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MODULE 1: WHAT IS CORPORATE GOVERNANCE?

Corporate governance is a set of rules and procedures that is abided in a
company in order to protect the basic interest of the stakeholders. These systematic
rules and regulations consist of guidelines that pave way for the company to achieve
its objectives. It affects every aspect of the company to shape it from every nuance for
effective functioning.

It starts with the basic components and moves on to the interest of
stakeholders, other investors, employees, suppliers, trade associations, creditors,
auditors and the government. It lays down the distributed responsibilities of the
corporate players mentioned and monitors their work periodically. We can also arrive
that the foremost aim of the corporate governance is to discipline the main or the
dominant stakeholders and to prevent the other stakeholders from being exploited.

The corporate governance is relevant not only for big establishments but also
for the other small profit as well as non-profit organisations to promote appropriate
management and control. But mostly, the preference is given to the corporate
governance by the public limited companies that trade in the national capital market.

IMPORTANT DEFINITIONS ON CORPORATE GOVERNANCE

The most common definition of Corporate Governance which is in use is given by
Cadbury Committee in the year 1992 as “the system by which companies are directed
and controlled”
The OECD Principles of Corporate Governance defines it as “Corporate Governance
involves a set of relationships between a company’s management, its board, its
shareholders and other stakeholders. Corporate Governance also provides the
structure through which the objectives of the company are set, and the means of
attaining those objectives and monitoring performance are determined”.

The IFC states “the relationship among the management, Board of directors,
controlling shareholders, minority shareholders and other stake holders”.

US Business Round Table White Paper On Corporate Governance 1997 stated
“Corporate governance is not an abstract goal, but exists to serve corporate purposes
by providing a structure within which the stockholders, directors and management can
pursue most effectively the objectives of the organisation”

THE ACTS AND OTHER REGULATIONS RELATED TO THE
CORPORATE GOVERNANCE ARE AS FOLLOWS

▪ Securities Exchange Board of India:

The Securities Exchange Board of India was established in the year 1988 and the
statutory powers were given to it starting from 30th January 1992.The main aim of
SEBI is to stabilise the investment market and protecting all the interests of the
investors through its regulations. Its head Quarters is located at the Bandra Kurla
Complex Business District in Mumbai. Another important function of SEBI includes
registering the brokers.

We can also state that SEBI is a regulatory authority that is Quasi-judicial, quasi
legislative and quasi-executive.

▪ Standard Listing Agreement of Stock Exchange:

These regulations are for those companies that have registered their companies to be
listed in the stock exchange. The listed companies therefore will have to comply
according to the rules and regulations established in this agreement.

▪ Institute of Company Secretaries of India:

The ICSI is statutory organisation aimed at promoting and developing the profession
of the corporate secretaries. It has its headquarters in four main cities which are New
Delhi, Chennai, Kolkata and Mumbai. It has issued secretarial standards on general
meetings and meetings of board of directors. Section 118(10) of The Companies Act
has provided that these secretarial standards must be abided as specified by the ICSI.

These secretarial standards postulated by the ICSI came into force from the July 1st
,2015.

▪ Institute of Chartered Accountants of India(ICAI):

In order to promote the profession of Chartered accountants in India this body was
established by the parliament through the Chartered Accountants Act of 1949.It is an
auditing licensing and accounting profession promoting body of India. It works in
close proximity with other Government bodies like the Reserve Bank of India,
Securities Exchange Board of India etc.

Section 129 and 133 of the Companies Act states that the financial statements
provided by the company must be true and fair as per the accounting and financial
standards prescribed by the Institute of Chartered Accountants of India.

▪ Indian The Companies Act, 2013:

The Indian Companies Act was enforced on the 29th August, 2013. It was enacted
mainly to look into the matters such as incorporation of the company, regarding the
functioning of the Board of meetings, regarding issues related to the winding up of the
company etc.

It also specifies regulations relating to disclosure of financial statements requirements,
company related financial transactions.

