Table of ContentsCorporate Governance under the Companies ActCorporate Governance Mechanism Prescribed by SebiGovernment Initiatives - MCA MeasuresChanges on the AnvilEconomic Growth boom that Indian companies have witnessed since the 1990s has brought to the forefront the need for Indian companies to adopt corporate governance practices and standards consistent with international principles. Industry groups, including the Confederation of Indian Industries ("CII"), have been at the forefront of bringing corporate governance issues to the attention of Indian businesses and have also led to the he introduction of legislative reforms prescribing how Indian companies could implement effective corporate governance. mechanisms. The legal framework relating to corporate governance is largely covered by the Indian Companies Act, 1956 (“Companies Act”) and regulations/guidelines issued by the Securities and Exchange Board of India (“SEBI”), the securities market regulator in India. India. The Companies Act is administered by the Ministry of Corporate Affairs (“MCA”) and the provisions of the Companies Act are enforced by the Company Law Board. Regulators such as the Reserve Bank of India (“RBI”) and the Insurance Regulatory Development Authority (“IRDA”) also prescribe corporate governance guidelines applicable to banks and insurance companies respectively. The establishment of SEBI also played an important role in establishing corporate governance standards in India. Say no to plagiarism. Get Custom Essay on “Why Violent Video Games Should Not Be Banned”?Get the original essayOver the years, SEBI has constituted two committees to make recommendations relating to corporate governance in India, namely the Kumar Mangalam Birla Committee (which submitted its report in 2000) and the Narayana Murthy Committee (which submitted its report in 2003). These committees issued various recommendations relating to the composition of the Board of Directors (“Board”) of listed companies, the terms of meeting of the Board, the constitution of an audit committee, the communication of relevant information to shareholders , etc. MCA also appointed the Naresh Chandra Committee on Auditing and Corporate Governance in 2002 to examine various corporate governance issues in India and make recommendations on two key aspects of corporate governance, to namely financial and non-financial reporting, as well as independent audit and board oversight. management. Subsequently, the MCA also appointed the JJ Irani Committee in 2004 to review international best practices in corporate governance, in light of the growing needs of the Indian economy and businesses. The recommendations of these committees form the basis of the legal regime of corporate governance in India. This document aims to provide a general overview of the legal framework governing corporate governance and the various mechanisms laid down in the Companies Act and by SEBI, applicable to listed companies in India.Corporate Governance under the Companies Act CompaniesThe fundamental principles of corporate governance have been enshrined in the Companies Act, which contains various provisions relating to shareholder rights, disclosure and transparency and board accountability. Some of the relevant provisions have been highlighted below: a. Rights ofshareholders The Companies Act requires every company to convene an annual general meeting and provides an effective mechanism for shareholders to participate and vote at general meetings. In order to raise investor awareness, the Companies Act also requires the continuous dissemination of information to shareholders in the form of a certain number of corporate documents such as: annual reports, minutes of general meetings and board meetings. board of directors, auditor's report, board of directors' report, etc. b. Disclosure and Transparency RequirementsThe Companies Act states that disclosure and transparency is an integral part of corporate governance and therefore information about the company and its activities must be provided to shareholders, the Registrar of Companies and to stock exchanges in the form of annual report and other corporate documents mentioned above. The company's annual accounts must be certified by auditors, appointed at general meetings.c. Responsibilities of the board of directors The board of directors of a company is appointed at the general meeting, the appointment of each director having to be approved by a majority of the shareholders present and voting. Likewise, shareholders can remove a director by a simple majority of shareholders. At any time, the directors together with the managing directors, the manager and the secretary are classified as directors in default by the Companies Act. Even though the Board has general powers, shareholder consent has been made mandatory for certain company decisions such as the continuation of the issuance of capital, the issuance of shares at a discount, the repurchase of shares, reissue of repurchased bonds, change of head office in the state. and issuance of intercompany loans. The Companies Act also contains provisions protecting the interests of shareholders in cases of oppression and mismanagement within the company. Corporate governance mechanism prescribed by Sebi. SEBI, as the securities market regulator in India, exercises primary oversight over investor protection and its establishment has played an important role in setting standards for corporate governance in India. The SEBI Act, 1992 (“SEBI Act”) empowers SEBI to frame regulations, under which the regulator has introduced a comprehensive set of guidelines on insider trading, mergers and acquisitions, fraudulent