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Consultative Paper On Review Of Corporate Governance Norms In India

1. Concept of Corporate Governance
Corporations pool capital from a large investor base both in the domestic and in the international capital markets. In this context, investment is ultimately an act of faith in the ability of a corporation’s management. When an investor invests money in a corporation, he expects the board and the management to act as trustees and ensure the safety of the capital and also earn a rate of return that is higher than the cost of capital. In this regard, investors expect management to act in their best interests at all times and adopt  goodcorporate governance practices.

1.2. Corporate governance is the acceptance by management of the inalienable rights of shareholders as the true owners of the corporation and of their own role as trustees on behalf of the shareholders. It is about commitment to values, about ethical business conduct and about making a distinction between personal and corporate funds in the
management of a company.

2. Evolution of Corporate Governance framework in India:
2.1. Companies Act, 1956 provides for basic framework for regulation of all the companies.
Certain provisions were incorporated in the Act itself to provide for checks and balances over the powers of Board viz.:
  1. Loan to directors or relatives or associated entities (need CG permission) (Sec 295)
  2. Interested contract needs Board resolution and to be entered in register (Sec 297)
  3. Interested directors not to participate or vote (Sec 300)
  4. Appointment of director or relatives for office or place of profit needs approval by shareholders. If the remuneration exceeds prescribed limit , CG approval required (Sec 314)
  5. Audit Committee for Public companies having paid-up capital of Rs. 5 Crores (Sec 292A)
  6. Shareholders holding 10% can appeal to Court in case of oppression or
  7. mismanagement (397/398).
2.2. In Companies Act, 1956, SEBI has been given power only to administer provisions pertaining to issue and transfer of securities and non-payment of dividend.

2.3. Apart from the basic provisions of the Companies Act, every listed company needs to comply with the provisions of the listing agreement as per Section 21 of Securities Contract Regulations Act, 1956. Non-compliance with the same, would lead to delisting
under Section 22A or monetary penalties under Section 23 E of the said Act.

2.4. Further, SEBI is empowered under Section 11 and Section 11A of SEBI Act to prescribe conditions for listing. However, Section 32 of the SEBI Act, 1992 states that the provisions of the SEBI Act, 1992 shall be in addition to, and not in derogation of, the provisions of any other law for the time being in force.

2.5. Considering the emergence of code of best Corporate Governance practices all over the world (like Cadbury Greenbury and Hampel Committee reports), in 1999, SEBI constituted a Committee on Corporate Governance under the Chairmanship of Shri Kumar Mangalam
Birla, to promote and raise the standard of Corporate Governance in respect of listed companies. SEBI’s Board, in its meeting held on January 25, 2000, considered the recommendations of the Committee and decided to make the amendments to the listing agreement on February 21, 2000 for incorporating the recommendations of the committee by inserting a new clause in the Equity Listing Agreement – i.e. Clause 49.

2.6. Subsequently, after Enron, WorldCom, and other corporate governance catastrophes, SEBI felt that there was a need to improve further the level of corporate governance standards in India and constituted a second corporate governance committee chaired by Mr. Narayana Murthy, of Infosys Technologies Limited. Based on the recommendations of the aforesaid Committee, SEBI issued a circular on August 26, 2003 revising Clause 49 of the Listing Agreement. Based on the public comments received thereon and the revised recommendations of the Committee, certain provisions of the regulatory framework for corporate governance were modified and relevant amendments were made to Clause 49 of the Listing Agreement. The revised clause 49 superseded all the earlier circulars on the subject and became effective for listed companies from January 01, 2006. It is applicable to the entities seeking listing for the first time and for existing listed entities having a paid up share capital of Rs. 3 crores and above or net worth of Rs. 25 crores or more at any time in the history of the company.

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