Corporate Governance

Introduction
If we have to define Corporate Governance considering the present scenario, it would be Most talked and debated but less followed topic. Governance is different from Management. It is an accepted ethical and professional norm and standards which is expected to be followed by an entity. There is no universal definition of corporate governance. The Institute of Company Secretaries of India defined term Corporate Governance as Corporate Governance is the application of best management practices, compliance of law in true letter and spirit and adherence to ethical standards for effective management and distribution of wealth and discharge of social responsibility for sustainable development of all stakeholders

Origin
A spate of scandals and financial collapses in UK in late 80s and early 90s, Enron, WorldCom, Qwest, Xerox etc in USA in 2001 and latest in India the Satyam mayhem has shaken the confidence of entire stakeholder fraternity. After corporate debacles in UK and USA, a lot of stress fell on the regulation of affairs of Corporate Entity in order to restore the confidence back of stakeholders and economy as a whole. There after Corporate Governance took a revolution. It was SOX in USA and Combined Code on Corporate Governance in UK.

Role of India in Corporate Governance

The Corporate Governance problem faced by India is quite different from UK and USA. The governance issue in the USA or UK is essentially that of disciplining the management who have ceased to be effectively accountable to the owner, But the problem in Indian corporate sectors is that of disciplining the dominant shareholder and protecting the minority shareholders. Confederation of Indian Industry (CII), Associated Chamber of Commerce and Industry (ASSOCHAM), Securities and Exchange Board of India (SEBI), Ministry of Corporate Affairs (MCA), Institute of Company Secretaries of India (ICSI) and Institute of Chartered Accountants of India (ICAI) is playing a very vital role in initiating and strengthening the Corporate Governance Code in India. CII took a special initiative on developing and promoting code for Corporate Governance called Desirable Corporate Governance Code. SEBI also inspired by CII initiative set up Kumar Mangalam Birla Committee to promote and raise standard of Corporate Governance. Government of India took a role in setting up of Naresh Chandra Committee and Dr. J J Irani Expert Committee which had a huge role in shaping the Corporate Governance Code. Department of Company Affairs (Now known as MCA) constituted High Powered Central Coordination and Monitoring Committee to further raise the standard Corporate Governance in India is of voluntary/optional in nature rather than mandatory in nature, again there isnt any specific Provision or Acts provided for compulsory applicability of

Corporate Governance Norms. The existing Corporate Governance norms covers only few corporate entities into its ambit say like Listing Agreement initiated by SEBI is only applicable to Listed Entities and Sec 292A of Companies Act, 1956 which speaks on Audit Committee is applicable to Public Companies having a paid up capital of Rs 5 Crores.

Present Scenario and role of the Regulators

The two forces play a vital role in Indian Corporate Governance one is Regulators like SEBI, MCA, IRDA etc and other being Capital Market. Indian Companies Act doesnt define the Corporate Governance, but envisages the role of Corporate Governance. Examples would be like Sec 292A of the Act states that Every Public Company having a Paid up Capital of Rs 5 Crores or more shall constitute an Audit Committee comprising of atleast 3 Directors and 2/3rd of the such number shall be independent Directors. Sec 255 of the Act speaks on Appointment of directors and proportion of those who are to retire by rotation. Sec 302 of the Act speaks on Disclosure to members of Directors interest in contract appointing manager, managing director. Sec 217 of the Act speaks on Disclosure required to be made in Boards Report. These were few examples to throw light on the certain sections which paramount to support and sustain Corporate Governance. Apart from the Compliance with Companies Act, 1956, the Listed Public Entities has to comply with Listing Agreement. SEBI being the Prime Regulator in Capital market is increasing power of the capital market to discipline the dominant shareholder by denying him access to the capital market. The newly unleashed forces of deregulation, disintermediation, institutionalization, globalization and tax reforms are making the minority shareholder more powerful and are forcing the companies to adopt healthier governance practices. These trends are expected to become even stronger in future. Listing Agreement has inculcated Good Governance Practice. Clause 49 is particular on Corporate Governance, which indicates on several provisions which Listed Company is expected to comply. A illustrative list is showcased as below Composition of Board comprising of Majority of Independent Director if Chairman is Promoter or occupies prominent position in Management ,

Non Executive Directors Compensation which shall be approved by the Shareholders

in General Meeting and Disclosure in Annual Report Frequency of Board Meeting in a year ie minimum of 4 times in a year with maximum time gap of 4 months between 2 meetings Code of Conduct which shall be abided by the Board members and shall be contained in the Annual Report of the Company and shall be posted on the website of the company

Composition, frequency, powers, roles of Audit Committee which is in line with Sec
292A of the Companies Act 1956. It further emphasizes on ACs role and responsibilities towards disclosure of related party transaction, review of financial

statements, internal control system, appointment and fixation of remuneration of auditors etc

Emphasizes on Disclosure aspects such as Disclosure of Basis of related party

transaction, Disclosure of Accounting Treatment, Disclosure of Risk Management, Disclosure of Utilization of proceeds from public issues and again it particular states what shall be disclosed in MDAR Setting up of Shareholders Grievance committee and the listed entities has to settle the Grievance through SCORE, which is SEBIs new initiative CEO/CFO certification and Report of Corporate Governance to be disclosed in Annual Report.

