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Corporate Governance Research Paper
Corporate Governance Research Paper
VISAKHAPATNAM
SUBJECT
Corporate Governance
FACULTY
TOPIC
DONE BY:
M. Eswar Brahmanand
Section-A
Semester-IX
1
TABLE OF CONTENTS:-
ABSTRACT
1. Introduction
4. Reasons behind Failure even though after Proper Planning by Various Committees
5. Conclusion
2
ABSTRACT
Following many corporate financial scandals in the early part of the decade, investors were
more concerned about the integrity of the corporate governance structure. Deregulation,
privatisations, takeovers, changes to pension funds, and the expansion of private savings have
all contributed to the rise in corporate governance. Globalization, privatisation, unethical
corporate practises, and security scams are all examples of these. At its core, corporate
governance is concerned with all aspects of a company’s management from its inception in
entrepreneurship through its eventual demise in the marketplace. For the health and stability
of our economies, we must ensure the integrity of our businesses and financial markets. To
put it another way: Corporate governance is “the method, mechanism, principles and
structure by which the business and the corporation are successfully managed, directed and
controlled,” according to Bradly. It aims to create long-term shareholder value by increasing
business performance and responsibility while taking other shareholders’ interests into
consideration. The board of directors, shareholders, and other stakeholders are the three key
actors in corporate governance, which describes the relationships and the allocation of rights
and obligations. There are rules and processes in place for making choices on business
affairs, and the system lays out a framework for setting and achieving company objectives, as
well as the tools to monitor and evaluate the firm’s performance. The primary goal of
corporate governance is to guarantee that managers are held responsible for the use of their
company’s assets to its investors. Fiduciary obligation and accountability are often debated as
elements of corporate governance. It provides for a more creative and flexible reaction to
enhance standards in operating and managing the organisation instead of stringent regulatory
restrictions. On top of these recommendations from various National Committees headed by
knowledgeable experts, I as a researcher would like to discuss in detail the highlights and
essential suggestions that have improved the corporate governance of our nation, but haven’t
made their mark in preventing corporate frauds. I’ll go into more detail on why they weren’t
able to stop it.
3
CHAPTER-I
“Today we need a pragmatic approach rather than a narrow doctrinaire approach to serve
our needs. It is essential that we have high ethical standards of corporate governance,
followed voluntarily, having community sanctions which will have much more
effectiveness. Only then our endeavour at economic reforms and liberalization will
fructify1”
The recent financial crises and frauds need a greater attention on corporate governance. We
can only defend our interests and those of the public by implementing appropriate corporate
governance standards. Many experts urged business leaders to adopt high ethical standards in
corporate governance, resulting in improved value for all stakeholders and development,
ultimately helping the nation battle poverty and crippling illnesses. It is only by doing so that
the Government can legitimise its liberalisation and economic reform initiatives.
Corporate Governance has gained widespread public attention due to its relevance for the
economic health of firms and the overall welfare of society. However, the term corporate
governance is used loosely since it encompasses a wide range of actions that impact the
financial health of corporations. The outcome is a variety of definitions that represent the
individual’s specific area interests. So, rather of presenting just one or two definitions, I
believe it is appropriate to provide a few.
To begin, let us remember the Economist and Nobel winner Milton Friedman’s original
formulation of Corporate Governance. To produce as much money as possible while adhering
to the essential social standards enshrined in law and local traditions, according to him, is
Corporate Governance. This term is based on the shareholder capitalist economic notion of
market value maximisation. Friedman’s notion seems to be more limited now. The concept of
1
The Honourable Union Finance Minister, Shri Yashwant Sinha, while inaugurating the 17th Annual Session of
FICCI Ladies Organization (FLO), stressed the need to formulate and adhere to a set of strong corporate
governance practices. He was addressing the august audience of leading businesswomen of FICCI on “The
Emerging Need for Corporate Governance”.
4
Corporate Governance has evolved throughout time. It now includes not just stockholders but
also numerous stakeholders.
When a new corporate fraud breaks, the concerns regarding corporate governance,
particularly in family organisations, resurface. After the CBI launched its investigation into
Nirav Modi’s firms, the attention shifted to professionals and other key management figures.
The directors of Nirav Modi’s firms were deemed to be unqualified. Some were corporate
clerks and others were accountants.
