Corporate Governance under Companies Act, 2013

Corporate governance is a mechanism for governing a company that is based on certain systems and principles. Governance ensures that a company is directed and controlled in such a way that it achieves its goals and objectives, which include providing long-term benefits to stakeholders such as shareholders, employees, suppliers, customers, and society, as well as adding value to the company. It is actually run by the board of directors and the relevant committees for the benefit of the company’s stakeholders.’ Corporate governance is all about striking a balance between individual and societal goals, as well as economic and social objectives.

Corporate Governance is essentially about leadership; leadership for efficiency in order for companies to compete effectively in the global economy, and thus create jobs; leadership for probity in order for investors to have confidence and assurance that a company’s management will act honestly and with integrity in regard to their shareholders and others. Leadership with responsibility, as companies are increasingly being called upon to address legitimate social concerns related to their activities; and, leadership that is both transparent and accountable, as otherwise business leaders cannot be trusted, resulting in the decline of companies and, ultimately, the demise of a country’s economy.^[1]

Meaning of Corporate Governance

The term “Governance” refers to the process of governing, whether by government, market, or network, over a family, tribe, formal or informal organisation, or territory, and whether through general laws, norms, or power. It entails the interaction and decision-making process. When applied to a business organisation, the term “Governance” is defined as a combination of processes established and executed by the Board of Directors, which are reflected in the organisation structure and how it is managed and led toward achieving goals. The term “Corporate Governance” gained prominence in the business world after accounting fraud of high-profile companies was discovered, which was caused by a lack of adequate governance mechanisms.

To apply the term Governance to the corporate world, the relationship between the company’s management, its Board of Directors, shareholders, auditors, and other stakeholders is ideally addressed. If we want to define corporate governance, we can say that it refers to the rules, processes, or laws that govern how businesses are run, regulated, and controlled. Transparency of corporate structures and operations; accountability of managers and the Board of Directors to shareholders; and corporate responsibility to stakeholders are key aspects of good corporate governance.

Corporate governance consists of the following elements

• Explicit and implicit contracts between the company and its stakeholders for the distribution of responsibilities, rights, and rewards.
• Procedures for reconciling stakeholders’ competing interests in accordance with their duties, privileges, and roles.
• Procedures for proper supervision, control, and the flow of information to serve as a system of checks and balances.

Why any company needs Corporate Governance?

The need for corporate governance has arisen as a result of growing concerns about noncompliance with financial reporting standards and accountability by boards of directors and company management, which has resulted in significant losses for investors. The following are India’s corporate governance requirements:

1. Changing the Structure of Ownership:

A corporate firm has many stakeholders, each with a different attitude toward corporate affairs; corporate governance protects the stakeholders’ rights by enforcing them through its code of conduct. Today, a company has a large number of stakeholders spread across the country and even the world, and the majority of shareholders act unaware and with a disinterest in corporate affairs. Maintaining a proper corporate structure necessitates the practical application of rules and regulations via a corporate governance code of conduct.

2. Social responsibility:

Society has higher expectations of corporations; they expect corporations to care about the environment, pollution, the quality of goods and services, sustainable development, and so on. All of these expectations can only be met with good corporate governance.

3. Takeovers and Mergers:

In the past, corporate takeovers and mergers caused a slew of issues. It affects the rights of various stakeholders in the company and creates a problem of chaos; this factor also pushes the country’s need for corporate governance.

4. Confidence booster:

In recent years, corporate scams or frauds have shaken public trust in corporate management. The need for corporate governance is then critical for reviving investors’ confidence in the corporate sector as a means of contributing to societal economic development.

5. Mismanagement and corruption:

There has been a significant increase in the monetary payments and packages of top level corporate executives in both developing and developed economies. There is no justification for exorbitant payments to top-level executives from corporate funds that are the property of shareholders and society. This factor necessitates corporate governance in order to limit the ill-practices of top management in businesses.

