PROJECT

ON
CORPORATE GOVERNANCE: THE NEED FOR PROPER REGULATION
SUBMITTED TO:
Dr. Dipak Das
(Faculty Member)

SUBMITTED BY:
VASUDHI MISHRA
Roll Number- 190
Semester VI
Section- A
B.A. LL.B (Honors.)

SUBMITTED ON: April 6, 2018

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 DECLARATION
I hereby declare that the project work entitled “CORPORATE GOVERNANCE: THE NEED
FOR PROPER REGULATION” submitted to the Hidayatullah National Law University, Raipur
is the original work done by me under the guidance of Dr. Dipak Das, HNLU, Raipur and
this project has not performed the basis for the award of any degree or diploma and similar
project if any.

Vasudhi Mishra

Roll No. 190.

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 ACKNOWLEDGMENTS

I would like to express my deepest gratitude to Dr. Dipak Das for his continued guidance and
support throughout the completion of this project and for giving me the opportunity to expand
my knowledge base by working on this topic . I would also like to thank my peers for their
unending support and the University for providing adequate infrastructure in the form of the
library and the IT lab which were pivotal in the completion of this work .

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 TABLE OF CONTENTS

PAGE
S.No TOPICS COVERED
NO.
1. Introduction 5
2. Objectives of the Study 6
3. Methodology of Study 6
4. Scope of the Study 6
5. Meaning of Corporate Governance 7
6. Good and Bad Governance 8
7. Need for Regulation 10
8. Regulatory Framework 12
9. Conclusion 13
10. Bibliography 14

INTRODUCTION
The burgeoning economic growth that corporate India witnessed since the 1990s brought to the
forefront the need for Indian companies to adopt corporate governance practices and standards,
which are consistent with international principles.

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Industry groups, notably the Confederation of Indian Industries (“CII”), spearheaded the move to
bring corporate governance issues to the attention of Indian companies and also led to the
introduction of legislative reforms prescribing the manner in which Indian companies could
implement effective corporate governance mechanisms. 

 The legal framework relating to corporate governance is broadly covered in the Indian Companies
Act, 1956 (“Companies Act”) and the regulations/ directives that are issued by the Securities and
Exchange Board of India (“SEBI”), the securities market regulator in India.

The Companies Act is administered by the Ministry of Corporate Affairs (“MCA”) and the
provisions of the Companies Act are enforced by the Company Law Board. Regulators such as the
Reserve Bank of India (“RBI”) and the Insurance Regulatory Development Authority (“IRDA”) also
prescribe corporate governance guidelines applicable for banking and insurance companies,
respectively. 

OBJECTIVES OF STUDY
Set in the above perspective the broad objective of the study is to : Analyse the need for
regulation of Corporate Governance.

The specific objectives are as follows :

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 To analyse the concept of corporate governance.

 To analyse various regulatory framework for corporate governance.

SCOPE OF STUDY
The scope of this study to know what is the need for the regulatory bodies to put regulation for
corporate governance. This project work also focuses on various regulatory framework in existence
in respect to corporate governance in India.

RESEARCH METHODOLOGY

The research project is descriptive and analytic in nature. The research project is mainly based on
secondary sources which include books and web pages.

The purpose of this project is to employ secondary method of research in order to substantiate the
synopsis with facts and figures. This secondary method includes excerpts from various journals,
articles and books. These methods do not include field work and mainly depend on electronic
resources.

CORPORATE GOVERNANCE
Meaning- Corporate governance is the system of rules, practices and processes by which a company
is 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.1
1
www.investopedia.com/terms/c/corporategovernance.asp. Last retrieved on 4th April, 2018.

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Internationally, there has been a great deal of debate going on for quite some time. The famous
Cadbury Committee defined "Corporate Governance" in its Report (Financial Aspects of Corporate
Governance, published in 1992) as "the system by which companies are directed and controlled".

Since corporate governance also provides the framework for attaining a company's objectives, it
encompasses practically every sphere of management, from action plans and internal controls to
performance measurement and corporate disclosure. Thus, the key aspects of good corporate
governance include transparency of corporate structures and operations; the accountability of
managers and the boards to shareholders; and corporate responsibility towards stakeholders.

Corporate governance is concerned with ways of bringing the interests of investors and manager into
line and ensuring that firms are run for the benefit of investors’. Corporate governance includes ‘the
structures, processes, cultures and systems that engender the successful operation of organizations’.

It is the framework of rules and practices by which a board of directors ensures accountability,
fairness, and transparency in a company's relationship with its all stakeholders (financiers,
customers, management, employees, government, and the community).

