Panda / The Evolution and Current Revolution of Company Law & Corporate Governance
THE EVOLUTION AND CURRENT REVOLUTION OF COMPANY LAW & CORPORATE GOVERNANCE Biranchi Narayan P. Panda ABSTRACT History has always witnessed about several frauds and scams in corporate sectors throughout the world. The only answer to these failures was lack of good corporate governance initiatives by the countries. In India, since 1990s, the regulators, policy makers and lawyers continuously and effortlessly have been working for the better corporate governance& economic development. As result, the Companies Act 2013 and Securities Law Amendment Act 2014 have reframed several weak corporate governance norms & bring new provisions to uplift the corporate sectors. But it is interesting to watch, how much these new laws and policy guidelines help corporates to grow. This short article divided into three parts, first part; discuss about the development of corporate governance, second part; explain about the recent development in corporate governance particularly after the Companies Act 2013, and final part of the paper discuss about the new initiatives taken to keep a tap on corporate frauds & scams.
I. INTRODUCTION Governance is a word, which was rarely used by corporates few decades back. Now, all most all the organizations starting from companies to universities, local authority and charity follow governance to run their organizations with particular emphasis on its accountability, integrity and risk management. Majorly, corporate governance is a combination of three aspects, such as company’s management, its shareholders & stakeholders and its board.1 The objectives of the company and the process to achieve those objectives, the active role of corporate governance is essential in order to attain and
Mr. Biranchi Narayan P. Panda, PhD Candidate, Jamia Millia Islamia, New Delhi & Senior Consultant, Indian Institute of Corporate Affairs (IICA). Email:
[email protected] 1 Stijn Claessens and Burcin Yurtoglu, Corporate Governance and Development-An Update, Global Corporate Governance Forum, International Finance Corporation, 2012, Focus 10. Available at http://www.ifc.org/wps/wcm/connect/518e9e804a70d9ed942ad 6e6e3180238/Focus10_CG%26Development.pdf (Last visited on November 6, 2014)
ISSN (O): 2278-3156
Vol. 4 No. 2 July 2015
345
International Journal of Law and Policy Review (IJLPR)
monitor the performance of the company. 2 In other words, Corporate Governance is about promoting corporate fairness, transparency and accountability.3 Basically, two reasons were responsible for highlighting the corporate governance in all over world. First, the wave of financial crisis in 1998 in Russia, Asia, and Brazil affected seriously the economies and destabilize the global financial system. Secondly, the growing corporate scandals in United States and European countries due to bad corporate governance adopted by corporates. In India, especially after Satyam fraud, corporate governance has gained a lot of importance and the companies has started giving special attention on transparency, stability and desired growth. Further, due to the rapid pace of globalization and liberalization, the companies has adopted some improvised standards of corporate governance as well as introduced new techniques and strategies for better performance in business. To bring financial stability in the companies, both the policy makers and business manager emphasized on the importance of corporate governance, in order to reduce frauds and malpractices. In international level, OECD and World Bank continuously worked upon better corporate governance and adopted a set of principles to strengthen corporation. Similarly, in India there were several reforms taken through a number of different paths from the Security and Exchange Board of India (SEBI) and the Ministry of Corporate Affairs, Government of India (MCA) to improve the corporate governance.4 The recent Companies Act, 2013 is one of the best step taken towards to enhance the corporate governance norms in India. This paper focus on the new development and emergence of new Companies Act 2013 and the good practices incorporated in this Act. IMPORTANCE OF CORPORATE GOVERNANCE Good corporate governance is utmost crucial for the emerging countries as well as developed countries to achieve its economic goals. Here the developing countries market known as ‘emerging markets’, where the markets are more imperfect and suffer from greater informational deficits 2
OECD Corporate Governance Principles, OECD 2004. Available at http://www.oecd.org/ corporate/ca/corporategovernanceprinciples/31557724.pdf (Last visited on November 05, 2014). 3 Kartikey Koti, Corporate Governance in India: An Impression, 1 (2) International Journal of Research in Management & Business Studies at 66 (2014). Available at http://ijrmbs.com/vol1issue2/1/kartikey_koti.pdf(Last visited on November 06, 2014. 4 Afra Afsharipour, Corporate Governance Convergence: Lessons from the Indian Experience, 29 Northwestern Journal international law& Business 335 (2009). Available at http://scholarlycommons.law.northwestern.edu/cgi/viewcontent.cgi?article=1687&context= njilb (Last visited on 6 November 2014).
