CORPORATE

GOVERNANCE
 CONTENT

 INTRODUCTION

 NEED OF CORPORATE GOVERNANCE

 SCOPE OF CORPORATE GOVERNANCE

 EMERGENCE OF CORPORATE GOVERNANCE IN

INDIA

 PROVISIONS OF COMPANIES ACT 2013(in relation

to Corporate Governance) & THE IMPLICATIONS
THEREIN

 CONCLUSION

 REFERENCES

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 INTRODUCTION
Corporate governance, broadly, refers to the entire set of system by which a
company is directed and controlled. Its main objective is better decision making
thereby ensuring balanced fulfilment of every stakeholder’s interest. Corporate
governance is not simply a regulatory compliance, but in fact corporate
governance actually enables the business to be more successful through better
decision making.
The keys to effectiveness of corporate governance in an organisation can be
summed up as- transparency, disclosure, accountability, integrity.
 Transparency - In context with corporate governance Transparency refers
to providing clear information about its rules and regulations,
performance, auditing information to its stakeholders.
 Disclosure - A corporate should in detail disclose all the necessary
information to all its stakeholders in order to enable them to extract the
information they require and make various decisions and interpretations
based on it.
 Accountability - A corporate should take responsibility to protect interest
of its all stakeholders and must be answerable to all of them in case of
any discrepancy or breach of trust or misfeasance
 Integrity – A corporate should be fair enough to protect the rights of all
its shareholders including minority and thus maintain and upkeep the
integrity of single stakeholder associated with it.

Despite all the advantages, corporate governance in India got emphasis

only from the late 90s and the corporate scams acted as a boon in disguise
as it was only after such loots that the Companies Act, 2013 was enacted
to give a prominent emphasis on the need, importance and maintenance
of proper governance in the corporates.

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 NEED OF CORPORATE GOVERNACE
Corporate governance helps in improving governance structures and processes
which consequents in ensuring quality decision making and encouraging senior
management in taking effective succession planning to enhance the long-term
wealth of companies. Some of the reasons why the role of corporate governance
cannot be undermined in today’s corporate world can be discussed as under:
Enhanced Investor Trust: For Investors corporate Governance of a company
is as important as its financial performance because investors believe that a
company with good corporate governance has the potential to provide good
amount of return on their investment so while evaluating which companies they
should invest in, corporate governance is taken as one of the important
parameters. It is because companies with a proper governance policy are in a
better position to ensure the investors of the transparency in their operations.
Better Access To Global Market: A company with better quality of corporate
governance systems is an attraction for investors as they easily gain their trust
for investment which allows the company to develop and gain a good position
in the market and the same goes for global investors as well. Hence corporate
governance is an effective tool to tap global investors.
Combating Corruption: If a company properly follows keys of corporate
governance i.e. Transparency ( proving clear information about its rules and
regulations, performance, auditing information and etc to its stakeholders) ;
disclosure (which involve disclosing its information related to its financial
situations, profit and loss accounts, its ownerships and etc. to its shareholders) ;
accountability ( taking responsibility to protect interest of all its shareholders
including minority) ;and integrity(fairness towards the rights of all its
stakeholders and truthfulness of the information that it provides) then the
chances of malpractices and fraud get reduced to the minimum.
Easy finance from financial institutions: Several structural changes like
increased role of financial intermediaries and institutional investors, size of the
enterprises, investment choices available to investors, increased competition,
and increased risk exposure have made monitoring the use of capital more
complex thereby increasing the need of Good Corporate Governance. Evidence
indicates that well-governed companies receive higher market valuations. The
credit worthiness of a company can be trusted on the basis of corporate
governance practiced in the company.
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 SCOPE OF CORPORATE GOVERNANCE
Corporate governance instils ethical standards in the company. It creates space
for open dialogue by incorporating transparency and fair play in strategic
operations of the corporate management. The significance of corporate
governance lies in:

1. Accountability of Management towards shareholders and all other

stakeholders

2. Transparency in the operations of the company and integrity in financial

disclosures produced by the company

3. Competent board comprising of a well-organised mix of executive as well

as independent directors in order to represent the interest of every
stakeholder

4. Checks & balances form an integral part of good corporate governance.

5. Adherence to the rules framed by the company as well the provisions and
requirement under the company law in law and spirit

6. Code of responsibility for Directors and Employees of the company

7. Open Dialogue enabling free communication between management and

stakeholders of the company.

