Author: Sourish Saha, Research Associate
The corporate scenario in the country has been on the rise since the 1990s. Therefore, it has become a necessity for the Indian corporate to adopt internationally governed standards and principles in order to meet global needs and requirements. The Confederation of Indian Industries (CII) is primarily responsible for drawing the attention of the Indian corporate houses towards the corporate governance issues that exist in the system. This has also led to forming new legislative reforms that could help the Indian companies implement corporate governance techniques more efficiently ((Confederation of Indian Industry, Desirable Corporate Governance: A Code, (1998).)). The legal structure administering the Indian companies are broadly encompassed in the Indian Companies Act and the Depositories Act ((The Companies Act, 1956 lays down the basic regulatory framework governing all companies of India which include provisions related to the incorporation, governance and winding up of the Company.)). The securities market regulator- the Securities and Exchange Board of India (SEBI) also provide guidelines related to the securities market. The Companies Act is administered by the Ministry of Corporate Affairs, Government of India and the law enforcing body of this Act is done by the Company Law Board which is also a Tribunal. Governance guidelines of the banking and insurance companies are given by the Reserve Bank of India (RBI) and Insurance Regulatory Development Authority (IRDA).
The SEBI has played an instrumental role in framing guidelines for the Indian corporate sector as it made two committees to provide guidelines for corporate governance in India. The two committees are the Kumar Mangalam Birla which submitted its report in 2000 and the Narayana Murthy Committee which submitted its report in 2003. The recommendations made by these committees related to the information that needs to be disclosed to the shareholders, procedure for Board meetings, constitution of Board of Directors for listed companies, formation of an audit committee to name a few. The Ministry of Corporate Affairs also appointed the Naresh Chandra Committee for Corporate Audit and Governance in 2002 ((Afsharipour, A., “The Promise and Challenges of India’s Corporate Governance Reforms”, Indian Journal of Law and Economics, Vol. 1, 2010, pp- 34- 70.)). The primary task of this committee was to examine the corporate governance practices prevailing in the country and make recommendations on the financial and non-financial disclosures, independent auditing and board oversight of management. The MCA subsequently appointed the J. J. Irani Committee in order to review the best international practices in the light of the growing industrial and economic needs of the Indian corporate ((Guidelines are online at, http://business.gov.in/corporate_governance/index.php, (Last visited July 18, 2013).)). The recommendations of these corporates form the cornerstone of the legal regime governing the Indian corporate sector.
Corporate Governance in India
There are a few relevant areas which govern the Indian corporate sector which are provided by the Companies Act. These relate to shareholder rights, Board responsibilities and other disclosure and transparency requirements.
Board meetings- The Companies Act provide for conducting one annual general meeting and that all shareholders can actively participate in the voting process of general meetings. For the benefit of the shareholder, the company has to ensure effective dissemination of information of the proceedings through the Auditor’s report, the minutes of the Board meetings and the Annual report ((Sections 165- 197, The Indian Companies Act, 1956.)).
Responsibilities of the Board- The Board of Directors is constituted in the general meeting which happens by the approval of the majority of votes given by the shareholders present in such meetings ((Sections 224- 233B, The Indian Companies Act, 1956)). Likewise, the shareholders can remove a director by majority votes ((Section 255, The Indian Companies Act, 1956.)). The Companies Act classifies officers in default to those like manager, managing director and secretary. Shareholders’ consent has been made mandatory for further issue of capital ((Section 81 (1A), The Indian Companies Act, 1956)), buy back of shares ((Section 77A, The Indian Companies Act, 1956)), issuing shares at a discount ((Section 79, The Indian Companies Act, 1956)), reissuing of redeemed debentures ((Section 121, The Indian Companies Act, 1956)), issuing of inter-corporate loans ((Section 370, The Indian Companies Act, 1956))and change of registered office within a state ((Section 146, The Indian Companies Act, 1956)). Shareholder rights have further been protected in case of oppression and mismanagement by the company ((Sections 397 and 398, The Indian Companies Act, 1956)).
Requirements of Disclosure and Transparency It is considered of prime importance by the Act that information relating to board meetings and other activities of the company should be provided to the Registrar of companies, shareholders and stock exchanges in the form of annual reports and other corporate documents in order to uphold transparency in the system. Auditors need to certify the annual report and such auditors are appointed in the Board meetings.
