Good corporate governance standards are essential for the integrity of corporations, financial institutions and markets and have a bearing on the growth and stability of the economy. Over the past decade, India has made significant strides in the areas of corporate governance reforms, which have improved public trust in the market.
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These reforms have been well received by the investors, including the foreign institutional investors (FIIs). A compelling evidence of the improving standards comes from the growing interest of FIIs in the Indian market; gross FII portfolio investment has risen from US $ 2.7 billion in FY 1996 to US $ 166.2 billion in FY 2013.
Governance reforms and globalization of the capital markets have been mutually reinforcing. While continuing governance reforms have led to rising foreign investment, globalization of the capital markets has provided an impetus to the CG practices in the following manner.
An important side effect of internationalization of Indian capital markets was a drive toward a more stringent corporate governance regime by the Indian industry itself. To market their securities to foreign investors, Indian companies making public offerings in India were persuaded to comply with corporate governance norms that investors in the developed world were familiar with. Further, Indian companies listing abroad to raise capital were subject to stiff corporate governance requirements applicable to listing on those Exchanges.
They also adhered to the norms and practices of corporate governance applicable to markets where they listed their securities. It must however be recognized that such practices have remained largely confined to only some large companies and have not percolated to majority of Indian companies. Sebi consultative paper on CG
In early 2012, SEBI released a consultative paper on “Review of Corporate Governance Norms in India”. To improve the governance standards of companies in India, the report had provided a broad framework in the form of overarching principles of corporate governance, and proposals. The objective of the concept paper was to attract a wider debate on the governance requirements for the listed companies so as to adopt better global practices.
An attempt was made to ensure that the additional cost of compliance with the proposals did not outweigh the benefits of listing, while at the same time the need to boost the confidence of the investors on the capital market was recognized.
Regulatory framework for corporate governance in India
As a part of the action or advance of economic liberalization in India, and the procedure toward further evolution or expansion of India’s capital markets, the Central Government well settled regulatory control over the stock markets through the design of the SEBI. Originally well settled as an advisory body in 1988, SEBI was admitted the authority to regulate the securities market under the Securities and Exchange Board of India Act of 1992 (SEBI Act) .
Public listed companies in India are governed by a multiple regulatory structure. The Companies Act is supervised by the Ministry of Corporate Affairs (MCA) and is presently enforced by the Company Law Board (CLB). That is, the MCA, SEBI, and the stock exchanges share jurisdiction over listed companies, with the MCA being the primary government body owed with supervising the Companies Act of 1956, while SEBI has offered as the securities market regulator since 1992.
SEBI serves as a market-oriented autonomous body to regulate the securities market alike to the role of the Securities and Exchange Commission (SEC) in the United States. The stated ambition of the agency is to protect the interests of investors in securities and to advocate the development of, and to direct, the securities market.
The domain of SEBI’s statutory authority has also been the subject of comprehensive debate and some authors have lifted doubts as to whether SEBI can make regulations in respect of matters that fall within the jurisdiction of the Department of Company Affairs.
SEBI’s authority for carrying out its regulatory accountabilities has not always been bright and when Indian financial markets accomplished colossal share price equipments frauds in the early 1990s, it was found that SEBI did not have sufficient statutory power to carry out a full investigation of the frauds. Accordingly, the SEBI Act was amended in order to allocate it sufficient powers with respect to inspection, investigation, and enforcement, in line with the powers allocated to the SEC in the United States.
Distinguishing that a problem arising from an overlay of jurisdictions between the SEBI and MCA does exist, the Standing Committee, in its final report, has endorsed that while providing for minimum benchmarks, the Companies Bill should allow sectored regulators like SEBI to discharge their designated jurisdiction through a more detailed regulatory dynasty, to be decided by them according to circumstances . Attributing to a similar case of jurisdictional overlay between the RBI and the MCA, the Committee has recommended that it needs to be accordingly enunciated in the Bill that the Companies Act will prevail only if the Special Act is silent on any manner.
