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CORPORATE GOVERNANCE REFORMS: WILL IT REALLY ENHANCE

TRANSPARENCY?

MANAS DAGA

R760214024

500037389

SUBMITTED UNDER THE GUIDANCE OF: DR. AJIT KAUSHAL

THIS DISSERTATION SYNOPSIS IS SUBMITTED IN PARTIAL FULFILLMENT OF THE


DEGREE OF B.B.A., LL.B. (HONS.)

SCHOOL OF LAW

UNIVERSITY OF PETROLEUM AND ENERGY STUDIES,

DEHRADUN

2014-2019
INTRODUCTION

The last two decades have been observed as the most crucial period for the development of
Indian securities market. The high profile corporate governance failures such as Satyam scam,
UTI scam, Sahara scam etc. took major strides to carve a niche for itself in the global securities
markets. In order to combat such scams and to curb down such similar scams in future, the
policy framers have always been pro-active in laying down stringent corporate governance
norms in India.

Corporate Governance provides for rules and policies governing a company, protecting the
interest of shareholders.1 Good governance strengthens investor’s confidence, ensures enhanced
transparency and disclosures.2 Various initiatives have been taken by the government by forming
committees laying down rigid governance policy time to time. From CII Desirable Corporate
Governance Code, 19963 to Uday Kotak committee on Corporate Governance4, the regulator has
moved a step forward for corporate governance reforms.

Recently, Uday Kotak Committee also came up with its report for formulating corporate
governance standards in India. Various suggestion by the committee were accepted by SEBI and
necessary amendments are made in SEBI (Listing Obligations and Disclosure Requirements),
Regulations 2015. The report aims at enhancing investor confidence by focusing on reforms for
role of auditors, related party transactions, disclosures, board composition and its independence.

The Kotak committee has failed to address some issues in its report and therefore the purpose is
to critically evaluate and suggest recommendations accordingly with the aim of improving
corporate governance standards in India. There is a need to strengthen governance norms so as to
avoid corporate scams, to ensure transparency and to safeguard the interest of shareholders.

1
Umakanth Varottil, “India’s Corporate Governance Voluntary Guidelines 2009: Rhetoric or Reality?”, NLSIU
Review Vol. 22 No 2, p. 1, 2010.
2
F. Mayer (1997), ‘Corporate governance, competition, and performance’, In Enterprise and Community: New
Directions in Corporate Governance, S. Deakin and A. Hughes (Eds), Blackwell Publishers: Oxford.
3
Desirable Corporate Governance a Code, http://www.nfcg.in/UserFiles/ciicode.pdf (last visited November 06,
2018)
4
Uday Kotak Committee Report on Corporate Governance, https://www.sebi.gov.in/reports/reports/oct-2017/report-
of-the-committee-on-corporate-governance_36177.html (last visited November 06, 2018)
STATEMENT OF PROBLEM

India has largely borrowed the philosophy of American corporate governance in our new
Companies Act. There is a large influence of Sarbanes Oxley (the Sarbanes-Oxley Act of 2002),
that is rooted in a much disaggregated shareholding context, with a large number of shareholders.

In India, most of the corporates tend to be family controlled businesses, where ‘controlling
shareholders’ are various persons from the family itself. The members of the same family are
promoters of the Company and manage the affairs of the Company. Thus, being the majority
shareholders, the oppression of minority shareholders is a common practice in such cases,

The recent Tata-Mistry case has shown excessive interference of promoter group in the working
of company and appointment and removal of directors. This case has highlighted the oppression
of minority shareholders who were getting oppressed by the majority shareholders. The Tata-
Mistry boardroom battle has cast the spotlight on the quality of corporate governance in board-
managed companies and highlighted the need for a wider, robust debate around the role of
independent directors, higher levels of transparency and fairness, and many other prickly issues. 5

The true independence of an independent director is also an important issue which needs to be
addressed properly and the ambit of ‘independent’ must need to be narrowed in order to restrict
the related person to be appointed as an independent director. It is only when the independent
directors are truly independent and free from any influences, the interest of shareholders can be
protected and frauds can be reported.6

Independence as defined by the Delaware Supreme Court in the matter of Aronson v Lewis 7 is as
follows:

“Independence means that a director’s decision on the corporate merits of the subject
before the board rather than extraneous considerations or influences.”

