In this blog post, Somanka Ghosh, a fourth-year B.A. LLB student at Calcutta University and pursuing a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, describes the legislative and regulatory initiatives that fall under corporate governance.
Corporate governance is mainly referred to the way of how a corporation can be governed. It borders all the rules and regulations by which companies are directed and managed.
A good corporate governance ensures corporate success and economic growth but it cannot be achieved without the Board of Directors and the committees for the company’s stakeholders benefit. Corporate governance is all about maintaining the harmony between the individual and societal goals, as well as economic and social goals. Corporate governance has a broad scope. It includes both social and institutional aspects. Corporate governance binds more trust, morality and an ethical environment.
Corporate governance also minimises wastages, corruption, risks and mismanagement. It helps in brand formation and development.
The Companies Act 2013 is the main feature of development in India’s history of corporate legislation. Corporate governance requirements in India were wholly in the legislative domain until the early nineties when an independent capital markets regulator, Securities and Exchange Board of India (SEBI) was set up by an Act of Parliament. Until SEBI, came, matters uniquely concerning publicly traded companies were dealt with under the Companies Act and the Securities ( Contracts) Act and Capital Issues Control Regulations, administered under the government.
THE COMPANIES ACT 2013
The Companies Act 2013 is an Act of the Parliament of India which regulates incorporation of a company, responsibilities of a company , directors , dissolution of a company.
Company is referred to an association of persons who work for a common goal together. A company may be an incorporated company or a “corporation” or an unincorporated company. It is called a body corporate because the persons composing it are made into one body by incorporating it according to the law , and covering it with legal image, and, so turn into a corporation.
There have been new concepts introduced in this Company Act, 2013 –
- One Person Company – The first step of the Companies Act 2013 is one person company where it includes only sole proprietorship and entrepreneurs who can enjoy the benefits of both the limited liability and that of separate legal entity. The concept of OPC was mooted in the report of Dr J.J Irani Committee. Regarding OPC the suggestions of the Committee were thus –
With increasing use of information technology and computers, emergence of the service sector, it is time that entrepreneurial capabilities of the people are given an outlet for participation in economic activity. Such economic activity may take place through the creation of an economic person in the form of a company. Yet it would not be reasonable to expect that every entrepreneur who is capable of developing his ideas and participating in the market place should do it through an association of persons. We feel it is possible for individuals to operate in the economic domain and contribute effectively.
- Woman Director – Every company whether it is public or a listed company with paid up capital of Rs 300 crores or 100 crore or more should have atleast one woman director .
- Corporate social responsibility – This clause was added in this new Act. Every company which has a network worth of Rs 500 crores or more at the end of financial year should constitute a Corporate Social Responsibility Committee of the Board consisting of three or more directors out of which one shall be an independent director.
- Class Action Suits( clause 245 ) – If certain members or depositors of the Company are of the opinion that the affairs that are conducted in the company is against the interests of the company, then the members or the depositors, file an application before the Tribunal. The order passed by the Tribunal shall be binding on the Company and all its members and depositors or any other person associated with the Company.
- Dormant company – When a company is formed and registered for a particular work but it has stayed inactive for a long time then such a company may make an application to the Registrar for obtaining the status.
- Serious Fraud Investigation Office ( Clause 211) – It has the power to arrest in respect of certain offences of the Bill which attract the punishment for fraud. The offences committed should be cognizance and should be released on bail on certain conditions.
- Fast Track Merger – The Companies Act 2013 , has separate provisions of fast track merger under Section 233 of Companies Act 2013. It gives Central Government the power to sanction all such scheme and there be no requirement to approach National Company Law Tribunal.
SECURITIES AND EXCHANGE BOARD OF INDIA (SEBI)
The Securities and Exchange Board Of India (SEBI) regulates the security markets in India. It was established in 1988 and it came into power on 12 April 1992 through the Securities and Exchange Board of India Act , 1992.
Key Role – It’s key role in India is to attract foreign investors and protecting the Indian investors.
SEBI headquarters is located at the Bandra Kurla Complex Business District in Mumbai.
FUNCTIONS AND RESPONSIBILITIES OF SEBI
The Preamble of SEBI clearly states that SEBI must “protect the interests of investors in Securities and to promote the development of, and to regulate the Securities market and for matters connected therewith or incidental thereto.
SEBI also keeps the account books in check which deals with finance and asks for regular returns from recognised stock exchanges. SEBI also manages the registration of brokers. It also inspects the books of financial intermediaries. It also handles the registration of brokers. It compel certain companies to get listed on one or more stock exchanges.
SEBI was set up with the purpose of keeping a check on malpractice and protect the interests of investors. It was set up to meet the needs of 3 groups :
- Issuers of Securities – it provides a marketplace in which they can raise finance fairly and easily.
- Investors – it provides protection and supply of accurate and correct information.
- Market intermediaries – it provides a competitive professional market.
SEBI is also managed by following members of the Board :
- The Chairman who is nominated by the Government of India.
- Two members from the Union Finance Ministry
- One member from the Reserve Bank of India
- The remaining five members are nominated from the Union Government of India, out of them.
Corporate governance requirements in India were wholly in the legislative domain until the early nineties when an independent capital markets regulator, Securities and Exchange Board of India (SEBI) was set up by an Act of Parliament. The earliest piece of corporate legislation was the Joint Stock Companies Act of 1886 by several impediments and replacement legislations, largely following the developments in UK. The first comprehensive overhaul of corporation law was undertaken in the years immediately following political independence of the country which led to the enactment of the Companies Act of 1956, this was the ‘guardian act’ that was in force until the 2013 legislation came into the scenario.
KEY INITIATIVES OF 2013 – 14
Although the Act has brought many changes impacting corporations in all their stages commencing from the incorporation through their span of operation to the last stage, the scope is limited to their board centric governance aspects, other improvements may be mentioned only to the extent they help clarify or set the context in perspective. These initiatives are broadly classified into five categories :
- Corporations and society
- Absentee shareholder primacy and protection
- Boards and their processes
- Disclosure and transparency in reporting
- Unlisted company governance.