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in
 Summary Sheet

Corporate Governance
Important Points

1. This Summary Sheet shall only be used for Quick Revision after you have read the
Complete Notes
2. For Building Concepts along with examples/concept checks you should rely only on
Complete Notes
3. It would be useful to go through this Summary sheet just before the exam or before any
Mock Test
4. Questions in the exam are concept based and reading only summary sheets shall not be
sufficient to answer all the questions

1. What is Corporate Governance

Corporate governance has also been defined as "Is the act of externally directing, controlling and
evaluating a corporation"

According to SEBI the definition is

1. Acceptance by management of the rights of the shareholders as the true owners

2. Acceptance by management that managers are the trustees on behalf of shareholders
3. Management’s Commitment to values, ethical conduct and making distinction between
personal and company’s interest

1.1. Difference between Corporate Governance and Management

Governance and Corporate Governance are different from management because governance
must be EXTERNAL to the object being governed. Governing agents do not have personal control
over and are not part of the object that they govern.

Corporate Management Corporate Governance

Corporate Management implements the order Corporate Governance gives the order
It is more esoteric (intended for or likely to be It is more exoteric (intended for or likely to be
understood by only a small number of people understood by the general public.)
with a specialized knowledge or interest)
Power is delegated Board is empowered in corporate Governance
Corporate Management is static concept Dynamic Concept
Works in close ended system Works in open -ended system
Corporate management is job performer Corporate Governance is job designer
It decides “how to go” It decides “Where to go”
It is about to do things right To do right things
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 2. Historical Background of Corporate Governance
The term corporate Governance came into picture after a series of unfortunate events in Japan,
UK, USA, and Asia. An organized movement started to formulate certain principles and Policies to
put the corporate world on sound footing.

1. The Cadbury committee in England provided some principles for corporate governance in
1992
2. Organization for Economic cooperation and Development (1999) also formulated certain
principles for improvement of corporate governance.
3. In India attempt to introduce corporate governance was made in 1997 when CII prepared
a code for corporate governance. Subsequently, the Kumar Manglam Birla Committee
(1999) set up by SEBI introduced standard listing agreement to be followed by all listed
companies under the clause 49. We shall discuss this in detail later
4. Sarbanes -Oxley Act, 2002 that laid down some principles for the strict compliance of
corporate sector in America

3. Why it is Important
In contemporary business corporations, the main external stakeholder groups are shareholders,
debtholders, trade creditors and suppliers, customers, and communities affected by the
corporation's activities. Internal stakeholders are the board of directors, executives, and other
employees.

Corporate Governance is important for equal distribution of rights and responsibilities among
different participants in the corporation and making the rules and procedures for making
decisions in corporate affairs

Primary and Secondary Stakeholders

A primary stakeholder group for a company is a group that is essential for the continuation of the
company as a going concern. Secondary stakeholders are those that the organization does not
solely rely on for its continued survival, at least in the short term.

Stakeholder Internal or External Primary or Secondary

Customers External Primary
Suppliers External Primary
Creditors External Primary
Media External Secondary
Communities External Secondary
Investors/Shareholders External Primary
Trade Unions External Secondary
Government Agencies External Secondary
Competitors External Secondary
Owners Internal Primary
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 Employees Internal Primary
Board of Directors Internal Primary

3.1. Principal Agent Problem

The owners are the people who are the promoters or the shareholders whereas the management
refers to the managers running the company. The management is supposed to help in running
the busines efficiently as they are expert in that field. The Owners are called the Principal and the
management is called the Agent. The upper management may have different interests than the
Owners which leads to Principal-Agent issue/conflict. These can be in following ways

1. Agency Cost: The objectives of principal may be different from the agent. The agent may like
to increase his own pay and may encourage nepotism. This may increase cost which is known
as Agency Cost. T
2. Rent-Seeking: Given the fixed pay, the agent may practice rent-seeking (to earn extra bucks
by unethical and illegal means)

3.2. Areas where Corporate Governance Contribute

1. Sustained Economic growth: Accountability and Transparency is encouraged by corporate
governance which is essential for capital market development. If a country has good corporate
governance models, then more investors from foreign countries will invest money in the
country which will lead to economic growth.
2. Corporate Governance ensures economic growth with social justice and development:
3. Reduce Financial Turmoil: Disciplines and controlled corporate governance can reduce
financial turmoil and can ensure financial stability.
4. Reduce Frauds and Scandals: Good corporate governance helps in reducing frauds and
scandals which leads to public confidence and national prestige. For example, Infosys is such a
brand in the world. Imagine if Infosys is hit by any big scandal then would it have the same
brand image?
5. Successful International Business:
6. Social Development and Social Welfare: Many companies with good corporate governance
give back to the society in one way or the other. Tata group has a trust which does lot of
social work
7. Environmental Protection and Sustainable Development: Growth cannot be sustained if it as
the cost of environment and health. Nike is keen to highlight the value of green initiatives
through its advertising in addition to putting the great ideas into practice. Its line of
sustainable products is made using environmentally preferred materials like recycled
polyester.

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 8. Interest of All stakeholders: A good corporate governance considers interest of all the
stakeholders and thereby ensures justice and fairness to all concerned. This point has already
been discussed in detail in the earlier section
9. Mitigation of Principal Agent Problem: Already discussed in the earlier section
10. Improve gender equity and diversity:
11. Improves information flow between management and boards for an efficient functioning

4. Principles of Corporate Governance

1. Rights and equitable treatment of shareholders: Organizations should respect the rights of
shareholders and help shareholders to exercise those rights.
2. Role and responsibilities of the board: The board needs sufficient relevant skills and
understanding to review and challenge management performance. It also needs adequate
size and appropriate levels of independence and commitment.
3. Integrity and ethical behavior
4. Disclosure and transparency:
5. Environment-Friendly Policies:
6. Trade-off between Profit and Social Welfare: Though every organization has profit as one of
its motive, but profit shall not be the only motive. Organization shall give back to the society
from where it is reaping the profits
7. Free from Political Interference: Organization shall be free from any political interference
8. Independent External Auditors: External auditors must be independent in the sense that they
shall not be in any way related to the company.
9. Clear Dividend Policy: A company shall have clear dividend policy so that investors are aware
about the logic on which dividends are being declared
10. Accountability and Responsibility: There shall be proper accountability and responsibility for
everyone. Proper punishment must be there for every type of aberration

5. Executive and Non-Executive Directors

The board of directors of most corporations includes both “insiders” and “outsiders”.

An “insider” is as a person who is either employed by the corporation (an executive, manager or
employee) or who has significant personal or business relationships with corporate management.

An “outsider” is a person or institution which has no direct relationship with the corporation or
corporate management.

A synonym for insider is executive director; a synonym for outsider is non-executive director or
independent director

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 6. Models of Corporate Governance

6.1. Anglo – US Model

The so-called "Anglo-American model" of corporate governance emphasizes the interests of
shareholders. It relies on a single-tiered Board of Directors that is normally dominated by
non-executive directors elected by shareholders. Because of this, it is also known as "the
unitary system" or “Single Tier”

Within this system, many boards include some executives from the company (who are ex
officio members of the board). These are also called executive Directors. Non-executive
directors are expected to outnumber executive directors and hold key posts, including audit
and compensation committees.

The three major players in Anglo-US Model are management, directors and shareholders.
They form what is commonly referred to as the "corporate governance triangle." The
interests and interaction of these players may be diagrammed as follows:

The Anglo-US model, developed within the context of the free market economy, assumes the
separation of ownership and control in most publicly held corporations.

