Development of Codes and Guidelines for Corporate Governance

The article 'Development of Codes and Guidelines for Corporate Governance' aims to highlight the crucial role of codes and guidelines in improving corporate behaviour, increasing transparency, and enhancing accountability.

Introduction

Corporate Governance is about how companies are led, directed, ruled, and held accountable by their shareholders. Corporate Governance is being talked about in India because the country's business and industry sectors have recently become less regulated and its economy has become more open. As the world keeps getting more linked, more and more businesses need to raise money in foreign markets. Neither lawmakers nor business leaders are blind to the fact that business governance needs to have better standards.

Even though India's rules on corporate governance are some of the best in the world, they have been weakened by bad implementation and the socialist policies of the pre-reform era. The Indian business scene is marked by a small number of people who own a lot of shares, a practice called "share pyramiding," and the movement of cash between group firms.

A Company is a place where many different kinds of people come together, such as customers, employees, investors, suppliers, governments, and communities. Under the new rules, an Indian company has the same responsibility as any other company to be open and honest with its clients. This is important in the globalised business world of today, where companies must get access to foreign sources of funding, fight for and keep top talent from around the world, form smart partnerships with suppliers, and work in social harmony with their surrounding neighbourhoods. If the people in charge of a company don't believe in and follow standards, the company will fail. The best Corporate Governance practices help make sure that companies have the backing of their many interest groups, which is important for their success.

Corporate Governance means different things to different people. "Governance" is an idea that has been around for a long time. It was there before the start of civilization. "Governance" refers to the way decisions are made and the ways those decisions are carried out (or not). Governance is a word that can be used in many different ways.

Some examples are corporate governance, foreign governance, national governance, and local governance. It's democratic in the sense of being open to input from all parties, consensus-driven, responsive, efficient, effective, fair, and inclusive. It makes sure that the weakest members of society are heard when decisions are made, that cheating is kept to a minimum, and that the views of minorities are taken into account. It can change to meet the needs of society now and in the future.

Evolution of Corporate Governance

Chanakya (Vazir of Patliputra) wrote in the third century B.C. about the four roles of a king: Raksha, Vriddhi, Palana, and Yogakshema. The idea of good government goes back a long way in India. The Principles of Corporate Governance are all about protecting (Raksha), increasing (Vriddhi), keeping (Palana), and, most importantly, protecting (Yogakshema) the wealth of owners.

The CEO or Board of Directors of the company has taken the place of the king of the state. Before the early 1990s, Indian companies didn't care much about corporate governance, and the Indian law canon didn't say anything about it. Unwanted stock market practices, boards of directors without proper fiduciary obligations, poor disclosure practises, a lack of openness, and chronic capitalism were just some of the structural flaws in India that begged for change and better governance.

In 1991, the country needed help from the International Monetary Fund because it had a big budget deficit. To get the economy back on track, the government took steps to open up the economy. When the economy was pushed to open up and the opening process began at the beginning of the 1990s, things started to move forward slowly but firmly. In 1999, as part of the deregulation drive, the Indian government changed the Companies Act, which was first passed in 1956. After that, more changes were made in 2000, 2002, and 2003. Reforms to corporate governance were put in place in India in the 1990s. The Government of India's Ministry of Corporate Affairs (MCA) and the Security and Exchange Board of India (SEBI) have been very important in putting in place the many changes that have happened.

Indian businesses and groups were limited by colonial rules for the first 40 years after they became independent. Many of these ideas and rules were based on the whims and tastes of their British bosses. The Companies Act was first passed in 1850. Since then, it has been changed in 1882, 1913, and 1932. These changes were not necessarily based on "whims and tastes" but rather reflected the evolving economic and legal landscape during British rule.

People or companies sign formal contracts with businesses to run them, so the management group plan was an important part of these laws. Experts in management didn't do their jobs well during that time because they weren't organised or professional. As a result, there was a lot of waste, abuse, and avoidance of duties.

As soon as the country became independent, business owners saw a chance to make money by making lots of different needs at prices set by the government. The government set up the Tariff Commission and the Bureau of Industrial Costs and Prices as a result. In the 1950s, the Industries (Development and Regulation) Act and the Companies Act were put into place. In addition to daily life, the 1960s were a time when big businesses started up. From the 1970s to the middle of the 1980s, cost accounting was based on cost, revenue, and profit analysis.

Associations and groups from all over the world are looking to a newly independent India as a way to get into rich new markets. No matter if there were rules or not, Indian businesses with a lot of energy tried from the start to use the standards of good business management. But the situation wasn't very hopeful because it was focused on the organisers and good governance rules were ignored to help the promoters.

There have been many talks and events that have led to the growth of corporate governance. This is because people are becoming more aware of the need to manage corporations better to make them more competitive on an international scale. The Chamber of Indian Industries came up with the basic rules for business management in 1998. 

India’s Corporate Governance Reforms

1. CII (Confederation of Indian Industry)

The first phase of India's corporate governance reforms aimed to enhance the oversight of management for the benefit of shareholders, especially institutional and international owners/investors. This was achieved by bolstering the independence, focus, and authority of Audit Committees and Boards. Numerous avenues were used to channel these reform efforts, including notable contributions from the Ministry of Corporate Affairs (MCA) and the Securities and Exchange Board of India (SEBI).

