CORPORATE GOVERNANCE

ASSIGNMENT # 01
“Evolution of Corporate Governance and its Practices in India”

The concept of governance is not a new thing. But it has become more popular for the last two
decades. What is the importance of governance in today’s world and how it links to the
corporate world? In olden times, the king is the owner of the country and he has some duties
and also has management who work under his regime. His management report him about the
affairs of the country and compliance of the laws that are properly followed by his
management. And his management protecting his country in his best interest.
The concept of governance is the set of principles, morals and ethical values, regulations, duties
and responsibilities in the direction of the affairs of the company.
Are the companies doing really well for all the stakeholders (in their best interest). Whether the
directors are not taking the undue advantage of their positions in the company (insider trading
ETC).
The duty of the company’s management is to protect the shareholder stake, the growth and
development of their interest, compliance of law and running the company. The management
of a company act as an agent of the person who appoints them, the principal, who is the owner
of the company.

Definition of Corporate Governance

CADBURY COMMITTEE (1992)
“Corporate Governance is the system by which companies are directed and controlled”. It
monitors the entire mechanism of an organization and attempts to put in place a system of
checks and balances between stakeholders.

OECD Principles of Corporate Governance

“Corporate governance involves a set of relationships between a company’s management, its
board, its shareholders and other stakeholders”. Corporate Governance is the interaction
between various stakeholders.
Corporate Governance by Institute of Company Secretaries of India
“Corporate governance is the application of best management practices, compliance of law in
true letter and spirit and adherence to ethical standards for effective management and
distribution of wealth and discharge of social responsibility for sustainable development of all
stakeholders”.
Government takes money from the society and in return gives money back to them. “Business
needs society and society needs business”. Likewise, corporate is earning money from the
society, and some part of the income give back to the society (a concept of CSR – Corporate
Social Responsibility).

Need of Corporate Governance and its History (in the context of India)
The concept of corporate governance in India was thought of at the ARTHSHASTRA time, a CEO
at that time. A king with his management and duties. Today in corporate world, these are
replaced with agents and shareholders. However, the principles remain the same as they were
in olden times (at the time of ATHSHASTRA).
The need of corporate governance arises due to the separation of ownership and management.
The Cadbury committee report in England on financial aspects gave rise to the NEED and
DEBATE of Corporate Governance in India.

Before Independence
Prior to independence and four decades after it, the Indian corporations and associations
followed the British rules and guidelines. The first company act in India was enacted in 1866
and amended in 1882, 1913 and 1932. Partnership act was also enacted in 1932. The main
focus of these enactments lies whether the business firms properly manage the people’s
contract, because in this age there was the misuse of resources and ignore the obligations
owing to the NON-PROFESSIONAL and SCATTERED business type.

After Independence
In the recent years of 1947, Major industrialists came into contact with the Government to
implement fair business strategies and intentions. This was the point of development in an
Indian industry and the Government has first introduced a legal system in 1960s after setting up
a heavy industry in India. The decade of 70s and 80s was a time of growth (cost, volume and
profit maximization) and it was vital to achieve the heights of corporate world.

First Phase of Corporate Governance in India (From 1996 to 2008)

From the period of 1996 to 2008, different committees were introduced by the notable
industrialists and amendments were made by the government. This was an initial phase and the
primary focus were to make audit committees and Boards more independent, transparent, fair
and accountable in supervising management. However MCA (Ministry of Corporate Affairs) and
SEBI (Securities and Exchange Board of India) played an important role and give reasons on
these reforms.
In 1996, CII (Confederation of Indian Industry) took the first initiative step on corporate
governance. The purpose of this step was to develop and promote the code for companies,
both in public and private sectors. It addresses transparency and need for the International
standards that protect the peoples’ confidence in corporate world. In April 1998, final draft was
introduced.

KUMAR MANGALAM BIRLA Report on Corporate Governance

A SEBI chairman and notable industrialist Birla reported on corporate governance. This report
provides a comprehensive concern relate to the insider trading and securing the rights of
several investors. The companies were need to disclosures separately in their annual audit
reports to enable the stakeholders to know where the company invests, how it invests and
what decisions they are taking.
An importance of AUDITING BODY is also realized in the committee. SEBI included their
recommendations in its listing in clause 49, and this came into contact in the years of 2000 and
2003.

