CORPORATE GOVERNANCE

Introduction:

In the past few decades, there has been a huge increase in the number of scandals because of the failure of Corporate Governance.

The higher authorities of the organization neglected the business ethics completely and tried to window dress the financial statements of the entity which led to manipulating the figures and showing fake profits. Various unethical means and methods were adopted which is totally unacceptable thing.

The higher authorities also offered good incentives to the employees of the entity in order to help them manipulate the accounts of the company.

Auditors also played a major role by involving in such unethical practices and not reporting such transactions to those charged with governance or such other higher authority who should be informed of such malpractices immediately.

The major reason for bringing into the concept of Corporate Governance was because of big scandals like Enron, Crazy Eddie and so on.

Meaning:

Before understanding the concept of Corporate Governance, let us keep an eye on Governance. Governance refers to all the means and mechanism that will enable multiple stakeholders in an enterprise to have an organized mechanism for evaluating options, setting direction and monitoring compliance and performance, in order to satisfy specific enterprise objectives.

Corporate governance is the system of rules, practices, and processes by which a firm is directed and controlled. Corporate governance essentially involves balancing the interests of a company's many stakeholders such as shareholders, senior management executives, customers, suppliers, financiers, the government, and the community. Since corporate governance also provides the framework for attaining a company's objectives, it encompasses practically every sphere of management, from action plans and internal controls to performance measurement and corporate disclosure.

[Source: https://www.investopedia.com/terms/c/corporategovernance.asp]

Mechanisms:

1) Internal Mechanism-

Internal controls are the most important mechanism in any organization. These controls monitor the day to day activities of the organization and take corrective actions when the business is running on the wrong track. These objectives include smooth operations, clearly defined reporting lines and performance measurement systems.

2) External Mechanism-

External control mechanisms are controlled by those outside an organization and serve the objectives of entities such as regulators, governments, trade unions and financial institutions. External mechanisms are often imposed on organizations by external stakeholders in the forms of union contracts or regulatory guidelines. External organizations, such as industry associations, may suggest guidelines for best practices, and businesses can choose to follow these guidelines or ignore them.

3) Independent Audit-

An independent external audit of a corporation’s financial statements is part of the overall corporate governance structure. It helps to determine the financial performance of the corporation. This exercise gives a broad but limited view of the organization’s internal working mechanisms and future outlook.

[Source: https://smallbusiness.chron.com/three-types-corporate-governance-mechanisms-66711.html]

Objectives:

It seeks to achieve the following objectives:

(i) To place a stable and effective board capable of taking independent and objective decisions at the helm of affairs;

(ii) That the Board is balanced as regards the representation of an adequate number of non-executive and independent directors who will take care of the interests and well being of all the stakeholders;

(iii) To adopt transparent procedures and practices and arrive at decisions on the strength of adequate information.

(iv) To place effective machinery to subserve the concerns of stakeholders;

(v) To keep the shareholders informed of relevant developments impacting the company;

(vi) To effectively and regularly monitor the functioning of the management team and

(vii) That the Board remains in effective control of the affairs of the company at all times. The overall endeavour of the Board should be to take the organisation forward, to maximise long-term gains and stakeholders' wealth.

Essential pillars of Corporate Governance:

Accountability: To be accountable for all kind of non-compliance

Transparency: To ensure that nothing has been kept as a secret

Responsibility: To be responsible for the duties and abide by the rules and regulations

Fairness: To treat everyone in a just and fair manner

Benefits of Corporate Governance:

1)     It ensures corporate success and economic growth.

2)     It maintains investors’ confidence, as a result of which, the company can raise capital efficiently and effectively.

3)     It lowers the capital cost.

4)     It brings about a positive impact on the share price.

5)     It provides a proper inducement to the owners as well as managers to achieve objectives that are in interests of the shareholders and the organization.

6)     It also minimizes wastages, corruption, risks and mismanagement.

7)     It helps in brand formation and development.

8)     It ensures the organization is managed in a manner that fits the best interests of all.

Securities and Exchange Board of India (Listing of Disclosure Requirements) Regulations, 2018:

Applicability-

These regulations shall apply to the listed entity who has listed any of the following designated securities on a recognized stock exchange(s):

1)     Specified securities listed on the mainboard or SME Exchange or Institutional trading platform;

2)     Non-convertible debt securities, non-convertible redeemable preference shares, perpetual debt instrument, perpetual non-cumulative preference shares;

3)     Indian depository receipts;

4)     Securitized debt instruments;

5)     Units issued by mutual funds;

6)     Any other securities as may be specified by the Board.