The corporate governance framework consists of

(1) Explicit and implicit contracts between the company and the stakeholders for distribution of
responsibilities, rights, and rewards.

(2) Procedures for reconciling the sometimes conflicting interests of stakeholders in accordance with
their duties, privileges, and roles, and

(3) Procedures for proper supervision, control, and information-flows to serve as a system of checks-
and-balances.

Good and Bad Governance

Bad corporate governance can cast doubt on a company's reliability, integrity or obligation to
shareholders. Tolerance or support of illegal activities can create scandals like the one that rocked
Volkswagen AG in 2015. Companies that do not cooperate sufficiently with auditors or do not select
auditors with the appropriate scale can publish spurious or noncompliant financial results.

Bad executive compensation packages fail to create optimal incentive for corporate officers. Poorly
structured boards make it too difficult for shareholders to oust ineffective incumbents.

Good corporate governance creates a transparent set of rules and controls in which shareholders,
directors and officers have aligned incentives. Most companies strive to have a high level of
corporate governance. For many shareholders, it is not enough for a company to merely be
profitable; it also needs to demonstrate good corporate citizenship through environmental awareness,
ethical behavior and sound corporate governance practices.

Major factors driving need for improved corporate governance

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Since the late 1900s several factors enabled a marked increase in the frequency and scale of
corporate disasters and scandals. These factors include notably:

Globalization - markets are global, and connected as never before; natural boundaries and limits that
existed before globalization no longer exist, so problems can reach and spread far wider than in
earlier times.

Technology - the vast modern scale of technologies, and the sheer size of things that organizations
now create and process, in every sector, increases the scale of potential damage of corporate wrong-
doing.

For example the enormous scale of manufacturing, production, commodities, machinery, transport,
construction, IT, the web, etc., compared with a generation ago. The maxim: 'The bigger they are, the
harder they fall' is very apt. When something goes wrong in modern times, the impacts are
potentially bigger than ever in history.

Population - volumes and densities of populations everywhere have increased dramatically since the
late 1900s. Where corporate scandals and disasters happen, the potential to affect vast numbers of
people has never been greater.

Free Market – Recently, the fondness of (mainly 'western') governments for 'free market' capitalist
economics (basically the view that market forces should be kept free from interference) has
encouraged the development of unregulated major risk-taking in organizational governance and this
style of running organizations has now become deeply embedded into corporate attitudes.2

Most corporations are run in an extremely selfish and greedy manner. Short-term gain, and the
enrichment of directors and senior staff continues to drive corporate strategy and decision-making
everywhere. Combined with the other factors, this creates a potent recipe for disasters of all kinds.

Generally, Corporate Governance refers to practices by which organisations are controlled, directed
and governed. The fundamental concern of Corporate Governance is to ensure the conditions
whereby organisation's directors and managers act in the interest of the organisation and its
stakeholders and to ensure the means by which managers are held accountable to capital providers
for the use of assets. To achieve the objectives of ensuring fair corporate governance, the
Government of India has put in place a statutory framework.

The need for such regulation of Corporate Governance-

A question often arises, given the theory behind corporate governance, is why do we need to impose
particular governance regulations through stock exchanges, legislatures, courts or supervisory
authorities? If it is in the interest of firms to provide adequate protection to shareholders, why
mandate rules, which may be counterproductive?

2
www.tribunajuridica.eu/arhiva/An4v2/20%20Gupta.pdf. Last retrieved on 4th April,2018.

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 Even with the best intentions regulators may not have all the information available to design
efficient rules. Worse still, there is a danger that regulators can be captured by a given constituency
and impose rules favouring one group over another.

There are at least three reasons for regulatory intervention. The main reason that is in favour of
mandatory rules is that if the founder of the company was allowed to design and implement a
corporate charter he likes, he may not clearly address the issues faced by other shareholders and thus
would, in the view of the society, conjure inefficient rules. 3

The functioning of the market for corporate control is an example. In absence of regulations,
founders could employ anti-takeover defences excessively and in the process not allow the capital
employed, which is owned by the shareholders, to be used most efficiently.

Alternatively, shareholders may favour takeovers that increase the value of their shares even if they
involve greater losses for unprotected creditors or employees. Thus, in absence of regulations, the
collective bargaining process may not yield socially acceptable solutions and may be at the peril of
one or multiple stakeholders.

Another reason for mandating regulations of corporate governance comes from the concept of
externality. An externality may be defined as a good, generated as the result of an economic activity,
whose benefits or costs do not accrue directly to the parties involved in the activity.

