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Published by Enhelion, 2019-11-28 23:34:07





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1.1 WHAT IS CORPORATE GOVERNANCE? appropriate management and control. But mostly,
the preference is given to the corporate governance
Corporate governance is a set of rules and by the public limited companies that trade in the
procedures that is abided in a company in order to national capital market.
protect the basic interest of the stakeholders. These
systematic rules and regulations consist of guidelines 1.2 IMPORTANT DEFINITIONS ON CORPORATE
that pave way for the company to achieve its GOVERNANCE
objectives. It affects every aspect of the company to
shape it from every nuance for effective functioning. The most common definition of Corporate
Governance which is in use is given by Cadbury
It starts with the basic components and moves Committee in the year 1992 as “the system by which
on to the interest of stakeholders, other investors, companies are directed and controlled”
employees, suppliers, trade associations, creditors,
auditors and the government. It lays down the The OECD Principles of Corporate Governance
distributed responsibilities of the corporate players defines it as “Corporate Governance involves a set of
mentioned and monitors their work periodically. We relationships between a company’s management, its
can also arrive that the foremost aim of the corporate board, its shareholders and other stakeholders.
governance is to discipline the main or the dominant Corporate Governance also provides the structure
stakeholders and to prevent the other stakeholders through which the objectives of the company are set,
from being exploited. and the means of attaining those objectives and
monitoring performance are determined”.
The corporate governance is relevant not only
for big establishments but also for the other small The IFC states “the relationship among the
profit as well as non-profit organisations to promote management, Board of directors, controlling

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shareholders, minority shareholders and other stake 1.3.2 Standard Listing Agreement of Stock
holders”. Exchange:

US Business Round Table White Paper On Corporate These regulations are for those companies that have
Governance 1997 stated “Corporate governance is registered their companies to be listed in the stock
not an abstract goal, but exists to serve corporate exchange. The listed companies therefore will have to
purposes by providing a structure within which the comply according to the rules and regulations
stockholders, directors and management can pursue established in this agreement.
most effectively the objectives of the organisation”
1.3.3 Institute of Company Secretaries of India:
RELATED TO THE CORPORATE GOVERNANCE The ICSI is statutory organisation aimed at promoting
ARE AS FOLLOWS and developing the profession of the corporate
secretaries. It has its headquarters in four main cities
1.3.1 Securities Exchange Board of India: which are New Delhi, Chennai, Kolkata and Mumbai.
It has issued secretarial standards on general
The Securities Exchange Board of India was meetings and meetings of board of directors. Section
established in the year 1988 and the statutory 118(10) of The Companies Act has provided that
powers were given to it starting from 30th January these secretarial standards must be abided as
1992.The main aim of SEBI is to stabilise the specified by the ICSI. These secretarial standards
investment market and protecting all the interests of postulated by the ICSI came into force from the July
the investors through its regulations. Its head 1st ,2015.
Quarters is located at the Bandra Kurla Complex
Business District in Mumbai. Another important 1.3.4 Institute of Chartered Accountants of
function of SEBI includes registering the brokers. We India(ICAI):
can also state that SEBI is a regulatory authority that
is Quasi-judicial, quasi legislative and quasi- In order to promote the profession of Chartered
executive. accountants in India this body was established by the
parliament through the Chartered Accountants Act

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of 1949.It is an auditing licensing and accounting been divided into 29 chapters along with 470
profession promoting body of India. It works in close sections and 7 schedules.
proximity with other Government bodies like the c. Companies Act 2013 consider some
Reserve Bank of India, Securities Exchange Board of definitions which Companies act 1956 did not
India etc. Section 129 and 133 of the Companies Act consider as of:
states that the financial statements provided by the
company must be true and fair as per the accounting o Associate company
and financial standards prescribed by the Institute of o Auditing standards
Chartered Accountants of India. o CEO & CFO
o Independent director
1.3.5 Indian The Companies Act, 2013: o Small company
o Promoter
The Indian Companies Act was enforced on the 29th o Related party
August, 2013. It was enacted mainly to look into the o Global Depository receipt
matters such as incorporation of the company, o Key managerial.
regarding the functioning of the Board of meetings, d. Some of the existing definition in the
regarding issues related to the winding up of the Companies Act 1956 has been modified in the
company etc. It also specifies regulations relating to Companies Act 2013 as follows:
disclosure of financial statements requirements, o Earlier excluded, Corporation sole has
company related financial transactions.
now been covered in the definition of
1.4 DISTINCTION BETWEEN COMPANIES ACT the body of corporate.
1956 & 2013: o The term “listed company” now includes
all companies listed on stock exchange.
1.4.1 Preliminary provisions o A subsidiary of a public co. shall be
a. This act was enacted in 1956 by Parliament of deemed to be a public co. even if it is a
India on 1st April 1956 and Companies act private co. by its Article.
2013 was in the year 2013 by Parliament of o The definition of Employee stock option
India on 1st April 2014. now covers Directors, officers &
b. Companies Act 1956 was separated into 13 employee of holding and subsidiary also.
parts having 658 sections, along with 15 o The scope of “officer in default” has been
schedules whereas Companies Act 2013 has