5
India’s Corporate Governance Challenge,
https://www.livemint.com/Companies/1MW7bYVYjyv4eiDytu2ZQN/Indias-corporate-governance-challenge.html
(last visited November 06, 2018)
6
Vikramaditya Khanna and Umakanth Varottil, Board Independence in India: From Form to Function?, Cambridge
University Press, 2017,
7
Aronson v Lewis, 473 A. 2d 805 (del. 1984).
We generally check independence by ‘relations’ - Business or Blood relations. Recently, in PNB
scam, Nirav Modi has appointed his friend as an Independent Director of the Company and thus
his working was influenced. Board interlocks, family links, senior executive of acquiring
company, remuneration to the Independent Director etc. are few factors affecting the
independence of IDs.8 Therefore, guidelines need to be formulated to ensure true independence
of independent director.9

Currently, IDs are resigning from their post without assigning any proper reasons. The Report
does not adequately deal with procedure for removal of IDs, performance evaluation of directors,
curbs on founders' control. From a company’s perspective, the recommendations will have a
significant impact on existing business practices.

Moreover, there is also a need to ensure the freedom of auditors from the management. The
auditors should be monitored on a regular basis to keep a proper check on them. Recently, in
Satyam scam, PWC has misappropriated accounts of Satyam Infotech with the help of directors
of the Company which led to siphoning of funds. Therefore, the auditors must also be regulated
and monitored properly.

RESEARCH OBJECTIVE

The primary aim of this study is to understand Indian corporate governance regime and compare
it with USA’s governance regime. Moreover, the issues which were not properly addressed by
Kotak committee will be discussed in detail. Further, internationally acceptable norms of
corporate governance will be thoroughly discussed. The objective is to suggest recommendations
that are best suitable for the growth of Indian corporate regime.

RESEARCH QUESTIONS

The research questions of this study are as follows:

8
Criteria for Assessing Director Independence,
https://www.moodys.com/sites/products/aboutmoodysratingsattachments/2006100000425776.pdf (last visited
November 06, 2018)
9
Dipak Mondal, Dozing Doorkeepers?, https://www.businesstoday.in/magazine/the-hub/dozing-
doorkeepers/story/281446.html (last visited November 06, 2018)
1. What are the criteria to be implemented for ensuring the “independence” of Independent
Directors not getting affected from cross shareholding, family links or current/former
executives and founders?
2. Whether the oppression of minority shareholders arises from the improper
implementation of laws?

LITERATURE REVIEW

1. UDAY KOTAK COMMITTEE REPORT ON CORPORATE GOVERNANCE

With a view to enhance corporate governance in India, in June 2017, SEBI constituted the
Committee on Corporate Governance, chaired by Mr. Uday Kotak (the Committee). Its main
objective was to enhance fairness and transparency, strengthen an independent board, improve
disclosure standards and to recommend reforms on corporate governance and compliance of the
law on paper as well as in sprit. The committee has given its recommendations on Board
composition, related party transactions, auditors,

The Board accepted several recommendations in their entirety, and some recommendations with
certain modifications. Further, the Board also referred certain recommendations to other agencies
and regulators, since the relevant subject matters therein required inputs and considerations from
such other agencies.

2. IOSCO REPORT ON CORPORATE GOVERNANCE, 2016

In August 2015, the Growth and Emerging Markets (“GEM”) Committee established a
Corporate Governance Task Force (“CGTF”), comprising 16 GEM Committee members. The
CGTF reviewed three key topics of corporate governance: board composition; remuneration and
incentive structures; and risk management and internal controls. These topics were benchmarked
against the G20/OECD Principles of Corporate Governance (“OECD Principles”). The rationale
for choosing these three topics is explained in the Introduction.