It’s not only Nirav Modi where the directors are just names on paper. During my meetings
with family company owners, I’ve seen a strong dislike for outsiders on their boards. While it
would be ideal for all firms to have competent boards, it is also realistic that this will not
happen immediately. Corporate governance cannot be avoided when organisations expand in
size and shareholder count. People often ask me how to tackle this issue in a practical
approach2. It’s clear that company owners are wary about involving “outsiders.” The power
they possess over their own businesses is threatened by having to justify their activities to the
board. Advisory boards for companies are a wonderful approach to start incorporating
governance into a family company management structure. The Advisory Board may assist the
company owner feel more comfortable with an outside group of specialists offering guidance
and information. The advisory board is not a regulatory obligation; it is a group formed by
the company owner. Thus, the advisory board’s makeup and responsibilities are flexible. The
inclusion of knowledgeable persons on an advisory board allows the company owner to
monitor the members’ contributions and devotion to the business.
5
Indian corporate entities that have developed into worldwide giants. They are typically
referred to as the GEC. The Tata and Mahindra groups have it. After a certain size, the DHFL
group formed its own Group Executive Council. These corporate groupings inspire the
smaller ones. Smaller enterprises, however, struggle to overcome such fears. This is
regrettable. They require a group council more than larger companies.
While larger companies have their own growth issues, it is the smaller companies that need
an outside viewpoint. They may not desire full-time staffs who are specialist in their fields. A
monthly or quarterly advisory board satisfies the needs of both the company owner and the
expert. The most important benefit of an advisory board, in my opinion, is that it allows a
firm owner to publicly declare his commitment to good governance.
6
CHAPTER-II
Corporate governance has historical origins in India. In Ramrajya, trusteeship was used. After
Rama left Ayodhya, Bharat became its ruler. Bharat’s function was Trusteeship; he
administered his realm as a representative. This is the ideal separation between owners and
managers. It has also been a successful governance approach in India. Though Bharat had
ruled Ayodhya for fourteen years, he was a poor man. The Mahabharata had similar
government. Krishna’s Kingdom had a president. Krishna and Balarama were kings-in-
waiting. Both instances relied on absolute ethical norms inherited from the Vedas.
VARNASHRAM is based on Indian ideas (Four Quality and Efficiency - based class of
people). The division of labour reduced the probability of a few amassing money and power.
The guidelines also stress having a single source of income. The Indian ethos further
separates individual action into four parts: (PURUSHARTH - Dharma, Artha, Kama, and
Moksha)
Until the early 17th century, most Indian organisations were governed jointly or owned by a
family. During that time period, partnerships predominated. The partners had minimal
personal liability for the company’s commitments. JRD TATA, for example, has imbued
these ideals and built the TATA group empire. Earlier, Indian governance management
centred on controlling the agency system. The Corporations Act 1956 was enacted to regulate
the running of joint stock companies and safeguard investors’ interests. But current rules have
enough capacity to prevent inefficiency, nepotism, and corruption. Firms are being urged to
create complex systems with high “Under the Table” remuneration for top executives.
Bankruptcy and restructuring systems have harmed Indian corporations. It is based on the
1985 Sick Industrial Companies Act, which declares a business “sick” only after its net value
has been depleted (BIFR). From 1987 to 1992, just a few enterprises survived the BIFR.
Moreover, the legal procedure took an average of ten years to liquidate the company’s assets3.
So the creditor’s rights were just on paper.
3
Dr.Chaitra Rangappa Beerannavar & Riya Sanjay Baghel- Legal Framework of Corporate Governance: Indian
Perspective [volume 6 i issue 1 i Jan.– March 2019] E-ISSN 2348 –1269,
7
POST LIBERALIZATION GOVERNANCE PRACTICES IN INDIA
In 1991, India started liberalising its laws and regulations. After liberalisation, India’s
Securities and Exchange Board (1992) was established, advancing corporate governance and
protecting minority investor interests. SEBI monitors stock trading. Following the Harshad
Mehta scandal in 1992, various investigations were launched to improve corporate
governance norms in India. The CII (Confederation of Indian Industry) was the first to
attempt to reform and modify current governance systems. The committee was founded in
1996 by Rahul Bajaj. They submitted their code in 1998. During this time period, SEBI also
set up two corporate governance committees, the first led by Kumar Manglam Birla and
reporting in early 2000, the second by Narayan Murthy and reporting three years later.
Through clause 49, these two committees’ deliberations and ideas become essential tools for
changing corporate governance in India. In addition, the DCA (Department of Company
Affairs) of the Indian Ministry of Finance has started to reconsider current processes and
adopt essential reforms. It was decided to amend the 1956 Companies Act, which remains the
cornerstone of corporate law in India. In 2000, Kumar Manglam Birla led the corporate audit
and governance committee, followed by Naresh Chandra in 2002 and J. J. Irani in 20044.
4
Meghna Thapar and Arjun Sharma, Corporate Governance In India: An Analysis, Journal of Economic and
Social Development – Vol 4. No. 1, March 2017, Pp 84-85.
