University School of Law and Legal Studies

Guru Gobind Singh Indraprastha University (GGSIPU)

Delhi

(2022)

RESEARCH PAPER ON
‘Corporate Governance in India’

Under the supervision of:

Dr. Anuradha Jha

Assistant Professor (USLLS, GGSIPU)

Presented by:

Aaishwary Tiwari

Enrollment id- 02016503821

Email id- aaishwarytiwari001@gmail.com

Table of Contents
ABSTRACT..........................................................................................................................................3

KEYWORDS: Governance, Corporation, Executives, Ethical.........................................................3

INTRODUCTION.................................................................................................................................4

Objectives Of Corporate Governance................................................................................................5

Historical Perspective for Corporate Governance..............................................................................6

RESEARCH METHODOLOGY..........................................................................................................7

EVOLUTION OF CORPORATE GOVERNANCE IN INDIA............................................................7

Committees on Corporate Governance..............................................................................................8

WHY CORPORATE GOVERNANCE IS IMPORTANT/NEEDED..................................................12

ISSUES AND CHALLENGES IN CORPORATE GOVERNANCE..................................................14

CONCLUSION...................................................................................................................................17
ABSTRACT
In the business world, corporate governance is a broad concept. One of the best systems for
directing and managing corporate organisations is corporate governance. Owners of
companies only hold ownership rights; the boards of directors are given administrative
authority. Owners do not manage or run the organisation. They manage the company while
taking the interests of shareholders and other stakeholders into consideration. The economic
and social objectives are coordinated through corporate governance. It entails encouraging
adherence to the letter and spirit of ethical behaviour. Corporate governance is a summary of
the laws and ordinances that apply to the managers of incorporated businesses. They are the
ones who consent to shoulder accountability to shareholders. No business entity can endure
for a long period in the corporate world without corporate governance. Corporate governance
is currently receiving a lot of attention from all organisations and corporations. Budgets for
corporate governance are prepared separately in some firms, which makes all the rules,
regulations, and procedures on corporate governance obvious to all associated parties. Indian
corporations are becoming aware of the necessity of starting solid corporate governance
processes in this age of globalisation in order to build a comprehensive enterprise value,
which cannot be achieved quickly. Despite this, India consistently ranks well in terms of
corporate governance regulations. However, there is still a long way to go. In this paper we
will study the concept and principles of corporate governance along with its importance from
the viewpoint of India. Then we will discuss the various issues and challenges related to
corporate governance.

KEYWORDS: Governance, Corporation, Executives, Ethical

INTRODUCTION
Corporate governance refers to the controls, procedures, and relationships that govern
corporations. It consists of the policies and procedures for making business decisions as well
as the methods used to create and pursue an organization's goals in the context of the social,
regulatory, and market environments. Monitoring corporate policies, practises, and choices,
as well as those of their agents and other stakeholders, is a function of governance structures.
The rights and obligations of the various members of the corporation (such as the board of
directors, management, shareholders, creditors, auditors, regulators, and other stakeholders)
are defined by the governance structures and principles. The four fundamental pillars of
justice, openness, accountability, and responsibility provide the basis for sound corporate
governance. Due to the fact that they go beyond company legislation, ethics are crucial.
Different countries have different models of corporate governance.1

The legal and regulatory environment, the business climate, and the articles of association for
each organisation all have a role in determining the corporate governance structure in a given
nation. Every country's corporate governance structure has unique features that set it apart
from those in other nations. Three corporate governance models for established capital
markets have been recognised by researchers. The first is the Anglo-US model, followed by
the Japanese and German models. Each model identifies the following component parts: the
share ownership distribution in the relevant nation, the board of directors' makeup, significant
players in the business environment, regulatory framework, corporate actions requiring
shareholder approval, disclosure, etc. Attempts to bring a certain stakeholder's interests into
alignment with corporate governance standards have an impact. Corporate governance
standards were first given the attention they deserved in India after the high-profile failures of
several significant firms in 2001–2002, the majority of which included accounting fraud or
corrupt activities, and again following the most recent financial crisis in 2008–2009.

