Company Secretaryship Training

PROJECT REPORT ON
CORPORATE GOVERNANCE

Submitted by:
Rashmi Rekha Bora
Registration Number: 120330769/08/2009
Acknowledgement
This project is a culmination of the constant endeavor to learn
while working and training, while pursuing a professional
course such as the Company Secretaryship Course. At the
outset I would like to express my sincere acknowledgement to
my parents who have always encouraged me to pursue the
Company Secretaryship Course as well as my other family
members. Further I would also like to thank my employer, CS
Abhishek Agarwal who has always trained me with great
enthusiasm and sincerity.

Further I would also like to express my sincere gratitude to my

professional colleagues at work who have always helped me
while I was pursuing my apprenticeship training and last but not
the least the Almighty who has given me the strength , courage
perseverance and the power to grasp knowledge which are all
essential attributes to pursue a professional course such as the
Company Secretaryship Course.

Rashmi Rekha Bora

Registration No- 120330769/08/2009
Preface
As per the Company Secretary ship Regulations, 1982 an
Apprenticeship Trainee is required to prepare a Project Report
in the Final Quarter of his/her training period. The said project
report should be prepared in consultation with the Company
Secretary under whom he/she has trained.

Keeping in view this requirement, I have prepared this project

report in consultation with my employer, Mr. Abhishek Agarwal
Sir under whom I have trained. The topic chosen by me is
Corporate Governance, which has had a significant impact in
the current corporate scenario. The subject of corporate
governance has been under limelight after multiple high-profile
cases across the international business world has shown how
crucial the subject really is.

The Project report has been prepared by me after taking into

consideration the need and importance of Corporate
Governance. Corporate Governance is integral to the Existence
of the Company and is needed to create a corporate culture of
Transparency, Accountability and Disclosure. It refers to
compliance with all the moral and ethical values, legal
framework and voluntary adopted practices. This enhances
customer satisfaction, shareholder value and wealth. The said
project has been prepared after referring various case laws and
real corporate scenarios
Contents
A Particulars Page No
1 Introduction 1
2 Definition 2
3 Historical Background 4
4 Corporate Governance Norms and 5
Constituents
5 Indian Scenario 7

6 International Scenario 15

7 Corporate Governance in 18
Companies Act 2013
8 Benefits and Limitations 21

9 Conclusion 23
Introduction

Companies pool capital from a large investor base both in the domestic
and in the international capital markets. In this context, investment is
ultimately an act of faith in the ability of a company’s management. In
order to manage the affairs of a company and to act in the best interests
of all at all times, there must be a system whereby the directors are
entrusted with responsibilities and duties in relation to the direction of the
company affairs.

Corporate governance is a system of making Management accountable

towards the stakeholders for effective management of the companies.
Corporate governance is also concerned with the morals, ethics, values,
parameters, conduct and behavior of the company and its management.

The underlying principles of corporate governance revolve around three

basic inter- related segments. These are:

• Integrity and Fairness

• Transparency and Disclosures

• Accountability and Responsibility

According to the Confederation of Indian Industry (CII), corporate

governance deals with laws, procedures, practices and implicit rules that
determine the ability of the company to make managerial decisions vis-
àvis its claimants – in particular, its shareholders, creditors, customers,
the State and employees.

Corporate governance mainly consists of two elements i.e., A long-term

relationship, which has to deal with checks and balances, incentives of
managers and communications between Management and investors.
The second element is a transactional relationship involving matters
relating to disclosure and authority. In other words, 'good corporate
governance' is simply 'good business'.

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Definition

Corporate governance refers to the structures and processes for the

direction and control of companies. Corporate governance concerns the
relationships among the management, Board of Directors, controlling
shareholders, minority shareholders and other stakeholders. Good
corporate governance contributes to sustainable economic development
by enhancing the performance of companies and increasing their access
to outside capital.

A means whereby society can be sure that large corporations are well-
run institutions to which investors and lenders can confidently commit
their funds. It is a term that refers broadly to the rules, processes, or
laws by which businesses are operated, regulated, and controlled. The
term can refer to internal factors defined by the officers, stockholders or
constitution of a corporation, as well as to external forces such as
customer groups, clients and government regulations creates
safeguards against corruption and mismanagement, while promoting
fundamental values of a market economy in democratic society.

Corporate Governance is a multi-faceted subject and difficult to

comprehend in a concise definition. The main theme of corporate
governance is to integrate sound management policies in the corporate
framework in such a manner to bring economic efficiency in the
organization in order to achieve twin
goals of profit maximization and shareholder welfare. Few
comprehensive definitions on Corporate Governance are discussed
below.

ICSI:

“Corporate Governance is the application of best Management practices,

compliance of law in true letter and adherence to ethical standards for
effective management and distribution of wealth and discharge of social
responsibility for sustainable development of all stakeholders.”