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widened to include registrar and merchant o The subsidiary can hold shares in
bankers related to the issues. holding company as trustee, which
o Only “April-March” to be considered as a was not allowed in Companies Act
financial year (exception: Foreign 1956.
holding/subsidiary subject to tribunal
approval.) o Penalizing Provisions- ROC is
empowered to strike off the name of a
1.4.2 Incorporation and Matters incidental company incorporated with wrong of
a. Changes towards Incorporation of entity: incorrect information. A person
o Companies Act 2013 introduced a deliberately furnishing false/incorrect
new concept which was not there in information at the time of
Companies act 1956 that was “One- incorporation shall be punishable for
person company”. fraud under section 470 of Companies
o No approval is now required for Act 2013.
conversion of the Private company
to one-person company or vice 1.4.3 Prospectus and allotment of securities
o No approval is required for a. The scope is widened to include all type of
conversion of private company into
public company. securities now than just shares.
b. Provisions regarding matters of the incidental
corporation: b. Specification for raising of funds by the public
o MOA to carry the object only.
Bifurcation of the object clause into company through:
main ancillary & and other object done
away with. o IPO /FPO
o Even the private companies have to
file the declarations for the o Private placement
commencement of business.
o Rights/Bonus shares.

c. Now company after varying the terms of

contract or objects mentioned in the

prospectus cannot use the amount raised by it

through prospectus for

buying/trading/otherwise dealing in equity

shares of other company.

d. Private placement offers have several

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conditions as: government shall prescribe the types of
o Offer to a section of public other than companies that can issue shelf prospectus.
QIBs i. Penalizing Provision- Persons authorizing the
o Not more than 50 number of people issue of the prospectus having misleading
o In compliance with prescribed terms information shall also be criminally liable
and conditions. besides holding the civil liability. Civil liability
o Made through private placement for misstatement in prospectus has been
offer letter, not through the extended to experts also.
1.4.4 Share capital and debentures
e. Public placement offer should comply with
the provisions of Companies Act 2013, There have been various changes in regard to the
Securities Contract Regulation Act 1956, share and securities in the Companies act 2013.
SEBI Act 1992.
a. General Changes
f. The person responsible for fraudulently o Coverage of all types of securities, Act
inducing others to invest money is now liable Seeks to regulate all types of securities
for stringent punishment under section 470 as opposed to the Equity and debentures
of the act which shall be non-compoundable. only.
o There is some new variation in
g. Any person affected by the misleading shareholders right now the company can
statement, any inclusion/omission of a matter issue shares with the differential right as
in the prospectus can file suit/take an action: to other things also in addition to voting
o For civil liability for misstatement in and dividend right.
o For Punishment of Fraud. b. Changes with respect to voting right.
o Equitable voting rights for equity and
h. In Companies Act 1956, only public financial preference shareholders with respect to
institution, public sector banks or scheduled their paid-up capital, for a vote on
bank with the main object of financing were resolution affecting rights of both
allowed to issue their shelf prospectus but categories.
now Companies Act 2013 provides that the

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o Preference shareholders allowed to vote c. Shareholder’s approval required for
on every resolution placed before the accepting deposits from members.
shareholders meeting if dividend payable
to any class of preference shareholders 1.4.6 Charges.
in arrears for more than 2 years.
According to the Companies Act 2013 all type of
o No classification between cumulative charges to be registered as per the act, whether
and non-cumulative preference share, created in or outside India:
for identification of voting right.
a. On property
c. Changes with respect to Issue of Shares. b. On Assets
o Private companies also to comply with c. On any undertaking whether tangible or
the provisions of further issue of shares,
which were applicable to public otherwise
companies only. d. Whether situated in or out of India.

