Corporate governance is the system of rules, practices and processes by which companies are directed and controlled. Corporate governance essentially involves balancing the interests of a company’s many stakeholders, such as shareholders, management, customers, suppliers, financiers, government and the community.
Why corporate governance?
- to balance and protect stakeholders’ interests.
- to enhance investor confidence so that funding can be mobilised for businesses.
Regulatory framework on corporate governance in India:
The Companies Act, 2013
The Companies Act and the guidelines issued under it by the Ministry of Corporate Affairs (MCA) entails several provisions, that govern the functioning of companies, such as those relating to board constitution, board meetings, board processes, general meetings, independent directors, disclosure requirements in financial statements, etc.
Securities and Exchange Board of India (SEBI) Guidelines
SEBI, being a statutory regulatory authority, has jurisdiction over listed companies – and issues guidelines to be followed by them to ensure protection of investors.
Institute of Chartered Accountants of India (ICAI)
ICAI (autonomous statutory body) issues Accounting Standards providing guidelines for disclosures of financial information by firms.
Institute of Company Secretaries of India (ICSI)
ICSI, being the statutory professional body with the objective of promoting, regulating and developing the profession of Company Secretaries in India, issues secretarial standards in terms of provisions of the Companies Act.
NFRA – National Financial Reporting Authority
NFRA is the newly created, all powerful, independent regulator for the auditing profession. It is independent in the sense that unlike ICAI or ICSI, it is not composed of those it seeks to regulate.
Why created? In the wake of accounting scams globally, a need was felt to establish independent regulators – independent from those it regulates – to enhance public confidence in institutions. Considering this, the Companies Act 2013 provides for the NFRA to replace the weak and advisory body of NACAS – National Advisory Committee on Accounting Standards – that was set up under Companies act 1956.
Responsibilities and powers: NFRA will set accounting and auditing standards, monitor and enforce compliance with standards, and oversee accounting profession’s record of ensuring compliance. It will take away significant regulatory powers from ICAI (Institute of Chartered Accountants of India). It will undertake auditing of CAs and their firms.
Jurisdiction: NFRA’s jurisdiction covers listed companies, large unlisted public companies, banks, insurers, and those body corporates referred to it by the Centre. ICAI’s regulatory role will continue with respect to private limited companies, and public unlisted companies below a threshold limit. It will also perform advisory function for NFRA.
“The Centre has notified the much-awaited National Financial Reporting Authority (NFRA) rules, taking away the CA Institute’s monitoring and disciplinary powers over auditors of listed entities and large unlisted companies besides banks and insurance companies.”– The Hindu Business Line. November 15, 2018.
The Kotak committee was constituted by the Securities and Exchange Board of India (SEBI) in June 2017 to suggest measures for improving corporate governance. The committee suggested a major overhaul of corporate governance norms for listed companies. In March 2018, SEBI partly accepted the Kotak committee recommendations (more than half of around 80 recommendations) including:
- Splitting the post of (CMD) chairman and managing director – for top 500 listed entities by market value. Minimum 6 directors mandatory.
- At least one independent woman director. tightened rules for independent directors.
- Enhanced disclosure of related-party transactions, disclosure of utilisation of funds from QIPs (Qualified Institutional Placements).
- Qualified Institutional Placements (QIP) is a capital raising tool, whereby a listed company can issue equity shares, fully and partially convertible debentures, or any security convertible to equity shares.
- Mandatory secretarial audits for listed entities and their material subsidiaries. Enhanced role of audit committee, nominations committee and the risk management committee of listed firms.
An important aspect of corporate governance is the role of independent directors. An Independent director is a non-executive director of the company, and helps the company in improving corporate credibility and governance standards. He is independent in the sense that he does not have any kind of relationship with the company which many affect the independence of his judgement.
Provisions: Under the provisions of the Companies Act:
- At least half of the board of directors should be non-executive. At least one-third of the board of directors should be non-executive if the chairman of the board is a non-executive director.
- An independent director should not be a supplier, customer or service provider of the company and should not hold more than 20% of the shares of the company.
- An independent director should not have been an executive with the company in the three preceding years.
Appointment and removal: Appointment and removal of an independent director can be made with a simple resolution of the board of directors of the company for the first time. In case a person is to be appointed (or removed) as independent director for second time, a special resolution (75% in favour) of the board of directors is required. Section 169 of the Companies Act 2013 deals with Removal of Directors.
Corporate Social Responsibility (CSR)
Corporate Social Responsibility is a management concept whereby companies integrate social and environmental concerns in their business operations and interactions with their stakeholders. Under the Companies Act 2013, certain class of profitable entities are required to spend at least 2% of their 3-year average annual profit towards CSR activities. The corporations are required to setup a CSR committee which develops a CSR policy which is approved by the board and encompasses the CSR activities the corporation is willing to undertake.
India is the first country in the world to mandate CSR. CSR activities include areas such as – Hunger, poverty, healthcare, education and vocation skills, PM’s Relief Fund, rural development, etc. Education and Vocational skills emerged as top activities according to data from CSR allocations for the financial year 2016-17.
India Responsible Business Index
- Published by Corporate Responsibility Watch, Oxfam India, Praxis and Partners in Change.
- It analyses policies for social inclusion in the top 100 BSE-listed companies.
- The 2017 index concluded that Public Sector Undertakings (PSUs) are ahead of Private Players in social inclusion.