CORPORATE for good corporate governance and appointed several committees

CORPORATE GOVERNANCE SCENARIO IN INDIA

 

Need of Corporate Governance:

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Transparency in corporate governance is essential
for the growth, profitability and stability of any business. The need for good
corporate governance has intensified due to growing competition amongst
businesses in all economic sectors at the national, as well as international
level. The need for an efficient corporate governance is also elevated because
of the increasing concern about the non-compliance of standards of financial
reporting and accountability by management of corporate and boards of directors
inflicting heavy losses on investors.

The negligence of efficient corporate
governance and corrupt practices adopted by the management and financial
consulting firms has resulted in the collapse of international giants like
Enron, WorldCom of US and Xerox of Japan.

The failures
of these multinational giants bring out the importance of good corporate
governance structure making clear the distinction of power between the Board of
Directors and the management which can lead to appropriate governance processes
and procedures under which management is free to manage and board of directors
is free to monitor and give policy directions.

In India, SEBI realized the need for good
corporate governance and appointed several committees such as

The CII Code :

More than a
year before the onset of the Asian crisis, CII set up a committee to examine
corporate governance issues, and recommend a voluntary code of best practices.
The committee was driven by the conviction that good corporate governance was
essential for Indian companies to access domestic as well as global capital at
competitive rates. The first draft of the code was prepared by April 1997, and
the final documentiv, was
publicly released in April 1998. The code was voluntary, contained detailed
provisions, and focused on listed companies.

Kumar Manglam Birla Committee:

The second
major corporate governance initiative in the country was undertaken by SEBI. In
early 1999, it set up a committee under Kumar Mangalam Birla to promote and
raise the standards of good corporate governance. In early 2000, the SEBI board
had accepted and ratified key recommendations of this committee, and these were
incorporated into Clause 49 of the Listing Agreement of the Stock Exchanges.
This report pointed out that the issue of corporate governance involves besides
shareholders, all other stakeholders. The committee’s recommendations have
looked at corporate governance from the point of view of the stakeholders and
in particular that of shareholders and investors.

 

 Naresh Chandra Committee:

The Naresh Chandra committee was
appointed in August 2002 by the Department of Company Affairs (DCA) under the
Ministry of Finance and Company Affairs to examine various corporate governance
issues. The Committee submitted its report in December 2002. It made
recommendations in two key aspects of corporate governance: financial and
non-financial disclosures: and independent auditing and board oversight of
management

 Narayana Murthy Committee.

The fourth initiative on corporate
governance in India is in the form of the recommendations of the Narayana
Murthy committee. The committee was set up by SEBI, under the chairmanship of
Mr. N. R. Narayana Murthy, to review Clause 49, and suggest measures to improve
corporate governance standards. Some of the major recommendations of the
committee primarily related to audit committees, audit reports, independent
directors, related party transactions, risk management, directorships and
director compensation, codes of conduct and financial disclosures.v

Issues affecting Corporate Governance in India

·        
To get the Board right

·        
True Independence of Directors

·        
Removal of Independent Directors

·        
Accountability to Stakeholders          

·        
Executive Compensation

·        
Founders’ Control and Succession
Planning

·        
Risk Management

·        
Privacy and Data Protection

·        
Board’s Approach to Corporate Social
Responsibility (CSR)

The Indian Companies Act of 2013 introduced
some progressive and transparent processes which benefit stakeholders,
directors as well as the management of companies. Investment advisory services
and proxy firms provide concise information to the shareholders about these
newly introduced processes and regulations, which aim to improve the corporate
governance in India.

Corporate
advisory services are offered by advisory firms to efficiently manage the
activities of companies to ensure stability and growth of the business,
maintain the reputation and reliability for customers and clients. The top
management that consists of the board of directors is responsible for
governance. They must have effective control over affairs of the company in the
interest of the company and minority shareholders. Corporate governance ensures
strict and efficient application of management practices along with legal
compliance in the continually changing business scenario in India.