Standard and Poor

“Corporate Governance is the way a company is organized and

managed to ensure that all financial stakeholders receive a fair share of
the company’s earnings and assets.”

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Mathiesen [2002]

“Corporate governance is a field in economics that investigates how to

secure/motivate efficient management of corporations by the use of
incentive mechanisms, such as contracts, organizational designs and
legislation. This is often limited to the question of improving financial
performance, for example, how the corporate owners can
secure/motivate that the corporate managers will deliver a
competitive rate of return”

The Cadbury Committee U.K

“It is a system by which companies are directed & controlled”.

Different countries have different ideas as to what constitutes good

corporate governance. Therefore any satisfactory definition, to be
applicable to a modern, global company, must synthesize best practice
from the biggest economic powers into something which can be applied
across all major countries. In essence we believe that good corporate
governance consists of a system of structuring, operating and controlling
a company such as to achieve the following:

• a culture based on a foundation of sound business ethics

• fulfilling the long-term strategic goal of the owners while taking into
account the expectations of all the key stakeholders, and in particular:

o consider and care for the interests of employees, past, present and
future

o work to maintain excellent relations with both customers and suppliers

o take account of the needs of the environment and the local community

• Maintaining proper compliance with all the applicable legal and

regulatory requirements under which the company is carrying out it’s
activities.

We believe that a well-run organization must be structured in such a way

that all the above requirements are catered for and can be seen to be
operating effectively by all the interest groups concerned.

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Historical Background

The principles of governance have been in existence for centuries.

History reveals that Kautilya, also called Chanakya or Vishnu Gupta who
was Mahaamatya (equivalent to Prime Minister) in Maurya Empire in 300
BC propounded principles of good governance. In his celebrated treatise
on statecraft “Arthashastra”, he provided principles of governance.

In recent times, the subject of corporate governance leapt to global

business limelight from relative obscurity after a string of collapses of
high profile companies. Enron, the Houston, Texas based energy giant,
and WorldCom, the telecom behemoth, shocked the business world with
both the scale and age of their unethical and illegal operations. Worse,
they seemed to indicate only the tip of a dangerous iceberg. While
corporate practices in the US companies came under attack, it appeared
that the problem was far more widespread. Large and trusted companies
from Parmalat in Italy to the multinational newspaper group Hollinger
Inc., revealed significant and deep-rooted problems in their corporate
governance. Even the prestigious New York Stock Exchange had to
remove its director, Dick Grasso, amidst public outcry over excessive
compensation. It was clear that something was amiss in the area of
corporate governance all over the world.

Corporate governance has, of course, been an important field of query

within the finance discipline for decades. Researchers in finance have
actively investigated the topic for at least a quarter century and the father
of modern economics, Adam Smith had recognized the problem over
two centuries ago. There have been debates about whether the Anglo-
Saxon market- model of corporate governance is better than the bank
based models of Germany and Japan

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Corporate Governance norms and Constituents

Corporate governance are the policies, procedures and rules governing

the relationships between the shareholders, (stakeholders), directors
and managers in a company, as defined by the applicable laws, the
corporate charter, the company’s bylaws, and formal policies. Primarily it
is about managing top management, building in checks and balances to
ensure that the senior executives pursue strategies that are in
accordance with the corporate mission. It consists of a set of processes,
customs, policies, laws and institutions affecting the way of a corporation
is directed, administered or controlled. Corporate governance governs
the relationship among the many players involved (the stakeholders) and
the goals for which the corporation is governed.

The Key Participants are as following

Shareholders

The shareholders are the principal owners of the company who provide
capital to the company in lieu of return received by them in form of
dividends on the earnings of the company. The individual shareholders
participate in corporate governance procedures by exercising their voting
rights on the key decisions of the company in in the interest of all
stakeholders. The other institutional shareholders of the company like,
insurance companies, trusts, investment banks, etc. who have greater
shareholding than other shareholders actively have a greater role in
monitoring corporate governance activities of the company as they are
interested in market viability of the company in form of large market
shares.

Directors
The Board of Directors are key constitute players for formulating and
implementing corporate governance practices in the heart of the
company machinery by making key decisions pertaining to setting long
term corporate strategy of the company, sharing high responsibility to
run the company on good governance structure, bringing effective board
leadership to tackle the company’s operations at all levels and
monitoring its performance in a fair and transparent manner.

Officers and key managerial personnel

Key Managerial Personnel (KMP) and other officers of the company who
serve the top management level under the Companies Act, 2013

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includes the Chief Executive Officer, Managing Director or Manager;
Whole Time Director; Company Secretary. The Key Managerial
Personnel would advise the Boards to achieve the corporate goals and
by adhering to Good Corporate Governance practices. KMP would also
have to report to the Sectoral Regulators for the noncompliances
made by the company.

The new law bestows upon KMP’s a significant role to run the
company’s operations in such a manner by adhering to laws in true letter
and spirit in order to spell out the will of directors and other stakeholders
effectively and efficiently in achieving company’s twin objective of profit
maximization and maximization of wealth.