Survey responses revealed a general alignment of GEM regulatory frameworks with the
recommendations of the OECD Principles. There is also broad agreement on the direction
regulators should take to: (i) improve the quality of boards, (ii) ensure that remuneration and
incentive structures work to create long-term value rather than promoting excessively risky
behavior; and (iii) improve risk management frameworks and internal controls within the
corporate environment.

3. OECD PRINCIPLES OF CORPORATE GOVERNANCE, 2015

The Principles are intended to help policy makers evaluate and improve the legal, regulatory, and
institutional framework for corporate governance, with a view to support economic efficiency,
sustainable growth and financial stability. This is primarily achieved by providing shareholders,
board members and executives as well as financial intermediaries and service providers with the
right incentives to perform their roles within a framework of checks and balances.

The Principles are presented in six different chapters: I) Ensuring the basis for an effective
corporate governance framework; II) The rights and equitable treatment of shareholders and key
ownership functions; III) Institutional investors, stock markets, and other intermediaries; IV) The
role of stakeholders; V) Disclosure and transparency; and VI) The responsibilities of the board.

4. SHAREHOLDER PRIMACY AND CORPORATE GOVERNANCE BY SHAUNGGE WEN,


ROUTLEDGE-TAYLOR AND FRANCIS GROUP

This book offers a thorough exploration of the origins, recent changes and future development of

the corporate objective–shareholder primacy. Legal and theoretical aspects are examined so as to

provide a comprehensive and critical account of the practices reflecting shareholder primacy in
the UK. In the wake of the financial crisis, this book investigates the direction of future policy,
with particular attention to changes in governing rules and regulations and their implications for
preserving the objective of shareholder primacy. It examines current UK and EU reform
proposals calling for long-term and socially-responsible corporate performance, and the potential
friction between proposed legal changes and commercial practices.

5. IOSCO OBJECTIVES AND PRINCIPLES OF SECURITIES REGULATION, 2017


This Document sets out 38 Principles of securities regulation, which are based upon three
Objectives of securities regulation. These are:

 protecting investors;
 ensuring that markets are fair, efficient and transparent;
 reducing systemic risk.

The 38 Principles need to be practically implemented under the relevant legal framework to
achieve the Objectives of regulation described above. The Principles are grouped into ten
categories.

6. INDIA’S CORPORATE GOVERNANCE VOLUNTARY GUIDELINES 2009: RHETORIC OR

REALITY? BY UMAKANTH VAROTTIL, NLSIU REVIEW VOL. 22 NO 2, P. 1, 2010.

This article examines, primarily on two counts, the response of the Government of India to
governance scandals through the issue of the Guidelines. First, it evaluates the substantive
provisions of the Corporate Governance Voluntary Guidelines, 2009 and finds that while the
Guidelines do contribute to enhancement of the existing corporate governance framework in
significant ways, they fail to satisfactorily address some of the shortcomings in the prevailing
regime that have surfaced in the recent past. Second, it seeks to determine the efficacy of the
“voluntary” approach followed by the Government of India (whereby companies are encouraged
to follow a code of corporate governance on a recommendatory basis) rather than through the
imposition of mandatory rules.

7. NOTE ON INDEPENDENCE OF INDEPENDENT DIRECTOR BY PROF. (DR.) INDERJIT DUBE,


JOURNAL OF INSTITUTE OF DIRECTOR XVII NO.12, PP. 13-17 (2012)

The law expects independent directors to bring an independent judgment to bear on the Board's
deliberations, especially, on issues of strategy, performance, risk management, resources, key
appointments, audit and standards of conduct; and to bring an objective view in the evaluation of
the performance of the board and management. This is practically impossible if independent
directors are considered in their existing capacity. This article emphasis on autonomous and
independence of Independent Director and suggest how it can be achieved.
8. BOARD INDEPENDENCE IN INDIA: FROM FORM TO FUNCTION BY VIKRAMADITYA
KHANNA AND UMAKANTH VAROTTIL, CAMBRIDGE UNIVERSITY PRESS, 2017

In this paper the authors have discussed about the application and evolution of board
independence in India, where concentration of shareholdings in public companies is the norm,
what effects it has had, and how one might make the best use of the board independence concept
in the Indian environment. Following India’s liberalization in the early 1990s, the first foray into
board independence came in the form of a voluntary code recommended by the Confederation of
Indian Industry, which was later on adopted in a revised form by the Securities and Exchange
Board of India (SEBI) as a mandatory requirement. This formal phase was influenced by
developments around the world, thereby displaying signs of a legal transplant. The authors have
concluded with some suggested reforms that may further push the board independence concept
towards greater effectiveness in India.

