Evolution of Corporate Governance in India

Corporate Governance points to a set of principles and systems by which a company is governed and to a large extent, a set of mechanisms through which outsider investors protect themselves from expropriation by insiders.

Corporate Governance has been gaining momentum across the world due to miserable corporate failures, unethical business practices and insufficient disclosure etc.

Although achieving world-class corporate governance may seem to be a complicated effort, it doesn’t have to be. A strong framework is the start. The principles of the framework goes as follows:

  • Conducting the business in a fair manner
  • Being transparent in all the transactions
  • Transparency in making decisions
  • Complying with all the laws
  • Accountability and responsibility towards stake holders
Investing in Ethical Corporate Culture is must for longterm growth of India & Corporates themselves

History of Corporate Governance in India

  • From 1947 through 1991, the Indian Government pursued markedly socialist policies when the state nationalized most banks and became the principal provider of the capital.
  • Due to the financial crisis in 1991, the Securities Exchange board of India (SEBI) was formed in 1992 which regulated the securities in India.

The need for the capital led to many corporate governance reforms and many initiatives were launched since mid 1990s

  • The first major initiative was taken by Confederation of Indian Industry (CII). The CII released its final document titled “Desirable Corporate Governance: A code” in 1998, which was voluntary, contained detailed provisions and focused on some listed companies

From the report of the committee appointed by the SEBI on Corporate Governance under the leadership of K.Birla, it was felt that India needs a statutory rather than a voluntary code.

  • The Second initiative was taken by SEBI, which had setup a committee under K. Birla to promote the standards of Corporate Governance. Later, the SEBI board accepted the recommendations of the report and incorporated into Clause 49.
  • The third initiative was taken by the Naresh Chandra Committee, which was appointed by Ministry of Finance and Company Affairs in August 2002.
  • The fourth initiative was in the form of recommendations of Naryana Murthy Committee, appointed by SEBI to review Clause 49. The Naryana Murthy committee report pointed many more developments for standards of Corporate Governance

India’s Corporate Governance reform did not cease after the adoption of Clause 49.

  • In parallel, the review of The Companies Act, 1956 was taken by Ministry of Corporate Affairs (MCA) in2004 under the chairmanship of J.J.Irani. Based on Irani’s report, the government introduced the Companies Bill which was introduced in parliament as The Companies Bill,2009.

In January 2009, the Indian Corporate Community was taken to shock by a massive accounting scandal involving Satyam Computer Services, one of the India’s largest IT companies. As a consequence, India’s ranking by the CLSA slid from third to seventh in Asia.

The CII task force recommended changes in Corporate Governance reforms. In addition to CII, many groups are formed and came forward with recommendations in the reforms of corporate governance. The National Association of Software and Services Companies (NAASCOM), chaired by Mr. N. R. Narayana Murthy also formed a Corporate Governance and Ethics Committee.

In 2010, the NAASCOM issued its recommendations in 2010. Additionally, the Company Secretaries of India (CSI) also had put forth a series of recommendations in the reforms. Based on all the recommendations the Companies Bill, 2013 was introduced in the parliament.

Although achieving world-class corporate governance may seem to be a complicated effort, it can be achieved with a strong framework,  collaboration with all stakeholders and continuous feedback implementation.

Coming up: Challenges in Corporate Governance in Indian scenario.

This post is a part of “Good Governance Yatra Series”.