d. Issues on shares on discount 1.4.7 Management and meetings.
o No other shares except sweat equity a. Directors- A prescribed class of company
share to be issued at discount.
will be required to have:
e. Prohibition on bonus issue if the company has o MD, CEO, Manager.
defaulted in payment of: o Whole time manager in absence of
o Interest/Principal in respect of fixed the MD, CEO, Manager
deposits or debt secured issued by it o Company secretary
o Statutory dues of employees such as
contribution to provident fund, gratuity, b. Maximum number of Directors will be 15
and bonus. on board, earlier it was 12 if more than 15
is required there should be a special
1.4.5 Acceptance of Deposit resolution passed by the approval of
a. NBFC will be governed by the rules shareholders.

issued by the Reserve Bank of India Only. c. The only prescribed number of person
b. Deposit from persons other than can pass a resolution for the removal of a
director in the following cases: Company
members is not allowed.

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with capital share = members holding be held quarterly, Time-gap should
1/10th of the voting power or members
holding share valued to Rs.5 lakh not be more than 120 days
aggregate or more, in other company it is
1/10th of the voting power. between two meetings.
d. Duties of Directors
1.4.8 Audit and Auditors.
o Act in accordance with the AOA
o To act in good faith a. Listed and other prescribed companies
o To exercise duty with due care and
shall not appoint or reappoint:
o To not involve in acts where the o An individual auditor for more than

object of the company in 1 term of 5 consecutive years
o To do not achieve undue gains o An auditor firm for more than 2
o To not assign its office.
e. Board meetings have some new terms 5 consecutive years
provisions in the new act those are:
o Notice of meetings should be o There should be a gap of at least 5
minimum 7 days prior and it should
be given to all the directors years should elapse after the
whether or not in India, it can be
sent through any means. completion of the aforesaid term
o Participation of Directors can be in
person or by video conference. before the same auditor can be
o Number and timings of meetings
should be at least 4 in a financial reappointed.
year though it is not necessary to
b. The auditor shall not provide the

following services whether

directly/indirectly to the company and its

holding and subsidiary companies:

o Design and implementation of a

financial information system

o Accounting and book-keeping


o internal Audit

o Actuarial services

o Investment banking and advisory

o Management services.

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1.4.8 Payment of dividend. the value of members of
No dividend shall be declared or paid by a company o Abolition of Treasury stocks
from its reserves other than free reserves it was a c. Fast track merger
major change done in the Companies Act 2013. o The short route is prescribed
in the act
1.4.9 Restructuring and revival. o The central government has
a. Reduction of capital the power to approve the
o No application to be scheme.
sanctioned unless accounting o Cross mergers are allowed
treatment proposed by the now.
company for such reduction is o Prior approval of the RBI is
in conformity with the required.
accounting standards. d. Sick Company
o No reductions allowed if the o Applicability = any company
company is in arrears for can be declared as a sick
payment of deposits. company and not necessarily
b. Compromise or arrangement an industrial unit.
o Notice of any meeting in this o Criteria of 50% net worth
matter also to be given to the erosion dispend with a
central government, income company unable to repay 50%
tax authorities, RBI, SEBI, and or more of secured debts
CCI. within 30 days of the notice
o Calling of the meeting of the served by the creditors can be
members or creditors now declared sick on the
mandatory (After consent application moved by the
received by postal ballot) for Company itself or The
the approval of the creditors.
compromise by persons
representing at least 3/4th of

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Seria Point Companies Companies person
l No. Act 2013 Act 1956

person) as its

1 Financial Companies Companies member

Year must have were 6 The issue of Section 53 Section 79

their permitted Share at prohibits the permitted

financial to have a discount issue of issue of

year ending financial shares at a shares at a

on 31 Mar year ending discount discount.

every year on a date However,

decided by Section 54

Company permits the

2 Formats of Schedule III Schedule IV issue of

Financial ESOPs to its

Statement employees

3 Maximum As per rules, 10 in the at a discount.

No of subject to banking 7 Security The The

Partners Max business Premium utilization of utilization

100.currentl and 20 in Reserve Securities of

y is 50. any other Premium Securities

business. Reserve is Premium

4 Max 200 50 provided in Reserve

Shareholder excluding excluding Section was

s in Pvt Ltd past and past and 52(2) provided in

Company present present Sec 77A

employees employees and 78

5 One Person A company Did not 8 Article of Table F Table A

Company which has exist Association applies applied

(OPC) only one where where

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Companies Companies advance is Calls-in-
Limited by did not
shares does adopt their 12% p.a. advance
not adopt own
their own Articles of was 6% p.a.
Articles of Association
Association. . 11 Minimum Sec39 a Sec 69 the
In the In the
absence of a absence of Subscription company requiremen
clause in the a clause in
Articles of the Articles shall not t of
Association, of
the Association allot minimum
maximum , maximum
9 Interest in interest interest Securities subscriptio
Calls in chargeable chargeable
Arrears on Calls-in- on Calls-in- unless the n was with
arrears is arrears was
10 Interest in 10% p.a. 5% p.a. amount respect to
Calls in In the In the
Advance absence of a absence of stated in the Shares only
clause in the a clause in
Articles of the Articles prospectus
Association, of
the Association as minimum
maximum , the
interest maximum subscription
payable on interest
Calls-in- payable on has been