An externality is created by one person and experienced by other (s) and may be positive (like a
well-maintained garden) or negative (like pollution). Bad corporate governance practice by a firm
can in the same vein be seen as a negative externality.

One corporate failure or scandal can potentially erode shareholders trust in the whole of the
corporate sector and thus negatively affect the businesses of honest firms as well. A few instances of
fraud, as seen in the case of Enron and later on in WorldCom, destroy the faith of investors in the
entire corporate sector and thus hurt the larger interest of the economy.

Thus in such cases where private action fails to resolve widespread externalities involving large
numbers of parties, the state has the responsibility to intervene to provide a level playing field and
also to prevent market failure.

Lastly, In case of dispersed shareholding, due to the (individual) large cost of monitoring the
company on a regular basis, there remains a possibility that management may change the rules (to
their advantage) ex post.

Thus the final reason in support of mandatory rules is to avoid a situation where efficient rules are
designed initially but due to lack of active tracking by dispersed shareholders, are altered or broken
later.

Issues to be considered-

While regulations are necessary, there are however, a few issues that need to be considered.

3
www.nfcgindia.org/library/cgitp.pdf. Last retrieved 4th April,2018.

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1. The first relates to policing and punishment. The SEBI envisages that all these corporate
governance norms will be enforced through listing agreements between companies and the stock
exchanges. A little reflection suggests that for companies with 5 little floating stock — which
account for more than 85% of the listed companies — delisting because of non-compliance is hardly
a credible threat. The SEBI can, of course, counter that by stating that the reputation effect of de-
listing can induce compliance and, hence, better corporate governance.

2. The second issue is more serious, and it has to do with form versus substance. There is a fear that
by legally mandating several aspects of corporate governance, the regulators might unintentionally
encourage the practice of companies ticking checklists, instead of focusing on the spirit of good
governance. The fear is not unfounded.

Take, for instance, the case of Korea, a fourth of the board of every listed Korean company must
consist of independent directors. They do, but the directors are hardly independent by any stretch of
imagination. For most part, they are, friends of business groups and politicians that have supported
the business in the past. And, in any event, they don’t do what was intended — namely, to speak for
shareholders and ensure that management does what is necessary to maximize long-term shareholder
value.4

3. The third concern relates to apprehension about excessive interference. There is an apprehension
that over-regulation of corporate governance could disrupt the functioning and quality of boards
without resulting in any substantial improvement in the standards of corporate governance. It needs
to be ensured that we do not go overboard with corporate governance regulations, and that
unwittingly micro-management of companies does not take place.

This raises a question of how to trace the line that divides voluntary from mandatory. In an ideal
world with efficient capital markets, such a question need not arise — because the markets would
recognize which companies are well governed and which are not, and reward and punish
accordingly.

Unfortunately, ideal capital markets exist only in theory. The reality is quite different. Markets are
often thin and shallow; informational requirements are lax; and regulatory and policing devices leave
much to be desired. Thus, what is needed a small corpus of legally mandated rules, buttressed by a
much larger body of self-regulation and voluntary compliance.

Regulatory framework on corporate governance

The Indian statutory framework has, by and large, been in consonance with the international best
practices of corporate governance. Broadly speaking, the corporate governance mechanism for
companies in India is enumerated in the following enactments, regulations, guidelines, listing
agreement:

The first initiative in India was taken by Confederation of Indian Industry (CII), India’s largest
industry and business association. The second major initiative was taken by Security Exchange
Board of India (SEBI) as clause 49 of the listing agreement. The third initiative was taken by Naresh

4
www.rtiallahabad.cag.gov.in/rti-website/rti. Last retrieved on 4th April,2018.

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Chandra Committee and Narayana Murthy Committee.  These committees had looked corporate
governance from the point of view of stakeholders in particular that of shareholders and investors.
The committees have identified three key constitutes of corporate governance as shareholders, the
Board of Directors and the Management.

1. The first was by the Confederation of Indian Industry (CII), India’s largest industry and business
association, which came up with the first voluntary code of corporate governance in 1998. The Task
force made a number of recommendations relating to board constitution, role of non-executive
directors, role of audit committees and others.

2. Kumar Mangalam Birla committee Report and Clause 49-

While the CII code was well-received and some progressive companies adopted it, it was felt that
under Indian conditions a statutory rather than a voluntary code would be more purposeful, and
meaningful. Consequently, The SEBI appointed committee, known as the Kumar Mangalam Birla
committee’s recommendations led to the addition of Clause 49 in the Listing Agreement. Listed
companies largely made compliance of provisions of Clause 49 mandatory.

