The Concept of Corporate Governance

Corporate governance broadly

refers to the mechanisms, processes

and relations by which corporations are controlled and directed .Governance
structures identify the distribution of rights and responsibilities among different
participants in the corporation (such as the board of directors, managers,
shareholders, creditors, auditors, regulators, and other stakeholders) and
includes the rules and procedures for making decisions in corporate affairs.
Corporate governance includes the processes through which corporations'
objectives are set and pursued in the context of the social, regulatory and
market environment. Governance mechanisms include monitoring the actions,
policies and decisions of corporations and their agents. Corporate governance
practices are affected by attempts to align the interests of stakeholders.
Interest in the corporate governance practices of modern corporations,
particularly in relation to accountability, increased following the high-profile
collapses of a number of large corporations during 20012002, most of which
involved accounting fraud; and then again after the recent financial crisis in
2008. Corporate scandals of various forms have maintained public and political
interest in the regulation of corporate governance. In the U.S., these
include Enron and MCI Inc. (formerly WorldCom). Their demise is associated
with the U.S. federal government passing the Sarbanes-Oxley Act in 2002,
intending to restore public confidence in corporate governance. Comparable
failures in Australia (HIH, One.Tel) are associated with the eventual passage of
the CLERP 9 reforms. Similar corporate failures in other countries stimulated
increased regulatory interest (e.g., Parmalat in Italy).
The meaning of the term corporate governance is a subject of considerable
debate. The concept has been defined in many ways. Organization for
Economic Co-operation and Development (OECD) has defined corporate
governance as, procedures and processes according to which an organisation
is directed and controlled. The corporate governance structure specifies the
distribution of rights and responsibilities among the different participants in the
organisation such as the board, managers, shareholders and other
stakeholders and lays down the rules and procedures for decision-making." As
per the Cadbury Committee (1992), Corporate governance is the system by
which companies are directed and controlled. Boards of directors are
responsible for the governance of their companies. The shareholders role in
governance is to appoint the directors and the auditors to satisfy themselves
that an appropriate governance structure is in place. The responsibilities of the
board include setting the companys strategic aims, providing the leadership to
put them into effect, supervising the management of the business and
reporting to shareholders on their stewardship. The boards actions are subject
to laws, regulations and the shareholders in general meeting. In a nutshell ,

the corporate governance is all about governing corporations in

such a transparent manner that all stakeholders interests are
protected, and with due compliance with the laid down laws.

Corporate Governance in India

Corporate governance concept has gained public attention in early 90s in

India. First special initiative on corporate governance was taken by
confederation of Indian Industry (CII) in 1996 by introducing voluntary
corporate governance code. The objective was to develop and promote a code
of corporate governance to be adopted and followed by Indian companies. CII
came up with the recommendations to be followed by Indian industry.
In 1999 Kumar Mangalam Birla committee was appointed to promote the
standards of corporate governance. It came with some mandatory and non
mandatory recommendations. The committee made recommendations for
several issues including board of directors, audit committee, remuneration
committee, management, shareholders etc.
In 2000, SEBI introduced mandatory corporate governance code in place of
voluntary one through Clause 49 of listing agreement. The term Clause 49
refers to Clause number 49 of the Listing Agreement between a company and
the stock exchanges on which it is listed (the Listing Agreement is identical for
all Indian stock exchanges, including the NSE and BSE). It is mandatory for
listed Indian companies to follow the provisions of Clause 49. The equivalent of
Clause 49 is US SarbanesOxley (SOX) Act of 2002, which was introduced by
Securities and Exchange Commission for the companies listed in U.S stock
exchanges.
In 2002, Naresh Chandra committee was appointed by the department of
company affairs. This committee took forward the recommendations of Kumar
Manglam Birla committee. This committee laid down strict guidelines defining
the relationship between auditors and clients.
In 2003, Narayan Murthy committee was setup by SEBI. This committee came
out with the recommendations focusing on strengthening the responsibility of
audit committee, quality of financial disclosure, proceeds from initial pubic
offerings and many other important aspects.
On 29th October 2004, SEBI finally announced revised Clause 49. The revised
Clause 49 on corporate governance made major changes in the definition of
independent directors, strengthening the responsibilities of audit committees,
improving quality of financial disclosures, including those relating to related

party transactions and proceeds from public/ rights/ preferential issues,

requiring Boards to adopt formal code of conduct, requiring CEO/CFO
certification of financial statements and for improving disclosures to
shareholders. Certain non-mandatory Clauses like whistle blower policy and
training of board members have also been included.
Although India has been rather slow in establishing corporate governance
principles over the last two decades, 2012 was a positive year for progression
in the Indian corporate governance arena. The Companies Bill 2012, passed by
Lok Sabha (the lower house) on 18 December 2012, includes a number of new
provisions aimed at improving the governance of public companies.
Interestingly, despite the structure of Indian businesses differing significantly
from those in the UK, the foundations of the new Indian corporate governance
model are drawn from the Anglo-Saxon governance model. The investor base
in the Indian corporate market, for instance, largely consists of the company
founders, their respective family members and the government. In contrast,
shareholders in UK companies are less concentrated towards a certain group of
people, are geographically dispersed and largely held by professional
investors. However, despite significant differences in the corporate structure in
the two markets, the corporate governance proposals recently published in
India are similar to those adopted in the UK. The question therefore arises as to
whether it is appropriate for a closed market to base its corporate governance
model on practices developed for and in a market fundamentally different from
its own.
The Indian market regulator, the Securities and Exchange Board of India (SEBI),
recently issued a consultative paper on the Review of Corporate Governance
encouraging a wider debate on governance. The paper calls for, inter alia, the
splitting of the roles of chairman and chief executive, disclosure of the reasons
for an independent director's resignation from office, a limit on the term of
appointment of independent directors and greater involvement of institutional
investors. SEBI goes on to propose making radical changes which seek to
ensure that these corporate governance proposals are implemented in a market
which is generally viewed as weak in the implementation of rules and
regulations. These changes include:

