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Corporate Governance in India
Corporate Governance may be defined as a set of systems, processes and principles, the sole of purpose of which is to create value for the stakeholders of the business like owners, creditors, workers, government etc. Its implementation will ensure that an organization is governed in the best interest of all its stakeholders. It is the system by which corporate fairness, transparency and accountability is introduced in the organization. It ensures:
- Protection of shareholder and other stakeholders interests;
- Transparency in all business process and dealing of the company
- Adequate disclosures and effective decision making to achieve corporate objectives;
- Statutory and legal compliances in true spirit;
- Commitment to values and ethical conduct of business.
Efforts related to Corporate Governance in India
India has been the foremost leader in introducing norms related to Corporate Governance in the corporate world. Corporate governance initiatives have been undertaken by the Ministry of Corporate Affairs (MCA) and the Securities and Exchange Board of India (SEBI). The first formal regulatory framework for listed companies specifically for corporate governance was established by the SEBI in February 2000, following the recommendations of Kumarmangalam Birla Committee Report. It was enshrined as Clause 49 of the Listing Agreement. Further, SEBI is maintaining the standards of corporate governance through other laws like the Securities Contracts (Regulation) Act, 1956; Securities and Exchange Board of India Act, 1992; and Depositories Act, 1996.
The Ministry of Corporate Affairs had appointed a Naresh Chandra Committee on Corporate Audit and Governance in 2002 in order to examine various corporate governance issues. It made recommendations in two key aspects of corporate governance: financial and non-financial disclosures: and independent auditing and board oversight of management. It is making all efforts to bring transparency in the structure of corporate governance through the enactment of Companies Act and its amendments.
The Government of India has also established National Foundation for Corporate Governance, with the following mission:
- To foster a culture for promoting good governance, voluntary compliance and facilitate effective participation of different stakeholders;
- To create a framework of best practices, structure, processes and ethics;
- To make significant difference to Indian Corporate Sector by raising the standard of corporate governance in India towards achieving stability and growth.
Norms related to Corporate Governance-Under Companies Act 1956
The Companies Act, 1956 which governs company related affairs in India provide various norms related to Corporate Governance, some of them are outlined below:
- Constitution of Audit Committee
Every public company having a paid up capital of not less than Rs 5 cr of rupees shall constitute a committee of the board known as Audit Committee, which shall consist of not less than three directors and such number of other directors as the board may determine of which two third of the total number of member shall be directors, other than managing or whole time directors. Audit Committee supervise the financial performance of the Company
- Remuneration to Directors
Remuneration beyond the specified limits to executive & non-executive Directors requires the approval of Shareholder & Ministry of Corporate Affairs.
- Appointment of Relatives
Appointment of relatives of Directors on place of profit in the Company requires the approval of Shareholder & Ministry of Corporate Affairs
- Related Party Transaction
In specific cases, transactions with related party requires the approval of Board of Directors and Ministry of Corporate Affairs Various disclosures are to be given regarding:
- Disclosure of Interest
Directors are required to disclose their direct and indirect interest in all the contracts entered into by the Company.
- Interested Directors shall not participate
In case of Public Company, interested Directors are not allowed to participate and vote on matters, in which he is interested.
- Directors Report
Board of Directors are required to give explanation as to the performance of the company in form of Directors Report. The Board report shall also include a Director Responsibility Statement indicating that
- in the preparation of annual accounts applicable accounting standards had been followed
- the directors had selected proper accounting policies and applied them consistently
- the directors had taken proper and sufficient care for the maintenance of adequate accounting records.
- Approval of Balance Sheet & Profit & Loss account
Shareholders approves the Balance Sheet & Profit & Loss account at every Annual General Meeting of the company.
- Appointment of Statutory Auditor
Shareholders appoints statutory auditor every year, who audits the annual accounts of the company and submit his report to the shareholder
Norms related to Corporate Governance-Under Securities Law
Every company, which is listed at a recognized stock exchange in India and whose paid-up capital is Rs 3 cr or more or networth is Rs 25 cr or more, is required to comply with clause 49 of the listing agreement, which provide for Corporate Governance norms, some of the features are outlined below
Clause 49 provides for the following provisions:
- Appointment of Independent Directors
The board of Directors of the company shall have the optimum combination of executive and non executive director with not less than fifty percent of the Board of Directors compromising of non – executive Director
- Constitution of Audit Committee
To set up an audit committee
- Audit committee shall have minimum three directors as members. Two-thirds of the members of audit committee shall be independent directors.
- The audit committee should meet at least four times in a year and not more than four months shall elapse between two meetings
- Disclosures
To give disclosures to shareholders:
- on the basis of related party transactions
- of Accounting treatment
- Risk Management
- Utilization of proceeds from public issue, right issue, preferential issue etc
- Remuneration of Director
- Management of the company
- About the appointment of new directors or re- appointment of the director
- Certification by CEO & CFO
The CEO and CFO shall certify to the board that they have reviewed financial statements and cash flow statements.
- Compliance Certificate
The company shall obtain a certificate from either the Auditors or Practicing Company secretaries regarding compliance of conditions of corporate governance.
- Compliance return
Company is required to file quarterly return with the Stock Exchange as to compliance of clause 49.
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