[Opinion] Importance and Values of Corporate Governance

[2022] 140 taxmann.com 460 (Article)

Introduction

Corporate Governance is about commitment to values, ethical business conduct and about promoting corporate fairness, transparency and accountability. Good governance is important for all organisations which have public investment be it by way of listed shares or other listed securities like debentures etc. Since the debt instruments are issued to the public at large and listed, there is a need to comply with the governance norms applicable under the Companies Act and under SEBI Guidelines. The Institute of Company Secretaries of India defines “Corporate Governance” as

“Corporate Governance is the application of best management practices, compliance of law in true letter and spirit and adherence to ethical standards for effective management and distribution of wealth and discharge of social responsibility for sustainable development of all stakeholders.”

Regulatory reform

Both Ministry of Corporate Affairs as well as SEBI has amended and implemented various policies and processes and the companies especially listed entities are striving to implement these policies and comply with the provisions of the Companies Act, 2013 and SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015. These regulations were further strengthened by recommendations of the Kotak Committee and SEBI has subsequently upgraded and amended these guidelines. The SEBI has been updating these guidelines in order to attract global investments, curb corruption and strengthen corporate governance. These regulations will also be strengthening the role of independent directors and ensure active participation in board meetings, promote diversity, improve disclosure standards, address accounting and auditing issues, increase the onerous responsibilities of Internal auditors and Statutory auditors and protect shareholder interests.

Role of Board of Directors

The Board’s composition, leadership and independence act as a guiding and supporting system for the management in taking decisions, particularly during difficult times and ensuring that the company emerges from the crisis stronger and able to respond to the changes.

Board Diversity: It was made mandatory to have at least one independent women director for all the listed entities. Institutional Shareholder Services (ISS) will vote “No” on the re-election of Nominating and Governance Chairman if their company does not have at least one woman on their board.

Role of global proxy advisory Firm

Global proxy advisory firms are representing institutional investors who have big equity holdings in several corporates in India. In the event, they feel that in any of the entities, corporate governance is lacking or substandard in any issue, they may vote against the concerned resolution which is causing poor corporate governance. For example, It is pertinent to mention here that when Mr. Deepak Parekh got barely a majority vote in a resolution seeking his contribution as director in the HDFC Limited. He got only 77.3 % voting as against the minimum of 75%. This has happened because these proxy firms voted against Parekh since they felt that Parekh already held the position of a Director in 9 companies and they felt that he cannot give sufficient time to the cause of shareholders of so many companies. This may also be attributed to as poor governance and thus the proxy firm did not favour the resolution for reappointment as director in HDFC.

Some of the important provisions under the Companies Act 2013 concerning Corporate Governance are as follows:-

(a) Company to have Board of Directors (Section 2(10) & Section 149) and manner of selection of independent directors and maintenance of databank of independent directors (Section 150)
(b) Number of directorships (Section 165) & Appointment of directors elected by small shareholders (Section 151)
(c) Disclosure of interest by a director (Section 184) & Duties of directors (Section 166)
(d) Related Party Transactions (Section 188)
(e) Directors’ Responsibility Statement [Section 134(5)]
(f) Prohibition on forward dealings in securities of company by director or key managerial personnel (Section 194)
(g) Prohibition on Insider Trading of Securities (Section 195)

Related Party Transactions

As far as Related Party Transactions (RPT) are concerned, the regulators made various amendments in the Companies Act, 2013 and Listing Regulations to align the requirements prescribed under the two. Notably, the omnibus approval by Audit Committee for repetitive RPT. Section 188 of the Companies Act, 2013 contains the provision relating to RPT i.e. transactions specified in the section with any person who falls within the definition of “related party” as per Section 2(76) of the Act. Further, Section 185 of the Act deals with loans to directors and to certain other parties in which Directors are interested. Section 192 deals with the restrictions in respect of non-cash transactions with Directors and certain other specified persons.

On the basis of the recommendations of the working group comprising members from the Primary Market Advisory Committee, SEBI as per Notification dated 9th November, 2021 has further amended provisions relating to RPTs under the SEBI Listing Regulations. These amendments are applicable in a phased manner i.e. certain amendments came into effect w.e.f. 1.4.2022 while the remaining amendments will be effective from 1st April, 2023. It is obvious that the promoter or the promoter group may exercise control over and influence the decision-making of the listed entity. Accordingly, the amendments were made to consider every person or entity forming part of the promoter or promoter group, irrespective of their shareholding in the listed entity, as a related party. The existing provisions consider any person or entity to be a related party if he/she or it belongs to the promoter or promoter group of the listed entity holding 20% or more of shareholding in the listed entity. But the amended regulations consider any person or entity to be a related party if he/she /it is belonging to the promoter or promoter group of the listed entity i.e. irrespective of the shareholding OR If any person or entity is holding 20% or more equity shares either directly or on a beneficial interest basis as per Section 89 of the Companies Act, 2013 at any time during the preceding financial year and effective from 1st April, 2023 if any person or entity is holding 10% or more of equity shares at any time during the immediately preceding financial year. It is to be noted that this amendment will cover persons or entities holding shares as above even if he/it does not form part of the promoter or promoter group of the listed entity.

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