The method through which firms are directed and governed is known as corporate governance. The governance of their companies is the responsibility of their boards of directors. The responsibility of the shareholders in governance is to appoint the directors and auditors, as well as to ensure that a suitable governance framework is in place. The board’s tasks include… Read More »

The method through which firms are directed and governed is known as corporate governance. The governance of their companies is the responsibility of their boards of directors. The responsibility of the shareholders in governance is to appoint the directors and auditors, as well as to ensure that a suitable governance framework is in place.

The board’s tasks include establishing the firm’s strategic goals, giving leadership to put them into action, overseeing the administration of the company, and reporting to shareholders on their stewardship.

Corporate governance is defined as the system of norms, processes, practises, regulations, and rules that influence how people direct, administrate, and manage a corporation at its most basic level. It’s a pledge to uphold the company’s values of accountability, diversity, transparency, and justice. It also refers to the connections between stakeholders and business objectives.

Importance of Corporate Governance

Corporate Governance in an organisation holds businesses accountable and makes them more transparent to investors, improving access to financing and safeguarding stakeholders.[1]

  • It guarantees that each entity’s rights and duties are appropriately apportioned, eliminating any form of discrimination.
  • It provides a platform for defining and achieving organisational objectives.
  • It regulates corporate behaviour by restricting the amount of influence and authority that each entity has.
  • It establishes the guidelines for decision-making in company matters.
  • It keeps track of the company’s activities as well as those of its stakeholders.

Principles of Corporate Governance

Accountability

Accountability entails more than merely determining who is to blame or praised after an event. Taking proactive actions to own your decisions entails identifying risks and establishing robust internal control systems.

Transparency

Transparency, like accountability, builds trust. It communicates to others that you have nothing to hide while also increasing accountability for company conduct.

Fairness

Fairness is about ethics as much as it is about good business sense. Unequal treatment leads to a loss of interest and support for your business. No one wants to put their money into a corporation that favours some employees over others.

Responsibility

Overall, these principles demand that you use your authority wisely. When your organisation is transparent, fair, and accountable, it’s difficult to show favouritism, take needless risks, or act unethically or against the best interests of shareholders and stakeholders.

Corporate Governance in India

The Ministry of Corporate Affairs (MCA) and the Securities and Exchange Board of India (SEBI) are the two organisations that make up India’s corporate governance framework (SEBI). Clause 49 of the SEBI Act oversees and governs corporate governance in India’s listed corporations. This clause is included in stock exchanges’ listing agreements with corporations, and it is mandatory for listed companies to follow its provisions.

(1) The Companies Act of 2013 includes laws relating to board composition, board meetings, board processes, independent directors, general meetings, audit committees, related party transactions, financial statement disclosure obligations, and so on.

The following provisions of the New Act address corporate governance:

  1. The New Companies Act makes major modifications to the board of directors’ makeup.
  2. Every company must nominate one (one) resident director to its board of directors.
  3. Nominated directors will no longer be considered independent.
  4. On their boards, listed businesses and certain classes of public companies must designate independent directors and women directors.
  5. The directors’ responsibilities are codified for the first time in the New Companies Act.
  6. Listed corporations and certain other public companies must nominate at least one (one) woman director to their board of directors.

(2) SEBI Guidelines: The Securities and Exchange Board of India (SEBI) is a regulatory body that oversees listed firms and sets regulations, rules, and guidelines to ensure investor protection.

The SEBI (Prohibition of Insider Trading) Regulations were implemented in 2015. Insider trading is not illegal in and of itself; however, trading by an insider on the basis of non-public knowledge is. SEBI enacted this legislation to prevent such trading. Corporate insiders who make trading decisions based on price sensitive information, whether directly or indirectly, are subject to this limitation. The disclosure is required at two levels: the first is prompt revelation of material facts, and the second is the disclosure of completed transactions.

The SEBI regulation (Issuance of Capital and Disclosure Requirements) was enacted in 2009. This regulation comprises regulations for public issues, in which the issuer must meet the requirements set forth in the regulation, as well as restrictions on right issues. It also includes provisions for the issuer to get in-principle approval from a recognised stock exchange before listing securities on a stock exchange. Part A of Schedule XI of the regulations discusses disclosure in Red Herring prospectuses, Shelf prospectuses, and Prospectuses, and states that it is the issuer’s responsibility to ensure that all material information and reports are submitted prior to the issue.

(3) Stock Exchange Standard Listing Agreement: For corporations whose shares are traded on stock exchanges.

(4) Accounting Standards

Accounting standards established by the Institute of Chartered Accountants of India (ICAI)- ICAI is an independent organisation that issues accounting standards that include recommendations for financial information disclosure. When it comes to the new Companies Act of 2013, Section 129 states that financial statements must present a true and fair picture of the company’s financial status and must be prepared in accordance with the accounting standards set forth in Section 133 of the Act[2]. It is also assumed that the information presented in such financial statements adheres to accounting rules.

Conclusion

The development of rules and norms is a crucial initial step toward ensuring excellent corporate governance, but it is only the first stage. Although the road ahead is lengthy, the Indian government and SEBI will continue to play an important role in addressing the issue of corporate governance. The Companies Act amendment, as well as the government’s many programmes and guidelines released by the ICAI and ICSI, create a regulatory framework for preventing fraud and protecting investors’ interests.


[1] Mitratech. (2020). What Is Corporate Governance? | Mitratech. [online] Available at: https://mitratech.com/what-is-corporate-governance/

[2] Companies Act of 2013


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Updated On 2021-12-20T06:40:22+05:30
Eshanee Bhattacharya

Eshanee Bhattacharya

Eshanee is practicing in the areas of Corporate Commercial, Insolvency and Securities Law. She is an alumnus of the National Institute of Securities Markets. (MNLU Mumbai)

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