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Evolution of Corporate governance reforms in India

Evolution of Corporate governance reforms in India

INTRODUCTION:

  • Corporate governance refers to the set of systems, principles and processes by which a company is governed.
  • They 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.

EVOLUTION OF CORPORATE GOVERNANCE REFORMS IN INDIA: A CHRONOLOGICAL PERSPECTIVE

  • Corporate governance is perhaps one of the most important differentiators of a business that has impact on the profitability, growth and even sustainability of business.
  • It is a multi-level and multi-tiered process that is distilled from an organization’s culture, its policies, values and ethics, especially of the people running the business and the way it deals with various stakeholders.
  • Creating value that is not only profitable to the business but sustainable in the long-term interests of all stakeholders necessarily means that businesses have to run—and be seen to be run—with a high degree of ethical conduct and good governance where compliance is not only in letter but also in spirit.
  • At the time of Independence in 1947, India had functioning stock markets, an active manufacturing sector, a fairly developed banking sector, and also a comparatively well-developed British-derived convention of corporate governance.
  • From 1947 through 1991, the Indian Government pursued markedly socialist policies when the State nationalized most banks and became the principal provider of both debt and equity capital for private firms.

Historical Perspective

  • The government agencies that provided capital to private firms were evaluated on the basis of the amount of capital invested rather than on their returns on investment.
  • Competition, especially foreign competition, was suppressed. Private providers of debt and equity capital faced serious obstacles in exercising oversight over managers due to long delays in judicial proceedings and difficulty in enforcing claims in bankruptcy.
  • Public equity offerings could be made only at government-set prices. It was natural that in such an environment, corporate governance deteriorated as, historically, there had been little, emphasis on corporate governance mechanisms in India.
  • Public companies in India were only required to comply with limited governance and disclosure standards enumerated in the Companies Act of 1956, the Listing Agreement, and the accounting standards set forth by the Institute of Chartered Accountants of India (ICAO. Faced with a fiscal crisis in 1991, the Indian Government responded by enacting a series of reforms aimed at general economic liberalization.
  • The Securities and Exchange Board of India (SEBI)—India’s securities market regulator—was formed in 1992, and by the mid-1990s, the in4an economy was growing steadily, and Indian firms had begun to seek equity capital to finance expansion into the market spaces created by liberalization and the growth of outsourcing.

The need for capital, amongst other things, led to corporate governance reform and many major corporate governance initiatives were launched in India since the mid ­1990s; most of these initiatives were focused on improving the governance climate in corporate India, which was far from satisfactory.

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