6.2. Japanese Model

The Key Players in Japanese Model are given below

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 The board of directors of Japanese corporations is composed almost completely of insiders, that
is, executive managers, usually the heads of major divisions of the company and its central
administrative body. If a company’s profits fall over an extended period, the main bank and
members of the keiretsu may remove directors and appoint their own candidates to the
company’s board. Another practice common in Japan is the appointment of retiring government
bureaucrats to corporate boards; for example, the Ministry of Finance may appoint a retiring
official to a bank’s board

6.3. Continental European Model

Some continental European countries, including Germany, Austria, and the Netherlands,
require a two-tiered Board of Directors as a means of improving corporate governance .In the
two-tiered board, the Executive Board, made up of company executives, generally runs day-to-
day operations while the supervisory board, made up entirely of non-executive directors who
represent shareholders and employees, hires and fires the members of the executive board,
determines their compensation, and reviews major business decisions.

7. Theories of Corporate Governance

1. Agency Theory: Shareholders are looked upon as the owners (principals), the managers and
board of directors are considered as the agents of the company. There is, thus, a separation
of ownership from the management. However, in such a case, there is the problem of conflict
of interests. While the managers are interested in maximizing their utility functions that
include pay, power and perks, the owners are interested in getting a high return on their
investment. Thus, there is an obvious principal-agent problem
2. Stewardship Theory: It posits that the duty of a steward is to protect and maximize the stock
of wealth of the shareholders, and by doing so they get their own rewards. In fact, the utility
function of a steward is maximized only through the maximization of the shareholders’
interest. Thus, there is no contradiction or conflict; rather, the two utility functions have the
same point of convergence. In a corporate set-up, managers and executives are stewards.
3. Stakeholders’ Theory: This theory is based on the perception that the basic purpose of any
corporate organization is to create wealth not only for the owners but also for the
stakeholders. This theory focuses on managerial decision-making for the benefit of all the
parties concerned.
4. Transaction Cost Theory: The transaction theory suggests that by varying the size of the firm,
its production structure, technique, and resources allocation methods, a firm can change the
transaction cost. The theory implies that managers are opportunists and arrange transactions
in their favor through many methods and manipulations. However, this does not imply that
they have to be selfish, or they alone enjoy the benefits of a reduced transaction cost. The
theory makes an important point that it is the basic purpose of corporate governance to make

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 the cost the lowest, reap the economies of scale and make the company highly competitive
and contestable. The increased profits will benefit all the parties
5. Dependency Theory: The dependency theory looks at the possibilities of development and
growth of a company. In this context, the role of board of directors can hardly be
exaggerated. The directors always try to invent innovative ways and means to access new
resources and make the firm more and more self-sufficient and competitive. In this context,
the outside directors can impart valuable advice that may reduce the transaction cost. The
directors can be business specialists, experts, economists, politicians, social workers,
teachers, and so forth. The theory suggests that whatever be the nature of directorship
(insider or outsider), it is the duty of these directors to gather newer and newer resources for
the betterment of the company. The dependency is about the procurement of resources
6. Political Theory: It explains the involvement of government in the governance of
corporations. The government in countries and in many situations participates or directs
corporate decision-making, and in such a situation, the allocation of corporate power, profit
and privileges are all determined by government rules, regulations and favors. In many
countries of our times, some governments exert strong pressure, power, and influence in
corporate governance. Perhaps the best example is the corporate governance in China. An
authoritarian government is more powerful than a democratic government in the matter of
corporate governance
7. Ethical Theory of Corporate Governance: Theory, as the name suggests, is concerned with
that type of governance which is ethically justified and is based upon fairness and justice for
all the parties. Ethical corporate governance distinguishes between right and wrong and
concentrates on the right type of governance without hate and harm.

8. Corporate Governance Outside India – A brief

7.1. Cadbury Committee

The main recommendations were

1. Separating the roles of CEO and chairman:

2. Having a minimum of three non-executive directors on the board
3. Formulation of Audit committees with Independent Members
4. Board of Directors should play an important Role for an Effective Corporate Governance

7.2. OECD Principles:

Organization for Economic Co-operation and Development (OECD) principles in summary
include the following elements.

1. The rights of shareholders being important

2. Equitable treatment of shareholders whether majority or minority

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 3. Important Role of stakeholders in corporate governance
4. Disclosure and Transparency of Financial reports and other areas
5. Responsibilities of the board ensuring and protecting rights of Stakeholders
6. Non-Biased Auditing of the Company

7.3. Sarbanes- Oxley Act, 2002:

The Sarbanes-Oxley Act of 2002 was enacted in the wake of a series of high-profile
corporate scandals. The important provisions in the SOX Act are briefly given below.

1. Establishment of Public Company Accounting Oversight Board (PCAOB): SOX

creates a new board consisting of five members of whom two will be certified
public accountants. All accounting firms have to get registered with the board. The
board will make regular inspection of firms.
2. Audit Committee: The SOX provides for new improved audit committee. The
committee is responsible for appointment, fixing fees and oversight of the work of
independent auditors.
3. Audit Partner Rotation: The act provides for mandatory rotation of lead audit or
coordinating partner and the partner reviewing audit once every 5 years
4. Improper influence on conduct of Audits: According to act, it is unlawful for any
executive or director of the firm to take any action to fraudulently influence, coerce
or manipulate an audit
5. Prohibition of non-audit services: Under SOX act, auditors are prohibited from
providing non-audit services concurrently with audit financial review services
6. CEOs and CFOs are required to affirm the Financials: CEOs and CFOs are required
to certify the reports filed with the Securities and Exchange Commission (SEC). This
point is very important because now CEO’s and CFO’s cannot say in case of fraud
that they were not aware of what was published in financial reports

9. Evolution of Corporate Governance in India - Various Committees in India

Established for Corporate Governance
The corporate governance in India has evolved over a period of time. The various developments
in area of corporate governance are discussed below

8.1. CII code for Corporate Governance

It released guidelines ‘Desirable Corporate Governance’ in 1998. It was not mandatory but
voluntary and emphasized on transparency and disclosure by companies.

This is not important for the exam.

Note: CII stands for Confederation of Indian Industry

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 8.2. Kumar Mangalam Committee and Clause 49:
1. Early 2000, the recommendations made by the committee were incorporated into
Clause 49 of the Listing Agreement of the Stock Exchanges
2. Recommendations:
a. Role of Board of Directors: Board should direct and control the management
of the company and is accountable to the shareholders
3. Composition of Board of Directors: Optimum combination of executive and non-
executive directors. Non-executive directors not less than 50%. Number of
independent directors depends whether Chairman is non-executive (1/3rd board
independent directors) and executive(1/2 board independent directors
4. Audit Committee: Minimum 3 members, all non-executive directors and majorly
independent with at least 1 director having finance and accounting knowledge.
Chairman of committee should be independent director and present in AGM.
Committee should meet thrice a year with gap no more than 6 months. Quorum → 2
members or 1/3rd of audit committee whichever higher and minimum 2 independent
directors
5. Functions of Audit Committee: To check credibility and righteousness of financial
statements, appointment and removal of external auditor and reviewing financial
statements with management before submitting to the board
6. Remuneration Committee: At least 3 directors, all non-executive and majorly
independent. Chairman of the committee should be independent director and present
in the AGM
7. Board Meetings: At least 4 times a year with maximum gap of 4 months between any
2 meetings. Director shall not be member in more than 10 committees and Chairman
not more than 5 committees serving as director
8. Corporate Governance: Annual report should contain separate section on Corporate
Governance with detailed compliance report
9. Shareholders: Under the chairmanship of non-executive director committee to
address shareholders and investors’ concerns. Delegation of power of share transfer
to registrar or agents

8.3. Naresh Chandra Committee

Set up by the Department of Company Affairs (DCA) under the Ministry of Finance and
Company Affairs

Recommendations:

i. Auditors: Audit firm should not have financial interest, received loans/guarantees form
the company, not dependent for more than 25% of revenues and key officers of the firm
cannot join the audited company before 2 years of last audit. Audit firm must not be
involved in non-audit services and at least 50 % of personnel auditing the company
rotated every 5 years

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 ii. Audit Committee: Directors of the committee must be independent and certify financial
statements by CEO & CFO and oversee the auditor appointment process
iii. Composition of Board of Directors: Minimum 50 % of independent directors and
minimum board size = 7. Independent directors must be given training and not held
criminally liable for any mismanagement by any employee
iv. Remuneration: Limit on the salary of non-executive directors and decided by board and
shareholders together

