Last Updated: May 2023 (Corporate Governance in India)
Corporate Governance in India
This article deals with ‘Corporate Governance in India (UPSC Notes).’ This is part of our series on ‘Economics’ which is an important pillar of the GS-3 syllabus. For more articles, you can click here.
What is Corporate Governance?
Corporate Governance works on the Triple Border Line Principle, i.e. it takes into account Planet, People and Profit while taking any decision.
It is a way of directing company to
- Protect the interests of stakeholders.
- To comply with legal-regulatory-ethical requirements.
Note: Stakeholders are the people and groups who have a legitimate interest in the operation’s activities.
The act was made after Satyam Scam to plug the loopholes and to protect all stakeholders with provisions of
- Independent Directors: Independent Directors are appointed to protect the interests of Minority Shareholders. 1/3rd of all Directors should be independent and shouldn’t have a pecuniary relationship with the company more than 10% of their total income.
- Audit mechanism: Make Audit Committees consisting of Independent Auditors and give guidelines related to Auditors like individual Auditor cant Audit a company for more than 5 years.
- Serious Fraud Investigation Office (SFIO): Earlier, this body solved Saradha & Satyam Scam. SFIO was Statutory Status by the Companies Act along with powers of Search and Seizure.
- Investor Protection and Education Agency: This fund has been created to educate and spread financial literacy among investors.
Side Topic: Administrative Setup in Company
Kotak Mahindra Committee on Corporate Governance
Issues with Corporate Governance in India (according to Kotak Committee)
- Insider trading
- Nepotism in board appointments (Board members are relatives or known ones)
- The Independent Directors in India have played a passive role. It can be easily removed if they do not side with promoters.
- The entire board is not often present at general meetings for stakeholders.
- Executive Compensation policies are not transparent and do not require shareholders’ approval.
- Family-owned Indian companies have excessive controls and poor succession planning.
- Unrealistic risk assessment policies.
- Inadequate emphasis on privacy and data protection, cyber security.
- Lack of serious effort by the board towards Corporate Social Responsibility (CSR) projects.
Kotak Mahindra Committee recommendations
- Increasing Transparency
- Full disclosure of utilization of funds.
- Disclosures of Auditor Credentials and Audit Fee.
- Disclosure of the Skills of Directors.
- Reshaping Board of Directors
- Separation of Powers: The CEO & Chairperson of the Board of Directors can’t be the same person in the top 500 listed companies.
- At least one Women Independent Director in Top 500 listed companies
- Levelling the playing field in Algorithmic Trading for all investors (big (who can afford) and small (who can’t))
- Permission of Minority shareholders should be necessary in case payments to related parties exceed 2% of revenue.
Examples of Corporate Governance Issue
|1. Tata Sons||Independent Director Nusli Wadia was removed for siding with Cyrus Mistry in his fight with Ratan Tata.|
|2. Ranbaxy |
|Indulged in ‘Creative Accounting’, i.e. fudged their accounts.|
|5. Sun Pharma||Insider Trading during Ranbaxy acquisition.|
- When someone with access to non-public information about the security instrument indulges in buying or selling a security, it is known as Insider Trading.
- E.g., a person who is on the board of Directors of a company and knows about the new product that the company is going to launch, which will increase the price of shares, starts buying shares in advance.
Why is it illegal?
- Insiders are better positioned to make bigger trading gains due to access to non-public information
- Against the Right to Equality.
- Wrong use of the information given to him in a fiduciary capacity
In India, the following acts prohibit Insider Trading
- SEBI (Insider Trading) Regulation, 1992
- Companies Act 2013