Corporate governance generally refers to the direction, management, control, and shareholder
accountability of corporations. The issue of corporate governance has primarily arisen in
India as a result of economic liberalisation and the deregulation of business and industry.
Numerous businesses have been compelled to access international financial markets as a
result of the rapid speed of globalisation, which has increased competitiveness. Policymakers
1
RujithaTR, Challenges to corporate governance :issues and concern, Vol.1 IJMFSMR, 2 2012,
http://indianresearchjournals.com/pdf/IJMFSMR/2012/December/8.pdf.
and business executives are becoming more and more conscious of the value of higher
corporate governance standards. Even though India has one of the greatest corporate
governance rules, its poor implementation and the communist pre-reform era policies have
had an impact on corporate governance. The Indian business environment is characterised by
concentrated ownership of shares, pyramiding, and funding tunnelling among group entities.

Objectives Of Corporate Governance

A corporation's entire existence depends on both strong corporate governance and corporate
governance. By guaranteeing the company's commitment to greater growth and earnings, it
not only encourages and strengthens investor confidence but also aims to accomplish the
following goals:

I. In addition to having an efficient system in place to address stakeholder issues, a

board that is properly organised and capable of making independent, objective
judgments when necessary.
II. The Board should be evenly distributed with respect to the representation of a
sufficient number of independent and non-executive directors who will look out for
the interests and wellbeing of all stakeholders. The Board should advise the
shareholders of significant events that have an impact on the business.
III. The Board uses open methods and procedures and bases its judgments on accurate
information.
IV. The Board should consistently and effectively oversee how the management team is
carrying out its duties, and it should exercise effective control over all business
matters.2
V. To coordinate corporate objectives with those of its stakeholders (society,
shareholders etc.).
VI. To clearly define the managers' and board of directors' responsibilities in order to
ensure strong corporate performance, enhance corporate functionality, and deter
mismanagement.
VII. To invest in profitable investment venues in order to attain company goals.

2
B.D. Chattterjee, Guide to Corporate Governance 124, (Bloomsbury India 2018).
Historical Perspective for Corporate Governance
Indian history is where the basics of corporate governance first emerged. But strangely, we
know relatively little about it. Our own ancient literature have outlined excellent governance
ideas that seem to be quite applicable to present company requirements.

Corporate Governance has become more and more crucial to how the corporate sector
operates globally over the past ten or so years. This is comprehensible given the increasing
role of the corporate sector in not just wealth creation but also in a number of societal
challenges, all of which call for a higher level of trust from society in the same corporates.
Due to the efforts of these organisations, we now have a rich and expanding corpus of the dos
and don'ts on the subject. As a result, we have seen numerous bodies, both nationally and
internationally, engage with the question of what constitutes effective corporate governance.
Due to the many different ways that the economies of different nations are set up and the
various methods that money is allocated, each nation has its own corporate governance
regulations.3

The East India Company, which had a monopoly on trade between England and the Far East,
was possibly the first company to be chartered as a company by the then-queen Elizabeth I
years ago in 1600. Since then, businesses have advanced significantly in terms of their
influence and capacity to generate wealth as well as the institutionalised checks and balances
that guarantee their sound operations within the confines of their mandates and open
reporting to the shareholders.

Since that time, corporate governance has taken centre stage in the business world. Different
corporate governance systems are used in various nations around the world. Additionally,
India mostly adopts the UK Model of Corporate Governance.

3
Dharmesh Kirtikumar Shah, Management of Corporate governance practices in dynamic capital market,
Shodhganga (September 30,2010, 11:05 a.m.), http://hdl.handle.net/10603/110891
RESEARCH METHODOLOGY
This paper is a descriptive in nature. The study has been carried out based on the collection of
the relevant secondary data which was collected from the various sources such as published
reports, books, articles published in different journals & newspapers, periodicals, conference
paper, working paper of different organizations or individuals and blogs of websites etc.

