Volume 2 Issue 1 November 2010

CORPORATE
GOVERNANCE IN INDIA
Priya Sharma*

A corporation is a congregation of various stakeholders,

namely, customers, employees, investors, vendor partners,
government and society. A corporation should be fair and
transparent to its stakeholders in all its transactions. This has
become imperative in today’s globalized business world where
corporations need to access global pools of capital, need to attract
and retain the best human capital from various parts of the world,
need to partner with vendors on mega collaborations and need
to live in harmony with the community. Unless a corporation
embraces and demonstrates ethical conduct, it will not be able
to succeed.
Corporate governance is the set of processes, customs,
policies, laws, and institutions affecting the way a corporation
or company is directed, administered or controlled. Corporate
governance also includes the relationships among the many

* Lecturer in Law, Law College Dehradun

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stakeholders involved and the goals for which the corporation

is governed.
Corporate Governance is the system by which companies
are directed and managed. It influences how the objectives of
the company are set and achieved, how risk is monitored and
assessed and how performance is optimized. Sound Corporate
Governance is, therefore, critical to enhance and retain investor’s
trust.

Definition of Corporate Governance

Report of SEBI Committee (India) on Corporate Governance
defines corporate governance as “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 & corporate funds in the management of a company.”1
The OECD provides the most authoritative functional
definition of corporate governance: “Corporate governance is
the system by which business corporations are directed and
controlled. The corporate governance structure specifies the
distribution of rights and responsibilities among different
participants in the corporation, such as the board, managers,
1
N. R Narayana Murthy, “Report of the SEBI Committee on Corporate Gover-
nance.” p.5, http://www.sebi.gov.in/commreport/corpgov.pdf. last visited on
14.10.2010.

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shareholders and other stakeholders, and spells out the rules

and procedures for making decisions on corporate affairs. By
doing this, it also provides the structure through which the
company objectives are set, and the means of attaining those
objectives and monitoring performance.”2

History of Corporate Governance in India: A Background

The history of the development of Indian corporate laws has
been marked by interesting contrasts. At independence, India
inherited one of the world’s poorest economies but one which
had a factory sector accounting for a tenth of the national product;
four functioning stock markets with clearly defined rules
governing listing, trading and settlements; a well-developed
equity culture if only among the urban rich; and a banking system
replete with well-developed lending norms and recovery
procedures.3 In terms of corporate laws and financial system,
therefore, India emerged far better endowed than most other
colonies.
The years since liberalization, have witnessed wide-ranging
changes in both laws and regulations driving corporate
governance as well as general consciousness about it. Perhaps
the single most important development in the field of corporate
governance and investor protection in India has been the
2
http://www.ccg.uts.edu.au/corporate_governance.htm last visited on 14.10.2010.
3
Rajesh Chakrabarti, ‘Corporate Governance in India – Evolution and Chal-
lenges’. http://unpan1.un.org/intradoc/groups/public/documents/APCITY/
UNPAN023826.pdf, last visited on 4.10.2010.
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establishment of the Securities and Exchange Board of India

(SEBI) in 1992 and its gradual empowerment since then.4
Established primarily to regulate and monitor stock trading, it
has played a crucial role in establishing the basic minimum
ground rules of corporate conduct in the country.
Concerns about corporate governance in India were,
however, largely triggered by a spate of crises in the early 90’s
– the Harshad Mehta stock market scam of 1992 followed by
incidents of companies allotting preferential shares to their
promoters at deeply discounted prices as well as those of
companies simply disappearing with investors’ money.
Corporate governance in India is evident from the various
legal and regulatory frameworks and Committees set relating
to corporate functioning comprising of the following5:
z The Companies Act, 1956
z Monopolies and Restrictive Trade Practices Act, 1969
(replaced by new Competition Law)
z Foreign Exchange Management Act, 2000
z Securities and Exchange Board of India Act, 1992
z Securities Contract Regulation Act, 1956
z The Depositories Act, 1996
z Arbitration and Conciliation Act, 1996
z SEBI Code on Corporate Governance
4
Ibid.
5
http://www.ss-associates.com/CORPORATEGOVERNANCEININDIA.pdf
last visited on 15.10.2010.
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Apart from these Acts many committees have been set up over
the years to legislate the concept called ‘corporate governance’.

1) Desirable Code of Corporate Governance (1998)

Corporate governance has been a buzzword in India since
1998. On account of the interest generated by Cadbury
Committee Report (1992) in UK corporate governance initiatives
in India began in 1998 with the Desirable Code of Corporate
Governance – a voluntary code published by the Confederation
of Indian Industry (CII), and the first formal regulatory
framework for listed companies specifically for corporate
governance, established by the SEBI.6 The CII Code on corporate
governance recommended that the key information to be
reported, listed companies to have audit committees, corporate
to give a statement on value addition, consolidation of accounts
to be optional. Main emphasis was on transparency.

