Governance deficit – On the issue of Corporate Governance in India | 15 July 2023 | UPSC Daily Editorial Analysis

What's the article about?

• It talks about the lack of corporate governance in the Indian Companies.

Relevance:

• GS3: Effects of Liberalization on the Economy, Changes in Industrial Policy and their Effects on Industrial Growth;
• GS4;
• Essay;
• Prelims

Context:

• The promoters of the Dish TV company and a group of minority investors got into a spat recently, which brought up the subject of poor corporate governance in Indian companies.
• The actual content of the article is not important for our exam. Thus, we will discuss the topic of corporate governance here.

Analysis:

What is corporate governance? What are the elements of corporate governance?

• Corporate governance is a set of principles, policies, and procedures that guide the management and operations of a company.
• It ensures that the company is managed in a responsible, transparent, and ethical manner that is aligned with the interests of all its stakeholders.
• In India, corporate governance has become a critical issue in recent years, as the country’s economy has grown rapidly and the importance of the corporate sector has increased.
• The Indian corporate governance framework focuses on the following:
  • Protection of minority shareholders
  • Accountability of the board of directors and management of the company
  • Timely reporting and adequate disclosures to shareholders
  • Corporate social responsibility

The elements of corporate governance can vary depending on the source, but some common elements include:

• Board of Directors:
  • The board of directors is the primary force influencing corporate governance.
  • They are responsible for overseeing the company's management and ensuring that the company is being run in the best interests of its stakeholders.
• Transparency:
  • Transparency refers to the openness and clarity of a company's operations and decision-making processes.
  • It involves providing accurate and timely information to stakeholders about the company's financial performance, risks, and other important matters.
• Accountability:
  • Accountability refers to the responsibility of a company's management and board of directors to act in the best interests of the company and its stakeholders.
  • This includes being accountable for the company's financial performance, ethical behavior, and compliance with laws and regulations.
• Ethics and Integrity:
  • Ethics and integrity refer to the moral principles and values that guide a company's behavior.
  • Companies with strong corporate governance prioritize ethical behavior and integrity in all aspects of their operations.
• Shareholders' Rights:
  • Shareholders have certain rights, such as the right to vote on important matters and the right to receive dividends.
  • Good corporate governance ensures that shareholders' rights are protected and that they have a say in the company's decision-making processes.
• Risk Management:
  • Risk management involves identifying, assessing, and mitigating risks that could impact the company's operations or financial performance.
  • Good corporate governance includes effective risk management practices to ensure that the company is prepared for potential risks and can respond to them appropriately.

In India, corporate governance is regulated by various legal and institutional provisions. Here are some key provisions for corporate governance in India:

• Securities and Exchange Board of India (SEBI):
  • SEBI is the regulatory body responsible for monitoring and regulating corporate governance of listed companies in India.
  • It enforces corporate governance requirements through Clause 49, which is incorporated in the listing agreement of stock exchanges with companies. Listed companies are required to comply with the provisions of Clause 49.
• Ministry of Corporate Affairs (MCA):
  • The MCA is another key organization involved in corporate governance initiatives in India.
  • It plays a role in formulating and implementing corporate governance regulations and guidelines.
• Companies Act, 2013:
  • The Companies Act, 2013 is a comprehensive legislation that governs corporate governance in India.
  • It mandates directors to owe duties not only towards the company and shareholders but also towards stakeholders.
  • The Act includes provisions related to the composition and functioning of boards, disclosure requirements, shareholder rights, and more.
• Listing Agreement:
  • Listed companies in India are required to comply with the provisions of the listing agreement with stock exchanges.
  • This agreement incorporates regulations related to corporate governance, including Clause 49.
• Non-regulatory bodies:
  • Non-regulatory bodies, such as the Confederation of Indian Industries (CII), have also published codes and guidelines on corporate governance.
  • These guidelines provide additional recommendations and best practices for companies to follow.
• Shareholder participation and rights:
  • Indian law provides mechanisms for shareholders to monitor companies and enforce their rights.
  • The Companies Act, 2013, and SEBI listing regulations include provisions related to shareholder participation, activism, and rights.

Some of the ethical issues involved in corporate governance in India are:

• Conflict of interest: This occurs when a director or officer of a company has a personal interest that conflicts with the interests of the company.
• Weak board: A weak board can lead to poor decision-making, lack of oversight, and inadequate risk management.
• Separation of ownership and management: In India, many companies are family-owned, which can lead to a lack of separation between ownership and management. This can result in a lack of accountability and transparency.
• Fiduciary duty: Directors under Indian law hold a fiduciary duty and are charged with the responsibility to undertake precautionary, preventive mitigation, as well as remedial measures, to ensure seamless operations and financial agility of the company. However, there have been instances of directors failing to fulfill their fiduciary duty.
• Board succession planning: This involves identifying and developing potential successors for key positions on the board. In India, there is often a lack of transparency and objectivity in board succession planning.
• Board diversity and harmony: A lack of diversity on the board can lead to groupthink and a lack of fresh ideas. Additionally, a lack of harmony on the board can lead to conflicts and poor decision-making.
• Poor disclosure: Companies in India often have poor disclosure practices, which can lead to a lack of transparency and accountability.

Way Forward:

• Corporate governance is a critical issue in India, and it is essential that companies operate in a socially responsible and ethical manner.
• The government has taken several steps to ensure good corporate governance practices, such as the introduction of the Companies Act, 2013, which has provisions for independent directors, audit committees, and whistleblower mechanisms.
• Companies must design the framework of corporate governance policies to uphold the principles of transparency, integrity, ethics, and honesty.
• Perhaps the most significant issue that Indian regulators must address is ensuring that independent directors can fulfil their obligations in the closely held and controlled world of Indian corporates.