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Indian Scenario

The system of corporate governance is India operates in an

administered environment. Administrative control is seen as arbitrary
and enforcement as poor, as many recent scams has demonstrated.
Directors from the promoter’s family have traditionally dominated the
Indian boards. Professionals and other persons close to them constitute
the majority on the board. Positions of chairman and managing director
and executive directors are filled in from among the above persons. In
most of the Indian companies there is no separation of roles of the
Chairman and Managing Directors and one individual combines both the
positions. Most boards of directors, inspire of having nominees of
Government controlled financial institutions, have little information about
illegal or unethical conduct of their executive. The boards find it difficult
to monitor the compliance of the company to the various legal
requirements. The monitoring of professional standards by professional
association such as of chartered accounts and auditors is also
considered lax and discretionary. In government corporations the boards
are a mere legal formally. The elaborate system of accountability of
public enterprises operates through the means of parliamentary
committees, independent vigilance officers and the comptroller and
auditor general of India. Accountability has remained more in form than
in substance. Major decisions such as appointments, investments,
purchase contract, selling arrangements, collaborations, and industrial
relation agreements have moved out of the corporation ambit into the
bureaucracy and the political arena, bringing into focus the widespread
corruption. None of the stakeholders-boards, the stock market, the
banker, the financial institutions, the trade unions, and government-
exercise major monitory role over the inappropriate actions taken by the
top management in the corporate sector. The Indian corporate sector,
largely represented by family-owned companies, has come to realize
that managing company affairs demonstrably in the interest of
shareholders is the only way to attract capital. There is evidence of a
fundamental shift from management-dominated boards to shareholder
sensitive ones and this strength is likely to be further strengthened.

The historical development of Indian corporate laws has been marked by

many interesting contrasts. At independence, India inherited one of the
world’s poorest economies but one which had a factory sector
accounting for a tenth of the national product. The country also inherited
four functioning stock markets (predating the Tokyo Stock Exchange)
with clearly defined rules governing listing, trading and settlements, a
well-developed equity culture (if only among the urban rich), and a
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banking system replete with well-developed lending norms and recovery
procedures2. In terms of corporate laws and financial system, therefore,
India emerged far better endowed than most other colonies. The 1956
Companies Act built on this foundation, as did other laws governing the
functioning of joint-stock companies and protection of investors’ rights.
Early corporate developments in India were marked by the managing
agency system. This contributed to the birth of dispersed equity
ownership but also gave rise to the practice of management enjoying
control rights disproportionately greater than their stock ownership. The
turn towards socialism in the decades after independence, marked by
the 1951 Industries (Development and Regulation) Act and the 1956
Industrial Policy Resolution, put in place a regime and a culture of
licensing, protection, and widespread red-tape that bred corruption and
stilted the growth of the corporate sector. The situation worsened in
subsequent decades and corruption, nepotism, and inefficiency became
the hallmarks of the Indian corporate sector. Exorbitant tax rates
encouraged creative accounting practices and gave firms incentives to
develop complicated emolument structures with large “under-the-table”
compensation at senior levels . In the absence of a stock market capable
of raising equity capital efficiently, three central (federal) government
development finance institutions (the Industrial Finance Corporation of
India, the Industrial Development Bank of India and the Industrial Credit
and Investment Corporation of India), together with about thirty other
state-government owned development finance institutions, became the
main providers of long-term credit to companies. Along with the central
government-owned and managed mutual fund, the Unit Trust of India,
these institutions also held (and still hold) large blocks of shares in the
companies to which they lent, and invariably had representations on
their boards in the form of nominee directors, though they traditionally
played very passive roles in the boardroom.

Corporate Governance and Law Reforms in India

Corporate governance has been a buzzword in India since 1998. But the
need to have a good mechanism started since the beginning of 1990s
when the Indian stock market rocked with many scams. On account of
the interest generated by Cadbury Committee Report (1992) in UK, the
Confederation of Indian Industries (CII), the Associated Chambers of
Commerce and Industry (ASSOCHAM) and the Securities and
Exchange Board of India (SEBI) constituted Committees to recommend
initiatives in Corporate Governance. The recommendations of the Kumar
Mangalam Birla Committee, constituted by SEBI, led to the addition of
Clause 49 in the Listing Agreement. These recommendations, aimed at

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improving the standards of Corporate Governance, are divided into
mandatory and non-mandatory recommendations. The
recommendations have been made applicable to all listed companies,
their directors, management, employees and professionals associated
with such companies. The ultimate responsibility for putting the
recommendations into practice lies directly with the Board of Directors
and the management of the company. The latest developments include
constitution of a high-powered Committee by Department of Company
Affairs, Government of India, headed by Shri Naresh Chandra, on
August 21, 2002, to examine various corporate governance issues.

