corporate governance in India

1) Overview of corporate Governance

Ownership and management patterns in businesses have changed phenomenally

over decades. The number of stakeholders in every business has also multiplied.

This has given rise to agency costs and ethical issues. However, whether it is the

proprietor or the executive managing the business, the basic objective of wealth

generation still remains. Even an owner needs to learn to govern. So how do we

understand the concept of governance? Corporate governance represents the

value framework, the ethical framework and the moral framework under which

business decisions are taken. Corporate Governance may be defined as a set of

systems, processes and principles which make sure that a company is governed

in the best interest of all stakeholders. It is the system by which companies are

directed and controlled. It make sure the commitment of the board in operate the

company in a transparent manner for maximizing long-term value of the

company for its shareholders. It is about promoting corporate sufficiency,

transparent and accountability. In other words, good corporate governance is

nothing but good business.

2)CorporateBoard

Corporate governance in India is the system by which companies are directed

and managed. It influences how the objectives of the company are set and
achieved, how risk is monitored and assessed, and how performance is

optimized. Good corporate governance structures encourage companies to

create value (through entrepreneurialism, innovation, development and

exploration) and provide accountability and control systems commensurate with

the risks involved. (ASX Principles of Good Corporate Governance and Best

Practices Recommendations, 2003)

3)ShapingDirectorial

As corporations grow in size and complexity and are increasingly doing

business in the global arena, it becomes essential for boards to uphold the

highest standards of corporate governance and to perform their role effectively.

There has been a constant transformation in corporate governance in Europe.

Changes in the US have been more visible due to the impact of Sarbanes-Oxley

Act. In India, with the advent of Clause 49, board structures have started to

change; board committees are playing a more central role, and it is now a

requirement for a majority of board directors to be independent. However, the

reality is that most listed company boards have little experience of what it

means to hear independent voices around the table and little appreciation of the

value that a truly diverse group of directors can bring to board performance. As

Indian companies participate in the global business arena alongside

multinationals, there is a more widespread understanding of fiduciary

responsibility and governance and expectations over governance standards will

rise yet further.

4) Financial Institutions and Nominee Directors

The fundamental objective of corporate governance in India is the

enhancement of shareholder value, keeping in view the interests of other

stakeholder. This definition harmonizes the need for a company to strike a

balance at all times between the need to enhance shareholders wealth whilst not

in any way being detrimental to the interests of the other stakeholders in the

company. The pivotal role in any system of corporate governance is performed

by the board of directors. It is accountable to the stakeholders and directs and

controls the Management. It stewards the company, sets its strategic aim and

financial goals and oversees their implementation, puts in place adequate

internal controls and periodically reports the activities and progress of the

company in a transparent manner to the stakeholders.

5) Corporate Disclosure and Investor Protection

In India, the capital market is regulated by the Capital Markets Division of the

Department of Economic Affairs of the Ministry of Finance. The division is

responsible for formulating the policies related to the orderly growth and
development of the securities markets (i.e. share, debt and derivatives) as well

as protecting the interest of the investors. In particular, it is responsible for (i)

institutional reforms in the securities markets, (ii) building regulatory and

market institutions, (iii) strengthening investor protection mechanism, and (iv)

providing efficient legislative framework for securities markets, such as

Securities and Exchange Board of India Act, 1992 (SEBI Act 1992); Securities

Contracts (Regulation) Act, 1956; and the Depositories Act, 1996. The division

administers these legislations and the rules framed thereunder.

6) Corporate Reputation

The emerging global business environment has undergone extraordinary

changes and raised challenges for existing business models to accommodate

these changes. While globalization has been an advantage in business

operations, it has also made corporations vulnerable to greater risk, abuse and

fraud on a global scale. This emerging scenario has given rise to the serious

issue of the inadequacies of governance and demands for new reforms, bringing

new models of operation and re-evaluation of systems. In the United States,

numerous numbers of corporate scandals including Enrons accounting fraud,

WorldComs accounting scandals and bankruptcy, destruction of natural

environments due to oil spillage, etc. have occurred and many of them have

suffered serious problems such as bankruptcy, corporate crisis, or loss of social

