History of Corporate Governance in India

This article has been written by Prithiv Raj Sahu, a student of KIIT School of Law, Bhubaneswar (4th year). The article enumerates the concept of corporate governance and its history in India.

Corporate Governance

Corporate governance is not a law it’s a mechanism. Corporate Governance refers to the set of system, principles and processes by which a company is governed. Corporate Governance is based on principles such as

  1. Conducting the business with all integrity & fairness,
  2. Being transparent with regard to all the transactions,
  3. making all necessary disclosures,
  4. Complying with applicable Law,
  5. Accountability & responsibility towers the stakeholder.

History of Corporate Governance in India

The concept of good governance is very old in India dating back to third century B.C. where Chanakya (Vazir of Parliputra) elaborated fourfold duties of a king viz. Raksha, Vriddhi, Palana and Yogakshema. Substituting the king of the State with the Company CEO or Board of Directors the principles of Corporate Governance refers to protecting shareholders wealth (Raksha), enhancing the wealth by proper utilization of assets (Vriddhi), maintenance of wealth through profitable ventures (Palana) and above all safeguarding the interests of the shareholders (Yogakshema or safeguard). Corporate Governance was not in agenda of Indian Companies until early 1990s and no one would find much reference to this subject in book of law till then. In India, weakness in the system such as undesirable stock market practices, boards of directors without adequate fiduciary responsibilities, poor disclosure practices, lack of transparency and chronic capitalism were all crying for reforms and improved governance. The most important initiative of 1992 was the reform of Securities and Exchange Board of India (SEBI). The main objective of SEBI was to supervise and standardize stock trading, but it gradually formed many corporate governance rules and regulations. The initiative in India was initially driven by an industry association, the confederation of Indian industry. In December 1995, CII set up a task force to design a voluntary code of corporate governance. The final draft of this code was widely circulated in 1997. In April 1998, the code was released. It was called Desirable Corporate Governance – A Code. Between 1998 and 2000, over 25 leading companies voluntarily followed the code – Bajaj Auto, Infosys, BSES, HDFC, ICICI and many others.

In India, the CII took the lead in framing a desirable code of corporate governance in April 1998. This was followed by the recommendations of the Kumar Mangalam Birla Committee on corporate governance. This committee was appointed by SEBI. The recommendations were accepted by SEBI in December 1999 and now enshrined in Clause 49 of the listing agreement of every Indian Stock Exchange.

Clause 49 of listing agreement

Listing agreement deals with the complete guidelines for corporate governance. Following are the provisions, a company, must comply to implement effective corporate governance.

  1. Board Independence: Boards of directors of listed companies must have a minimum number of independent directors.
  2. Audit Committees: Listed companies must have audit committees of the board with a minimum of three directors, two-thirds of whom must be independent.
  3. Disclosure: Listed companies must periodically make various disclosures regarding financial and other matters to ensure transparency.

We can compare the Sarbanes-Oxley Act of 2002 and Clause 49. Clause 49 was based on the principles of Sarbanes-Oxley Act of 2002. It was developed for the companies listed on the US stock exchanges. As far as the responsibilities of management and number of directors were concerned, they are both the same. They also have same rules regarding insider trading, refusal of loans to directors and so on. The important difference between the two is under Sarbanes-Oxley legislation if fraud or annihilation of reports takes place up to 20 years of imprisonment can be charged, but in case of Clause 49, there is no such condition. Being the controller of the market SEBI can commence a criminal proceeding. If in case SEBI decides to give a severe punishment then it can commence a criminal proceeding or raise the fine for not agreeing with Clause 49, which automatically delists the company.

Amendments to the Companies Act, 1956

India took up its economic reforms programme in 1990s. Again a need was felt for a comprehensive review of the Companies Act, 1956 which has become the bulkiest and archaic with 781 sections and 25 schedules by this time. Three unsuccessful attempts were made in 1993, 1997 and then in 2003 to rewrite the company law. Companies (Amendment) Bill, 2003 which contained several important provisions relating to corporate governance was withdrawn by the Government in anticipation of another comprehensive review of the law. As many as 24 amendments to this Act were made since 1956, of which the 52 amendments pertaining to corporate governance and corporate sector development through the Companies (Amendments) Act, 1999, the Companies (Amendment) Act, 2000 and the Companies (Amendment) Act, 2001.

Corporate Governance provisions in the Companies Act, 2013

 The enactment of the companies Act 2013 was major development in corporate governance in 2013. The new Act replaces the Companies Act, 1956 and aims to improve corporate governance standards simplify regulations and enhance the interests of minority shareholders.

  1. Board of Directors (Clause 166)
  2. Independent Director (Clause 149)
  3. Related Party Transactions (RPT) (Clause 188)
  4. Corporate Social Responsibility (CSR) (Clause 135)
  5. Auditors (Clause 139)
  6. Disclosure and Reporting (Clause 92)
  7. Class action suits (Clause 245)

Importance of Corporate Governance

  1. Creation of wealth
  2. Protecting the interest of shareholders and all other stakeholder
  3. Shapes the growth and future of capital market and economy
  4. Contributes to the efficiency of the business enterprise

Conclusion

The concept of corporate governance once there is a brand image, there is greater loyalty, once there is greater loyalty, there is greater commitment to the employees, and when there is a commitment to employees, the employees will become more creative. In the current competitive environment, creativity is vital to get a competitive edge. Corporate Governance in the Public Sector cannot be avoided and for this reason it must be embraced. But Corporate Governance should be embraced because it has much to offer to the Public Sector. Good Corporate Governance, Good Government and Good Business go hand in hand.

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