Other developments include the constitution of a Committee by SEBI

under the Chairmanship of Shri N.R.Narayana Murthy, for reviewing
implementation of the corporate governance code by listed companies
and issue of revised clause 49 based on its recommendations; setting up
of a proactive Standing Company Law Advisory Committee by
Department of Company Affairs to advise on several issues like
inspection of corporate for wrong doings, role of independent auditors
and directors and their liability and suggesting steps to enhance
imposition of penalties. Another Committee has been constituted by the
Department of Company Affairs known as the Working Group for
examination of suggestions received on good corporate governance. A
High Powered Central Coordination and Monitoring Committee (CCMC),
co-chaired by Secretary, Department of Company Affairs and Chairman,
SEBI was set up to monitor the action taken against the vanishing
companies, and unscrupulous promoters who misused the funds raised
from the public. It was decided by this Committee that Seven Task
Forces be set up at Mumbai, Delhi, Chennai, Kolkata, Ahmadabad,
Bangalore and Hyderabad with Regional Directors/ Registrar of
Companies of respective regions as convener, and Regional Offices of
SEBI and Stock Exchanges as Members. The main task of these Task
Forces was to identify the companies, which have disappeared, or which
have mis-utilised the funds mobilized from the investors, and suggests
appropriate action in terms of Companies Act or SEBI Act. SEBI says
that the Corporate governance norms introduced for listed companies
International Journal of Advanced Research in Management and Social
Sciences vide clause 49 of the listing agreement on the basis of the
Kumaramanagalam Birla Committee Report, 1999 have met with
encouraging success, since most of the ‘A’ Group companies listed on
BSE and NSE have complied with the Norms. However, the corporate
governance has remained more on paper is clear from the Report on
Corporate Governance by the Advisory Group constituted by the

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Standing Committee on International Financial Standards and Codes of
the Reserve Bank of India. The following facts emerged from the report:

• The predominant form of corporate governance in India is ‘insider

model’ where promoters dominate governance in every possible
way. Indian corporate which reflect the pure ‘outsider model’ are
relatively small in number.
• A distinguishing feature of the Indian Diaspora is the implicit
acceptance that corporate entities belong to founding families.
• The listing agreement, the main instrument, through which SEBI
ensures implementation of corporate governance, is a weak
instrument, as its penal provisions are not stringent. The maximum
penalty a stock exchange can impose on any company that does
not follow the corporate governance norms is suspension of
trading in its shares. This penalty hurts the investor community
more than the management of the company that violates the listing
agreement.
• Regional stock exchanges where a large number of companies are
listed lack effective organization and skills to monitor effective
compliance with corporate governance norms.
• A vast majority of companies that are not listed remain outside the
purview of SEBI’s measures.
• The financial institutions that have large shareholdings in most of
the listed companies have been passive observers in the area of
corporate governance and do not effectively exercise their rights
as shareholders.
• The autonomy of the Boards of Public Sector Units and public
sector banks has been seriously eroded due to special legislative
provisions or notifications and day to day interference by the
concerned administrative ministries.

It is interesting to note that despite corporate governance in the form of

clause 49 was already introduced in the year 2000; it could not prevent
securities scam of 2002. Following events in the stock exchanges have
exposed the lack of ethical conduct by many Indian corporate:

• Rampant insider trading by the promoters in league with big

market players.
• Massive price rigging/ manipulation by the promoters in league
with big market players prior to mergers and takeovers.
• Gross misuse of bank funds for clandestine stock market
operations.
• Criminally motivated investment in violation of laid down norms.

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 • Many companies, which raised money from the capital market
through public issues, have not paid any dividend for more than
five years.
• The total amount of money (collected through public offerings)
duped by the vanishing companies is calculated to be Rs 66,861
billion;

In addition small investors have lost their hard earned money in the
stock markets for the following reasons:

• Lack of ethics, selfish conscience, and breach of trust on the part

of the promoters.
• Lack of adequate compliance mechanism, supervision, proper
inspection, effective regulation and preventive action by regulators
like Department of Company Affairs, Registrar of Companies,
Board of Stock Exchanges as well as SEBI.
• Lack of professional ethics on the part of professionals, like
Chartered Accountants, Company Secretaries etc, who are holding
onerous positions in companies.

It all establish that no matter that most of the companies may be fully
complying with the corporate governance norms laid down by clause 49,
but absence of good conscience on the part of the promoters to observe
ethical practices have created little impact in practice. A number of
proposals have been made to improve corporate governance. The
various suggested reforms include:

• strengthening the position of internal and outside auditors;

• allowing mergers and acquisitions approved by a panel;
• requiring more independent outside directors on boards;
• introducing the supervisory board or two- tier system;
• allowing banks to own greater equity in shares of the companies;
• enhanced disclosure through consolidated balance sheets and
enforcement of accounting standards.

