How to strengthen corporate governance?

HOW TO STRENGTHEN CORPORATE GOVERNANCE

Author: Ms. Jyoti Jha, JEMTEC, School of Law

  1. INTRODUCTION

Corporate governance refers are the legal and non-legal principles and practices affecting control of publicly held business corporations. In other words, we can say that corporate governance is all about “promoting corporate fairness, transparency, and accountability.” In the last decade, corporate fraud and governance failure is occurring frequently which is why we require good corporate governance in the country. India provides proper norms and laws aligned with international requirements to govern a corporation. In India, the issue of corporate governance came into limelight after the Rs 14,000 crore Satyam accounting fraud by its founder-chairman Ramalinga Raju was brought to the notice of the public.

OECD Guidelines for good Corporate Governance

According to the Australian Securities and Investments Commission (ASIC), the OECD Principles of corporate governance (Principles) have been adopted in Australia as the benchmark for achieving good Corporate Governance. It contains certain principles which cover six (6) areas, as follows:

  • ensuring the basis for an effective corporate governance framework;
  • the rights of shareholders and key ownership functions;
  • the equitable treatment of shareholders;
  • the role of stakeholders;
  • disclosure and transparency; and
  • the responsibilities of the board
  • CORPORATE GOVERNANCE FRAMEWORK
  • UNDER COMPANIES ACT, 2013

The Ministry of Company Affairs appointed various committees on the subject of corporate governance which leads to the amendment of the companies Act in 2000.  These amendments aimed at increasing transparency and accountabilities of the Board of Directors in the management of the company, thereby ensuring good corporate governance.  The dealt with the following:

  • As per this subsection inserted by the Companies Act[1], every profit and loss account and balance sheet of the company shall comply with the accounting standards.  The compliance of Indian Accounting standards was made mandatory and the provisions for setting up of National Committee on accounting standards were incorporated in the Act.
  • The section[2] was inserted by the Companies Act 1999 which provides that the central government shall establish a fund called the Investor Education and Protection Fund and amount credited to the fund relate to unpaid dividend, unpaid matured deposits, unpaid matured Debenture, unpaid application money received by the companies for allotment of securities and due for refund and interest accrued on above amounts.
  • The Companies Act, 2000 added Subsection (2AA) under S217 which provides that the Boards report shall also include a Director’s Responsibility Statement with respect to the following matters:
  • Whether accounting standards had been followed in the preparation of annual accounts and reasons for material departures, if any;
  • Whether appropriate accounting policies have been applied and on a consistent basis;
  • Whether directors had made judgments and estimate that are reasonably prudent so as to give a true and fair view of the state of affair and profit and loss of the company;
  • Whether the directors had prepared the annual accounts on a going concern basis.
  • Whether directors had taken proper and sufficient care for the maintenance of adequate accounting records for safeguarding the assets of the company.
  • Registrar of Companies is to allot a Corporate Identity Number to each company registered on or after November 1, 2000 (Valid circular No.)12/2000 dated 25-10-2000).
  • The section[3] of the companies Act, 2000 provides for the constitution of audit committees by every public company having a paid-up capital of Rs. 5 crores or more.  Audit Committee is to consist of at least 3 directors.  Two of the members of the Audit Committee shall be directors other than managing or whole-time director.  Recommendation of the Audit Committee on any matter related to financial management including audit report shall be binding on the Board.
  • The companies Act, 2000 under Section 274(g) provides disqualification of director i.e. disqualifies a person who is already director of a public company which (a) has not filed the annual accounts and annual returns for any continuous three financial years commencing on and after the first day of April 1999; or (b) has failed or repay its deposit or interest thereon on due date or redeem its debentures on due date or pay dividend and such failure to continues for one year or more,  however, the aforesaid disqualification will last for five years only.
  • Secretarial Audit Section 383A was amended to provide for secretarial audit with respect to companies having a paid-up share capital of Rs. 10 lakhs or more but less than, present Rs. 2 crores.  As per the Companies Act, 2000 a whole-time company secretary has to file with ROC a certificate as to whether the company has complied with all the provisions of the Act.  A copy of this certificate shall also be attached to the report of the Board of Directors.

2.2 UNDER SEBI GUIDELINES AND STANDARD LISTING AGREEMENT OF STOCK

  • The powers of SEBI under Companies Act, 2000[4] empowers SEBI to administer the provisions contained in section 44 to 48, 59 to 84, 10, 109, 110, 112, 113, 116, 117, 118, 119, 120, 121, 122, 206, 206A and 207 so far as they relate to issue and transfer of securities and non-payment of dividend.  However, SEBI’S power in this regard is limited to listed companies. Also the Finance Bill, 2019 has given the Securities Exchange Board of India (SEBI) net powers to act against entities that temper or destroy or fail to furnish the information sought by SEBI by imposing a penalty of Rs 10 crores.
  • SEBI revise Clause 49 of the Listing Agreement pertaining to corporate governance vide circular dated October 29th, 2004, which superseded all other earlier circulars issued by SEBI on this subject.  All existing listed companies were required to comply with the provisions of the new clause by 31st December 2005.

The major provisions included in the new Clause 49 are:

  • The board will lay down a code of conduct for all board members and senior management of the company to compulsorily follow.
  • The CEO and CFO will certify the financial statements and cash flow statements of the company.
  • If while preparing financial statements, the company follows a treatment that is different from that prescribed in the accounting standards, it must disclose this in the financial statements, and the management should also provide an explanation for doing so in the corporate governance report of the annual report.
  • The company will have to lay down procedures for informing the board members about the risk management and minimization procedures.
  • Where money is raised through public issues etc., the company will have to disclose the uses/ applications of funds according to major categories ( capital expenditure, working capital, marketing costs, etc) as part of quarterly disclosure of financial statements.