The committee paid much attention to role and composition of the Board of directors, disclosure
laws and share transfers and under clause 49 all the listed companies with a paid up capital of Rs. 3
crores and above or net worth of Rs. 25 crores or more at any time during the life of the company as
of March 31, 2003 are governed by these principles.

3. Narayana Murthy Committee report on Corporate Governance-

The fourth initiative on corporate governance in India is in the form of the recommendations of the
Narayana Murthy committee. The SEBI analyzed the statistics of compliance with the clause-49 by
listed companies and felt that there was a need to look beyond the mere systems and procedures if
corporate governance was to be made effective in protecting the interest of investors.

The committee was set up by SEBI, under the chairmanship of Mr. N. R. Narayana Murthy, to
review Clause 49 i.e. implementation of corporate governance code by listed companies and suggest
measures to improve corporate governance standards. Some of the major recommendations of the
committee primarily related to audit committees, audit reports, independent directors, related party
transactions, risk management, directorships and director compensation, codes of conduct and
financial disclosures.

1. The Companies Act, 2013 - has tried to overhaul the various provisions relating to strong
Corporate Governance. The provisions relating to independent directors are examples which confer
greater power and responsibility in the governance of a company. There are no explicit provisions for
independent directors under the six decade old Companies Act, 1956 and only clause 49 of the
Listing Agreement prescribed for the induction of independent directors and made it mandatory for
listed companies.

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  Woman Director - Section 149 (1) of the Companies Act, 2013 prescribes the following
classes of companies to have at least one woman director. i. All listed companies ii. Non-
listed public companies having paid up share capital of Rs.100 crores or more or having
turnover of Rs.300 crores or more.
 Audit Committees- The Companies Act,2013 has increased the ambit of companies to
constitute audit committees. The constitution of audit committee has also seen change as
compared to clause 49 with minimum three independent directors. The Chairperson should be
able to read and understand the financial statement. It shall be applicable to all the listed
companies or non-listed public companies having paid up share capital of Rs.10 crores or
more, Turnover of Rs.100 crores or more, aggregate outstanding loan of Rs. 50 crores or
more.
 Corporate Social Responsibility- Section 135(1) of Companies Act, 2013 prescribes that
every company shall constitute Corporate Social Responsibility Committee constituting of
three or more directors with at least one independent director. These companies includes
companies having net worth of Rs. 500 crores or more, turnover of Rs.1000 crore or more, or
net profit of Rs.5 crores or more during any financial year.
 Independent Director- Under the Companies Act, 2013 the strength of number of
Independent directors for the prescribed companies under Section 149(4) read with Rule 4 of
Companies (Appointment and Qualifications of Directors) Rules, 2014 is as follows: Listed
Public Company At least one third of total number of directors Public Companies having
turnover of 100 crores rupees or more At least 2 directors Public companies having paid up
capital of 10 crores rupees or more At least 2 directors.
 Accounting Standards issued by the Institute of Chartered Accountants of India (ICAI):
ICAI is an autonomous body, which issues accounting standards providing guidelines for
disclosures of financial information.
 Section 129 of the New Companies Act inter alia provides that the financial statements shall
give a true and fair view of the state of affairs of the company or companies, comply with the
accounting standards notified under s 133 of the New Companies Act. It is further provided
that items contained in such financial statements shall be in accordance with the accounting
standards.

CONCLUSION:
An effective corporate governance framework requires a sound legal, regulatory and institutional
foundation, upon which all market participants can rely when they enter into contractual relations.
This framework typically comprises elements of legislation, regulation, self-regulatory arrangements,

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voluntary commitments and business practices, with the balance among them determined by a
country’s specific economic circumstances, history and traditions.

The framework is also dynamic: as new experiences accrue and business circumstances change, the
content and structure might need to be adjusted. In this process, it is essential to assess the quality of
the domestic framework in light of international developments and requirements.

We can conclude that measures taken to restore trust in some instances is to satisfy social demands,
burdening business with greater reporting requirements for no discernible benefit for stakeholders.
However much of the changes have been positive and helped to make firm operations much more
transparent particularly in developing nations, although it is difficult to measure the impact this has
on investment decisions by investors.

There remain considerable contextual distinctions across nations, making a universal expression of
corporate governance rules unlikely in the current circumstances. These rules will, no doubt, have to
be reconciled or aligned in some respect in due course, as globalization and international business
activities grow.

BIBLOIOGRAPHY

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BOOKS
 Dr G.K. KAPOOR, Company Law and Practice , Taxman; (20th edition, 2015)

WEBLINKS
 www. Shodhganga.com
 www. slideshare.net
 www. wikipedia.org
 www. mondaq.com
 www. conventuslaw.com

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