No meaningful attempt to improve corporate governance in India can begin without learning lessons from the biggest corporate fraud in the country — by Satyam, which drew attention to systemic flaws in India’s corporate governance framework and practices. The company won great accolades for being exceptionally well-governed, was listed on different global exchanges and was audited continuously by one of the best known international audit firms. However, the majority shareholder perpetuated fraudulent transactions and manipulated the entire activities of the company in his own selfish interests, bypassing all components of the then prevalent corporate governance framework.
The Standing Committee on Finance wants to plug all loopholes in the legislation and proposed an elaborate control mechanism in ‘The Companies Bill, 2009’ in its 21st report submitted recently to Parliament. The changes proposed in the Bill include provisions for speedy incorporation with detailed disclosures at the time of incorporation, restrictions on companies in mobilising funds from the public, specifying legal sanction of accounting and auditing standards, and a modified legal framework for regulating insolvency, liquidation and winding up.
Important changes have also been suggested in the corporate governance framework, such as incorporation of guidelines issued on the subject and the Listing Agreement prescribed by Sebi for listed companies, though the guidelines may be voluntary for unlisted companies. There are suggestions for separation of the offices of the chairman and chief executive officer, and the roles, responsibilities, qualifications and procedure for appointment of independent directors and their rights and liabilities are specified.
The proposed change may explicitly provide for a mode of appointment of independent directors in which the management has no role, to enable independent directors to function objectively. The ministry of corporate affairs may possibly maintain a panel, from which companies can choose independent directors. The need for a procedure for the appointment of competent independent directors and for ensuring that they function objectively in the interest of stakeholders cannot be ignored.
The amendments suggested in the Bill seek to enhance the mandate and role of the existing National Advisory Committee on Accounting Standards (NACAS), giving it additional regulatory powers to oversee, monitor and enforce compliance with applicable auditing and accounting standards and quality of audits undertaken across the corporate sector. Objective and transparent procedures for empanelment of eligible auditors, allocation of audit assignments, and some oversight mechanism similar to public sector undertaking (PSU) audits by the Comptroller and Auditor General of India (CAG) may improve the quality of audits. Some of the other best practices followed by the CAG in PSU audits — rotation of auditors, joint audits for major audits, and prohibition on taking jobs that come in the way of independence of audits — are significant measures towards effecting good corporate governance.
Explicit provisions are intended for ensuring protection of minority shareholders and small investors. They may enable shareholders’ associations and groups to take legal action in case of fraud by companies. The director of a company, if found defaulting on payment of interest to depositors, may be disqualified for future appointment. It is recommended that the source of the promoter’s contribution must be disclosed in the prospectus, there should be stricter rules governing acceptance of deposits from the public by bigger and solvent companies, and changes in the stake of the promoters or top 10 shareholders beyond certain limits must be disclosed to the Registrar of Companies.
Separate disclosures are required to be made by companies in their annual report indicating company policy as well as specific steps taken. In order to safeguard investors from corporate delinquency, one-person companies, private companies, Limited Liability Partnerships and subsidiary companies may be prohibited from having further subsidiaries. The source of the promoter’s contribution is required to be disclosed, and the main objects of a public offer mentioned on the first page of the prospectus. The committee has emphasised that procedural defaults should be viewed in a different perspective from fraudulent practices. To promote shareholder democracy, it wants the system of proxy voting to be discontinued, and the quorum for company meetings fixed higher than the proposed five members.
An appropriate legal and regulatory framework ensuring a high degree of corporate governance, as is being proposed, is expected to create a strong foundation for effective corporate governance. The experience so far has been that dominant shareholders manage to govern companies in their own interests. Adequate internal control mechanisms, strengthening of internal audits, enforcement of applicable regulations through creation of an effective overseeing authority, prescribing specific measurable performance indices for evaluating the quality of governance and effective monitoring and evaluation are, no doubt, vital steps towards improving corporate governance.
Besides being an indispensable ingredient for good governance, corporate social responsibility and sustainable development concerns can also be mentioned in the new legislation to safeguard the rights of shareholders and interests of other stakeholders, including the community at large. Shareholders respond positively to corporate philanthropic acts that go beyond the legal framework for community development.
The author is director-general in the CAG’s Office. The views are personal