Initiatives Taken By the Misinistry of Corporate Affairs
The Ministry of Corporate Affairs (MCA) gets to administer crucial legislations governing the corporate sector which includes the Companies Act, 1956, Companies (Donations to National Funds) Act, 1951 and the Partnership Act, 1932. The MCA also gets to supervise three bodies important to the functioning of the corporate sector that includes the body of cost and works accountants as well as company secretaries and chartered accountants. Let us now examine the key initiatives taken by the MCA.
Voluntary Guidelines for the Corporates
The MCA introduced the Voluntary Guidelines for Corporate Governance in 2009. These were a set of rules that would ensure that the best and most ethical practices were followed by the corporates. These guidelines although are voluntary but it was recommended by the government so that most public and private companies would follow this. The guidelines related to practices of good corporate governance which include secretarial audit, appointment and rotation of auditors, appointment, role and remuneration of the Board of Directors, constitution, power, responsibilities and role of the Audit committees of the Board and other functions of the Board which include risk management, compliance and enabling smooth decision making for the Company and also issues related to whistle blowers ((Corporate Governance Voluntary Guidelines 2009, Ministry of Corporate Affairs, Government of India, online at, http://www.mca.gov.in/Ministry/latestnews/CG_Voluntary_Guidelines_2009_24dec2009.pdf (Last visited July 28, 2013).)).
Green initiatives relating to the corporate sector have been introduced which relate to service of documents through electronic mode to increase speed of delivery ((General Circular No. 17/2011, Ministry of Corporate Affairs, Government of India.)), prescribing other methods of voting during an election like electronic voting ((General Circular No. 35/2011, Ministry of Corporate Affairs, Government of India.)), participation of directors and shareholders through video conferencing so that there is higher participation and costs incurred by the corporate is reduced ((General Circular No. 27/2011 and General Circular No. 28/2011, Ministry of Corporate Affairs, Government of India.))and issuance of digital certificates by the Registrar of Companies to the reduce the delay ((General Circular No. 29/2011, Ministry of Corporate Affairs, Government of India.)).
Serious Fraud Investigation Office
This office was set up in 2003 after numerous reasons forced its coming into existence. This included a number of stock market scams, non banking companies failed and that companies vanished all of a sudden ((Serious Fraud Investigation Office (SFIO), online at http://www.sfio.nic.in/websitenew/main2.asp, (Last visited July 28, 2013).)). All of this had to be curbed and restricted. The role of this office includes investigating inter-departmental and multi disciplinary issues of public interests and the office also goes on to explore if any improvement could be suggested to the existing procedures and rules. Such an investigation can be carried out by the Central Government only if it has been referred to under Sections 235 and 237 of the Companies Act ((Sections 235 and 237 empowers the Central Government to appoint investigating officers to inspect into the affairs of the company when such an investigation is necessitated by the Registrar of Companies (ROC).)).
Investor Grievances Management Cell
Set up in the year 1993 by the MCA in order to look into the investor grievances through jurisdictional Registrar of Companies, this cell was earlier known as the Investor Protection Cell. The Investor Grievances Management Cell co-ordinates with the Securities Exchange Board of India, the Reserve Bank of India and the Department of Economic Affairs in order to deal with issues related to non receipt of annual reports, non refund of application money and non receipt of dividend amount. The MCA has also made grievance filing user friendly by launching an online portal for the same ((Circular No. 3/ 11/ 2011-IGM, Ministry of Corporate Affairs, Government of India, online at http://www.mca.gov.in/Ministry/pdf/Office_Order_21july2011.pdf, (Last visited July 28, 2013).)).
National Foundation for Corporate Governance (NFCG)
Established in 2003 by the Ministry of Corporate Affairs, this forms the supreme body for corporate governance issues in the country. The body aims at spreading consciousness amongst the private companies and business leaders with respect to their responsibilities related to good corporate governance practice and directorial responsibilities. Besides the MCA and the National Stock Exchange of India, the other stakeholders in this body include the Institute of Company Secretaries of India (ICSI), Institute of Cost and Works Accountants of India (ICWAI) and Institute of Chartered Accountants of India ((National Foundation for Corporate Governance, guidelines are online at http://www.nfcgindia.org/home.html, (Last visited July 28, 2013).)).