Corporate Governance in India

With the growth and development of industries, firms, companies, and corporate cultures, the concept of corporate governance also evolved in India. However, since its beginning, the corporate governance in India, has undergone significant changes and reforms to encourage the transparency, accountability, independency, and ethical standards within Indian companies.

Why does India Need Corporate Governance?

The need for corporate governance in India arose because of demand of time and different indispensable reasons.

So, following are some of the significant reasons that arose the need of corporate governance in India:

• To Provide Protection to Shareholders' Rights − Primarily, the corporate governance safeguards the rights of all shareholders on equitable principle by ensuring the accountability, transparency, and equitable treatment.

• To Increase Investor Confidence − Secondly, the good practice of corporate governance increases the credibility of respective company and that ultimately attracts investors not only from different parts of India, but also from different countries. Such domestic and foreign investments in India ensure economic growth and development.

• To Fulfill the Growing Challenges of International Trade and Businesses: − During the 20th century, international trade and businesses increased swiftly. Especially after liberalization and privatization of Indian economic policies (in the early 1990s, the national and international businesses have grown multifaceted and multi-directionally. In such a condition, the practice of corporate governance is the most essential to maintain the reputation, balance, and growth of the companies.

• Economic Growth and Stability − To ensure the economic growth and its stability at national level, a disciplined system is essentially required; and, in order to maintain the discipline in corporate sector, the practice of corporate governance is essentially required. It supports the efficient allocation of resources, responsible business conduct, and long-term sustainability.

• Easy Access to Capital − Companies or firms with strong corporate governance practices find it easier to access capital or can attract more investors whether through equity markets, debt financing, or even partnerships. The good practice, integrity, and good reputation of a company easily attracts various investors.

• Competitiveness − All those companies and firms who practice corporate governance and maintain high level standards; naturally, used to be more competitive in the global market. They are more reliable and trusted by national and international investors and partners, which can lead to enhanced market access. For example, Reliance Group, Mahindra and Mahindra, Infosys, etc.

• Risk Management − A regular and honest practice of corporate governance help identify, assess, and mitigate any risks that arose or may be arise in the future. Managing risks ensures that companies can respond to challenges and uncertainties more adeptly.

• Preventing Fraud and Mismanagement − An effective practice of corporate governance help to prevent fraud, mismanagement, and unethical behavior within the companies. Likewise, it ensures the financial well-being of shareholders and stakeholders.

• Legal and Regulatory Compliance − Complying with corporate governance standards ensures companies adhere to relevant laws and regulations. This minimizes the risk of legal issues and penalties.

• Ethical and Responsible Behavior − The practice of corporate governance encourages ethical as well as socially responsible business behaviors. This includes taking precautionary steps to protect the environment, society, and governance, which are becoming increasingly important for companies and investors.

• Safeguarding Minority Shareholders − There are various minority shareholders, whose interests can be breached at any point in time, but because of the practice of corporate governance, they are as secure as the big investors.

• Long-Term Sustainability − Corporate governance encourages to make strategic plan in advance that helps in effective decision-making. Such practice, ultimately, secures long-term sustainability along with the short- term gains. This is essential for the enduring success of companies and the economy.

• Reputation and Brand Value − The companies that practice high governance standards usually have better reputations and higher brand value. And, such reputation and values win customers’ loyalty and trust.

• Global Integration − The increasing international trade and businesses arose the need of adopting international corporate governance norms, which is essential for attracting foreign investments and partnerships.

Regulatory Framework for Corporate Governance in India

The regulatory framework for corporate governance in India is properly defined through the legislation of some specific Acts and Laws; such as

• Companies Act, 2013 − The Companies Act of 2013, is the primary legislation that regulates corporate governance in India. The Act outlines the legal framework for the incorporation, management, and operation of companies in the country. Further, it also provides provisions related to the composition of boards, shareholder rights, financial disclosures, and the responsibilities of company management.

• Securities and Exchange Board of India (SEBI) − SEBI is the regulatory authority specifically for the Indian securities market. SEBI issues guidelines and regulations to ensure transparency, fairness, and accountability in the capital markets. Notable SEBI regulations related to corporate governance include the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015.

• Listing Obligations and Disclosure Requirements (LODR) − The SEBI (LODR) Regulations, 2015, lay down specific obligations for listed companies concerning corporate governance. These regulations cover features like board composition, committee requirements, financial disclosures, and shareholder rights. Compliance with LODR is mandatory for companies listed on stock exchanges.

• Corporate Social Responsibility (CSR) − The Companies Act of 2013, introduced mandatory CSR spending for eligible companies. This rule instructs eligible companies and firms to allocate a certain percentage of profits to CSR activities with the purpose protect the environment and ensure the welfare of the society.

Moreover, the regulatory framework for corporate governance in India is continually evolving to meet the changing needs of the business environment and to align with international best practices. Its sole purpose is to ensure that Indian companies operate with integrity, accountability, and transparency and promote the interests of shareholders, stakeholders, and the public.

Conclusion

Corporate governance in India, which continues to evolve and adapt to changing economic and regulatory landscapes, keeps high importance because of promoting various aspects including legal, ethical, social, and economic. It plays crucial role in promoting responsible and ethical business practices while safeguarding the interests of shareholders and stakeholders. Therefore, compliance with corporate governance standards is indispensable for Indian companies seeking to attract domestic and international investments.

FAQs

1. What is corporate governance, and why is it important in India?

Corporate governance defines a system of rules, practices, and processes that govern how a company is directed and controlled. It is imperative in India to ensure transparency, accountability, and ethical management, which, in turn, builds the brand value of respective company increases investors’ confidence.

2. How are Indian companies required to disclose their corporate governance practices?

Indian companies are essentially required to disclose their corporate governance practices in their annual reports, including compliance with regulations and adherence to best practices. And, this is not optional rather mandatory, as the Securities and Exchange Board of India (SEBI) mandates disclosure requirements through the Listing Obligations and Disclosure Requirements (LODR) Regulations.

3. What is the role of independent directors in Indian corporate governance?

Independent directors, in Indian corporate governance, ensure the impartiality and objectivity of board decisions. Further, they are expected to provide unbiased guidance and safeguard the interests of minority shareholders.

4. What is the significance of the SEBI (LODR) Regulations in corporate governance in India?

The SEBI (LODR) Regulations, in India, set out the framework for corporate governance. It covers board composition, committees, disclosure requirements, and other governance aspects for listed companies. More importantly, compliance with these regulations is mandatory for companies listed on stock exchanges.

5. What is the role of the National Financial Reporting Authority (NFRA) in Indian corporate governance?

The National Financial Reporting Authority or simply NFRA is an independent regulatory authority. It is responsible for supervising the quality and credibility of financial reporting and auditing in India. So, its major work is to ensure that financial statements comply with accounting and auditing standards.

6. How is corporate social responsibility (CSR) integrated into corporate governance in India?

The Companies Act of 2013, mandates certain companies to allocate a portion of their profits for Corporate Social Responsibility (CSR) related activities. This mandate aligns CSR initiatives with corporate governance principles, emphasizing social and environmental responsibility.