practices, etc., all of which have a significant impact on businesses. governance of the country. SEBI, as a market regulator, also decides the terms and conditions of listing agreements which govern arrangements between stock exchanges and listed companies. The listing agreement generally requires the company to make disclosures to the stock exchange. For example, under Section 41 of the Listing Agreement, a company is required to submit quarterly financial results to the recognized stock exchange and these results must be approved by the board of directors of a company or by a committee (other than the audit committee). committee). In doing so, the company's chief executive officer and chief financial officer (by whatever name) are required to certify that the financial results do not contain any "false or misleading statements or figures" and do not omit any material facts that could make any statements or figures contained therein are misleading. Corporate governance standards are detailed in clause 49 of the listing agreement. Clause 49 of the listing agreement is the regime's most significant recent developmentIndian law relating to corporate governance. This clause, introduced in 2000 and subsequently revised, details the corporate governance standards that each listed company is required to adopt and follow. Article 49 of the Listing Agreement prescribes various corporate governance mechanisms in the following areas:a. Board of Directors and Independent DirectorsThe board of directors of a listed company should consist of an optimal number of executive and non-executive directors, with at least half of the board comprising non-executive directors. The article defines an independent director and specifies the conditions which determine independence. Thus, the independent director is a person who:i. apart from directors' remuneration, has no significant pecuniary relationship or transaction with the company, promoters, directors, senior management or holding company, subsidiaries and associates;ii. is not related to the promoters or persons in management positions at or below the board level.iii. has not been a manager of the company during the three previous financial years or who is not a partner or manager or who has been a partner or manager during the three previous years, of a firm of auditors, an internal audit firm, a law firm, a consulting firm associated with the company. The director is also not allowed to be a significant shareholder of the company, that is, own two percent or more of the voting block of shares of the company. With regard to the composition of the Board, Article 49 requires that at least one third of the Board be composed of independent directors, when the Chairman of the Board is a non-executive director or, failing that, at least half of the Board is composed of independent directors. independent directors, if the Chairman of the Board is an executive director. Controls have also been carried out on the extent of the power of directors by limiting the number of committees of which a director can be part. In addition, the listing agreement requires the company to adopt a code of conduct established by the board of directors and ensure that this code is followed by members of the board of directors and senior management of the company. SEBI is also quite vigilant towards the activities of independent directors and in a recent case has also held that independent directors can be held liable for misleading and fictitious financial statements published by the company. While responding to the argument that independent directors are not involved or have no knowledge of the day-to-day functioning of the company, SEBI observed that “the institutions of independent directors and the audit committee have been established to promote corporate governance and strengthen the protection of interests”. investors”. The SEBI order also states that: “Although the extent of liability of an independent director may differ from that of an executive director, an independent director has a duty of care. This duty requires the exercise of independent judgment with reasonable care, diligence and skill that should reasonably be exercised by a prudent person having the knowledge, skill and experience that could reasonably be expected of a director in his position….By failing to ask the right questions at the right time, I find that the notices failed in their duty of care as an independent director. " b. Audit committees The audit committee, which oversees the financial reporting process of companies and the necessary financial information, must be headedby an independent administrator. In order to ensure the independent functioning of the audit committee, two thirds of the directors making up the committee must be independent directors.c. SubsidiariesThe presence of at least one independent director of the holding company, participation in the boards of directors of a significant unlisted subsidiary has been made mandatory by Article 49. The financial statements, in particular the investments made by the subsidiary unlisted, must also be examined by the audit committee mentioned above. DisclosuresClause 49 of the Listing Agreement requires listed companies to provide periodic disclosures on related party transactions, accounting treatment, risk management, directors' remuneration, management-related matters, appointment and renewal of the mandate of directors and the use of proceeds from public issues, rights issues, preferential issues. etc. Corporate Governance ReportA separate section, containing a detailed corporate governance compliance report, must be included in the company's annual reports. A quarterly