Concept of Corporate Governance in India

Corporate governance is a set of rules or concepts used to run a business. It makes sure that the business operates as it should in order to accomplish the desired objectives. Each stakeholder, including directors, owners, employees, and customers, is held accountable by the corporations. The definition of governance as the act of governing a corporate body is provided by the term itself. Corporate governance is a crucial topic to research because a corporation’s entity and officials are distinct. Corporate governance is crucial in protecting the rights of thousands of shareholders who own the firm but are not actively involved in running day-to-day operations. In this article, we will discuss the Concept of Corporate Governance in India.

Quick Look

The Indian corporate sector has always practiced corporate governance, but Satyam Computer Services Limited’s fraud and corporate governance failure raised questions about the practice in India. In the Indian economy, corporate governance is a topic that is becoming more and more crucial. A number of scandals and shareholder disputes over the last ten years have all pointed to governance flaws, if not outright failures.

To address these issues, regulators have amended and, in some cases, introduced new laws, while shareholders are turning to activist corporate governance to protect their interests. This keeps corporate governance in the spotlight, along with the closely held stock ownership of Indian corporations, 4 as well as the several elements that affect India’s ranking on the Transparency Index.

Aim of Corporate Governance in India

The foundation for corporate governance in India is centered on:

• Safeguarding small stockholders;
• Accountability of the company’s management and board of directors;
• Timely reporting and sufficient shareholder disclosures; and
• Societal accountability for businesses.

The system places a strong focus on transparency through disclosures and a requirement that each company’s board of directors contain a certain percentage of independent directors.

Importance of Corporate Governance in India

Corporate fraud and governance failures have become more common over the past ten years, which is why the nation needs sound corporate governance. India offers appropriate laws and norms that are in line with global standards for corporate governance. The following is an overview of some of the significant factors that made corporate governance in India necessary.

• Corporate governance safeguards shareholder democracy by putting it into practice through its code of conduct when a company has many shareholders with various perspectives on corporate activities.
• Because they are influencing the company’s decisions, large corporate investors are posing a challenge to the management of the company. To handle such circumstances, corporate governance established the rules.
• To restore the public’s trust in the company after it was damaged by multiple instances of corporate fraud in recent years, corporate governance is essential. It is critical for restoring investors’ faith.
• Because society has higher expectations of corporations, they anticipate that these entities would take care of environmental issues, pollution, product and service quality, sustainable development, etc. In order to meet all of these requirements, corporate behavior code is crucial. In the past, corporate entity takeovers caused a lot of issues. It affects the rights of different company stakeholders. This element also drives the nation’s demand for corporate governance.
• Due to simple and frequent foreign travel and communication, many Indian companies have gone public on international stock exchanges, which has increased the demand for corporate governance in India.
• Indian companies’ management is being impacted by the massive inflow of foreign capital, which necessitates the creation of a code of corporate behavior.

Basic Notion of Corporate Governance in India

The foundation of rules and regulations established for the company has grown around a few essential themes.

• Transparency: It is vital to promptly and accurately disclose any pertinent information about the company. Knowing their rights and the daily operations of the company aids stakeholders.

• Accountability: It guarantees the responsibility of the individual who makes decisions in others’ best interests. Therefore, individuals like managers, chairmen, directors, and other officers should be answerable to other company stakeholders.

• Independence: The independence of the senior management is crucial for the efficient operation of the corporation. The Board of Directors must operate independently from any corporate stakeholders.

Concept of Corporate Governance in India

The Indian framework for corporate governance is nearly identical to international standards. It can be broadly defined as follows:

• The Companies Acts, 2013 includes provisions for Independent Directors, Board Constitution, General Meetings, Board Meetings, Board Processes, Related Party Transactions, Audit Committees, and other matters.
• SEBI (Securities and Exchange Board of India) guidelines safeguard investors and require corporations to follow the best practices outlined in the recommendations.
• Accounting Standards established by the ICAI (Institute of Chartered Accountants of India), a self-governing organization that produces accounting standards. The ICAI has also made financial statement transparency mandatory, which is supported by Section 129 of the Companies Act, 2013.
• The ICSI (Institute of Company Secretaries of India) sets standards on “Meetings of the Board of Directors,” “General Meetings,” and other topics. The Companies Act, 2013 authorizes an autonomous authority to establish criteria that all companies must follow in order to avoid prosecution under the Companies Act.

Now, let us look into what problems exist that are associated with Corporate Governance in India.

Problems regarding Corporate Governance in India

Although there are several difficulties in the field of Corporate Governance, particularly in India, an effort has been made to highlight only the most significant ones here:

• Performance of the Board: At least one female director is required, and the balance of executive and non-executive directors is not maintained. Evaluation is not done on a regular basis, and openness has been lost somewhere. The performance is not directed toward results. These standards are not usually met.

• Directors who are self-employed: Independent directors are selected for a cause that does not appear to be met in the current situation. Even after SEBI instructions for the creation of an audit committee or the provision of a complete definition of independent directors were issued to corporations, the actual situation appears to be worse.

• Stakeholder Accountability: Accountability is not limited to shareholders or the corporation; it extends to society as a whole and the environment. The directors must consider not only their own interests but also the interests of the community.

• Management of Risk: The risk management procedures must be implemented by the directors in accordance with the Company Laws, and they must be mentioned in their annual report to shareholders. This is not done with the utmost sincerity required for the work.

• Privacy and Data Security: This is a critical issue of governance. Cybersecurity has become the most critical part of modern administration. Good governance can only be realized after the directors and other corporate leaders are fully aware of the risks involved.

• Corporate Social Responsibility (CSR): As one of the few countries with CSR legislation, it is necessary for corporations to invest at least 2% of profits in the previous three years in CSR initiatives. Otherwise, correct reasons for failure should be provided in the reports. Companies appear to be hesitant to make such investments.

Takeaway

The higher the quality of corporate governance, the more powerful the corporation appears to its shareholders. The independent and active directors are the ones who inject and contribute to the corporate portrayal of a positive attitude. When it comes to investing, investors look for organizations that have better corporate governance. Corporate governance laws in India encourage corporations to audit their working culture and provide a more positive outlook to the shareholder community, as their activities have moral and legal consequences.

The new rules imposed by the Companies Act, 2013 are both balanced and innovative. They have helped to modify the growth of Indian enterprises in accordance with international standards. Shareholders are involved in company decision-making, and numerous protections have been put in place to ensure that the interests of shareholders and society as a whole are not overlooked. Corporate Governance fosters much-needed transparency in corporations. As a result, it propels India ahead of the world’s growing economies.

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