Broad features-

1) Time Limit to comply with other provisions of the regulations has been given for 90 Days i.e.it became effective from 01st December 2015

2) The regulations have provided broad principles for periodic disclosures by the listed entities and also have incorporated the principles for corporate governance they have been formed on the lined with OECD.

3) The Regulations have been structured and designed in such a way so that they are aligned with the Companies Act, 2013.

4) In order to avoid any sort of confusion or overlapping, pre-listing, as well as post-listing requirements, have been incorporated in the Listing Regulations.

5) Obligations which are applicable to specific types of securities have been incorporated in separate chapters.

Common Obligations of Listed Entities:

This part deals with the obligations and responsibilities upon all the listed entities. A responsibility has been cast upon Key Managerial Personnel (KMP’S), Directors, and Promoters that they shall comply with responsibilities or obligations assigned to them under the regulations.

The following are the common obligations on Listed entities:-

1)     Regulation 6: Compliance Officer And his Obligations

A listed entity shall appoint a qualified Company Secretary as the Compliance Officer. The Compliance officer so appointed shall be responsible for ensuring conformity with regulatory compliance, coordination and reporting to the Board, ensuring that correct procedures have been followed that would result in the correctness of information filed by a listed entity under the regulations and monitoring email address of grievance redressal division.

2)     Regulation 7: Share Transfer Agent

The listed entity shall appoint a share transfer agent or manage the share transfer facility in house.

Other Regulations-

Regulation 24: Requirements with respect to a Subsidiary of Listed Companies

Atleast one Independent Director on Board shall be a Director on Board of Unlisted Material Subsidiary. The management of the unlisted subsidiary shall periodically bring to the notice of the board of directors of the listed entity, a statement of all significant transactions and arrangements entered into by the unlisted subsidiary. A listed entity shall not dispose of shares in its material subsidiary resulting in reduction of its shareholding (either on its own or together with other subsidiaries) to less than 50 % or cease the exercise of control over the subsidiary without passing a special resolution in its General Meeting except in cases where such divestment is made under a scheme of arrangement duly approved by a Court/Tribunal.

Selling, disposing and leasing of assets amounting to more than 20% of the assets of the material subsidiary on an aggregate basis during a financial year shall require prior approval of shareholders by way of a special resolution, unless the sale/disposal/lease is made under a scheme of arrangement duly approved by a Court/Tribunal.

Quarterly Compliances- Listed Entity

"Regulation, Heading, What to be filed, Due Date"

1) 13(3) Grievance Redressal Mechanism, A statement giving the number of investor complaints pending at the beginning of the quarter, those received during the quarter, disposed of during the quarter and those remaining unresolved at the end of the quarter, Within 21 days from the end of each quarter

27(2) Other Corporate Governance Requirements, Quarterly compliance report, Within 15 days from close of the quarter

31(1) The holding of Specified Securities and Shareholding Pattern, A statement showing holding of securities and shareholding pattern separately for each class of securities(a) One day prior to the listing of its securities on the stock exchange(s); (b) On a quarterly basis, within 21 days from the end of each quarter; and, (c) Within 10days of any capital restructuring of the listed entity resulting in a change exceeding 2 % per cent of the total paid-up share capital.

33(3) Financial Results, Quarterly and year-to-date standalone financial results, Within 45 days of the end of each quarter, other than the last quarter.

32(1) Statement of Deviation(S) Or Variation(S), For public issue, rights issue, preferential issue etc, Quarterly basis

Principles of Corporate Governance:

1)     Rights and equitable treatment of shareholders:

To respect the shareholder’s rights and help them exercise their rights openly and effectively.

2)     Interests of other stakeholders:

To consider the interests of stakeholders, internal as well as external.

3)     Role and responsibilities of the board:

To have skills and understanding to challenge and review the performance of the management.

4)     Integrity and ethical behaviour:

Integrity is the most important requirement in any organization. Ethical behaviour is characterized by honesty, fairness and equity in interpersonal, professional and academic relationships and in research and scholarly activities. Ethical behaviour respects the dignity, diversity and rights of individuals and groups of people. To develop a code of conduct for the ethical performance of the organization.

5)     Disclosure and transparency:

To disclose all the important information which the stakeholders should be informed of and to not hide anything material from the stakeholders. To install a piece of transparent machinery into the place to treat everyone at par and part of the same family.

Conclusion:

It is essential that good governance practices must be effectively implemented and voluntary adoption of an ethical code of business conduct.

It increases the confidence in the investors and attract more investment from foreign companies. An organization with good corporate governance sustains for a longer time.

Corporate governance is a great pillar of any organization. Compliance is costly but non-compliances are costlier. So, good corporate governance not only helps you complying laws and regulations but also helps to save money.