8. Guaranteeing investor loyalty that is marked by the practice of good

corporate governance practices throughout the day to day operations of
the business.

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 EVOLUTION OF CORPORATE GOVERNANCE
Corporate Governance, though finds official mention only in the present
time, is not a new concept as it has got its roots right in the days of Kautilya.
The Arthashastra maintains that for good governance, all administrators,
including the king were considered servants of the people and that good
governance and stability were completely linked. It opined that when the
positions of the rulers portrayed the characteristics of responsiveness,
accountability, removability, recall ability, there was stability. These tenets
hold good even today.

Though there was no expressed mention of corporate governance, all the

previous company laws that were framed in the country, up to the
Companies Act, 1956, impliedly stress on the need and requirement of
adhering to the practices that ensures proper governance in the corporates.
The initiatives taken by the Government in 1991, aimed at economic
liberalization and globalisation of the domestic economy, compelled India to
initiate complete reform package in order to suitably respond to the
developments taking place world over.

On account of the interest generated by Cadbury Committee Report, the

Confederation of Indian Industry (CII), the Associated Chambers of
Commerce and Industry (ASSOCHAM) and, the Securities and Exchange
Board of India (SEBI) and such other bodies constituted a number of
committees to recommend initiatives in Corporate Governance.

CII took the first hand initiative on Corporate Governance, the first
institution resourcefulness in Indian Industry. The objective was to design,
develop and promote a code for Corporate Governance to be adopted and
followed by Indian companies, irrespective of them being in the Private
Sector or the Public Sector and whether they were banks or other financial
institution. The final draft of the said Code was widely circulated in 1997. In
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 April 1998, the Code was released which was titled ‘Desirable Corporate
Governance: A Code’. The code consisted of 16 recommendations.

The committees that were formed also gave their recommendations which
were in line with the idea of ensuring proper governance practices. Some of
such significant committees were KUMAR MANGALAM BIRLA
COMMITTEE, TASK FORCE ON CORPORATE EXCELLENCE
THROUGH GOVERNANCE,
NARESH CHANDRA COMMITTEE,N.R. NARAYANA MURTHY
COMMITTEE.

Subsequently, the Ministry of Corporate Affairs issued Corporate

Governance Voluntary Guidelines, 2009 after a detailed examination of all
the committee reports and evaluation of all the recommendations thereby
made. It also took into consideration the suggestions received from various
stakeholders on issues related to corporate governance. These guidelines
provided a set of good practices which may be voluntarily adopted by the
public companies and private companies, especially the big corporate
houses. It is noteworthy to mention that these guidelines are not substitute
for or additions to the already existing laws, rather they are recommendatory
in character.

Finally, after much waiting, the Companies Act 2013 came into the picture
which aims at emphasising the importance of and strengthening the role of
good governance across the corporates of the nation.

EMERGENCE OF CORPORATE GOVERNANCE IN INDIA

Despite of the implied mention of Corporate Governance in the previous
company laws prevalent in the country, the real change in the corporate sector
could be felt with the introduction of 2009 Mandatory Corporate Governance
Voluntary Guidelines which calls for adherence from the end of companies
listed in stock exchanges by Clause 49 of the Listing Agreement including
mandatory codes to be followed by companies pertaining to board of directors,
audit committees and various disclosures with respect to related party
transactions, whistle blower policies etc. But the final node to the acceptance of
concrete practices of Corporate Governance in the effective management of the
company can be seen only with the introduction of new significant provisions
incorporated in the Companies Act, 2013 in the form of independent directors,
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women directors on the board, corporate social responsibility and mandatory
compliance of Secretarial Standards issued by Institute of Company Secretaries
of India as per Section 118 of Companies Act, 2013.

