In this article, Arpit Srivastava discusses Regulatory framework on corporate governance in India. 

We all are aware of Satyam scam which is the India’s Biggest corporate scam. The scam is all about corporate governance and it is regarded as the ‘Debacle of the Indian Financial System’. Ever since this scam the concern for good corporate governance has increased phenomenally. The Cadbury Committee defined Corporate Governance as “the system by which companies are directed and controlled” in its report called Financial Aspect of Corporate Governance published in the year 1992. In general words Corporate Governance means set of rules and regulations by which an organization is governed, controlled and directed. It is conducted by the Board of Directors or the concerned committee for the benefit of the company’s stakeholders.

In order to ensure good corporate governance in India many Regulatory frameworks are introduced.

The Companies Act, 2013

The new Companies Law contains many provisions related to good corporate governance like Composition of Board of Directors, Admitting Woman Director, Admitting Independent Director, Directors Training and Evaluation, Constitution of Audit Committee, Internal Audit, Risk Management Committee, SFIO Purview, Subsidiaries Companies  Management, Compliance center etc. All such provisions of new Company Law are instrumental in providing a good Corporate Governance structure.

Few provisions are:-

1. Section 134, which mandates to attach a report to every Financial statement by Board of Directors containing all the details of the matter including the statement containing director’s responsibility.
2. Section 177, which requires Board of Directors of every listed company or any other class of committee to constitute an Audit Committee. It also provide the manner to constitute the committee.
3. Section 184, which mandates the Director disclose his interest in any company or companies, body corporate, firms, or other association of Individuals. The director is required to disclose any such interest at the first meeting of the board and if there is any change in the interest then the first meeting held after such change.

Securities and Exchange Board of India (SEBI) guidelines 

SEBI is a regulatory authority established on April 12, 1992. SEBI was established with the main purpose of curbing the malpractices and protecting the interest of its investors. Its main objective is to regulate the activities of Stock Exchange and at the same time ensuring the healthy development in the financial market. In order to ensure good corporate governance SEBI came up with detailed Corporate Governance Norms.

1. As per the new rules the companies are required to get shareholders approval for RPT (Related Party Transactions), it established whistle blower mechanism, clear mandate to have at least one woman director in the Board and moreover it elaborated disclosures on pay packages.
2. Clause 35B of the Listing Agreement is being amended by the regulatory authority. Now as per the amended clause, Listed companies are required to provide the option of e-voting to its shareholders on all proposed or passed at general meetings. Those who do not have access to e-voting facility, they should be provided to cast their votes in writing on Postal Ballot. There was the need to amend the provision so that the provisions of the listing agreement can be aligned with the provisions of Companies Act, 2013. By doing so an additional requirement can be provided to strengthen the Corporate Governance norms in India with respect to Listed companies.
3. Clause 49 of the Listing Agreement was also amended by SEBI in order to strengthen the Corporate Governance framework for Listed companies in India. The revised clause forbids the independent directors from being eligible for any kind of stock option. Whistle blower policy is also added in the revised clause whereby the directors and employees can report any unethical behavior, any fraud or if there is violation of Code of Conduct of the company. By the amendment Audit Committee is also enhanced, now it will include evaluation of risk management system and internal financial control, will keep a check on inter-corporate loans and investments. The amendment now requires all the companies to form a policy for the purpose of determination of ‘material subsidiaries’ and that will be published online.

SEBI also implemented various Regulations for effective working of the companies, few of these Regulations are as follows-

1. SEBI (Issue of Capital and Disclosure Requirements) regulation, 2009. This Regulation contains provisions for public issue wherein the issuer shall satisfy the conditions mentioned under the regulation, it also contains provisions regarding restriction on right issue. It also contains provisions regarding listing of Securities on stock exchange wherein in-principle is to be obtained by the issuer from recognised stock exchange.Part A of schedule XI of this regulations talks about disclosure in Red Herring prospectus, Shelf prospectus, and Prospectus wherein it is the duty of issuer to ensure that all material information and reports were submitted prior to the issue.It also makes it very clear that underwriting obligations would not be restricted to any kind of minimum subscription level but it would be applicable to the whole issue. All such rules are instrumental in ensuring good corporate governance.
2. SEBI (Listing obligations and Disclosure  Requirements), 2015. The LODR Regulations were notified with the aim of simplifying the existing provisions of listing agreements for different segment of capital markets like convertible and non-convertible debt securities, equity shares etc. it requires all listed entities to make disclosure and abide by the provisions of these regulations. Listed entities shall ensure that directors, KMP or any other person related to the company shall adhere to the responsibilities assigned to them under this regulation. The intent here is to ensure that once the shares of a company is listed on a Stock Exchange they are easily accessible to the normal public. The company secretary who will be the ‘Compliance Officer’ of the company shall ensure compliances and should also provide the ‘Compliance certificate’ to Stock Exchanges. Listed companies shall have a policy for ‘Preservation of Documents’ approved by Board.
3. SEBI (Prohibition of Insider Trading) Regulations,2015. Insider trading per se is not a violation of Law but what is prohibited is trading by an insider on the basis of Non-public information. To prevent such trading SEBI came up with this regulation. Under this, the restriction is corporate insiders who arrive at trading decisions by using the price sensitive information directly or indirectly. Under this the disclosure mandated at two different levels, one is the immediate disclosure of material facts while the other is regarding disclosure of transactions undertaken. While the former prevents insider trading, the latter reveals the insider trading. Under this Insiders may be restricted from dealing in securities for a specific time period in order to prevent them taking advantage of any material information before the shareholders or public. A condition can be imposed upon the insiders to obtain a prior approval before dealing in securities of a company.
4. SEBI came up with many other regulations like Regulation on Fraudulent and Unfair Trade Practices, Regulations on Substantial Acquisition of Shares and Takeovers, Issue of Sweat Equity etc. The main aim behind coming up with such Regulation, rules etc is to ensure good corporate governance in a company.