8
CHAPTER-III
CADBURY COMMITTEE:
The Cadbury Committee’s declared goal was “to assist increase the standards of corporate
governance and the degree of trust in financial reporting and audits by clearly defining the
roles and responsibilities of those involved.”
The ensuing report and accompanying “Code of Best Practices” were favourably accepted in
December 1992. In addition to the guidelines, firms listed on the London Stock Exchange
have to indicate in their accounts whether or not the code was followed. Companies who did
not comply had to justify their actions5.
5
Dr. Anil Kumar, (2012), ‘Corporate Governance Theory and Practice’,-International book House
9
They should be able to make independent decisions on matters of strategy, performance,
resources, critical appointments, and standards of behaviour. Aside from their remuneration
and ownership, the majority should be independent of management and free of any
commercial or other link that may seriously impair their independent judgement. Their
remuneration should reflect the time they provide to the firm. Non-executive Directors should
be appointed for a set time and not automatically reappointed. Non-executive Directors
should be appointed by the Board as a whole, following a proper procedure.
The Cadbury Code of Best Practices states that executive director contracts should not exceed
three years without shareholder approval. Their overall pay, including pension contributions
and stock options, should be fully disclosed, as should the Chairman’s and the highest-paid
UK Directors’. Separate pay and performance data should be provided, together with
explanations of how performance is assessed. The Remuneration Committee should provide
recommendations on Executive Directors’ remuneration. The Cadbury Code of Best Practices
further states that the Board must offer a fair and intelligible appraisal of the company’s
stance. The Board should maintain a professional relationship with the Auditors. The Board
should form an Audit Committee of at least three non-executive directors with clearly defined
power and tasks. The Directors should explain their role in compiling the accounts alongside
the Auditors’ role in reporting. The Board should report on the company’s internal control
system. Also, the directors should report on the business’s viability, with any relevant
assumptions or qualifiers.
Due to the recent spate of corporate scams and catastrophes in the US, UK, Canada, Australia
and several East Asian nations, including India, Corporate Governance concerns have
garnered major global attention. Several notable firms have failed in the recent two decades.
The legal and regulatory framework of a country is highly important in forming an efficient
corporate governance structure and securing external finance and investment. Corporate
investment and finance patterns impact a country’s economic development6.
The economic crisis was caused by bad governance and lack of transparency in most East
Asian countries before and after liberalisation. And now it’s important in these emerging
nations too. The bulk of corporate handlings are similar across all nations, with concentrated
ownership and family or state control defining a substantial component of the whole business
6
Dr. A.C. Fernando (2012), ‘Corporate Governance Principles, Policies and Practices’, Pearson Education in
South Asia
10
sector. This has had several negative effects for these nations’ enterprises in terms of
governance. It has not left India behind in terms of this adverse corporate governance result7.
From 1947 until the 1990s economic reforms, the Indian corporate sector was a combination
of government and private firms (Family Business Groups, Individual Companies, and
Multinationals), and championed an authority and control approach to advancements. It has
survived beyond the historical history of many emerging countries because to inadequate
corporate governance.
During this time period, the government nationalised many industrial and financial sectors,
including oil and gas. This made the banking system the dominant lenders of debt and equity
capital to both public and private corporations.
Further, industrial and production activities were heavily controlled via licencing, public
sector ownership of various productive enterprises, and regulation of labour markets, pricing,
and salaries. Post Liberalization in the 1990s changed the Indian economy and allowed the
global economy to interact and participate. This has steadily eased the government’s
complicated licencing, market entry, and product price requirements. This has encouraged
private business managers and executives to adopt excellent governance practises in their
organisations.
In conclusion, the institutional, economic, and social settings have substantially affected and
ingrained the Governance changes in Indian Corporate World. The Indian Corporate Regimes
have been pushed to implement necessary steps in applicable laws and regulations to make
substantial improvements in their Corporate Governance Mechanisms. The Confederation of
Indian Industry developed a Code of Corporate Governance as one of the earliest attempts to
restructure the corporate governance framework (CII). In December 1995, the CII formed a
task group headed by Mr. Rahul Bajaj to develop a voluntary code of corporate governance.
The final code was published in 1997. The code came out in April 1998. Desirable Corporate
Governance: A Code (April 1998). The code was voluntarily adopted by around 25
significant firms between 1998 and 2000. The goal was to develop and promote a code of
7
Ellen R. Mc Grattan and Edward C. Prescott Unmeasured Investment and the Puzzling US Boom in the 1990s,
American Economic Journal: Macroeconomics , October 2010, Vol. 2, No. 4 (October 2010), pp. 88-123
11
corporate governance for Indian corporations, whether private or public, banks or financial
institutions, all of which are largely corporations. A high degree of public trust in the
commercial and industrial sectors of the economy was the main issue8.
