executive to act more autonomously so that shareholder's returns are maximised.
     
  4. Stakeholder theory-This theory incorporated the accountability of management to a broad range of stakeholders. It states that managers in organisation have a network of relationship to serve this includes the suppliers, employees and business partners. This theory focuses on managerial decision making and interest of all stakeholders have intrinsic value , and no sets of interest is assumed is assumed to dominate the others .According to this theory the company is seen as an input output model and all they interest which includes creditors , customers, employees and the government.
     
  5. Resource dependency theory-The resource dependency theory focuses on the role of board of directors in providing access to resource needed by the firm. It states that directors bring resources such as information ,skills access to key constituents such as suppliers, buyers, public policy makers.
     
  6. Political theory- Best 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 government's favour.
     
  7. Transaction cost theory-A company has a number of contracts within the company itself or with markets through which market which it creates value for the company. There is cost associated with each contract with the external party such cost is called transaction cost. If the transaction cost of using market is higher , the company would undertake that transaction itself.

Evolution Of Legal Framework Corporate Governance In India

Prior to Independence and Four Decades into Independence
Indian organisations and corporations were subject to colonial regulations, many of which took into consideration the desires and preferences of the British employers. The 1866-enacted Companies Act was revised in 1882, 1913, and 1932. In 1932, the Partnership Act was passed. These laws emphasised the managing organisation model because individuals or businesses entered into legal agreements with other businesses to govern the latter.

Because of the disorganised and unprofessional ownership during this time, there was a misuse/abuse of resources and a shunning of responsibilities by managing specialists. Industrialists expressed interest in producing a number of necessities shortly after the country gained its independence, as long as the government set reasonable prices and directed production.

Reforms brought in by SEBI Committees
Initiatives taken by Government of India in 1991, aimed at economic liberalization, privatization and globalisation of the domestic economy, led India to initiate peform process )n order to suitably respond to the developments taking place world over. On account of the interest generated by Cadbury Committee Report, the Confederation of Indian Industry (CI), the Associated Chambers of Cormerce and Industry (ASSOCHAM) and, the Securities and Exchange Board of India (SEBI) constituted committees to recommend initiatives in Corporate Governance.

1998-Desirable Corporate Governance: A Code
CIl took a special initiative on Corporate Governance, the first institution initiative in Indian Industry. The objective was to deve!op and promote a code for Corporate Governance to be adopted and followed by Indian companies, whether in the Private Sector, the Public Sector, Banks or Financial Institutions, all of which are corporate entities. The final draft of the said Code was widely circulated in 1997. In April 1998, the Code was released. It was called Desirable Corporate Governance A Code.

1999- Kumar Mangalam Birla Committee
The Securities and Exchange Board of India (SEBI) had set up a Committee Kumar Mangalam Birla Committee on May 7, 1999 under the Chairmanship of Kumar Mangalam Birla to promote and raise standards of corporate governance. The Report of the committee was the first formal and comprehensive attempt to evolve a Code of Corporate Governance, in the context of prevailing conditions of governance in Indian companies, as well as the state of capital markets at that time. The recommendations of the Report, led to inclusion of Clause 49 in the Listing Agreement in the year 2000.

2002-Naresh Chandra Committee
The Enron debacle of 2001 involving the hand-in-glove relationship between the auditor and the corporate client, the scams involving the fall of the corporate giants in the U.S. like the WorldCom, Qwest, Global Crossing, Xerox and the consequent enactment of the stringent Sarbanes Oxley Act in the U.S. were some important factors which led the Indian Government to wake up and in the year 2002, Naresh Chandra Committee was appointed to examine and recommend inter alia amendments to the law involving the auditor-client relationships and the role of independent directors.

2003- N R. Narayana Murthy Committee
In the year 2002, SEBI analysed the statistics of compliance with the clause 49 by listed companies and felt that there was a need to look beyond the mere systems and procedures if corporate governance was to be made effective in protecting the interest of investors. SEBI therefore constituted a Committee under the Chairmanship of Shri N.R. Narayana Murthy, for reviewing implementation of the corporate governance code by listed companies and for issue of revised clause 49 based on its recommendations.

2004-Dr JJ Irani Committee
The Government constituted a committee under the ChairmanshipDr. I. I. Irani Committee on Company Law of Dr. J. J. Irani, Director, Tata Sons, with the task of advising the Government on the proposed revisions to the Companies Act, 1956 with the objective to have a simplified compact law that would be able to address the changes taking place in the national and international scenario, enable adoption of internationally accepted best practices as well as provide adequate flexibility for timely evolution of new arrangements in response to the requirements of ever- changing business models.

2009-Task Force on Corporate Governance
In 2009, CIl's Task Force on Corporate Governance gave its report and suggested certain voluntary recommendations for industry to adopt.

