Corporate Governance: Indian Context

The focus has shifted to Corporate Governance (CG) time and again on account of repeat emergence of financial crises across the global, as well as frequent instances of financial reporting failures.  In competitive markets, Corporate Governance is a reflection of market disciplines, and forms the cornerstone for efficient allocation of resources.  CG enables managements to take decisions, while at the same time being accountable for the decisions taken.  Securities & Exchange Board of India (SEBI) appointed the Committee on Corporate Governance in May, 1999 under the Chairmanship of Kumar Mangalam Birla, to promote and raise the standards of Corporate Governance, in the particular context of companies of the Committee included

(i) to suggest measures to improve Corporate Governance in the listed companies, in areas such as continuous disclosure of material information, both financial and non financial, manner and frequency of such disclosures, and the responsibilities of independent and outside directors;

(ii) to draft a code of corporate best practices; and

(iii) to suggest safeguards to be instituted to deal with insider information and insider trading.

Based on the recommendations of the Birla Committee, SEBI laid down requirements on Corporate Governance for listed entities in February, 2000.  However, certain entities including public and private sector banks, financial institutions, insurance companies and those incorporated under a separate statute were exempted from the requirements. Subsequently, the requirements of SEBI were forwarded to Reserve Bank of India (RBI) to consider issuing appropriate guidelines to banks and financial institutions so as to ensure that all listed companies followed the same standards of Corporate Governance.  While a number of recommendations already stood implemented, with a view to further improving the Corporate Governance standards in banks, additional measures were recommended for implementations by banks.   These measures included constitution of a Committee to look into the complaints of shareholders and half yearly disclosure of unaudited results.  The RBI also recommended compliance with the requirements of the provisions of clause 49 of the Listing Agreement in June, 2002.  The Standing Committee on International Financial Standards and Codes, Reserve Bank of India constituted the Advisory Group on Corporate Governance to study the status of applicability and relevance and compliance of international standards and codes of industrialized and emerging countries and suggest measures/recommendations for achieving the best practice in India.  The Group while submitting its Report in March, 2001, drew attention to the Organization for Economic Cooperation and Development (OECD) principles, the models of corporate governance in various countries – U.S., U.K., East Asia and Europe, and the status in India.  The Group covered the mechanism in India with reference to (i) the private corporate sector, (ii) banks and the development financial institutions, and (iii) Central and State public sector enterprises set up under the Companies Act, 1956.  Comparisons were also drawn with Bank for International Settlement (BIS) principles.  The report submitted that it was essential to bring reforms quickly so as to make boards of corporates/banks/financial institutions/public sector enterprises

more professional and truly autonomous.  The first important step to improve governance mechanism in public sector units was to transfer the actual governance functions to the boards from the concerned administrative ministers and also strengthen the boards by streamlining the appointment process of directors. Further there was a need for public sector banks to maintain a high degree of transparency in regard to disclosure of information. The recommendations covered areas of responsibilities of the board of stakeholders/shareholders, selection procedures for appointment of directors of the board, size and composition of the board, committees to be appointed by the board for corporate governance, disclosure and transparency standards, role of shareholders and role of auditors.  In August, 2002, the Department of Company Affairs (DCA) under the Ministry of Finance and Company Affairs appointed the Naresh Chandra Committee to examine the various CG issues including appointment of the auditors and his independence; determination of audit fees; measures to ensure that the managements and companies present “true and fair” financial statements and certification of the same by the management and the directors; the necessary to have a transparent system of random scrutiny of the audited accounts; adequacy of regulations for oversight of statutory functionaries; and the role of independent directors.  SEBI appointed the N.R. Narayana Murthy Committee in February, 2003 to evaluate the adequacy of existing Corporate Governance practices and to further improve upon them.  The Committee was in line with the Board’s belief that efforts to improve CG standards in India must continue.  The Committee focused on such issues as audit committees and reports, independent directors, related parties, risk management, directors and their compensation, code of conduct and financial disclosure. The Committee’s recommendations were based on such parameters as fairness, accountability, transparency, ease of implementation, verifiability and enforceability.  Prior to these initiatives, in 1996, the CII had taken the first institutional initiative to develop and promote a code of conduct for the Indian industry.  The initiative was in response to concerns regarding promotion of investor interest, particularly, small investor’s interest; promotion of transparency within business and industry; need to move towards international standards in terms of disclosure of information by the corporate sector; and to develop a high level of public confidence in Indian industry.