8.4. Narayan Murthy Committee

Recommendations made by this committee also incorporated into Clause 49 of the Listing
agreement of the Stock Exchanges
Recommendations:
a. Audit Committee: Members of the committee should be financially literate and at
least one member should have accounting or financial management expertise
b. Related Party Transactions: Denotes any transactions between two parties having
financial interest in the company. Statement regarding this should be submitted to
audit committee for approval
c. Risk Management: Management should form and place the report on risk assessment
and minimization procedures to the Board every quarter and get it approved from the
board
d. Training of Board Members: Board members must be trained in business model and
risk profile of business parameters of the company to know their responsibilities
e. Disclosure on money raised through IPO: Application of funds raised through IPO
should be submitted to the Audit Committee every quarter
f. Nominee Directors: Denotes the ones who have been appointed by a party which is
the largest shareholder of the company or has interest in the working of the
company. No nominee directors on board and if required then through shareholder’s
decision
g. Remuneration: Compensation paid to the non-executive directors must be decided
by board and shareholder in the general meeting
h. Whistle Blower Policy: Any wrongdoing observed by anyone should be informed to
the audit committee and protection of harassment given to the informant
i. Evaluation of Board Performance: This to be done by peer groups of the board of
directors of non-executive director’s performance

8.5. JJ Irani Committee

This committee was formed in 2004 by Ministry of Corporate Affairs (MCA) to offer advice
on the new company bill. MCA wanted to come up with new company bill as the
companies Act, 1956 did not seem to be relevant in the current scenario. The
recommendations by JJ Irani Committee were used in formulation of Companies bill. The
companies bill is explained later in this document

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 8.6. Uday Kotak Committee
The Securities and Exchange Board of India (Sebi) had set up a committee in June 2017 under
the chairmanship of Uday Kotak, executive vice chairman and managing director of Kotak
Mahindra Bank Ltd, to advise it on issues relating to corporate governance in Indian firms.

The committee was a 21-member panel includes representatives from other companies, stock
exchanges, professional bodies, investor groups, law firms, academicians, research
professionals and Sebi officials

The committee was supposed to advise the markets regulator on areas such as

1. Ensuring the active participation of independent directors in the functioning of companies

2. Improving safeguards and disclosures pertaining to related-party transactions
3. Issues in accounting and auditing practices by listed firms
4. Improving effectiveness of board evaluation practices
5. Addressing issues faced by investors on voting and participation in general meetings
6. Improving on disclosure- and transparency-related issues.
7. Listed public sector enterprises are now keen that the minimum number of independent
directors in their boards be reduced from the current 50 per cent norm and, they be
exempted from evaluation of directors. They are also seeking exemption from succession
planning. The committee will also consider this issue

The committee advised the markets regulator on areas such as

Related Party Transactions: A listed entity has to submit within 30 days of publication of its
standalone and consolidated financial results for the half year, disclosures of RPTs on a
consolidated basis.

Separation of the office of the chairperson (i.e., the leader of the board) and CEO/MD (i.e.
the leader of the management) : The top 500 listed entities (by market capitalization) having a
public shareholding of 40 per cent or more, have to separate the office of CEO/MD and
Chairperson with effect from April 1, 2020.

Capping max number of Directorship: No person will be allowed to hold the office of director
in more than eight listed entities at the same time (of which independent directorships are
capped at seven) with effect from April 1, 2019. Further, with effect from April 1, 2020, such
number will be capped at seven.

Independent Directors: It was suggested that independent directors shall be between 33% to
50% of the board members. No person who is a part of the promoter group can be appointed
as an Independent Director.

Enhanced Role of Committees

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 (i) Audit Committee - The Audit Committee will have to review the utilization of loans
and/or advances from/investment by the holding company in the subsidiary exceeding Rs
100 crore or 10 percent of the asset size of the subsidiary, whichever is lower.

(ii) Nomination and Remuneration Committee– The Nomination and Remuneration

Committee shall now have to identify and recommend to the board, the appointment and
removal of persons one level below the chief executive officer specifically including the
position of the company secretary and the chief financial officer. Such positions/offices
will now be considered to be a part of the ‘senior management’. Further, it shall now be the
duty of the Nomination and Remuneration Committee specifically to recommend to the
board, all remuneration, in whatever form, payable to members of the senior management.

(iii) Risk Management Committee - The functions of the Risk Management Committee shall
now specifically cover cyber security.

Strengthening the Regulator

1. Strengthening the role of market regulator to improve the governance practices

2. SEBI should have powers to act against auditors if the need arises
3. SEBI to develop capabilities to be able to regulate listed entities more effectively and
protect the interest of the small shareholders

Other Reforms

1. For government companies, it is recommended that board have final say on the
appointment of independent directors and not the nodal ministry
2. It seeks to address the issue faced by minority shareholders on voting and participation in
annual general meeting

8.7. Role of SEBI in Corporate Governance Reforms

SEBI was established on April 12, 1988, which became fully autonomous in 1992. SEBI is the main
regulator of the financial markets. In 1992, the BSE witnessed one of the largest scams of the
decade, the Harshad Mehta scam. It was an eye opener of its kind. As a result, government of
India enacted SEBI Act, 1992 and through this act gave SEBI the special powers to deal with
defaulters with iron-hand. SEBI since then had incorporated various committees to improve the
corporate governance in India. These committees are given below and have already been
discussed in the earlier sections

1. Kumar Manglam Birla Committee

2. Narayan Murthy Committee
3. Uday Kotal Committee

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 The recommendations given by Kumar Mangalam Birla Committee and Narayan Murthy
Committee were incorporated into clause 49 of the listing agreement and all the entities listing on
stock exchange had to comply with clause 49 of listing agreement. Later listing agreement was
replaced by LODR regulations

10.Structure and Processes of Corporate Governance

From the above diagram, it can be clearly seen that major pillars of corporate governance are

1. Shareholders
2. Board of Directors
3. Management
4. Financial Markets (Capital markets)
5. Society
6. Government + Regulators such as SEBI

Let us try to discuss these critical pillars of the corporate governance

10.1. Role of Board of Directors

The Board of Directors having following responsibilities (All these points are very general so just
skim through them and make a general view in your head)

• Review and guide corporate strategy, objective setting, major plans of action, risk policy,
capital plans, and annual budgets.
• Oversee major acquisitions and divestitures.
• Select, compensate, monitor, and replace key executives and oversee succession planning.
• Align key executive and board remuneration (pay) with the longer-term interests of the
company and its shareholders.
• Ensure a formal and transparent board member nomination and election process. Board is
the ones who appoints independent directors.
• The board appoints various critical committees such as Audit Committee, Nomination
Committee etc. and functions through them. Board has to take care that where committees
of the board are established, their mandate, composition and working procedures should be
well-defined and disclosed. We shall be discussing about these committees in detail in the
upcoming part of this document
So, Board of Directors act as Agent while Shareholders are the principal

10.2. Rights and Protection given to Shareholders

Apart from the role played by the board of directors, the rights and protection given to the
shareholders also helps in implementing good corporate governance

Shareholders must have the right to

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 1. Participate and be informed about fundamental changes in the organization such as sale of
corporation, divesting into new business etc.
2. Voting rights in general meeting of the company
3. Electing board members/directors and removing them in case their performance is not in line
with the interest of the company

Shareholder’s Interest must be Protected in following ways

a. Information Asymmetry:
b. Strict Disclosers:
c. Agency Cost:

10.3. Management
Prevention of fraud in any organization is successful when there is a proper, preexisting “tone at
the top” in an organization. The importance of setting an example of ethical behavior within an
organization is a responsibility of executive management

10.4. Financial Markets/Capital Markets

Financial markets act as a place companies with bad corporate governance can be overtaken by
better companies. This results in replacement of bad managers. So, in this way bad corporate
governance is punished.

