Corporate Governance In India

Corporate Governance in India

Corporate governance is a procedure established for companies based on certain structures and principles through which a corporation is governed. It guarantees that the corporate works in a way it is supposed to work for achieving the preferred goals. It makes the firms accountable for each stakeholder that includes directors, shareholders, employees, consumers, etc.

Generally, Corporate governance generally refers to practices by which a firm is controlled, directed and administered. The main concern of Corporate Governance is to make certain the conditions whereby a corporation’s directors and managers do something on behalf of the interest of the corporation and its stakeholders. It delivers the means by which managers are held responsible for capital providers for the use of corporate assets.

Importance of Corporate Governance

Corporate governance has a significant role in every corporation. The importance of Corporate Governance in a corporation are-

•    There is a level of confidence among the corporation and its stakeholders, due to the good corporate governance.

•    For good corporate governance, the corporation should have an active group of independent directors on the board. It makes certain confidence in the market.

•    Foreign institutional stakeholders consider corporate governance before investing in any of the corporation. It is one of the most significant criteria in foreign investors list.

•    Good corporate governance sets a positive influence on the share price of the corporation

•    If the corporation is maintaining a clean record and has a positive image on the corporate governance front, then it is much simpler for the corporations to source capital at a more reasonable cost.

•    Corporations having good corporate governance are far away from scams and any bad exposures.

Benefits of Corporate Governance

If the corporation is practicing good corporate governance in India, it makes certain lots of benefits towards the Corporation. The benefits are;

•    If the corporation has good corporate governance, it directs towards corporate progress and economic development.

•    In the case of good corporate governance, the corporation has the stakeholder’s confidence. It also assists in raising the capital efficiency as well as be effective in its corporate matters.

•    It makes certain a lot of saving by lowering the capital cost.

•    It directs towards a positive impact on the prices of a share.

•    Corporate Governance inspires the owners and managers of the corporation towards fulfilling the goals that are in the interest of the shareholders and the corporation.

•    Governance lessens the risk, reduces corruption, diminishes wastage, etc. and makes certain better management.

•    It assists in the formation of the brand and development of a corporation.

•    Corporate governance makes the administration of the corporation work in a way that fits the best interest of all.

The Role of Corporate Governance in India

The reasons why it is important to have Corporate Governance in India are; 

Boardroom Failures

Boards of Directors, especially Audit Committees, are charged with especially oversight mechanisms for monetary reporting on behalf of investors. This concern recognizes Board Members who either did not exercise their obligations nor have the expertise to recognize the complexities of the business.

Banking Practices

Lending funds towards a corporation often send out signals to investors concerning the corporation’s risk. In India, substantial Non-Performing Assets (NPAs) being carried as baggage through the banks/ financial institutions against the huge amount of loans given without appropriate due diligence has now become a part of history.

Conflict of Interest with Auditors

Prior to the implementation of Corporate Governance standards, auditing enterprises were self-regulated. These enterprises also performed substantial non-audit or consulting work for the corporations they audited. Many of these consulting deals were much more lucrative than the auditing engagement itself. This seemed to be an important conflict of interest.

Insider Trading

Not charged with adequate penalties, many board members allegedly carried on with insider trading which headed to unjust enrichment.

Securities Analysts’ Conflict of Interest

The functions of securities analysts, who make and sell recommendations on a corporation’s stocks and bonds, as well as investment bankers, who assist in providing corporations loans or handle mergers and acquisitions, offer opportunities towards conflicts.

Internet Bubble

Investors were stung in 2000 by the decline in technology stocks and to a lesser extent, by the decline in the overall market. Few mutual fund managers were alleged to have advocated the purchasing of particular technology stocks, while quietly selling them. The losses sustained also assisted create frustration and anger amongst investors.

Executive Compensation

Stock option and bonus practices, combined with volatility in stock prices for even small earnings missing, resulted in pressure to manage earnings. Stock options were not treated as compensation expense by corporations, encouraging this form of compensation. Through a sizeable stock-based bonus at risk, managers were pressured to meet their targets.

Corporate Governance Framework in India

The regulatory Frameworks on Corporate Governance are for Indian corporations are

•    The Companies Act of 2013.

•    Securities and Exchange Board of India (SEBI) Guideline.

•    Standard Listing Agreement of Stock Exchanges.

•    Accounting Standards by the Institute of Chartered Accountants of India (ICAI).

•    Companies (Indian Accounting Standards) Rules of 2015.

•    Companies (Indian Accounting Standards) (Amendment) Rules of 2016 and Companies (Accounting Standards) (Amendment) Rules of 2016.

•    Companies (Indian Accounting Standards) Rules of 2018.

•    Secretarial Standards.

FAQ

1. What is corporate governance?

The term “corporate governance” denotes the structures, rules, and procedures through which corporations pursue their goals. In other words, corporate governance is the method by which corporations are directed and controlled. 

2. What are the objectives of Corporate Governance?

Transparency in corporate governance is important for the growth, profitability, and stability of any commerce. The requirement for good corporate governance has strengthened due to growing competition among businesses in all economic sectors at the national and international level

3. Is corporate governance relevant to corporations of any size and in any market?

Yes, corporate governance is relevant to corporations of any size and in any market

4. How does someone implement an effective corporate governance system within their corporation?

For successfully implementing an effective corporate governance framework, it is significant to secure the support of leaders in the corporation. The next step is to identify the areas of governance in which the corporation might need to improve its practices to improve its business performance. 

5. Corporate Governance Forums?

The list of forums and institutions of corporate governance are: Conference Board; Institute of Directors; The Institute of Company Secretaries of India; The Asian Corporate Governance Association; International Corporate Governance Network; National Foundation for Corporate Governance; Corporate Secretaries International Association; Organization for Economic Co-operation and development; The European Corporate Governance Institute; The Institute of Company Secretaries of India; Global Corporate Governance Forum.

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Author:

eStartIndia Team