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Analysis Of Corporate Governance Practices In India

Corporate governance is said to have steadily changed and grown over the previous decade. Several causes, including the convergence and globalisation of financial markets, as well as the rise of corporate scandals such as Enron, World Com, and Satyam, have contributed to fast developments in this region.

Corporations went bankrupt because their management values were unsuccessful. Corporate governance, according to the Cadbury Committee model, is a system that leads and governs enterprises.[1] Investors from developed countries are requesting that Indian businesses practice foreign best practices with openness and anti-corruption policies.

The current practice of revealing corporate governance started during the late 1990s reform phase in the Indian market. Strong corporate governance would positively encourage and improve every form of organization irrespective of its type and existence. Besides, corporate governance does have its position when it comes to banks and financial institutions.

Banks are a key part of the current monetary system. The credit cooperative is a provider of affordable credit for small and large businesses. Banks deal with depositors' funds and therefore ought to act as their trustees. India's new economic policy introduced during the first decade of the nineties unleashed a process of liberalization and deregulation.[2]

It opened the door for private banks to be founded in the country. Private sector banks are not a shining example of effective conduct of their affairs. Regulators have picked this concept internationally as they are controlling banks differently than most companies. Due to bank failures in western countries, the importance of bank regulation and supervision has been highlighted.

This research work is divided into five chapters which are mentioned below:
Firstly, the researcher would introduce the brief concept of corporate governance in India. It also outlines the research objectives, research questions, research hypothesis, and method of study.

Secondly, the researcher would lay down guidelines for corporate governance practice. It also deals with key components of corporate governance, the significance of corporate governance, and its benefits.

Thirdly, the researcher has briefly touched on the concept of corporate governance in the banking sector. This chapter talks about how the banking industry is affected by corporate governance. This chapter also talks about the need for good corporate governance in banks. Further, the researcher has analysed various kinds of significant committees which enhance the workings of any corporate entity.

Committees On Concept Of Best Corporate Governance

Best governance is part of a company's life as it encourages trust for investors by showcasing the ways for the businesses to strive for advanced levels of growth and income.

Corporate governance intends to accomplish the following goals:
  1. The Board is unanimously capable of making decisions free from prejudice.
  2. The Board should execute transparent policies and activities.
  3. The Board is holding a check on the running of top management.
  4. The Board has an efficient functioning structure to help the need of the customers.
  5. The Board of Directors is balanced as regards the representation of a sufficient number of non-executive and independent directors.
  6. The Board fulfils its task of keeping shareholders up to date with developments affecting the organization.

Key Components Of Corporate Governance

Good governance relies on good leadership and good Board Management, and these cannot be decoupled. The Board is primarily responsible for the development of value for its stakeholders. Organizations can lose their legitimacy because they failed to identify specific key objectives. Good governance includes clear lines of separation of authority between relevant decision-makers, duties, and functions.

The Board is expected to keep a detailed record of its committees and procedures.[1] The role of the audit committee is to maintain a harmonious relationship between auditors and management. Audit of interior control and enforcement with important strategies and procedures would provide the knowledge to handle the policies and procedures of the company.[2]

The key components of corporate governance include the following:
  • To be in consistent contact with the customers to represent the stakeholders.
  • To ensure that the company's goals are clear to all.
  • To keep the whistle-blower policy-relevant. Any misconduct should be informed to the senior managers of the company.
  • To draft a sound business plan with clear knowledge of business goals.
  • To prevent ambiguity and equitable legislation should be formed.
  • To ensure stakeholders are rational in their approach.
  • To emphasize making social and environmental improvements.
  • To analyse risk as an essential part of corporate governance.
  • To improve the Boards' efficiency by being more autonomous in target achievement.

Significance Of Corporate Governance

Corporate governance is of significant importance in a company. It ensures that business partnerships and trade will continue to strengthen.[3] A company having good corporate governance will keep the Board accountable and honest with its stakeholders. It will also make sure that an appropriate mechanism is built-in which people can be held responsible for their acts. It has been noticed in the past few years that a modern joint-stock company and family businesses have gained importance. They have become a significant part of our society.

The researcher submits that corporate governance is very relevant for businesses and stakeholders. It is beneficial to both parties. One of the benefits of corporate governance is that it enhances accountability, openness to financial markets, and an opportunity to reduce conflicts of interest by improving decision-making and minimizing scrutiny.

In addition, it offers better potential for a large variety of businesses and is a wonderful opportunity for future expansion because of a strong foreign credit system. Further, it should provide suitable instruments for the board and management that connect in the best interest of the company and the shareholders.

It provides better protection for the investment of the stockholders. This generates an atmosphere where stockholders are properly updated on important decisions. It has been found from several study assessments that investors are willing to pay more for a well-kept business compared to one with bad governance.

Corporate Governance In The Banking Industry

Corporate governance in the banking sector is similar to the functioning of private companies. Private companies are ruled by their board of directors and senior management. Banks act as lenders of money. They have the important function of acting as a link between people who possess surplus funds and those who need these funds.