9. THE ESSENTIAL BOOK OF CORPORATE GOVERNANCE BY G. N. BAJPAI

This book helps organizations to maximize wealth creation, build enduring relationships with
stakeholders and be a net contributor to the economies of operated geographies. Based on
extensive research, interviews and case studies, the book assists companies to develop their own
governance best practices. This book gives an overview of the Corporate Governance regime in
India.

10. TAXMANN’S CORPORATE GOVERNANCE BY INDIAN INSTITUTE OF CORPORATE


AFFAIRS

This book has been compiled by the Indian Institute of Corporate Affairs as a guide to
understand key issues in the area of corporate governance. The book covers fundamental aspects
of corporate governance with a strong focus on Indian regulatory system. The various authors
who have contributed to the book present practitioner’s approach to understand the corporate
governance issues. The regulations, strengths and weaknesses of corporate governance in the
USA, UK, Germany, Japan and South Korea are presented in detail in this book. OECD
Principles of corporate governance which have provided specific guidance for legislative and
regulatory initiatives in both OECD and non-OECD countries are also part of this book.
11. CORPORATE GOVERNANCE: PRINCIPLES, POLICY AND PRACTICE BY BOB TRICKER

Taking an international perspective, Bob Tricker examines different models and theories of
corporate governance and applies them in a real world context. The author is highly experienced
in this field and his practical discussion throughout allows students to appreciate the reality of
governance. In this new edition corporate governance theories, the governance of corporate risk,
and corporate social responsibility and sustainability are all now more prominent. In addition,
more emphasis is given to the BRIC nations to reflect their growing importance.

12. DR, C. L. BANSAL, TAXMANN’S CORPORATE GOVERNANCE: LAW PRACTICE &


PROCEDURE

A comprehensive commentary on Law Practice & Procedure relating to corporate Governance


with Case Studies Fundamental principles and models of corporate governance. Governance of
composition of Board of Directors, Independent directors and their role, Board committee, Board
chairman, board evaluation, directors' remuneration, shareholders' democracy, disclosures and
transparency as attributes of good corporate governance. Financial oversight by auditor’s
regulatory framework of corporate governance with special emphasis on clause 49 of the Listing
Agreement mechanism of wealth creation constraints on effective corporate governance
methodologies.

13. BUSINESS ETHICS AND CORPORATE GOVERNANCE BY C. FERNANDO

Business Ethics and Corporate Governance offers readers a comprehensive coverage of the
theories of business ethics and corporate governance. This book emphasizes the importance of
ethical principles in overcoming ethical dilemmas in the highly dynamic business world of today.
It also provides a detailed explanation of the corporate governance mechanism, its constituents
and its implementation in India and abroad. Numerous real-life examples and case studies
presented in this book help in the comprehension of concepts and class discussions around these
cases provide a better understanding of real-life business practices.

14. CORPORATE GOVERNANCE: PRINCIPLE, POLICY AND PROCEDURE BY E. K. SATHEESH,


A. C. FERNANDO AND K. P. MARALEEDHARAN
The Third edition of Corporate Governance: Principles, Policies and Practices sheds light on
recent corporate problems using a flexible modular format, through a detailed explanation of the
corporate governance mechanism and the various incentives within today's governance system,
while offering potential solution in context. With an emphasis on connecting corporate
governance to practical management, the book provides cutting-edge material comprising new
and unique study tools and fresh, thought-provoking content.

15. CORPORATE GOVERNANCE BY CHRIS A. MALLIN

In the wake of the recent global financial collapse the timely new edition of this successful text
provides students and business professionals with a welcome update of the key issues facing
managers, boards of directors, investors, and shareholders. In addition to its authoritative
overview of the history, the myth and the reality of corporate governance, this new edition has
been updated to include: analysis of the financial crisis, the reasons for the global scale of the
recession, the failure of international risk management.