The CII has been acknowledged as one of the finest in the world at Corporate Governance.
Companies’ capacity to make management choices in relation to its claimants, including
shareholders, creditors, consumers, the government, and workers is determined by corporate
governance laws and processes. Global agreement on ‘good’ corporate governance’s goal:
maximising long-term shareholder value.
In a healthy capital and financial market, maximising shareholder value must inevitably
maximise business prosperity, and best meet the rights of creditors, workers, shareholders
and the State.
The Task Force offered suggestions on board composition, non-executive director roles, audit
committee roles, and more.
2. At least 30% of the board, if the chairman is non-executive, and 50% of the board, if the
Chairmen & MD are the same person.
5. The corporation could explore a stock offering to entice non-executive directors to work
more.
6. When reappointing board members, directors with less than 50% attendance shall not be
reappointed.
7. A compliance certificate signed by the CEO and CFO should state that the company will
continue to operate in the following year, that the accounting policies and practises are
standard practise, that the management is responsible for the preparation, integrity, and fair
8
A.C Fernando- Corporate Governance Principles, Policies and Practices, 2009, Publisher- Pearson Education,
ISBN:9788177585650, 8177585657
12
presentation of the financial statements and other information in the annual report, and that
the Board has overseen the company’s System of Internal Accounting and Reporting.
SEBI has established up a committee headed by Shri Kumar Mangalam Birla, a board
member, to promote and strengthen the norms of good corporate governance. The
committee’s report is the first official and thorough effort to develop a “Code of Corporate
Governance” in light of current governance situations in Indian corporations and the status of
capital markets9.
1. Propose changes to the listing agreement that the stock exchanges have with the
companies, as well as other steps to improve corporate governance in the companies that are
on the stock exchanges. These steps include continuous disclosure of material information,
both financial and non-financial, the manner and frequency of such disclosures, and the
responsibilities of independent and outside directors.
The committee’s main goal was to establish a code of corporate governance that would fit the
Indian business environment and investors. As a result of their work, the committee selected
Shareholders, Directors, and Management as the three fundamental elements of successful
corporate governance.
Shareholders and other stakeholders such as suppliers, consumers, creditors, bankers, firm
workers, government, and society at large are all claimants in corporate governance.
However, the committee did not ignore the requirements of other parties.
9
T.N. Pandey- Audit Committees - A comparative study under the Companies Act 1956 and as proposed under
the Companies Bill 2012 as passed by Lok Sabha http://docs.manupatra.in/newsline/articles/Upload/10874227-
0CE6-4CDA-AE78-E5606D14AEF9.pdf L.A on 1-12-2021
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implemented by amending the listing agreement. Others, desired or requiring legislative
reform, may be designated as non-mandatory for now.
A. Mandatory Recommendations:
1. Applies To Publicly Traded Companies with a Paid-Up Capital of at least Rs. 3 Crores.
3. Audit Committee - Comprised of three independent directors, one of whom has financial
and accounting expertise.
4. Committee on Remuneration
5. Board Procedures - At least four Board meetings each year with a maximum gap of four
months between meetings. To conduct a review of operational plans, capital budgets,
quarterly results, and committee meeting minutes. A director may not serve on more than ten
committees and may not chair more than five committees across all companies.
B. Non-Mandatory Recommendations:
5. Restructuring of Businesses
14
Chandra Committee Report on Corporate Audit and Governance (2002):
In August 2002, the Ministry of Corporate Affairs established a high-level group to explore
numerous corporate governance concerns10. The committee was tasked with analysing and, if
required, recommending modifications in a variety of areas, including:
1. The interaction between the statutory auditor and the business, in order to further reinforce
the professional quality of this contact;
6. Measures necessary to ensure that management and corporations truly produce ‘true and
fair’ financial statements;
9. The regulatory framework for chartered accountants, company secretaries, and other
comparable statutory supervision officials is adequate;
10. The benefits, if any, of establishing an independent regulator comparable to the Public
Company Accounting Oversight Board established by the Sarbanes-Oxley Act (SOX Act),
and, if so, the structure of such a regulator; and
11. The role of independent directors and methods for ensuring their independence and
effectiveness.
