Indian Corporate Governance - Evolution & Evaluation

EVOLUTION

“To han the gouernance of hous and land”

The word ‘Governance’ is probably as old as English literature. Chaucer described the word governance at the cosmic level as the relationship between God and Nature and Nature and sublunary creation. Corporate governance is a relatively newer term underpinned by Company law and has been practiced for as long as there have been corporate entities. It was in the late 18th century, Adam Smith observed:

“The directors of companies, being managers of other people’s money than their own, it cannot well be expected that they should watch over it with the same anxious vigilance with which the partners in a private company frequently watch over their own.”

This observation is reflective of the fact that even prior to the knowledge about the term “corporate governance”, it was well comprehended. Yet, the underlying ideas and concepts of corporate governance have been surprisingly slow to evolve. Corporate governance acquired its distinctive significance only in the 20th Century i.e. when ‘Strategic Management’ saw a massive growth along with serious management thought. The 1970s saw two major significant developments in corporate governance thinking. These were the United States realizing the importance of independent outside directors and further introducing audit committees and the promotion of two-tier board systems in the European Union. The conventional wisdom with regard to corporate governance developed as a result of various company collapses and constant pressure on the board of directors (BoD) from various sources such as the institutional investors, investigative media etc. Sir Adrian Cadbury’s report popularly known as the Cadbury Report (1992) was the first report on corporate governance that reflected on the financial aspects of corporate governance in the UK and emphasized upon the importance of independent non-executive directors, “independent of management and free from any business or other relationship which could materially interfere with the exercise of independent judgment, apart from their fees and share-holding”.

An original member of the British Empire (‘the jewel in the crown’), India benefited from the codified body of company law backed by a reliable judiciary. Post independence, public sector undertakings and large-scale state and central government owned enterprises dominated the economy. In the wake of liberalization, corporate governance gained its prominence in India. The need for India to develop its business infrastructure and attract capital was recognized. It was in April 1997 at the National Conference and Annual Session of Confederation of Indian Industry (CII) that the National Task Force presented the draft guidelines and the code of Corporate Governance for the very first time. On the basis of these draft guidelines a voluntary code called ‘Desirable Corporate Governance Code’ was published in April 1998. With prima facie focus on regulating listed companies the code called for “independent non-executive directors” to constitute “at least 30 % of the board, if the chairman is a non-executive director and at least 50% when the chairman and the managing director were the same person.”

Although a few progressive companies adopted the aforementioned code voluntarily, the Birla Committee in its report felt that “under Indian conditions a statutory rather than a voluntary code would be far more purposive and meaningful, at least in respect of essential features of corporate governance.” Birla Committee in the said report, made certain recommendations, which pertained to board representation and independence. These key recommendations were accepted and approved by SEBI who codified a mandatory Clause 49 of the listing agreement of the stock exchanges, which made adherence to corporate governance norms mandatory. In August 2002, another committee was appointed by the Department of Company Affairs under the Ministry of Finance and Company Affairs, which submitted its report in December 2002 that made recommendations such as, “financial and non-financial disclosures, independent auditing, board oversight of management, grounds for disqualifying auditors from assignments, type of non-audit services that auditors should be prohibited from performing and the need for compulsory rotation of audit partners.” In furtherance, the Murthy Committee, set up by SEBI, reviewed clause 49 and in furtherance suggested measures to improve corporate governance standards by focusing on the role and structure of corporate boards, director independence particularly to address the role of insiders on Indian boards.

However, the said formation of committees generated more enthusiasm than the application of their recommendations as with the Satyam Computer Services scandal in January 2009 a re-assessment of the country’s progress in corporate governance was necessitated. This led to CII again putting forth certain recommendations that attempted to strike a balance between regulation and promotion of strong corporate governance norms by recommending a series of voluntary reforms. Vide its voluntary corporate governance guidelines, released in late 2009, the MCA laid emphasis on independence of BoD, strengthening the audit committee and encouraging whistle blowing.

The codification of a Code for Independent Directors, enacting guidelines of professional conduct including assistance to the company in implementing the best corporate governance practices and further mandating disclosures in the BoD’s report under the heading “Corporate Governance” in the newly incorporated the Act. This reflects the efforts of MCA to codify and consolidate corporate governance norms into the Act. As the focus swings to the legitimacy and the effectiveness of the wielding of power over corporate entities worldwide, 21st century promises to be the century of governance. With the entrenched corruption in government administration of India, which has lead to a high government distrust, the Ministry of Corporate Affairs and SEBI needs to adopt stringent measures in order to increase investor trust for further encouraging rapid economic growth.

Through this article, we shall try to understand the meaning attached to corporate governance, current corporate governance regimes prevalent in India and their evaluation and the steps that could be undertaken to encourage stringent application of corporate governance norms in India.

DEFINITIONS

“The system by which companies are directed and controlled.”

Over the years several attempts have been made to define corporate governance. Ken Olisa OBE, Director Institute of Directors, Chairman of the Advisory Panel stated that, “It’s hard to define because governance is all about behaviours; and behaviours – whether individual or collective – are hard to reduce to a coherent framework connecting a small number of factors.” However, over the years some efforts have been made to define corporate governance. Corporate Governance: An International Review defines corporate governance as, “the exercise of power over corporate entities so as to increase the value provided to the organization’s various stakeholders.” While everyone perceives value differently, corporates need to ensure that all stakeholders, whether directly or indirectly should benefit from it.

