Evolution of Corporate Governance in India

Corporate governance refers to the set of systems, principles and processes by which a company is governed. It provides the framework for attaining a company’s objectives, encompassing practically every sphere of management, from action plans and internal controls to performance measurement and corporate disclosure. In India, corporate governance has evolved significantly, influenced by economic reforms, scandals and regulatory changes.

Historical Background of Corporate Governance in India

Corporate governance in India has undergone a significant transformation over the years. Traditionally, Indian businesses were family-owned and governance was largely driven by the interests of the promoters. However, with economic liberalisation in the early 1990s, the landscape began to change. The opening up of the economy led to increased foreign investment, heightened competition and the need for improved corporate governance practices to attract global investors.

Early Phase (Pre-1991)

Before the economic liberalisation of 1991, corporate governance in India was rudimentary. Family-owned businesses dominated the corporate sector and the interests of minority shareholders were often overlooked. The Companies Act, 1956, provided the legal framework for corporate governance, but enforcement was weak and there was little emphasis on transparency and accountability.

Economic Liberalisation and Initial Reforms (1991-2000)

The economic liberalisation of 1991 marked a turning point for corporate governance in India. The influx of foreign investments and the need to integrate with the global economy prompted the government to introduce several reforms aimed at improving corporate governance standards. Key developments during this period include:

Confederation of Indian Industry (CII) Code of Corporate Governance (1998)

The CII, an industry body, was one of the first to take proactive steps towards improving corporate governance. In 1998, it released the Desirable Corporate Governance Code, which set forth guidelines for listed companies. Although voluntary, it laid the foundation for future regulatory frameworks.

Kumar Mangalam Birla Committee (1999)

In 1999, the Securities and Exchange Board of India (SEBI) appointed the Kumar Mangalam Birla Committee to propose guidelines for corporate governance. The committee’s recommendations, implemented through Clause 49 of the Listing Agreement, emphasised the role of independent directors, audit committees and disclosures.

Scandals and Strengthened Regulations (2000-2010)

The early 2000s witnessed several high-profile corporate scandals, most notably the Satyam Computer Services scandal in 2009. These events exposed significant weaknesses in corporate governance and prompted regulatory authorities to tighten the governance framework.

Clause 49 (2000)

Clause 49 of the Listing Agreement, introduced in 2000 and revised in 2004, mandated several governance practices for listed companies, including the composition of the board, the role of independent directors and the establishment of audit committees.

Naresh Chandra Committee (2002)

In response to global corporate failures like Enron, the government set up the Naresh Chandra Committee to examine auditor-company relationships and the role of independent directors. The committee’s recommendations led to stricter auditing norms and enhanced disclosure requirements.

Narayana Murthy Committee (2003)

SEBI appointed the Narayana Murthy Committee to review Clause 49. The committee’s recommendations, implemented in 2004, focused on improving the quality of financial disclosures, strengthening the role of audit committees and enhancing shareholder rights.

Satyam Scandal (2009)

The Satyam scandal was a watershed moment for corporate governance in India. Chairman Ramalinga Raju confessed to inflating the company’s financials by $1.47 billion. This scandal highlighted the need for more robust corporate governance mechanisms and led to the overhaul of regulations.

The Companies Act, 2013

The introduction of the Companies Act, 2013, was a landmark event in the evolution of corporate governance in India. This comprehensive legislation replaced the Companies Act, 1956 and incorporated several provisions aimed at improving governance standards. Key features include:

Board Composition:

The Act mandates the inclusion of at least one woman director on the board of listed companies and certain classes of public companies. It also specifies the number of independent directors required on the board.

Audit Committees:

The Act enhances the role and responsibilities of audit committees, emphasising their role in overseeing financial reporting and disclosures.

Corporate Social Responsibility (CSR):

The Act introduced mandatory CSR provisions, requiring companies meeting certain criteria to spend at least 2% of their average net profit on CSR activities.

Enhanced Disclosures:

The Act requires more detailed disclosures in financial statements, including related party transactions, loans to directors and the remuneration of directors and key management personnel.

Whistleblower Mechanism:

The Act mandates the establishment of a vigil mechanism for directors and employees to report genuine concerns about unethical behaviour, actual or suspected fraud or violation of the company’s code of conduct.

Recent Developments and Current Trends (2010-Present)

Corporate governance in India continues to evolve, driven by regulatory changes, market dynamics and global trends. Some of the recent developments and current trends include:

SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015

These regulations consolidate and streamline the listing obligations and disclosure requirements for listed entities. They emphasise timely disclosures, strengthen the role of independent directors and enhance accountability.

Kotak Committee Recommendations (2017)

SEBI constituted the Kotak Committee to propose further improvements in corporate governance. The committee’s recommendations, implemented in 2018, include enhanced board diversity, stricter independence criteria for directors, improved oversight of group entities and stronger whistleblower mechanisms.

Integrated Reporting

There is a growing trend towards integrated reporting, which provides a holistic view of a company’s performance, including financial, social and environmental aspects. This approach enhances transparency and helps stakeholders make informed decisions.

Focus on ESG (Environmental, Social and Governance)

Companies are increasingly recognising the importance of ESG factors in long-term value creation. Investors and regulators are pushing for better ESG disclosures and many companies are adopting sustainable business practices.

Technology and Digital Governance

The adoption of technology in corporate governance is gaining traction. Digital tools and platforms are being used for board meetings, compliance tracking and stakeholder engagement, enhancing efficiency and transparency.

Challenges and the Way Forward

Despite significant progress, corporate governance in India faces several challenges. These include:

Implementation Gaps:

While regulations are robust, implementation remains inconsistent. Ensuring compliance across diverse sectors and companies is a significant challenge.

Quality of Independent Directors:

The effectiveness of independent directors is crucial for good governance. Ensuring their independence, competence and active participation remains a challenge. Many independent directors are often seen as lacking the required autonomy or being overly influenced by the company’s promoters.

Regulatory Overlap:

The regulatory framework in India involves multiple authorities, such as SEBI, the Ministry of Corporate Affairs (MCA) and the Reserve Bank of India (RBI). Coordination among these bodies is essential to avoid overlaps and ensure cohesive governance standards.

Corporate Culture:

Embedding a culture of good governance within companies is vital. This involves promoting ethical behaviour, transparency and accountability at all levels of the organisation. Changing entrenched corporate practices and mindsets can be a slow and challenging process.

Conclusion

The evolution of corporate governance in India has been a journey marked by significant milestones, driven by economic reforms, regulatory changes and lessons learned from corporate scandals. While substantial progress has been made, challenges remain in ensuring effective implementation and fostering a culture of good governance.

The Companies Act, 2013, along with SEBI regulations and guidelines, has laid a strong foundation for corporate governance. However, continuous efforts are needed to address implementation gaps, enhance the quality of independent directors and promote ethical behavior within organisations.