subscribed &

the sum paid


When the relationship between the corporate
participants are enhanced there would be very less
opportunities for any disputes to arise that could
possibly disrupt the functioning of the company. The
main players in this field are the board of directors of
the company. Now we will discuss all the factors and
important components that affect the decisions and
rules of corporate governance.

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1.5.1 Basic Components heads the board and acts as the spokesperson
responsible for the productiveness of the company.
An effectively functioning company will have certain
very important basic components that are keenly The following are the various duties of the Board of
looked into. Those basic components include strong Directors: -
vision statement (how the company would like to see
itself after a certain long period from now or the level a. Selection of the members, executives and
of establishment in a long term perspective), an monitoring the works of the board.
efficient mission statement (what sort of services are
provided by the company and who the company b. Planning of organisational hierarchy and
specifies as its target audience), operative objectives structure.
and constructive strategies.
c. Reviewing organizational strategies and
When these components are efficacious the further implementing the same.
development phase of the company will have a
smoother hike. Corporate governance helps at d. Financial control and postulating the
strengthening these components and making the budget confinements of the company.
foundation sturdy enough for triggering the growth
of the company. e. To analyse and take decisions regarding
the strengths, weaknesses, Risks and
1.5.2 Board of Directors other opportunities that affects the
The board of directors play the pivotal role in the
controlling of the business of the company. They have f. Doing comparative analysis of reports
huge responsibilities and they are appointed on the regarding the performance of the
basis of election through voting by the existing company.
shareholders of the company. The board is appointed
as the representing authority on behalf of the existing g. To see if the works of the company are
shareholders. The chairman of the board is again decorous and are bonafide in nature.
decided by the members of the Board and he usually
h. To maintain a good relationship with the
corporate participants by improving the
communications with them and between

i. To confine the work within the legal

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j. Arranging of periodical meetings, investments through layers of companies did not
discussions and audit. make it to the Bill. As per the 2013 Act, investments
in a company cannot be made through more than two
So, any group whether it is a formal group or informal layers of investment companies. The 2016 version of
group will need a leader to guide them carefully to the amendment Bill had proposed to remove this
meet their goals. The leader needs to be exceptionally restriction. But the version passed by Lok Sabha, by
conscious, devoted and unwavering towards leading omitting this proposal, did away with the possibility
the group. of any such relaxation.

The Board of Directors act as the leaders of the The role of an ID is considered to be of great
company and help the company cruise through all significance. The guidelines, role and functions and
obstacles and to come out of it safely in order to earn duties and etc. are broadly set out in a code described
a good economic standard and position in the market. in Schedule IV of the Act, 2013. The code lays down
The board is also having the upper hand in the control certain critical functions like safeguarding the
of Management information system. interest of all stakeholders, particularly the minority
holders, harmonizing the conflicting interest of the
1.5.3 Independent Directors stakeholders, analysing the performance of
management, mediating in situations like the conflict
Pecuniary Interest Provision Relaxed Section 149 of between management and the shareholder's interest
the 2013 Act mandates the appointment of and etc.
independent directors on the board of a company. It
defines independent director as someone who has or The code also lays down certain important duties like
had no pecuniary relationship with the company, its keeping themselves updated about the company and
holding, subsidiary or associate company, or their the external environment in which it operates, not
promoters, or directors, during the two immediately disclosing important and confidential information of
preceding financial years or during the current the company unless approved by the board or
financial year. required by law, actively participating in committees
of the board in which they are chairperson or
The amendment seeks to exclude remuneration and members, keeping themselves update and
transactions not exceeding 10 percent of his total undertaking appropriate induction and refreshing
income from what constitutes a pecuniary
relationship. The much-awaited relief on cap on

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their knowledge, skills, and familiarity with the 1.5.4 The Conceptual Frame Work
company, regularly attend the general meetings of
the company and etc.