16. INTERNATIONAL CORPORATE GOVERNANCE: A COMPARATIVE APPROACH BY THOMAS


CLARKE.

Thomas Clarke's International Corporate Governance offers a comprehensive guide to corporate


governance forms and institutions and examines the recurring crises in corporate governance and
the resulting corporate governance reform around the world. While the popular structure of the
original text has been retained, significant changes have been made to take account of the global
financial crisis, ever-changing regulations and worldwide governance developments. This
textbook contains a wealth of pedagogical material to guide the reader through this complex
subject, including student questions to help with assessments, and a new companion website.

RESEARCH METHODOLOGY

Research Design: The study being descriptive in nature, it will go through theoretical data
collection, and its analysis. The doctrinal method will be adopted for the overall research design.
Source of Data: The study is mainly based on secondary data and has gathered information from
various reports, journals, books, newspapers, magazines and websites to provide an
understanding of the corporate governance regime of different nations.

HYPOTHESIS

The Independent Director should be truly independent and he should be able to report any frauds
without any fear. The minority shareholder’s rights to be protected from getting oppressed by
majority shareholders.

SCHEME OF CHAPTERS

1. INTRODUCTION

The Chapter will provide the introduction of corporate governance regime in India and along
with its aims, objects and factors affecting good corporate governance structure. It will throw
some light on existing framework of corporate governance. It will highlight the cases which led
to the development of corporate governance in India.

2. DEVELOPMENT OF CORPORATE GOVERNANCE IN INDIA

Corporate Governance in India gained prominence in the wake of liberalization during the 1990s
and was introduced by the industry association Confederation of Indian Industry (CII) as a
voluntary measure to be adopted by the Indian companies. Consequently, the second major
corporate governance initiative was taken by Kumar Mangalam Birla to promote and raise the
standards of good corporate governance. Further, Naresh Chandra committee and Narayan
Murthy Committee have suggested measures to improve corporate governance standards in
India.

3. UDAY KOTAK COMMITTEE REPORT ON CORPORATE GOVERNANCE

With a view to enhance corporate governance in India, in June 2017, SEBI constituted the
Committee on Corporate Governance, chaired by Mr. Uday Kotak (the Committee). Its main
objective was to enhance fairness and transparency, strengthen an independent board, improve
disclosure standards and to recommend reforms on corporate governance and compliance of the
law on paper as well as in sprit. The committee has given its recommendations on Board
composition, related party transactions, auditors,

4. INDEPENDENCE OF INDEPENDENT DIRECTORS

The true independence of independent director is also an important issue which needs to be
addressed properly and the definition of ‘independent’ must need to be narrowed. It is only when
the independent directors are truly independent, the interest of shareholders can be protected and
frauds can be reported.

5. PROTECTION OF MINORITY INTEREST

This chapter will commence with defining minority interest and how it needs to be protected
from the oppression and mismanagement by majority shareholders. It primarily aims at
protecting the interest of minority shareholders. It will highlight the problems faced by the
minority shareholders and will suggest the ways to overcome such problems.

6. COMPARISON OF OTHER JURISDICTION

The corporate governance standards in India will be compared with the standards set in USA
(Sarbenes Oxley Act) and UK (Cadbury Committee Report). This chapter will also take into
account IOSCO comparative jurisdiction report on corporate governance. The purpose is to be
aware about the good practices adopted by other nations and try to implement such practices as
per Indian circumstances.

7. SUGGESTION AND CONCLUSION

The concluding chapter would be based on the critical analysis of the report and Indian corporate
governance regime. It will suggest the practices to be implemented so as to fill the lacuna under
the current regime. It will improve the transparency and enhance the disclosures which will
ultimately protect the rights of shareholders.

BIBLIOGRAPHY
BOOKS

 CORPORATE GOVERNANCE: PRINCIPLES, POLICY AND PRACTICE BY BOB TRICKER, III ED.,
2014, OXFORD PUBLICATION.
 TAXMANN’S CORPORATE GOVERNANCE BY INDIAN INSTITUTE OF CORPORATE AFFAIRS, I
ED., 2015.