10.5. Role of Society

Good corporate governance is about ‘intellectual honesty’ and not just sticking to rules and
regulations. In many cases it is observed that it is wrong value system and unethical standards
which leads to biggest scam Therefore, it becomes especially important that the society aims
towards better value system, high ethical standards.

10.6. Government
The role of government and other regulatory bodies in framing rules and regulations becomes
important. Many of the regulations have been framed by Government (Company Law) and SEBI
(LODR regulations) which aim towards effective corporate governance. Apart from these rules
and regulations various other steps have been taken by government which are listed below

1. The government is ensuring widespread investors education programs to ensure that they
know their rights and duties and contribute to ethical development of corporations
2. The importance of whistleblowing has been formally recognized and whistle blowers are
being given legal protections
3. As important step in this direction is right to information at all the levels. This eliminates
information asymmetry which is main cause of corporate scams and scandals

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 11.Factors Affecting Corporate Governance
1. Ownership Structure: If the Ownership is concentrated in few hands, then dominant
shareholders would be able to take decisions at their will. In PSU’s, the government is major
shareholder and takes decision which might not be good for shareholders.
2. Financial Structure: If company is more equity than debt, then all the decisions would have
to be taken by consulting shareholders which is good. But in case of large debt and low equity
it might be possible for board to take decisions in their interest and debtors might not like
those decisions
3. Extent of Development of Financial Markets: Financial markets act as a place companies with
bad corporate governance can be overtaken by better companies. Investors can refuse to
subscribe to the capital of a company in the primary market and in the secondary market;
they can sell their shares, thus depressing the share prices. In the same context, investor
education becomes especially important. The more developed the capital markets are and
the more educated the investor is, the better will be the corporate governance
4. Policies and Law of the Country: The legal environment in which the company is operating
has a vast amount of influence on the Corporate Governance. For example, the extent to
which shareholders can control the management depends on their voting right as defined in
the Company Law, the extent to which creditors will be able to exercise financial claims on a
bankrupt unit will depend on bankruptcy laws and procedures etc.
5. Competency of Board of Directors: If board of directors does not understand the business
then they will not be able to fulfill their duties to the extent required. In such a case
management would be able to take decisions in their own interest rather than in the interest
of the shareholders
6. Independent Directors on Board: The more independent the independent directors are and
larger the number of independent directors is, the better is the corporate governance
7. Directors Remuneration: The remuneration needs to be designed very smarty so that it acts
as a motivation to perform better but at the same time should not prevent them form sharing
any information which can impact the performance of the company
8. Effective Audit Committee and Independent Auditors: The more qualified, experienced, and
ethical the audit committee is, the better will be the corporate governance. On the same
lines, the more qualified, experienced, and independent the auditors appointed by the
company, the better will be the corporate governance
9. Addressing Grievances of Shareholders: If company has a well determined process to look
into the grievances of shareholders and there is proper accountability for the same, then it
will lead to better governance
10. Transparency
11. Whistleblower Policy: The more protection the whistleblowers are given against harassment
and the more detailed policy is there with respect to whistleblowing, the more it will
encourage people to raise issues and hence better the corporate governance would be.

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 12. Political Interference: Any type of political interference can help company reap benefits in
short-term but in longer term it will damage the reputation of the company.
13. Proactiveness from Government in framing rules and Regulations: The more proactive the
government is in making rules and regulations and updating them from time to time, the laws
will be better equipped to handle the prevailing situations.
14. Strength and Training of Enforcement Agencies
15. Extent of Commitment towards Social Welfare and CSR: The extent to which company is
committed towards social welfare determines the effectiveness of corporate governance
16. Media and Society Pressure:
17. Extent of Competition in Market: Competition from other firms force the companies to
innovate and follow best practices. The more the competition is, the better will be the
chances of corporate governance.

12.Mechanisms of Corporate Governance

There are internal and external mechanisms of corporate governance. While discussing these
mechanisms of corporate governance, we shall discuss about the relevant clauses in Companies
Act, 2013 and SEBI LODR Regulations which help us implement corporate governance. The
companies act, 2013 and SEBI LODR Regulations are the main acts/regulations in India which
help us implement Corporate Governance in India

Internal Mechanisms are:

1. Balanced Ownership Concentration: If large number of shares are owned by institutional

investors or individual investors then they can vote against or question any decision made
by the company. A company having large institutional investors will always be challenged on
their wrong decisions.

Companies Act, 2013

Appointment of Nominee Directors

a. As per Section 163 of the Companies Act, the company may authorize the board of
directors to appoint any person as a director nominated by any institution as a nominee
Director. Nominee Directors are normally appointed by large shareholding institutions like
Investment bank to act as their representative

SEBI LODR Regulations

a. SEBI LODR regulations under rights to shareholder mentions about exercise of ownership
rights by all shareholders, including financial institutions

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 2. Voice to Small Shareholders: Many a times majority shareholders take decisions which are in
their interest though it may be at the cost of small shareholders. To counter this, small
shareholders shall also have their representative in the board of directors to represent them

Companies Act,2013
As per section 151 of the companies Act, a listed company may have one director elected by such small
shareholders. Small shareholders” means a shareholder holding shares of nominal value (face value) of
not more than twenty thousand rupees
SEBI LODR Regulations
a. SEBI LODR regulations under rights to shareholder mentions about protection of minority
shareholders from any abusive action
b. It mentions about equitable treatment to all the shareholders. Exercise of voting rights even by
foreign shareholders is promoted
c. It also mentions that process of casting vote shall be easy and inexpensive. The listed entity shall
provide the facility of remote e-voting facility to its shareholders

3. Efficient Discharge of Roles and Responsibilities by the Board: Since board of directors play
an important role in the governance of the company, so it becomes really important that only
people who are qualified for the post are appointed. Moreover, the board shall meet
regularly, and decisions shall be taken in the presence of minimum number of members.
Otherwise, there is grave risk that decisions taken may not be in the interest of the company
and other stakeholders

Companies Act, 2013

a. As per Section 164 of the companies Act, any person of unsound mind, an insolvent person or
who has been convicted of the offence dealing with related party transaction at any time during
the last preceding five years cannot be appointed as director
b. As per Section 164 of the companies Act, any person who has been convicted by a court of any
offence and has been sentenced to imprisonment for not less than six months cannot be
appointed as director
c. As per Section 178 of the companies Act, every Listed Public Company and non-listed
companies having paid capital >= 10 crore or Turnover >= 100 Crore, or outstanding loans,
debentures and deposits >= 50 crore shall constitute a Nomination and Remuneration
Committee. This committee shall
a. Shall formulate the criteria for determining qualifications and independence of a director
b. Shall identify persons who are qualified to become directors and recommend to the
board for appointment

The above two points ensure that person appointed as directors shall not be someone who is
not capable of discharging his duty. He/she is selected after following the due process of
selection

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 d. As per section 165 of the companies act, person can be a director in maximum of 20 companies
subject to that he can be a director in maximum of 10 Public companies. This ensures that
person is able to manage time for his duties and responsibilities because if he/she is director in
say 50 companies, then he will not get time to do justice to his role in all the companies
e. As per section 173 of the companies act, every company shall hold the first meeting of the
Board of Directors within thirty days of the date of its incorporation. After the first meeting
Board of directors shall hold a minimum number of four meetings every year in such a manner
that not more than one hundred and twenty days shall intervene between two consecutive
meetings of the Board. This ensures that Board meets at regular intervals to discuss the
relevant matters
f. As per section 149 of the companies act, At least one director should stay in India for a total
period of >= than 182 days during the financial year. This ensures that directors are not there
just for the namesake and they should be discharging their duties by being present in India
g. As per section 174 of the companies act, the quorum for a meeting of the Board of Directors of
a company shall be 1/3rd of its total strength or two directors, whichever is higher. This ensures
that a certain minimum number is present in meeting when any decisions are taken

b.
SEBI LODR Regulations
SEBI LODR Regulations mentions following points with respect to functions of board
a. Board must ensure a transparent nomination process to the board of directors with the
diversity of thought, experience, knowledge, perspective, and gender in the board of
directors. This ensures that board is diversified and qualified to handle any problem
b. Board must Review and guide corporate strategy, major plans of action, risk policy, annual
budgets and business plans, setting performance objectives, monitoring implementation and
corporate performance, and overseeing major capital expenditures, acquisitions, and
divestments. This ensures board is responsible for major areas of functioning
c. Board shall meet at least four times a year, with a maximum time gap of one hundred and
twenty days between any two meetings. This ensures that Board meets at regular intervals to
discuss the relevant matters

4. Decent Representation of Independent Directors in Board of Directors: The board with right
mix of independent and non-independent directors can effectively monitor and advice the
organization.

