Understanding "Corporate Governance"?

Company Law is very very complicated and interesting. If we look at all the corporate regulations or law, it is very clear that it focuses mainly on the interests of the shareholders. The liability of the members is limited in limited companies and as such the shareholders will be clueless often when their investment in the Company is not properly managed.

While the professionals use the term “Corporate Governance” with its relevance, many use the term “Corporate Governance” generally and emphasizing on good governance. While it is true that the “Corporate Governance” is meant to provide “Good Governance” in the Company, there is a specific way to understand the term “Corporate Governance”.

The term “Corporate Governance” is used in Listed Public Companies as they need to comply with the “Corporate Governance” commitments agreed with the Stock Exchanges. The term “Corporate Governance” is specifically used under clause 49 of the model listing agreement to be entered into with the Stock Exchanges and the violation of which may lead an action by the Stock Exchange to de-list the company’s shares.

While we look at the logical understanding and analysis of “Corporate Governance”, we need to look at the corporate set-up in brief and have an understanding of the law or the regulations governing different kinds of companies. While the provisions of Companies Act, 1956 provides certain kinds of companies like company limited by shares, company limited by guarantee, an unlimited company, a company incorporated under section 25 and a producer company etc; the concept has become vague with describing companies based on certain elements like “Family Companies”. For the purpose of getting a basic understanding as to the law or regulations governing the Companies in India, we can consider following kind companies. 

a)    A Private Company Limited by Guarantee.

b)    A Public Limited Company.

c)     A Listed Public Company. 

The basic set-up and the concept of company is as follows: 

1)    The term “Company” is defined under section 3 of the Companies Act, 1956 as “a company which is registered under the provisions of Companies Act, 1956”.

2)     Every Company should provide the basic information as to its share capital, the name, the registered office, the objects, initial subscribers, the authorized share capital, the directors and especially the chosen regulations. Every Company provides the basic information as referred to above by filing “Memorandum” and “Articles of Association”. Memorandum contains very basic and important information about the Company as everybody knows.

3)    The Company is managed by professionals called directors and they are entrusted with certain powers to conduct the day-to-day affairs of the Company.

4)    Every Company is supposed to conduct a meeting of all its shareholders and it is called “Annual General Body Meeting”.

5)    The shareholders are conferred with certain vital powers in the Company and even the Board can not usurp the powers of Shareholders at times.

6)    Thus, certain decisions in the Company are taken by the Board and certain decisions are taken by shareholders in the Annual General Body Meetings.

7)    Every Company is supposed to provide certain vital information about the company in the form of final reports to the shareholders like Annual Report and Financial Statements like Balance Sheet and Profit & Loss Account.

8)    The Registrar of Companies, the Central Government, the Company Law Board and the Company Court discharges various responsibilities in regulating the Companies.

9)    Important changes, events and data are filed by every company with the Registrar of Companies and those are accessible by the shareholders.

10)           Other professionals like Chartered Accountants and Company Secretary discharge their responsibilities in the Company for the protection of the shareholders and compliance of corporate regulations. 

Thus, basically, a company is a complicated and well regulated set-up with ultimate motive of business expansions and the interests of shareholders. 

Now, let us look at the regulations governing various kinds of companies in brief.

Private Limited Companies: 

Regulated by the provisions of Companies Act, 1956, the regulations of the Company in the form of Articles of Association and the Central Government rules as applicable. 

Public Limited Companies: 

Regulated by the provisions of the Companies Act, 1956, regulated by the Articles of Association, regulated by the Central Government Rules, regulated by the Accounting Standards issued by ICAI etc. 

While both the Private Limited Companies and Public Limited Companies are governed by the provisions of Companies Act, 1956, Private Limited Companies are relaxed from many provisions and Private Limited Companies are given liberty to modify certain provisions by having a regulation in the Articles.  The difference is from application point of view. 

Listed Public Companies: 

Regulated by the provisions of Companies Act, 1956, Articles of Association, the SEBI regulations, Central Government rules, regulations of Stock Exchanges to some extent like complying with the listing agreements, Accounting Standards issued by ICAI etc. 