 THE ESSENTIAL BOOK OF CORPORATE GOVERNANCE BY G. N. BAJPAI,, I ED., 2016, SAGE


PUBLICATIONS
 SHAREHOLDER PRIMACY AND CORPORATE GOVERNANCE BY SHUANGGE WEN,
ROUTLEDGE-TAYLOR AND FRANCIS GROUP, I ED., 2013.
 DR, C. L. BANSAL, TAXMANN’S CORPORATE GOVERNANCE: LAW PRACTICE & PROCEDURE
WITH CASE STUDIES, I ED., 2005.

 A. C. FERNANDO, BUSINESS ETHICS AND CORPORATE GOVERNANCE, II ED., 2012,


PEARSON EDUCATION INDIA
 CHRIS A. MALLIN, CORPORATE GOVERNANCE, V ED., 2017, OXFORD PUBLICATION
 THOMAS CLARKE, INTERNATIONAL CORPORATE GOVERNANCE: A COMPARATIVE
APPROACH, II ED., 2017.
 E. K. SATHEESH, A. C. FERNANDO AND K. P. MARALEEDHARAN, CORPORATE
GOVERNANCE: PRINCIPLE, POLICY AND PROCEDURE, III ED., 2018, PEARSON EDUCATION
INDIA

ARTICLES

 NOTE ON INDEPENDENCE OF INDEPENDENT DIRECTOR BY PROF. (DR.) INDERJIT DUBE,


JOURNAL OF INSTITUTE OF DIRECTOR XVII NO.12, PP. 13-17 (2012)
 BOARD INDEPENDENCE IN INDIA: FROM FORM TO FUNCTION BY VIKRAMADITYA KHANNA
AND UMAKANTH VAROTTIL, CAMBRIDGE UNIVERSITY PRESS, 2017

 INDIA’S CORPORATE GOVERNANCE VOLUNTARY GUIDELINES 2009: RHETORIC OR

REALITY? BY UMAKANTH VAROTTIL, NLSIU REVIEW VOL. 22 NO 2, P. 1, 2010.


 DIPAK MONDAL, DOZING DOORKEEPERS?, HTTPS://WWW.BUSINESSTODAY.IN/MAGAZINE/THE-
HUB/DOZING-DOORKEEPERS/STORY/281446.HTML (LAST VISITED NOVEMBER 06, 2018)
 CRITERIA FOR ASSESSING DIRECTOR INDEPENDENCE,
HTTPS://WWW.MOODYS.COM/SITES/PRODUCTS/ABOUTMOODYSRATINGSATTACHMENTS/200

6100000425776.PDF (LAST VISITED NOVEMBER 06, 2018)


 INDIA’S CORPORATE GOVERNANCE CHALLENGE,
HTTPS://WWW.LIVEMINT.COM/COMPANIES/1MW7BYVYJYV4EIDYTU2ZQN/INDIAS-

CORPORATE-GOVERNANCE-CHALLENGE.HTML (LAST VISITED NOVEMBER 06, 2018)

 F. MAYER (1997), ‘CORPORATE GOVERNANCE, COMPETITION, AND PERFORMANCE’, IN


ENTERPRISE AND COMMUNITY: NEW DIRECTIONS IN CORPORATE GOVERNANCE, S.
DEAKIN AND A. HUGHES (EDS), BLACKWELL PUBLISHERS: OXFORD.

REPORTS

 DESIRABLE CORPORATE GOVERNANCE A CODE,


HTTP://WWW.NFCG.IN/USERFILES/CIICODE.PDF (LAST VISITED NOVEMBER 06, 2018)

 UDAY KOTAK COMMITTEE REPORT ON CORPORATE GOVERNANCE


 IOSCO REPORT ON CORPORATE GOVERNANCE, 2016
 OECD PRINCIPLES OF CORPORATE GOVERNANCE, 2015
 IOSCO OBJECTIVES AND PRINCIPLES OF SECURITIES REGULATION, 2017