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CORPORATE GOVERNANCE THEORY, STRUCTURE, MECHANISM IN INDIA NOTES |COMPANY LAW
CONTENT
- CORPORATE GOVERNANCE THEORY
- STRUCTURE OF CORPORATE GOVERNANCE IN INDIA
- CORPORATE GOVERNANCE MECHANISM IN INDIA
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| Corporate Governance Theory notes |
Corporate Governance Theory
Corporate Governance is a new way of conducting business affairs. Corporate Governance has become a new dimension to Business management and it presents a new outlook of the corporate houses and also becomes a desirous part of annual reports. It has laid a new trust-building among the stake-holders. Ever since India’s biggest ever corporate fraud and Governance failures in Satyam Computer service limited, the concern about good corporate governance has increased significantly.
Internationally, the implementation of corporate Governance was exercised phenomenally.
The organization for Economic co-operation and Development (OECD) in 1999 published a paper titled “Principle of Corporate Governance” which defined Corporate Governance very comprehensively as follows-
“A set of relationships between a company’s management, board, its shareholders, and its other Stakeholders".
Corporate Governance is the structural basis of an organization through which the objectives of a company are marked and the means of obtaining those objectives and monitoring performance are ascertained. Good Corporate Governance should provide proper incentives for the board and the management to pursue objectives that are in the interests of the company and the shareholders and should facilitate effective monitoring, thereby encouraging firms to use resources mere efficiently.
STRUCTURE OF CORPORATE GOVERNANCE
In the Indian Scenario, the term Corporate Governance was first coined by the Confederation of Indian Industry in 1998 in its paper titled “ Desirable Corporate Governance: A code" as a voluntary code. Later in 2000 SEBI made it mandatory by introducing clause 49 to listing agreement following the recommendation of Kumar Mangalam Birla Committee. At present, the structure of Corporate Governance is prescribed by the New Companies Act, ICAI accounting standards which are converged with IFRS, SEBI guidelines.
Every company must adhere to the necessary disclosure requirement as required by the various Statutes/regulations or regulatory bodies. The structure of good Corporate Governance must incorporate information as follows:-
1) Right of the Shareholders
Corporate Governance must specify the rights of the shareholders
(a) To attend and participate in the annual general meetings, to elect the board members and to receive dividends, to avail timely regular and accurate information.
(b) Right to transfer shares
(c) To know the capital structure
(d) Capital control mechanism
(e) Adherence to one share, one vote standard. International investors and institutional investors have proxy rights.
2) Equitable treatment of the shareholders:-
All shareholders including the minority shareholders must receive equitable treatment.
Effective redressal for rights violations.
Prohibition of insider trading and self-dealing.
3) Role of Stakeholders-
(a) Recognition of their rights as prescribed by law.
(b) Access to information.
(c) Building good and produced a relationship with them by the directors or the management.
(d)Establishment of effective and enforceable accountability standards.
4) Disclosure and Transparency:
Accurate and timely disclosure of the company’s objective, majority share ownership, and voting rights; financial and operating results; directors key executives and their remuneration; significant, foreseeable risk factors; governance structure and practices; material issues regarding employees and other stakeholders. Annual audits by internal statutory auditors must be adhered to.
5) Responsibility of the Board of Directors:
Must specify key responsibilities of the board of directors overseeing the process of disclosure and communication, monitoring the effectiveness of governance practices, and changing them if necessary. The judgment of directors, independent of management operation, formation of the board, and their remuneration, etc must be disclosed.
The structure of Corporate Governance in India is a result of many statutory and non-statutory bodies' joint efforts. Some of the Contributory to it is named as below :
(i) Working Group or the Companies act, 1996.
(ii) The confederation of Indian Industry (CII) initiative
(iii) Naresh Chandra Committee Report (2002)
(iv) Kumar Mangalam Birla Committee Report (1999)
(v) The SEBI’s follow up on Birla Committee Report.
(vi) Taskforce on corporate excellence (NOV,2000)
(vii) Narayan Murthy Committee Report (2003)
(ix) A convergence of Accounting Standard Of India with IFRS which was initiated by ICAI in April 2011.
(x) The new Companies act called Companies Act,2013.
MECHANISM OF CORPORATE GOVERNANCE IN INDIA
Broadly speaking, the corporate governance mechanism for companies in India is enumerated in the following enactments/regulations/guidelines/listing agreements:
1. The Companies Act ,2013 inter alia contains ,provisions relating board constitution ,board meetings ,board processes ,independent directors,general meetings,audit committees ,related party transactions,disclosure requirements in financial statements etc.The new companies cover the concept of corporate governance in the following way:
(i) The new act introduces significant changes to the composition of the board of directors.
