This article on ‘Nexus between M&A and Corporate Governance Reforms‘ was written by Jessica Fernandez, an intern at Legal Upanishad.
In today’s business environment, mergers and acquisitions are becoming increasingly common. While these transactions can bring many benefits, they can also be complex and challenging to manage. Corporate governance is critical in ensuring companies can successfully navigate the complexities of mergers and acquisitions.
Merger or acquisition (M&A) refers to the transfer of ownership of businesses or their operating units, together with all related assets and liabilities, to a new organization. An acquisition happens when one business takes over the ownership of the other while a merger is the union of two entities into one. M&A enables organizations to grow or downsize and to adjust their competitive position.
Corporate Governance is defined as the system that is responsible for the directing and controlling of companies in India. It ensures long-term efficacy, efficiency, and careful administration of the businesses. In technical terms, corporate governance refers to the set of rules, procedures, mechanisms, and interpersonal interactions that business organizations use to ensure efficient and smooth governance of the corporate.
This article discusses the nexus between M&A and Corporate Governance reforms.
CORPORATE GOVERNANCE: MEANING AND OBJECTIVES
The term “corporate governance” describes the internal frameworks and procedures that control an organization, encompassing anything from moral standards to decision-making procedures. Making sure that every new organization formed as a result of a merger or acquisition complies with competencies, policies, and procedures is becoming more and more crucial in mergers and acquisitions.
One of corporate governances’ main objectives is to assist in risk management. Corporate governance aids in the creation of comprehensive strategies for the effective merger of two businesses while also taking possible hazards related to such transition into account, from risk management to HR management.
CORPORATE GOVERNANCE REFORMS IN INDIA
The concept of corporate governance is an old concept in India. From the ancient times, 3rd century B.C., Chanakya elaborated fourfold duties of a king i.e. Raksha, Vriddhi, Palana and Yogakshema. In recent times, the king now is the Company CEO or Board of Directors the principles of Corporate Governance refer to:
- Protecting the shareholder’s wealth (RAKSHA)
- Increasing the income by proper utilization of the assets (VRIDDHI)
- Maintaining proper profitability of the income ( PALANA)
- Protecting the interests of the shareholders (YOGAKSHEMA/ SAFEGUARD)
In 1992 the most important initiative was taken by the SEBI. SEBI has supervised the standardized stock market and established a number of rules and regulations for better working of the corporates.
In 1995, the Confederation of Indian Industry (CII) took the initiative to force a code of corporate governance. Its final draft of the code was adopted worldwide in 1917. This code was called Desirable Corporate Governance- A code, in April 1998. Many companies including Bajaj Auto, Infosys, BSES, HDFC, ICICI and many more welcomed the code. CII took the lead in drafting the favourable code.
SEBI had appointed the Kumar Mangalam Birla Committee for recommendations on Corporate governance. When presented, their recommendations were accepted by SEBI in December 1999 which are mentioned in clause 49 of the listing agreement of every Indian Stock Exchange.
LEGAL REFORMS IN CORPORATE GOVERNANCE IN INDIA
Corporation Governance Reforms (CGRs) have always had the required support from the Government of India. Different acts came into force by the Government to ensure the finest Corporate Governance. Acts that came in force are listed below as:
The Companies Act, 1956:
All the listed and unlisted companies in India follow the norms under the Companies Act, 1956 and it is administered by the Ministry of Corporate Affairs. It has gone through several amendments in the past years. Three unsuccessful attempts were made to amend the company law in 1993, 1997 & 2003. A total of 24 amendments have been made to this Act since 1956, out of which 52 amendments pertaining to corporate governance and corporate sector development through the Companies (Amendments) Act, 1999, the Companies (Amendments) Act, 2000 and the Companies (Amendments) Act, 2001
The Securities Act, 1956:
Covering the entire sort of markets like tradable government paper, stock, shares, bonds, debentures, and other forms of marketable securities issued in the interest of the companies.
SEBI Act, 1992:
As this Act came into force, the Security and Exchange Board of India was established which regulates all the market regulatory authorities as an independent unit.
Companies Act, 2013:
The enforcement of this Act was a major step in strengthening corporate governance in 2013. It was a replacement for Companies Act, 1956 and focused on simplification and improvement of corporate Governance and also increases the benefits of minor shareholders. The key provisions of this Act were;
- It allowed the maximum number of shareholders to be 200 from 50 in private limited Companies.
- Section 153 of the Act deals with Corporate Social Responsibility.
- Women Empowerment.
- Fast Track Mergers and cross Borders Merger position.
- Establishment of Company Law Tribunal and Company Law Appellate Tribunals.
It benefits the following groups of people as mentioned in the different clauses of the Act:
- Boards of Directors (Clause 166)
- Independent Director (Clause 149)
- Related Party Transactions (RPT) (Clause 188)
- Corporate Social Responsibility (CSR) (Clause 135)
- Auditors (Clause 139)
- Disclosure and Reporting (Clause 92)
- Class action suits (Clause 245)
The Companies (Amendment ) Act, 2017:
It focuses on:
- Mentioning the difficulties of the Companies Act 2013 and amending them.
- Enhancing employment opportunities and facilitating growth.
- Deals with the SEBI Act 1992, Accounting Standards and regulations done under the RBI Act 1934.
- Changing the inconsistencies of the Acts.
- SEBI issues guidelines on a regular basis to keep a check on the governance.
- Standard listing exchange on the stock exchanges.
Mergers and acquisitions are complex processes that require strong corporate governance practices to ensure success. Companies must consider developing a secure checklist for compliance matters and establishing frameworks for identifying potential issues. They must also invest in communication tools and digital collaboration methods.
- Burcin Col & Kaustav Sen, The role of corporate governance for acquisitions by the emerging market multinationals: Evidence from India, 59 Journal of Corporate Finance (2019)
- James Chen, ‘Corporate Governance: Definition, Principles, Models, and Examples’, Investopedia, available at: https://www.investopedia.com/terms/c/corporategovernance.asp