Corporate Governance in India: Objectives, History, Regulatory Framework, Examples

Ever wondered why big companies in India are so trusted and always in the lead? This blog explains their secret: good corporate governance. In this article, we will explore the principles of corporate governance in India and showcase why it's key for businesses to be open, responsible, and ethical.

What is Corporate Governance in India?

Corporate governance in India sets the guidelines for how a company operates, aiming to ensure that the company's activities are good for everyone connected, including investors, leaders, customers, suppliers, financial backers, regulators, and the community.

Need for Corporate Governance in India

The following summarises the need for corporate governance in India:

• To make companies more accountable: Corporate governance was needed to improve how responsible companies are and to reduce the risks of doing business.
• To fix rule-breaking: Corporate governance helps handle situations where companies are not following important financial and management rules.
• To protect investors: Corporate governance was necessary to prevent investors from losing a lot of money because of careless or dishonest actions by corporate leaders.
• To set up good management practices: Corporate governance helps put in place the right procedures for managing a company well and making sure the roles and powers of those running the company and those overseeing it are separate.
• To strengthen a company's finances: Corporate governance helps maintain healthy competition amongst companies, which is conducive to financial growth.
• To operate openly and avoid scams: Having corporate governance policies in place ensures companies operate openly, which thereby reduces the chances of fraud.

Principles of Corporate Governance in India

The principles of corporate governance include:

Accountability: This means those in charge must take responsibility for their actions. It ensures that:

• The management answers to the Board of Directors.
• The Board of Directors answers to the shareholders.
• This builds shareholder trust, knowing responsible parties will be held accountable if needed.

Fairness: This principle ensures shareholders can express concerns and seek remedies for any violation of rights. It involves:

• Protecting shareholder rights.
• Treating all shareholders equally.
• Offering solutions for violation of rights, if any.

Transparency: This involves sharing clear, important information about the company’s operations and decisions affecting shareholder rights. It helps to:

• Build trust with stakeholders.
• Ensure timely disclosure of significant information, such as financial status and ownership.

Independence: This means making decisions without undue influence or personal interest. It aims to:

• Reduce conflicts of interest.
• Suggest appointing independent directors to ensure unbiased decision-making.

Social Responsibility: Beyond the main principles, companies are encouraged to address social issues, enhancing their industry image. Good corporate governance also involves fulfilling corporate social responsibility.

Regulatory Framework of Corporate Governance in India

To keep transparency, accountability, and fair management among companies intact, the Indian corporate governance framework adopts best practices worldwide. The following are some of the governing bodies deciding and implementing the best practices of corporate governance in India:

• Companies Act 2013: This foundational legislation prescribes how companies should operate. It mainly touches on board composition, director duties, and audit committees.
• Securities and Exchange Board of India (SEBI) Guidelines: SEBI has rules for listed companies. These rule­s provide that necessary information be given to the public. This he­lps keep things fair to those who buy shares in the company.
• Standard Listing Agreement of Stock Exchanges: This agreement applies to those businesses that are listed on any stock exchange in India. Their purpose is to ensure continuous disclosures so that the market can be transparent.
• Accounting Standards by Institute of Chartered Accountants of India (ICAI): ICAI has set these standards to see that financial reporting is done accurately and uniformly, thus maintaining integrity in financial statements and in showing an entity’s financial position.
• Indian Accounting Standards (Companies – Indian Accounting Standards) Rules: These­ rules say that Indian companies must follow International Financial Re­porting Standards or IFRS. IFRS helps make financial stateme­nts clear and easy to compare.
• Secretarial standards: These were put forward by ICSI (Institute of Company Secretaries of India). They govern how board meetings should be conducted along with general meetings, thereby enhancing good practice in corporate affairs while ensuring adherence to laws.

Role of the Government in Ensuring Corporate Governance in India

The Indian government plays a crucial role in steering companies towards ethical and responsible behaviour through a variety of initiatives:

• New laws: The government introduced important laws such as the Companies Act of 2013. These laws guide how companies should operate, how directors behave, and protect the rights of shareholders and workers.
• Setting up regulators: It established organisations like the Securities and Exchange Board of India (SEBI) and the Institute of Chartered Accountants of India (ICAI). SEBI looks after the stock market and protects investors, while ICAI governs accounting rules for companies.
• Watching over companies: The government checks on companies to make sure they follow all rules and laws. For instance, companies are required to file various forms with the Ministry of Corporate Affairs, in compliance with The Companies Act, 2013. If they fail to do so, there could be penalties.
• Supporting honesty and equality: The government expects companies to share clear information about their activities, financial situation, and how they make decisions to ensure fair treatment for everyone.

Best Practices of Corporate Governance in India

Here are the top five best practices in corporate governance in India:

1. Create a strong, diverse board:

• Aim for a board with varied skills, backgrounds, and perspectives.
• Ensure board members are independent, ethical, and fully engaged.
• Offer training for new members and continuous learning for all.

2. Define roles and responsibilities:

• Define clear roles, duties, and responsibilities for the board, chairperson, CEO, and management.
• Use written guidelines for each role and committee task.
• Keep the chairperson and CEO roles separate to balance power.

3. Promote integrity and ethical behaviour:

• Board members should avoid conflicts of interest and promote honesty.
• Implement policies for ethical conduct and reporting wrongdoings.
• Assign someone to oversee these policies.

4. Assess performance and compensation fairly:

• Set fair payment for board members to attract talent without causing conflicts.
• Evaluate the board's and executives' performances regularly.
• Link executives’ pay to their performance through a compensation committee.

5. Manage risks effectively:

• Develop a clear strategy for risk tolerance and management.
• Continuously identify and evaluate new and existing risks.
• Regularly check if the risk management measures are working.

Benefits of Corporate Governance in India

The following are the main advantages of strong corporate governance:

1. Improves corporate performance:

• Enhances the quality of decision-making.
• Helps develop a strong corporate strategy.
• Leads to effective execution capabilities, improving overall performance.

2. Enhances accountability:

• Makes the Board of Directors more accountable to shareholders.
• Improves the branding and reputation of the enterprise.

3. Enhances investor trust:

• Encourages more investment by promoting investors' interests through effective disclosures.
• Builds investor confidence in the company.

4. Access to global markets:

• Transparency in reporting attracts investment from global investors.
• Improves efficiencies in the financial sector, opening up international market opportunities.

5. Eradicates corruption:

• Implements strong internal control and audit processes.
• Prevents fraud and malpractice such as insider trading, ensuring operations are conducted ethically.

Examples of Good Corporate Governance in India

In India, the following are great examples of companies that show how important good corporate governance is for earning trust and maintaining integrity:

• The Tata Group is a leading example, known for its strong ethical standards and commitment to transparency. With a mix of independent and experienced directors, it makes decisions carefully and promotes a culture of honesty. 
• HDFC Bank is another company that stands out for its commitment to good governance. It focuses on being open, managing risks well, and keeping a good relationship with all stakeholders. Its board, similar to the Tata Group, blends expertise and independent oversight, making the bank known for its trustworthiness.
• Sun Pharmaceutical Industries is also recognized for its governance, especially in how it engages with stakeholders and manages risks. The board encourages diversity and includes independent directors, providing thorough supervision.