▪ Distinction between Companies Act 1956 & 2013:
✓ Preliminary provisions

a. This act was enacted in 1956 by Parliament of India on 1st April 1956 and
Companies act 2013 was in the year 2013 by Parliament of India on 1st April
2014.

b. Companies Act 1956 was separated into 13 parts having 658 sections, along
with 15 schedules whereas Companies Act 2013 has been divided into 29
chapters along with 470 sections and 7 schedules.

c. Companies Act 2013 consider some definitions which Companies act 1956
did not consider as of:

o Associate company
o Auditing standards
o CEO & CFO
o Independent director
o Small company
o Promoter
o Related party
o Global Depository receipt
o Key managerial.
d. Some of the existing definition in the Companies Act 1956 has been modified
in the Companies Act 2013 as follows:
o Earlier excluded, Corporation sole has now been covered in the

definition of the body of corporate.
o The term “listed company” now includes all companies listed on stock

exchange.
o A subsidiary of a public co. shall be deemed to be a public co. even if

it is a private co. by its Article.
o The definition of Employee stock option now covers Directors, officers

& employee of holding and subsidiary also.
o The scope of “officer in default” has been widened to include registrar

and merchant bankers related to the issues.
o Only “April-March” to be considered as a financial year (exception:

Foreign holding/subsidiary subject to tribunal approval.)

✓ Incorporation and Matters incidental
a. Changes towards Incorporation of entity:

o Companies Act 2013 introduced a new concept which was not there
in Companies act 1956 that was “One-person company”.

o No approval is now required for conversion of the Private company
to one-person company or vice versa.

o No approval is required for conversion of private company into
public company.

b. Provisions regarding matters of the incidental corporation:
o MOA to carry the object only. Bifurcation of the object clause into
main ancillary & and other object done away with.
o Even the private companies have to file the declarations for the
commencement of business.
o The subsidiary can hold shares in holding company as trustee, which
was not allowed in Companies Act 1956.
o Penalizing Provisions- ROC is empowered to strike off the name of a
company incorporated with wrong of incorrect information. A person
deliberately furnishing false/incorrect information at the time of
incorporation shall be punishable for fraud under section 470 of
Companies Act 2013.

✓ Prospectus and allotment of securities
a. The scope is widened to include all type of securities now than just shares.
b. Specification for raising of funds by the public company through:

o IPO /FPO
o Private placement
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 conditions as:
o Offer to a section of public other than QIBs
o Not more than 50 number of people
o In compliance with prescribed terms and conditions.
o Made through private placement offer letter, not through the

prospectus.
e. Public placement offer should comply with the provisions of Companies Act

2013, Securities Contract Regulation Act 1956, SEBI Act 1992.

f. The person responsible for fraudulently inducing others to invest money is
now liable for stringent punishment under section 470 of the act which shall
be non-compoundable.

g. Any person affected by the misleading statement, any inclusion/omission of a
matter in the prospectus can file suit/take an action:
o For civil liability for misstatement in prospectus
o For Punishment of Fraud.

h. In Companies Act 1956, only public financial institution, public sector banks
or scheduled bank with the main object of financing were allowed to issue
their shelf prospectus but now Companies Act 2013 provides that the
government shall prescribe the types of companies that can issue shelf
prospectus.

i. Penalizing Provision- Persons authorizing the issue of the prospectus having
misleading information shall also be criminally liable besides holding the civil
liability. Civil liability for misstatement in prospectus has been extended to
experts also.

✓ Share capital and debentures

There have been various changes in regard to the share and securities in the
Companies act 2013.

a. General Changes
o Coverage of all types of securities, Act Seeks to regulate all types of
securities as opposed to the Equity and debentures only.
o There is some new variation in shareholders right now the company
can issue shares with the differential right as to other things also in
addition to voting and dividend right.

b. Changes with respect to voting right.
o Equitable voting rights for equity and preference shareholders with
respect to their paid-up capital, for a vote on resolution affecting rights
of both categories.

o Preference shareholders allowed to vote on every resolution placed
before the shareholders meeting if dividend payable to any class of
preference shareholders in arrears for more than 2 years.

o No classification between cumulative and non-cumulative preference
share, for identification of voting right.

c. Changes with respect to Issue of Shares.
o Private companies also to comply with the provisions of further issue
of shares, which were applicable to public companies only.

d. Issues on shares on discount
o No other shares except sweat equity share to be issued at discount.

e. Prohibition on bonus issue if the company has defaulted in payment of:
o Interest/Principal in respect of fixed deposits or debt secured issued by
it
o Statutory dues of employees such as contribution to provident fund,
gratuity, and bonus.

✓ Acceptance of Deposit
a. NBFC will be governed by the rules issued by the Reserve Bank of India
Only.
b. Deposit from persons other than members is not allowed.
c. Shareholder’s approval required for accepting deposits from members.

