Need for Legislation of Corporate Governance

Corporate Governance is a mechanism based on certain systems and principles by which a company is governed. The governance ensures that a company is directed and controlled in a way so as to achieve the goals and objectives which include providing benefits to the stakeholders like shareholders, employees, suppliers, customers and society in the long term and adding value to the company. It is actually conducted by the board of Directors and the concerned committees for the benefit of stakeholders’ company’. Corporate governance is all about balancing individual and societal goals as well as economic and social goals.

The Companies Act, 2013

The new Companies Law contains many provisions related to good corporate governance like Composition of Board of Directors, Admitting Woman Director, Admitting Independent Director, Directors Training and Evaluation, Constitution of Audit Committee, Internal Audit, Risk Management Committee, SFIO Purview, Subsidiaries Companies Management, Compliance center etc.

All such provisions of new Companies Law are instrumental in providing a good Corporate Governance structure. Few provisions are:

Section 134:

It mandates to attach a report to every financial statement by Board of Directors containing all the details of the matter including the statement containing director’s responsibility.

Section 177:

It requires Board of Directors of every listed company or any other class of committee to constitute an Audit Committee. It also provides the manner to constitute the committee.

Section 184:

It mandates the Director disclose his interest in any company or companies, body corporate, firms, or other association of Individuals. The director is required to disclose any such interest at the first meeting of the board and if there is any change in the interest, then the first meeting will be held after such change.

Securities and Exchange Board of India (SEBI)

SEBI is a regulatory authority established on April 12, 1992 with the main purpose of curbing the malpractices in the financial market and protecting the interest of its investors. Its main objective is to regulate the activities of Stock Exchange and to ensure the healthy development in the financial market. In order to ensure good corporate governance, SEBI came up with detailed norms of Corporate Governance.

• As per the new rules, the companies are required to get shareholders’ approval for RPT (Related Party Transactions), a provision for whistle blower mechanism, clear mandate to have at least one woman director in the Board and moreover it elaborated disclosures on pay packages.
• Clause 35B of the Listing Agreement is being amended by the regulatory authority. Now as per the amended clause, listed companies are required to provide the option of e-voting to its shareholders on all proposed or passed general meetings. Those who do not have access to e-voting facility, they should be entitled to cast their votes in writing on Postal Ballot. The amended provision was needed so that the provisions of the listing agreement can be aligned with the provisions of Companies Act, 2013. By doing so, a closer step is provided to strengthen the Corporate Governance norms in India with respect to listed companies.
• Clause 49 of the Listing Agreement was also amended by SEBI in order to strengthen the Corporate Governance framework for listed companies in India. The revised clause forbids the independent directors from being eligible for any kind of stock option. Whistle blower policy is also added in the revised clause whereby the directors and employees can report any unethical behaviour, any fraud or if there is violation of Code of Conduct of the company.

With the amended provision, Audit Committee is also enhanced, now it will include evaluation of risk management system, internal financial control and will keep a check on inter-corporate loans and investments. The amendment now requires all the companies to form a policy for the purpose of determination of ‘material subsidiaries’ and that will be published online.

Standard Listing Agreement of Stock Exchanges

The Listing Agreement is the basic document which is executed between companies and the Stock Exchange when companies are listed on the stock exchange. The main purposes of the listing agreement are to ensure that companies are following good corporate governance. The Stock Exchange on behalf of the Security Exchange Board of India ensures that companies follow good corporate governance.

The Listing Agreement comprises of 54 clauses stating corporate governance which listed companies have to follow and in case of failing to such, companies have to face disciplinary actions, suspension, and delisting of securities. The companies also have to make certain disclosures and act by the clauses of the agreement.

Secretarial standards issued by ICSI (Institute of Company Secretaries of India)

It is an autonomous body constituted by the Company Secretaries Act, 1980. It is a body to regulate and develop the profession of Company Secretaries in India. It issues secretarial standards as per the provision of the Companies Act, 2013.

Section 118(10) of the Companies Act states that every company shall observe secretarial standards specified by Institute of Company Secretaries of India with respect to General and Board meetings.

• Secretarial standard-1 on Meeting of the Board seeks to prescribe a set of principles for conducting meetings of Board of Directors. These principles are equally applicable to the meetings of committees as well. SS-1 principles are applicable to the Meeting of Board of Directors of all companies except one Person Company.
• Secretarial standard-2 prescribes a set of principles for conducting and convening general meetings. This standard also deals with the procedure for conducting e-voting and postal ballot. SS-2 is applicable to all types of General meetings of all companies except one Person Company incorporated under the act. The principles in SS-2 are applicable mutatis-mutandis to meetings of creditors and debenture holders. Moreover, it also prescribes that any meeting of members or creditors or debenture-holders of a company under the direction of CLB (Company Law Board), NCLT (National Company Law Tribunal) or any other authority shall be governed by the provisions of this standard.

Eight Codes of Corporate Governance

Governance Structure:

All organizations should be headed by an effective board and all the responsibilities and accountabilities within the organisation should be clearly distinguished.

Structure of the Board and its Committees:

The board should consist of appropriate combination of executive directors, independent directors and non-independent non-executive directors to prevent one individual or a small group of individuals from dominating the board’s decision. The board’s size and scale should be in proportion with the level of diversity of the organisation. Appropriate board committees may be formed to assist the board in effective performances to fulfil the duties.

Director’s Appointment Procedure:

There should be a formal, rigorous and transparent process for various activities like appointments, election, re-election of directors etc. Members for the board should be appointment on merit basis fulfilling objective criteria which should include skills, knowledge, experience, and independence for the benefits of the company. The board should ensure that a formal, rigorous and transparent procedure be in place for planning the succession of all key officeholders.

Directors’ duties, remuneration and performance:

Directors should be aware of their legal duties. They must observe and foster high ethical standards and a strong ethical culture in their organisation. Each director must be able to give sufficient time to discharge his or her duties effectively. Conflicts of interest should be disclosed and managed.

The board of members is responsible for the governance of the organisation’s information, information technology and information security. The board, committees and individual directors should be supplied with informations in a timely manner and in an appropriate form and quality. The performances of board members should be evaluated and be held accountable to appropriate stakeholders. The board should be transparent, fair and consistent in determining the remuneration policy for directors and senior executives.

Risk Governance and Internal Control:

The board will be held responsible for risk governance. It must check the development and execution of a comprehensive and powerful system of risk management and also ensures the maintenance of a sound internal control system.

Reporting with Integrity:

The board must present a fair, balanced and understandable assessment of the performances and outlook of organization’s financial, environmental, social and governance position in its annual report and on its website.

Audit:

All the organizations should consider having an effective and independent internal audit function that has the respect, confidence and cooperation of both the board and the management. The board should establish formal and transparent arrangements to appoint organisation’s auditors and maintain an appropriate relationship with them.

Relations with Shareholders and other key Stakeholders:

The board should be responsible for ensuring that an appropriate interchange and disclosure takes place between the organisation, its shareholders and other key stakeholders. The board should respect the interests of its shareholders and other key stakeholders within the context of its fundamental purpose.