This article has been written by Hemang Mohanlal Doshi pursuing Diploma in Intellectual Property, Media and Entertainment Laws and edited by Shashwat Kaushik.
This article has been published by Sneha Mahawar.
Table of Contents
Introduction
Corporate governance can be defined as “the combination of rules, processes or laws by which businesses are operated, administered, regulated or controlled.” These are the ways in which companies are directed and controlled. All the internal and external factors that directly or indirectly affect positively or negatively the interests of stakeholders, customers, suppliers, government acts, and regulation or management itself are primarily the key areas of corporate governance. In short, corporate governance is a system created by a set of rules and practices for operating a company.
Corporate governance is the responsibility of the company’s board of directors. The basic principles of governance are accountability, transparency, fairness and responsibility.
Good governance helps to build trust and long-lasting relationships in the market, while bad governance not only jeopardises a company’s brand name but also destroys profitability in the long run.
The Ministry of Corporate Affairs (MCA) and the Securities and Exchange Board of India (SEBI) are responsible for the corporate governance of the listed companies in India.
The Corporate Governance (for fuel/energy industries) Code was approved by the Securities Exchange Board of India (SEBI) and implemented with a new Clause 49 in the listing guidelines for the stock exchanges. This clause has made it mandatory for the listing companies to follow the requirements of Clause 49, effective January 1, 2006. Clause 49 for the renewal energy (fuel) sector focuses on the appointment of independent directors, audit committees, risk reports, legal compliance reports, certification of account and code of conduct. It enforces strict rules and regulations to avoid any major frauds and scams in the growing industry.
The primary need of corporate governance is to provide long-term economic value to all stakeholders. Secondary reasons can vary from boosting companies efficiency and productivity to avoiding frauds and scams, better monitoring of financial ratios, etc.
Current governance status in India for renewable fuels industry
Governing bodies in India
Currently, we use electricity as a renewable fuel across 36 states and Union territories in India. The Ministry of New and Renewable Energy (MNRE) and State Nodal Agencies (SNAs) are the government agencies for the promotion of grid-connected and off-grid renewable energy in the country. The MNRE is responsible for the overall policy and planning of renewable energy development in India, while the SNAs are responsible for implementing renewable energy projects at the state level.
The MNRE has a number of programmes and initiatives to promote renewable energy, including:
- The Jawaharlal Nehru National Solar Mission (JNNSM), which aims to install 100 GW of solar power capacity by 2022.
- The National Wind Energy Programme (NWEP), which aims to install 60 GW of wind power capacity by 2022.
- The National Biomass Power Programme (NBPP), which aims to install 10 GW of biomass power capacity by 2022.
The SNAs are responsible for implementing these programmes and initiatives at the state level. They work with state governments, local communities, and private developers to develop renewable energy projects.
The MNRE and SNAs have made significant progress in promoting renewable energy in India. In the past decade, India has become one of the world’s leading renewable energy markets. The country has installed over 50 GW of renewable energy capacity and is on track to meet its 2022 targets.
However, there is still much work to be done. India needs to continue to invest in renewable energy to meet its climate change goals and ensure energy security. The MNRE and SNAs will play a key role in this effort.
“India stands 4th globally in renewable energy installed capacity (including large hydro), 4th in wind power capacity, and 4th in solar power capacity (as per the REN21 Renewables 2022 Global Status Report). The country has set an enhanced target at COP26 of 500 GW of non-fossil fuel-based energy by 2030.”
The world’s largest wind-solar hybrid power plant, AGEL, now has the largest operating renewable portfolio in India with 8,024 MW.
Rules and regulations for corporate governance
The Companies Act of 2013 introduced many provisions to support and facilitate governance by providing the composition of Board of Directors, including women directors, independent directors, training and evaluation directors, an audit committee, risk management reports, internal audit reports, compliance centre, etc.
A few sections provided by the Companies Act 2013 are as follows
- Section 134- As per this Section, the board of directors has to attach reports for the financial statements made for the matter, which include the following:
- A statement of directors’ responsibilities, which sets out the responsibilities of the directors in relation to the preparation of the financial statements.
- A declaration by the directors that they have taken all reasonable steps to ensure that the financial statements are true and fair.
- A statement by the auditors that they have conducted an audit of the financial statements in accordance with the standards of auditing.
The board of directors is also required to attach a report on the company’s corporate governance practices. This report should include information on the company’s board structure, its audit committee, its risk management framework, and its whistleblowing policy.
- Section 177- As per this Section, the audit committee is to have a minimum of three directors. The committee should comprise a majority of independent directors and at least one member should have financial expertise. The term of office of the members of the audit committee should be for a period of two years and they can be re-appointed. The audit committee should meet at least four times a year and the quorum for a meeting should be two members.
- Section 184- As per this Section, directors are to disclose their interest in companies, body corporate, firms, etc. Interest is to be disclosed in the first meeting, and changes are to be reported in subsequent meetings thereafter.
Disclosure of interest by directors is important for the following reasons:
- It helps to prevent conflicts of interest.
- It ensures transparency and accountability in the management of the company.
- It protects the interests of the shareholders and other stakeholders of the company.
- Section 178- This Section details the formation of Nomination and Remuneration Committee and the Stakeholder Relationship Committee. The Nomination and Remuneration Committee is responsible for proposing candidates for election to the board of directors and for determining the remuneration of directors. The committee is composed of at least three independent directors, and the chairman of the committee must be an independent director.