Companies Act, 2013

a. As per section 149 (4) of the companies Act, each listed company shall have at least 1/3rd of its
directors as independent directors. Moreover, all public companies having capital >= 10 crore
or Turnover >= 100 Crore, or outstanding loans, debentures and deposits >= 50 crore must have
at least 2 independent directors

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 SEBI LODR Regulations

SEBI LODR Regulations mentions that

a. If Chairman is Non-Executive, then Minimum of 1/3rd directors shall be independent
b. If Chairman is Executive, then Minimum of 1/2 i.e., 50% directors shall be independent

Since executive directors are the one which are involved in day-to-day functioning, so when
executive director is the chairman of board there is more risk that decisions taken are not in the best
interest of minority shareholders or other stakeholders because executive director would be more
focused towards profit. Hence when chairman is executive director the number of independent
directors has been mandated at 50%. This ensures independent directors have decent
representation

5. Independence of Independent Directors: The selection procedure shall be such that people
appointed as independent directors shall not have monetary or any other kind of relationship
with the company which can make them act in biased way

Companies Act, 2013

a. As per section 149 (6), the Companies Act, 2013 states that independent directors should
not have any material pecuniary relationship with the company, its promoters, directors,
and subsidiaries which can affect the independence of the director either in the current
financial year or immediately preceding two years
b. Section 149 (6) also states that none of relatives of independent director shall be holding
security of more than 50 lakh or 2% of the paid-up capital of the company, whichever is
higher
c. Section 149 (6) also states that none of relatives of independent director shall be indebted
more than 50 lakhs to the company

The above three points ensure that independent directors are not subject to any bias

d. The independent directors of the company shall hold at least one meeting in a financial year
without the attendance of non-independent directors and members of management. This
makes sure that independent directors get space to discuss the issued without the influence
of other directors

SEBI LODR Regulations

SEBI LODR Regulations mention that Independent directors shall not be entitled to any stock
option. This ensures ensure that independent directors are not subject to any bias

A person shall not serve as an independent director in more than seven listed entities. Moreover,
any person who is serving as a whole-time director in any listed entity shall serve as an
independent director in not more than three listed entities. The logic behind this is that if you are
involved at too many places then conflict of interest will arise at one place or the other.

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 SEBI LODR Regulations mention that Independent directors shall not be entitled to any stock
option. This ensures ensure that independent directors are not subject to any bias

A person shall not serve as an independent director in more than seven listed entities.
Moreover, any person who is serving as a whole-time director in any listed entity shall serve as
an independent director in not more than three listed entities. The logic behind this is that if you
are involved at too many places then conflict of interest will arise at one place or the other.

The Securities Exchange Board of India (SEBI) in June 2021 approved amendments for listed
companies. As per the new rules, appointment, removal of independent directors will be through
a “special resolution” approved by shareholders. All the new rules will be applicable post January
2022

The regulations for appointment Independent Directors (IDs) include:

• Appointment/Re-appointment and Removal of IDs shall be through a special resolution of
shareholders for all listed entities.

• A cooling off period of three years has been introduced for Key Managerial Personnel

• Shareholder approval for appointment of all directors including IDs shall be taken at the next
general meeting, or within three months of the appointment on the Board, whichever is
earlier.

The regulations for resignation Independent Directors (IDs) include:

• The entire resignation letter of an ID shall be disclosed along with a list of her/his present
directorships and membership in board committees.

• A cooling-off period of one year has been introduced for an ID transitioning to a whole-time
director in the same company/ holding/ subsidiary/ associate company or any company
belonging to the promoter group.

6. Internal control procedures and internal auditors: Internal control procedures are policies
implemented by an entity's board of directors, audit committee, management, and other
personnel to provide reasonable assurance of the entity achieving its objectives related to
reliable financial reporting, operating efficiency, and compliance with laws and regulations.
Internal auditors are personnel within an organization who test the design and
implementation of the entity's internal control procedures and the reliability of its financial
reporting.

Both companies Act and SEBI LODR regulations talk about timely and accurate disclosure on
all material matters including the financial Position, performance, ownership etc.

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 7. Timely, Honest and Detailed Audits and Independence of Audit Committee: Auditing is
especially important for effective corporate governance. Detailed Auditing improves the
quality of financial reporting by reviewing the financial statements, creating a climate of
discipline, and reducing the opportunity for fraud. Every company must have timely, honest,
and detailed audits. Qualified and Independent audit committee is central to good corporate
governance as it is the audit committee which recommend appointment of auditors, review
the performance of auditors, and approve related party transactions.

Companies Act, 2013

As per section 177 of the companies Act
a. Every Listed Public Company and non-listed companies having paid capital >= 10 crore
or Turnover >= 100 crore, or outstanding loans, debentures and deposits >= 50 crore
shall constitute an Audit Committee. This ensures that Audit committee is formed in
listed and big size companies
b. The Audit Committee shall consist of a minimum of three directors and Majority of
Members of Audit Committee shall be Independent Directors. This presence of
majority members at independent directors ensure that it works in rational and non-
biased manner
c. Majority of members of Audit Committee including its Chairperson shall be persons
with ability to read and understand, the financial statement. This ensures that
members are qualified to discharge their duty
d. The Audit Committee shall have authority to investigate into any matter in relation to
the financial reports of the company
SEBI LODR Regulations
a. All shall be financially Literate and at least one member should be expert in finance or
accounting. This ensures that members are qualified to discharge their duty
b. There shall be min. of 3 members in Audit committee and at least 2/3rd members shall
be independent directors. all related party transactions shall be approved by only
Independent Directors on the Audit Committee. This ensures that Audit Committee is
answerable to independent directors
c. Audit committee shall meet at least four times in a year and not more than one
hundred and twenty days shall elapse between two meetings. This ensures that Audit
Committee is constantly working towards its goal
d. Audit committee has been given powers to investigate any activity, seek information
from any employee or obtain outside legal advice

8. Balance of power: The simplest balance of power is quite common; require that the President
be a different person from the Treasurer. Similarly, in an organization, the CEO and Chairman
shall be different. There must be check on the powers of the board also, so they do not have
GOD like status in the company

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 a. As per section 180 of the Companies Act, 2013, The Board of Directors of a company shall
exercise the following powers only with the consent of the company by passing a special
resolution. This ensures check on the power of the board of directors
i. to sell, lease or otherwise dispose of the whole or large part of the undertaking(s) of
the company
ii. to borrow money, where the money to be borrowed, together with the money
already borrowed by the company will exceed aggregate of its paid-up share capital,
free reserves, and securities premium.
iii. To give time for repayment of any debt due from a director

9. Remuneration of Executives/Directors: Performance-based remuneration is designed to

relate some proportion of salary to individual performance. It may be in the form of cash or
non-cash payments such as shares and share options, superannuation or other benefits. Such
incentive schemes, however, can be negative in the sense that they provide no mechanism for
preventing mistakes or opportunistic behavior, and can elicit myopic behavior. The
remuneration of executives should be such that they do not have any incentive to go against
the interests of the company and shareholders.