The following are the Committee’s recommendations. They are Exclusions from audit
assignments; List of prohibited non-audit services; Standards of independence for consulting
firms and other entities affiliated with audit firms; Mandatory Audit Partner Rotation;
10
https://www.mca.gov.in/Ministry/latestnews/Draft_Report_NareshChandra_CII.pdf L.A 02-12-2021
15
Auditor disclosure of contingent liabilities; Auditor disclosure of qualifications and
subsequent action; Management certification in the event of an auditor’s replacement; Annual
confirmation of the auditor’s independence; Nomination of auditors; Establishment of an
independent quality control board; Proposed system for disciplining auditors; Defining the
concept of an independent director; Independent directorships as a percentage; Minimum size
of a company’s board of directors; Additional disclosure to directors on the length of
board/committee meetings; Audit Committees of publicly traded businesses should have
independent directors; Charter of the Audit Committee; Non-executive directors’
compensation; Exemption from certain obligations for non-executive directors; Independent
director education; SEBI and Subordinate Legislation, as well as the Corporate Serious Fraud
Office, among others.
The Ministry of Corporate Affairs has established up a not-for-profit National Foundation for
Corporate Governance (NFCG). It facilitates sharing of experiences and ideas among
business executives, policy makers, regulators, law enforcement agencies, and non-
governmental groups.
The NFCG is managed by the Governing Council, the Board of Trustees, and the Executive
Directorate. The NFCG has developed an action plan that incorporates excellent corporate
governance standards for institutional investors, independent directors, and audit.
The Securities and Exchange Board of India (SEBI) established a Committee on Corporate
Governance in 2002 to assess the adequacy of existing corporate governance practises and
recommend improvements. It was formed to study Clause 49 and recommend ways to
strengthen corporate governance11. Shri N. R. Narayana Murthy, Chairman and Chief Mentor
of Infosys Technologies Limited, chaired the SEBI Committee. The Committee included
people from all areas of life. Members of the financial press and industry forums were also
present. The committee’s mandate was to:
11
S.E.B.I has actually opened up the committee report for the public opinion and commentary so that it would
be eventually helping out every one https://www.sebi.gov.in/reports/reports/mar-2003/the-report-of-shri-n-r-
narayana-murthy-committee-on-corporate-governance-for-public-comments-_12986.html L.A 02-12-2021
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Assess firms’ responses to rumours and other price-sensitive information in order to
improve market openness and integrity.
These included audit committees, independent directors and linked parties. The committee
also considered directorships and board salaries as well as standards of conduct and financial
disclosures. The final report’s recommendations were chosen for their relative relevance,
justice, accountability, and openness, as well as their verifiability and enforcement.
Because some business tasks are too crucial to be left to vague notions of fiduciary duty, the
committee’s suggestions formalise key principles of “good governance.” Their adoption will
improve current governance standards and give a strong incentive to prevent company
collapse. The Committee highlighted that its report’s suggestions may be adopted by
amending the Listing Agreement’s current Article 49.
The Naresh Chandra committee was established in August 2002 by the Ministry of Finance
and Company Affairs to explore corporate governance concerns. The Committee reported in
December 2002.
1. Appointment of an Intelligence Advisor to assist the NSA and the National Intelligence
Board in topics relevant to intelligence committee cooperation.
17
2. Amend the Prevention of Corruption Act to protect honest personnel who make critical
judgments concerning military equipment purchase from harassment.
4. Creating new counter-terrorism tools including the National Intelligence Grid and National
Counter Terrorism Centre.
6. Measurable increases in the influx of foreign language expertise into the intelligence and
security services
This Group’s 2001 recommendations to SEBI encompassed further norms and principles of
private sector businesses, such as consolidation of accounts including subsidiary
performance, criteria of independent directors, and disclosures. In the past, it was known as
the Advisory Group on Corporate Governance. The Group contrasted the legal and regulatory
framework of corporate governance in India with worldwide best practises 12. The Group’s
recommendations include board responsibilities, shareholder accountability, criteria for
selecting independent board members, board size and composition, board committees such as
the audit, nomination, remuneration, and investment committees, and shareholder role in a
company. Given the importance of the public sector in India, the Committee examined the
practises of federal and state public firms governed by the Companies Act. Corporate
governance policies in banks and financial organisations were also researched, since they
have substantial monetary and financial ramifications.
12
This paragraph is based on the analysis made from the review found in this article “Review of the
Recommendations of the Advisory Groups Constituted by the Standing Committee on International Financial
Standards And Codes: Report on the Progress and Agenda Ahead” available at:
https://rbidocs.rbi.org.in/rdocs/Bulletin/PDFs/60223.pdf L.A 03-12-2021
18
The Committee finds that the legislation safeguards common shareholders’ rights, at least in
the private business sector. However, shareholders’ rights to vote and influence management
and corporate governance of private sector banks, PSBs, and PSUs are severely restricted.