(ii) Every company must appoint at least one resident director.
(iii) Nominee director shall not be considered as an independent director anymore.
(iv) The listed companies must appoint independent and women directors.
(v) The duties of the directors are codified.
(vi) The board must constitute its committees as
· Audit committee
· Nomination and remuneration committee
· Stakeholders Relationship committee
· Corporate Social Responsibility committee.
2. Listing Agreement as prescribed by SEBI:- SEBI introduced clause 49 to its listing agreement in 2000 to give a true and fair view of GCR for the listing companies. Further SEBI has amended the listing agreement w.e.f. October 1,2014 to align the New Companies Act,2013.
I. Board of Directors:- The B.O.D. shall comprise of such a number of minimum independent directors, as may be prescribed.
II. Audit Committee: The audit committee to be set up shall comprise of a minimum of three directors as members,two-third being independent.
III. Disclosure Requirement: Periodical disclosure relating to the financial and commercial transactions, remuneration of directors etc.to ensure transparency.
IV. Report and compliance: A separate section in the annual report on compliance with the GCR, quarterly compliance report to the stock exchange to be signed by CEO/CFO.
V. CEO/CFO Certification: To certify to the board that they have reviewed the financial statement and the same are fare and comply with the laws/regulations and accept responsibility for the internal control system.
3. Accounting Standard issued by the Institute of Chartered Accountant of India (ICAI):
ICAI is an autonomous body, which issues accounting standards providing guidelines for disclosure of financial information. Section 129 of the New Companies Act,2013 inter alia provides that the financial statements shall give a true and fair view of the state of affairs of the companies comply with the accounting standard notified under section 133 of the companies Act,2013.
4. Secretarial Standards issued by the Institute of Company Secretaries of India(ICSI):
ICSI is an autonomous body, which issues secretarial standards in terms of the provisions of the Companies Act,2013. So far, the ICSI has issued Secretarial Standards in terms of the “Meetings of the Board of Directors” (ss-1) and Secretarial Standards on “General Meetings” (ss-2), these Secretarial Standards have come into force w.e.f. ,1st of July,2015. Section 118 (10)of the companies act,2013 provide that every company(other than a one-person company-OPC) shall observe Secretarial Standards specified as such by the ICSI.
Corporate Governance is a new way of conducting business affairs. Corporate Governance has become a new dimension to Business management and it presents a new outlook of the corporate houses and also becomes a desirous part of annual reports. It has laid a new trust-building among the stake-holders. Ever since India’s biggest ever corporate fraud and Governance failures in Satyam Computer service limited, the concern about good corporate governance has increased significantly.
Internationally, the implementation of corporate Governance was exercised phenomenally.
The organization for Economic co-operation and Development (OECD) in 1999 published a paper titled “Principle of Corporate Governance” which defined Corporate Governance very comprehensively as follows-
“A set of relationships between a company’s management, board, its shareholders, and its other Stakeholders".
Corporate Governance is the structural basis of an organization through which the objectives of a company are marked and the means of obtaining those objectives and monitoring performance are ascertained. Good Corporate Governance should provide proper incentives for the board and the management to pursue objectives that are in the interests of the company and the shareholders and should facilitate effective monitoring, thereby encouraging firms to use resources mere efficiently.
STRUCTURE OF CORPORATE GOVERNANCE
In the Indian Scenario, the term Corporate Governance was first coined by the Confederation of Indian Industry in 1998 in its paper titled “ Desirable Corporate Governance: A code" as a voluntary code. Later in 2000 SEBI made it mandatory by introducing clause 49 to listing agreement following the recommendation of Kumar Mangalam Birla Committee. At present, the structure of Corporate Governance is prescribed by the New Companies Act, ICAI accounting standards which are converged with IFRS, SEBI guidelines.
Every company must adhere to the necessary disclosure requirement as required by the various Statutes/regulations or regulatory bodies. The structure of good Corporate Governance must incorporate information as follows:-
1) Right of the Shareholders
Corporate Governance must specify the rights of the shareholders
(a) To attend and participate in the annual general meetings, to elect the board members and to receive dividends, to avail timely regular and accurate information.
(b) Right to transfer shares
(c) To know the capital structure
(d) Capital control mechanism
(e) Adherence to one share, one vote standard. International investors and institutional investors have proxy rights.