Like other companies, banking company deals with private money. Banks must be managed in compliance with strict ethical standards and implement a corporate governance framework. The goal of the banks' governance should be to maximize the interests of their depositors and not shareholders.

The Banking Regulation Act, 1949[4] remains the cornerstone of the corporate governance system for the banks in India. The Basel Committee on banking supervision needs to make sure there are adequate accountability processes in place for banks and in particular, good corporate governance. The Reserve Bank of India (RBI) has taken various steps for the betterment of corporate governance in the Indian banking sector.

The Ganguly Committee on corporate governance for banks also has a role as a regulatory mechanism for financial institutions. The committee suggested the establishment of numerous committees for boards to oversee different aspects of business, such as audit committee, corporate governance committee, and management committee.

"Taking into consideration the vital role of banks in the economic growth of the nation, RBI allowed small private banks to operate freely in the country. Private sector banks are being applauded by the people but the key focus should be to protect the interests of depositors since their money is now in private hands."[5]

Need Of Efficient And Balanced Governance In Banks

Numerous principles aid in assessing the standard of corporate governance in the banking sector. Financial institutions are vital for the financing of any economic development. They have access to "capital market" and corporate funds with a sound Capital Adequacy Ratio (CAR). They have alternate sources of funding from the stock market and big shareholders. Investors trust a corporation with good governance to generate higher numerical returns. Good corporate governance is essential in maintaining existing clients and attracting new clients. In these cases, market orientation and investor security inspire the investors, patrons, and consumers.

Employees and vendors should consider the long-term ambitions of the bank. Important practices in "good corporate governance" such as evaluation of credit risks about the lending process have a positive impact on the quality of corporate governance practices and standards of the banking industry. Successful banks need to adopt appropriate corporate governance that enables clear contact between the incumbent management and the board members.

Corporate governance is extremely important in the banking sector because:
  • To form a competent team of a Board of Directors.
  • To have an Audit Committee, Salary committee, and Corporate Governance committee for effective internal control.
  • To increase shareholders' value.
  • To create a management code of ethics.
  • To share details in an honest manner.

Corporate Governance

The researcher submits a few guidelines on committees on corporate governance. These guidelines have been taken from the Securities and Exchange Board of India (SEBI), The Companies Act, 2013, RBI, and the Ministry of Corporate Affairs.
  1. Composition of the Board
    Banks, investment intermediaries, and Non-banking Financial Companies (NBFC) are all governed by SEBI. For good corporate governance, it is encouraged that there are a higher number of non-executive directors than the executive director. According to provisions of SEBI, "at least one woman director is to be on the board, and the majority of directors must be from non-executives. It shall be applicable that at least 33% of the board of directors shall consist of independent directors. The board of directors shall at least consist of 50% Independent Directors, but when it is not a daily Independent Director, at least 50% directors shall be Independent Directors." In a scenario where the non-executive chairman is the promoter of the company then at least half of the directors should be autonomous.
     
  2. An Audit Committee
    According to the Companies (Amendment) Act 2020, listed companies are required to form an Audit Committee consisting of at least three Directors, with an Independent Chairman in the majority.[6] It is one of the most significant board committees.[7] It will ensure an accurate, comprehensive, and reliable company financial status report. Committee meeting needs to be held at least four times a year.
     
  3. Committee for Remuneration and Nomination
    A committee may have a member of the chairman as its chairman but cannot have a chairman of such committee. The Remuneration Committee looks for skilled and competent individuals to get board seats and oversee managerial decisions and activities. "There should be more than 2 non-executive directors, and ideally 50 present as independent directors." This committee sets standards for compensation, employment, and scope of autonomy for executives and other managers.
     
  4. Committee for Risk Management
    It is an important committee whose purpose is to assist the Board so it can fulfil its administrative and oversight duties regarding risk detection, assessment, and mitigation.
     
  5. Executive Committee
    As far as the position of Shareholders and Investors Complaint and "Administrative Committee" is concerned, it is very significant because it approves, transfers, and transmits shares and, of course, disburses assets upon the plea. This committee will consider the questions and inquiries received from the stockholders.
     
  6. Committee for Corporate Social Responsibility
    A company is required to fulfil its corporate social responsibility. Those companies which have a net wealth of Rs. 500 crore or more or total annual sales of Rs.1000 crore or more or gross profit of Rs. 5 crores or more in any financial year have to fulfil the CSR. To become a socially responsible organization, a corporation must have a corporate social responsibility (CSR) committee on the board of directors. The main role of the CSR review committee will include checks on CSR programs, formulation of legislation, tracking of CSR operations, implementation and enforcement, and reviewing and updating.

Corporate Governance Practices In Financial Institutions

An equal mix of executive and non-executive directors should be present on the board with at least "one woman director" and the majority of directors should be from outside the executive office (i.e., 50 percent or more).

"In the event where the chairman of the board is not an executive director so at least 33% of the board's board should be independent directors." When the Chairman is not a normal Non-executive Officer, 50 percent of the board must be independent directors. In instances where there's a Non-executive Chairperson who is a promoter of the company or some similar-level person, then 50% of the company's directors should be Independent Directors.