Corporate Governance Initiative in India

The establishment of India’s Corporate Governance system, i.e. the contribution of each and every organ in its upbringing and establishment, is highly commendable, The Confederation of Indian Industry (CII), India’s largest industry and business association, launched the first initiative.[2] The Security Exchange Board of India (SEBI) took the second major initiative as clause 49[3] of the listing agreement.[4] The Naresh Chandra Committee and the Narayana Murthy Committee took the third initiative. These committees examined corporate governance from the perspective of stakeholders, particularly shareholders and investors. Shareholders, the Board of Directors, and management have been identified as three key constituents of corporate governance by the committees. The committees have identified three major aspects: accountability, transparency, and treating all shareholders equally.[5]

The Ministry of Corporate Affairs (MCA)[6] issued a new set of “Corporate Governance Voluntary Guidelines 2009”[7] in 2009 to encourage companies to improve the operation of the Board and Board committees, the appointment and rotation of external auditors, and the establishment of a whistle blowing mechanism. The guidelines introduced are recommendatory in nature and can be broadly divided into six parts, which include the Board of Directors, Board Responsibilities, Audit committees, Auditors, Secretarial audit, and the establishment of a mechanism for whistle blowing. While some Indian companies have actively pursued high standards of governance, the vast majority of companies have not taken the guidelines seriously.

Corporate Governance Issues in India

Although there are numerous issues in the field of Corporate Governance, particularly in India, an effort has been made to highlight only the most significant ones here:

1. Performance of the Board:

At least one female director is required, and the balance of executive and non-executive directors is not maintained. Evaluation is not done on a regular basis, and transparency has been lost somewhere. The performance is not oriented toward results. These standards are not always met.

2. Problem pertaining to Independent Director:

Independent directors are appointed for a reason that does not appear to be met in the current situation. Even after SEBI guidelines for the appointment of an audit committee or the provision of a comprehensive definition of independent directors were issued to corporations, the actual situation appears to be worse.

3. Stakeholder Accountability:

The accountability does not stop with the shareholders or the company; it extends to society as a whole as well as the environment. The directors must consider not only their own interests, but also the interests of the community.

4. Management of Risks:

The risk management techniques must be implemented by the directors in accordance with the Company Laws, and they must also be mentioned in their annual report to shareholders. This is not done with the utmost sincerity required for the job.

Relevant Sections of the Companies Act 2013 with Explanation & The Role Of The Concerned Section/S In Furthering Corporate Governance

The Companies Act of 2013 focuses on great corporate governance practises by expanding the Board’s roles and responsibilities, ensuring investor enthusiasm, acquiring a revelation-based administration, and inherent prevention through self-direction. The 2013 Act fundamentally alters how businesses are represented.

The Act makes provision for the following arrangements which are discussed in detail below:

1. Appointment of Board:

According to the Companies Act of 2013, an open and additionally privately owned business can have a maximum of fifteen executives on the Board,[8] and naming more than fifteen executives would require the approval of investors through an uncommon decision in the General Meeting.[9]It also allows for the appointment of at least one female executive to the Board of Directors for whatever class or classes of companies are recommended.[10] The Act requires organisations to have at least one executive who has lived in the country for at least a year.[11]

2. Independent Directors:

The majority of the qualities of the posting understanding are contained in the definition of independent director given in the Companies Act, 2013.[12] An independent director should be a man of integrity with significant aptitude and experience. The Act expressly states that independent director should not have any material monetary relationship with the organisation, its promoters, executives, or auxiliaries that could influence the director’s autonomy in the current fiscal year or in the next two years. The Act includes the following provisions for independent director: According to the Companies Act of 2013, each registered organisation must have at least 33 percent of its total number of directors as independent directors, with any portion counted as one.[13] The central government will be able to recommend the fewest number of independent directors in various classes of open companies.

Independent Directors’ Code of Conduct

Schedule IV,[14] of the Act includes a Code for Independent Directors, which independent directors must follow. The “Code for Independent Directors” establishes clear guidelines for professional leadership, roles, and responsibilities. It includes the following perspectives: Professional conduct; data illumination; safeguarding the interests of all partners; actual performance of obligations and duties; and evaluation of board and administration execution, among other things.

Independent Directors’ Liabilities-

Under the Companies Act of 2013, an independent director and a non-official executive who is not a promoter or KMP will be held liable for such demonstrations of oversight or commission by an organisation that occurred with his insight, as evidenced by board forms, and with his assent, or where he did not act decisively.[15]

3. Committees of Board:

(A). Audit Committee-

Review panels are required for recorded companies and other recommended classes of companies under Section 177 of the Companies Act of 2013. According to the Act, the review panel should consist of at least three chiefs, with independent executives playing a dominant role. The 1956 Act made no mention of academic or professional qualifications for executives. According to the 2013 Act, the majority of members of the Audit Committee, including the Chairperson, must be able to read and comprehend financial articulations.