The Organization for Economic Co-operation and Development in the year 2001 observed:

“Corporate governance refers to the private and public institutions, including laws, regulations and public institutions, which together govern the relationship, in a market economy, between corporate managers and entrepreneurs, on the one hand, and those who invest resources in corporations on the other.”

The Kumar Mangalam Birla Committee constituted by SEBI observed:

“Strong corporate governance is indispensable to resilient and vibrant capital markets and is an important instrument of investor protection. It is the blood that fills the veins of transparent corporate disclosure and high quality accounting practices. It is the muscle that moves a viable and accessible financial reporting structure.”

In addition to the above, the N.R. Narayana Murthy Committee observed:

“Corporate Governance is the acceptance by management, of the inalienable rights of the shareholders as the true owners of the corporation and of their own role as trustees on behalf of the shareholders. It is about commitment to values, about ethical business conduct and about making a distinction between personal and corporate funds in the management of a company.”

Simply put, corporate governance refers to an economic, legal and institutional environment that allows companies to diversify, grow and restructure to maximize long-term shareholder value. Corporate governance is a system by which corporations are directed and controlled. The corporate governance structure specifies the distribution of rights and responsibilities among different participants in the corporation and other stakeholders and spells out rules and procedures for making decisions on corporate affairs. By doing this, it also provides a structure through which the company objectives are set and the means of attaining those objectives and monitoring performance.

It is the process and structure, which directs and manages the affairs of the company and seeks to enhance long-term shareholder value, by encouraging corporate transparency and accountability, while paying due consideration to the interests of other stakeholders. Key aspects of good corporate governance includes:

“a) Transparency of corporate structures and operations;

b) Accountability of managers and the boards to shareholders; and

c) Corporate responsibility towards stakeholders.”

EVALUATION OF THE INDIAN CORPORATE GOVERNANCE REGIME

Good governance and good corporate governance have been clearly distinguished by the Supreme Court. In ‘Ashoka Smokeless Coal Ind.P.Ltd. and Ors. v. Union of India (UOI) and Ors.’, 2006 (13) SCALE 102, the Apex Court inter alia observed, “Whereas good governance would mean protection of the weaker sections of the people; so far as good corporate governance is concerned, the same may not be of much relevance.” Good governance is an essential prerequisite for sustainable success. Likewise, good corporate governance provides direction for a company, which describes structures and procedures to direct and control companies, to increase the BoDs’ accountability to shareholders, promote effective risk management, encourage discipline, transparency, social responsibility and eventually building investor trust. Mr.G.N. Bajpai, ex-chairman of SEBI was of the view that “Good governance, over and beyond its process aspects, is fundamentally a sustainability issue - good governance could result in the creation and fair distribution of tangible benefits.”

During recent times, corporate governance has gained significant attention and focus worldwide. India too has made commendable regulatory efforts for the very high maturity levels of corporate governance. We shall now analyze some of these regulatory efforts.

1. The Companies Act, 2013

The newly enacted Companies Act, 2013 (The Act) seeks to imbibe corporate governance within its domain by making certain good governance requisites mandatory. For achieving this objective, this Act seeks to lay greater emphasis on governance through the board and its processes. With significant changes to board compositions, the newly formed act seeks to ensure transparency in the corporate governance mechanisms by entrusting greater responsibility and obligation on the BoD and Management in Indian companies. These include:

(a) Appointment of Independent Directors

In terms of Section 149(4) of the Act, every listed public company is required to have at least one-third of the total number of directors as independent directors, whereas in case of any class or classes of public companies the Central Government may prescribe the minimum number of such directors. Such a director shall be a director other than a managing, whole time or a nominee director. Being independent of the operations of a Company enables independent directors in evaluating the performance of the board, scrutinize the performance of the management of a company, safeguard and balance the conflicting interests of the stakeholders and satisfy themselves on the integrity of financial information in a better manner. Stringent liabilities imposed by the Act increases accountability and discourages acceptance of this post by persons seeking personal favours. Independent directors are the enhancers of corporate governance and with a proper system of checks and balances provided by the Act, it is made sure that such extensive powers are not exercised in a rampant manner.

(b) Duties of the Directors

Section 166 of the Act, stipulates certain duties and liabilities upon the directors of a company. These include:

(1) To act in accordance with the articles of the company.

(2) To act in good faith in order to promote the objects of the company for the benefit of its members as a whole, and in the best interests of the

company, its employees, the shareholders, the community and for the protection of environment.

(3) Exercise his duties with due and reasonable care, skill and diligence and shall exercise independent judgment.

(4) Not to involve in a situation in which he may have a direct or indirect interest that conflicts, or possibly may conflict, with the interest of the company.

(5) Not to achieve or attempt to achieve any undue gain or advantage either to himself or to his relatives, partners, or associates and if such director is found guilty of making any undue gain, he shall be liable to pay an amount equal to that gain to the company.

(6) Not assign his office and any assignment so made shall be void.

(7) Any contravention of the provisions of this section shall be punishable with fine, which shall not be less than one lakh rupees but which may extend to five lakh rupees.