There certain other clause with envisage Corporate Governance such as Clause 35 on Shareholding Pattern, Clause 54 on updation of Website with full disclosure of required information, Clause 41 on presentation of Financial Results so that clear and fair statement of affairs are presented to stakeholders, Clause 19 & 20 discusses on Entities responsibility to intimate the Stock Exchanges about the Board Meeting and Agenda to be considered such as dividend, bonus, financial results etc and also to intimate to Stock Exchanges about the proceeding of the Board Meeting within 15 min of the conclusion. SEBI has along made several regulation to pace up the revolution of Corporate Governance such as SEBI ( Substantial Acquisition and Takeover Code), SEBI ( Prohibition of Insider Trading Regulation), SEBI (Disclosure and Investor Protection) Guidelines etc. These very only few examples to showcase the role played by SEBI Regulators such as RBI, MCA, SEBI, IRDA are facilitating the process by adopting measures such as: enhancing the scope, frequency, quality and reliability of information disclosures; promoting an efficient market for corporate control; restructuring or privatizing the large public sector institutional investors; and reforming bankruptcy and related laws. In short, the key to better corporate governance in India today lies in a more efficient and vibrant capital market. Of course, things could change in future if Indian corporate structures also approach the Anglo-American pattern of near complete separation of management and ownership.

Suggestion in Addition to the present Corporate Governance Code

If protection of the interest of the stakeholders including the shareholders is the main objective of the Corporate Governance, it shall be pro-active. The following are the Alternate suggestion to strength further objectives of Corporate Governance

1.) Corporate Governance norms shall be applicable to all the entities irrespective of
whether they are Private Company or Unlisted or Listed Public Company. Corporate Governance should also cover Limited Liability Entities and Co-operative Societies. 2.) The appointment of the Independent Directors shall be decided by a body independent of the management and the remuneration of these directors shall be decided and paid by that body

3.) Along with Financial Reporting, Cost Audit Reports, Secretarial Audit Report, Internal Audit Report, Corporate Sustainability Reporting & Accounting shall be mandatory, so that entire Stakeholder community is well informed about the affairs of the Entity. 4.) Mandatory implementation of Secretarial Standards issued by ICSI and mandatory Secretarial Audit which shall be placed in the General meeting along with the Financial Report. 5.) Mandatory auditors rotation in every 3 years and Auditors shall also be made accountable for any non-disclosure of material discrepancy and mis-statement of financial statement 6.) Sec 166(2) of the Companies Act should be amended and it shall allow the Company to hold its General meeting on Holidays and place other than Registered Office also, so that maximum number of members can participate in Meeting. General Meeting via Tele-conferencing and Video Conferencing should also be made mandatory. 7.) Postal Ballot should be made mandatory for all the Public Companies. 8.) Non-Compliance Corporate Governance shall be dealt strictly including heavy penalty and imprisonment. 9.) MCA in consultation with ICAI, should conduct special surprise audit of all the Companies by an independent auditor.

Conclusion
This article argues that structural characteristics of the Indian corporate sector make the Corporate Governance problems in India very different from that in say the US or the UK. The Governance issue in the US or the UK is essentially that of disciplining the management who has ceased to be effectively accountable to the owners. The solution has been to improve the functioning of vital organs of the company like the board of directors. The problem in the Indian corporate sector (be it the public sector, the multinationals or the Indian private sector) is that of disciplining the dominant shareholder and protecting the minority shareholders. A Board which is accountable to the owners would only be one which is accountable to the dominant shareholder; it would not make the governance problem any easier to solve. Clearly, the problem of corporate governance abuses by the dominant shareholder can be solved only by forces outside the company itself. This article has discussed the role of two such forces the regulator (the company law administration, banking as well as the securities regulator) and the capital market. Corporate governance abuses perpetrated by a dominant shareholder pose a difficult regulatory dilemma in that regulatory intervention would often imply a micromanagement of routine business decisions. The regulator is forced to confine himself to broad proscriptions which leave little room for discretionary action. Many corporate governance problems are ill suited to this style of regulation.

References
Corporate Governance ( 7th Edition) published by Institute of Company Secretaries of India Jayanth Rama Verma (1997) Corporate Governance in India: Disciplining the Dominant Shareholder IIM-B Management Review Listing Agreement- National Stock Exchange of India