We can see the clear difference among the regulations governing Private Limited Companies, Public Limited Companies and Listed Public Companies. The difference is due to their exposure to the market and the interests of shareholders. While the Private Limited Companies are not allowed to solicit investment from the public by issuing prospectus or advertisement etc., the Public Limited Companies are allowed to issue a prospectus or advertisement soliciting investment from the public. The listed companies tend to attract more capital in view of the well regulated primary market and the option of easy transfer of shares in the secondary market.

Now let us look at the issue of Corporate Governance. Every Company which has opted to list its shares in the recognized Stock Exchanges should enter into a listing agreement and non-compliance of the terms and conditions of the agreement can lead to a stringent action by the Stock Exchanges like de-listing of shares. 

Clause 49 of the listing agreement to be entered into by the listed companies with the Stock Exchanges refers to certain conditions under the heading “Corporate Governance”. The said clause 49 mandates various conditions to be complied with by the Companies under the head “Corporate Governance”. Thus, it is specific to the Listed Public Companies though the word “Corporate Governance” is used in general and as a synonymous to “Good Governance”. 

We know the authority of SEBI over listed public companies. In view of section 55A of Companies Act, 1956, SEBI governs certain issues like issuance of shares etc. SEBI issues very very detailed regulations governing the Listed Public Companies with frequent changes, amendments and introductions with the ultimate object of regulating the capital market or protecting the interests of investors/shareholders. 

Though, the SEBI regulates the companies on certain issues, the shares are listed actually with the Stock Exchanges and trading takes place there as we know. As an additional protection to the shareholders, Stock Exchanges are permitted to impose additional conditions to be complied with by the listed public companies and the listing agreement is one among them.

The listing agreement to be complied with by all the listed companies, though lists out many conditions, clause 49 occupies significance. Clause 49 of the listing agreement emphasizes on executive directors, composition of directors, independent directors, disclosures by non-executive directors and their compensation, provisions as to committees like Audit Committee, Code of Conduct, some additional disclosures, CFO/CEO certification and a report on Corporate Governance etc.

The logic behind the further conditions on the listed companies under clause 49 of the listing agreement is just a further effort to eliminate the loopholes and for the protection of investors/shareholders. 

The provisions of Companies Act, 1956 itself deal with the rights of the shareholders, the responsibilities of Board, the books to be maintained by the Company, the reports to be filed with the statutory authorities like Registrar of Companies, the financial statements, the clear bifurcation of powers with sound logic and a mechanism for the protection of the interests of the shareholders and frauds inside.  We have a mechanism for the enforcement of the provisions of Companies Act, 1956, but, a need was felt for further stringent regulations and specialist enforcement agencies in view of the market participations and the stakes involved. This is the logic behind establishment of SEBI and various connected regulations governing listed companies including listing agreements to be entered into with the Stock Exchanges. 

The SEBI or Stock Exchanges may not have the power to enforce the provisions of Companies Act, 1956, but, it is not right to say that the Company Law Board or the Company Court can not enforce SEBI regulations etc. though it is followed as a practice.

After Saytam Episode, everybody focused and criticized at “Corporate Governance” regulations.  But, there always exist a limitation. The listed agreement refers to the appointment of independent directors, but, how can we expect that an independent director, being a human being, is impartial always.  These are all the limitations and upon which nobody can have any control. When the auditors of Satyam were attacked, the ICAI has rightly focused on the limitations on auditing as I feel. There are standards and law as to how the auditors should audit the accounts of the Company. It may be standard governing Chartered Accountants that they should find the truth in the averments in a document or a particular transaction. The standard may be ideal, but, it is not possible practically. This can be a limitation on auditing. Likewise, there tend to be limitations on “Corporate Governance” too. 

We have been working so hard to strengthen our regulations further and ensure the safety of the investment of shareholders/investors. It will be a continuing process as ICAI and ICSI always focuses on the new areas upon which they can prescribe standards.  Some obsolete regulations will go, some regulations may get amended and new regulations may come in the course.

I am of the strong opinion that our listed companies are well regulated though the issues of insider trading, inter-company transactions in violation of regulations, non-disclosures, oppression and mismanagement will remain always and to be tackled carefully.

 Note: My intention to provide a basic understanding of “Corporate Governance” and I am aware of the complicated issues and the vastness of the subject.