✓ Charges.

According to the Companies Act 2013 all type of charges to be registered as per the
act, whether created in or outside India:

a. On property
b. On Assets
c. On any undertaking whether tangible or otherwise
d. Whether situated in or out of India.

✓ Management and meetings.
a. Directors- A prescribed class of company will be required to have:
o MD, CEO, Manager.
o Whole time manager in absence of the MD, CEO, Manager
o Company secretary

b. Maximum number of Directors will be 15 on board, earlier it was 12 if
more than 15 is required there should be a special resolution passed by
the approval of shareholders.

c. The only prescribed number of person can pass a resolution for the
removal of a director in the following cases: Company with capital
share = members holding 1/10th of the voting power or members
holding share valued to Rs.5 lakh aggregate or more, in other company
it is 1/10th of the voting power.

d. Duties of Directors
o Act in accordance with the AOA
o To act in good faith
o To exercise duty with due care and diligence.
o To not involve in acts where the object of the company in
contradicting
o To do not achieve undue gains
o To not assign its office.

e. Board meetings have some new provisions in the new act those are:
o Notice of meetings should be minimum 7 days prior and it
should be given to all the directors whether or not in India, it
can be sent through any means.
o Participation of Directors can be in person or by video
conference.
o Number and timings of meetings should be at least 4 in a
financial year though it is not necessary to be held quarterly,

Time-gap should not be more than 120 days between two
meetings.

✓ Audit and Auditors.
a. Listed and other prescribed companies shall not appoint or reappoint:
o An individual auditor for more than 1 term of 5 consecutive
years
o An auditor firm for more than 2 terms 5 consecutive years
o There should be a gap of at least 5 years should elapse after the
completion of the aforesaid term before the same auditor can be
reappointed.
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 service.
o internal Audit
o Actuarial services
o Investment banking and advisory
o Management services.

✓ Payment of dividend.

No dividend shall be declared or paid by a company from its reserves other than free
reserves it was a major change done in the Companies Act 2013.

✓ Restructuring and revival.
a. Reduction of capital
o No application to be sanctioned unless accounting treatment
proposed by the company for such reduction is in conformity
with the accounting standards.

o No reductions allowed if the company is in arrears for payment
of deposits.

b. Compromise or arrangement
o Notice of any meeting in this matter also to be given to the
central government, income tax authorities, RBI, SEBI, and
CCI.
o Calling of the meeting of the members or creditors now
mandatory (After consent received by postal ballot) for the
approval of the compromise by persons representing at least
3/4th of the value of members of creditors.
o Abolition of Treasury stocks

c. Fast track merger
o The short route is prescribed in the act
o The central government has the power to approve the scheme.
o Cross mergers are allowed now.
o Prior approval of the RBI is required.

d. Sick Company
o Applicability = any company can be declared as a sick
company and not necessarily an industrial unit.
o Criteria of 50% net worth erosion dispend with a company
unable to repay 50% or more of secured debts within 30 days of
the notice served by the creditors can be declared sick on the
application moved by the Company itself or The creditors.

Serial Point Companies Act 2013 Companies Act 1956
No.

1 Financial Year Companies must have Companies were permitted

their financial year ending to have a financial year

on 31 Mar every year ending on a date decided

by Company

2 Formats of Schedule III Schedule IV
Financial
Statement

3 Maximum No As per rules, subject to 10 in the banking business

of Partners Max 100.currently is 50. and 20 in any other

business.

4 Max 200 excluding past and 50 excluding past and

Shareholders present employees present employees

in Pvt Ltd

Company

5 One Person A company which has Did not exist

Company only one person (natural

(OPC) person) as its member

6 The issue of Section 53 prohibits the Section 79 permitted issue

Share at issue of shares at a of shares at a discount.

discount discount However, Section

54 permits the issue of

ESOPs to its employees at

a discount.

7 Security The utilization of The utilization of

Premium Securities Premium Securities Premium

Reserve Reserve is provided in Reserve was provided in

Section 52(2) Sec 77A and 78

8 Article of Table F applies where Table A applied where

Association Companies Limited by Companies did not adopt

shares does not adopt their their own Articles of

own Articles of Association.

Association.