EVOLUTION OF CORPORATE GOVERNANCE IN INDIA

In India, the idea of effective government dates back to the third century B.C., when
Chanakya (Vazir of Parliputra) outlined the four main responsibilities of a king: Raksha,
Vriddhi, Palana, and Yogakshema. The principles of corporate governance refer to
safeguarding shareholders' interests above all else, protecting shareholders' wealth (Raksha),
enhancing shareholders' wealth through wise asset management (Vriddhi), maintaining
shareholders' wealth through successful ventures (Palana), and replacing the king of the State
with the company CEO or board of directors (Yogakshema or safeguard). Before the early
1990s, corporate governance was not a priority for Indian companies, and there were few
legal references to it. Reforms and better governance were desperately needed in India
because of systemic flaws such unfavourable stock market practises, boards of directors
without sufficient fiduciary duties, inadequate disclosure standards, a lack of transparency,
and enduring capitalism. The government's decision to take reformative steps for economic
stabilisation through liberalisation was prompted by the budgetary crisis of 1991 and the
ensuing need to contact the IMF. Once the economy was opened up and the liberalisation
process started in the early 1990s, momentum began to build, albeit slowly. The Companies
Act of 1956 was modified by the government in 1999 as part of the liberalisation drive.
Following that, there were additional revisions in the years 2000, 2002, and 2003. the most
significant corporate governance programmes introduced in India since the mid-1990s. There
are various reforms which were channelled through a number of different paths with both the
Security and Exchange Board of India (SEBI)and the Ministry of Corporate Affairs,
Government of India(MCA) playing important roles.4

4
Afsharipour Afra, A brief overview of Corporate governance reforms in India, SSRN, (December 22 2010,
1:08 p.m.), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1729422
Committees on Corporate Governance
Reforming Corporate Governance in India since 1990s:

I. Confederation of Indian Industries (CII): In 1995, Rahul Bajaj, a well-known

industrialist, established a taskforce for the Confederation of Indian Industries. The
CII published the "Desirable Corporate Governance" code in April 1998. It examined
a number of facets of corporate governance and was the first to criticise nominated
directors and advocate for a reduction in the government's ownership share in
corporations.
II. Kumar Mangalam Birla committee report: Although the CII code was favourably
embraced by the business community and several forward-thinking firms also adopted
it, it was believed that given Indian circumstances, a statutory rather than a voluntary
code would be more significant. As a result, the Securities and Exchange Board of
India (SEBI) launched the second significant initiative. In 1999, Kumar Mangalam
Birla established a committee with the charge of advancing and increasing the
standards of good corporate governance. The main suggestions of this committee
were adopted and ratified by the SEBI Board in the early 2000s, and they were
inserted into Clause 49 of the Listing Agreement of the Stock Exchanges.
III. Department of Corporate Affairs: Under the direction of Dr. P.L. Sanjeev Reddy,
DCA Secretary, a comprehensive research group was established by the Department
of Corporate Affairs (DCA) in May 2000. In order to "sharpen India's competitive
edge in the global marketplace and to further build corporate culture in the country,"
the group was given the challenging goal of researching how to "operationalise the
notion of corporate excellence on a sustained basis." The group's Task Force on
Corporate Excellence released a report in November 2000 with a number of
recommendations for improving governance practises across all Indian enterprises.
IV. Naresh Chandra committee report: Under the leadership of Naresh Chandra, a
committee was established by the Ministry of Finance and Company Affairs in
August 2002 to review and make recommendations regarding, among other things,
changes to the law pertaining to the relationships between auditors and clients and the
function of independent directors. Two important facets of corporate governance were
addressed by the committee's recommendations: financial and non-financial
disclosures; independent audits; and board control of management.
 V. Narayan Murthy committee report (2002): 5A committee headed by Narayana Murthy
was established by the SEBI to examine how listed businesses were implementing the
corporate governance code and to produce a revised clause 49. The audit committee,
audit reports, independent directors, related party transactions, risk management,
directorships and director compensation, codes of conduct, and financial disclosures
were some of the main areas where the committee made key recommendations.