An important mechanism required to make the capital marked discipline

is liberalization of restrictions on mergers and acquisitions. Secondly, the
bankruptcy provisions are allowed to operate without any government
interference. Another important commitment necessary on the part of
government is that it should discontinue directed lending and permit
commercial banks and government financial institutions to be run by
their boards in the interest of their shareholders rather than the
government. In India, the four clusters of legal arrangements have been

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developed to respond to corporate governance problems. These are
securities market regulations, the fiduciary responsibilities of directors
and officers, laws governing takeovers, and rules governing shareholder
voice. The two most important laws that control the listed companies are
the Securities Contracts (Regulation) Act, 1956 which regulate all new
public offerings, dealings in stock market and the functioning of the stock
exchanges in India and the Securities and Exchange Board of India Act,
1992 which created the Securities and Exchange Board of India (SEBI),
giving it the authority to administer the Securities Contracts (Regulation)
Act, and all the other regulation of securities. The major purpose of these
laws is to require regular, accurate, and timely public disclosure of
financial Information by any company that issued publicly traded
securities and to instill public confidence in the reliability and accuracy of
information so reported. A new law called the Indian Competition Act,
2002 has been enacted to replace the MRTP Act, 1969. The objective of
the new law is to prevent practices having adverse effect on competition,
to promote and sustain competition in markets, to protect the interest of
consumers and to ensure freedom of trade carried on by other
participants in markets and for matters connected therewith or incidental
thereto.

Committees and Codes on Corporate Governance in India

a. CII Code of Corporate Governance: In December 1995, the CII set-

up a Committee under the chairmanship of industrialist Rahul Bajaj to
prepare a comprehensive voluntary code of corporate governance for
listed companies. The final draft report was released in April 1998. The
CII Code on corporate governance recommended that the: key
information to be reported, listed companies to have audit committees,
corporate to give a statement on value addition, consolidation of
accounts to be optional. Main emphasis was on transparency, as stated
by Shear Data, the then President of CII, in the foreword to the Report:
“Corporate Governance is a phrase which implies transparency of
management systems in business and industry, be it private or public
sector –all of which are corporate entities. Just as industry seeks
transparency in Government policies and procedures, so, corporate
governance seeks transparency in corporate sector.

b. UTI Code of Corporate Governance: In the year 1999, the Unit

Trust of India (UTI) also formulated a code of corporate governance.
This was followed by the professional bodies like the Institute of
Company Secretaries of India (ICSI) to focus the attention of the Indian

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corporate sector, on the norms of governance and it set up a National
award of Excellence in Corporate Governance.

c. Birla Committee Report on Corporate Governance: SEBI

constituted a Committee on corporate governance with as many as 18
members under the chairmanship of Shri Kumar Managalam Birla, to
promote and raise the standards of corporate governance in respect of
listed companies on 7th May 1999. This Committee, after a good deal of
deliberations with industrial associations and professional bodies,
submitted its report on 25th January 2000, and recommended various
new norms of corporate governance. SEBI accepted the
recommendations, which culminated in the introduction of clause 49 in
the standard Listing Agreement for implementation by all stock
exchanges for all listed companies, within a time frame of three years
commencing from the financial year 2000-2001. The main
recommendations of this Committee related to the composition of the
board including independent directors, constitution of audit committee in
certain sized companies to look into the financial aspects of a company,
remuneration of directors, director’s report to include management
discussion and analysis report, better disclosure norms to the
shareholders through annual report, etc.

Regarding the composition of the board of directors of a company, the

Committee was of the view that the composition of the board of directors
is critical to the independent functioning of the board as it determines the
ability of the board to collectively provide the leadership and ensures that
no one individual or group is able to dominate the board. The committee
recommended that the board of a company should have an optimum
combination of executive and non-executive directors, with not less than
fifty percent of the board comprising the non-executive directors. As the
executive directors are involved in the day-to-day management of
companies, the non-executive directors bring external and wider
perspective and independence to the decision-making. It has been the
practice of most of the companies in India to fill the board with
representatives of the promoters of the company as independent
directors. This has undergone a change and now the boards comprise of
following groups of directors: Promoters’ directors, Executive directors,
non-executive directors, and a part of who are independent.

d. Naresh Chandra Committee Report on Corporate Audit and

Governance (2002): The Enron debacle in July 2002, involving the
hand-in-glove relationship between the auditor and the corporate client
and various other scams in the United States, and the consequent

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enactment of the stringent Sarbanes – Oxley Act in the United States
were some important factors, which led the Indian government to wake
up. The Department of Company Affairs in the Ministry of Finance on 21
August 2002, appointed a high level committee, popularly known as the
Naresh Chandra Committee, to examine various corporate governance
issues and to recommend changes in the diverse areas involving the
auditor-client relationships and the role of independent directors. The
Committee submitted its Report on 23 December 2002. In its report, the
Committee commented on:

• the poor structure and composition of the board of directors of

Indian companies,
• scant fiduciary responsibility,
• poor disclosures and transparency,
• inadequate accounting and auditing standards,

The need for experts to go through the minutest details of transactions

among companies, banks and financial institutions, capital markets etc.
On the auditor - company relationship, the Committee recommended
that the proprietary of auditors rendering non- audit services is a
complex area, which needs to be carefully dealt with. The
recommendations of this Committee are more or less in line with the
Rules framed by the Securities & Exchange Commission (SEC) in
accordance with the provisions of the Sarbanes-Oxley Act 2002. The
recommendations of the Naresh Chandra Committee are expected to
play a vital role in strengthening the composition and effectiveness of the
regulatory framework for good corporate governance.