346
Vol. 4 No.2 July 2015
ISSN (O): 2278-3156
Panda / The Evolution and Current Revolution of Company Law & Corporate Governance
than markets in developed countries.5 According to Bruner, the developing countries’ emerging markets are different from developed markets in areas such as accounting transparency, liquidity, corruption, volatility, governance, taxes and transaction costs.6 The importance of good corporate governance for emerging market is very crucial. By “Improvement in corporate governance practices can improve the decision making process within and between a company’s governing bodies, and should thus enhance the efficiency of the financial and business operations. Better corporate governance also leads to an improvement in the accountability system, minimizing the risk of fraud or self-dealing by company officers. An effective system of governance should help ensure compliance with applicable laws and regulations, and further, allow companies to avoid costly litigation” 7 Broadly, the good corporate governance practices bring companies reputation, customers friendly and attract investors & suppliers. Advantages of Good Corporate Governance8: First of all, by taking finance from external source, firms can gain higher growth and create greater employment opportunity. Secondly, through good governance firms can attract investors for investment and generate employment opportunity by cost cutting and valuation process. Thirdly, to avoid financial loss and chance of financial fraud, corporate governance standard is important. Fourthly, this creates better management and allocation of resources or the firm. Lastly, good corporate governance can mean generally better relationships with all stakeholders. This helps improve social and labor relationships and aspects such as environmental protection.
II. EVOLUTION &DEVELOPMENT OF CORPORATE GOVERNANCE & COMPANY LAW 5
Singh Ajit, Corporate Governance, Corporate Finance and Stock Markets in Emerging Countries(ESRC Centre for Business Research University of CambridgeWorking Paper No. 258, 2003). 6 Bruner R, Conroy R, Estrada J, Kritzman M. and Li W, Introduction toValuation in Emerging Markets, 3 (4) Emerging Markets Review at 310-324 (2002). 7 Afra Afsharipour, The Promise and Challenges of India's Corporate Governance Reforms, Indian Journal of Law & Economics, Vol. 1, No. 1, p. 33 at 36. Available athttp://papers.ssrn.com/sol3/papers.cfm?abstract_id=1640249(Last visited on November 07, 2014). 8 Stijn Claessens, Corporate Governance and Development, Global Corporate Governance Forum, 2003, Focus. Available at http://www.gcgf.org/wps/wcm/connect/7fc17c0048a7e 6dda8b7ef6060ad5911/Focus_1_Corp_Governance_and_Development.pdf?MOD=AJPER ES (Last visited on November 07, 2014).
ISSN (O): 2278-3156
Vol. 4 No. 2 July 2015
347
International Journal of Law and Policy Review (IJLPR)
This part of the paper discuss about development of corporate governance in global scenario, especially in USA and UK. And in the second section of this part discuss about development of corporate governance in Indian context. A. GLOBAL SCENARIO: USA & UK USA: The importance of the corporate governance gained momentum in western part of the globe particularly after the Watergate scandal and bribe government officials by big corporations. Soon after, the United States adopted Foreign and Corrupt Practice Act 1977, which was followed by Securities and Exchange Commission’s in 1979, for mandatory reporting on internal financial controls. Again in 1980s, several business houses collapsed in USA; so another commission was set up as Tradway commission to identify the cause and recommend the government. In 1987, Tradway commission produced its report and suggested the need for proper control environment, independent audit committees, which would look-after internal control of companies. UK: Similarly in UK, corporate governance came to light after several big scandals and corporate failures, such as; the Bank of Credit and Commerce International (BCCI) Scandal, Barings Bank scandal, British& Commonwealth, Polly Peck, Maxwell and the etc.9 The ‘revolution’ started in the early 1990s, to stop financial reporting irregularities, under Sir Adrian Cadbury. In 1992, ‘Cadbury Report’ 10 published, which was known “Cadbury Code”, this suggested for setting up different standard for corporate behavior and ethics. The City and the Stock Exchange as a benchmark of good boardroom practice gradually adopted this code. In 1996, a committee was set-up, which was known as ‘Hampel committee’, to review both ‘Cadbury Report’ and ‘Greenbury Report 1995’. 11 This 9
Financial Reporting Council, The UK Approach to Corporate Governance, October 2010 Available at https://www.frc.org.uk/getattachment/1db9539d-9176-4546-91ee-828b7 fd08 7a8/The-UK-Approach-to-Corporate-Governance.aspx (Last visited on November 07, 2014). 10 See Cadbury Report published in 1992 outlined a number of recommendations around the separation of the role of an organisation’s chief executive and chairman, balanced composition of the board, selection processes for non-executive directors, transparency of financial reporting and the need for good internal controls. See also Cadbury Committee, Committee on the Financial Aspects of Corporate Governance,1992, The Report of the Committee on the Financial Aspects of Corporate Governance, London. Available at http://www.ecgi.org/codes/documents/cadbury.pdf (Last visited on January 10, 2015). 11 This committee was setup in January 1995 to identify good practices by the Confederation of British Industry (CBI), in determining directors’ remuneration and to prepare a code of such practices for use by public limited companies of United Kingdom. The committee produced the Greenbury Code of Best Practice, which was divided into the four sections: Remuneration Committee, Disclosures, Remuneration Policy and Service Contracts and Compensation. See Report on Directors’ Remuneration, 1995.