(B). Committee on Nominations and Remuneration-

Review boards are required for recorded companies and other recommended classes of companies under Section 177 of the Companies Act of 2013. According to the Act, the review panel should consist of at least three executives, with independent chiefs playing a dominant role. The 1956 Act made no mention of scholarly or professional qualifications for executives. According to the 2013 Act, the majority of individuals on the Audit Committee, including the Chairperson, must be able to read and comprehend the directors.

(C). The Committee on Corporate Social Responsibility (CSR)-

According to the Act, any organisation that meets certain criteria must form a Corporate Social Responsibility Committee of the Board, comprised of at least three executives. At least one independent executive should serve on the CSR Committee. CSR strategies should be planned and screened by the CSR advisory group, and they should be discussed in the Board’s report. The board must endorse the CSR strategy and reveal the substance in the board report, which must be posted on the organization’s website.

(D). Committee for Relationships with Stakeholders-

The Act protects all security holders, including value speculators. It is required that an organisation with more than 1000 investors, debenture holders, store holders, and other security holders form a Stakeholders Relationship Committee at some point during the fiscal year. It will be led by a non-official executive and will be made up of individuals chosen by the board. The board will consider and resolve the organization’s security holders’ grievances.[16]

(E). Related Party Transactions-

According to the Companies Act of 2013, a related gathering exchange can be entered into only if it is approved by a unanimous decision at the general gathering. A member of the organisation who is a related gathering cannot vote on such an extraordinary decision. The restrictions will have no effect on any transactions conducted by the organisation in its normal course of business, other than transactions conducted on an at-a-distance premise.[17] Each agreement or course of action entered into with a related gathering should be mentioned in the Board’s report, along with the defence for entering such contract or game plan. The central government may propose additional conditions for participating in related gathering exchanges.

(F). Prohibition of Insider Trading-

No one, including any executive or KMP of a company, should engage in insider trading aside from correspondence required in the ordinary course of business, profession, or work, or under any law. Insider trading by any executive or key administrative faculty of an organisation is punishable by imprisonment for up to five years and a fine of up to 25 crore INR or three times the amount of profits made from insider trading, whichever is greater, or both.[18] Despite the fact that corporate administration practises can be traced back to 1961 around the world, India lagged behind. It wasn’t until 1991 that progress was made and corporate administration established a global network.[19]

The most important event in 1992 was the change of the Securities and Exchange Board of India (SEBI). SEBI’s primary goal was to manage and institutionalize stock trading, but it gradually framed numerous corporate administration standards and controls.[20] The following significant change was the establishment of the Confederation of Indian Industry (CII) in 1996, which established a set of laws for Indian organisations in order to begin the demonstration toward corporate administration. At that point, two advisory groups led by Kumar Mangalam Birla and Narayan Murthy of the Securities and Exchange Board of India began laying the groundwork for formalizing the prescribed corporate administration procedures.[21]

Clause 49 was presented as a major aspect of the posting contract for the organisations listed on the Indian stock exchange in response to the recommendations of these committees. Nonetheless, outrages like Enron, Satyam, WorldCom, and so on compelled the condition 49 to be changed in order to consolidate and defeat the issues that caused these organisations to crumple and smash the economies of the specific nations. From 2000 to 2003, Statement 49 of the posting understanding of Indian stock trade produced results. It included all of the controls and prerequisites, for example, the least number of free executives, board members, various vital advisory groups, a set of accepted rules, review council principles and breaking points, and so on.[22]

Future of Corporate Governance in India

Although corporate governance in India is far from perfect, it has a long way to go before it can be considered the best in the world. Many CEOs now believe that their companies require financial and human capital to develop the standards required to compete on a global scale. Stakeholders are increasingly aware of the market, and they begin analyzing every aspect of a company in order to pass it in terms of corporate governance. As a result, the CEOs and owners of the company are well-versed in corporate governance. They also understand that such capital will not be available in a non-transparent corporate regime devoid of international disclosure and accountability standards.

Corporate Governance is a growing trend concept that may be able to expand further in India in the future. India’s current market is very different from that of the future. As a result, it can be stated that the theory of corporate governance will be applicable in every company in India with some additional and advanced modifications and policies.