VI. J.J. Irani committee report: The Bhaba Committee, which was established in 1950
with the goal of consolidating the existing corporate laws and establishing a new
framework for corporate operation in independent India, made recommendations that
led to the enactment of the Companies Act in 1956. The Companies Act of 1913 was
repealed in 1956 with the passing of this legislation. Since 1956, there have been as
many as 24 revisions to this Act due to the necessity for streamlining as the corporate
sector expanded alongside the Indian economy. Following consideration of the Sachar
Committee's recommendations, the Companies (Amendment) Act 1998 made the
most significant changes to the Act. Subsequent amendments were made in 1999,
2000, 2002, and finally in 2003 through the Companies (Amendment) Bill 2003 in
response to the R.D. Joshi Committee's report. After a tentative start in 1980, India
began its economic reform programme in the 1990s, and it was considered that the
Companies Act of 1956 needed to be thoroughly reviewed. As a result, the
government took additional action in this area and established a committee in
December 2004 with the aim of advising the government on the suggested
amendments to the Companies Act 1956. The group was chaired by Dr. J.J. Irani.

VII. Central Coordination and Monitoring committee: A high powered Central

Coordination and Monitoring Committee (CCMC) co-chaired by Secretary,
Department of Corporate Affairs’ and Chairman, SEBI was set up by the Department
of Corporate Affairs to monitor the action taken against the vanishing companies and
unscrupulous promoters who misused the funds raised from the public. It was decided
by this committee that seven Task Forces be set up at Mumbai, Delhi, Chennai,
Kolkata, Ahmedabad, Bangalore and Hyderabad.
5
Shallu singh, Evolving legal framework of corporate governance in India – issues and challenges, 4 JT 241, 3
2014, http://www.tribunajuridica.eu/arhiva/An4v2/20%20Gupta.pdf
VIII. National Foundation of Corporate Governance: The National Foundation for
Corporate Governance (NFCG) was recently established by the Ministry of Company
Affairs in collaboration with the Confederation of Indian Industry (CII), the Institute
of Company Secretaries of India (ICSI), and the Institute of Chartered Accountants of
India (ICAI).
IX. Voluntary Guidelines issued by Ministry of Corporate affairs 6: Voluntary Guidelines
on Corporate Governance were issued by the Ministry of Corporate Affairs in
December2009. Few guidelines are worth mentioning-
 The offices of chairman of the board and chief executive officer should be
separate.
 The companies may have a Nomination Committee comprised of a majority of
Independent Directors, including its Chairman.
 Independent Directors should not be paid with stock options or profit-based
commission
 The Board should provide training for the directors.
 The Audit Committee should be composed of at least three members, with
Independent Directors in the majority and an Independent Director as the
chairperson.
 The audit partner should be rotated every three years; the firm should be
rotated every five years.
 The Committee may appoint an internal auditor.
X. Ownership Structure: Regarding the ownership structure of the listed firms in India,
there are two sets of problems. First, there is a significant concentration of ownership,
which gives a small number of people or families actual or effective influence over
the majority of businesses, including those that are publicly traded. The second issue
is that a sizable number of businesses in India are consolidated under the common
management of a single shareholder or family.

6
Umakanth Varottil, India’s Corporate Governance Voluntary Guidelines 2009: Rhetoric or Reality?, 22 NLSIR, 1, 2
(2010).
XI. Establishment of NSE centre for Excellence in Corporate Governance : The NSE
established a Center for Excellence in Corporate Governance in December 2012 to
promote the highest standards of corporate governance among Indian corporates and
to keep them informed of new and ongoing concerns (NSE CECG). This is an
impartial expert advisory body made up of academics, practitioners, and notable
domain specialists.
XII. Corporate Provisions in the Companies Act, 20137: A significant advancement in
corporate governance in 2013 was the passing of the Companies Act. The new Act,
which replaces the Companies Act of 1956, aims to raise the bar for corporate
governance, streamline rules, and advance the interests of minority shareholders.
 Board of Directors (Clause 166): The new Act provides that the company can
have a maximum of 15 directors on the Board;
 Independent Director (Clause 149): The concept of independent directors
(IDs) has been introduced for the first time in the Company Law in India.
 Related Party Transactions (RPT) (Clause 188): The new Act requires that no
company should enter into RPT contracts pertaining to sale, purchase or
supply of any goods or materials
 Corporate Social Responsibility (CSR) (Clause 135): The new Act has
mandated the profit making companies to spend on CSR related activities
 Auditors (Clause 139): A listed company cannot appoint or reappoint (a) an
individual as auditor for more than one term of five consecutive years,
 Disclosure and Reporting (Clause 92): In the new Act, there is significant
transformation in nonfinancial annual disclosures and reporting by companies
as compared to the earlier format in the Companies Act, 1956.
 Class action suits (Clause 245): For the first time, a provision has been made
for class action under which the order passed by the Tribunal shall be binding
on all the stakeholders including the company and all its members, depositors
and auditors.