Enumerating the aforesaid duties and determining liabilities for acting in contravention to the aforesaid provisions, further seeks to ensure that the directors maintain high corporate governance standards. Penal consequences corroborate effective discharge of duties as they enable a person handling responsibility to work more diligently.

For corroborating adequate mechanisms that enable transparency and effective discharge of duties by corporations and in turn ensuring good governance, the Act has established certain committees. These include:

(i) Audit Committee: Section 177 of the Act requires the BoD of every listed company and certain other public companies to constitute an audit committee consisting of a minimum of 3 (three) directors, with the independent directors forming a majority. It emphasizes on the fact that majority of the members of the audit committee shall be persons with ability to understand financial statement. Audit Committees improve financial practices by constantly monitoring and reporting internal control measures, with a specialist department dedicated to auditing, it enables the creation of effective anti-fraud programs, ensures heightened credibility among stakeholders and eventually enhances internal audit function. With such extensive scrutiny over the financial mechanisms of the company and also self-evaluation to determine their own effectiveness, the audit committee assures continuous update and upgrade of the corporate governance standards of a company.

(ii) Nomination and Remuneration Committee: Section 178 of the Act necessitates the BoD to constitute a nomination and remuneration committee consisting three or more non-executive directors, one half of which shall be independent directors. As the name suggests the committee has been entrusted with the responsibility to determine the qualifications of not only directors but also persons who can be appointed in senior management. They therefore ensure that the background of a prospective director and other prospects shall in no way hamper the discharge of their duties as and when so appointed. This Committee also makes remuneration recommendation, which shall strike a balance between fixed and incentive pay. Disclosures with regard to remunerations including salary, bonuses, stock options, pension and other benefits have to be made in the Director’s annual report. These background checks before nominations ensure that effective persons capable of handling responsibilities are being hired and that qualified persons are advanced and paid accordingly. Remuneration disclosures also refrain hidden benefits that may be extracted by the persons in power. Therefore, through these operations Nomination and Remuneration Committee further good governance and successful organizations.

(iii) Stakeholders Relationship Committee: In furtherance to above, Section 178 (5) of the Act entails every company having more than one thousand shareholders, debenture-holders, deposit-holders and any other security holders at any time during a financial year to constitute a stakeholders relationship committee to resolve the grievances of security holders of the company. Stakeholder relationships are key to sustainable enterprises. Better relations with stakeholders help companies’ progress and recover faster. Better stakeholder relationships imply more trust on a companies actions, which increases transparency, better decision making and as such enable further investments. Dedicating a separate committee for stakeholders shall enable better understanding of their grievances, swift resolution and help organizations maintain high ethical standards.

(iv) Corporate Social Responsibility Committee (CSRC): Section 135 of the Act, requires every company having net worth of rupees five hundred crore or more, or turnover of rupees one thousand crore or more or a net profit of rupees five crore or more, to constitute a CSRC. The CSRC shall formulate and recommend to the BoD external activities that may be included in the social responsibilities of the corporations. The committee is also required to prepare a report detailing the CSR activities undertaken and if not, the reasons for failure to comply. CSR is the one thing that helps in winning over consumers and encourages strong loyalty amongst the consumers. In the modern day era, consumers are well aware of the global social issues. Any step by corporation towards society and its cause could make a positive image before consumers. Broad categories of social responsibility include responsibility towards environment, philanthropy and ethical labor practices. The CSRC handles these operations of a company, chalks out a proper policy, recommends expenditure and monitors the effective execution of these operations by a company. Corporate governance concerns itself to holding a balance between economic and social goals. Therefore, eventually the company gains more reputation with higher CSR standards and CSRC ensures that these standards are maintained.

Each of the committees would act as a “check and balance” on the powers of the board, by ensuring greater transparency and accountability in it’s functioning.

2. SEBI’s Corporate Governance Norms

Vide Circular No. CIR/CFD/POLICY CELL/2/2014 dated 17.04.2014; SEBI amended the clauses 35B and 49 of the Equity Listing Agreement. These amendments were made applicable to all listed companies with effect from 01.10.2014. Some of the key highlights of this circular include:

• Devising a mandatory whistle blower mechanism in a company enabling the stakeholders, including individual employees and their representative bodies, to freely communicate their concerns about illegal or unethical practices.

• Combination of executive and non-executive directors (50% of BoD) with at least one woman director.

• Maximum tenure of independent directors to be five consecutive years.

• Performance evaluation of Independent directors – to be conducted by entire BoD (excluding the evaluated director).

• Independent Audit Committee – two-third members be independent directors, at least one member to have accounting or related financial management expertise. Expanded role with mandatory performance evaluation.

• Nomination and Remuneration Committee shall disclose the remuneration policy and the evaluation criteria in its Annual Report.

• Constituting a Risk Management Committee to be delegated monitoring and reviewing of the risk management plan framed by the BoD.

• Establishment of a ‘Stakeholders Relationship Committee’ with the non-executive director as the chairman, to look into the grievances of the security holders of a company.