Increase good will, profitability and gaining good position in the market

1.5.5 Employees in Corporate Governance made by the upper level management.

The main object of the employees is to listen to the Employees have unions to voice their opinions and
orders given to them by the upper level management. concerns. Some companies even issue their shares to
They will have to work within the scope of work their employees to increase their involvement in the
delegated to them. business. When they feel that their contribution is
important for their own welfare then they will put in
The employees are the human assets to the company more efforts.
as they form the integral part for executing the plans

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1.5.6 Financial institutions and other creditors in kings’. Customers are yet another great factor
corporate governance influencing corporate governance. The major
decision making, strategy formulation, and
Financial institutions and other creditors are main implementation or in short the entire functioning of
factors affecting corporate governance. The the company depends upon the customers.
governance of the company would be impossible if
the financial needs of the company are not met on The profitability of the company mainly depends
time. upon the customers. If the entire system of the
company is perfect in every single way and if it lacks a
The financial institutions and creditors in turn good customer base, then the entire system would be
depend upon the debt repayment from the company. considered unworthy. So, we can apparently not deny
Sometimes the company also issues debenture to the fact that the customers are important factor
raise funds for the company. The debenture holders influencing the corporate governance rules and
get equity from the profit of the company. In the case regulations.
of secured debentures or secured creditors of the
company they can seize the collateral securities in 1.6 GOVERNMENT DECISIONS AND POLICIES
case of non-payment of debt. At the time of winding INFLUENCING CORPORATE GOVERNANCE
up of the company the creditors are given first owing
to the unlimited liability, their debts are cleared first. In order to control economic development, the
Government must take responsibility to promote
1.5.7 Role of suppliers and customers proper corporate governance.

Suppliers influence the price of products easily. The Government must come up with rules and
Strong suppliers can instigate raise in price, lowering regulations that ensure that both the public as well as
the quality of product. So in the competitive market the private sector companies in any way do not
to establish a strong position the role of suppliers is exploit or infringe the welfare of the people in the
very important. Especially when there are no country.
substitute products in the market then the power of
the suppliers starts increasing immensely. Also, for the business in a country to thrive and
prosper the Government must stabilise the social,
There is a famous phrase stating that ‘customers are economic and political condition in a country.

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1.7 IMPORTANT PROVISION RELATED TO Before these regulations were brought about there
CORPORATE GOVERNANCE TO BE was mere inefficiency in the investment market
REMEMBERED where the innocent investors were exploited and
fooled. Satyam Scam can be mentioned as a great
Governance norms for Indian listed companies are example for inefficient corporate governance in
set out in the companies Act , a detailed clause (clause India. In fact, it would be appropriate to mention that
49 ) in the listing agreement that companies sign with Satyam scam provoked immediate need for proper
the exchanges and SEBI’s new listing obligations and corporate governance in our country. In order to
disclosure requirement regulations of 2015. detect fraudulent activities taking place in a company
its essential for the managers and auditors to have an
DID YOU KNOW? eagle’s eye in the matters relating to the financial
statements and position of the company. Corporate
A GREAT RESEARCH BODY STATED THAT governance is the support system for such managers
MOST OF BUSINESS BENEFITS ARE and auditors to abide by for preventing such
ASSOCIATED WITH GENDER DIVERSITY ON disrupting activities that would probably put the
THE CORPORATE BOARDS.THE WIDE SET OF company into great threat.
The corporate capital market is growing very fast and
o INCREASED FINANCIAL PERFORMANCE achieving great heights every passing day. It is
o INCREASED SHARE VALUE becoming hard to establish as new start-ups and
o STRENGHTHENED CUSTOMER BASE organisations pop up every one minute. In order to
position one’s company in this fascinating market will
AND SATISFIED EMPLOYEES be the aim of all the businessmen today. Some will
o ABUNDANT KNOWLEDGE ABOUT work earnestly to establish themselves whereas
some will be so induced to look for the short cuts and
MARKET AND MORE REPUTATION unethical ways to establish their company probably
manipulating the profit figures of their company and
1.8 CONCLUSION cheating the monitoring and control systems. In order
to prevent such acts and to protect the safety of the
The main revolutionary idea behind the corporate stakeholders and shareholders of the
governance is to bring out transparency in the
disclosure of the financial statements. Also the
corporate governance wave brought about
mandating of quality financial reports and counter
checking of these financial statements.

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company corporate governance must be developed welfare. Corporate governance must be given more
in much efficient manner. importance and more regulations and amendments
related to that must come up which would really
Corporate Governance is a need for the society to protect our country when it faces huge economic
enhance the business environment and economic catastrophe.

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