A few columns ago, I wrote about the G20-OECD principles and the impact these have had on Indian Corporate Governance (CG) regulations, which (“Putting principles into practice”, February 19) prompted some to write and ask, how we got till here. This column provides a snapshot of this journey.
First generation
The journey began in 1997 with the Confederation of Indian Industry setting up a task force under Rahul Bajaj to look at CG. The final report, with a quirky title, “Desirable Corporate Governance: A Code”, was presented a year later, in 1998, and introduced the concept of CG to Indian markets. It shied away from defining CG, focusing instead on a few elements — transparency, disclosures, boards, etc. It did recognise that “corporate governance goes far beyond company law” — something usually forgotten.
A year later, the Securities and Exchange Board of India (Sebi) formed a committee with Kumar Mangalam Birla in the chair. Its recommendations focused on two aspects, concentrating on boards’ responsibilities and pushing for better disclosures. It introduced the audit committee, the board composition with the need for independent directors. It also spoke of the need for quarterly reporting and the annual report containing an MD&A (management discussion and analysis) section.
Most of its recommendations were presented as mandatory — enforced on companies in a phased manner — as the committee was of the view that “a statutory rather than a voluntary code would be far more purposive and meaningful”.
These recommendations, better known as Clause 49, were incorporated into the Listing Agreement and rolled out between 2000 and 2003.
Second generation
Even as the Listing Agreement was being applied, the Enron scandal and a number of other accounting scams rocked the US corporate establishment. The US quickly overhauled its accounting rules and investor protection oversight through the Sarbanes-Oxley Act of 2002.
This led to a series of reviews of the CG landscape in India. The first of these was the Naresh Chandra Committee, with a strong focus on the accounting framework — auditors, their appointment, fees, audit committees, etc. This was followed by the 2003 Narayana Murthy Committee to review the progress of the Kumar Mangalam Birla Committee and strengthen disclosures, and then the 2005 J J Irani Committee, to look at CG in the context of the proposed revision of the Companies Act, 1956. The recommendations broadened the remit of CG — for example, risk management, related party transactions — and deepened our understanding of issues.
Third generation
The next wave of reforms hit after the Satyam scam in 2009. While industry viewed the Satyam scam as a one-off and cautioned against over-regulation, a series of regulatory changes — including the appointment of a qualified chief financial officer, timelines on disclosures and rotation of auditor (albeit voluntary) — were brought in. Unaccepted suggestions of the earlier committees were incorporated into codes, several of which subsequently found their way into regulations.
The Satyam scam was significant because it highlighted the primacy of good governance practices. Till it happened, governance had remained an amorphous idea. That scam quantified the cost of its failure.
Fourth generation
The fourth generation of CG is driven by two specific themes: the emphatic use of regulation to enforce governance practices; empowering different stakeholders to assert their rights.
The Companies Act, 2013, implemented in 2014, has completely modernised corporate law in India. It is far more current than its half-a-century-old predecessor, and focuses on the CG agenda and aligning these to the G20-OECD guidelines. Some of what has been incorporated includes:
- Roles and responsibilities of the board
- Definition of an independent director
- Granular disclosures regarding CEO compensation
- Mandatory auditor rotation
- Tenure of independent directors
- E-voting
- Approval of related party transactions by the audit committee, and of majority of minority shareholders under specified situations
- Two per cent of profits to be spent on corporate social responsibility (comply or explain)
- One woman director on the board
- Permit class-action suits against the board
- A National Financial Reporting Authority
Some of these provisions are the global best in class.
Afra Afsharipour from UC Davis School of Law provides a detailed account of this journey in her India CG Handbook.
Last December also saw the Sebi (Listing Obligation and Disclosure Requirements) Regulations, 2015, getting notified: It is the consolidation of the compliance requirements by every listed entity into a single document across various types of securities listed on a stock exchange. While several of the requirements are aligned with the Companies Act, 2013, there are several that are more stringent.
Stepping back and looking at the arc of regulatory changes, three elements stand out. One, to begin with, regulators have viewed CG as something you cannot regulate and have usually prescribed best practices. Companies have pushed back citing the letter, and not the spirit, of the then law. It is only then that CG practices have had to be codified. Two, regulations have increasingly come to rely on disclosure as an enforcement tool: publicly disseminating information will create comparability, thereby fostering an environment of competitive behaviour that serves shareholders and the CG agenda. In addition, they propagate robust internal controls to provide stronger oversight to rein in promoters. Three, there is a shift in the thinking of how better governance will be achieved. In the first blush, regulations dealt with the rights and responsibilities of companies. Today, the focus is on the rights of stakeholders.
Now, while the environment itself demands better governance, many companies, like mobile phone users, are yet to upgrade themselves.
The writer works with Institutional Investor Advisory Services of India Limited.
The views are personal
Disclaimer: These are personal views of the writer. They do not necessarily reflect the opinion of www.business-standard.com or the Business Standard newspaper
