Corporate Governance in India

Paper Code: MPA – 405

Topic:
Corporate Governance
and personnel issues and challenges in India

Presented to
Dr. Naved Jamal

By
Lakshya Mittal
MAPA 4th Semester
March, 2022
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Index
1. Introduction ……………………………………………………………… 2
1.1. Meaning of Corporate Governance ………………………………. 3
2. Objective ………………………………………………………………... 4
3. Methodology …………………………………………………………….. 4
4. Corporate Governance framework in India …………………………….. 5
5. Issues and Challenges …………………………………………………… 7
5.1. The Board Factor …………………………………………………. 7
5.2. Lack of Independence of Directors ………………………………. 7
5.3. Removal of independent directors ……………………………….. 8
5.4. Multiplicity of regulations ……………………………………….. 8
5.5. Problem with unlisted corporate …………………………………. 8
5.6. Liability towards stakeholder …………………………………….. 8
5.7. Role of Founder/Promoter ………………………………………... 9
5.8. Transparency and protection of data ………………………..…… 9
5.9. Internal conflicts in business structure …………………………... 9
5.10. Environment of mistrust ………………………………………… 10
6. Suggestions …………………………………………………………….. 11
7. Conclusion ……………………………………………………………... 12
8. References ……………………………………………………………… 12
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Introduction

Companies are microcosms of the countries and cultures in which they

function. They are the collective institutions of individuals with varied
interests who work together to achieve the common goal of growth and
development for each individual participating. In this scenario, corporate
governance is more than just having checks and balances, it is about building a
high-performing organization that leads to increased customer satisfaction and
shareholder profit. The most pressing requirement is to establish a corporate
culture of conscience and consciousness. The Board should not limit itself to
statutory tasks alone, but should also serve as effective management pivots.
Employees must not only feel empowered to take risks, but they must also be
aware of the associated responsibilities. Companies must build skills and find
opportunities that best suit their goals. They must use resources to turn
potential into realities; instill employees with a vision that inspires dynamism
and entrepreneurship; and design a succession system that balances stability
with flexibility and continuity with change. Above all, they must strike a
balance between individual interests and community aims while adhering to
established norms of decency and justice. Thus, they can mitigate the issues
and challenges arising for personnel management.

By taking on the task of controlling corporations, the government offered

opportunities for such managements to shirk responsibilities that should have
always been theirs. Financial institutions, as major shareholders, might have
interfered but opted to remain silent. All of this has resulted in poor decision-
making, frequent errors, and poor performance. Simply put, Corporate
Governance necessitates that these irregularities be remedied if Indian firms
are to become healthy development engines and responsible enterprises that
serve all stakeholders. Corporate Governance is a tool to that objective. It
comprises driving the corporation's strategy, managing the procedures that put
plan into action, and monitoring the day-to-day operations.

Good governance comprises all acts aimed at delivering a high standard of

living for its citizens. With the fast change in the corporate environment and
the creation of new rules by international organizations such as the EEC,
WTO, OECD, World Bank, and others, the idea of Corporate Governance has
been established and given momentum. Corporate governance offers the
underlying value foundation for an organization's culture, ensuring the
effective operation of the firm based on good ethical ideals and principles.
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 Meaning of Corporate Governance

Governance is fundamentally a politically charged term in the realm of public

law. The word "corporate governance" is a self-contradiction. In the world of
corporate customers, there is a lack of academic consensus on the definition of
'corporate governance.' In broader terms corporate governance includes the
relationship between shareholders, creditors, and corporations, between
financial mar institutions, and corporations and between employees and
corporations 1

The true meaning of 'corporate governance' may be deduced from the historical
growth of a corporation. It is a vehicle for the growth and development of
capital moments, sometimes to make large scale production and sometimes to
provide incentives to pool savings and invest sometimes to produce at the
lowest cost, or focusing produced and supplied or fulfilling the concerns of
everyone. Corporate governance is defined differently at various eras based on
the evolution of capitalism and its ideals. The notion evolved historically as
capitalism self-corrected in response to the challenge of socialism. Its meaning
and substance shifted in response to historical demands.