Corporate governance was guided by Clause 49 of the Listing Agreement before introduction of the Companies Act
of 2013. As per the new provision, SEBI has also approved certain amendments in
the Listing Agreement so as to improve the transparency in transactions of
listed companies and giving a bigger say to minority stakeholders in
influencing the decisions of management. These amendments have become effective
from 1st October 2014

Provisions:

·        
One or more women directors are recommended for certain
classes of companies

·        
Every company in India must have a resident directory

·        
The maximum permissible directors cannot exceed 15 in a
public limited company. If more directors have to be appointed, it can be done
only with approval of the shareholders after passing a Special Resolution

·        
The Independent Directors are a newly introduced concept
under the Act. A code of conduct is prescribed and so are other functions and
duties

·        
The Independent directors must attend at least one meeting a
year

·        
Every company must appoint an individual or firm as an
auditor. The responsibility of the Audit committee has increased

·        
Filing and disclosures with the Registrar of Companies has
increased

·        
Top management recognizes the rights of the shareholders and
ensures strong co-operation between the company and the stakeholders

·        
Every company has to make accurate disclosure of financial
situations, performance, material matter, ownership and governance.

·        
Related Party Transactions

·        
Corporate Social Responsibility

·        
Whistle Blower Policy – This is a mandatory provision by
SEBI which is a vigil mechanism to report the wrong or unethical conduct of any
director of the company.

 

Why
is Corporate Governance in India Important?

Foreign institutional investors (FII) and FDI consider
Corporate Governance as an important criteria to decide on which company to
invest in. Active and independent directors contribute towards a positive
outlook of the company in the financial market, positively influencing share
prices. A company that has good corporate governance has a much higher level of
confidence amongst the shareholders associated with that company.

Takeovers and Mergers: Today, there are many takeovers and mergers in the business
world. Corporate governance is required to protect the interest of all the
parties during takeovers and mergers.

Indifference on the part of Shareholders: In general,
shareholders are inactive in the management of their companies. They only
attend the Annual general meeting. Postal ballot is still absent in India.
Proxies are not allowed to speak in the meetings. Shareholders associations are
not strong. Therefore, directors misuse their power for their own benefits. So,
there is a need for corporate governance to protect all the stakeholders of the
company.

SEBI: SEBI has made corporate governance compulsory for certain
companies. This is done to protect the interest of the investors and other
stakeholders.

Growing Number of Scams: In recent years, many scams, frauds and corrupt practices have
taken place. Misuse and misappropriation of public money are happening everyday
in India and worldwide. It is happening in the stock market, banks, financial
institutions, companies and government offices. In order to avoid these scams
and financial irregularities, many companies have started corporate governance.

 

Corporate governance failure in India:

 

1.      Subrata
Roy, Sahara: Sahara
Group was accused of failing to refund over Rs. 20,000 crore to its more than
30 million small investors which it collected through two unlisted companies of
Sahara. In 2011, SEBI ordered Sahara to refund this amount with interest
to the investors, as the issue was not in compliance with the requirements
applicable to the public offerings of securities. 

 

2.     
Ramalinga Raju, Satyam Computers: The
failure of corporate governance and of misleading accounts is a failure of both
the management and of the auditors. The promoters decided to inflate the
revenue and profit figures of Satyam. In the event, the company has a huge hole
in its balance sheet, consisting of non-existent assets and cash reserves that
have been recorded and liabilities that are unrecorded. This episode has led to
debates in India, about some of inadequacies in the corporate governance norms.
Questions have been raised about the performance/ effectiveness of board of
directors, roles of auditors, the impact of regulations, disclosures, etc.

B Ramalinga Raju, the
founder of Satyam Computers, got into trouble after he admitted to inflating
the company revenue, profit and profit margins for every single quarter over a
period of 5 years, from 2003-2008. The amount embezzled by him is estimated to
be around Rs. 7,200 crore. In April 2015, Ramalinga Raju and his brothers were
sentenced to 7 years in jail, and fined Rs. 5.5 crore.

 

3.      Reebok India case Agencies probing the alleged Rs 870
crore corporate fraud in the operation of Reebok India have detected a systemic
“mismanagement” in the business planning and governance of the
company reportedly done by some of its officials and employees. The main reason
for this scam were the governance and operations in the company were
mismanaged.

The
bills were inflated and not recorded correctly. So, the probe clearly indicates
that it was not a corporate scam in the apparel manufacturing firm but it was
non-adherence to the rules and guidelines of business procedures in the
firm,” sources privy to the probe said. The I-T which has indicated to an
alleged Rs 140 crore tax evasion in the case.

 

 

4.     
Sudipta Sen,
Saradha Chit Fund .

Saradha group which ran a chit fund in
West Bengal had collected around ?200 to 300 billion from investors with a
promise of high returns for their investments. The company which enjoyed strong
political backings collapsed in April 2013. The amount investors lost is
estimated to be between Rs. 2060 – 2400 crores. 

 

 

 

5.     
Harshad Mehta

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