2) Equitable treatment of the shareholders:-
All shareholders including the minority shareholders must receive equitable treatment.
Effective redressal for rights violations.
Prohibition of insider trading and self-dealing.
3) Role of Stakeholders-
(a) Recognition of their rights as prescribed by law.
(b) Access to information.
(c) Building good and produced a relationship with them by the directors or the management.
(d)Establishment of effective and enforceable accountability standards.
4) Disclosure and Transparency:
Accurate and timely disclosure of the company’s objective, majority share ownership, and voting rights; financial and operating results; directors key executives and their remuneration; significant, foreseeable risk factors; governance structure and practices; material issues regarding employees and other stakeholders. Annual audits by internal statutory auditors must be adhered to.
5) Responsibility of the Board of Directors:
Must specify key responsibilities of the board of directors overseeing the process of disclosure and communication, monitoring the effectiveness of governance practices, and changing them if necessary. The judgment of directors, independent of management operation, formation of the board, and their remuneration, etc must be disclosed.
The structure of Corporate Governance in India is a result of many statutory and non-statutory bodies' joint efforts. Some of the Contributory to it is named as below :
(i) Working Group or the Companies act, 1996.
(ii) The confederation of Indian Industry (CII) initiative
(iii) Naresh Chandra Committee Report (2002)
(iv) Kumar Mangalam Birla Committee Report (1999)
(v) The SEBI’s follow up on Birla Committee Report.
(vi) Taskforce on corporate excellence (NOV,2000)
(vii) Narayan Murthy Committee Report (2003)
(ix) A convergence of Accounting Standard Of India with IFRS which was initiated by ICAI in April 2011.
(x) The new Companies act called Companies Act,2013.
MECHANISM OF CORPORATE GOVERNANCE IN INDIA
Broadly speaking, the corporate governance mechanism for companies in India is enumerated in the following enactments/regulations/guidelines/listing agreements:
1. The Companies Act ,2013 inter alia contains ,provisions relating board constitution ,board meetings ,board processes ,independent directors,general meetings,audit committees ,related party transactions,disclosure requirements in financial statements etc.The new companies cover the concept of corporate governance in the following way:
(i) The new act introduces significant changes to the composition of the board of directors.
(ii) Every company must appoint at least one resident director.
(iii) Nominee director shall not be considered as an independent director anymore.
(iv) The listed companies must appoint independent and women directors.
(v) The duties of the directors are codified.
(vi) The board must constitute its committees as
· Audit committee
· Nomination and remuneration committee
· Stakeholders Relationship committee
· Corporate Social Responsibility committee.
2. Listing Agreement as prescribed by SEBI:- SEBI introduced clause 49 to its listing agreement in 2000 to give a true and fair view of GCR for the listing companies. Further SEBI has amended the listing agreement w.e.f. October 1,2014 to align the New Companies Act,2013.
I. Board of Directors:- The B.O.D. shall comprise of such a number of minimum independent directors, as may be prescribed.
II. Audit Committee: The audit committee to be set up shall comprise of a minimum of three directors as members,two-third being independent.
III. Disclosure Requirement: Periodical disclosure relating to the financial and commercial transactions, remuneration of directors etc.to ensure transparency.
IV. Report and compliance: A separate section in the annual report on compliance with the GCR, quarterly compliance report to the stock exchange to be signed by CEO/CFO.
V. CEO/CFO Certification: To certify to the board that they have reviewed the financial statement and the same are fare and comply with the laws/regulations and accept responsibility for the internal control system.
3. Accounting Standard issued by the Institute of Chartered Accountant of India (ICAI):
ICAI is an autonomous body, which issues accounting standards providing guidelines for disclosure of financial information. Section 129 of the New Companies Act,2013 inter alia provides that the financial statements shall give a true and fair view of the state of affairs of the companies comply with the accounting standard notified under section 133 of the companies Act,2013.
4. Secretarial Standards issued by the Institute of Company Secretaries of India(ICSI):
ICSI is an autonomous body, which issues secretarial standards in terms of the provisions of the Companies Act,2013. So far, the ICSI has issued Secretarial Standards in terms of the “Meetings of the Board of Directors” (ss-1) and Secretarial Standards on “General Meetings” (ss-2), these Secretarial Standards have come into force w.e.f. ,1st of July,2015. Section 118 (10)of the companies act,2013 provide that every company(other than a one-person company-OPC) shall observe Secretarial Standards specified as such by the ICSI.