The CSRC shall formulate and recommend to the BoD external activities that may be included in the social responsibilities of the corporations. The committee is also required to prepare a report detailing the CSR activities undertaken and if not, the reasons for failure to comply. CSR is the one thing that helps in winning over consumers and encourages strong loyalty amongst the consumers. In the modern day era, consumers are well aware of the global social issues. Any step by corporation towards society and its cause could make a positive image before consumers. Broad categories of social responsibility include responsibility towards environment, philanthropy and ethical labor practices. The CSRC handles these operations of a company, chalks out a proper policy, recommends expenditure and monitors the effective execution of these operations by a company. Corporate governance concerns itself to holding a balance between economic and social goals. Therefore, eventually the company gains more reputation with higher CSR standards and CSRC ensures that these standards are maintained.

Each of the committees would act as a “check and balance” on the powers of the board, by ensuring greater transparency and accountability in it’s functioning.

Analysis

Corporate performance is reflective of corporate governance mechanisms adopted by a company, which in furtherance reflect the conditions of the capital market. The aforementioned norms laid down by SEBI align with corporate governance requirements to those in the Act, while some requirements are in addition to the provisions of the Act, which prima facie strengthen the corporate governance framework primarily for listed companies in India. Therefore, SEBI has tried to give effect to provisions of the Act and has taken tangible steps in that regard. With the help of aforesaid norms, SEBI as a regulator seeks to ensure transparency in the operations of the company and has also established stringent monitoring mechanisms to keep the operations of an organization under constant checks and balances. Such enforcement mechanisms further plan to strengthen the risk-based supervision framework for all corporations, in line with international standards. Stricter regulatory environment ensures efficiency by the executives who shall try to avoid unfounded penalties, which may further tangle them into India’s lengthy and complex appeals process.

Having said that Independent and effective regulatory corporate governance reforms are necessary to maintain the market credibility and confidence amongst investors. With constant performance evaluation of the Independent directors, SEBI and MCA have tried to ensure transparency in their operations. However, the thought of conflict of interest of such directors cannot be sidelined. Cases like Satyam scam, where the independent directors (TR Prasad and Vinod Dham) were found oblivious to the fraud given effect to for years by Satyam’s chairman Mr. B. Ramlingam Raju. One may wonder, what else could be done to improve the already stringent and effective reforms in place? Let us take a look at some suggestions.

RECOMMENDATIONS

Mandatory Shareholder Participation

In India shareholders are notorious for non-active participation in companies’ decision-making process and are more interested in short term gains. If such trend continues, the new mechanisms adopted shall be rendered ineffective almost immediately and shall also hamper the high corporate governance standards that MCA and SEBI collectively seek to achieve. An effective solution to address this problem could be implementation of laws necessitating mandatory shareholder participation in the annual general meetings of a company. Companies further need to establish proxy advisory mechanisms to encourage active participation. Shareholders need to be made aware of their rights, which could also be done by way of proactive advertisements in financial media. Such reforms could ensure effective discharge of duties by the BoD and dubious and controversial proposals.

Protection and Promotion of Minority Shareholders Interest

The Code for Independent Directors referred to in the Act states that the adherence to the standards as described in the Act and the fulfillment of their responsibilities in a professional and faithful manner promotes confidence of the investment community particularly minority shareholders. Independent directors are required to safeguard the interests of all stakeholders, particularly the minority shareholders. SEBI’s governance norms direct equitable treatment and protection of such shareholders from abusive actions. Since minority shareholders do not have the majority in voting control over the firm, they exercise little power over the management of the company or the distribution of its profits and there involvement in the management decisions of an organization could be easily restricted.

The act seeks to empower and involve the minority shareholders in corporate decision-making. Section 151 of the Act requires a listed company to appoint one director elected by small shareholders i.e. a shareholder holding shares of nominal value of not more than twenty thousand rupees or such other sum as may be prescribed. Such shareholders even though are different from minority shareholders, but can be considered to be a part of minority shareholders on account of their non-controlling stake in the company. Whether such a director is an independent director? The Act is unclear on that. In order to safeguard the interests of minority shareholders, it is important the director so appointed is independent of the BoD and is capable of putting across the interests of the minority shareholders before the BoD and also monitor the same.

The Act should work towards instilling confidence in the minority shareholders, as minority shareholders can ensure effective decisions are taken that promote the interest of the corporation at large. SEBI monitoring the related party transactions, directing Audit committee to review the significant related party transactions, emphasis on formulation of policy of related party transactions by a company and requiring prior approval of the Audit Committee and disclosures of related party transactions, could be a step towards protection of such interests. With the MCA changing its stand on related party transactions in 2014 by lowering the threshold for minority shareholder votes for listed companies from 75% to 50% for passing resolutions, it is evident that in its quest to protect its investors, SEBI understands a need to strike, a balance between minority shareholder’s statutory and equitable rights and their veto powers.

Increased Government Support and Surveillance

Strong governance standards encourage not only the healthy and vibrant growth of the corporate sector but also of the economy as a whole. Effective government mechanism and stepped up law enforcement can assure further transparency in corporate operations and more accountability and responsibility in corporate behavior. Section 210 of the Act encourages the participation of the central government into the affairs of the company. Further, in terms of amendment to Rule 13 of the Companies (Audit and Auditors) Rules, 2014 dated 14.12.2015, an auditor of a company during the course of performance of his duties as a statutory auditor is required to report those matters to the central government, wherein the offence of fraud has been committed by its officers or employees (involving an offence of Rs.1 crore or more).

