Issues and Challenges of Corporate Governance in India

Corporate Governance

I. INTRODUCTION

Money swindling has been a common practice in corporate world in view of the loopholes in the rules and regulations. Scams such as Harshad Mehta scam, the Cobbler’s scam,  Dinesh Dalmia’s stock scams, have rocked the Indian economy’s base time and again.  It is quite evident that corporate governance deals with the entire spectrum of formal and informal relationships with the management of the company and company’s stakeholders including employees, customers, creditors, etc.  In common parlance, corporate governance is synonymous with corporate health of the company’s machinery.  In India, it was the Narayana Murthy Committee which reviewed the Clause 49 of the Listing Agreement way back in 2003, suggesting measures on improving the governance standards.¹ The erstwhile clause 49 was applicable to all the listed companies whereas the provisions relating to independent directors under the Companies Act, 2013 are still only applicable on a selected  class of unlisted public companies in addition to Listed companies. Moreover, the SEBI LODR (Listing Obligations and Disclosure Obligations), 2015 capture the corporate governance principles found in Clause 49 of SEBI’s Model Listing Agreement by providing for periodic and event based disclosures by the companies.

Pursuant to the overview of the report, the various facets of issues which the companies grapple with are listed below:

  • Regulatory issues in Corporate Governance
  1. Board of Director’s Performance and control over management
  2. Accountability of Audit Committees and Independent Director’s Responsibilities
  • Whistleblower Policies
  • Prevention of insider trading
  • Other Implementation issues.
  1. Steps for ensuring corporate governance for larger companies
  2. Execution of corporate governance  for companies registered with BIFR (i.e. the Sick Companies)

 

II. OECD PRINCIPLES ON CORPORATE GOVERNANCE²

Principle I: Ensuring the Basis for an Effective Corporate Governance Framework

 Principle II: The Rights of Shareholders and Key Ownership Functions protected and facilitated protect and facilitate the exercise of shareholders’ rights

Principle III: The Equitable Treatment of Shareholders

Principle IV: The Role of Stakeholders in Corporate Governance- recognized  should recognise the rights of stakeholders

Principle V: Disclosure and Transparency-  Timely and accurate disclosure is made on all material matters including the financial situation, performance, ownership, and governance of the company

Principle VI: The Responsibilities of the Board-Monitoring Management and Accountability to Shareholders

III. SUGGESTIONS

  • Lessons from corporate failure need to be learnt
  • Corporate Governance and Human Resource Management should be dealt with together
  • Disclosure, transparency, and accountability need to be ensured
  • Compliance with laws and norms on regular basis
  • Strengthening the external monitoring system
  • Third party evaluation of the Related party transactions
  • Demarcating fiduciary and other duties of the controlling shareholders
  • Improving the quality and periodicity of the financial disclosures

IV. CONCLUSION

As Corporate governance is more or less, a financial impropriety, it is imperative that  the audit committee reviews the company’s operations and determine whether management has established a mechanism to deal with  antitrust laws, policies conflicts, insider trading, corporate funds misappropriation, etc. The SEBI had made it mandatory that all listed companies should create a mechanism for employees to report to the management concerns about any unethical behavior, fraud or violation of the code of conduct. There should be continued monitoring of the entire process.

If one has to summarize, the ultimate objective of corporate governance is to attain the highest standard of procedures and practices followed by corporate world so as to have transparency in its functioning with an ultimate aim to maximize the value of various stakeholders of the organization.³ It is also realized that the application of corporate governance should be incorporated in both letter and spirit.  Other measures to effective corporate governance include access to external financing for investment, reduction in cost of capital mitigating the financial risk and better resource allocation to all the stakeholders.

 

 

 

[1] Report of Narayana Murthy Committee on Corporate Governance, 2003 available at https://www.sebi.gov.in/commreport/corpgov.pdf last accessed  31/01/2016

[2] The OECD Principles of Corporate Governance, 2002

[3] Vidhu Shekhar Jha, ‘ Corporate Governance Issues, Practices And Concerns In The Indian Context – A Conceptual Study,’ https://ictactjournals.in/paper/IJMS_Paper_6_93_102.pdf last accessed 31/01/2016

 

by-

Aishwarya Dhakarey,

BA LLB, IV year

Symbiosis Law School, Pune.

Campus Ambassador, Fusion Law School

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