Further the Committee recommended that if both are silent, essential provisions can be included in the Special Act itself and that the status quo in this regard may, therefore, be maintained and the same may be pleasantly clarified in the Bill. This, in the Committee’s view, would assure that there is no jurisdictional overlay or conflict in the governing statute or rules framed there under.
Companies Bill, 2011 and its impact on corporate governance in India
The basis of the umbrella revision in the Companies Act, 1956 was laid in 2004 when the Government formed the Irani Committee to conduct an extensive review of the Act. The Government of India has placed before the Parliament a new Companies Bill, 2011 that incorporates several important provisions for bettering corporate governance in Indian companies which, having gone through an expensive consultation process, is expected to be approved in the 2012 Budget session. The new Companies Bill, 2011 introduces formational and fundamental changes in the way companies would be governed in India and incorporates various lessons that have been learnt from the corporate scams of the recent years that displayed the role and importance of good governance in organizations. Significant corporate governance redeems, primarily focused at battering the board delinquency process, have been proposed in the new Companies Bill; for instance it has proposed, for the first time in Company Law, the concept of an Independent Director and all listed companies are required to appoint independent directors with at least one-third of the Board of such companies comprising of independent directors.
The Companies Bill, 2011 takes the concept of board independence to another level altogether as it allots two sections to deal with Independent Directors. The definition of an Independent Director has been appreciably binding and the definition now defines positive characters of independence and also requires every Independent Director to announce that he or she meets the basis of independence. In order to establish that Independent Directors maintain their independence and do not become too familiar with the management and promoters, minimum tenure requirements have been recommended. The initial term for an independent director is for five years, following which further appointment of the director would require a special resolution of the shareholders. However, the total tenure for an independent director is not allowed to exceed two consecutive terms.
The new guidelines which set out the role, functions and duties of Independent Directors and their appointment, resignation and evaluation advance greater clarity in their role; however, in certain places they are authoritative in nature and could end up making the role of Independent Directors quite exigent.
In the background of the current provisions in the Companies Act, 1956 which do not provide any clear limitation of liability and have left it to be interpreted by Courts , it is helpful to provide a limitation of liability clause. The new Bill also requires that all resolutions in a meeting convened with a shorter notice should be ratified by at least one independent director which gives them an element of veto power. Various other clauses such as those on directors’ responsibility statements, statement of social responsibilities, and the directors’ responsibilities over financial controls, fraud, etc, will create a more transparent system through better disclosures.
A major proposal in the new Bill is that any undue gain made by a director by abusing his position will be disgorged and returned to the company together with monetary fines. A significant first, in the proposals under the new Companies Bill, is the provision that has been made for class action suits.
The Companies Bill, 2011 seeks to provide clarity on the respective roles of SEBI and the MCA and demarcate their roles – while the issue and transfer of securities and non-payment of dividend by listed companies or those companies which intend to get their securities listed shall be administered by the SEBI all other cases are proposed to be administered by the Central Government.
Corporate social responsibility and small and medium enterprises
What are SMEs? Small and medium enterprises (SMEs) significantly grant towards India’s economic growth. These serve freely and also as ancillary to bigger units and help generate employment and industrialise the countryside and backward regions of India. They employ nearly 40% of India’s workforce and subscribe around 45% to India’s manufacturing output. What do they do? The business activities of SMEs are performed in almost to the locals. This enables them to be knowledge of community needs, manage expectations and expand CSR programmes appropriately.
Now that the CSR clause in the Companies Act, 2013 covers companies that have a net profit of five crore INR and above, it is expected that while micro-enterprises will not qualify, many small and medium enterprises (SMEs) will. SMEs are being treated separately in this article because of their clear-cut features. The CSR activities of these enterprises are come for the personal interests of promoters who hold a significant financial stake in the business.
They tend to be in clusters and engaged in similar business activities. While the quantum of revenue available for CSR with individual SMEs is expected to be small, all eligible companies in a specific geographical cluster, who single handed as well as collectively impact the same community, can pool their resources to create a sizeable CSR fund .