compliance report, in the format specified in the listing agreement, must also be submitted to the stock exchange within 15 days of the close of the quarter in a specific format.f. ComplianceFinally, the company is required to obtain an annual certificate from the existing auditors or company secretaries regarding compliance with corporate governance conditions, which is then sent to shareholders and stock exchanges.Government Initiatives – MCAMCA Measuresis the executive arm that regulates the functioning of the business sector. It mainly administers the Companies Act and other related laws, such as the Competition Act 2002, the Partnerships Act 1932, the Companies (Grants to National Funds) Act 1951 and the the Companies Registration of 1860. The MCA also exercises supervision over three separate bodies. , established by Parliament, which concerns respectively the professions of chartered accountant, company secretary and cost accountant. As the principal government agency, the MCA has taken a number of steps to set the standards of corporate governance in the country. Some of the key initiatives taken by the MCA are highlighted below: a. Voluntary Guidelines on Corporate Governance MCA introduced the Voluntary Guidelines on Corporate Governance in 2009 (“Guidelines”), a set of best practices for developing ethical and responsible standards in Indian industry. The guidelines are completely voluntary in nature, but are strongly recommended by the government to all public companies as well as large private companies. The guidelines cover various issues such as: the constitution of the Board (nomination, role of independent directors, remuneration); the responsibilities of the Board (training, enabling quality decision-making, risk management, performance evaluation, compliance); audit committees of the board of directors (constitution, enabling powers, role and responsibilities); and auditors (appointment, certificate of independence, rotation); secretarial audit; whistleblowers, etc.b. Green Initiatives A number of green initiatives have also been recently introduced, such as: (i) serving documents electronically to increase speed of delivery, (ii) participation of directors and shareholders via video conferencing to ensure greater participation and to limit the costs incurred forattending various meetings, (iii) secure electronic voting at general meetings of the company and (iv) issuance of digital certificates and standard letters by the Registrar of Companies (“ROC”) to reduce delays. Serious Fraud Investigation Office (“SFIO”)In 2003, the SFIO was created in a context of stock market scams, bankruptcies of non-financial banking companies, phenomena of disappearance of companies and plantation companies. The office investigates cases that have interdepartmental and multidisciplinary ramifications or that involve the public interest or the possibility of an investigation contributing to the improvement of systems, laws or procedures. Inquiry shall be carried out only when requested by the Central Government under sections 235 and 237 of the Companies Act.d. Investor Grievance Management Cell (“IGMC”) The IGMC, formerly known as the Investor Protection Cell, was established by the MCA in 1993 with the aim of resolving investor grievances through ROCs jurisdictional. IGMC coordinates with the RBI, SEBI and the Ministry of Economic Affairs and generally deals with issues such as non-receipt of annual report, non-receipt of dividend amount, non-reimbursement of demand money, etc. Recently, the MCA also authorized the use of MCA-21, an online portal, to receive complaints online.e. National Foundation for Corporate Governance (“NFCG”)NFCG, the apex national platform on corporate governance issues, was established in 2003 by the MCA to serve as a platform for deliberation on issues related to corporate governance. business and raise awareness among business leaders of the importance of “good corporate governance, self-regulation and managerial responsibilities”. Besides MCA, other stakeholders of NFCG are: Confederation of Indian Industry, Institute of Chartered Accountants of India, Institute of Company Secretaries of India, Institute of Cost Accountants and Works of India and National Stock Exchange of India Limited. The MCA proposes to replace the existing Companies Act with the Companies Bill, 2011 (“Companies Bill”), which is currently under consideration by the Union Cabinet. The Companies Bill significantly reworks the framework of the Companies Act and places greater emphasis on corporate governance standards and shareholder interests. Some of the salient features of the Companies Bill have been highlighted below: (i) The Companies Bill contains provisions relating to the roles and responsibilities of independent directors, whose roles and responsibilities are currently only included 'in article 49 of the listing contract. Under the Companies Bill, one third of a company's directors must be independent directors. (ii) The Companies Bill also proposes to empower the Central Government to prescribe a minimum number of independent directors in the case of public companies and subsidiaries of any public company. companies that are not listed. (iii) The Companies Bill recognizes the importance of disclosures in corporate governance and therefore provides for additional disclosures by boards of directors, such as information relating to directors' remuneration, shareholding structure, etc. (iv) Additionally, the Companies Bill also proposes to introduce the concept of class actions, which would allow member shareholder associations or a group of shareholders to take legal action in cases of fraudulent action of the.