Principles of Corporate Governance in India | Company Management

These principles of corporate governance are as follows:

Ensuring an Effective Corporate Governance Framework:

The corporate governance framework should promote transparent and efficient Markets, be consistent with the rule of law and clearly articulate the division of responsibilities among different supervisory, regulatory and enforcement authorities.

Corporate Governance Framework in India:

India has a well-established corporate governance framework and it remained unaffected even during the Asian financial crisis of the late 1990s. Indeed, the move towards adopting good corporate governance practices, better financial and non-financial disclosures, and the promotion of transparent and efficient markets in India were built up well before the Asian debacle.

The corporate governance framework in India primarily consists of the following legislations and regulations:

The Companies Act, 1956:

The Companies Act governs companies in India. The Department of Companies Affairs (DCA) administers the Act. Among other things, the Act deals with rules and procedures regarding in incorporation of a company, prospectus, allotment of ordinary and preference shares and debentures, management and administration of a company, annual returns, frequency and conduct of shareholders’ meetings and proceedings, maintenance of accounts, board of directors, prevention of mismanagement and oppression of minority shareholder rights, and the power of investigation by the government, including powers of the Company Law Board.

The Securities Contracts (Regulation) Act, 1956:

It covers all types of tradable government paper, shares, stocks, bonds, debentures, and other forms of marketable securities issued by companies. The SCRA defines the parameters of conduct of stock exchanges as well as its powers.

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

This established the independent capital market regulatory authority, SEBI, with the objective to protect the interests of investors in securities, and promote and regulate the securities market.

The Depositories Act, 1996:

This established share and securities depositories, and created the legal framework for dematerialisation of securities.

Listing Agreement with Stock Exchanges:

These define the rules, processes, and disclosures that companies must follow to remain as listed entities. A key element of this is Clause 49, which states the corporate governance practices that listed companies must follow.

The Rights of Shareholders and Key Ownership Functions:

The corporate governance framework should protect shareholders’ rights and facilitate the exercise of shareholder rights.

(A) Basic shareholder rights include the right to:

1. Secure methods of ownership registration;

2. Convey or transfer shares;

3. Obtain relevant information on the corporation on a timely and regular basis;

4. Participate and vote in general shareholder meetings;

5. Elect and remove members of the board;

6. Share in the profits of the corporation.

(B) Shareholders should have the right to participate in, and to be sufficiently informed on, decisions concerning fundamental corporate changes such as:

1. Amendments to the statutes, or articles of incorporation or similar governing documents of the company;

2. The authorisation of additional shares;

3. Extraordinary transactions including the transfer of all or substantially all assets that in effect result in the sale of the company.

(C) Shareholders should have the opportunity to participate effectively and vote in general shareholder meetings and should be informed of the rules, including voting procedures that govern general shareholder meetings:

1. Shareholders should be furnished with sufficient and timely information concerning the date, location and agenda of general meetings, as well as full and timely information regarding the issues to be decided at the meeting.

2. Opportunity should be provided for shareholders to ask questions of the board, including questions related to the annual external audit, to place items on the agenda of general meetings, and to propose resolutions subject to reasonable limitations.

3. Effective shareholder participation in key corporate governance decisions, such as the nomination of and election of board members should be facilitated. Shareholders should be able to make their views known on the remuneration policy for board members and key executives. The equity component of compensation schemes for board members and employees should be subject to shareholder approval.

4. Shareholders should be able to vote in person or in absentia, and equal effect should be given to votes whether cast in person or in absentia.

(D) Capital structures and arrangements that enable certain shareholders to obtain a degree of control disproportionate to their equity ownership should be disclosed.

(E) Markets for corporate control should be allowed to function in an efficient and transparent manner.

1. The rules and procedures governing the acquisition of corporate control in the capital markets, and extraordinary transactions such as mergers, and sales of substantial portions of corporate assets, should be clearly articulated and disclosed so that investors understand their rights and recourse. Transactions should occur at transparent prices and under fair conditions that protect the rights of all shareholders according to their class.

2. Anti-take-over devices should not be used to shield management from accountability.

(F) The exercise of ownership rights by all shareholders, including institutional investors, should be facilitated.

1. Institutional investors acting in a fiduciary capacity should disclose their overall corporate governance and voting polices with respect to their investments, including the procedures that they have in place for deciding on the use of their voting rights.

2. Institutional investors acting in a fiduciary capacity should disclose how they manage material conflicts of interest that may affect the exercise of key ownership rights regarding their investments.

(G) Shareholders, including institutional shareholders, should be allowed to consult with each other on issues concerning their basic shareholders rights as defined in the Principles, subject to exception to prevent abuse.

The Equitable Treatment of Shareholders:

The corporate governance framework should ensure the equitable treatment of all shareholders, including minority and foreign shareholders. All shareholders should have the opportunity to obtain effective redress for violation of their rights.

1. All shareholders of the same class should be treated equally.

(a) Within any class, all shareholders should have the same voting rights. All investors should be able to obtain information about the rights attached to all series and classes of shares before they purchase. Any changes in voting rights should be subject to approval by those classes of shares, which are negatively affected.