Corporate governance refers to the systems, procedures, and relationships that

organizations use to regulate and steer their operations. It consists of the rules
and procedures for making corporate choices, as well as the processes by
which an organization’s objectives are formed and pursued in the context of
the social, regulatory, and commercial environment. Monitoring the policies,
practices, and choices of businesses, their agents, and other stakeholders is
what governance systems are all about. Governance structures and principles
define the allocation of rights and obligations among the corporation's many
partners (such as the board of directors, managers, shareholders, creditors,
auditors, regulators, and other stakeholders).

Objective:
1
Ozden, Deniz. The Importance of Corporate Governance for a Well Functioning Fin System: Reforming
Corporate Governance in Developing Countries. 2012.
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The main objective of this study is:

 To understand the framework of corporate governance in India.

 To identify the challenges and issues in this field.
 To analyze regulatory deficiency in corporate governance.
 To put forth suggestions that might be implemented to bring about
transparency in corporate governance.

Methodology

Secondary sources are used as the research and data collecting approach. The
acquisition of data from secondary sources entails gathering information from
people who have already undertaken research in the relevant topic. This is a
form of doctrinal study in which secondary sources such as books, articles,
journals, research papers, library resources, statutes, international conventions,
internet sources, and other pertinent subject topics are carefully considered.
The material was gathered to the best of my ability and is relevant to the issue
at hand.

Corporate governance framework in India:

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In general, Corporate Governance refers to the processes that organizations use

to regulate, direct, and govern themselves. The primary objective of Corporate
Governance is to ensuring that an organization's directors and management
operate in the best interests of the organization and its stakeholders, as well as
to ensure that managers are held accountable to capital sources for the use of
assets. The Government of India has put in place a regulatory framework to
fulfill the goals of promoting equitable corporate governance.

Since the late 1990s, corporate governance reforms in India have seen
substantial changes. The Securities and Exchange Board of India (SEBI)
implemented the first comprehensive corporate governance reforms in 2000
under Clause 49 of stock exchange listing agreements. Over the next decade,
the Companies Act, 1956 was abolished and replaced by a new set of
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legislation under the Companies Act, 2013, following extensive discussion,

voluntary recommendations, and lessons learned from the Satyam debacle in
2009. Following the passing of the 2013 Act, additional rules were enacted, as
well as distinct SEBI-administered regulations for listed firms.

In India, there are several legislations having requirements pertaining to

corporate governance. These regulations have been established in conformity
with international standards. We can have a look at them through the following
points:

1. The Companies Act of 2013 - it contains provisions governing the

composition of the board, general meetings, audit committees, board
processes, and so on.

2. SEBI (Securities Exchange Board of India) - There are various corporate

governance norms that corporations must follow, and violations of any
guidelines result in fines.

3. ICAI (Institute of Chartered Accountants of India) - The ICAI

establishes several accounting rules relating to corporate governance,
such as financial statement transparency.

4. ICSI (Institute of Company Secretaries of India) — ICSI establishes

numerous secretarial standards for board of directors meetings, general
meetings, and so on, which must be followed by corporations.

5. Standard listing agreement of stock – it is recognized as the most

significant foundation for corporate governance applicable to listed
corporations.

Issues and Challenges:

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Below are the issues and challenges faced by corporate governance in India –

1. The Board Factor:

Enough has been said about the board of directors and its function as the
foundation of sound corporate governance. To that purpose, the legislation
mandates a balanced mix of executive and non-executive directors, as well as
the nomination of at least one female director for diversity. There is little
question that a qualified, diversified, and engaged board would significantly
improve a company's governance standards. The issue is to instill governance
in corporate cultures so that compliance may be improved "in spirit." Most
Indian businesses only conform on paper; board appointments are still made
through "word of mouth" or by recommendations from other board members.

Recent research work also identifies this as a huge problem. Tuteja 2 (2006)
investigated the Board's structure as a key problem in corporate governance.
He studied the data of 100 Indian organizations to examine the current
corporate management system. According to his research, there is a significant
change in favor of management by chief executive officers/whole-time
directors under the supervision of the Board of Directors.

Dwivedi and Jain 3 (2005) have also looked into corporate governance
parameters including board size, director’s shareholders, and institutional and
foreign shareholding. They have looked at 340 large, listed Indian firms from
the period of 1997-2001 across industry groups.