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International Scenario

During 1990s, financial scams have rocked the U.K. and billions of
pounds were lost which forced the U.K., U.S. and Europe corporate word
to look into corporate governance. In India, Mr. Harshad Mehta’s time
‘Creative Accounting’ practices was found in corporate reports and
forced to form a committee for the corporate governance. The term
Corporate Governance has a great deal of importance academically and
professionally since the decade of the 1980s.

a. European Union: The EU’s approach to corporate governance

matters is principle-based. It seeks to ensure the adoption of certain key
specific standards throughout the EU, while leaving it to Member States
and market participants to determine how to best apply these standards.
The EU corporate governance framework, which consists of a mix of
binding and non-binding rules, has as its cornerstone the ‘comply or
explain’ principle. Every listed EU Company is under an obligation to
make an annual statement indicating which Code of corporate
governance it applies and declaring whether it complies with all the
provisions of that Code. If that company does not comply with some
provision of the Code, it must state to what extent and give a
justification. Alongside the corporate governance statement, the
Commission has adopted two non-binding recommendations on the
remuneration of directors and on the role of independent directors, which
contain key substantive standards. With these measures, the
Commission seeks to encourage national corporate governance codes
to converge gradually. The European Corporate Governance Forum, set
up by the Commission and composed of fifteen high level experts, seeks
to reinforce this through exchanges of views on best practices to
promote the convergence of national corporate governance practices
within the European Union.

b. UK: In June 2007, the EU adopted the Shareholder Rights Directive

to create consistent standards across Member States and simplify cross-
border investment. It aims to reduce problems associated with cross-
border investment which include: a lack of sufficient information on a
timely basis; the inability to trade shares ahead of general meetings
(share blocking); and inefficient voting procedures and constraints.
National governments are required to implement the Directive within two
years. Some of the key measures of the Directive are: • Share-blocking
is banned. Instead, companies are required to set a record date within a
30-day period before the election, giving the vote to whoever holds
shares on that day. • Notice of Annual General Meetings (AGM) must be
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at least 21 days in advance, or 14 days for special meetings. •
Shareholders must be able to ask questions related to AGM agenda
items. • Shareholders must have the opportunity to vote by post. •
Companies must disclose results on resolutions and this should be
published on its website no more than 15 calendar days after the AGM.
In April 2007 the Financial Reporting Council (FRC) issued a
consultation on the ‘Review of the Impact of the Combined Code’. It will
address the effectiveness of the ‘comply or explain’ regime, the impact of
the Combined Code on smaller companies, how it supports board
performance and whether disclosures are considered useful and
proportionate in terms of cost to companies.

c. United States: In the United States, investor protection being

governed by the federal and state laws, in addition to the implementation
of the Sarbanes-Oxley corporate governance norms, different states
have brought in several laws. These include; Under Delaware law:

• any stockholder can inspect and copy a corporation’s stock ledger,

a list of stockholders, and certain books and records of the
corporation;
• any stockholder can sue for an appraisal by the chancery court of
the fair value of the stockholder’s stock in connection with certain
mergers; and
• interested director transactions are subject to heightened approval
requirements.

• Further, the US federal securities laws and the SEC’s rules also
contain provisions aimed at protecting individual shareholders,
such as

• requiring heightened disclosure for going private transactions;

• requiring issuers to send proxy materials to all shareholders (not
just certain shareholders); and
• mandating significant disclosures for related-party transactions.

Simultaneously rigorous work on further areas of reforms on the

governance is being actively pursued and these include;

• improved quality in compensation disclosure;

• advisory votes on executive compensation;

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• access to the management proxy for shareholder designated
board candidates;
• reform of shareholder communications and proxy voting
mechanics;
• promotion of global corporate governance standards and cross-
border voting protections;
• transparency in stock lending, empty voting and the governance
impact of hedging and derivative trading strategies;
• reduction of regulatory costs;
• use of technology in disclosure and communications;
• alleviation of short-term investment and business focus;
• maintaining financial market efficiency and competitiveness.