7
Companies Act, 2013, §166 149 188 135 139 92 245, act no.121-c of 2011, 2013(India).
WHY CORPORATE GOVERNANCE IS IMPORTANT/NEEDED
I. Changing Ownership and business structure
The ownership structure of businesses has undergone significant shift recently. In
most of the large companies nowadays, public financial institutions, mutual funds,
etc. are the largest individual shareholders. They effectively govern how the
corporations are run. They compel management to improve its effectiveness,
accountability, and transparency. Additionally, they request that management develop
consumer-friendly policies and safeguard all social groups in addition to the
environment. That is how corporate governance has been impacted by the shifting
ownership structure. The size of corporate operations has multiplied. In the corporate
world, there are several takeovers and mergers that occur in order to achieve
economies of expansion. Additionally, corporate governance is necessary to safeguard
everyone's interests during takeovers and mergers.8

II. Increase importance of social corporate responsibility

Currently, a lot of emphasis is placed on corporate social responsibility. As much as
society gives to businesses, society also has expectations of them. Corporate social
responsibility is the term used to describe the obligation of corporations to meet these
expectations. As part of its social duty, the board is required to defend the interests of
all parties involved, including shareholders, customers, employees, local
communities, suppliers, etc. Corporate governance is necessary for them to meet all of
these obligations.

III. Increased corrupt practices in business

Numerous frauds, scams, and dishonest acts have come to light in recent years. Public
monies are being misused and misappropriated on a wide scale in the stock market,
banks, financial institutions, businesses, and government agencies. Corporate
governance is a practise that many businesses have adopted to prevent these financial
problems.

8
Priyanka Aggarwal, Impact of corporate governance on corporate financial performance, 13 IOSR-JBM 1,
1(2013), http://iosrjournals.org/iosr-jbm/papers/Vol13-issue3/A01330105.pdf
IV. Inactiveness and share holders
Only shareholders show up to their companies' annual general meetings. They rarely
participate in management. Additionally, shareholder associations are weak. Directors
frequently profit from this circumstance and abuse their authority. Therefore,
corporate governance is essential to safeguarding the interests of all company
stakeholders.

V. Globalised Era
The majority of large corporations now sell their products on the international market
as the Indian economy has become more globalised. They must draw in overseas
investors and customers in order to survive and expand, and they must also abide by
foreign laws and regulations. Corporate governance is necessary for all of this. It is
hard to enter and survive in the global market without corporate governance.

VI. Legal Bindings

The law also mandates that corporate governance be practised. The parameters of
corporate governance in India are set forth by the SEBI and the Indian Companies
Act. Corporate governance is now required for some corporations by SEBI. To
safeguard the interests of investors and other stakeholders, this is done.
ISSUES AND CHALLENGES IN CORPORATE GOVERNANCE
I. Selection Procedure and term of Board: The main obstacle to excellent corporate
governance in Indian firms is the selection process. According to the law, there must
be a good balance of female directors, independent directors, and executive and non-
executive directors. In India, the majority of businesses seem to simply comply on
paper; recommendations from other board members or "word of mouth" still play a
role in board appointments. Friends and relatives of promoters and management are
frequently appointed as board members. Life-term board members can cause a
number of issues for business, such as set beliefs and power-seeking. Therefore, no
company favours appointing board members for life. And if the board is very small,
members won't be able to make long-term judgments with all of their efficiency
because they will eventually be replaced or relieved of their responsibilities. Thus, the
length of the board's term must be determined carefully. In a board of directors,
members typically serve terms of two to five years, and it is best practise to rotate
some directors every predetermined amount of time rather than the entire board all at
once.
II. Performance Evaluation of Directors: A "Guidance Note on Board Evaluation" was
published by SEBI, India's capital markets regulator, in January 2017. which cover all
significant facets of board evaluation, such as the purpose and method of the
evaluation, the feedback given to the individuals being evaluated, the action plan
based on the findings of the evaluation process, the disclosure to stakeholders, the
frequency and the duty of the board evaluation, among others. However, they must
make the evaluation results public in order to achieve the desired performance
evaluation objectives, and these disclosures could land the company in serious
difficulty.
III. Missing Independence of directors: The Kumar Mangalam Committee on Corporate
Governance's plan for the biggest corporate governance reform in 1999 called for the
appointment of independent directors. Independent directors, however, haven't really
been able to have the anticipated effect. It is still debatable that promoters still have
the discretion to pick directors in the majority of corporations. It is essential to restrict
the promoter's authority in decisions involving independent directors in order to
ensure actual success.
IV. Removal of Independent Directors: A majority shareholder or promoter can easily
oust an independent director in accordance with the law. Promoters depose
independent directors from their positions when they don't agree with their decisions.
Directors must therefore work for promoters' interests in order to keep their jobs. The
International Advisory Board of SEBl had suggested increasing openness for the
appointment and replacement of directors to address this problem.