2012- Policy Governance
The Ministry of Corporate Affairs constituted a Committee to formulate a Policy Document on Corporate Governance under the chairmanship of Mr. Adi Godrej with the President ICSI as Member Secretary / Convenor.The Policy Document sought to synthesize the disparate elements in the diverse guidelines, draw on innovative best practices adopted by specific companies, incorporate current international trends and anticipate emerging demands on corporate governance in enterprises in various classes and scale of operations. The Adi Godrej Committee submitted its report which was articulated in the form of 17 Guiding Principles of Corporate Governance.

2013-Companies Act
The Companies Act, 2013 brought with it radical changes in the sphere of Corporate Governance in India. It provided a major overhaul in Corporate Governance norms and sought to have far-reaching implications on the manner in which corporate operates in India.The Act has since been amended thrice - in 2018, 201 and 2019.The Amendments impacts different aspects of business management in India, including key structuring,disclosure and compliance requirements.

2015-SEBI (Listing Obligations and Disclosures Requirements) Regulations, 2015
With a view to consolidate and streamline the provisions of the erstwhile listing agreements for different segments of the capital market and the provisions pertaining to listed entities with the Companies Act, 2013, the SEBI notified SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 for the listed entities having listed designated securities on recognized stock exchanges.

2017- Uday Kotak Committee
The SEBI Committee on corporate governance was formed in June 2017 under the Chairmanship of Mr. Uday Kotak with the aim of improving standards of corporate governance of listed companies in India. With the aim of improving standards of Corporate Governance of listed companies in India, the Committee was requested to make recommendations to SEBI on the following issues:
  • Ensuring independence in spirit of Independent Directors and their active participation in functioning of the company;
  • Improving safeguards and disclosures pertaining to Related
Party Transactions;
  • Issues in accounting and auditing practices by listed companies;
  • Improving effectiveness of Board Evaluation practices;
  • Addressing issues faced by investors in general meetings ,etc
     
Landmark Cases of failure of Corporate Governance
Satyam Scam
In 2009, the India-based business Satyam Computer Services was embroiled in a corporate scandal in which Ramalinga Raju, the chairman, acknowledged that the company's financial records had been falsified. A Rs 7000 crore business scandal involving tampered accounts occurred with Satyam. In an email to SEBI dated 7-1-2009, Ramalinga Raju admitted to fabricating the company's funds and bank balances.

He made the well-known claim that he was riding a tiger and had no idea how to get off without getting slain weeks before the con started to fall apart. In an interview, Raju claimed that Satyam, the fourth-largest IT firm, had a cash balance of Rs. 4,000 crore and could use it to acquire additional funds.

Ricoh case
The saga at Ricoh India shows that MNCs' reputation for good governance is not always a guarantee of success. The Ricoh incident was almost a carbon copy of the Satyam episode in terms of accounting fraud and the ensuing fraud of stock prices, interestingly without any promoter being in the driver's seat.

This was true despite administrative interference following the Satyam scam and legislative amendments to tighten the governance framework [Companies Act, 2013, SEBI (Listing Obligations and Disclosure Requirements) Regulations, etc. A few dishonest managers were all it took to bring down the entire system, and the primary regulatory bodies´┐Żauditors, credit rating agencies, reputable independent directors, boards of directors, powerful audit committees, etc, all failed as usual.

ICICI Bank Scam
Case of ICICI Bank Fraud The Board played a part in the apparent case of alleged nepotism by hastily clearing its CEO of any wrongdoing without releasing the findings of an independent inquiry to the public and by declining to answer any questions about the situation.

Kingfisher Airlines and United Spirits Case
Particularly with regards to falsifying accounts and providing illegal internal corporate financing to parties. It was abundantly clear that during the time Mr. Vijay Mallya was in charge of USL, assets had been transferred from United Spirits Ltd. (USL) to subsidise Kingfisher, United Breweries (UB) Holdings had been used as a conduit for borrowing money and giving it to his group, inter-corporate credits had been given to related groups without the Board's approval, accounts had been improperly expressed, reviews had been stage managed, etc. True, but sad. Each month, more corporate frauds are added to the list and discovered at businesses and institutions that once led the way in good corporate governance.

Conclusion
India has taken steps to improve its corporate structure by implementing various guidelines and act to promote and protect the investors interest as well as the key stakeholders it has come a long way from 1956 when Securities Contract (Regulation), Act,1956 was implemented to the current LODR Regulations 2015 which helps in prevailing the pillars of good corporate governance

End-Notes:
  1. Corporate Governance, Principles , policies and practices, 2nd ED, Pearson
  2. International Reporting Monetary Standards issued by the International Accounting Standard Board.

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