2. Lack of independence of Directors:

The nomination of independent directors was intended to be the most

significant corporate governance reform by the Kumar Mangalam Committee
on Corporate Governance. However, independent directors have struggled to
create the intended impact. Until date, most firms' directors have been
appointed at the discretion of the promoters, which is still problematic. It is
vital to limit the promoter's authority in matters pertaining to independent
directors in order to provide actual success.

3. Removal of independent directors:

2
S. K. Tuteja, “Board Structure in Indian Companies – An empirical survey”, Journal of Management
Research, Vol. 6, No. 3, pp. 149-155, 2006.
3
Neeraj Dwivedi and Arun Kumar Jain, “Corporate Governance and performance of Indian Firms: The
effect of Board Size and Ownership”, Employee Responsibilities and Rights Journal, Vol. 17, No. 3, pp.
161-171, 2005.
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An independent director can be readily dismissed by promoters or majority

shareholders under the law. When an independent director does not agree with
a promoter's choice, they are dismissed from their position. So, in order to
maintain their job, directors must act in the interests of promoters. To address
this issue, SEBl's International Advisory Board advocated more openness in
director nomination and dismissal.

4. Multiciplity of regulations:

There are numerous regulatory bodies in India, including the Companies Act
20134, the Securities and Exchange Board of India (SEBI), the Reserve Bank
of India, the Insurance Regulatory Development Authority, and others, and
they lack coordination, resulting in multiple provisions for a single type of
event. This leads to confusion and this dishonesty provides a way for
businesses to avoid accountability. These regulatory agencies are reactive
rather than proactive, which means they only act when a fraud occurs.

5. Problem with unlisted corporate:

An unlisted company is one that is not traded on the stock exchange. Listed
firms are bought out by a group of shareholders. Private investors such as
founders, founders' relatives, and colleagues buy unlisted firms. This is a
serious impediment to good corporate governance since, according to clause 49
of the listing agreement; the applicability of laws and regulations is limited to
listed organizations exclusively, causing small and mid-sized enterprises to
engage in legal but unethical dealings.

6. Liability towards stakeholder:

The Indian Firm Act of 2013 5 requires directors to have responsibilities not
just to the company and its shareholders, but also to other stakeholders and to
the environment. However, in general, the board seeks to restrict and avoid
these types of accountability. It is a good idea to require the complete board to
be present at general meetings to allow stakeholders to address questions to the
board.

4
The Companies Act, 2013, s. 135. It imposes an obligation on all companies having net worth of Rs. 500
crore or more or turnover of Rs. 1000 crores or more or a net profit of Rs. 5 crore or more to spend at
least 2% of the average net profit of the company made during the three years immediately preceding
the financial year.
5
The Companies Act 2013 is an Act of the Parliament of India on Indian company law which regulates
incorporation of a company, responsibilities of a company, directors, dissolution of a company.
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7. Role of Founder/Promoter:

In India, rather than a distinct corporate entity, promoters or founders

continually influence business choices. Inherent in family-owned Indian
businesses is a reluctance to relinquish control. They have an impact on
choices through influencing the board of directors and management. This is
done since they owned a sizable chunk of the corporation. To address this
issue, it would be prudent to expand the shareholder base while decreasing the
holdings of the founders.

8. Transparency and protection of data:

Corporate governance is built on the idea of openness, however it is not clear

what information should or should not be revealed. In today's cutthroat
competitive atmosphere, disclosing incorrect information may be quite
damaging. In terms of digitalization Privacy and data protection is a critical
problem in governance. For this, the board must be capable of processing data
and ensuring that such data is protected from any exploitation. And, given the
importance of data and the potential cost of data abuse, we may conclude that
organizations must invest a decent amount of resources on data protection.

9. Internal conflicts in business structure:

Business structures also obstruct the path to effective governance since they
necessitate several levels of management, executives, and other officials. This
makes it difficult for corporate executives to acquire accurate, critical data
from lower levels and to issue instructions to lower levels of the firm since
data might be corrupted at any point along the chain. The board of executives
has the ability to create many smart judgments and policies. However, if the
internal connection in the company, say, between the board and the
management, is poor, the execution of decisions and policies suffers.
Rebellious managers can undermine company choices and practices at all
levels of the organization.

