This article on ‘CORPORATE GOVERNANCE IN INDIA: EVERYTHING YOU NEED TO KNOW‘ is written by an intern at Legal Upanishad.
This article examines corporate governance in India and its provisions. The article highlights the various enactments introduced by the government of India. It aims at regulating the corporate entities and ensuring good governance practices in them. A corporate entity is established to carry on business activities by individuals.
There is bound to be unfair trade practices in these entities which affect the interests of shareholders/stakeholders. To avoid all such instances the governments introduced the corporate governance principles and makes regular amendments in the same. The article will throw a light on the introduction, needs, benefits, disadvantages, and the daily developments of these governments.
WHAT IS A CORPORATE ENTITY?
Before understanding corporate governance in India, it is imperative to understand what corporate entities are and how they are formed along with their functions. A corporate entity is a business entity formed to carry on business activities to earn profit. It is formed of individuals such as directors, KMP, CEO, CFO, shareholders, etc.
There are different types of corporate entities such as sole proprietorship, partnership, corporation, LLP. These corporate entities enter into legal agreements to carry out businesses and many times there are fraudulent activities carried out through these legal agreements. To avoid these frauds the government introduced Corporate Governance in India which controls and looks over the activities of the businesses and ensures compliance with regulations.
CORPORATE GOVERNANCE IN INDIA AND IT’S NEEDS:
A system of rules and regulations to control and direct the corporate entity is known as corporate governance. Corporate governance in India aims primarily at protecting the interests of stakeholders. These stakeholders invest in the entities and many a time fraudulent activities are carried out due to the corporate veil. Corporate governments make regulations and enactments concerning them.
Many high-profile scams such as the Sathyam scam, Harshad Mehta scam, and many others were witnessed in India. Due to these scams, the country witnessed huge economic losses. To avoid these situations in the country corporate governances are introduced and amended time and again to ensure fair business activities. Other issues such as insider trading, failures on account of BOD, conflict with auditors are also governed under these regulations.
PRINCIPLES OF CORPORATE GOVERNANCE:
Corporate governments follow three principles in their regulations. These are transparency, accountability, independence. Transparency ensures disclosure of relevant and important information to the stakeholders and business persons as well as the government. This enables to spot any unlawful activity going on in the company to some extent. Accountability ensures answerability or liability to answer the queries and doubts of stakeholders.
The top management should be accountable for all activities carried out by the businesses. Independency is essential in any aspect of business or life. Corporate governance ensures that the management in a company is independent enabling them to take decisions independently without any authority stopping them from achieving their objectives. The other principles in corporate governance can be listed as discipline, responsibility, fairness, CSR, etc. These principles promote good corporate governance among businesses.
FRAMEWORK OF CORPORATE GOVERNANCE IN INDIA:
Indian Corporate Governance is the largest and most efficient framework in the world. It comprises various laws and regulations established. The primary framework of corporate governance is:
Companies Act 2013:
The Companies Act 2013 was introduced as an amendment to the Companies Act 1956. This is the main regulation over the companies. It is a vast regulation comprising rules and enactments concerning the functioning, business, and composition of individuals in a company. It specifies various frameworks and penalties about the frauds and misdealing carried out by these companies.
The Companies Act 2013 is established by the Ministry of Corporate Affairs by the Indian Government and it governs the various entities such as Companies, Sole proprietorship, LLP, Partnership, etc. Although these entities have various other laws governing them, the Companies Act is considered the primary regulator of these organizations.
Securities and Exchange Board of India:
SEBI was formed to govern and gain compliance over the listed entities. The listed entities are companies having large paid-up capital and are listed on the stock exchanges, gaining funds or as you can say monies from a huge number of stakeholders. The SEBI gives guidelines concerning insider trading, laundering of money, and many other issues. It regulates various intermediaries such as collective investment schemes, mutual funds, listed and unlisted companies, brokers, stock exchanges, etc.
Institute of Chartered Accountants of India:
ICAI is a body established to govern the regulations controlling the activities of chartered accountants in the country. They issue accounting standards for the regulations of various accounting principles and activities of auditors. The financial statements must be following the accounting standards and must be formed per them.
Institute of Company Secretaries in India:
ICSI is a body established to govern the activities of the company secretaries in India. They form regulations concerning the legal framework of the companies and ensure their sustainability. ICSI issues secretarial standards for the companies. As of now secretarial standards concerning General Meetings and Meetings of Board of Directors have been issued by ICSI.
Corporate Governance in India also has many other frameworks about the risk management committees, stakeholders relationship committees, Audit committees, Holding and Subsidiary companies, Board of directors, etc. These frameworks ensure a safe and secure environment while performing and dealing in businesses.
Corporate Governance in India and its principles have proved to be a boon for the Corporate field. The various benefits are attributed to these corporate governments which have ensured an increase in businesses in a lawful manner.
Financial and economic growth has been witnessed in recent years on a large scale. Corporate Governance has helped to promote this safe environment and helped increase the financial and economic field by regulating the businesses continuity. It has helped build strong connections with overseas governments and businesses.
The interests of stakeholders especially minority stakeholders have been protected due to these governances. Yes, the country still witnesses scams and frauds but also the positive side to it is that the scalability and frequency of these frauds have reduced by 3-4%. Mergers, amalgamations have become easy and lawful protecting the interests of all parties. Hence truly Corporate Governances have been a boon for the Companies in India.
Corporate Governance principles have truly been a blessing to the corporate sector in India. However, there are still a few lackings in the sector which need to be overcome. The country should keep in mind that not only regular compliance ensures full accountability. Many times frauds can be committed when the companies that the next compliance check will be in a few days or months. Sudden compliance checks will ensure more enhanced compliance.
Bribes and greed are major factors in the failure of corporate governance. The state and country should ensure that a competent officer or competent team is appointed. These teams must be on par with the objectives of the corporate governance and they must believe in it. Many other suggestions can be put forth before the officials but ensuring these two at the primary stage will help build a good corporate sector in many ways.
Corporate Governance can be considered as the heart or the soul of the corporate sector in our country. It has ensured the development of the business sector in the country in a legal way. Good and bad corporate governances are the result of it. Good corporate governance has ensured that there is business development and prosperity.
It ensures protecting the interests of all including businesses, its stakeholders, its management-top as well as lower. On the other hand, bad governance results in frauds, scams, losses, scandals, insolvency, etc which leads to losses for the businesses as well as the country. Ensuring corporate governance with care and due process will lead to the prosperity of not only a particular country but the entire world.
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