Introduction
Corporate governance is the framework for managing and directing businesses. The governance of corporations is the responsibility of the boards of directors. Therefore, it has to be separated from the day-to-day operational administration of the firm by full-time executives. It is about what the board of a company does and how it determines the values of the organisation.
“There are eight significant features of good corporate governance which include: Accountability, Transparency, Effective principles and policies, Responsiveness, Participatory decision-making process, Efficiency, Consensus oriented operations, Equitable Administration, and in accordance with the rule of law.[1]” The adoption of such aspects, wherein the creation of appropriate incentives shall aid management and the board of a business in attaining the objectives that shall help yield the best interest of the firm and its shareholders should represent the characteristics of excellent corporate governance. Good governance, in its simplest form, refers to the procedures that an organisation must follow in order to be directed, regulated, and controlled. It is a way to ensure that a company’s management, board, and directors act in the best interests of the business and its stakeholders, as well as to hold the managers responsible to the capital providers for how the business uses its assets.
Legal Framework of Corporate Governance
The following statutory regulations govern corporate governance in India; they have been streamlined for easy interpretation and to accommodate the country’s rapid economic growth:
- The 2013 Companies Act – The Act specifies the requirements for board meetings, audit committees, financial statement disclosures, board composition, and related party transactions. With the implementation of this Act, a number of significant developments in the field of corporate governance have begun. The laws governing the makeup of the board of directors, which required the nomination of at least one resident director, have undergone significant revisions. Nominee directors are no longer considered as independent directors.
- Clause 49[2]– A set of its principles are outlined in Clause 49 of the country’s listing laws. For instance, a listed firm is required to have a non-executive director, and one-third of the board members must be non-executive. Nonexecutive members of the board should be there to challenge management, etc. The implementation of Clause 49 would significantly improve corporate administration in India for listed firms. The following processes, which aimed for fair and good governance among the listed businesses, were required to be established under clause 49.
- Securities and Exchange Board of India (SEBI): Under Clause 49 of the listing agreement between stock exchanges and corporations, SEBI is a regulatory body tasked with overseeing and regulating the governance of listed firms. SEBI strives to safeguard investors, and listed firms are required to follow Clause 49’s rules in order to remain listed.
The necessity of Corporate Governance in India
- A corporation’s shareholders have various viewpoints and attitudes concerning business issues. The shareholders might, however, be brought together by good corporate governance that emphasises the interests of the shareholders.
- Effective corporate governance might prevent corporate entity takeovers, which have an impact on shareholders’ rights and hinder an organization’s ability to satisfy certain social expectations.
- The firm’s internal decision-making might be influenced by huge corporate investors, which would present the largest challenge to the organisation. In this case, effective corporate governance could direct the company.
- A huge number of investors’ confidence has been significantly impacted by the abundance of corporate frauds that have occurred in recent years. Therefore, good governance might contribute to restoring public confidence in the business sector.
- An effective code of corporate behaviour is essential to regulating the management of Indian corporations, which is significantly impacted by a large inflow and outflow of foreign capital into Indian corporations.
Conclusion
Promoting an open, accountable, and effective system of corporate governance is the major responsibility of the regulatory body, The Ministry of Corporate Affairs. The MCA has established a platform where good governance issues are highlighted in order to raise awareness of good governance among corporate leaders, policymakers, law enforcement officials, and other non-governmental organizations, as well as to encourage voluntary compliance and effective stakeholder participation. This platform was created in collaboration with the National Foundation for Corporate Governance (NFCG), ICAI, and ICSI. In order to make a significant impact in the Indian business sector by raising the level of the same and moving forward with the steps of growth and stability, it is necessary to build a workable regulatory framework made up of ethics and best practices.
Risk reduction, governance, and compliance are closely related. The company will therefore always be prepared to deal with uncertainties and other political, economic, and technological upheavals with its efficient risk mitigation mechanisms if the elements of good governance as discussed in the preceding paragraphs prevail in a company having sound and effective principles and the functionality of such a company ensures due compliance with the statutory laws and regulations. As a result, these procedures will increase the confidence and pleasure of shareholders. Therefore, effective corporate administration increases a company’s value and aids in maximising the interests of its shareholders.
Corporate governance in India requires businesses to audit their operations and give shareholders a more trustworthy perspective since their activities have moral and legal repercussions. The Companies Act’s most successful rules and regulations are equally creative and well-balanced. These guidelines have taken into account the worldwide standards for the economic success of Indian companies. Shareholder participation in corporate decision-making and the implementation of several protections that take into account both shareholders’ and society’s interests paint a transparent and convincing picture of good governance. Business governance supports the corporate culture of much-needed openness. Therefore, adopting good corporate governance might significantly raise a nation’s business sector’s economic standard.
[1] Corporate governance in India – concepts and Frameworks Law Corner, https://lawcorner.in/corporate-governance-in-india-concepts-and-frameworks/#_ftn1 (last visited Jul 20, 2022)
[2] Corporate governance and the role of institutional investors in India corporate governance and the role of institutional investors in India by Akbar, M., & Khan, A. Journal of Asia-Pacific Business.