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Corporate Governance in Companies Act 2013

There has been a sea change in companies Act, 2013 which has waived
its way from principle of corporate governance practices as the new key
change in the act. The Companies Act, 2013 has taken a foot forward
from SEBI’s Clause 49 of listing agreement by introducing provisions in
the Companies act 2013 which promotes corporate governorship code in
such a manner that it will no longer be restricted to only listed public
companies but also unlisted public companies. The new (Companies
Act), 2013 has introduced various key provisions which have changed
the corporate regime in such a way to run the corporate machinery in
alignment with the globalised corporate world by mandatory disclosure
requirements for:

Independent Director under the Companies Act, 2013

The strength of number of Independent Directors for the prescribed

companies under Section 149(4) read with Rule 4 of Companies
(Appointment and Qualifications of Directors) Rules, 2014 for listed
Public Company is at least one third of total number of directors and
public companies having turnover of 100 crores rupees or more at least
2 directors and public companies having paid up capital of 10 crores
rupees or more at least 2 directors.

Audit Committee

The Audit Committees of the Companies Act, 2013 has undertaken

public companies within its ambit to constitute audit committees. The
constitution of audit committee has also seen change as compared to
clause 49 with minimum with three independent directors on the board
along with the chairperson xwho should be able to read and understand
the financial statement.

Section 177 of the Companies Act, 2013 and Rule 6 and 7 of

Companies (Meetings of Board and its Powers) Rules,2014 deals with
the Audit Committee.

The Board of directors of every listed company and the following classes
of companies, as prescribed under Rule 6 of Companies (Meetings of
Board and its powers) Rules, 2014 shall constitute an Audit Committee.

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1. All public companies with a paid-up capital of Rs.10 Crores or more;

2. All public companies having turnover of Rs.100 Crores or more;

3. All public companies, having in aggregate, outstanding loans or

borrowings or debentures or debentures or deposits exceeding Rs. 50
Crores or more.

Internal Audit

Companies Act, 2013 has mandated the internal audit for certain classes
of companies as specified under Section 138 of the Companies Act,
2013.

Serious Fraud Investigation Offence (SFIO)

Section 211 (1) of the Companies Act, 2013 shall establish an office
called the Serious Fraud Investigation office to investigate fraud relating
to Company. The powers are given to SFIO under the act as mentioned
that he can investigate into the affairs of the company or on receipt of
report of Registrar or inspector or in the public interest or request from
any Department of Central Government or State Government.

Corporate Social Responsibility

The concept of CSR rests on the good corporate citizenship where

corporate contributions to the societal growth as a part of their corporate
responsibility for utilizing the resources of the society for their productive
use. Ministry of Corporate Affairs has recently notified Section 135 and
Schedule VII of the Companies Act as well as the provisions of (CRS
Rules) which has come into effect from 1 April 2014.

Applicability

Section 135 of the Companies Act provides the threshold limit for
applicability of the CSR to a

Company:

1. Net worth of the company to be Rs 500 crore or more;

2. Turnover of the company to be Rs 1000 crore or more;

3. Net profit of the company to be Rs 5 crore or more.

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Further, as per the CSR Rules, the provisions of CSR are not only
applicable to Indian companies but also applicable to branch offices of a
foreign company in India.

CSR Committee and Policy

Every company as prescribed in Section 135 of the Act and Company

(Corporate Responsibility) Rules, 2014 within the threshold limit requires
spending of at least 2% of its average net profit for the immediately
preceding 3 financial years on CSR activities. Further, the company will
be required to constitute a committee (CSR Committee) of the Board of
Directors (Board) consisting of 3 or more directors.

The CSR Committee shall formulate and recommend to the Board, a

policy which shall indicate the activities to be undertaken (CSR Policy);
recommend the amount of expenditure to be incurred on the activities
referred and monitor the CSR Policy of the company. The Board shall
take into account the recommendations made by the CSR Committee
and approve the CSR Policy of the company.

The new CSR regime is based on “Comply or explain” approach to

stringently push big corporate giants to take initiative towards their duty
to contribute towards their CSR activities. Companies failing to do so
would be required to explain why they have not included such
information, in the annual report as under Section 92 of the Companies
Act, 2013 as part of “comply or explain” approach for large
companies.The Companies Act, 2013 empowers independent directors
with proper checks and balances so that such extensive powers are not
exercised in an unauthorized manner but in a rational and accountable
way. The changes are a step forward in the right direction to smoothly
run the management and affairs of the companies in the interest of
stakeholders. These are all welcome changes in the globalised
corporate world of today and they will strengthen the core corporate
machinery by instilling strong corporate governance norms in a company
leading to economic efficiency and higher ethical standards which will
always inspire the company’s management to work in the direction to
uphold its goals of maximization of wealth of stakeholders backed with
good corporate repute.

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Benefits and Limitations
The concept of corporate governance has been attracting public
attention for quite some time. It has been finding wide acceptance for its
relevance and importance to the industry and economy. It contributes
not only to the efficiency of a business enterprise, but also, to the growth
and progress of a country's economy. Progressively, firms have
voluntarily put in place systems of good corporate governance for the
following reasons:

• Several studies in India and abroad have indicated that markets

and investors take notice of well managed companies and respond
positively to them. Such companies have a system of good
corporate governance in place, which allows sufficient freedom to
the board and management to take decisions towards the progress
of their companies and to innovate, while remaining within the
framework of effective accountability.