Another issue that needs to be addressed in the future is the record number of independent directors and auditors leaving companies before the end of their terms. A record number of mid-term resignations of auditors and independent directors have resulted from a rash of corporate governance scandals in 2019. According to data from nseinfobase.com, the number of exits of independent directors from boards of Indian companies increased 54% year on year in calendar 2019. In addition, 58 auditors stepped down mid-term in 2019, slightly more than in 2018.[23] SEBI, the market regulator, has taken action against auditors for faulty audits and made qualifying examinations for independent directors mandatory.

Conclusion

India’s corporate governance structure includes a variety of measures that promote governance accountability and transparency of financial and other data. On the administrative structure of corporate governance, the Indian government has attempted a series of changes to improve money-related data disclosure standards and to refresh bookkeeping rules. The authorization of the Companies Act 2013 merits mention in the context of corporate governance.

The new Act, which replaces the Companies Act of 1956, is intended, among other things, to improve corporate governance standards. The purpose of this paper is to examine the arrangement and various improvements in corporate governance in India under the Companies Act, 2013.

According to the Companies Act of 2013, the role of the Board of Directors is extremely important in terms of better Corporate Governance motivation. Numerous arrangements relating to chiefs’ and inspectors’ autonomy, strict exposure standards, and financial specialists’ insurance will have broad ramifications and acquire more noteworthy straightforwardness and responsibility in the organization’s working while limiting the occurrences of corporate cheating. Its primary goal isn’t simply to satisfy the requirements of the law, but to ensure the Board’s duty in dealing with the organisation in a straightforward way to maximize partner esteem.

However, in a broader sense, good corporate governance extends beyond the tenets and controls that the government can impose. It should come from within, allowing the organisation to establish a profitable relationship with its inward clients and a long-term business relationship with its outside clients. The genuine onus of achieving desired levels of corporate governance rests with corporations themselves, not on external measures.

About the Author: Parth Bindal is a 4^th year student at School of Law, University of Petroleum and Energy Studies (UPES), Dehradun.

Note: The views in this article are personal only.

References

[1] Mervyn King, King Report on Corporate Governance for South Africa [King II Report] [Parktown, South Africa: Institute of Directors in Southern Africa, 2002] p.18

[2] https://www2.deloitte.com/in/en/pages/risk/articles/governance-101.html.

[3] The provisions in Clause 49 of the Equity Listing Agreement are both mandatory and non-mandatory. Those that are absolutely necessary for corporate governance and that can be enforced without any legislative changes are classified as mandatory. Others are classified as non-mandatory because they are either desirable or may necessitate a change in the law. Non-mandatory requirements may be implemented at the company’s discretion. However, disclosures of compliance with mandatory requirements and adoption (and compliance) / non-adoption of non-mandatory requirements must be made in the Annual Report’s section on corporate governance.

[4] https://bit.ly/3xAeNch.

[5] https://www.caclubindia.com/articles/importance-of-corporate-governance-and-companies-act-2013-24923.asp.

[6] https://bit.ly/3JPKkcJ.

[7] https://www.mca.gov.in/Ministry/latestnews/CG_Voluntary_Guidelines_2009_24dec2009.pdf.

[8] Section 149(1) of the Companies Act, 2013.

[9] Section 149(1) of the Companies Act, 2013.

[10] Section 149(1) of the Companies Act, 2013.

[11] Section 149 (3) of the Companies Act 2013.

[12] Section 149 (6) of the Companies Act 2013.

[13] Section 149(6), Companies Act, 2013.

[14] Company Act 2013.

[15] Section 149(12) of the Companies Act, 2013.

[16] https://taxguru.in/company-law/stakeholder-relationship-committee.html#:~:text=Stakeholder%20Relationship%20Committee%20(Committee)%20is,Corporate%20Governance%20of%20the%20Company..

[17] https://www.investopedia.com/terms/r/related-partytransaction.asp#:~:text=The%20term%20related%2Dparty%20transaction,or%20have%20a%20common%20interest.

[18] https://blog.ipleaders.in/insider-trading-regulations/#:~:text=It%20is%20illegal%20to%20use,trading%20was%20taken%20in%201948.

[19] https://bit.ly/3rDxrfv.

[20] https://www.mca.gov.in/content/mca/global/en/home.html.

[21] https://bit.ly/3KZUOHT.

[22] https://www.sebi.gov.in/sebi_data/commondocs/cir2803an1_p.pdf.

[23] https://economictimes.indiatimes.com/markets/stocks/news/five-trends-that-defined-india-incs-corporate-governance-standards-in-2019/articleshow/73027056.cms.