Business ethics unit 3

Corporate governance practices in India

The organizational framework for corporate governance initiatives in India consists of the Ministry of
Corporate Affairs (MCA) and the Securities and Exchange Board of India (SEBI). SEBI monitors and
regulates corporate governance of listed companies in India through Clause 49. This clause is
incorporated in the listing agreement of stock exchanges with companies and it is compulsory for listed
companies to comply with its provisions. MCA through its various appointed committees and forums
such as National Foundation for Corporate Governance (NFCG), a not-for-profit trust, facilitates
exchange of experiences and ideas amongst corporate leaders, policy makers, regulators, law enforcing
agencies and non- government organizations.

Corporate governance is an increasingly important issue in the Indian economy. The past decade has seen
a number of scandals and shareholder disputes, all of which indicate lacunae, if not lapses, in governance.
Regulators have responded to these challenges by amending and, in some cases, introducing new
legislation, and shareholders are resorting to activist intervention in companies to secure their rights. This,
coupled with the closely held shareholding of Indian companies, as well as the several factors that
contribute to India's ranking on the Transparency Index, keep corporate governance on the radar.
The Indian corporate governance framework focuses on:
1. protection of minority shareholders;
2. accountability of the board of directors and management of the company;
3. timely reporting and adequate disclosures to shareholders; and
4. corporate social responsibility.
The regime emphasises transparency through disclosures and a mandatory minimum proportion of
independent directors on the board of each company.
However, as is common in India, the corporate governance regulatory framework is composed of statutes
and regulations that require supervision by multiple regulators:
1. the Securities and Exchange Board of India (SEBI) is the principal regulator for listed companies;
2. the Ministry of Corporate Affairs (MCA) and the registrar of companies (Registrar) administer
the Companies Act 2013 and the relevant rules that apply to all companies, including listed
companies; and
3. additionally, sector-specific regulation also applies, and this can have a significant impact on the
governance regime
Perhaps the most significant issue that Indian regulators must address is ensuring that independent
directors can fulfil their obligations in the closely held and controlled world of Indian corporates.

Corporate Governance At Abroad :-

The U.S. passed the Foreign Corrupt Practices Act (FCPA) in 1977, with subsequent
modifications.
This law made it illegal to bribe government officials and required corporations to maintain
adequate accounting controls. It is enforced by the U.S department of Justice and the Securities
and Exchange Commission (SEC). Substantial civil and criminal penalties have been levied on
corporations and executive convicted on bribery.
The Foreign Corrupt Practices Act (Hereinafter referred as “FCPA) applies to any person who
has any connection to the United States and engages in foreign corrupt practices.
The Act also applies to any act by foreign corporations trading securities in the U.S., U.S.
businesses, American nationals, citizens, and residents acting in furtherance of a foreign corrupt
practice.
The FCPA contains two types of provisions :

1. Anti-bribery provisions (which prohibit corrupt payments to foreign officials, parties or

candidates to assist in obtaining or retaining businesses or securing any improper
advantage)
2. Record-Keeping and Internal Controls provisions, which impose certain obligations on all
companies whose securities are registered in the United States or which are required to
file reports with the SEC ,regardless of whether or not the companies.

Independent Director
An independent director, in corporate governance, refers to a member of a board of directors who does
not have a material relationship with a company and is neither part of its executive team nor involved in
the day-to-day operations of the company.

Potential Benefits of Appointing Independent Directors

Independent directors are generally desirable to be appointed to the board of directors and are key to good
corporate governance.

A board that is majority independent would be better suited to oversee the CEO as opposed to a board
comprised of dependent directors. Additionally, appointing more independent directors generally results
in greater third-party advice and expertise (due to the executives coming from different backgrounds).
Since the directors, by definition, do not have a material relationship with the company, they are not
subject to undue influence from the management team.

Potential Drawbacks of Appointing Independent Directors

In addition to the potential benefits, there are a number of drawbacks to consider.

One example is the risk of information asymmetry, as independent directors are generally less informed
about the company than the management team. Although a director may be independent by definition, it
does not imply that the director is acting in absolute independence – independent directors can be co-
opted by management. In addition, they may not have the requisite skills and knowledge to be an
effective board member.

Nomination Committee
A nomination committee refers to a group of board members who are responsible for the corporate
governance of an organization. Nominating committee members typically work to evaluate the
characteristics and performance of board members and are responsible for selecting the best candidates
for each seat on the board.

Who is Part of a Nomination Committee?

A nomination committee includes a chair – the person responsible for overseeing and managing
the committee and its decisions. The role of the chair’s been traditionally held by the company’s
chairman, but there is an increasing reliance on:

 Non-Executive Directors (NEDS)

NEDs are directors that represent a majority shareholder but do not oversee the day-to-day
management of the company.

 Senior Independent Directors (SIDs)

SIDs are external directors with no link to the company but are hired for guidance.

Nomination committees usually comprise a mix of SIDs, NEDs, and senior directors that are part
of the company’s board (e.g., the chairman). The individual assigned to the role of the committee
chair is decided by the company.