V. Liability towards Stakeholders: According to the 2013 Indian Firm Act, directors are
required to have obligations not just to the company and its shareholders but also to
other stakeholders and the environment. However, boards typically work to restrict
and avoid these sorts of responsibility. For this reason, it could be a good idea to
mandate that the full board be present at general meetings so that interested parties
can ask the board questions.

VI. Founder/Promoter’s Extensive Role: The 2013 Indian Companies Act mandates that
directors have duties to the company, its shareholders, as well as to other stakeholders
and the environment. Boards, on the other hand, often try to limit and steer clear of
these kinds of duty. So that interested persons can ask the board questions, it could be
a good idea to require that the entire board be present during general meetings.9

VII. Transparency and Data Protection: The idea of openness underpins corporate
governance, however it is not clear what information must be revealed or not. If
incorrect information is revealed in the fiercely competitive world of today, it could
prove to be quite damaging. In the digitalisation Protection of privacy and data is a
crucial governance problem. The board's ability to manage data and guarantee that it
is shielded from potential abuse is required for this. And by considering the value of
data and the possible costs associated with data misuse, we may conclude that
organisations should provide an appropriate amount of resources to data protection.

9
Companies Act, 2013, §166, act no.121-c of 2011, 2013(India).
VIII. Business Structure and internal conflicts : Good governance is also hampered by
business structures because they call for multiple levels of management, executives,
and other officers. Because the data may be skewed at any point along the chain, it is
exceedingly difficult for the corporate executives to acquire reliable, crucial
information from the lower levels and to give commands to lower levels of the firm.
The board of executives is capable of developing many useful policies. However, the
execution of decisions and policies is also impacted by internal relationships inside
the business, for example, those between the board and management. At many levels
of the company, disobedient managers can thwart corporate choices and practises.
IX. Environment of mistrust: The confidence of investors and society has decreased as a
result of the numerous scams, frauds, misappropriations of public funds, and corrupt
practises that have occurred in recent years, as well as the dubious actions of
important executives and board members. The stock market, banks, financial
institutions, businesses, and government agencies are all experiencing it. The business
atmosphere has become suspicious as a result.
CONCLUSION
In this paper, we looked at the value of sound corporate governance to businesses and other
organisations. The implementation of effective corporate governance may cause firms to have
some short-term difficulties, but in the long run, it will be beneficial and investors will be
encouraged to behave more like owners than traders. We also talked about problems and
difficulties with Indian corporate governance, the majority of which only exist because to the
swayed actions of directors. Directors are chosen by the promoters, who then use their
influence to further their own interests. The size, selection process, and number of
independent directors can all be regulated in order to address these problems. controlling the
function of corporate promoters or founders so that directors can make unbiased decisions.
Additionally, it is necessary for credit rating organisations to evaluate the corporate
governance policies of various firms. As a result, there will be competition for the finest
governance practises. After reading this essay, we may draw the conclusion that while India
has a respectable ranking in terms of corporate governance laws, it still has a long way to go
in terms of corporate governance because it is a developing nation.