Even in the private sector, the mechanism to protect shareholder rights is limited. Company
management might easily restrict shareholder rights by conducting general meetings at
inconvenient places. Shareholder rights may be enforced and corporate governance improved
through restructuring boards, board committees, appointing independent directors, and
requiring full disclosure. The government and the RBI have a vital role to play in
strengthening the quality of governance in PSUs and financial institutions.
The Ganguly Committee made suggestions to implement corporate governance norms in the
banking industry13. The Ganguly Committee’s recommendations are as follows:
2. Board Compensation: The Committee decided that current director compensation (sitting
fees, etc.) is grossly inadequate to recruit talented professionals to their Boards and expect
them to perform their obligations in accordance with mutually agreed covenants.
3. Board Committees:
4. The Committee advises following the Reserve Bank of India’s Risk Management
Guidelines for Banks released in October 1999.
13
https://www.rbi.org.in/Scripts/PublicationReportDetails.aspx?ID=394 L.A 03-12-2021
19
5. Directors must be “fit and proper” in terms of formal education, experience, and track
record. Companies might ask applicants for directorship to self-declare, provide market
verification reports, etc. Some public sector bank conditions, such as the director’s age being
between 35 and 65, and not being a Member of Parliament or state legislatures, may also
apply to private sector banks.
7. The banks may sign into a “Deed of Covenant” with each non-executive director, outlining
their obligations and holding them accountable.
8. Training of Directors: Directors should get needed training to efficiently oversee banks.
According to the Bhaba Committee, which was formed in 1950 to unify existing corporate
rules and provide a new framework for business operations in independent India, the
Companies Act 1956 was enacted. The Companies Act 1913 was repealed by this law in
1956. Since 1956, the Companies Act, 1956, has governed Indian corporations. This Act has
been amended 24 times since 1956 as the business sector developed in tandem with the
Indian economy. Major revisions to the Act were enacted in 1988, 1998, 2000, and 2002,
after the Eradi Committee’s findings, via the Companies (Second Amendment) Act 200142.
A company law expert group chaired by Dr. J.J Irani, then-Director of Tata Sons, was set up
by the Indian government on December 2, 2004. It included specialists from trade and
industry groups, chambers of commerce, professional organisations, government agencies,
and other commercial organisations. The committee’s primary areas of suggestion are given
below.
1. Bringing about compactness by reducing the size of the Act and eliminating redundant
provisions 2. Making provisions of the law easy to understand and interpret. 3. Providing
greater flexibility in rulemaking to enable timely response to ever evolving business models
4. Protecting the interests of stakeholders and investors, included.
14
The Authors Analysis is based upon the source of Report of the Expert Committee on Company Law 2005,
Available at the website of the Ministry of Corporate Affairs and in pdf http://reports.mca.gov.in/Reports/23-
Irani%20committee%20report%20of%20the%20expert%20committee%20on%20Company%20law,2005.pdf
L.A 03-12-2021.
20
The Committee’s goals were to address the changing national and international environment
for listed businesses, allow for globally recognised best practises, and allow for prompt
legislative adjustments in response to changing business models. The Committee’s report was
due in May 2005. The Dr. J.J. Irani Committee has proposed changes to Indian company
legislation that would help the country’s business development in the future years. This has
resulted in many nations forming improved corporate governance frameworks and a tendency
towards worldwide convergence of corporation rules. The committee’s suggestions focus on
the following areas of the laws:
2. Pyramidal Structure: The committee also advised all corporations with subsidiaries to
adopt a pyramidal corporate structure. This makes the subsidiary firm the holding company
for additional subsidiaries. This is particularly true when a firm acquires another company
overseas.
4. Single Person Company: The committee has also shaken the idea of a solo business. The
committee has proposed the notion of One Person Business (OPC) instead of the present need
of two people to start a company.
21
6. Stringent Penalties: The report compelled publishing of information pertaining to
convictions for criminal violations of the Firm Act by the company or its officials in the
annual report to enhance the deterrent measures. The measures to impose strict punishments
would surely help the regulator combat corporate fraud.
7. Accounts and Audits: Financial information is critical to a company’s reputation and the
investors’ ability to make smart investment choices, according to the committee. Noting the
ICAI and the National Advisory Committee on Accounting Standards (NACAS)
participation, the committee recommended that the present institutional system for creating
and communicating Accounting Standards be maintained.
True to that, the Satyam catastrophe, nicknamed “India’s Enron,” has had a significant
influence on the Indian corporate climate, with both the government and other firms pressing
down on attempts to improve governance regulations.