PROVISIONS OF INDIAN COMPANIES Act, 2013 (ICA

2013) : A STEP TOWARDS BETTER GOVERNANCE
PROVISIONS RELATING TO MEETINGS
PROVISION COMPANIES ACT 2013 COMPANIES ACT
1956
Holding first Company shall hold its first No specific time has
Board Meeting board meeting within a period of been mentioned for
thirty days from its holding first board
incorporation meeting

Notice of Board Requirement of giving seven No specific time period

Meeting days’ notice to call board of providing notice is
meeting mentioned

Holding First The maximum time limit for
Annual General holding the first AGM is 9
Meeting months from the closure of
books of accounts.
The maximum time limit
for holding of first AGM
is 18 months from
incorporation or 9
months from closure of
accounts whichever is
earlier

IMPLICATIONS:
1) Timely holding of first board meeting is ensured
2) Proper notice of board meeting is proposed in order to ensure the
presence of the directors to facilitate better decision making

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 3) As the first Annual General Meeting holds enormous significance with
regards to the important businesses that are required to be transacted,
more stringent provision for holding it is introduced.

PROVISIONS RELATING TO DIRECTORS:

PROVISIONS COMPANIES ACT, COMPANIES ACT,
2013 1956
Appointment of women At least one women No such compulsion to
directors director must be appoint women directors
compulsorily appointed
in the specified classes of
companies
Appointment of Provides that the Board There was no such
Additional Director of Directors shall not provision
appoint a person who
fails to get appointed as a
director in a general
meeting as an Additional
director
Appointment of Subject to the articles of There was no such
Nominee Director a company, the Board provision
may appoint any person
as a director nominated
by any institution who
shall be known as
Nominee Director

Appointment of Section 149 (4) provides Does not expressly

Independent Directors that at least 1/3rd of total
number of Directors
shall be Independent
Director of the
provide for Independent
Directors except Clause
49 of the listing
agreement that is
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 prescribed companies. applicable on all listed
companies which calls
for the appointment of
Independent Directors on
the Board.

IMPLICATIONS:
1. The appointment of women directors is mandated in the specified classes
of companies in order to increase the role of women in the corporate
sector and also to enable the representation of the interest of women
stakeholders (mainly women employees) in the board decisions
2. Shareholders are given the power of ratifying the appointment of any
person as a director and in order to upkeep such power and interest the
Board of Directors are disabled from appointing any person as an
Additional Director who fails to get appointed as Director in a General
Meeting.
3. Appointment of Nominee Director ensures that the interest of the
institution concerned is well taken care of while making any decisions
4. Introduction of the requirement of appointing Independent Directors on
the Board is a revolutionary step undertaken by the new act to ascertain
independent and subjective decision making that is free from any personal
bias and is at the best interest of the company as a whole.

PROVISIONS RELATING TO CORPORATE SOCIAL

RESPONSIBILITY (CSR)
PROVISION COMPANIES ACT, COMPANIES ACT,
2013 1956
CSR Activities The Companies Act, No such provisions are
2013 for the first time present
gave a statutory status to
the concept of Corporate
Social Responsibilities
wherein the prescribed
classes of companies are
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 required to spend a
specified amount for
discharging CSR
activities.

IMPLICATIONS:
It is a step towards bringing an enhanced sense of corporate citizenship.

PROVISIONS RELATING TO COMMITTEES

PROVISIONS COMPANIES ACT, COMPANIES ACT,
2013 1956
Recommendation of All the appointment of No Such Provision
Audit Committee statutory auditors,
including the case of
casual vacancy, shall be
made after considering
the recommendations of
the Audit Committee, if
the company is required
to constitute the same

Nomination and Requires every listed No such requirement

Remuneration company and prescribed
Committee classes of unlisted
companies to constitute a
Nomination and
Remuneration
Committee

Corporate Social States that every No such provisions

Responsibility (CSR) company having :

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Committee • net worth of 500
crore or more, or
• turnover of 1000
crore or more, or
• net profit of 5
crore or more
during any financial year
shall constitute a CSR
Committee

IMPLICATIONS:
1. Recommendation by the Audit Committee at the time of appointment of
Statutory Auditors facilitates the appointment of better and eligible
individuals or bodies which in return ensures transparent and unbiased
auditing practices
2. Nomination and Remuneration Committee, which by nature of being
mainly comprised of independent and non-executive directors ensures
proper and impartial nomination of and evaluation of performance of the
board members. It also manifests a subjective view while determining the
remuneration policies of senior management.
3. Corporate Social Responsibility Committee is concerned with seeing that
the company fulfils the interest of the society and environment at large.

