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Corporate Governance

Corporate Governance

Corporate Governance

Corporate Governance may be defined as a system of rules, practices and processes by which an entity or a company is directed and controlled. Therefore, Corporate Governance essentially involves balancing the interests of the many stakeholders in a company. They comprise of shareholders, management, customers, suppliers, financiers, government and the community. It also constructs the framework for attaining the objectives of a company as well as encompasses practically every sphere of management, from action plans and internal controls to performance measurement and corporate disclosures. This article talks about the Corporate Governance in India.

Corporate Governance in India

With high-profile corporate governance failure scams like the stock market scam, the UTI scam, Ketan Parikh scam, Sathyam scam, which was severely criticised by the shareholders, the need for an effective and transparent corporate governance increased as it dramatically affects the development of the country. Generally, Corporate Governance usually refers to practices by which an organisation is controlled, directed and governed. The primary concern of  Corporate Governance is to ensure the conditions whereby an organisation’s directors and managers act on behalf of the interest of the organisation and its stakeholders. It provides the means by which managers are held accountable to capital providers for the use of corporate assets.

The need for Corporate Governance in India

The following are the reasons why it is essential to have Corporate Governance in India.

Boardroom Failures

Board of Directors, specifically Audit Committees, are charged with establishing oversight mechanisms for financial reporting on behalf of investors. These issues identified Board Members who either did not exercise their responsibilities nor have the expertise to understand the complexities of the business.

Banking Practices

Lending funds to a firm often send out signals to investors regarding the firm’s risk. In India, substantial Non-Performing Assets (NPAs) being carried as baggage by the banks/ financial institutions against the enormous amount of loans given without proper due diligence has now become a part of history.

Conflict of Interest with Auditors

Before the implementation of Corporate Governance norms, auditing firms were self-regulated. These firms also performed significant non-audit or consulting work on behalf of the companies they audited. Several of these consulting deals were far more lucrative than the auditing engagement itself. This appeared to be a significant conflict of interest.

Insider Trading

Not charged with enough penalties, some board members allegedly carried on with insider trading which led to unjust enrichment.

Securities Analysts’ Conflict of Interest

The roles of securities analysts, who make by and sell recommendations on a company’s stocks and bonds, and investment bankers, who help provide companies loans or handle mergers and acquisitions, offer opportunities to conflicts.

Internet Bubble

Investors had been stung in 2000 by the sharp decline in technology stocks and to a lesser extent, by the decline in the overall market. Certain mutual fund managers were alleged to have advocated the purchasing of particular technology stocks, while quietly selling them. The losses sustained also helped create frustration and anger among investors.

Executive Compensation

Stock option and bonus practices, combined with volatility in stock prices for even small earnings missings, resulted in pressure to manage earnings. Stock options were not treated as compensation expense by companies, encouraging this form of compensation. With a sizeable stock-based bonus at risk, managers were pressured to meet their targets.

Benefits of Corporate Governance

Corporate Governance is required to create a corporate culture of transparency, accountability and disclosure. It enhances organisational performance, investor trust, accessibility to the global market, financing from institutions, enterprise valuation and enterprise risk management and inculcates accountability. The following are the benefits of robust Corporate Governance.

Improves Corporate Performance

  • Assist the quality of decision making
  • Develop a robust corporate strategy
  • Ushers effective execution capabilities

Enhances Accountability

  • Effective governance process highlights and improves accountability of Board of directors towards shareholders.
  • Assists in improvement in branding of the enterprise.

Enhances Investor Trust

  • Encourages investors to make investments
  • Encourage promotion of investors’ interest through effective disclosures.

Access to Global Markets

  • Owing to transparency in reporting, it attracts investment from global investors.
  • Bring about better efficiencies in the financial sector.

Eradicate Corruption

  • Implement robust internal control and audit processes.
  • Enables the prevention of any fraud and malpractice due to robust processes and best practices.
  • Adequate and accurate disclosure of all accounting and auditing processes across operations.

Funding from Institutions

  • Proper disclosure and sound internal control processes bring about investor confidence.
  • Results in further investment from banks and financial institutions.

Enhances Enterprise Valuation

  • Robust processes and controls
  • Results in enhancement of enterprise valuation going forward.

Improved Enterprise Risk Management

  • Effective governance process develops a firewal against possible risks.
  • Brings about an effective enterprise risk mitigation system.

Regulatory Frameworks on Corporate Governance

The Indian statutory framework has been structured in line with the international best practices of Corporate Governance. The Corporate Governance mechanism for Indian companies is enumerated in the following regulations and guidelines.

  1. The Companies Act of 2013
  2. Securities and Exchange Board of India (SEBI) Guideline
  3. Standard Listing Agreement of Stock Exchanges
  4. Accounting Standards by the Institute of Chartered Accountants of India (ICAI)
  5. Companies (Indian Accounting Standards) Rules of 2015
  6. Companies (Indian Accounting Standards) (Amendment) Rules of 2016 and Companies (Accounting Standards) (Amendment) Rules of 2016.
  7. Companies (Indian Accounting Standards) Rules of 2018
  8. Secretarial Standards