“Clause 49 of the Listing Agreement, which deals with Corporate Governance norms that a
listed corporate business must follow, was first established in the financial year 2000-01,
based on proposals by the Kumar Mangalam Birla Committee. The SEBI Board examined
and accepted the Committee findings at its meeting on January 25, 2000. The suggestions
will be adopted through a modification to the stock exchanges’ listing agreements. In most
markets throughout the world, listing agreements have been utilized to implement corporate
governance in listed businesses.15”
In 1991, the government measures aimed at economic liberalization and globalization of the
domestic economy pushed India to begin on a reform process in order to respond to global
trends correctly. In response to the Cadbury Committee Report, the Confederation of Indian
Industries (CII), the Associated Chambers of Commerce and Industry (ASSOCHAM), and
the Securities and Exchange Board of India (SEBI) established committees to recommend
corporate governance changes. As a consequence of the Kumar Mangalam Birla Committee
recommendations, Clause 49 was added to the Listing Agreement in February 2000.
15
Ankur Srivastava, “Practical Aspects on Listing Agreements”, Corporate Law, 2011
22
These proposals, which attempt to improve corporate governance standards, are separated
into required and non-mandatory categories. All listed firms, their directors, management,
employees, and professionals affiliated with such companies are subject to the
recommendations. The Board of Directors and the Company Management bear the final
responsibility for putting the recommendations into action.
Following the implementation of these suggestions for roughly two years, SEBI established a
committee under the chairmanship of Mr. Narayana Murthy in 2002-03 to assess the
appropriateness of current procedures and to further enhance them. The Murthy group has
issued draught suggestions on corporate governance rules after three sessions. SEBI approved
the suggestions in August 2003 after discussion and requested that the Stock Exchanges
modify Clause 49 of the Listing Agreement in light of the Murthy committee
recommendations. This prompted numerous industry complaints and submissions, requiring
the Murthy committee to reconvene to address the objections. Following that, the committee
significantly altered the prior recommendations, which were then posted on the SEBI website
for public discussion on December 15, 200316. SEBI ultimately issued amended Clause 49 on
October 29, 2004, which must be implemented by the end of the financial year 2004-05. The
original Murthy Committee proposals have likewise been significantly weakened by these
updated suggestions.” Major modifications were made in the following areas:
1. Independence of Directors
The following are the modifications in corporate governance norms as stipulated in the
amended Clause 49:
16
Dilip Kumar Sen, “Clause 49 of the Listing Agreement on Corporate Governance”, The Chartered
Accountant, 2004.
23
Composition of Directors:
This criterion remains in the amended section, with the exception that the relationship will
also include its management, holding company, and affiliates, in addition to the previous list.
In addition, the Board is no longer obligated to assess a director’s independence. To assess a
director’s independence, five additional provisions have been introduced. The following are
examples of these:
2. He has not served on the board of directors of the firm in the previous three fiscal years.
3. He is not a partner or an executive of (a) the statutory audit firm or the internal audit audit
firm that is associated with the company, or (b) the legal and consulting firms that have a
material relationship with the company.
5. He is not a significant shareholder in the firm, owning less than 2% of the voting stock17.
Composition of board:
If the Chairman of the Board is a non-executive director, “at least one-third of the Board must
be made up of independent directors, and if he is an executive director, at least half of the
Board must be made up of independent directors, according to Clause 49 of the Companies
Act. A non-executive director, who is an independent director, as defined under the revised
clause, is one who18:
17
Dilip Kumar Sen, “Clause 49 of the Listing Agreement on Corporate Governance”, The Chartered
Accountant, 2004
18
K.R. Chandratre & A.N. Navare, Corporate Governance- A Practical Handbook with Exhaustive Commentary
on Clause 49 of the Listing Agreement, (New Delhi- Bharat Law House) 2010
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1. Apart from receiving directors salary, has no substantial financial ties or transactions with
the firm, its promoters, directors, senior management, holding company, subsidiaries, or
affiliates that might compromise the director’s independence.
3. Has not served on the board of directors of the firm in the previous three fiscal years.
4. Is not a partner or executive, or has not been a partner or executive in the last three years,
of any of the following: (a) The company statutory auditing firm or internal auditing firm and
(b) The law firms and consulting companies with which the corporation has a substantial
relationship.
5. Is not a material supplier, service provider, or customer of the company, nor a lesser or
lessee of the company, which could compromise the directors independence.”
6. isn’t a significant shareholder in the company, meaning he or she doesn’t own more than
2% of the voting stock19.
Board Meetings:
Between two board meetings, the maximum time interval has been extended from three to
four months.
Sitting Fees:
The payment of non-executive directors’ sitting fees, as permitted by the Companies Act
1956, would not require shareholder approval.