PROVISIONS RELATING TO AUDIT/AUDITORS

PROVISIONS COMPANIES ACT, COMPANIES ACT,
2013 1956
Appointment of Prescribed classes of Such appointment was
Internal Auditor companies are required not mandatory
to compulsorily appoint
internal auditors under
Sec 138
Auditor’s attendance Provides that auditor The auditor was entitled
mandatory in AGM shall, unless otherwise to but not obliged to
exempted by the attend any general
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 Company, attend any meeting
general meeting either by
himself or through his
authorized representative
who is qualified to be an
auditor.

Secretarial Audit As per section 204 of the provided the requirement

ICA, 2013 the prescribed of a compliance
companies are required certificate to be issued by
to obtain ‘Secretarial a CS in practice that
Audit Report’ from must be annexed to the
independent practicing Board Report
company secretary

IMPLICATIONS:
1. Appointment of Internal Auditor would ensure an efficient internal control
system
2. Auditor’s attendance is made compulsory in AGM in order to make him
answerable to and accountable for the authenticity and verification of the
financials.
3. Secretarial Audit is an effort to ensure better compliance of law.

OTHER PROVISIONS:
PROVISIONS COMPANIES ACT, COMPANIES ACT,
2013 1956
Related Party  Enhanced scope of Limited scope of
Transactions transactions; transactions and persons
covered
 Enhanced scope of
related parties to
include KMP and
relatives, directors
with certain
shareholding,

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 persons in
advisory capacity
etc

Risk Management It placed specific Did not contain any

Policy expectations on the mandatory provisions
Board of Directors, relating to Risk
Audit Committee and the Management
Independent Directors in
relation to Risk
Management.
Annual Return Certification of Annual mandated this provision
Return by a Company only for listed companies
Secretary in Whole-time
practice in case of
prescribed classes of
unlisted companies
besides all listed
companies

Annual Return An extract of Annual did not contain such

Return shall form a part provision
of the Board’s Report

Place of keeping allows registers of is limited to a place

Registers and Returns members or any other within the city, town or
security holders or village in which the
copies of return, to be registered office is
kept at any other place in situated.
India in which more than
one-tenth of members
reside

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IMPLICATIONS:
1. Widening of the definitions of both ‘related party’ and ‘related party
transactions’ have been a landmark step in incorporating independent and
unbiased transactions providing complete disclosure and transparency.
2. Risk Management Policy has been introduced to make the stakeholders
aware of the possible risks that lie underneath the operations of the
business that they cannot figure out by mere examination the financial
statements.
3. Provisions relating to Annual Return have been introduced to ensure
authenticity and proper disclosure.
4. Flexibility in terms of preservation of registers and annual returns has
been proposed. It also ensures that the members and other interested
parties are enabled to have copies of or take extracts from the same by
paying necessary charges.

CONCLUSION
The Companies Act, 2013 has been a phenomenal effort to bring oneness in the
governance of corporates and making it difficult for any action that is against
the interest of stakeholders to take place. The various provisions that it has
incorporated are designed, to the extent possible, taking into consideration the
minutest interest of every single person holding stake in the company affairs. It
empowers independent directors with proper checks and balances so that such
extensive powers are not exercised in an unauthorized manner but in a rational
and accountable way. These are all welcome changes in the globalised corporate
world of today and they will strengthen the core corporate machinery thereby
empowering the use of strong corporate governance norms in a company that
will lead to economic efficiency and enhanced ethical standards. But only
framing laws would bring the least benefits if their importance is not felt by the
persons who are responsible for adhering to the law. Thus, absolute Corporate
Governance can be said to prevail only when corporates themselves are instilled
to avoid malpractices for the common benefit of all, with or without laws
mandating them to do so.

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 REFERENCES
1. Comparison between Companies Act 1956 and the revised Act 2013:
article by SNG Partners, Advocates and solicitors
2. ETHICS, GOVERNANCE & SUSTAINABILITY, ICSI
3. Analyzing Companies Act: A move towards better Governance: Paper by
Nishant Sharma, Ruchita Dang
4. Corporate Governance in India: Developments and Policies : ISRM

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