9 Interest in In the absence of a clause In the absence of a clause

Calls in in the Articles of in the Articles of

Arrears Association, the maximum Association, maximum

interest chargeable on interest chargeable on

Calls-in-arrears is 10% Calls-in-arrears was 5%

p.a. p.a.

10 Interest in In the absence of a clause In the absence of a clause

Calls in in the Articles of in the Articles of

Advance Association, the maximum Association, the maximum

interest payable on Calls- interest payable on Calls-

in-advance is 12% p.a. in-advance was 6% p.a.

11 Minimum Sec39 a company shall not Sec 69 the requirement of
Subscription allot Securities unless the minimum subscription was
amount stated in the with respect to Shares only
prospectus as minimum
subscription has been
subscribed & the sum paid

DISCUSSING VARIOUS COMPONENTS OF CORPORATE GOVERNANCE

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.

Basic Components

An effectively functioning company will have certain very important basic
components that are keenly looked into. Those basic components include strong
vision statement (how the company would like to see itself after a certain long period
from now or the level of establishment in a long term perspective), an efficient

mission statement (what sort of services are provided by the company and who the
company specifies as its target audience), operative objectives and constructive
strategies.

When these components are efficacious the further development phase of the
company will have a smoother hike. Corporate governance helps at strengthening
these components and making the foundation sturdy enough for triggering the growth
of the company.

Board of Directors

The board of directors play the pivotal role in the controlling of the business of the
company. They have huge responsibilities and they are appointed on the basis of
election through voting by the existing shareholders of the company. The board is
appointed as the representing authority on behalf of the existing shareholders. The
chairman of the board is again decided by the members of the Board and he usually
heads the board and acts as the spokesperson responsible for the productiveness of the
company.

The following are the various duties of the Board of Directors: -

✓ Selection of the members, executives and monitoring the works of the board.
✓ Planning of organisational hierarchy and structure.
✓ Reviewing organizational strategies and implementing the same.
✓ Financial control and postulating the budget confinements of the company.
✓ To analyse and take decisions regarding the strengths, weaknesses, Risks and

other opportunities that affects the company.
✓ Doing comparative analysis of reports regarding the performance of the

company.
✓ To see if the works of the company are decorous and are bonafide in nature.
✓ To maintain a good relationship with the corporate participants by improving

the communications with them and between them.
✓ To confine the work within the legal regulations.
✓ Arranging of periodical meetings, discussions and audit.

So, any group whether it is a formal group or informal group will need a leader to
guide them carefully to meet their goals. The leader needs to be exceptionally
conscious, devoted and unwavering towards leading the group.

The Board of Directors act as the leaders of the company and help the company cruise
through all obstacles and to come out of it safely in order to earn a good economic
standard and position in the market. The board is also having the upper hand in the
control of Management information system.

Independent Directors

Pecuniary Interest Provision Relaxed Section 149 of the 2013 Act mandates the
appointment of independent directors on the board of a company. It defines
independent director as someone who has or had no pecuniary relationship with the
company, its holding, subsidiary or associate company, or their promoters, or
directors, during the two immediately preceding financial years or during the current
financial year.

The amendment seeks to exclude remuneration and transactions not exceeding 10
percent of his total income from what constitutes a pecuniary relationship. The much-
awaited relief on cap on investments through layers of companies did not make it to
the Bill. As per the 2013 Act, investments in a company cannot be made through
more than two layers of investment companies. The 2016 version of the amendment
Bill had proposed to remove this restriction. But the version passed by Lok Sabha, by
omitting this proposal, did away with the possibility of any such relaxation.

The role of an ID is considered to be of great significance. The guidelines, role and
functions and duties and etc. are broadly set out in a code described in Schedule IV of
the Act, 2013. The code lays down certain critical functions like safeguarding the
interest of all stakeholders, particularly the minority holders, harmonizing the
conflicting interest of the stakeholders, analyzing the performance of management,
mediating in situations like the conflict between management and the shareholder's
interest and etc.

The code also lays down certain important duties like keeping themselves updated
about the company and the external environment in which it operates, not disclosing

important and confidential information of the company unless approved by the board
or required by law, actively participating in committees of the board in which they are
chairperson or members, keeping themselves update and undertaking appropriate
induction and refreshing their knowledge, skills, and familiarity with the company,
regularly attend the general meetings of the company and etc.