credibility.
7) Corporate Governance in India and Regulatory

There are four primary financial regulators Reserve Bank of India, Insurance

Regulatory and Development Authority, Securities Exchange Board of India and

Pension Fund Regulatory Development Authority in the Indian Financial

System. The RBI is the apex body in the system. The governmental role is

played by the Ministry of Corporate Affairs. Corporate governance in India

specifies the relationship among various primary participants (shareholders,

directors, and managers) in determining the directions and performance of

corporations. Because insiders have an inherent informational advantage over

outside stakeholders, it is required that the governance systems empower

independent parties to monitor their behavior and reports. The legal and

regulatory system of a country plays a crucial role in creating an effective

corporate governance in India mechanism in a country, the development of

markets and economic growth. The regulatory bodies in India have advocated

comprehensive and rigorous corporate governance in India reforms which

emphasize the importance of the credibility and integrity of the listed

companies, the responsibilities of minority shareholders, and the necessity for

information disclosure.

8) Globalisation and Corporate Governance in India

From the point of view of the firm, globalisation implies greater competition,

but it also implies participation in more markets for inputs (including capital,

intermediate goods and factors of production) and outputs. As these markets

become more integrated, there will be strong pressure to adopt strategies and

structures that make the firm as competitive as possible. Globalization of

markets for intermediate products has had a major impact on the organization of

firms. The opportunities for firms to engage in globally structured production

through outsourcing, as well as multi-nationalization, induces firms to adopt

new governance structures to manage the new production structures.

Responding to increased opportunities and threats resulting from globalization

in the market for final goods could also cause firms to consider reorganization

of its corporate governance in India practices. Good corporate governance in

India is critical for ensuring the efficiency of investment. It is also essential for

attracting foreign investment.

9) Regulatory framework and Investor Protection

Investors are the main stake holders in a company. As shareholders, they are the

ultimate owners of the company. An incorporated association operates on the

principle of separation of ownership and management where the Board of

Directors have to run the company keeping in view the shareholders interests.

While the term shareholders is limited to people holding shares of the company,

the term investors is broad taking into the purview all classes of investors. The
company starts its business on the basis of investments made by different

investors and as agents of the company, the board of directors should try to

maximise shareholders wealth. When corporate fail to follow ethical practices,

the people who suffer directly are the investors. Investor protection is the

foundation of a healthy capital market. There are different categories of

investors; small or retail investors, institutional investors and high net worth

individuals. Not all of them need the same degree of protection. It is generally

the small investors who considering his lack of financial literacy and lack of

information need greater protection thats why corporate governance in India

here to solve these issue.

10) Corporate Social Responsibility

Every business has to incur a private cost and a social cost. Any business

activity would involve the use of resources which are scarce and which have an

opportunity cost. Rapid industrialization and urbanization has apart from

bringing out economic development has also caused a lot of damage to the

environment. The cost that the society has to bear in terms of pollution,

deforestation, exploitation of resources is the social cost. While the private cost

restricted to the firm, the social cost is borne by the society at large

Sustainability in consumption pattern is essential if we are looking at long time

existence and well-being of the human race and that of the earths resources.

Ever increasing population coupled with excessive greed and unscrupulous

consumption is putting a pressure on the environment and disturbing the

ecological balance. Changing lifestyles, greater disposal incomes, influence of

aggressive advertisements and conspicuous consumption have accelerated the

consumption levels across nations. The life cycle of a product starts from its

manufacture, packaging use and disposal all of which will have an ecological

impact. A nation is considered developed on the basis of its capacity to spend or

the propensity to consume. The gross domestic product (GDP) is one which the

primary indicators used to gauge the health of a countrys economy. However, it

is argued that it is not a correct measure as it encourages development at the

cost of sustainability.

11) Majority Rule and Minority Protection

Doing business as an incorporated association is preferred vehicle over other

forms of business organisation because of some definite advantages. There is

tremendous scope for expansion and growth owing to easy access to finance.

The advantage of incorporating a company and doing business is its liability

factor. The liability of a shareholder for the losses incurred by the company is

limited to the extent of unpaid amount on his shareholding. The relation

between the company and its shareholders and the relation between the
shareholders inter-se is primarily contractual in nature. The memorandum and

articles of association of the company constitute the core of this contract and the

corporate law provides the framework within which the contracts operate. The

essence of this contractual relationship is that each shareholder is entitled to a

share in the profits and assets of the company in proportion to his shareholding.