Standing Committee on International Financial Standards (March 2001)

At this time, an advisory group compares the corporate governance with International Financial
Standards and advice to improve the corporate governance in India.

Report of Consultative group of Directors of Banks (2001)

The directors of the banks and financial institutions get feedback from the board and the
activities like transparency, compliance, disclosures and audit committees with the aim to
mitigate or reduce the risks.

NARESH CHANDRA Committee (2002)

This committee suggests the changes in the areas of procedure of appointment of an auditor,
audit fee, whether the statutory audit required or not and the steps that need to ensure that
management and company reveal the transparent and fair financials of the company.
NARAYAN MURTHY (2003)
This committee improves the role of independent directors, company’s management, risk
management, remuneration, ethical values and financial disclosures.

NARESH CHANDRA Second Committee

The main focus of this report on TWO Elements:

 Companies act 1956

 Partnership act 1932
As there was a need to revisit the law again and improve the framework on the regulation of
private companies and partnership. This report was submitted in 2003.

Amendment of Clause 49 (MURTHY COMMITTEE 2004)

Keeping in view the MURTHY report which was submitted in 2003, SEBI took further changes in
the clause 49. Now the Government requirements relates to the audit committees, shareholder
disclosures and corporate boards. Internal Control was the massive element of this amendment
that needs to be transformed in the corporate governance of Indian Companies.

Second Phase of Corporate Governance in India (From 2009 to

onwards | After Satyam Scam)
In January 2009, an extremely fraud in the financial of Satyam, a corporate giant in the
community of India and this was the greatest shock that damaged the revelations. But the
scandal of Satyam leads to the Indian government to rethink about the corporate governance
and its practices, disclosures, accountability and mechanism. CII began to investigate where the
main reason lies and what is its impact on Corporate Governance and Ethics.
However, CII task force came into contact to reform Corporate Governance recommendations.
They came into unique decision that Satyam scandal is one-off incident. The majority of the
corporations in India is running well and ethically and in a legal manner. But the committee
issued a minor changes in Corporate Governance law, in the light of Murthy’s, 2010.

In 2013, Legal framework of Corporate Governance highlights the following matters:

 The company act 2013, contains the laws regarding Board meetings, Independent
Directors, Audit Committees and disclosures issues in the financials.
 SEBI guidance ensures that there is a compliance of law and protect the stakeholders
interest.
 A listing agreement between companies and stock-exchange (especially listed
companies).
 All companies follow the ICAI (Institute of Chartered Accountant of India) Accounting
Standards in their financial statements that show a true and fair picture of the company
matters.

Corporate Governance and Big Corporate Failures in India

Satyam Scam: A colossal corporate scandal that affects the Indian Economy in 2009, in
which chairman RAMALINGA RAJU admitted that the company’s accounts had been
manipulated.

Ricoh Case: The Ricoh Scandal was almost the duplicate of Satyam Scam in relation to the
financials. But after tightening the rules of governance after Satyam scam, Ricoh could not
ensure the good governance in its management.

ICICI Bank case: A board given a clean chit to its CEO without independent investigation
of the results, due to favoritism and nepotism.

Lesson Learned from these scams and the future of Corporate

Governance in India
Every scandal has a lesson in it and it gives signal to the other corporate bodies that the
good governance really does matters. It is very important to note that corporate
governance is not limited to increase the shareholder’s wealth, but other stakeholders
cannot be neglected, if we need to move the path of success. Today many Indian
corporations like Infosys, Pepsi co, Tata, Birla Reliance are the corporate giants and
successful due to the good governance system.
According to the issued given above, it is the main responsibility of the management of the
company that it comply with the corporate governance standards and best practices
according to the SEBI and CII guidelines. In the modern age, a good governance is a tool of
success to the corporate world that has been coming from the ancient time of
ARTHSHASTRA.
Corporate Governance is not an END but a good governance and excellence is the END. If
the good governance is achieved by the corporate world, Indian corporations will achieve a
flying colors in the world.