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226 viewsAll GS PapersGS Paper 2
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Approach:

  1. Introduction
  2. Pointwise mention the key laws governing corporate space in India.
  3. Explain the challenges therein.
  4. Conclusion – way forward.

Corporate Governance involves a set of comprehensive rules to deal with the affairs of a corporation. A lapse in corporate governance is detrimental to the interests of all stakeholders including the investors, the shareholders, the general public and the Government.

Structure of Corporate Governance in India:

  • The Companies Acts 2013: The Act provides a formal structure for corporate governance by providing disclosures, reporting, transparency and compliance norms. It has provisions concerning Independent Directors, Board Constitution, General meetings, Board meetings, Board processes, Related Party Transactions, Audit Committees, etc.
  • Complementing Legislations: The Competition Act 2002; the Foreign Exchange Management Act,1999; the Industries (Development and Regulation) Act, 1951; and other legislations also have a bearing on the corporate governance principles.
  • SEBI Guidelines: SEBI ensures the protection of investors and has mandated the companies to adhere to the best practices mentioned in various guidelines released and amended from time to time.
  • Accounting Standards issued by the ICAI: Institute of Chartered Accountants of India is an autonomous body that issues accounting standards. The disclosure of financial statements is also made mandatory by the ICAI backed by the Companies Act 2013.
  • Standard Listing Agreement of Stock Exchanges: They apply to the companies whose shares are listed on various stock exchanges. The Agreement contains elaborate provisions related to audits, disclosure of information, publication of Annual Statements etc.
  • Secretarial Standards Issued by the ICSI: Institute of Company Secretaries of India issues standards on ‘Meetings of the board of Directors’, General Meetings’, etc.

Challenges:

  • In the ongoing NSE case, the independent directors (called Public Interest Directors or PIDs in case of exchanges) were severely lacking in their duties. They failed to take any action against Ms. Ramakrishna when they knew about the lapses in the hiring of Subramanian. Further, they were aware that key information pertaining to the exchange was being shared with an unknown third party.
  • Lack of Monitoring enables the companies to disobey the established norms e.g., the re-designation of Mr. Subramaniam as COO was not tabled to the then NRC (Nomination and Remuneration Committee).
  • The quantum of punishments given to violators are often inadequate and fails to create effective deterrence for future discourse. In the ongoing NSE case, a penalty of INR2 crore on NSE and a restriction on launching any new products for the next six months has been imposed. This is not adequate as per the opinion of various financial experts.
  • Tax Havens provide a foreign corporation with a low taxation regime and often keeps their financial secrets intact which hinders corporate governance in the domestic nation. The income tax department is probing a possible fund diversion to three foreign jurisdictions in case of NSE scam.
  • Concentration of powers – ownership of corporations in India, is still held in a few hands. A single shareholder or family controls a large group of companies. This leads to several governance related challenges and has often led to poor decision making that harms company’s profits.

SEBI had made a rule to separate the roles of the Chairperson and the CEO/MD (i.e., the same person can’t hold both roles) based on Uday Kotak Panel recommendations, but has made this rule ‘voluntary’ now. The Rule ropes in from April 01, 2022.

Way forward: The forensic auditing ecosystem in the country should be augmented so as to effectively investigate and prosecute violators. A forensic audit examines and evaluates a firm’s or individual’s financial records to derive evidence used in a court of law or legal proceeding. Secondly, the double taxation avoidance treaties should be regularly updated. Any loophole that enables a nation to be used merely as a tax haven should be rectified with robust data sharing based on mutual consent. Thirdly, for good corporate governance the focus should be shifted from independent directors to limiting the power of promoters. Fourthly, the board must invest a reasonable amount of time & money to ensure the goal of data protection is achieved. Lastly, strengthening the power of SEBI, ICAI, and ICSI is desirable to handle corporate failure in order to reduce the need for court intervention. For example, in the Sahara case, the court had to intervene to bring justice.

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