Standard Listing Agreement of Stock Exchanges

It is for all those companies whose shares are listed on Stock Exchange. All companies are required to file the listing agreement of the Stock exchange where its shares are listed.

Accounting standards issued by the ICAI (Institute of Chartered Accountants of India)

ICAI is a statutory body established by Chartered Accountants Act, 1949. It issues accounting standards for disclosure of financial information. Section 129 of the Companies Act, 2013 states that financial statements of a company shall comply with the accounting standards notified under section 133 of the Act. it also states that the financial statement shall give true and fair view of the state of affairs of the company. Section 133 states that Central government may prescribe the accounting standards as recommended by ICAI. accounting standards are provided so that good corporate governance can be ensured in a company. Some accounting standards issued by ICAI are: Disclosure of Accounting policies followed in preparation of Financial statement, Determination of values at  which the inventories are carried in a financial statement, cash flow statements for assessing the ability  of an enterprise in generating cash, standard to ensure that appropriate measurement bases are applied  to provisions and contingent liability, standard prescribing accounting treatment of cost and revenue associated with construction contracts.

Secretarial standards issued by ICSI (Institute of Company Secretaries of India)

It is an autonomous body constituted by the Company Secretaries Act, 1980. It is a body to regulate and develop the profession of Company Secretaries in India. It issues secretarial standards as per the provision of the Companies Act,2013. Section 118(10) of the Companies Act states that every company shall observe secretarial standards specified by Institute of Company Secretaries of India with respect to General and Board meetings.

1. Secretarial standard-1 on Meeting of the Board seeks to prescribe a set of principles for conducting meetings of Board of Directors. These principles are equally applicable to the meetings of committees as well.SS-1 principles are applicable to the Meeting of Board of Directors of all companies except one person company.
2. Secretarial standard-2 prescribes a set of principles for conducting and convening general meetings. This standard also deals with the procedure for conducting e-voting and postal ballot. SS-2 is applicable to all types of General meetings of all companies except one person company incorporated under the act. The principles in SS-2 are applicable mutatis-mutandis to meetings of creditors and debenture holders moreover it also prescribes that any meeting of members or creditors or debenture-holders of a company under the direction of CLB (Company Law Board), NCLT (National Company Law Tribunal) or any other authority shall be governed by the provisions of this standard.

Apart from some initiatives for Corporate Governance as discussed above, few other initiatives were also taken like-

• Setting up IEPF (Investor Education and protection Fund) for protection of the interest of the investors and promoting investors awareness.
• Empowering investors with the help of VO’s, NGO’s, Investor Association etc by educating them and providing relevant information.
• Launching websites like www.investorhelpline.in and www.watchoutinvestors.com .
• Setting up NFCG (National Foundation for Corporate Governance) in partnership with ICAI, ICSI, CII with the vision to foster the culture of good governance and to set a framework related to best practices, ethics and processes. Under NFCG a core group on Corporate Governance norms is constituted for Institutional Investors and ID’s. Core group on Corporate Social responsibility is also constituted under NFCG.

As per the SEBI committee the objective of Corporate Governance is maximization of shareholders wealth and at the same time protecting the interest of other shareholders. As per the Report on Corporate Governance initiative in India by OECD (Organization for economic Co-operation and Development) the Government has renamed the Ministry to “Corporate Affairs” from “Company Affairs”. The vision behind renaming the Ministry is to become a part for initiating Corporate Reforms in the country by ensuring Good Governance and  Enlightened regulation and to facilitate effective investor protection and Corporate functioning.

Development of rules and norms is an important step but only the first step to ensure good corporate governance. Journey is long but serious efforts from Indian government and SEBI will always remain instrumental in dealing with the problem of Corporate Governance. Amendment brought in the Companies Act, various initiatives taken up by the government, standards issued by ICAI and ICSI provides a regulatory framework for curbing the malpractices and ensuring the rights of the investors.