- Section 135- This Section details the formation of the Corporate Social Responsibility Committee. The National Wind Energy Programme (NWEP)
Penalties for violating rules and regulations mentioned in Sections 177 and 178 would be fines and penalties of INR 1 lacs to 5 lacs for the company and 1 year imprisonment or fines of INR 25000 to 1 lacs for the defaulting officer. In addition to the above penalties, the company may also be liable to pay compensation to any person who suffers loss or damage as a result of the violation.
The penalties for violating the rules and regulations mentioned in Sections 177 and 178 are intended to deter companies from failing to maintain proper books of account and other records. These records are essential for the proper functioning of a company and for the protection of the interests of its shareholders and creditors.
Besides the above, the Central Government of India has set up the National Company Law Tribunal (NCLT) to check for mismanagement in the functioning of a company. NCLT has 11 benches to handle the disputed matters.
Rating agencies have developed indices to measure corporate governance performance. A few agencies are ISS (Institutional Shareholder Services), Corporate Governance Indices, Standard & Poor’s Corporate Governance Scores, etc.
Future of governance status in India for renewable fuels industry
We can see the Renewable Energy sector growing massively and even supporting the entire needs of our country through solar power, wind mills, hydropower, etc. But we are exposed to the bigger question of e-waste and by-products generated, which would be harmful or even pose threats to mankind. We would face challenges in the disposal of e-waste and by-roducts as we might again land up in a catastrophe of climate and environmental change after 25 years.
As per the Central Pollution Control Board (CPCB), for the years 2021-22, only 33% of total e-waste generated in India was collected and processed. In total, 16.01 lakh metric tonnes of e-waste were generated in the years 2021-22. This means 67% of e-waste remained unprocessed and uncollected. If policies are not adequate to collect and process this huge amount of e-waste, it might cause tremendous environmental impact in the coming decades.
With the current trend and evolution of generative AI, robotics, chatbot and digitalization, it is possible in the near future to have provisions and sections lawfully allotted to monitor and govern companies for mismanagement and frauds/scams.
Today we have the Information Technology Act 2000 and the Electricity Act of 2003 to handle e-governance, digitalization and the distribution and management of electricity.
We would see changes from the Central Government in the Information Technology Act 2000 to have software and robots act as members of the board to enforce rules and strict regulations on the operation of the board and the corporation as a whole. The Electricity Act, 2003, may soon see digitalization and AI automation governing the regime of renewable energy in India. Transparency and fairness in corporate governance will improve with reforms in law as we move more towards technology driven e-governance.
Policies to enforce strict rules and regulations for the safe disposal and processing of e-wastewould be implemented in anticipation. The Central Government of India will modify reforms and empower existing authorities like NCLT and rating agencies to audit disposed e-waste.
Suggestions
The suggestions and recommendations would be to focus more on emerging technologies and incorporate those changes lawfully into the system. The Companies Act of 2013 should be modified to have the following sections as provisions and mandates
Section XXX:- As per this section, AI, Robotics and digitalization should be part of the corporate governance board. Government approved systems are to be configured and installed in renewable energy sector companies mandatorily to collect necessary data and information related to operation, finance and control.
Section XYZ:- As per this section, a matrix, indicators, acceptable Tolerance and more authorities are to be created to monitor and control the E-Waste and By-Products generated by the renewable energy sector. The report should provide mandatory updates on the risk and mitigation of E-Waste and BY-product details to avoid threats in the future.
Section 135 :- This section should be modified and the Corporate Social Responsibility Committee’s role should be defined at a broader level to control the effects of Section XYZ.
The National Company Law Tribunal (NCLT) and Rating Agencies should be allowed to conduct necessary audits related to e-waste and BY-product disposables to ensure safe handling, processing and maintaining safe tolerance limits. Biogas as a renewable fuel should be explored and utilised more as it is produced from organic matter, such as food or animal waste.
The Four P’s of Corporate Governance People, Purpose, Process and Performance should focus more actively on purpose and performance to ensure the existence of corporate governance and its benefits.
Conclusion
This article has covered, in a nutshell, corporate governance for the renewable energy sector in India and has posed a few questions on potential environmental threats that may arise due to massively generated E-Waste and By- Products. A question is raised about adding strict regulation to the renewable energy sector to control and regulate the safe disposal of E-Waste and By-Products.
References
- https://www.hindustanpetroleum.com/corporategovernance.
- http://www.gpgl.in/assets/governance-of-renewable-energy-in-india-issues-challenges.pdf
- https://iocl.com/contents/AnnualReportenglish_2022-23/pdf/Report%20on%20Corporate%20Governance%20(154-175).pdf
- https://www.iocl.com/contents/integrated-annual-report-2020-21/pdf/Statutory/REPORT-ON-CORPORATE.pdf
- https://www2.deloitte.com/content/dam/Deloitte/in/Documents/risk/Corporate%20Gove rnance/in-cg-roles-and-responsibilities-of-audit-committee-noexp.pdf
- https://www.slideshare.net/VineetMurli/corporate-governance-a-conceptual-framework
- https://www.insightsonindia.com/2023/06/05/e-waste-solar-panels/
Students of Lawsikho courses regularly produce writing assignments and work on practical exercises as a part of their coursework and develop themselves in real-life practical skills.
LawSikho has created a telegram group for exchanging legal knowledge, referrals, and various opportunities. You can click on this link and join:
Follow us on Instagram and subscribe to our YouTube channel for more amazing legal content.