Therefore, central government has extended its surveillance to the auditing functions of a company. It is important that the same is extended to other operations/committees of an organization and even to independent directors, to encourage better discharge of duties by the directors of the company and in turn promoting higher standards of governance.

Prohibition of Insider Trading

Insider trading basically is an act of dealing in the securities of a company by any key managerial personal or director of a company who is expected to have non-public price sensitive information in respect of securities of company. Under Section 195 of the Act, such an offence is punishable with imprisonment for a term which may extend to five years or with fine which shall not be less than five lakh rupees but which may extend to twenty-five crore rupees or three times the amount of profits made out of insider trading, whichever is higher, or with both. SEBI has recently enacted the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015 to strengthen and regulate the legal framework for prohibition of insider trading. Even though investigative mechanisms and criminal liabilities are in place yet, there is still something lacking in the vigilant approach adopted by SEBI regulating the securities of a corporation as a result of which insider trading is still by and large very much alive in the country. With unearthing of large-scale frauds the concept of good governance has been hugely affected. Therefore, something needs to be done to address this issue to ensure high standards of governance in organizations.

While regulation and micromanagement of fraudulent action can monitor the discharge of duties by corporations, such actions should be accompanied with effective and stringent law enforcements prohibiting obvious illegalities. Reliance could also be placed upon the US legislature’s Sarbanes-Oxley Act, 2002 which requires directors, executive officers and large shareholders of public issuers to report transactions within two business days of a transaction, pre-clearance procedures for transactions in the issuer’s equity securities, responsibilities the company will take for completing filings, requirements to use a specified broker, sanctions for failure to make timely filings etc. An independently functioning compliance officers should be appointed for ensuring that the board agenda, board minutes etc. pertaining to price sensitive information or any information impacting the security pricing is not leaked. In the past, SEBI has encountered cases such as ‘Samir C. Arora v. SEBI’,(2002) 38 SCL 422 wherein the order of SEBI has been set aside by the Securities Appellate Tribunal for lack of evidence. Independently functioning compliance officers shall make sure substantial evidence is collected in order to punish such insiders. Good corporate governance ensures commitment of the board in managing the company in a transparent manner for maximizing long-term value of the company. Legitimate and effective trading practices strengthen investor trust. All investors should have equal access to profits and be exposed to identical market risks. Therefore, markets should be free from any kind of fraud. The concept of corporate governance should not be lost in the quest of monetary incentives.

CONCLUSION

“Three R’s of corporate governance, ‘Robust’, ‘Responsible’ and ‘Relevant’.”

Global institutional investors now regard good corporate governance as an important parameter before making an investment decision. Corporate governance practices should be followed above and beyond the rules and prescriptions, not as an imposition but as a value adding mechanism to the management, stakeholders and society at large.

With India’s globally integrated and business landscapes becoming more dynamic than ever before, it has become paramount for it to become robust and proactive in managing unforeseeable risk for its growth and sustainability. Clumsy execution has made implementation of governance codes as a ‘box ticking exercise’ that may not entirely achieve its aim. Strong corporate governance is essential to meeting increasingly complex global regulatory standards and maintaining the confidence of the global investment and stakeholder community. The advent of technology has enabled more transparency and consistency within governance processes, contributing to better performance.

From the developments discussed above, it is quite clear that the Act sincerely seeks to make the corporate management and governance in India rather efficient, fully accountable, transparent, and maximally beneficial to all stakeholders and related professionals, through this intelligent legislation. Further SEBI has also taken a welcome and much needed step to bring corporate governance in India at par with best norms globally.

In addition to above mechanisms, SEBI is also considering improved disclosures by body corporates by adopting measures that may ensure mandatory disclosures of all ratings assigned to companies by various credit rating agencies, which may curtail ‘rating shopping’. Further, SEBI’s (Listing Obligations and Disclosure Requirements) that shall be applicable from April, 2016 makes it mandatory for the top 500 listed companies (top 100 companies formerly), to prepare annual business responsibility reports, deliberating upon the steps taken by various companies related to environment and stakeholder relationships. SEBI also aims to conduct a comprehensive review of its surveillance systems by engaging external expertise in order to make the systems more transparent and competitive.

Corporate Governance creates a culture of transparency and responsibility towards organizational culture. It is beyond the realm of law and cannot be regulated by legislation alone. Therefore, the first responsibility however, lies with the BoD, while independent directors are the real corporate watchdogs.

“Such disclosures are steps towards achieving better governance. Corporate India will learn.”

Disclaimer: The views and opinions expressed in this article are based on extensive and thorough research. In no way does the author or the law firm claim ownership of the ideas and concepts presented in this paper. Information so provided is to be strictly considered for general reference of the subject matter, which has been adequately referenced. Specialist advice should be sought about any specific circumstances directly from the law firm.