(b) Minority shareholders should be protected from abusive actions by, or in the interest of, controlling shareholders, acting either directly or indirectly, and should have effective means of redress.

(c) Votes should be cast by custodians or nominees in a manner agreed upon with the beneficial owner of the shares.

(d) Processes and procedures for general shareholder meetings should allow for equitable treatment of all shareholders. Company procedures should not make it unduly difficult or expensive to cast votes.

2. Insider trading and abusive self-dealing should be prohibited.

3. Members of the board and key executives should be required to disclose to the board whether they, directly, indirectly, or on behalf of third parties, have a material interest in any transactions or matter directly affecting the corporation.

The Role of Stakeholders in Corporate Governance:

The corporate governance framework should recognise the rights of stakeholders as established by law or through mutual agreements, and encourage active cooperation between corporations and stakeholders in creating wealth, jobs, and the sustainability of financially sound enterprises.

1. The rights of stakeholders that are established by law or through mutual agreements are respected.

2. Where stakeholder interests are protected by law, stakeholders should have the opportunity to obtain effective redress for violation of their rights.

3. Performance-enhancing mechanisms for stakeholder participation should be permitted to develop.

4. Where stakeholders participate in the corporate governance process, they should have access to relevant, sufficient and reliable information on timely and regular information.

5. Stakeholders, including individual companies and their representative bodies, should be able to freely communicate their concerns about illegal or unethical practices to the board and their rights should not be compromised for doing this.

6. The corporate governance framework should be complemented by an effective, efficient insolvency framework and by enforcement of creditor rights.

Disclosure and Transparency:

The corporate governance framework should ensure that timely and accurate disclosure is made on all material matters regarding the corporation, including the financial situation, performance, ownership and governance of the company.

(a) Disclosure should include, but not be limited to, material information on:

1. The financial and operating results of the company.

2. Company objectives.

3. Major share ownership and voting rights.

4. Remuneration policy for members of the board and key executives and information about board members, including their qualifications, the selection process, other company directorships and whether they are regarded as independent by the board.

5. Related party transactions.

6. Material foreseeable risk factors.

7. Material issues regarding employees and other stakeholders.

8. Governance structures and policies, in particular, the content of any corporate governance code or policy and the process by which it is implemented.

(b) Information should be prepared, audited, and disclosed in accordance with high quality standards of accounting, financial and non-financial disclosure, and audit.

(c) An annual audit should be conducted by an independent, competent, and qualified auditor in order to provide an external and objective assurance to the board and shareholders that the financial statements fairly represent the financial position and performance of the company in all material respects.

(d) External auditors should be accountable to the shareholders and owe a duty to the company to exercise due professional care in the conduct of the audit.

(e) Channels for disseminating information should provide for fair, timely and cost-efficient access to relevant information by users.

(f) The corporate governance framework should be complemented by an effective approach that addresses and promotes the provisions of analysis or advice by the analysts, brokers, rating agencies and others that are relevant to decisions by investors, free from material conflicts of interest that might compromise the integrity of their analysis and advice.

The Responsibilities of the Board:

The corporate governance framework should ensure the strategic guidance of the company, the effective monitoring of management by the board, and the board’s accountability to the company and the shareholders.

(a) Board members should act on a fully informed basis, in good faith, with due diligence and care, and in the best interest of the company and the shareholders.

(b) Where board decisions may affect different shareholder groups differently, the board should treat all shareholders fairly.

(c) The board should apply high ethical standards. It should take into account the interests of stakeholders.

(d) The board should fulfill certain key functions, including:

1. Reviewing and guiding corporate strategy, major plans of action, risk policy, annual budgets and business plans, setting performance objectives, monitoring implementation and corporate performance, and overseeing major capital expenditures, acquisitions and divestitures.

2. Monitoring the effectiveness of the company’s governance practices and making changes as needed.

3. Selecting, compensating, monitoring and, when necessary, replacing key executives and overseeing succession planning.

4. Aligning key executive and board remuneration with the long-term interests of the company and its shareholders.

5. Ensuring a formal and transparent board nomination and election process.

6. Monitoring and managing potential conflicts of interest of management, board members and shareholders, including misuse of corporate assets and abuse in related party transactions.

7. Ensuring the integrity of the corporation’s accounting and financial reporting systems, including the independent audit, and that appropriate systems of control are in place, in particular, systems for monitoring risk, financial control, and compliance with the law.

8. Overseeing the process of disclosure and communications.

(e) The board should be able to exercise objective judgment on corporate affairs independent, in particular, from management.

1. Boards should consider assigning a sufficient number of non-executive board members capable of exercising independent judgment to tasks where there is a potential for conflict of interest. Examples of such key responsibilities are ensuring the integrity of financial and non-financial reporting, the review of related party transactions, nomination of board members and key executives, and board remuneration.

2. When committees of the board are established, their mandate, composition and working procedures should be well defined and disclosed by the board.

3. Board members should devote sufficient time to their responsibilities.

(f) In order to fulfill their responsibilities, board members should have access to accurate, relevant and timely information.