New Clause 49 mandates the establishment of a code of conduct for all members of the Board
of Directors and senior management. The company’s website will have this code of conduct
placed on it. On a yearly basis, all members of the Board of Directors and top management
staff must reaffirm their commitment to the code. A declaration to this effect, signed by the
CEO, must be included in the company’s Annual Report20.
19
Institute of Company Secretaries of India (2003) Corporate Governance –Module of Best Practices,
Taxman publishers (P) Ltd
20
Institute of Company Secretaries of India (2003) Corporate Governance –Module of Best Practices, Taxman
publishers (P) Ltd
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DISCLOSURES
1. Transactions with related parties in the usual course of business must be reported to the
Audit Committee on a regular basis.
2. The Audit Committee must be informed of any substantial individual transactions with
linked parties that are not in the ordinary course of business;
3. Details of major individual transactions with related parties or others that are not on an
arm’s length basis, as well as management’s rationale, should be provided to the Audit
Committee. Neither has the term “material” been defined. Listed companies should ask their
audit committees about the frequency with which such transactions are reported.
4. Any accounting treatment that differs from that required in Accounting Standard should be
disclosed together with management’s explanation in financial statements.
5. The firm will establish processes to notify board members about risk assessment and
mitigation methods, which will be evaluated by the Board on a regular basis.
6. The firm must report the use of money generated through public/rights/preferential issues
to the Audit Committee on a quarterly basis. Annually, the Audit Committee shall be
presented with a statement detailing the use of money for objectives other than those
specified in the offer document/prospectus. The statutory auditors should certify such a
declaration.
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NON-MANDATORY REQUIREMENTS:
The current item on the postal ballot has been removed, and five new ones have been added
under non-mandatory criteria. The first change is that independent directors can only serve on
the Board of Directors for a total of nine years. The following topic concerns firms that are
moving toward a system of unqualified audit reports. The third point concerns board member
training on the company’s business model, as well as the risk profile of the company’s
business parameters and directors’ responsibilities and how best to discharge them. The
fourth point concerns a peer group comprised of the whole Board of Directors evaluating the
performance of non-executive directors. The fifth point concerns the establishment of a
company-wide whistle-blower policy.
Corporate governance is holding the balance between economic and social aims, and between
individual and community ambitions,” says Sir Adrian Cadbury in the prologue to the World
Bank publication Corporate Governance: A Framework for Implementation. The governance
structure exists to promote resource efficiency while also requiring responsibility for resource
management. The goal is to bring people, companies, and society closer together.
Corporations are motivated to accomplish their goals and attract investment. States are
motivated to improve their economies and reduce fraud and mismanagement.
Regulators are the key to better Corporate Governance. They are pressure points outside.
While regulatory compliance is essential, it is not sufficient for strong corporate governance.
Internal pressures from peers and the market to raise standards above statutory minimums are
increasingly relevant. Minimizing regulatory requirements and boosting voluntary codes
ensures efficiency in company governance.
In my opening statement, I said that corporations now impact every element of human
existence. Their ordered behaviour is crucial for a successful economy. Efficient Corporate
Governance will also enhance foreign capital flow. Despite greatest attempts to improve
corporate governance, we continue to see disappearing enterprises, mismanagement,
widespread shareholder unhappiness, and unethical business activities. Several scandals have
also surfaced in the recent decade, tarnishing the image of Indian corporations. No one wants
to work with shady firms, especially international investors and partners.
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To survive and flourish in the face of increased competition from multinational and
international corporations, Indian corporations must achieve ‘Excellence’ in their work. The
‘Excellence’ I elude to be excellence in administration, investor return, end product or
service, social obligations, promoter returns and incentives for the individuals who operate
the corporations, including workers. Corporate governance is essential to corporate
excellence.
I think we can all do our part to enhance corporate governance. Cadbury, Kumar Mangalam,
and the Basel Committee have established substantial frameworks. Every corporate job
holder might establish their own distinctive duty responsibilities in this respect. So let us all
give it some serious consideration and analyse our contribution to corporate governance in
our individual spheres of influence. I am convinced that this will point us in the correct
direction and allow us to chart out our own path. Only by working together can we create a
fool proof corporate governance structure that benefits us all personally and collectively.
The lack of a nail, a shoe, a horse, a rider, and a war were all due to a lack of a rider. Tiny
droplets of water become the ocean. Minor oversights may lead to huge schemes. A little hole
may sink a large ship. I urge you to avoid minor lapses in order to protect the interests of all
parties. That, to me, is the cornerstone to excellent corporate governance and business
excellence.
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