REFERENCES

1. “To han the gouernance of hous and land” - Chaucer Bob Tricker , Corporate Governance Principles, Policies and Practices (1st edn, Oxford University Press 2009 ), 12

2. Chaucer described the word governance at the cosmic level as the relationship between God and Nature and Nature and sublunary creation. - Jerome Mandel ‘Geoffrey Chaucer, Building the Fragments of the Canterbury Tales’ (1st edn, Associated University Press), 66

3. “The directors of companies, being managers of other people’s money than their own, it cannot well be expected that they should watch over it with the same anxious vigilance with which the partners in a private company frequently watch over their own.” - Ibid, 8

4. Corporate governance acquired its distinctive significance only in the 20th Century i.e. when ‘Strategic Management’ saw a massive growth along with serious management thought. - Ibid, 7

5. These were the United States realizing the importance of independent outside directors and further introducing audit committees and the promotion of two-tier board systems in the European Union. - Ibid, 10

6. The conventional wisdom with regard to corporate governance developed as a result of various company collapses and constant pressure on the board of directors (BoD) from various sources such as the institutional investors, investigative media etc. - Ibid, 13

7.“independent of management and free from any business or other relationship which could materially interfere with the exercise of independent judgment, apart from their fees and share-holding”- Ibid

8.An original member of the British Empire (‘the jewel in the crown’), India benefited from the codified body of company law backed by a reliable judiciary. - Ibid, 205

9. Post independence, public sector undertakings and large-scale state and central government owned enterprises dominated the economy. - Ibid

10. It was in April 1997 at the National Conference and Annual Session of Confederation of Indian Industry (CII) that the National Task Force presented the draft guidelines and the code of Corporate Governance for the very first time. -

Confederation of Indian Industry, 'Desirable Corporate Governance A Code ‘, 3 <http://www.nfcgindia.org/desirable_corporate_governance_cii.pdf> accessed 28 December 2015

11.On the basis of these draft guidelines a voluntary code called ‘Desirable Corporate Governance Code’ was published in April 1998. - Ibid, 3

12. With prima facie focus on regulating listed companies the code called for “independent non-executive directors” to constitute “at least 30 % of the board, if the chairman is a non-executive director and at least 50% when the chairman and the managing director were the same person.” - Id, 3, 205

13. “under Indian conditions a statutory rather than a voluntary code would be far more purposive and meaningful, at least in respect of essential features of corporate governance.” - Birla Committee Report, ‘Report of the Committee Appointed by the SEBI on Corporate Governance under the Chairmanship of Shri Kumar Mangalam Birla’ <http://www.sebi.gov.in/commreport/corpgovhtml> accessed 28 December 2015

14. Birla Committee in the said report, made certain recommendations, which pertained to board representation and independence. - Santosh Pande, Kshama V Kaushik, ‘Study on the State of Corporate Governance in India’, <http://iica.in/images/Evolution_of_Corporate_Governance_in_India.pdf > accessed 28 December 2015

15. These key recommendations were accepted and approved by SEBI who codified a mandatory Clause 49 of the listing agreement of the stock exchanges, which made adherence to corporate governance norms mandatory. - Clause 49 <http://indianboards.com/files/clause_49.pdf > accessed 28 December 2015

16. “financial and non-financial disclosures, independent auditing, board oversight of management, grounds for disqualifying auditors from assignments, type of non-audit services that auditors should be prohibited from performing and the need for compulsory rotation of audit partners.” - Id, 15 at 11

17. However, the said formation of committees generated more enthusiasm than the application of their recommendations as with the Satyam Computer Services scandal in January 2009 a re-assessment of the country’s progress in corporate governance was necessitated. - Id, 15 at 10

18. Vide its voluntary corporate governance guidelines, released in late 2009, the MCA laid emphasis on independence of BoD, strengthening the audit committee and encouraging whistle blowing. - Id, 15 at 11

19. The codification of a Code for Independent Directors, enacting guidelines of professional conduct including assistance to the company in implementing the best corporate governance practices. - Schedule IV [See Section 149(8)], Code for Independent Directors, Guidelines of professional conduct, (9), Companies Act, 2013.

20. and further mandating disclosures in the BoD’s report under the heading “Corporate Governance” in the newly incorporated the Act. - Schedule V (See Sections 196 and 197), Part II, Remuneration, IV. Disclosures, Companies Act, 2013.

21. “The system by which companies are directed and controlled.” - Kings Commission, King 1994 , < http://www.corporate-governance.co.za/Home/CorporateGovernanceQuotes/tabid/148/Default.aspx > accessed 28 December 2015

22. “It’s hard to define because governance is all about behaviours; and behaviours – whether individual or collective – are hard to reduce to a coherent framework connecting a small number of factors.” - Ken Olisa OBE, ‘The Great Governance Debate – Towards a Good Governance Index for Listed companies June, 2015’, <http://www.zyen.com/Research/Research/IOD%20Good%20Governance%20Report.pdf > accessed 29 December 2015

23. “the exercise of power over corporate entities so as to increase the value provided to the organization’s various stakeholders.” - Dr. William Judge (Editor), ‘Corporate Governance: An International Review’, (18th Edition, Blackwell Publishing)

24.