10. Environment of mistrust:

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Many scams, frauds, theft of public funds, and unethical activities such as the
Tata-Mistry fallout, PNB-Nirav Modi Scam, ICICI Bank-Videocon bribery
case etc, have occurred in recent years. Investor and societal confidence has
been eroded as a result of the questionable conduct of senior executives and
board members. It is taking place in the stock market, banks, financial
institutions, businesses, and government agencies. This has created skepticism
in the corporate community.

Suggestions:
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1. Up-gradation of regulations:

In this era of fast expansion, when technology is evolving on a daily basis, it is

critical to update corporate governance legislation to reflect the country's
changing industrial and economic context. Adhering to the outdated provisions
may have ramifications in the firm.

2. Regulations for unlisted companies:

For healthy competition and improved competition goals, unlisted enterprises

should also be brought under the jurisdiction of corporate governance. For
mid-sized new entrants to the capital market, standards and incentives are
essential. There are now just a few measures for unlisted corporations that
allow them to avoid corporate governance obligations.

3. Independent Directors:

Directors must have integrity and independence of thinking, as well as the guts
to articulate their own ideas. They should have a firm grip of the reality of
company operations as well as a command of business and financial jargon. In
order for efficient corporate governance, the skill set of the independent
directors must match that of the firm.

4. Proactive regulatory bodies:

Regulatory agencies' roles should not just be reactive, but also proactive. They
should not only respond to the fraud, but also manage and control the
company's actions in order to eliminate hazards that may have been averted.
To prevent violating any criteria imposed by regulatory agencies,
precautionary precautions must be followed.

5. More accountability:

Disclosure, openness, and accountability are critical components of successful

governance. Financial situation, performance, and other information should be
provided in a timely and accurate manner. Customers who have options do not
switch to other corporate bodies due to intense rivalry in the industry.

Conclusion:
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This paper discusses some of the issues and concerns of Corporate Governance
in India faces. To summarize, the ultimate goal of corporate governance is to
achieve the highest quality of processes and practices followed by the
corporate world in order to have transparency in its functioning with the
ultimate goal of maximizing the value of the organization's many stakeholders.
Understanding and applying Corporate Governance in letter and spirit is
critical for any organization's long-term development and competitiveness.

In the Indian context, the necessity for corporate governance has been
highlighted due to the frequent occurrence of scams since the birth of the
notion of liberalization in 1991. We have the Harshad Mehta Scam, the Ketan
Parikh Scam, the UTI Scam, the Vanishing Company Scam, the Bhansali
Scam, and so on. In the Indian business environment, there is a need to
incorporate global norms so that, while the possibility for fraud may still
remain, it may be kept to a bare minimum.

In order to achieve success, corporate governance need to undergo

comprehensive changes. In terms of structural and regulatory changes, India
has seen several enactments, including the Companies Act of 2013, and SEBI's
listing obligations and disclosure requirements regulations, which have
significantly contributed to strengthening governance norms and increasing
accountability through disclosures. However, these policies have not been able
to bring about a holistic change. Interestingly, these modifications have been
influenced by the Anglo-Saxon model of corporate governance, which in my
opinion is likely to be one of the main reasons why present corporate
governance methods are failing to achieve the necessary degree of completion.
To get the intended objectives, regulatory measures must be modeled to Indian
norms and the business climate. To emphasize the obvious, such reforms must
be supported by the board and promoters in both form and spirit. Thus, it can
be concluded, that India still has a long way to go on the path towards
optimum corporate governance.

References:
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Books -

 Clarke, Thomas, and Douglas Branson. The SAGE Handbook of

Corporate Governance. SAGE, 2012.
 Das, Arindam. Corporate Governance in India. Routledge, 2019.

Papers/Articles -

 Singh, J. P. “Improving the Quality of Corporate Governance in India.”

Indian Journal of Industrial Relations, Shri Ram Centre for Industrial
Relations and Human Resources, 2007.
 Sawakar, Mamata. “Corporate Governance in India - Evolution and
Challenges.” The International Journal of Creative Research Thoughts,
2018.
 Robin. “Corporate Governance in India: Issues and Importance.”
International Journal of Research and Analytical Reviews, 2019.