Evolution and Development of Corporate Governance in India

03/04/2024 0 By indiafreenotes

Corporate Governance refers to the system by which companies are directed and controlled. It involves a set of relationships between a company’s management, its board, its shareholders, and other stakeholders. Corporate governance also provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined. The evolution and development of corporate governance in India is a testament to the country’s economic progression, adapting to global standards while addressing local challenges.

The journey of corporate governance in India is a reflection of its broader economic and corporate evolution. From a period of minimal regulation and oversight, India has moved towards a more structured and transparent corporate governance regime. This journey, while marked by significant progress, is ongoing, with continuous efforts needed to address emerging challenges and align with global best practices. The development of corporate governance in India is crucial not just for the growth of its companies but also for the overall health of its economy, ensuring that it remains competitive, inclusive, and sustainable in the long term.

  • Early Stages and Pre-liberalization Era

The concept of corporate governance, while always intrinsic to companies, began gaining prominence in India during the late 20th century. Prior to the 1990s, the Indian business environment was characterized by the ‘License Raj’, heavy regulation, and protectionism, with a significant emphasis on public sector enterprises. Corporate governance in this era was primarily compliance-driven, focusing on adherence to the legal framework, with minimal emphasis on shareholder value or board accountability.

  • Post-1991 Economic Reforms

The liberalization of the Indian economy in 1991 was a turning point for corporate governance in India. The opening up of the economy led to increased foreign investment, competition, and the need for Indian companies to meet global standards. This period marked the beginning of a shift towards greater transparency, accountability, and emphasis on protecting the interests of minority shareholders.

  • CII Code, 1998

Recognizing the need for improved corporate governance practices, the Confederation of Indian Industry (CII) took a proactive step by developing the first voluntary code for corporate governance in 1998. The CII Code focused on enhancing the transparency and accountability of boards, and it laid down guidelines for board composition, the role of independent directors, audit committees, and shareholder communication.

  • SEBI and Clause 49

The Securities and Exchange Board of India (SEBI), the regulator for securities markets in India, played a pivotal role in shaping the corporate governance landscape. In 2000, based on the recommendations of the Kumar Mangalam Birla Committee, SEBI introduced Clause 49 in the Listing Agreement for companies. Clause 49 made it mandatory for listed companies to adhere to specific corporate governance standards, including the composition of the board, the establishment of an audit committee, and improved financial disclosures.

  • Further Reforms and the Companies Act, 2013

The corporate governance framework in India received a comprehensive overhaul with the introduction of the Companies Act, 2013. This Act replaced the Companies Act of 1956, bringing in several new provisions aimed at enhancing transparency, accountability, and corporate democracy. Key features included stricter norms for board and management functions, enhanced roles of independent directors, mandatory corporate social responsibility (CSR) spending, and stricter penalties for non-compliance.

  • Recent Developments

The Indian corporate governance framework has continued to evolve in response to emerging challenges and global trends. Recent developments include the introduction of stewardship codes for institutional investors to ensure they actively engage in enhancing the governance of investee companies. SEBI has also revised the LODR (Listing Obligations and Disclosure Requirements) regulations to include stricter requirements for board composition, audit committees, and disclosure requirements.

  • Impact and Challenges

The evolution of corporate governance in India has had a significant impact on improving the transparency, efficiency, and sustainability of businesses. It has enhanced investor confidence, both domestic and international, leading to more robust capital markets. However, challenges remain, including ensuring the effectiveness of independent directors, managing related party transactions, and improving the enforcement of regulations.