"a) Transparency of corporate structures and operations;

b) Accountability of managers and the boards to shareholders; and

c) Corporate responsibility towards stakeholders." - Regional training institute, Allahabad, 'Meaning and concept of corporate governance, evolution of corporate governance in India and other parts of world Need and essence of corporate governance and role of CAG in this regard' (Cag.gov.in, 2013), 2 <http://rtiallahabad.cag.gov.in/rti-website/rti-allahabad/downloads/material/Background training materail on corporate governance.pdf> accessed 28 December 2015

25. Likewise, good corporate governance provides direction for a company, which describes structures and procedures to direct and control companies, to increase the BoD’s accountability to shareholders, promote effective risk management, encourage discipline, transparency, social responsibility and eventually building investor trust.

- International Center for Journalists, ‘Chapter 1 What’s good governance, and why should journalists care?’ <http://www.icfj.org/resources/who%E2%80%99s-running-company-guide-reporting-corporate-governance/chapter-1-whats-good-governance-and-why-should-journalists > accessed 29 December 2015

26. “Good governance, over and beyond its process aspects, is fundamentally a sustainability issue - good governance could result in the creation and fair distribution of tangible benefits.” - G.N. Bajpai, ‘Corporate Governance and Development: Why it matters?’ (Sebigovin, 4 November, 2003), 6 <http://www.sebi.gov.in/cms/sebi_data/attachdocs/1293011165899.pdf> accessed 28 December 2015

27. Stakeholder relationships are key to sustainable enterprises. - John Friedman, ‘Stakeholder Relationships: Key to a Sustainable Enterprise, 13 April 2012’, < http://www.huffingtonpost.com/john-friedman/managing-stakeholder-rela_b_1415255.html?ir=India&adsSiteOverride=in > accessed 28 December 2015

28. Better relations with stakeholders help companies’ progress and recover faster. - Pamela Laughland, ‘Better relations with stakeholders help companies stay on top longer – and recover faster, September 2010’, < http://nbs.net/wp-content/uploads/RI-good-stakeholder-relations.pdf > accessed 29 December 2015

29. The CSRC shall formulate and recommend to the BoD external activities that may be included in the social responsibilities of the corporation. - Schedule VII, The Companies Act, 2013, 294

30. Broad categories of social responsibility include responsibility towards environment, philanthropy and ethical labour practices. - Nicole Fallon Taylor, ‘What is Corporate Social Responsibility?, 19 June 2015’, <http://www.businessnewsdaily.com/4679-corporate-social-responsibility.html > accessed 28 December 2015

31.Corporate governance concerns itself to holding a balance between economic and social goals. - Sir Adrian Cadbury in ëGlobal Corporate Governance Forumí, World Bank, 2000

32. Vide Circular No. CIR/CFD/POLICY CELL/2/2014 dated 17.04.2014; SEBI amended the clauses 35B and 49 of the Equity Listing Agreement. - SEBI Circular:CIR/CFD/POLICY CELL/2/2014 dated 17.04.2014 <http://www.sebi.gov.in/cms/sebi_data/attachdocs/1397734478112.pdf>accessed 28 December 2015

33. Devising a mandatory whistle blower mechanism in a company enabling the stakeholders, including individual employees and their representative bodies, to freely communicate their concerns about illegal or unethical practices. - Ibid, 6

34. Combination of executive and non-executive directors (50% of BoD) with at least one woman director. - Ibid, 9

35. Maximum tenure of independent directors to be five consecutive years. - Ibid, 12

36. Performance evaluation of Independent directors – to be conducted by entire BoD (excluding the evaluated director). - Ibid, 17

37. Independent Audit Committee – two-third members be independent directors, at least one member to have accounting or related financial management expertise. Expanded role with mandatory performance evaluation. - Ibid

38. Nomination and Remuneration Committee shall disclose the remuneration policy and the evaluation criteria in its Annual Report. - Ibid, 20

39. Constituting a Risk Management Committee to be delegated and reviewing of the risk management plan framed by the BoD. - Ibid, 22

40. Establishment of a ‘Stakeholders Relationship Committee’ with the non-executive director as the chairman, to look into the grievances of the security holders of company. - Ibid, 26

41. Corporate performance is reflective of corporate governance mechanisms adopted by a company, which in furtherance reflect the conditions of the capital market. - T.M. Nagarajan, ‘Recent Trends in Capital Market’, < http://www.sebi.gov.in/cms/sebi_data/docfiles/2974_t.html > accessed 29 December 2015

42. The aforementioned norms laid down by SEBI align with corporate governance requirements to those in the Act. -

The Firm ‘Corporate Governance: SEBI v Companies Act, 2013, February 15, 2014’,<http://thefirm.moneycontrol.com/story_page.php?autono=1043960 > accessed 29 December 2015

43. Having said that Independent and effective regulatory corporate governance reforms are necessary to maintain the market credibility and confidence amongst investors. - General Knowledge Today, ‘Framework around Corporate Governance in India, January 17,2015’, < http://www.gktoday.in/framework-around-corporate-governance-in-india/ > accessed 29 December 2015

44. Cases like Satyam scam, where the independent directors (TR Prasad and Vinod Dham) were found oblivious to the fraud given effect to for years by Satyam’s chairman Mr.B.Ramlingam Raju. - Jaya Mathew and Warada Bhagwat, 'Role of Independent Directors under Companies Act, 2013: Will it lead to better Corporate Governance in India? [2015] 4(2) Journal of Law and Social Sciences 90

