Regulatory Structure and Corporate Governancein India-Issues and Challenges

Regulatory Structure and Corporate
Governance in India: Issues and Challenges
R.VASANTHAGOPAL PhD
UNIVERSITY OF KERALA

Introduction
 Investors are susceptible to conflicts of interest and managerial
incompetence
 Investors are not well protected by contract and so have to
relay on the law to protect them from conflicts of interest and
on good CG to protect them from managerial incompetence
 Also, there is a fair amount of evidence to suggest that good CG
does lead to better results in terms of higher profits and better
dividends.
 So, CG matters
April 26, 2020 2R.Vasanthagopal PhD University of Kerala

Corporate Governance (CG)
 A system by which the businesses are directed and controlled
(The Cadbury Report, 1992)
 A system of rules, practices and processes by which authority is
exercised and controlled in corporations.
 CG essentially involves balancing the interests of stock holders
and the other stake holders.

Pillars of CG
 Fairness (to stock holders and other stakeholders)
 Accountability (obligation to the owners)
 Responsibility (for overseeing the management)
 Transparency (clear information to all stakeholders)
 Disclosure (of material matters)

How CG Works?
 Application of best management practices,
 Compliance of law in true letter and spirit,
 Adherence to ethical standards for effective management and
 Distribution of wealth and discharge of social responsibility
for sustainable development of all stakeholders

CG Code: Global Status
 Throughout the 20th century, the focus of attention of corporate
was not on CG but on management.
 CG became the focus for the 21st century, particularly in the
context of globalization
 Corporate scandal and collapse in the 1980s led to the first
corporate governance code: the UK’s Cadbury Report (1992). This
decisive work soon led to codes in other countries around the
world- Mervyn E. King’s Committee, South Africa (1994) Blue
Ribbon Committee , US (1999)

Scope of CG Code
 CG codes concentrate on form rather than function, emphasizing
the importance of independent outside directors, the need for
audit, remuneration, and nomination committees of the board,
and the separation of the role of the board chairman from the
CEO.
 More recently, enterprise risk assessment, corporate social
responsibility, green credentials and sustainability have been
added to the lexicon.

CG in Third World Countries
 Of the late 20th century / 21st century, in addition to the
traditional three elements of the economy viz. physical capital in
terms of plant and machinery, technology and labour, the
volatile elements of financial capital invested in the emerging
markets and in the third world countries is an important
element of modern globalization and has become particularly
powerful.

Models of CG
 Continental (insider) Model
 Here, the interests of the management, employees and banks are
integrated.
 Pay little attention for protecting minority shareholder rights
 This model is followed in continental European countries like France,
Germany and Italy which have relatively small equity markets.
 Anglo – Saxon (outsider) Model/Aglo-American Model
 Here, the corporation is considered as an extension of the shareholder.
 Applied where the widely spread shareholding and the related conflict of
interests between managers and shareholders exist.
 This model is followed in America, Britain, Canada, Australia, India etc.

Way to CG in India……
 At the time of independence, India had Functioning stock
markets, active manufacturing sector, developed banking
sector and British driven corporate practices
 During 1947-1991, India pursued markedly socialistic policies
 Financial crisis during 1990-91, led to economic liberalization
 The need of capital, amongst other things led to CG reforms

CG: Different Initiatives
 In 1998, CII came up with the first CG code (Based on Anglo-
saxon Model)-Bajaj Committee
 Kumaramangalam Birla Committee by SEBI in 1999
(recommended to incorporate clause 49 of the listing agreement)
 Naresh Chandra Committee by Dept. of Corporate Affairs in 2002
 N.R.Narayana Muthy Committee by SEBI in 2003.
 Companies Act 2013(Based on Irani Committee)

CG in India: Completed Two Full Cycles
 First introduced by CII as a voluntary measure
 Acquired a mandatory status during 2000 through the introduction
of Clause 49 of the Listing Agreement
 In late 2009, the MCA released a set of voluntary guidelines for CG
 Companies Act 2013 has now introduced some mandatory
guidelines

CG in India: Regulatory Frame Work
 The Companies Act, 2013
(contains provisions relating to board constitution, board meetings,
board processes, independent directors, general meetings, audit
committees, related party transactions, disclosure requirements in
financial statements, etc.)
 Securities and Exchange Board of India (SEBI) Guidelines
 Standard Listing Agreement of Stock Exchanges (Clause 49)
 Accounting Standards issued by ICAI
(Comply Sec. 129 and Sec.133 of the New Companies Act )
 Secretarial Standards issued by ICSI
(Comply Section 118 (10) of the New Companies Act with respect to
general and board meetings)

The Companies Act, 2013 and CG
 Every company is required to appoint 1 (one) resident director on its
board.
 Nominee directors shall no longer be treated as independent directors.
 Listed companies and specified classes of public companies are required
to appoint independent directors and women directors on their boards.
 New Companies Act for the first time codifies the duties of directors.
 New Companies Act mandates following committees to be constituted
by the board for prescribed class of companies:
 Audit committee
 Nomination and remuneration committee
 Stakeholders relationship committee
 Corporate social responsibility committee

CG in India: Key Issues
 Agency gap (Interest of management Vs Dispersed shareholders
and Majority shareholders and Other stake holders)
 Board is subordinate to the shareholders
 Conflict between majority and minority shareholders
 Boards in PSUs
 MNCs
 Family businesses
 Promoter control
 Closely held and widely held companies

CG in India: Challenges
 Powers of dominant shareholders
 Lack of incentive for companies to implement CG reform measures
 Underdeveloped external monitoring system
 Shortage of real independent directors
 Weak regulatory oversight including multiplicity of regulators
 Conglomerates and conglomerates lead to promoters within
promoters

Conclusion
No doubt, the codes and regulatory frame works have certainly been
a force for improving governance structures, procedures, and
reporting. But the codes and regulatory frame works have not
changed the perceptions of corporate behaviour- the behaviour of
companies, the attitudes of their directors and the actions of key
executives

Regulatory Structure and Corporate Governancein India-Issues and Challenges

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