Importance of corporate governance and companies act, 2013

Introduction

The term “Governance” refers to the process of governing, whether undertaken by government, market or network, whether over a family, tribe formal or informal organization or territory whether through general laws, norms or power. It involves the process of interaction and decision making. The term “Governance” when applied to a business organization, it is defined as combination of processes established and executed by Board of Directors that are reflected in the organization structure and how it is managed and led toward achieving goals. The term “Corporate Governance” gained much importance when accounting fraud of high profile companies were observed in the business world and the reason was due to lack of adequate governance mechanism.

Now to apply the term Governance to the corporate world would ideally deal with the relationship amongst the Companies management, its Board of Directors, shareholders, auditors and other stakeholders. If we want to define the term corporate governance, it would broadly refer to the rules, processes, or laws by which businesses are operated, regulated and controlled. The key aspects of good corporate governance include transparency of corporate structures and operations; accountability of managers and Board of Directors to the shareholders; and corporate responsibility towards stakeholders.

History of Corporate Governance

If we look at the corporate history which includes several fraud and scams, we may arrive at the conclusion that the system of existing regulations was not satisfactory and there was strong need for external regulations which could penalize the wrong doers and reward those who abide by the rules and regulations. On the basis of investigation results of various scandals and fraud that had taken place around the world, the regulatory bodies were able to highlight control failures that had allowed several major corporations to make illegal payments and syphon the money which should have been used for the purpose of business. Various results of corporate failures and lack of regulatory measures from authorities as an adequate response to check them in future gave birth to Committee of Sponsoring Organizations (COSO). The corporate governance committees of last decade have analyzed the problems and crisis besetting the corporate sector and markets and have sought to provide guidelines for corporate management.

Sarbanes –Oxley Act, 2002 was introduced which made a sincere attempt to address all the issues associated with corporate failure to achieve quality governance and to restore investor’s confidence. The act contains number of provisions that dramatically change the reporting and corporate director’s governance obligations of public companies, and the directors and officers. The most important aspect of SOX is that it makes it clear that company’s senior officers are responsible for corporate culture they create and must be faithful to the same rules they set out for other employees. The CEO for example, must be responsible for the company’s disclosure, controls and financial reporting.

Corporate Governance in India

The first initiative in India was taken by Confederation of Indian Industry (CII), India’s largest industry and business association. The second major initiative was taken by Security Exchange Board of India (SEBI) as clause 49 of the listing agreement. The third initiative was taken by Naresh Chandra Committee and Narayana Murthy Committee.  These committees had looked corporate governance from the point of view of stakeholders in particular that of shareholders and investors. The committees have identified three key constitutes of corporate governance as shareholders, the Board of Directors and the Management. The committees have identified three major aspects namely accountability, transparency and equal treatment of all shareholders. At the heart of the committees report are the recommendation, which distinguishes the responsibilities, and obligations of the boards and the management in instituting the systems for good corporate governance.

In 2009 Ministry of Corporate Affairs (MCA) published a new set of “Corporate Governance Voluntary guidelines 2009” to encourage companies to adopt better in running of the Board and Board committees, appointment and rotation of external auditors, and creating whistle blowing mechanism. The guidelines introduced are recommendatory in nature which can be broadly divided into six parts which includes Board of Directors, Responsibilities of the Board, Audit committees, Auditors, Secretarial audit and Institution of mechanism for Whistle Blowing. While some companies in India has been actively pursuing high standard of Governance, majority of Companies have not taken the guidelines seriously.

Corporate Governance in Companies Act, 2013

One of the important areas of corporate governance introduced in Companies Act, 2013 has been introduction of :

a. Independent Director

Under the Companies Act, 2013 the strength of number of Independent directors for the prescribed companies under Section 149(4) read with Rule 4 of Companies (Appointment and Qualifications of Directors) Rules, 2014 is as follows:

b. Woman Director

Section 149 (1) of the Companies Act, 2013 prescribes the following classes of companies to have at least one woman director.

i. All listed companies
ii. Non-listed public companies having paid up share capital of Rs.100 crores or more or having turnover of Rs.300 crores or more

c. Audit Committees

The Companies Act,2013 has increased the ambit of companies to constitute audit committees. The constitution of audit committee has also seen change as compared to clause 49 with minimum three independent directors. The Chairperson should be able to read and understand the financial statement. It shall be applicable to all the listed companies or non-listed public companies having paid up share capital of Rs.10 crores or more, Turnover of Rs.100 crores or more, aggregate outstanding loan of Rs. 50 crores or more.

d. Composition of Nomination & Remuneration Committee& Stakeholder relationship Committee

Section 178(1) of the Companies Act prescribes appointment of Nomination and Remuneration committee. The duty of the Committee shall be to identify the persons who are qualified to become directors and who can be appointed in the senior management and carry out the evaluation of directors. Section 178(5) prescribed appointment of stakeholder relationship Committee to resolve grievances of security holders of company

e. Internal Audit

Companies Act, 2013 has mandated the internal audit for certain classes of companies under Section 138. These companies includes all the listed companies, All listed companies having paid up share capital of Rs. 50 crores or more, all the non-listed companies having paid up share capital of Rs.50 crores or more, turnover of Rs.200 crores or more in the preceding financial year, outstanding loans or borrowings from the banks or public financial institutions of Rs.100 crores or more.

f. Serious Fraud Investigation Office (SFIO)

Section 211 (1) of the Companies Act, 2013 shall establish an office called the Serious Fraud Investigation office to investigate fraud relating to Company. SFIO can investigate into the affairs of the company or on receipt of report of Registrar or inspector or in the public interest or request from any Department of Central Government or State Government.

g. Corporate Social Responsibility

Section 135(1) of Companies Act, 2013 prescribes that every company shall constitute Corporate Social Responsibility Committee constituting of three or more directors with at least one independent director. These companies includes companies having net worth of Rs. 500 crores or more, turnover of Rs.1000 crore or more, or net profit of Rs.5 crores or more during any financial year.

CA Amrita Chattopadhyay