Further, on an annual basis, the company will prepare a statement of funds utilized for purposes other than those specified in the offer document/ prospectus and place it before the audit committee. The company will have to publish its criteria for making its payments to non-executive directors in its annual report. Clause 49 contains both mandatory and non-mandatory requirements.

  • CASES ON CORPORATE GOVERNANCE

Sahara told to repay $3 billion to small investors

Unlisted conglomerate Sahara, one of India’s biggest business groups was ordered by the Supreme Court of India after a prolonged legal battle with capital markets regulator SEBI to refund 174 billion rupees raised by “dubious” means from 22 million small investors. From 2008-11, they received 174 billion rupees through what is known as optionally fully convertible debentures. The Sahara was also asked to pay 15 percent interest to the investors of the fund which has been illegally raised from the public without resorting to proper legal procedures. The Supreme Court, whose order reaffirmed an earlier ruling that the fundraising did not meet the rules, ordered two unlisted Sahara group firms to refund the money they had raised with the interest within three months.[5]

  • Kingfisher

The financially troubled Kingfisher Airlines lost its flying permit after a deadline to renew its suspended license expired. The Directorate General of Civil Aviation (DGCA) has suspended Kingfisher Airline’s license to fly till further orders’ pursuant to Clause 15 (2) of Schedule XI of the Aircraft Rules, 1937 after the airline failed to deliver a viable financial and organizational revival plan. The debt-ridden carrier was grounded since October 2012 after repeated strikes by workers over unpaid wages. Kingfisher owes various public sector banks $1.4bn (£870m) in debts and has been frantically trying to raise funds after lenders refused to give fresh loans. The airline now owes money to staff, airports, tax authorities, and its lenders and may have to be liquidated.[6]

  • Harshad Mehta: The scamster[7]

He was known as the ‘Big Bull’. He triggered a rise in Bombay Stock Exchange in the year 1992 by trading in shares at a premium across many segments. Taking advantage of the loopholes in the banking system, Harshad and his associates triggered a securities scam diverting funds to the tune of Rs 4000 crore from banks of stockbrokers. He worked with the New India Assurance Company before he moved ahead to try his luck in the stock markets. He siphoned off huge sums of money from several banks and millions of investors were conned in the process. His scam was exposed and was banned for life from trading in stock markets. He was charged with 72 criminal offences. SC sentenced him rigorous imprisonment along with his brother and six bank officials. He died in 2002 with many litigations still pending against him.

  • EMERGING ISSUES IN CORPORATE GOVERNANCE

Corporate governance seems to have favourably impacted only a handful of corporations whose leaders imbued with its lofty ideals, have taken them seriously, while others have done nothing but certain changes in the governance of their companies.

  • Sanction and enforcement: The existing provisions on sanctions in the Companies Act are inadequate, particularly the fines imposed. Stock Exchange; do not have the power to impose fines. It should be such as to ensure that business practices are aligned with the legal and regulatory framework.
  • Lack of professionalism of directors: A key missing ingredient is a strong focus on the professionalism of directors. Directors should upgrade their knowledge and skill. The management or promoters must have a clear understanding of what is expected of them.
  • Role of institutional investors: Institutional investors acting in a fiduciary capacity should be encouraged to form a comprehensive corporate governance policy, including voting and Board representation. In addition to the above policy recommendations of the World Bank – IMF Team, there are other deficiencies in the country’s capital market that need to be addressed effectively.
  • Whistleblower policy: SEBI had proposed some time ago that a whistleblower policy should be made mandatory. However, after stiff resistance from the industry, it asked the N.R. Narayana Murthy panel to rework the policy. Later, the whistleblower policy was made optional for companies.
  • Obliging auditors: Another weak link in the wobbling chain of corporate governance in the country is that of the auditing profession. Obliging auditors help companies in window-dressing, manipulation of profit and loss accounts, hedging and fudging of unexplainable expenditures and resorting to a continuous upward evaluation of assets to conceal poor performance. 
  • STRENGTHENING CORPORATE GOVERNANCE

The legislature can ensure a better environment by promoting and strengthening corporate governance and creating more structured guidelines for corporations to follow. The importance of corporate governance is quite understated in India. As observed in Standard Chartered Bank case in 2005[8], the position in India regarding criminal corporate liability is that corporations can be held criminally liable for offences that require compulsory imprisonment. However, the Court ruled that since the corporations cannot be imprisoned, the imprisonment shall be substituted with compensation.

Corporate governance should seek to ensure the welfare of all quarters — be it the Board of Directors, shareholders, and other stakeholders. Internal transparency is instrumental in ensuring a healthy relationship between the decision-makers and shareholders of a corporate entity. Therefore, good governance ensures that the rights of shareholders and the society dependent on the corporations are respected. Further, good governance ensures the stability of stock prices of corporates and maintains goodwill for the company. Thus, an environment where good governance is the rule would see less dishonest corporate activities.

Thus, the importance of codification of good corporate governance practices having mandatory force cannot be mitigated.  But in order to ensure implementation and compliance in the true spirit, Corporate Governance practices need to be legislated by one regular or body so as to avert duplicity, confusion, and uncertainty.


[1] The Companies Act,2013 Section 210 A

[2] The Companies Act,2013 Section 205C

[3] The Companies Act,2013 Section 292A

[4] The Companies Act,2013 Section 22A

[5] https://www.ndtv.com

[6] www.livemint.com/Companies

[7] www.businesstoday.in/current/corporate

[8] Standard Chartered Bank v. Directorate of Enforcement, (2005) 4 SCC 530.

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