Indian corporate governance is based on a relatively elaborate statutory-regulatory framework established on the basis of the Companies Act, 2013 and SEBI Listing Obligations and Disclosure Requirements (LODR) but it continues to be plagued by problems such as the dominance of the promoters, the lack of autonomy on the board, and the absence of enforcement. Notwithstanding the ongoing reforms and the growth in shareholder activism, the repetition of corporate frauds, abuses on parties, and position of compliance indicates that formalizing the rules into actual ethical governance is still a significant challenge.
Concept and Evolution
Indian corporate governance can be defined as the set of rules, practices, and procedures under which companies are governed and controlled and focus on accountability to the shareholders and other stakeholders. It has also developed to be more of a disclosure-light, promoter-focused regime in 1990s to a much more organized model with global best practice and high profile scandals such as Satyam that triggered stronger regulation.
The initial stage was largely based on voluntary codes and Clause 49 of the listing agreement, which brought in some simple board and disclosure standards.
The statutory responsibilities of directors, board committees, and the CSR post-2013 portend a trend towards stakeholder-based governance.
Core Legal Framework
The Indian companies benefit of corporate governance norms based on the Companies Act, 2013, which governs the composition of boards, responsibilities of directors, audit committees, and compulsory CSR of the qualifying companies in relation to section 135. In the case of listed entities, SEBI LODR Regulations, 2015 (amended in 2023-24) superimposes specifications on independent directors, related-party transactions, disclosure and shareholder rights in more detail.
Key elements include:
Board structure and role: Statutory fiduciary obligations, good faith obligations, board meeting obligations, audit, nomination and remuneration committees obligations. structure and role: Statutory fiduciary duties, good faith duties, board meeting duties, audit duties, nomination and remuneration duties.
disclosure and transparency: Interim financial performance, disclosure of material events and specific disclosure of RPT approval/disclosure mechanism under LODR.
Regulation: SEBI of listed companies, the ministry of corporate affairs (MCA) and Registrar of companies of corporate compliance, and Competition Commission of India on combinations and unhealthy competition practices.
The Institutional and Regulatory Developments.
The past years have experienced an ever increasing restrictive measures in terms of governance standards, especially following the occurrence of numerous instances of governance failure in listed companies. The reforms have concentrated on the enhancement of independent appointment of directors, improvements in the examination of related-party dealings, digitisation of compliance, and better traceability and enforcement services.
Changes on corporate governance of listed entities by SEBI in 2023-24 raised the disclosure requirements of RPTs and refined the role of audit committee in doing so
Digital activities and Competition (Amendment) Act, 2023, have simplified filings, reduced time frames to control mergers and expanded the amount of anti-competitive agreements, indirectly strengthening the expectations of governance.
Significant Practice Issues.
Regardless of this thick structure, there are a number of structural and behavioural issues that erode successful application of corporate governance norms in India. The control of boards with concentrated ownership and promotion is likely to result in tunnelling the resources at the expense of the minority shareholders and lacks transparency in board control due to lack of independence of the boards and promotion.
Key challenges include:
Board independence and quality: There are numerous independent directors who are not genuinely independent or who may be under pressure to be removed or who may belong to a limited pool, which may limit their monitoring function.
Lack of transparency: ineffective or slow disclosure particularly in financial reporting and transactions involving related parties diminish investor confidence.
Weak enforcement and compliance culture: Formal compliance is more often than not a box-ticking exercise and regulatory penalties and prosecutions are disproportionate and slow to accomplish.
Lack of ethics and fraud: The frequent cases of financial maneuvering and misplacing of funds reveal that the law is not enough to substitute an ethical organizational culture.
Emerging Trends and Way Forward.
You have shareholder activism, made significant by or through institutional investors, proxy advisory firms and enhanced access to information, that is an increasingly significant counter to the promoter dominance in India. Meanwhile, expectations based on ESG, real-time disclosure technological tools and global capital market demands are pushing Indian companies to prefer more substantive governance practices to purely formal compliance ones
Enhancing independence, diversity and performance evaluation of boards will play an important role in enhancing oversight.
The gap that exists between the law on paper and governance on the ground can be addressed through improvement of the enforcement capacity, protection of the whistle-blowers and inculcating a culture of ethics and accountability.
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