2) Committee on Corporate Governance under the

Chairmanship of Shri Kumar Mangalam Birla (1999).
The Kumar Mangalam Committee made mandatory and non-
mandatory recommendations. Based on the recommendations
of the Committee, the SEBI had specified principles of Corporate
Governance and introduced a new clause 49 in the Listing
agreement of the Stock Exchanges in the year 2000.
6
Supra Note 1, last visited on 15.10.2010.

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3) Naresh Chandra Committee (2002)

The Enron debacle in July 2002, involving the hand-in-glove
relationship between the auditor and the corporate client and
various other scams in the United States, and the consequent
enactment of the stringent Sarbanes – Oxley Act in the United
States were some important factors, which led the Indian
government to wake up. The Department of Company Affairs
in the Ministry of Finance on 21 August 2002, appointed a high
level committee, popularly known as the Naresh Chandra
Committee, to examine various corporate governance issues and
to recommend changes in the diverse areas involving the auditor-
client relationships and the role of independent directors.
The Committee submitted its Report on 23 December 2002.
Naresh Chandra Committee recommendations relate to the
Auditor-Company relationship and the role of Auditors. Report
of the SEBI Committee on Corporate Governance recommended
that the mandatory recommendations on matters of disclosure
of contingent liabilities, CEO/CFO Certification, definition of
Independent Director, independence of Audit Committee and
independent director exemptions in the report of the Naresh
Chandra Committee, relating to corporate governance, be
implemented by SEBI.

4) Committee on Corporate Governance under the

Chairmanship of Shri N. R. Narayana Murthy (2002)
Narayana Murthy Committee recommendations to clause 49
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of the Listing Agreement, include role of Audit Committee,

Related party transactions, Risk management, compensation to
Non-Executive Directors, Whistle Blower Policy, Affairs of
Subsidiary Companies, Analyst Reports and other non-
mandatory recommendations.

Corporate Governance under Clause 49 of the Listing

Agreement
Clause 49 of the Listing Agreement, which deals with
Corporate Governance norms that a listed entity should follow,
was first introduced in the financial year 2000-01 based on
recommendations of Kumar Mangalam Birla committee. After
these recommendations were in place for about two years, SEBI,
in order to evaluate the adequacy of the existing practices and
to further improve the existing practices set up a committee under
the Chairmanship of Mr Narayana Murthy during 2002-03.
The Murthy committee, after holding three meetings, had
submitted the draft recommendations on corporate governance
norms.7 After deliberations, SEBI accepted the recommendations
in August 2003 and asked the Stock Exchanges to revise Clause
49 of the Listing Agreement based on Murthy committee
recommendations. This led to widespread protests and
representations from the Industry thereby forcing the Murthy
committee to meet again to consider the objections. The
committee, thereafter, considerably revised the earlier
7
Supra Note 1, last visited on 16.10.2010.
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recommendations and the same was put up on SEBI website on

15th December 2003 for public comments. It was only on 29th
October 2004 that SEBI finally announced revised Clause 49,
which had to be implemented by the end of financial year 2004-
05. These revised recommendations have also considerably
diluted the original Murthy Committee recommendations.
Areas where major changes were made include:
z Independence of Directors
z Whistle Blower policy
z Performance evaluation of nonexecutive directors
z Mandatory training of non-executive directors, etc.
Failure to comply with clause 49 (corporate governance) of
SEBI’s listing agreement is punishable with imprisonment of
up to 10 years or a fine of up to Rs 25 crore or both. Besides,
stock exchanges can suspend the dealing/trading of securities.
With over 6000 listed companies, monitoring and enforcement
are significant challenges in the immediate term. While SEBI’s
ultimate sanction in cases of serial non-compliance is delisting,
this is unpopular as delisting penalises the non-controlling
dispersed shareholders and closes their exit options. Hence, SEBI
has tended to enforce the recommendations through dialog and
in some cases monetary penalties.8
8
For example in September 2007, SEBI imposed monetary penalties on 20
companies which did not comply with Clause 49 (The Economic Times, 2007).
The identity of these 20 companies were however, not disclosed. Rounding up
20 companies for disciplinary action seems to be a small step compared to the
perceived number of non-compliant companies remaining to be acted against.
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Corporate Governance under Companies Act, 1956

