Aug 10,2019 | 20 min read

Corporate Governance in an Era of Compliance

Author - Associate Kantika Mukherjee

In the present competitive market, compliance is the new corporate governance.  The compliance does not imply the traditional models of the Corporate Governance, but it comes from the internal governance structure which has been imposed on the corporation from outside through enforcement agents.

Corporate governance framework in India

There are many acts with clauses involving corporate governance in India. They are:

· The Companies Act, 2013 – it has sections regarding the constituency of the board, general meetings, audit committees, board processes etc.

· SEBI (Securities Exchange Board of India) – there are several guidelines concerning the corporate governance which are mandatory for the firms to follow and violation of any guidelines attracts penalties.

· ICAI (Institute of Chartered Accountants of India) – there are many accounting standards related to corporate governance like disclosure of financial statements set by ICAI.

· ICSI (Institute of Company Secretaries of India) – there are many secretarial standards on meeting of the board of directors, general meetings and so forth, set by ICSI which have to be followed by the corporations.

· Standard listing agreement of stock – this is applicable towards the listed companies.
The Objectives of Corporate Governance
The Companies Act, 2013, had made some significant changes in the way corporations in India are administered. Also, provisions were specified under the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015 (Sebi LODR) for increasing transparency in transactions or dealings of a corporation in India.

Also, corporate governance was guided by Clause 49 of the Listing Agreement before introduction of the Companies Act of 2013. According to the new provision, SEBI has also approved few amendments in the Listing Agreement so as to improve the transparency in the business transactions of listed companies. These amendments are

The New Provisions for Directors and Shareholders are;

  • One or more women directors are recommended for certain classes of corporations

  • Every corporation in India must have a resident directory

  • The maximum permissible directors cannot go beyond 15 in a public limited company. If more directors requires to be appointed, it can be done only with approval of the shareholders after passing a Special Resolution

  • The Independent Directors are a newly incorporated concept under the Act. A code of conduct is specified and so are other functions and responsibilities

  • The Independent directors should attend at least one meeting a year

  • Every corporation should appoint an individual or firm as an auditor. The responsibility of the Audit committee has increased

  • Filing and disclosures with the ROC has been  increased

  • Top management recognizes the rights of the shareholders and make certain strong cooperation between the corporation and the stakeholders

  • Every corporation has to make accurate disclosure of financial situations, performance, material matter, ownership and governance

  •  Related Party Transactions – It involves the transfer of resources or facilities among a company and another specific party. The corporation creates policies which should be disclosed on the website and in the annual report. These transactions are required to be approved by the shareholders by passing a Special Resolution as the Companies Act of 2013.

  • A change in Clause 35B – The e-voting facility requires to be provided to the shareholder for any resolution is a legal binding for the company.

  • Corporate Social Responsibility – The Company has the duty towards promoting social development so as to return something that is beneficial for the society.

  • Whistle Blower Policy – This is a compulsory provision by SEBI which is a vigil mechanism to report the wrong or corrupt conduct of any director of the corporation.

Penalties for non-compliance

For ensuring that corporations follow the corporate governance in their business, the Companies Act has provided penalties in case of non-compliance. Under the Companies Act and Sebi LODR, there have been some penalties ensuring compliance with corporate governance provisions a compulsory affair.

The penalties under the Companies Act differ from a penalty of a few thousand rupees to jail term of up to 10 years. Provisions for example non-compliance with the appointment of directors, disclosure requirements relating to board report or director responsibility statement, which includes internal financial controls, related party transactions, maintenance of books of accounts, preparation of financial statements, etc.could attract not only huge penalties, but also jail term which may extend up to 6 months to 3 years.

The Penal consequences relating to fraud or false statements attracts fines of up to 3 times the sum involved and jail term which may extend up to 10 years.

The Act likewise has provisions where directors might end up vacating their office owing to slippages in governance, like failure to attend board meetings for a period of 12 months, non-disclosure of conflicts, and so forth. 

The Companies Act 2013 not only furnishes penal consequences for the corporation and its officers and directors, but also has severe penalty provisions for auditors and professionals for instance registered valuers. This consists of fines, as well as imprisonment and refund of remuneration where the infringement is carried out knowingly with intent to deceive.

As per Sebi LODR, non-compliance of corporate governance requirements could end up in attracting penalties for instance imposition of penalties, suspension in trading of the securities as well as freezing of promoter holdings.

Conclusion

Therefore, it is vital that businesses adopt as well as follow corporate governance provisions as instructed under the Companies Act and SEBI towards ensuring smooth administration of the company affairs in the best interest of the shareholders. This in turn, would also assist in promoting a healthy culture of ethical behavior with higher economic competence in the operations of the corporations.


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