How can SMEs contribute to CSR initiatives?
This section deals with the option of undertaking common CSR activities by Small and medium enterprises. This amalgamation can also be used by other companies to maximise the collision of their CSR initiatives while diminishing the operational costs for fund management.
Why collaborate for CSR resourceful? CSR is for all companies. SMEs in India have participated in CSR activities but these efforts have not been optimally delivered. One possible reason can be the fact that CSR activities build upon the profits of an SME and any inconstancy in profits can adversely affect their capability to continue their contribution for CSR. Another reason can be the limited human resources available to SMEs which may also result in the lack of a professional approach. SMEs tend to focus on short-term activities that involve lesser operational costs. A survey conducted by UNIDO in 2008 on five SME clusters in India, found that 31% to 79% of the SMEs in these clusters, preferred charity donations rather than long-term programmes for local communities. With the introduction of the new Companies Act, 2013, the SME’s approach to CSR has to be modified while keeping operational costs low. One viable alternative is to pool resources with other SMEs in the chunk and create joint CSR programmes managed by a single entity. This collusion can be formed within the units in a bunch as they interact with the same communities and have already established associations that cater to the business needs of the units.
Reduces operational cost: Individual CSR efforts by a company consist of establishing a CSR department, assessing the needs of local communities, engagement programmes directly or through an NGO and conducting regular impact assessment studies. A common organisation catering to a number of companies will carry out these activities collectively and thus reduce the operational cost of management.
Undertake long-term projects: A major barrier in developing long term projects is the uncertainty in the CSR budget. This is dependent on the financial performance of the company. A flutter performance implies that the CSR budget allocations can be uncertain and can jeopardise a programme started earlier. Pooling resources addresses this issue to a certain amount as the other partners can raise their share in case there is deviation in allocation from a certain sector of the cluster. The long term programmes also have greater effect than the short-term projects. Communities are more and more realising the importance of the support offered by these programmes in making their lives better. Long-term programmes also lead to better community relations and this certifies avoiding situations of community anxiety that harm business activities.
Learning from experiences: A common entity with multiple participants from the collection will help assess community needs, undertake related programmes based on past experiences and address a greater number of community issues. Combination among the SMEs in a cluster also provides an opportunity to manage social and environmental issues and respond better to the pressure from buyers, who are trying to form an ethical supply chains and gain recognition from the international community. Collaborations can also be forged amongst larger companies, possibly through industry associations, to enable them to address common issues plaguing a geographical region or an industry.
By requiring companies, with a minimum net profit of 5 crore INR, to spend on CSR activities, the Companies Act, 2013 is likely to bring in many SMEs into the CSR fold. This will usher in a fresh set of challenges to a sector that is increasingly being asked by its B2B customers to comply with environmental and social standards, while remaining competitive in terms of price and quality. Thus, SMEs will have to quickly learn to be compliant with these diverse set of requirements and it is hoped that this handbook will facilitate their ability to comply with the CSR clause of the Companies Act, 2013.
We may conclude that the Corporate Governance in a narrow and broad definition. In the narrow sense, corporate governance associates a set of consanguinity amongst the company’s management, its board of directors, its shareholders, its auditors and other stakeholders. These consanguinities, which associate various code and encouragements, provide the anatomy through which the aims of the company are set, and the means of acquiring these objectives as well as monitoring performance are strong- minded.
In a broader sense, however, good corporate governance the ambits to which companies are run in an accessible and transparent manner is important for inclusive market confidence, the capabilities of capital allocation, the growth and development of countries’ industrial bases, and conclusively the nations’ inclusive wealth and welfare. It is significant to note that in both the narrow as well as in the broad definitions, the concepts of acknowledgement and fairness employ center-stage. In the first ground, they create faith at the firm level among the suppliers of finance. In the second ground, they create inclusive confidence at the accumulate economy level. In both cases, they result in efficient allocation of capital.
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