Corporate Governance in Indian Scenario

A company is the largest form of business organization. Its dimension may be global. There are a lot of stakeholders in a corporate body. The companies philosophy on corporate governance is to attain the highest level of transparency, accountability and integrity. Procedures and systems which are in accordance with best practices for governance. The true meaning of corporate governance is to satisfy the aspirations of all stakeholders, customers, suppliers, leaders, employees the share holders and the expectations of the society. The Board of directors supports the broad principles of corporate governance and lays string emphasis on its trusteeship role to align and direct the actions of the organization to achieve its a vowed objectives of transparency, accountability and integrity.

Factors influencing corporate governance;

The Ownership structure;

The structure of ownership of a company determines, to considerable extent, how a corporation is managed and controlled. Our corporate sector is characterized by the c o-existence of state owned, private and multinational enterprises. The shares of these enterprises (except those belonging to the public sector) are held by institutional as well as small investors. Large shareholders tend to be active in Corporate Governance either through their representatives on company boards/through their active participation I n annual general body meetings. This has been demonstrated by Reliance Industries Ltd., which has the highest number of equity shareholders spread across the country.

The Structure of Company Boards;

Along with the structure of ownership, the structure of company boards has considerable influence on the way the companies are managed and controlled. The Board of Directors is responsible for establishing corporate objectives, developing broad policies and selecting top-level executives to carryout those objectives and policies. The board also requires management’s performance to ensure that the company is run well and shareholder’s interests are protected.

Company boards are permitted to vary in size, composition and structure to best serve the interests of the corporation and the shareholders. Boards can be single-tired/two-tired with regard to the size of the board, opinions and practices vary. Some argue that the adequate size is to range from 9 to15. Some put the figure at 10. Yet others recommend a minimum of 5 and a maximum of 10.

The Financial Structure:

Along with the notion that the structure of ownership matters in Corporate Governance is the notion that the financial structure of the company ie., Proportion between debt and equity, has implications for the quality of governance. Recent research has shown contrary to the Modigliani-Miller hypothesis that the financial structure of the firm has no relationship to the value of a firm, that the financial structure does matter, it is no secret that the lenders exercise significant influence on the way a company is managed and controlled. Banks can perform the important function of screening and monitoring companies as the (banks) are better informed than other investors. Further, banks can diminish short-term biases in managerial decision-making by favouring investments that would generate higher benefits in the long run. Banks play a more favourable role than other investors in reducing the costs of financial distress.

THE INSTITUTIONAL ENVIRONMENT:

The legal, regulatory and political environment within which a company operates determines in large measure the quality of Corporate Governance. In fact, Corporate Governance mechanisms are economic and legal institutions and often the outcome of political decisions. For eg. The extent to which shareholders can control the management depends on their voting rights as defined in Company Law and the extent to which the market for corporate control efficiency operates to discipline under performing management will depend on take-over regulations.

MECHANISMS OF CORPORATE GOVERNANCE:

In India, there are 6 mechanisms to ensure Corporate Governance;

1. Companies Act 1956:

Companies are regulated by the Companies Act 1956, as amended up to – date. The Companies Act is one of the biggest legislations with 658 sections and 14 schedules. To ensure Corporate Governance, the Act confers legal rights to shareholders to

a. Vote on every resolution placed before an annual general meeting.
b. To elect directors who are responsible for specifying objectives and laying down policies.
c. Determine remuneration of directors and the CEO
d. Removal of Directors and
e. Take active part in the annual general meeting Internationally accepted Corporate Governance practices aimed at strengthening corporate democracy, protecting the interests of minority shareholders and providing maximum flexibility to the companies in responding to the market needs. Among these, the amendments that have made headlines are permitting companies to buy back shares and the liberalization of inter-corporate investments.

SECURITIES LAW:

Primary security law in India is the SEBI Act. Since its a inception in 1992, the Board has taken a number of initiatives towards investor protection. One such initiatives to mandate information disclosure both in prospectus and in annual accounts. While the company’s Act itself mandates certain standards of information disclosure, SEBI Act has added substantially to these requirements in an attempt to make these documents more meaningful.

Another aspect of the SEBI regulations is that in most public issues, the promoter are required to take a minimum stake of about 20% in the capital of the company and to retain these shares for a minimum lock in period of three years. Finally, the Board constituted a committee under the chairmanship of Kumaramangalam Birla to suggest ways to promote and raise the standards of Corporate Governance in listed companies.

