Corporate Governance Report by Alea Consulting

New Delhi, May 02, 2018: Introduction

The relationship between ownership structure, performance and demands of society, encourages companies to exercise a high degree of diligence in their governance. In order to have sustainable development, such practices must be integrated into the very ethos of the company and its business. From the long-term perspective, corporate governance improves performance, draws investment, which leads to the creation of jobs, wealth and consumer welfare.

Evolvement of Corporate Governance

Recent corporate scandals in India, such as Punjab National Bank (February 2018), Saradha Group (2013) and the Commonwealth Games (2010) have highlighted the need for good corporate governance practices for restoration of public trust. Good governance aligns with the interests of all parties involved in the functioning of an entity. Corporate governance must flow from ethical business practices, even if there is an absence of concrete legislation to enforce it.

Best corporate governance practices are emerging all over the world, and the Indian government is implementing numerous enactments and regulations to protect investors and attract investment.

Digital solutions are introduced to strengthen the four pillars of corporate governance: ‘Accountability‘, ‘Fairness‘, ‘Transparency‘, and ‘Responsibility‘, making a determined push for e-governance through single point access to all information to reduce the role of Government employees; including Central Public Procurement Portal and Government E-Marketplace.

Several committees have been constituted by CII, SEBI and MCA to make recommendations, codes and guidelines on corporate governance:

1. CII’s Desirable CG Code, 1998
2. Kumar Mangalam Birla Committee, 2000
3. Task Force on Corporate Excellence, 2000
4. Naresh Chandra Committee, 2002
5. Narayan Murthy Committee, 2003
6. Dr. J J Irani Expert Committee, 2005
7. CG Voluntary Guidelines, 2009
8. Guidelines issued by the Department of Public Enterprises for Central Public Sector Undertakings, 2010
9. Adi Godrej Committee Report, 2012
10. The Companies Act, 2013
11. Clause 49 of Listing Agreement, 2014
12. SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015
13. The Companies (Amendment) Act, 2015 and 2017
14. BSE & IFC announce collaboration for development of the CG Scorecard for India, February 2016
15. Uday Kotak 21 member committee on corporate governance submitted its report, October 2017
16. Corporate Anti-Bribery Code released by The Institute of Company Secretaries of India, October 2017
17. IICA – IFC entered into a Cooperation Agreement for instituting a Corporate Governance Index, 2018

Recent Key Events

• January 19, 2018: Government to announce corporate governance norms to improve the quality of credit appraisal at Indian banks, including measures to track performance of executive rank employees.
• February 10, 2018: SEBI to take up the Kotak panel report on corporate governance at its next board meeting. SEBI held preliminary discussions with the Ministry of Corporate Affairs and the Finance Ministry on proposed norms. The Kotak panel report headed by senior banker Mr. Uday Kotak suggested a major overhaul of corporate governance norms for listed companies in a 177-page report submitted on October 5, 2017.
• March 2018: Union Cabinet approves a proposal for establishing the National Financial Reporting Authority, an independent regulator for the auditing community. It also approves the Fugitive Economic Offenders Bill 2018, which will be tabled in Parliament in the next session.

Benefits of Good Corporate Governance

Key Challenges

• Application of corporate governance norms in promoter-driven companies are susceptible to promoters exerting disproportionate influence over decisions.
• Increased compliance to improve governance could prove costly for small companies.
• Lack of awareness and experience among board members.

Actualization of Corporate Governance Endeavors

• Company level
• Demonstrate greater transparency to their stakeholders
• Develop a robust anti-corruption and anti-bribery training program
• Set up systems that keep insiders, including managers and directors, from taking advantage of their positions
• Whistleblower policy is a mandatory provision by SEBI
• CSR to promote social development

• Directors
• Minimum of 1 female Director in a certain class of companies to encourage women empowerment
• Every company in India must have a Resident Director
• The maximum number of Directors cannot exceed 15 in a public limited company
• Independent Directors have a code of conduct and must attend at least one meeting a year

• Shareholders
• Top management must recognize the rights of the shareholders and ensures strong co-operation between the company and the stakeholders
• Special Resolution to be passed by stakeholders to approve related party transactions
• E-voting facility must be provided to the shareholder

• Other changes
• The responsibility of the Audit Committee has increased. Section 143(12) of Companies Act, 2013 requires auditors to report fraud to the Central Government, where the Auditor has reason to believe that a fraud has been committed  against  the company.
• Accurate and timely filing of documents with the Registrar of Companies

Indian Companies Recognized for Corporate Governance

Statistics

• A 2016 survey of FICCI shows that post reforms, quality of financial and non-financial disclosures have improved, transparency in corporate decision making is greater, and effectiveness of independent directors has increased.
• As on January 26 2018 of 1,723 NSE listed companies, 1,667 companies had met the mandate of one woman director on board.
• About 209,032 shell companies struck-off the Registrar’s record by September 2017. Over 300,000 directors of companies that had defaulted on statutory compliances have been disqualified from serving on boards of other companies.
• Professionals, Chartered Accountants, Company Secretaries, and Cost Accountants associated with such shell companies, and involved in illegal activities, have been identified and action is being taken.
• India climbs up in the World Bank’s ‘Ease of Doing Business’ rankings.

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