Companies Act, 2013

As per section 178 of the companies act
a. Every Listed Public Company and non-listed companies having paid capital >= 10 crore or
Turnover >= 100 crore, or outstanding loans, debentures and deposits >= 50 crore shall
constitute a Nomination & Remuneration Committee. This Committee should have
responsibility for determining the remuneration for all executive directors and senior
management members to ensure that the individuals remain motivated but at the same
time they do not have any incentive to go against the interests of the company and
shareholders by withholding some information
b. This committee shall have 3 or more Non-Executive Directors. Among non-executive
directors at least ½ should be independent directors. This ensures that the senior
management who is running day to day affairs is not able to make remuneration policy
which is to their advantage. Moreover, the decent representation of independent
directors prevents any harm to the interest of small shareholders

SEBI LODR Regulations

a. SEBI LODR Regulations makes in mandatory to constitute a Nomination &
Remuneration Committee. This Committee should have responsibility for determining
the remuneration for all executive directors and senior management members

b. Nomination & Remuneration Committee shall consist of min of 3 members, and it

should include 2/3rd of Independent Directors (IDs) instead of existing requirement of
majority of IDs. This ensures that the senior management who is running day to day
affairs is not able to make remuneration policy which is to their advantage.

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 10. Redressal of Shareholder/Stakeholder Grievance: Company must have well determined
process to look into the grievances of shareholders and there shall be proper accountability for
the same.

Companies Act, 2013

As per section 178 of the companies act,
a. company which consists of more than one thousand shareholders, debenture-holders,
deposit-holders, and any other security holders at any time during a financial year, the
Board of Directors of a company shall constitute a Stakeholders Relationship Committee
b. The chairperson shall be non-executive director and it shall consist of some other
members as decided by the board
c. The Stakeholders Relationship Committee shall consider and resolve the grievances of
security holders of the company such as dividend not received, Rights issue subscription
problem, Transfer of shares and other related areas
SEBI LODR Regulations
a. SEBI LODR Regulations under rights of shareholders mentions that there shall be adequate
mechanism to address the grievances of the shareholders

b. The listed entity shall ensure that it is registered on the SCORES platform or such other
electronic platform. SCORE platform is maintained by SEBI which facilitates you to lodge
your complaint online with SEBI and subsequently view its status.

c. The listed entity shall file with the recognized stock exchange(s) on a quarterly basis,
within twenty-one days from the end of each quarter, a statement giving the
I. Number of investor complaints pending at the beginning of the quarter
II. New received during the quarter
III. Disposed of during the quarter
IV. Those remaining unresolved at the end of the quarter.

d. The listed entities shall have Stakeholder relationship Committee which shall address
grievances of shareholders/security holders of the listed entity including complaints
related to transfer of shares, non-receipt of dividends etc.

11. Risk Management: It is very essential to manage risk for effective governance. There shall be
proper monitoring and management of risk in every company at branch level and corporate
level.

Companies Act, 2013

a. Section 134(3)(n) of companies act, 2013 states that the Board’s Annual Report shall
contain a statement indicating development and implementation of a risk management
policy for the company including identification therein of elements of risk, if any, which in
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 the opinion of the Board may threaten the existence of the company.

SEBI LODR Regulations

As per SEBI LODR Regulations, board is responsible for Framing, implementing, and monitoring
the risk management plan for the listed entity.

1-Initially first 100 companies by market capitalization are mandated for setting up of Risk
Management Committee. This committee can have members form outside also but the
Majority of members of Risk Management Committee shall consist of members of the board
of director
2-In 2020, Sebi proposed extending the risk management committee requirement to the top
1,000 listed companies.

12. Effective Implementation of Whistleblower Policy: Whistleblower shall be given protection

against harassment

Companies Act, 2013

a. As per section 177 of the companies act, the Companies which accept deposits from
the public or the Companies which have borrowed money from banks and public
financial institutions in excess of fifty crore rupees shall establish a vigil mechanism
(whistleblowing framework) for directors and employees to report genuine concerns

SEBI LODR Regulations

SEBI LODR regulations mentions that every listed entity shall devise effective whistle blower
mechanism enabling stakeholders to raise their concerns

13. Mechanism for Evaluation of Board Performance: There must be some mechanism for
evaluation of performance of the board so that non-performers are not given extension or are
removed from the board.

Companies Act,2013
a. As per section 134 of the companies Act, In the Board’s Report a statement has to be given
indicating the manner in which formal annual evaluation has been made by the Board of its own
performance and that of its committees and individual directors
b. As per section 169(1) of the companies act, 2013, a company can remove a director By Passing an
ordinary Resolution before the expiry of his term after giving him an opportunity to present his
case. This can be used in case director is not able to discharge his duties
c. As per section 178 of the companies act, every Listed Public Company and non-listed companies
having paid capital >= 10 crore or Turnover >= 100 crore or outstanding loans, debentures and
deposits >= 50 crore shall constitute a Nomination and Remuneration Committee. This committee
shall
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 i. Shall specify criteria for evaluation of directors and various committees and its
independent directors
ii. Recommendation regarding removal of directors
SEBI LODR Regulations
SEBI LODR regulations mentions the following which ensures that there is ownership of performance by
directors
a. Board shall Monitor Evaluation of Board of Directors
b. Board shall review and replace directors if they are not able to discharge their duties
c. Performance evaluation of independent directors shall be done by the entire board of directors
except those being evaluated

14. Keep a check on Political Interference: There must be some mechanism to ensure that
companies are answerable for their political affiliations and contributions to a political party.

As per section 182 of the companies act, 2013

a. A government company and company which has been in existence for less than three
financial years cannot make political contributions
b. Eligible companies may contribute any amount directly or indirectly to any political party
only if a resolution authorizing the same is passed at a meeting of the Board of Directors.
c. Every company shall disclose in its profit and loss account the total amount contributed by
it under this section during the financial year

The above regulations help keep a check on the political bias of company towards a particular
political party which can lead to political interference

15. Promoting Social Equality and Social Welfare: In India, there is lot of discrimination based on
various factors especially based on sex. The companies must ensure zero tolerance for sexual
discrimination. Moreover, companies shall try to give back to the society as social welfare is
one of the important pillars of corporate governance

Companies Act, 2013

a. As per section 151 of the companies act, all listed companies and unlisted companies
having paid up capital >= 100 crore or Turnover >=300 cr are required to have at least 1
women director. This ensures that sexual discrimination does not prevents the capable
women from reaching the top
b. As per section 135 of the companies Act, every company having net worth of rupees five
hundred crore or more, or turnover of rupees one thousand crore or more or a net profit
of rupees five crore or more during the immediately preceding financial year shall
constitute a Corporate Social Responsibility Committee of the Board consisting of three or
more directors, out of which at least one director shall be an independent director.
c. As per section 135 of the companies Act, the Board of every company mentioned in the
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 above point, shall ensure that the company spends, in every financial year, at least two per
cent. of the average net profits of the company made during the three immediately
preceding financial years on CSR activities. This ensures that companies commit
themselves to CSR activities
SEBI LODR Regulations

SEBI LODR regulations mentioned that there shall be at least one-woman director. This ensures
that sexual discrimination does not prevents the capable women from reaching the top

16. Compliance with Regulations: Making regulations is one thing but to ensure that there is
compliance is a difficult part of implementation on the part of government and regulators.
Organizations should always comply with regulations made by government and the
regulators

Companies Act, 2013

Under section 205 of companies act, 2013, it requires the company secretary to provide a report to
the board about compliance with the provisions of this Act. It is however pertinent to note that the
Act does not require the Board to confirm that they comply with all the applicable laws and
regulations, the requirement is to ensure that a system of compliance in defined and it is operating
effectively. What this means is that even if there are non-compliance, it is important that
appropriate and timely remediation’s are put in place to ensure that the non-compliance is
corrected and prevented from reoccurring in future
SEBI LODR Regulations
SEBI LODR Regulations
SEBI LODR Regulations mentions that a listed entity shall appoint a qualified company secretary as
the compliance officer. The compliance office shall ensure that listed entity conforms to all the
regulations

External Mechanisms are:

1. Financial Markets: Well-developed Financial markets act as a place companies with bad
corporate governance can be overtaken by better companies. This results in replacement
of bad managers. So, in this way bad corporate governance is punished. The role the
minority shareholders can play effectively. They can refuse to subscribe to the capital of a
company in the primary market and in the secondary market; they can sell their shares,
thus depressing the share prices. A depressed share price makes the company an
attractive takeover target. SEBI has taken various steps in last decade for the
development of financial markets.