The clause 49 provides for the optimum composition of executive and non-executive director’s setting up of a qualified and Independent audit committee;’ remuneration of director’s; management discussion and analysis report to form part of annual report to the shareholders; a separate section on corporate governance in the annual reports of the company; for information to be furnished in the report on corporate governance; and auditor’s compliance certificate to the effort that all the conditions of corporate governance have been complied with.

DISCIPLINE OF THE CAPITAL MARKET:

In a well functioning capital market, there is a strong incentive for corporate management themselves to voluntarily adopt transparent processes and subject themselves to external monitoring to reassure potential investors. In last few years, Indian companies voluntarily accepting International Accounting standards though they are not legally binding. They have voluntarily gone for greater disclosures and more transparent governance practices than are mandated by law. They have sought to cultivate an image of being honest with their investors and of being concerned about shareholder value maximization.

Capital market is very good at micro level judgments and decisions. In fact, the market is taking micro-decisions all the time. It is its success in doing so that makes it such an efficient allocator of capital. Capital market makes sense for the regulator to pass on as much of the burden of ensuring corporate governance to the markets as possible. The regulator can then concentrate on making the markets more efficient of performing this function.

NOMINEES ON COMPANY BOARDS:

Equity holders as investors have their nominees in the board of companies. These nominees can effectively block resolutions which may be detrimental to their interests.

STATUTORY AUDIT:

It is yet another mechanism directed to ensure good corporate governance Auditors are the conscience – keepers of shareholders, lenders and others who have financial stakes in companies. As the Cadbury committee observed “The annual audit is one of the corner stones of corporate governance. Given the separation of ownership from management, the directors are required to report on their stewardship by means of the annual report and financial statements sent to the shareholders. The audit provides an external and objective check on the way in which the financial statements have been prepared and presented and it is an essential part of the checks and balances required.

Codes of Conduct:

The code is thus based on checks and balances, especially at the level of the Board of Directors and the chief executive, to guard against undue concentration of power and adequate disclosure to enable those entitled to have the information they need, in order to exercise their rights. It comprises four sections; Role of the Board of Directors – Role of non-executive Directors – Executive Directors – Financial Reporting and Controls.

The confederation of Indian Industry (CII) issued a draft code of “Desirable Corporate Governance” for the Indian Industry in April 1997 in response possibly to the finance ministries veiled threats that soften the self-regulatory regime, greater the likelihood of harsher Government regulations. The CII Code, is based on the explicit assumption that “Good governance helps to maximize shareholders value which will necessarily maximize corporate value and, thereby, satisfy the claims of creditors, employees and the state” whether the code will stimulate a change in corporate governance only time will tell.

THE PRESENT:

The corporate governance movements in India picked up momentum after deback of big companies such as Enron, world com and BCCI Bank. Those were times when the confidence of the financial community, shareholders and investor took a beating the world over. It was around that time that foreign financial institutions started investing money in Indian companies, which also triggered the need for greater accountability. Today, fund managers view firms such as Tata Motors, ITC, Ranbaxy, Infosys and Hero Honda Motors as having higher governing standards. Luckily many companies are exhibiting good governance standards.

The Economic Times did a survey of Indian corporate governance and published its finding in its issue dated August 19, 2005. The criteria used by the Economic Times Survey to identify the winners are;

– Accounting quality
– Value creation focus
– Fair policies and actions
– Communication
– Effective governing board
– Reliability

THE FUTURE:

As we go to the future, corporate governance will become more relevant and a more acceptable practice. Seeds are already sown towards honest but practices. More and more progressive companies are drawing and enforcing codes of conduct, are accepting tougher accounting standards and are following more stringent disclosure norms than are mandated by law. These tendencies would be further strengthened by a variety of forces that are acting today and would become stronger in years to come. Such forces are;

a. Deregulation: Economic reforms have not only increased growth prospects, but they have also made markets more competitive. This means that in order to survive, companies will need to invest continuously in a large scale.

b. Disintermediation: Meanwhile, financial sector reforms have made it imperative for firms to rely on capital markets to a greater degree for their needs of additional capital.

c. Institutionalization: Simultaneously the increasing institution of the capital markets has tremendously enhanced the disciplining power of the market

d. Globalization: Globalization of financial markets has exposed issuers, investors and intermediaries to the higher standards of disclosure and corporate governance that prevail in more developed capital markets.

e. Tax Reforms: Tax reforms coupled with deregulation and competition have tilted the balance away from block money transactions. This means the worst forms of mis-governance less attractive than in the past.