CERTIFICATE COURSE ON

CORPORATE GOVERNANCE

Certificate Course on Corporate Governance (Module 4)

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Module 4: Understanding the
Legislative construct of the Indian
system of Corporate Governance,
challenges and the way forward
1. CONTEXT OF THE MODULE

This Module is a facilitative Module, attempting to draw an analysis of how the

system of corporate governance is legislatively governed in the largest
democracy, and emphasizing upon the challenges to the transparency of the
same and way forward, in the light of contemporary incidents.

2. WHAT EXACTLY IS CORPORATE GOVERNANCE?

The system of governance that deals with the methodology of governing a

corporate entity is known as corporate governance. It comprises of Rules,
Regulations and Bylaws by which a corporate firmed is governed, managed,
run and controlled. It works on the principle of balance of interests, balancing
the interest of the company, stakeholders, customers, suppliers, financers,
government and shareholders on one hand and the community at large on the
other hand.

3. WHY IS CORPORATE GOVERNANCE NEEDED?

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 Changing Ownership Structure

Widespread Investors

Corporate Scams or Scandals

Greater Expectation of the Sector

Hostile Take Overs

Huge increase in Top Management Compensation

Globalization

Deregulation and Capital Market Integration

4. PROMINENT EXAMPLES SHOWCASING THE

FAILURE OF CORPORATE GOVERNANCE IN INDIA

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 5. DEVELOPMENT OF CORPORATE GOVERNANCE AS
A SYSTEM IN INDIA

The development of Corporate Governance in India can be studied under two

broad timelines

1. Pre- Liberalization Era

2. Post- Liberalization Era

5.1. Pre Liberalization Era:

During that time, the corporate governance practices were based upon the
Gandhian Principles of Trusteeship and directives from the Indian
Constitution. One of the most landmark rise from such system of corporate
governance included the emergence of JRD Tata and TATA Groups.

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5.2. Post Liberalization Era:

The Era of Liberalization gave vast changes to the working of the Principles of
Corporate Governance. The most important development that facilitated the
working of corporate governance by protecting the rights of the Minority
investors’ during this era was the establishment of the Security and Exchange
Board of India (1992).

The next landmark development in the area came after the Satyam Scam of
2007, post which there came a series of regulations for Auditors, Directors,
Independent Directors, Promoters and Regulators.

6. INDIAN LEGISLATIONS GOVERNING THE SYSTEM

OF CORPORATE GOVERNANCE

The current laws and provisions directly or indirectly dealing with the concept
and working of Corporate Governance may be provided as follows:

6.1. SEBI Act, 1992: The Act establishes SEBI as an autonomous and
Independent body regulating the capital market.

SEBI, by virtue of the authority conferred by this act, has provided certain
guidelines for the regulation of corporate governance and firms:

For the companies whose shares are listed into the stock exchange, SEBI has
provided for Standard Listing Agreement for Stock Exchange.

Apart from the guidelines of SEBI, there liesAccounting Standards issued by

Institute of Charted Accountants of India, which is again an autonomous
body. The guidelines provide for the disclosure of financial information.

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In addition, the Secretariat standards issued by the Institute of Company
Secretaries in India, again an autonomous body, facilitate the process.

6.2. Companies Act 2013: The major overhaul in the area of Corporate
Governance, done by the new act is permitting the maximum limit of the
number of shareholders in a private limited company to rise from 50 to 200.

Other important provisions and concepts include the following

Section 135 of the Act

FastTrack Merger

NCLT, Etc.

7. IMPORTANT COMMITTEES FORMED FOR

FACILITATING CORPORATE GOVERNANCE IN
INDIA

1. Rahul Bajaj Committee (1995): The Committee was set up by CII, it

came up with a voluntary code called “Desirable Corporate Governance” in
1998.

2. Kumarmanlagal Birla Committee (2000): This committee was set

up by SEBI and covered issues such as protection of investor’s interests,
transparency enhancement, building international standards with respect to
the disclosure of information. The SEBI, in consonance with the
recommendation of the committee, enacted Clause 49.

3. Naresh Chandra Committee Report: It exclusively covered

relationship between the auditor and the company.

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4. R. Narayan Murthy Committee (2003): It was also set up by SEBI
with the aim to review the ongoing standards and working of Corporate
Governance Practices back then.

5. UdayKotak Panel: This was also selected by SEBI in the light of Tata and
Infosys episodes with the purpose to enhance Corporate Governance in India.

7.1. Key Recommendations of TheUdayKotak Panel

 There should be atleast 6 onboard Directors in a listed company.

 Atleast 1 independent director should be a woman.
 All the Directors should attend atleast half of the Board Meetings every
financial year. In case of failure, they would require the shareholder’s
consent to continue as the director.
 The maximum age limit for being non executive director should be 75
years and the companies should make the relevant skills of the director
public.
 A non executive director should be the chairperson of a listed company
in order to maintain non prejudiced governance.
 An independent director cannot hold the post for more than 8 listed
companies and the managing director can act as the independent
director only for three listed companies.
 There should be 5 meetings in a year.
 Every board meeting must require the presence of the Independent
Director.
 The number of independent directors in a board should be increased
from 33% to 50%.
 In case of resignation of an independent director, detailed reasons must
be furnished.

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  Audit committees must be appointed in every company.
 SEBI should have clear authority against the auditors to the security
board.
 For government companies, the board, and not the nodal ministry should
have the power to decide upon the number of independent directors.

8. CHALLENGES FACED BY THE INDIAN SYSTEM OF

CORPORATE GOVERNANCE
 The friends and family members of the promoters to the company are
generally appointed as the board members without paying heed towards
their credentials.
 The identity of the Founder and the company is often merged, without
realizing that the company is a separate legal entity, having nothing to do
with the founder.
 Women directors appointed to the board are generally from the family
members of the founders, which negates the whole purpose of their
appointment.
 Appointment of Independent Directors is always questionable as it is
generally never the case that the independent director goes against the
company to protect the rights of minority shareholders. Eg. Tata Case.
 An independent director gets easily removed by the board of directors or
the promoters.
 In this era of digitalization, there lies extreme unawareness about the
issues of data protection amidst the directors and the shareholders.
 The approach towards CSR by the board lies to be meager and
insensitive.
 There is continuous prevalence of the internal conflict of interests. Eg.
ICICI Bank Conflict.

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 9. WHAT CAN BE DONE? THE WAY AHEAD

The following steps and approached may be opted for the promotion of good
corporate governance in the country:

 There should be a paradigm shift of focus from independent directors to

limiting the powers of the promoters.
 Women from different backgrounds should be encouraged to be the
directors rather than taking women from the family to that stop.
 SEBI, ICAI and ICSI should be provided with more autonomy and power
to deal with corporate failures. There should not be periodic interference
by the courts as seen in the Sahara Case.
 There should be more interest and vigor towards maintaining and
enhancing the CSR practices.
 Adequate monetary and logistic resources should be used in order to
create awareness and facilitate the process of data protection.
 A robust risk mitigation mechanism should be developed to avoid fiascos
like Kingfisher.

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