In the realm of corporate governance, the Confederation of Indian Industry assumed a pioneering role in 1996 as the foremost industrial group in India. The objective was to promote and institute a set of guidelines applicable to all types of corporate entities, including both publicly traded and privately held companies, as well as banks and other financial institutions. The measures implemented by CII effectively responded to public apprehensions surrounding the protection of investors' interests, with a particular focus on small investors. These actions also aimed to foster transparency within the industry and business sectors, while emphasising the importance of adhering to international standards for disclosing corporate information. 

2. The Report of the Kumar Mangalam Birla Committee

The business community endorsed the CII code, and some forward-thinking companies even adopted it. However, it was determined that a mandatory code would be more effective in the Indian context than a voluntary code. Therefore, in 1999, the Securities and Exchange Board of India (SEBI) established a committee led by Kumar Mangalam Birla to promote and improve corporate governance standards. Early in the twenty-first century, the SEBI Board embraced and ratified the main recommendations of this committee, which are now reflected in Clause - 49 of the Listing Agreement of the Stock Exchanges.

4. The Advisory Group

The Advisory Group on Corporate Governance, Standing Committee on International Financial Standards and Code in March 2021 suggested the improvement of Corporate Governance in India.

5.  Report of the Consultative Group of Directors of Banks - 2001

Reserve Bank established the objective of this study to evaluate the efficacy of the board of directors as a means of mitigating and reducing risks in banks and financial institutions through the examination of their corporate governance practises. That would be achieved by analysing the supervisory role of the boards and gathering feedback on their activities pertaining to compliance, transparency, disclosures, and audit committees, among other factors.

6. Report of the Naresh Chandra Committee on Corporate Audit and Governance Committee—December 2002

The Ministry of Finance and Company Affairs established a committee convened by Naresh Chandra to examine the legality of auditor-client relationships, appointment of auditors, and audit fees.

7.  SEBI Report on Corporate Governance (Narayana Murthy)

The Securities and Exchange Board of India (SEBI) appointed Narayana Murthy as chairman of a committee tasked with examining the compliance of listed companies with the corporate governance code and issuing a revised clause 49. The majority of the committee's important recommendations pertained to audit committees, audit reports, independent directors, related party transactions, risk management, directorships, director compensation, codes of conduct, and financial disclosures.

8. SEBI Clause 49

SEBI drafted Clause 49 of the Listing Agreements to resolve corporate governance issues following the liberalisation of the system. Clause 49 of the Listing Agreement to the Indian Stock Exchange is in effect as of December 31, 2005. The following are some of its most crucial preconditions:

• Listed companies must have a preponderance of "independent" board directors.
• Listed companies are required to establish audit committees with a minimum of three independent directors, with at least two-thirds of the members being independent.
• Publicly traded companies are required to regularly disclose specific information to the public.

9. Report of the J.J. Irani Committee

The Bhaba Committee was set up in 1950 in order to make recommendations on the structure and function of RBI. The Companies Act of 1956 was made because of what they said. Once this law was passed in 1956, the Companies Act of 1913 was no longer in effect. Since 1956, there have been a total of 24 changes to this Act. These changes were needed as the Indian economy grew and the business world grew with it.

The Companies (Amendment) Bill of 1999, 2000, 2002, and 2003 made further changes. In the 1980s, India's economic reforms got off to a slow start, but by the 1990s, it was clear that the country's Companies Act from 1956 needed to be changed. So, in December 2004, the government took another step in this direction by putting Dr J.J. Irani in charge of a group that was supposed to give advice on suggested changes to the Companies Act 1956.

10. Central Coordination and Monitoring Committee

In order to monitor and oversee the actions taken against companies facing dissolution and unethical promoters involved in the misappropriation of investor funds, the Department of Corporate Affairs has established the Central Coordination and Monitoring Committee (CCMC). This committee is jointly chaired by the Secretary of the Department of Corporate Affairs and the Chairman of the Securities and Exchange Board of India (SEBI). As a consequence of the committee's discussions, seven Task Forces were created in major cities throughout India, namely Mumbai, Delhi, Chennai, Kolkata, Ahmedabad, Bangalore, and Hyderabad.

Important Legal Framework on Corporate Governance

1) The Companies Act, 2013

2) SEBI Guidelines

3) Standard Listing Agreement of Stock Exchanges

4) Accounting Standards Issued by the Institute of Chartered Accountants of India

5) Secretarial Standards issued by the Institute of Company Secretaries of India

Conclusion

Satyam Scam (2009), PACL Scheme Scam (2015) and so on and so forth enhanced the need for good corporate governance. In light of these problems, company leaders have a wide range of responsibilities to make sure that their companies follow the laws and best practices for their industries. Companies have to act properly towards society as a whole, which means they have to do more than just follow the rules and standards that different authorities set from time to time. This is because businesses today are so big that they affect every single person in the country.

Firms no longer have to make changes to their policies because they have to follow strict rules. This has made their work easier. To make this a good situation for everyone, they must all show they care about the problems at hand and are willing to take an active role in making decisions. Corporate misrule can only be fixed by the government, banks, RBI, statutory bodies, and independent boards working together to make a single, perfect structure.

References

[1] Evolution of Corporate Governance in India, Available Here

[2] Corporate Governance in India: Evolution and Challenges, Available Here

[3] Corporate Governance in India, Available Here

[4] Corporate Governance in India, Available Here

Important Links