2. Investor Education: Investor Education is especially important for activism by investors.

Sebi gad earlier invited applications from individuals and entities to be empaneled as
Securities Market Trainers (SMARTs) to shore up the regulator's investor education
initiative amid growing retail participation in the capital markets. There is also
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 mechanism for Investor Education and Protection Fund (IEPF) which is for promotion
of investors' awareness and protection of the interests of investors

3. Media and Society Pressure: Any wrongdoing is highlighted in media and prevent people
from indulging in wrong practices. Society can as a group make sure that bad corporate
governance is badly rejected through rejection of the products of that group, people
resigning from jobs of that company etc. Sucheta Dalal had exposed Harshad Mehta's
1992 Securities scam amounting up to Rs 1000 crore. Mehta was considered superstar
of the Indian stock market until the journalist shone light on his scams and was
eventually banished from the stock market. Mehta and few of his associates had
reportedly managed to siphon a walloping amount through interbank transactions.

4. Debt Covenants: A covenant is a promise in an indenture, or any other

formal debt agreement, that certain activities will or will not be carried out. Covenants in
finance most often relate to terms in a financial contracting, such as a loan document
stating the limits at which the borrower can further lend. These covenants prevent firms
from engaging in activities which are prohibited in the covenants

5. Annual Financial Statements also helps to ensure corporate governance is implemented.

a. As per section 129 of the companies act, 2013, at every annual general meeting of a
company, the Board of Directors of the company shall lay before such meeting financial
statements for the financial year.
b. As per section 136 of the companies act, a copy of the financial statements, including
consolidated financial statements, if any, auditor’s report, and every other document
required by law to be annexed or attached to the financial statements, which are to be
laid before a company in its general meeting, shall be sent to every member of the
company

6. Proxy Firms: A proxy firm (also a proxy advisor, proxy adviser, proxy voting agency, vote
service provider or shareholder voting research provider) provides services to
shareholders (in most cases an institutional investor of some type) to vote their shares at
shareholder meetings of, usually, quoted companies. This helps people high turnout in
voting and balance of opinions

7. External Audits: External Audits are an important mechanism to check for any fraud in the
company. The external auditors must be qualified and independent. Many a times
external auditors are at loggerheads with management because when auditors question
the management about their wrongdoings, the conflict initiates between them. Hence it is
especially important that management or the board shall not be able to remove them
easily.
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 a. As per section 139 of the companies act, an individual cannot be appointed as
auditor for more than one term of five consecutive years and an audit firm cannot
be appointed as auditor for more than two terms of five consecutive years.
b. There are also various guidelines with respect to Auditors such as rotation of
auditors to ensure that there is no long-term setting between management and
auditors
c. As per section 140 of the companies act, an auditor can be removed only after
sending an application to the Central Government and taking its consent. Once the
consent is obtained, a special resolution needs to be passed to remove the
auditor. A special resolution is the resolution, that is affirmed by the members of
the company by three-fourth majority. This ensures that if auditor is exposing the
wrong doings of the company the company shall not be able to remove him/her
easily.
d. As per section 141 of the companies act, a person shall be eligible for
appointment as an auditor of a company only if he is a chartered accountant. This
ensures only qualified people can be appointed as auditors
e. One cannot be appointed as auditor if he is
i. partner in the company
ii. person or a firm who has business relationship with the company
iii. A person who in full time employment in some other company
iv. A person convicted by court for a fraud or any other offence till 10 years
from date of conviction
v. A person who himself or his relative or partner is (holding securities of
more than 1 lakh) or (Indebted/Owes more than 5 lakhs to the company)
vi. All the above points ensure that no one who is having monetary or any
other relationship with the company can be appointed as auditor. This
ensures the independence of auditors

8. Competition: Competition from other firms force the companies to innovate and follow
best practices. Yes, sometimes it can lead to bad practices but if companies have good
intentions then they will do everything in line with corporate governance. Competition
commission of India ensures that no cartels are formed. The Competition Commission of
India ("CCI/Commission") imposed a penalty of INR 6.69 billion on four public sector
insurance companies in 2015 for causing an appreciable adverse effect on competition in
the health insurance sector. These companies had formed a cartel and sought higher
premiums from the Kerala government to implement insurance schemes in kerala

9. Rights and Protection to Shareholders: The rights and protection given to the
shareholders also helps in implementing good corporate governance. This has already
been discussed in the earlier section

Company Act, 2013

1. As per companies act 2013, shareholders play an important role in the appointment
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 of directors. An ordinary resolution is required to be passed by the shareholders for
the appointment
2. As per companies act 2013, Shareholders also have the right to attend and vote at
the annual general body meeting. Every company registered in India should comply
with the provisions of the Companies Act 2013.
3. As per companies act 2013, Shareholders have the right to call a general meeting.
They have a right to direct the director of a company to can all extraordinary
general meeting. They also can approach the Company Law Board for the
conduction of general body meeting, if it is not done according to the statutory
requirements
4. As per companies act 2013, shareholders are the main stakeholders in a company,
they have the right to inspect the accounts register and also the books of the firm
and can ask questions about the same if they feel so.
5. As per companies act 2013, Shareholders have the right to get copies of financial
statements. It is the duty of the company to send the financial statements of the
company to all its shareholders either in a quarterly or annual statement
LOD Regulations
1. Right to participate and right to be informed of decision regarding fundamental
corporate changes
2. Opportunity to ask questions to board of directors
3. Right to effective shareholder participation in key Corporate Governance decisions
such as nomination and election of board of directors

10. Pressure form Apex Financial Institution: The apex financial institution such as World
Bank and IMF needs to pressurize the countries which are weak in corporate governance
to improve their standards if they want help in terms of grants or loans form these
financial institutions

After the East Asian financial crisis in 1997, the interest of world bank in corporate
governance of Asian countries became very much evident. World bank made a
remined in G7 meeting in 1998 that unless the standard of corporate governance is
improved, financial crisis may reoccur. World bank endorsed OECD principles of
corporate governance and asked every country to follow these principles strictly.
World bank also warned that if these principles are not followed, no financial help
shall be provided. As a result of this, it was observed that many countries realized that
they would struggle if they do not improve corporate governance standards

11. Monitoring and Enforcement Agencies: No matter how much the regulations and laws
are made, there will always be defaulters. We as humans has a tendency of not complying
with the regulations till the time, they are enforced through implementing agencies which
instill fear of being exposed.

Companies Act,2013
a. The Government of India has set up the Serious Fraud Investigation Office (SFIO) in
the Ministry of Company Affairs (MCA) with effect from July 1, 2003 with an
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 objective to undertake the investigations under the provisions of the Companies
Act, 1956 for corporate frauds
b. Despite the SFIO came into existence over 10 years ago, it did not have the enough
teeth to deal with the fraudsters. However, the Companies Act 2013, which came
into existence on 29th August 2013 is more stringent and conferred more powers
to SFIO to effectively deal the fraud cases and people indulged in fraudulent
activities
c. The new act has empowered SFIO to carry out arrests, raids and seizure in respect
of certain offences of the act which attract the punishment for fraud
d. Further, as per the clause 212 of the companies act,2013, SFIO can investigate into
the affairs of the company on the intimation of special resolution passed by the
company or on the receipt of a report of the Registrar or inspector or in the public
interest or on request from any Department of the Central Government or a State
Government
e. This empowerment of SFIO will surely act as deterrent against the companies
indulged in fraudulent activities and in turn will help in building the confidence of
the stake holders
SEBI LODR Regulations
SEBI itself has many powers to investigate and punish any entity who does not comply
with the LODR regulations