• In today's globalised world, corporations need to access global

pools of capital as well as attract and retain the best human capital
from various parts of the world. Under such a scenario, unless a
corporation embraces and demonstrates ethical conduct, it will not
be able to succeed.

• The credibility offered by good corporate governance procedures

also helps maintain the confidence of investors – both foreign and
domestic – to attract more long-term capital. This will ultimately
induce more stable sources of financing.

• A corporation is a congregation of various stakeholders, like

customers, employees, investors, vendor partners, government
and society. Its growth requires the cooperation of all the
stakeholders. Hence it imperative for a corporation to be fair and
transparent to all its stakeholders in all its transactions by adhering
to the best corporate governance practices.

• Good Corporate Governance standards add considerable value to

the operational performance of a company by:

1. improving strategic thinking at the top through induction of

independent directors who bring in experience and new ideas;

2. rationalizing the management and constant monitoring of risk

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 that a firm faces globally;

3. limiting the liability of top management and directors by

carefully articulating the decision making process;

4. assuring the integrity of financial reports, etc. It also has a long

term reputational effects among key stakeholders, both internally
and externally.

• Also, the instances of financial crisis have brought the subject of

corporate governance to the surface. They have shifted the
emphasis on compliance with substance, rather than form, and
brought to sharper focus the need for intellectual honesty and
integrity. This is because financial and non-financial disclosures
made by any firm are only as good and honest as the people
behind them.

• Good governance system, demonstrated by adoption of good

corporate governance practices, builds confidence amongst
stakeholders as well as prospective stakeholders. Investors are
willing to pay higher prices to the corporates demonstrating strict
adherence to internally accepted norms of corporate governance.

• Effective governance reduces perceived risks, consequently

reduces cost of capital and enables board of directors to take quick
and better decisions which ultimately improves bottom line of the
corporates.

• Potential stakeholders aspire to enter into relationships with

enterprises whose governance credentials are exemplary.

On the other hand, effectiveness of corporate governance system

cannot merely be legislated by law neither can any system of corporate
governance be static. As competition increases, the environment in
which firms operate also changes and in such a dynamic environment
the systems of corporate governance also need to evolve. Failure to
implement good governance procedures has a cost in terms of a
significant risk premium when competing for scarce capital in today's
public markets

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Conclusion
It is true that the 'corporate governance' has no unique structure or
design and is largely considered ambiguous. There is still lack of
awareness about its various issues, like, quality and frequency of
financial and managerial disclosure, compliance with the code of best
practice, roles and responsibilities of Board of Directories, shareholders
rights, etc. There have been many instances of failure and scams in the
corporate sector, like collusion between companies and their accounting
firms, presence of weak or ineffective internal audits, lack of required
skills by managers, lack of proper disclosures, non-compliance with
standards, etc. As a result, both management and auditors have come
under greater scrutiny.

But, with the integration of Indian economy with global markets,

industrialists and corporates in the country are being increasingly asked
to adopt better and transparent corporate practices. The degree to which
corporations observe basic principles of good corporate governance is
an increasingly important factor for taking key investment decisions. If
companies are to reap the full benefits of the global capital market,
capture efficiency gains, benefit by economies of scale and attract long
term capital, adoption of corporate governance standards must be
credible, consistent, coherent and inspiring. Quality of corporate
governance primarily depends on following factors, namely:- integrity of
the management; ability of the Board; adequacy of the processes;
commitment level of individual Board members; quality of corporate
reporting; participation of stakeholders in the management; etc. Since
this is an important element affecting the long-term financial health of
companies, good governance framework also calls for effective legal and
institutional environment, business ethics and awareness of the
environmental and societal interests.

Hence, in the years to come, corporate governance will become more

relevant and a more acceptable practice worldwide. This is easily
evident from the various activities undertaken by many companies in
framing and enforcing codes of conduct and honest business practices;
following more stringent norms for financial and non-financial
disclosures, as mandated by law; accepting higher and appropriate
accounting standards; enforcing tax reforms coupled with deregulation
and competition; etc.

However, inapt application of corporate governance requirements can

adversely affect the relationship amongst participants of the governance

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system. As owners of equity, institutional investors are increasingly
demanding a decisive role in corporate governance. Individual
shareholders, who usually do not exercise governance rights, are highly
concerned about getting fair treatment from controlling shareholders and
management. Creditors, especially banks, play a key role in governance
systems, and serve as external monitors over corporate performance.
Employees and other stakeholders also play an important role in
contributing to the long term success and performance of the
corporation. Thus, it is necessary to apply governance practices in a
right manner for better growth of a company.

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