Responsibilities of a Nomination Committee

The responsibilities of a nomination committee must be made clear in a document that outlines
the role, as well as the processes that are to be followed in certain situations. Typical tasks a
nomination committee is assigned with include:

1. Board recruitment and succession planning

2. Annual board evaluations
3. Linking company strategy to recruitment
4. Induction, training, and development of new directors

Mandatory auditing
A mandatory audit regime prevents outsiders from learning more about a company's type by
observing its decision on whether to have an audit. Requiring audits prevents companies from
exploiting this signaling mechanism, although they can partly reveal their type through auditor
choice even when auditing is mandatory.

Corporate Fraud in India

Corporate fraud is defined as unlawful, misleading activities conducted by a company or a person using
highly trained accounting practices to inflate a company’s apparent earnings, which can take years to
identify. Furthermore, this article seeks to analyze the causes and impacts of fraud on corporate
stakeholders. This article informs us about Corporate Fraud in India.

Different Types of Corporate Frauds in India

Corporate fraud comes in a variety of forms:
 Misappropriation of Funds: Payment fraud, accounting fraud, and deceiving investors into
investing by sharply boosting the share price.
 Assets taken without Authorization: Theft of physical goods, intellectual property rights, and
Dummy payments that exploit an entity’s assets for one’s own benefit.
 Corruption: Making or accepting fraudulent payments, giving bribes to public or private
authorities, aiding and abetting, and obtaining political backing to conduct fraud are all
prohibited.
However, among these, Financial Fraud, Asset Misappropriation, Employee Fraud, Vendor Fraud,
Customer Fraud, and Investment Scams are the most prevalent forms.
BOARD COMMITTEES
The Board has constituted sub-committees to focus on specific areas and make informed decisions
within the authority delegated to each of the Committees. Each Committee of the Board is guided by its
charter, which defines the scope, powers and composition of the Committee. All decisions and
recommendations of the Committees are placed before the Board for information or approval.

The oversight function of corporate governance is performed by the company's board of directors
and its designated committees. Boards of directors perform their advisory and oversight function
through well-structured, planned, and assigned committees to take advantage of the expertise of
all the directors. Board committee formations and assignments depend on the size of the
company, its board, and assumed responsibilities. Committee members address relevant issues
and make recommendations to the entire board for final approval. Board committees normally
function independently from each other and are provided with sufficient authority, resources, and
assigned responsibilities in assisting the entire board.

Primary Objectives
The primary objectives of this chapter are to

 Provide an overview of the functions of board committees.

 Understand the roles and responsibilities of board committees.
 Be aware of the objectives of establishing board committees.
 Become familiar with the duties, responsibilities, and composition of the audit, compensation,
nominating, governance, and special committees.
 Understand the process and emerging practices for the election of corporate directors.

Functions of board committee

 Maintain liaise with executive management

 Exchange of information between itself and management
 Facilitates officers and other boards
 Resources development and planning
 The committee should ensure that there is no duplication of work

Standing committee
The term ‘standing committee’ refers to any committee that is a permanent feature
within the management structure of an organisation. In the context of corporate
governance, it refers to committees made up of members of the board with
specified sets of duties. The four committees most often appointed by public
companies are the audit committee, the remuneration committee, the nominations
committee and the risk committee.

Role of Standing Committees

The primary purpose of standing committees shall be to consider and recommend actions and propose
policies in the functional areas under their jurisdictions, subject to final approval by the Council.
Duties of Standing Committee Chairs

The duties of the chair shall include:

1. Scheduling meetings
2. Preparing agendas
3. Presiding over meetings
4. Preparing an annual report
5. Performing other duties as consistent with the efficient management of the committee.

Ad hoc Committees
An ad hoc committee is a temporary committee established to resolve a specific issue. The ad hoc
committee is typically appointed by executive leadership.
In general, the ad hoc committee is responsible for providing the navigational direction needed to
resolve a specific issue.
Ad hoc committees have different purposes, including but not limited to the following:
 Solve problems
 Develop ideas
 Make decisions
 Perform tasks

Ad Hoc Committee Responsibilities

The purpose of an ad hoc committee is to address a particular issue or problem. When a
committee is created, its members are assigned specific roles and responsibilities. These roles
and responsibilities vary depending on the type of committee being formed. But here are the three
primary roles that every committee member should strive to fulfill:

1. Serve as a Sounding Board

2. Resolve Specific Issues
3. Support the Goals and Objectives of the Organization

Task force committee

A task force or action committee (also sometimes called an ad hoc committee from the Latin meaning
"for this purpose") is a group assembled to address a specific problem or accomplish a specific goal.
A task force or action committee is usually part of a larger initiative - a community coalition of some
sort, a local or other government committee, etc. It may be one of several such groups spawned by the
initiative, each aimed at a different issue or goal. It may operate independently, or may have to gain
approval from the larger group before taking any action.
The key word in the phrase "task force" is task. That is, a task force is organized to accomplish particular
goals, or tasks. Unlike a Board or standing committee that has ongoing responsibilities within an
organization, a task force is usually time-limited, focusing on specific goals.