Under the Companies Act, at least "one-third of Directors must be independent, although the SEBI listing agreement under Clause 49 does not define any clear criterion for the percentage of independent directors, where the Board has an Executive Chairman."[8] The world is moving towards more diversity by growing the number of Directors from various backgrounds. A properly and diversified board helps inform the decisions of the plan as well as able to develop intellectual property.

One of the recommended diversity initiatives is the involvement of women in decision creation. This measure can be seen by the rise in women's representation on boards. According to the Act, all listed companies must have at least "one woman director" on the board.

It is submitted that a lively board is necessary for a management team to be effective and efficient, efficient management can be calculated by the number of "board meetings" held and the amount of involvement of the board members. Under Clause 49 of the Listing Agreement the number of committees differs for various types of businesses.[9]

However, they are the subject of Clause 48. For an organization to function effectively there should be a set method of corporate governance. It should be open and non-partisan to decide corporate governance issues. The boards which are assigned these problems should be made up of independent directors.

What had been causing such problems within the financial sector was increased remuneration of the executives, unnecessary risk in financial goods, the opacity of the knowledge, and complaint redressal of stockholders. One of the ways to eliminate these problems is to make suggestions to the board of directors to make sure members of the Board are independent, qualified individuals.

Conclusion And Recommendations
The main aim of this research paper was to quantify the role of corporate governance in evaluating bank efficiency. The model opted is "Return on equity" and "Return on Assets", Price to Earnings ratio and return of investment. Each of these moves had an insignificant effect on the overall companies' governance ranking. The key proxy for corporate governance is the non-performing assets ratio (NPA). Therefore, the more the NPA more corrupt the corporate governance is structure.

The researcher concludes that the concept of NPA ratio was an insignificant variable to the entire research. Thus, the research indicates that corporate governance efficiency has little effect on banks' financial performance.

Some of the significant recommendations for corporate governance are as follows:
  • There should be more transparency about the remuneration of senior executives and board members, and a mechanism to assess their results.
  • There must be at least one woman director of any company.
  • Companies should have whistle-blower systems where workers can reveal company wrongdoings quickly.
  • An independent director should serve for a total of two terms of five years.
  • Due to this restriction, it is unlikely that an individual will be an independent director in more than seven companies.
  • Any business should obtain prior approval for all material-related-party transactions.
To sum up, the researcher submits that if a corporate governance system is to be successful it must have more consistent reporting measures and it must be connected to the outcomes of that process.

Bibliography
Articles
  1. Ankita Asthana and M.L. Dutt, The Extent of Disclosure Code of Corporate Governance in India: A Comparative Study of Public and Private Sector Banks
  2. Madan Lal Bhasin, Corporate Governance Disclosure Practices: The Portrait of a Developing Country.
  3. A. Gupta, A.P. Nair, R. Gogula, Corporate Governance Reporting by Indian Companies: A Content Analysis Study.
  4. Rajesh Chakrabarti, William Megginson, Pradeep K. Yada, Corporate Governance in India.
  5. Dulacha G. Barako, Phil Hancock, H.Y. Izan, Factors Influencing Voluntary Corporate Disclosure by Kenyan Companies.
Books
  1. C.L. Bansal, Corporate Governance, Taxman's Publications (2005)
Internet Sources
  1. https://www.companiesact.in/Companies-Act-2013/Useful-Articles
Statutes Referred:
  • The Banking Regulation Act, 1949.
  • The Companies Act, 2013, clause 49.
  • The Companies (Amendment) Act 2020.
  • SEBI Regulations, 2021.
End-Notes:
  1. The Hampel Committee: Final Report, the European Corporate Governance Institute, (1998) < https://ecgi.global/sites/default/files/codes/documents/hampel.pdf> accessed on 02.09.2022
  2. Mehul Raithatha, Dr. Varadraj Bapa, Corporate Governance Compliance Practices in Indian Companies accessed on 02.09.2022
  3. Rajesh Chakrabarti, William Megginson, Pradeep K. Yada, Corporate Governance in India, Journal of Applied Corporate Finance, Pg. 60-62 (2008).
  4. The Banking Regulation Act, 1949.
  5. Dulacha G. Barako, Phil Hancock, H.Y. Izan, Factors Influencing Voluntary Corporate Disclosure by Kenyan Companies, Corporate Governance: An International Review, Pg. 110-126 (2006).
  6. The Companies (Amendment) Act 2020.
  7. Boris, Sanja, Ana, The Role of Audit Committee in Corporate Governance, Extended Abstract, Conference Proceedings: International Conference of the Faculty of Economics, Sarajevo, Pg. 19-22 (2008).
  8. A. Gupta, A.P. Nair, R. Gogula, Corporate Governance Reporting by Indian Companies: A Content Analysis Study, The ICFAI Journal of Corporate Governance, Pg. 7-10 (2003).
  9. The Listing Agreement, clause 49.

References:
  • The Cadbury Report, ICAEW accessed on 02.09.2022
  • The New Economic Policy of 1991 accessed on 02.09.2022

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