The Conceptual Frame Work

THE BOARD OF
DIRECTORS

EVALUATING

SELECTIO CONTRO PLANNING MONITORING
N LL NG DELEGATING

VISCOSITY OR STABILITY

Employees in Corporate Governance

The main object of the employees is to listen to the orders given to them by the upper
level management. They will have to work within the scope of work delegated to
them.

The employees are the human assets to the company as they form the integral part for
executing the plans made by the upper level management.

Employees have unions to voice their opinions and concerns. Some companies even
issue their shares to their employees to increase their involvement in the business.
When they feel that their contribution is important for their own welfare then they
will put in more efforts.

Financial institutions and other creditors in corporate governance

Financial institutions and other creditors are main factors affecting corporate
governance. The governance of the company would be impossible if the financial
needs of the company are not met on time.

The financial institutions and creditors in turn depend upon the debt repayment from
the company. Sometimes the company also issues debenture to raise funds for the
company. The debenture holders get equity from the profit of the company. In the
case of secured debentures or secured creditors of the company they can seize the
collateral securities in case of non-payment of debt. At the time of winding up of the
company the creditors are given first owing to the unlimited liability, their debts are
cleared first.

Role of suppliers and customers

Suppliers influence the price of products easily. Strong suppliers can instigate raise in
price, lowering the quality of product. So in the competitive market to establish a
strong position the role of suppliers is very important. Especially when there are no
substitute products in the market then the power of the suppliers starts increasing
immensely.

There is a famous phrase stating that ‘customers are kings’. Customers are yet another
great factor influencing corporate governance. The major decision making, strategy
formulation, and implementation or in short the entire functioning of the company
depends upon the customers.

The profitability of the company mainly depends upon the customers. If the entire
system of the company is perfect in every single way and if it lacks a good customer
base, then the entire system would be considered unworthy. So, we can apparently not
deny the fact that the customers are important factor influencing the corporate
governance rules and regulations.

GOVERNMENT DECISIONS AND POLICIES INFLUENCING
CORPORATE GOVERNANCE

In order to control economic development, the Government must take responsibility
to promote proper corporate governance.

The Government must come up with rules and regulations that ensure that both the
public as well as the private sector companies in any way do not exploit or infringe
the welfare of the people in the country.

Also, for the business in a country to thrive and prosper the Government must
stabilise the social, economic and political condition in a country.

IMPORTANT PROVISION RELATED TO CORPORATE GOVERNANCE
TO BE REMEMBERED

Governance norms for Indian listed companies are set out in the companies Act , a
detailed clause (clause 49 ) in the listing agreement that companies sign with the

exchanges and SEBI’s new listing obligations and disclosure requirement regulations of
2015.[1]

DID YOU KNOW?

A GREAT RESEARCH BODY STATED THAT MOST OF BUSINESS BENEFITS
ARE ASSOCIATED WITH GENDER DIVERSITY ON THE CORPORATE
BOARDS.THE WIDE SET OF BENEFITS INCLUDES:

• INCREASED FINANCIAL PERFORMANCE
• INCREASED SHARE VALUE
• STRENGHTHENED CUSTOMER BASE AND SATISFIED EMPLOYEES
• ABUNDANT KNOWLEDGE ABOUT MARKET AND MORE

REPUTATION

CONCLUSION

The main revolutionary idea behind the corporate 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.

Before these regulations were brought about there was mere inefficiency in the
investment market where the innocent investors were exploited and fooled. Satyam
Scam can be mentioned as a great example for inefficient corporate governance in
India. In fact, it would be appropriate to mention that Satyam scam provoked
immediate need for proper corporate governance in our country. In order to detect
fraudulent activities taking place in a company its essential for the managers and
auditors to have an eagle’s eye in the matters relating to the financial statements and
position of the company. Corporate governance is the support system for such
managers and auditors to abide by for preventing such disrupting activities that would
probably put the company into great threat.

The corporate capital market is growing very fast and achieving great heights every
passing day. It is becoming hard to establish as new start-ups and organisations pop
up every one minute. In order to position one’s company in this fascinating market

will be the aim of all the businessmen today. Some will work earnestly to establish
themselves whereas some will be so induced to look for the short cuts and unethical
ways to establish their company probably manipulating the profit figures of their
company and cheating the monitoring and control systems. In order to prevent such
acts and to protect the safety of the stakeholders and shareholders of the company
corporate governance must be developed in much efficient manner.

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