12. Acts and Regulations made by Government and Regulators: These acts mainly drive the
corporate governance in India
a. Clause 49 of the listing Agreement by SEBI: The recommendation of the Kumar
Mangalam Birla and Narayan Murthy Committee constitutes the clause 49 of SEBI
listing agreement. We have already discussed about these committees in the previous
sections. The listing agreement is now replaced by SEBI LODR regulations discussed
below

b. Companies Act, 2013 by MCA: This act has gained prominence off late. Now this act
takes the lead in defining rules and regulation for Corporate Governance. We have
discussed all the relevant clauses/regulations under the company act, 2013 while
discussing about the internal and external mechanisms of corporate governance

c. SEBI LODR Regulations: Many of the clauses listed in clause 49 of listing agreement
by SEBI were not in line with the companies act, 2013. So, SEBI came up with Listing
Obligations and Disclosure requirements (LODR) which specifies various regulations
that companies need to comply with. In LODR regulations, sebi has tried to come up
with regulations which are in line with company’s law. We have discussed all the
relevant clauses/regulations under the LODR regulations while discussing about the
internal and external mechanisms of corporate governance
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 Please note that, as of now since listing agreement is replaced by SEBI LODR regulations,
the listing agreement shall not be mentioned as the act/regulation governing corporate
governance in India. We have included clause 49 of listing agreement in this document
just for completeness perspective

13.Challenges to Corporate Governance in India

1. Power of Dominant Shareholders/Family Ownership
2. Lack of incentives to companies to implement corporate governance:
3. Shortage of Independent directors who understand the business of the company:
4. Multiple regulators: A clear-cut separation of powers is not there between different
regulators which leads to unnecessary power struggle and showdowns. For example, the
authority of SEBI and MCA is not well defined.
5. Inadequate monitoring and response failure by regulatory authorities : The speed with
which regulatory changes have been brought in, the enforcement machinery has not been
strengthened with that speed.
6. Are Independent directors really Independent?
a. In most companies, the nomination committee, nominates independent directors
only with the approval of the promoter or controlling shareholder or the incumbent
management. Therefore, even today, the question ‘how independent are
independent directors’ remains valid. The mindset needs to change here. The
promoters need to give freedom to the board of directors and various committees
working under the board
7. Lack of succession planning and capital allocation mechanism: Companies have often
been found clueless about the successor of the founding directors. Most of the companies
lack good succession planning.
8. Lack of Diversity: Corporate boards lack diversity. The representation of other genders in
the boards is nominal. The company law mandates at least 1 women director in the board
of the company but that is just a symbolic representation and not something which can
really change the landscape with respect to participation of women in the board of the
companies.

14. Open Questions/Issues in Corporate Governance

There are still many questions/issued that needs to be addressed in corporate governance

1. Proportion of Independent Directors: There are different views on number of independent

directors. Some say 1/3rd of directors shall be independent whereas others say 50% of the
directors shall be independent. Actually, it we see carefully then it is not the number of
independent directors rather the quality of independent directors that matter.

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 2. Who shall be given more priority: There is confusion whether priority shall be given to the
shareholders (Anglo-American model) or it shall be given to workers, managers, suppliers
and customers (Continental and Japanese model)
3. What shall be representation of Women? Some people say women should have large
representation whereas regulations in India has mandated just 1 women director on the
board of listed companies. There is no doubt that women representation shall increase but
just mandating higher number of seats be reserved for women directors is not the solution.
The works needs to be done at grassroot level by promoting education for women and
promoting self-confidence in them
4. What shall be the Remuneration of Directors? Some will favour high remuneration and
some low. What is fair is a reasonable package of remuneration depending on the
qualifications, experience and value-added of the Director. All Directors should not be paid
an equal amount of remuneration
5. What shall be the degree of Government Control: Opinion differs on this issue, and many
are in favour of minimal control. It should be instructive to note that in case of India, after
the introduction of liberalization, the role of the government has become minimal, although
in some matters, legal tentacles are still strong. The constant frauds, scams and scandals
makes it necessary for government to have some say in these matters
6. Should there be a few big shareholders, or a large number of small shareholders scattered
over the whole country: large number of small shareholders increase the compliance cost,
and these may not have much combined power to challenge any decision. On the other
hand, the few big shareholders lead to monopoly of these shareholders and there is nobody
left to question them on crucial issues

8. Emerging Trends in Corporate Governance

1. In many countries including India, the role of the Board has been made more elaborate by
making management more accountable through the Audit Committee.
2. Another recent trend in the area of corporate governance is the increasing use of newer
and newer technology and communication system. This has considerably reduced the
problem of information asymmetry
3. There is now a growing trend of more external candidates becoming CEOs. These CEOs
will have a shorter tenure than internal CEOs and would have less inclination and contacts
to engage in frauds
4. Promulgation of corporate governance codes in public sector organizations also to make
them more efficient and accountable
5. In spite of RTI (Right to Information) Act in India in 2005, informers and whistle blowers
are being harassed. Recent recommendations are in favour of protecting the whistle
blowers to make the corporate governance more streamlined and trouble free

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 6. All forms of corporate disclosures are now the trend. Disclosures will make things more
transparent. In the list of disclosures, there are also disclosures of executive remuneration
and compensation
7. A recent trend in corporate governance is to make Audit, Nomination and Remuneration
Committees more neutral by bringing in independent directors. This will, perhaps, make
business activities more transparent and increase accountability.
8. Many corporations are now looking for a market for corporate governance services. Such
services are going to be outsourced in the near future. This may decrease cost and
increase efficiency.
9. All countries, especially India, are engaged in reforming company laws and tax laws in
accordance with the requirements of industrial growth and new responsibilities towards
corporate governance.
10. Corporate social responsibility (CSR) has now been accepted as one of the most
important agreed tasks of corporate governance all over the world.
11. One of the most important emerging trends in the corporate governance now is the
acceptance of a globalized standard of corporate governance. These standards as norms
are already set by the OECD. Many of the world countries have opted for this standard in
recent years.
12. It is trend now to look for people for the position of independent directors based on
their qualification and experience than based on acquaintance
13. Media has become more vigilant
14. Investor education is now a top priority

15. Corporate Social Responsibility (CSR)

Being a good corporate citizen means that companies have to be internally well governed
through corporate governance and externally responsible through CSR. As the cliché goes,
charity begins at home and hence corporates need to ensure that their internal governance
models are robust before they embark on CSR. In other words, CSR and corporate governance
are two sides of the same coin

Corporate Social Responsibility can be explained as:

• Corporate - means organized business

• Social - means everything dealing with the people
• Responsibility - means accountability between the two CSR has become an established part of
the global corporate landscape. It means when a corporation goes beyond making profit and
engages in actions that results in social good.

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 15.1. Government Mandate for CSR
Companies with a net profit of RS 5 crore should spend 2% of their average profit in the last three years
on social development-related activities such as sanitation, education, health care and poverty alleviation,
among others, which are listed in Schedule 7 of the rules

15.2. Need for CSR

The resources and abilities of governments in the developing world are limited. Organizations (Public or
Private), therefore through CSR can play vital role in supporting government in the development
process. Apart from this, it also helps as-

• Creates a favorable public image

• Encourage social involvement of employee
• Coalescing societal and organizational goals
• Gives greater freedom and flexibility in decision-making
• Encourages co-operative attitude and healthy competition

15.3. Issues with CSR

▪ Eyeing profit and displaying greed:
▪ Lack of specialists:
▪ Transparency Issues: NGOs or local agencies do not disclose the information about their
programs, address concerns, assess Impacts and utilize funds. This lack of transparency
creates an indelible impact on the relationship and trust between the companies and local
communities which is the key to the success rate of any CSR initiative
▪ Geographic equity: Five states: Maharashtra, Gujarat, Andhra Pradesh, Rajasthan, and Tamil
Nadu account for well over one quarter of all CSR funding. Towards the bottom of list are
Nagaland, Mizoram, Tripura, Sikkim, and Meghalaya-all from North-east. It reflects the
inclinations, interest, and priorities of the business sector.

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