45. In India shareholders are notorious for non-active participation in companies’ decision-making process and are more interested in short term gains. - Jay Sayta, ‘Era of shareholder activism?, November 26, 2015’, < http://www.thestatesman.com/mobi/news/law/era-of-shareholder-activism/106554.html > accessed 30 December 2015

46. The Code for Independent Directors referred to in the Act states that the adherence to the standards as described in the Act and the fulfillment of their responsibilities in a professional and faithful manner promotes confidence of the investment community particularly minority shareholders. - Schedule IV, ‘Code for Independent Directors’, the Companies Act, 2013, 282

47. Such shareholders even though are different from minority shareholders, but can be considered to be a part of minority shareholders on account of their non-controlling stake in the company. - Akshat Sulalit, ‘Companies Act 2013: Rise of the Minority Shareholder’, <http://indialawjournal.com/volume6/issue-2/article5.html > accessed 30 December 2015

48. With the MCA changing its stand on related party transactions in 2014 by lowering the threshold for minority shareholder votes for listed companies from 75% to 50% for passing resolutions. - Indiacsr, ‘Government asks SEBI to twist rules in concern with companies act, 2013, 11 July, 2015’,<http://www.indiacsr.in/en/government-asks-sebi-to-twist-rules-in-concern-with-companies-act-2013/> accessed 30 December 2015

49. Strong governance standards encourage not only the healthy and vibrant growth of the corporate sector but also of the economy as a whole. - S.Chaitanya Shashank, Nilika Kumar, ‘Weaknesses of Corporate Governance in India, 12 January, 2015’ <http://www.lawctopus.com/academike/corporate-governance-in-india/> accessed 30 December 2015

50. While regulation and micromanagement of fraudulent action can monitor the discharge of duties by corporations, such actions should be accompanied with effective and stringent law enforcements prohibiting obvious illegalities.

Job Thangasamy, ‘Ethics Management: Insider trading a menace to corporate governance’, <http://www.academia.edu/4220805/Ethics_Management_Insider_trading_a_menace_to_corporate_governance> accessed 30 December 2015

51. Reliance could also be placed upon the US legislature’s Sarbanes-Oxley Act, 2002 which requires directors, executive officers and large shareholders of public issuers to report transactions within two business days of a transaction, pre-clearance procedures for transactions in the issuer’s equity securities, responsibilities the company will take for completing filings, requirements to use a specified broker, sanctions for failure to make timely filings etc. - Ibid

52. “Three R’s of corporate governance, ‘Robust’, ‘Responsible’ and ‘Relevant’.” - Chanda Kochhar, ‘CSR, Technology, Culture, HR Practices, Society, Environment All Integral to CorporateGovernance”<http://www.cii.in/PressreleasesDetail.aspx?enc=+Uzij7bAiO2ANWTx5F9/xTnqxGG5HUcwx9xLkLmvAN6/h3jiEz+7YMi6kQ9QV0wBIEtZmburf0rQWzF3ZyDLHt5d2GKaqIhWaoFkPooQNyUa424o665cGJhGRrDkNuG4wKyWhWAi393vpP4HuBnNM9M2PvEyvDyrp1HiQLR7joZX9mRkNAxWPzK90bgVzifB > accessed 28 December 2015

53. Global institutional investors now regard good corporate governance as an important parameter before making an investment decision. - Special Correspondent, ‘Boards fiddled as debt, defaults grew, December 9, 2015’ <http://www.thehindu.com/news/cities/mumbai/boards-fiddled-as-debt-defaults-grew-sinha/article7963801.ece > accessed 29 December 2015

54. Corporate governance practices should be followed above and beyond the rules and prescriptions, not as an imposition but as a value adding mechanism to the management, stakeholders and society at large. - Id, 54.

55. Clumsy execution has made implementation of governance codes as a ‘box ticking exercise’ that may not entirely achieve its aim. - Reuters, ‘In India, corporate transparency comes with puzzling questions, 7 December, 2015’<http://www.financialexpress.com/article/industry/companies/in-india-corporate-transparency-comes-with-puzzling-questions/175488/ > accessed 29 December 2015

56. In addition to above mechanisms, SEBI is also considering improved disclosures by body corporates by adopting measures that may ensure mandatory disclosures of all ratings assigned to companies by various credit rating agencies, which may curtail ‘rating shopping’. - PTI, ‘Panel asks Sebi to curb ‘rating shopping’, improve disclosure, 23 December 2015’, < http://articles.economictimes.indiatimes.com/2015-12-23/news/69261376_1_rating-agencies-rating-shopping-iab > accessed 29 December 2015

57. Further, SEBI’s (Listing Obligations and Disclosure Requirements) that shall be applicable from April, 2016 makes it mandatory for the top 500 listed companies (top 100 companies formerly), to prepare annual business responsibility reports, deliberating upon the steps taken by various companies related to environment and stakeholder relationships. - PTI, ‘Business responsibility reports must for top 500 listed companies, 24 December 2015’, <http://articles.economictimes.indiatimes.com/2015-12-24/news/69282626_1_entities-business-responsibility-market-capitalisation > accessed 30 December 2015

58. “Such disclosures are steps towards achieving better governance. Corporate India will learn.” - V.R. Narashimhan, Id, 40.