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Corporate Governance

  • Corporate governance refers to the set of systems, principles and processes by which a company is governed.
  • Corporate governance provide the guidelines as to how the company can be directed or controlled such that it can fulfil its goals and objectives in a manner that adds to the value of the company and is also beneficial for all stakeholders in the long term.
  • Stakeholders in this case would include everyone ranging from the board of directors, management, shareholders to customers, employees and society.
  • The management of the company hence assumes the role of a trustee for all the others.

What are the principles underlying Corporate Governance?

  • Good corporate governance is not an end in itself.
  • It is a means to create market confidence and business integrity, which in turn is essential for companies that need access to equity capital for long term investment.
  • Access to equity capital is particularly important for future oriented growth companies and to balance any increase in leveraging.
  • Corporate governance is based on principles such as conducting the business with all integrity and fairness, being transparent with regard to all transactions, making all the necessary disclosures and decisions, complying with all the laws of the land, accountability and responsibility towards the stakeholders and commitment to conducting business in an ethical manner.
  • Another point which is highlighted in the SEBI report on corporate governance is the need for those in control to be able to distinguish between what are personal and corporate funds while managing a company.
  • There is no single model of good corporate governance.
  • However, Organisation for Economic Cooperation and Development (OECD) analyzing the works carried out in member countries has formulated some important principles of good corporate governance:
  1. The corporate governance framework should be developed with a view to its impact on overall economic performance, market integrity and the incentives it creates for market participants and the promotion of transparent and well-functioning markets.
  2. The legal and regulatory requirements that affect corporate governance practices should be consistent with the rule of law, transparent and enforceable.
  3. The division of responsibilities among different authorities should be clearly articulated and designed to serve the public interest.
  4. Stock market regulation should support effective corporate governance.
  5. Supervisory, regulatory and enforcement authorities should have the authority, integrity and resources to fulfil their duties in a professional and objective manner. Moreover, their rulings should be timely, transparent and fully explained.
  6. Cross-border co-operation should be enhanced, including through bilateral and multilateral arrangements for exchange of information.

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Uday Kotak-Led SEBI Panel on Corporate Governance

  • With the view of improving corporate governance standards of listed companies in India, the panel under the chairmanship of Uday Kotak submitted its report to the SEBI, suggesting a host of changes for bringing in transparency at companies’ boards.
  • The panel’s report gains significance in the backdrop of recent boardroom battles at some of the biggest Indian corporate houses, including Tata Group and Infosys.
  • Markets regulator SEBI had formed the 24-member group in June that consisted of representatives of Corporate India, stock exchanges, professional bodies, investor groups, chambers of commerce, law firms, academicians and research professionals and SEBI officials.

Recommendations of the Panel

  • Panel suggested that it was the right time to split chairman, MD-CEO role of listed companies.
  • It should be mandatory for top 500 companies by market capitalization to undertake D&O (Directors and Officers insurance) insurance for its independent directors.
  • Also, minimum of 6 directors to be on board of listed entities; every listed entity to have at least 1 independent woman director.
  • It suggested more transparency on appointment of independent directors; wants them to play a more active role on the boards.
  • Maximum number of listed entity directorship to be reduced to 8 and at least half of every listed entities board to have independent directors.
  • There be an application to fill a casual vacancy of office of any Independent Director which must be okayed by holders; minimum number of Audit Committee meetings be increased to five every year.
  • No person to be appointed as alternate director for an independent director of a listed company.
  • A formal induction should be mandatory for every new Independent Director appointed to the board.
  • Lastly, BoD to be updated on regulatory & compliance changes at least once a year; as well as an interaction between NEDs & senior management.

Companies Act, 2016 (Amendments to Companies Act, 1956)- Some relevant points for Corporate Governance:

  1. Private company can have a maximum of 200 members (earlier limit was upto 50).
  2. The maximum limit of directors in the Company has been increased to 15 with a power to add more directors upon passing of Special Resolution without taking CG approval as earlier required. One director can also form a company.
  3. Resident Director – Every company shall have at least one director who has stayed in India for a total period of not less than one hundred and eighty-two days in previous calendar year.
  4. The Financial Year of any Company can be only from April-March. Existing companies has to align within 2 years of the commencement of the Act.
  5. A person cannot become director in more than 20 companies out of this, he cannot be director of more than 10 public companies.
  6. New concept of One person companies has been introduced .One person can also form the company. One Person Company need not to hold any AGM (Annual General Meeting) for each year.
  7. Concept of CSR– Corporate Social Responsibility was introduced – For companies having networth of Rs. 500 crore or more or turnover of Rs. 1000 crore or more or net profit of Rs. 5 crore or more during any financial year. Above specified company need to spend at least 2% of average net profit of immediately preceding 3 financial years for every financial year.
  8. Provisions for compulsory rotation of individual auditors in every five years and of audit firm every 10 years in the listed company & certain other class of companies, as may be prescribed.
  9. Internal audit – As per draft rules it is made compulsory for below mentioned class of company:-
    • Every listed company;
    • Every public company having paid up capital of Rs.10 crores;
    • Every other public company having outstanding loans or borrowing from banks or financial instiutions exceeding Rs.25 crores or accepted fixed deposit of Rs.25 crores or more at any point of time during last financial year.
    • 10.Women director – every listed company shall, and every other company having a paid up share capital of ₹ 100 cr or more are mandatorily required to appoint atleast one women director.

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