The Companies Act, 1956 is the central legislation in India
that empowers the Central Government to regulate the formation,
financing, functioning and winding up of companies. It applies
to whole of India and to all types of companies.9
The Companies Act, 1956 has elaborate provisions relating
to the Governance of Companies, which deals with management
and administration of companies. It contains special provisions
with respect to the accounts and audit, director’s remuneration,
other financial and nonfinancial disclosures, corporate
democracy, prevention of mismanagement, etc.
z Disclosures on Remuneration of Directors

The specific disclosures on the remuneration of directors

regarding all elements of remuneration package of all the
directors should be made as a part of Corporate Governance.
Section 299 of the Act requires every director of a company to
make disclosure, at the Board meeting, of the nature of his
concern or interest in a contract or arrangement (present or
proposed) entered by or on behalf of the company.10 The
company is also required to record such transactions in the
Register of Contract under section 301 of the Act.
z Requirements of the Audit Committee

Audit Committee has a critical role to play in ensuring the

9
http://business.gov.in/corporate_governance/companies_laws.php last visited
on 6.10.2010.
10
http://www.iiaindia.org/docs/companies%20act%20proviso%20on%20CG.doc.
last visited on 16.10.2010.
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integrity of financial management of the company. This

Committee add assurance to the shareholders that the auditors,
who act on their behalf, are in a position to safeguard their
interests. Besides the requirements of Clause 49, section 292A
of the Act requires every public having paid up capital of Rs 5
crores or more shall constitute a committee of the board to be
known as Audit Committee.11
As per the Act, the committee shall consist of at least three
directors; two-third of the total strength shall be directors other
than managing or whole time directors. The Annual Report of
the company shall disclose the composition of the Audit
Committee.12
If the default is made in complying with the said provision
of the Act, then the company and every officer in default shall
be punishable with imprisonment for a term extending to a year
or with fine up to Rs 50000 or both.
z Number of Directorships Restricted

Sections 275, 276 and 277 have been amended to provide

that no person shall hold office as director in more than 15
companies (excluding private company, unlimited company, etc.,
as defined in section 278) instead of 20 companies. This shall
enable the director concerned to devote more time to the affairs
11
Supra Note 10.
12
The recommendations of the committee on any matter relating to financial
anagement including Audit Report, shall be binding on the board. In case board
does not accept the recommendations so made, the committee shall record the
reasons thereof, which should be communicated to the shareholders, probably
through the Corporate Governance Report.
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of company in which he is a director.13

z Corporate Democracy

Wider participation by the shareholders in the decision-

making process is a pre-condition for democratizing corporate
bodies. Due to geographical distance or other practical problems,
a substantially large number of shareholders cannot attend the
general meetings. To overcome these obstacles and pave way
for introduction of real corporate democracy, section 192A of
the Act and the Companies (Passing of Resolution by Postal
allot), Rules provides for certain resolutions to be approved and
passed by the shareholders through postal ballots.
z Appointment of Nominee Director by Small Shareholders

Section 252 has been amended to provide that a public company

having paid-up capital of Rs. 5 crore or more and one thousand
or more small shareholders can elect a director by small
shareholders. “Small shareholders” means a shareholder holding
shares of nominal value of Rs. 20,000 or less in a company.14
However, this provision is not mandatory and small shareholders
have option to elect a person as their representative for
appointment as director on the Board of such company.
z Directors’ Responsibility Statement

Sub-section (2AA) in section 217A has provided that the

Board’s report shall include a directors’ responsibility statement
13
http://articles.manupatra.com/PopOpenArticle.aspx?ID=729b115f-d9c6-44ea-
be22- b00d73f61f0d&txtsearch=C.M.%20Bindal* last visited on 17.10.2010.
14
Supra Note 9, last visited on 17.10.2010.

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with respect to applicable accounting standards having been

followed, consistent application of accounting policies selected
so as to give a true and fair view of state of affairs and of the
profit and loss of the company, maintenance of adequate
accounting records with proper care for safeguarding assets of
company and to prevent and detect fraud and other irregularities,
and the preparation of annual accounts on a going concern basis.

Conclusion
With the recent spate of corporate scandals and the
subsequent interest in corporate governance, a plethora of
corporate governance norms and standards have sprouted around
the globe. After the Satyam Scandal, corporate governance,
which is the system that helps firms control and direct operations,
is in the spotlight as key parts of the governance framework
such as audit and finance functions have failed to check the
promoter-driven agendas.
Corporate governance extends beyond corporate law. Its
objective is not mere fulfilment of legal requirements but
ensuring commitment on managing transparentcy for maximising
shareholder values. As competition increases, technology
pronounces the deal of distance and speeds up communication,
environment also changes. In this dynamic environment, the
systems of Corporate Governance also need to evolve, upgrade
in time with the rapidly changing economic and industrial climate
of the country.
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