the appointment of independent directors by minority shareholders,

independent directors
examinations; and

to

receive

compulsory

training

and

pass

the adoption of a principle-based approach for certain principles.

Although it is clear that the proposals stem from the Anglo-Saxon corporate
model, in some instances they go further and introduce new initiatives which
recognise the need for certain obligatory requirements and the need for
training in a market that has for centuries been based on a closed board
structure and investor base.

There has been a clear move in India to develop the corporate market to attract
foreign investment. Foreign investment is slowly increasing shareholder
diversity in some companies. This in turn pushes the agenda for the
introduction of a regulated and universal corporate governance model. It
appears from the recent SEBI proposals that the adoption of a corporate
governance model based on the Anglo-Saxon model will be a useful starting
point but the adoption of certain UK-based concepts such as 'comply or explain'
should be adopted cautiously given the radical nature of certain proposals and
significant effects they will have on the structure of Indian businesses. New
regulatory institutions may need to be created, existing institutions
strengthened and hybrid approaches adopted but, on the whole, the AngloSaxon model may well be a useful foundation.
With the goal of promoting better corporate governance practices in India, the
Ministry of Corporate Affairs, Government of India, has set up National
Foundation for Corporate Governance (NFCG) in partnership with Confederation
of Indian Industry (CII), Institute of Company Secretaries of India
(ICSI)and Institute of Chartered Accountants of India (ICAI).

Regulatory Framework for Corporate Governance in India

As a part of the process of economic liberalization in India, and the move

toward further development of Indias capital markets, the Central Government
established regulatory control over the stock markets through the formation of
the SEBI. Originally established as an advisory body in 1988, SEBI was granted
the authority to regulate the securities market under the Securities and
Exchange Board of India Act of 1992 (SEBI Act).
Public listed companies in India are governed by a multiple regulatory
structure. The Companies Act is administered by the Ministry of Corporate
Affairs (MCA) and is currently enforced by the Company Law Board (CLB). That
is, the MCA, SEBI, and the stock exchanges share jurisdiction over listed
companies, with the MCA being the primary government body charged with
administering the Companies Act of 1956, while SEBI has served as the
securities market regulator since 1992.
SEBI serves as a market-oriented independent entity to regulate the securities
market akin to the role of the Securities and Exchange Commission (SEC) in
the United States. The stated purpose of the agency is to protect the interests
of investors in securities and to promote the development of, and to regulate,
the securities market.
The realm of SEBIs statutory authority has also been the subject of extensive
debate and some authors31 have raised doubts as to whether SEBI can make

regulations in respect of matters that fall within the jurisdiction of the

Department of Company Affairs.
SEBIs authority for carrying out its regulatory responsibilities has not always
been clear and when Indian financial markets experienced massive share price
rigging frauds in the early 1990s, it was found that SEBI did not have sufficient
statutory power to carry out a full investigation of the frauds. 32 Accordingly, the
SEBI Act was amended in order to grant it sufficient powers with respect to
inspection, investigation, and enforcement, in line with the powers granted to
the SEC in the United States.
A contentious aspect of SEBIs power concerns its authority to make rules and
regulations. Unlike in the United States, where the SEC can point to the
Sarbanes-Oxley Act, which specifically confers upon it the authority to prescribe
rules to implement governance legislation, SEBI, on the other hand, cannot
point to a similar piece of legislation to support the imposition of the same
requirements on Indian companies through Clause 49. Instead, SEBI can look to
the basics of its own purpose, as given in the SEBI Act, wherein it is granted the
authority to specify, by regulations, the matters relating to issue of capital,
transfer of securities and other matters incidental thereto . . . and the manner
in which such matters shall be disclosed by the companies.33 In addition, SEBI
is granted the broad authority to specify the requirements for listing and
transfer of securities and other matters incidental thereto. 34
Recognizing that a problem arising from an overlap of jurisdictions between the
SEBI and MCA does exist, the Standing Committee, in its final report, has
recommended that while providing for minimum benchmarks, the Companies
Bill should allow sectoral regulators like SEBI to exercise their designated
jurisdiction through a more detailed regulatory regime, to be decided by them
according to circumstances.35
Referring to a similar case of jurisdictional overlap between the RBI and the
MCA, the Committee has suggested that it needs to be appropriately
articulated in the Bill that the Companies Act will prevail only if the Special Act
is silent on any aspect.
Further the Committee suggested that if both are silent, requisite provisions
can be included in the Special Act itself and that the status quo in this regard
may, therefore, be maintained and the same may be suitably clarified in the
Bill. This, in the Committees view, would ensure that there is no jurisdictional
overlap or conflict in the governing statute or rules framed there under.