348
Vol. 4 No.2 July 2015
ISSN (O): 2278-3156
Panda / The Evolution and Current Revolution of Company Law & Corporate Governance
committee in 1998 produced its publication as Combined Code of Corporate Governance, talked about structure and operations of the board, directors’ remuneration, accountability and audit, relations with institutional shareholders, and the responsibilities of institutional shareholders. Likewise, in 2001 ‘Myners Review’ 12 and in 2002 the ‘Directors’ Remuneration Report Regulations’, introduced better relationship between institutional investor and companies, the powers of shareholders in relation to directors’ pay etc. By 2003, sections had been added on remuneration, risk management, internal control and audit committees. In 2002 ‘The Sarbanes-Oxley Act’ was introduced to increase the accountability of auditing firm to remain objective and independent to achieve quality governance and to restore investor’s confidence. In 2008, the global financial crisis spread over UK and damaged massive banking and financial structure. Many organizations and economists pointed that due to week corporate governance, companies failed to safeguard losses. The UK Government asked, Sir David Walker to look specifically at corporate governance in UK banks and other large financial institutions to stabilizing the banking system to protect people’s savings and the economy. 13 The Walker Review 14 reported in 2009, which made 39 recommendations for better governance in banks, large insurance companies and other financial institutions. The FCR, body established by Government review the code and on the basis of recommendation, came out with a new version titled as the UK Corporate Governance Code, which applied to company on 29th June 2010. OECD & World Bank: Organization for Economic Co-operation and Available at http://www.ecgi.org/codes/documents/greenbury.pdf(Last visited on January 11, 2015). 12 See Institute of Directors, Standards for the Board – Improving the effectiveness of your board, 2001, London: Kogan and Committee on Corporate Governance, Hampel Committee, Final Report 1998. Available athttp://www.kingstoncitygroup.co.uk/.../Corporate%20governance%20develop(Last visted on January 15, 2015). 13 Financial Reporting Council, Available on https://www.frc.org.uk/corporate /ukcg code.cfm(Last visited on January 20, 2015). 14 The Walker Review published in November 2009 recommended on: the effectiveness of risk management at board level, including the incentives in remuneration policy to manage risk effectively; the balance of skills, experience and independence required on the boards of UK banking institutions; the effectiveness of board practices and the performance of audit, risk, remuneration and nomination committees; the role of institutional shareholders in engaging effectively with companies and monitoring boards; and whether the UK approach is consistent with international practice and how national and international best practice can be promoted. Available at http://www.frc.org.uk/corporate/ukcgcode.cfm(Last visited January 22, 2015).
ISSN (O): 2278-3156
Vol. 4 No. 2 July 2015
349
International Journal of Law and Policy Review (IJLPR)
Development (OECD) was the first non-governmental organization took initiatives for good corporate governance through its first set of corporate governance principles in 1999. Further, OECD released a revised version of corporate governance principles in 2004, in order to create legal and regulatory frameworks for OECD and non-OECD countries. The OECD principles were:15
Ensuring the basis of an effective corporate governance framework The rights of shareholders and key ownership functions The equitable treatment of shareholders The role of stakeholders in corporate governance Disclosure and transparency The responsibilities of the board
The World Bank and OECD came together with a MoU on 1999, to improve, reform and to respond to the need of individual countries to improve corporate governance through policy dialogue and co-operation. The co-operation between World Bank and OECD was structured along two major initiatives; a Global Corporate Governance Forum (GCGF) and a series of Regional Policy Dialogue Round Tables. B. DOMESTIC SCENARIO: INDIA During the British colonial period, Indian companies were controlled by British rules and regulations. First time, the Companies Act was introduced in India 1866, which was amended and revised several times such as 1882, 1913 and 1932. After the independence, particularly in 1950s and 1960s, the Tariff Commission and the Bureau of Industrial Costs and Prices were set up by the Govt. 1951. Soon after the India‘s development Regulation Act 1956-Companies Act came into existence.16 During the 1970s to 1980s, the banking institutions developed rapidly, as a result there were several laws and regulation framed to regulate these institutions. Particularly in 1990s, during this period of liberalization one of the important developments took place in the field of corporate governance
15
Fianna Jesover and Grant Kirkpatrick, The revised OECD principles of Corporate Governance and their relevance to non-OECD countries. 2005. Available at http:// www.oecd.org/ corporate/ca /corporatego vernancep rinciples/3397 7036. pdf(Last visited January 25, 2015). 16 JP Sharma, Governance, Ethics and Social Responsibility of Business, Ane Books Pvt. Ltd. (2014).
350
Vol. 4 No.2 July 2015
ISSN (O): 2278-3156
Panda / The Evolution and Current Revolution of Company Law & Corporate Governance
and investor protection by establishment of the Securities and Exchange Board of India (SEBI) in 1992.17 After liberalization period, there have been continuous efforts taken by Indian government and several leading organizations for the good corporate governance. According to Bajpai, “the Securities and Exchange Board of India (SEBI) continues to raise the bar for good Corporate Governance.” The first phase of India‘s corporate governance reforms were aimed at making boards and audit committees more independent, powerful and focused monitors of management as well as aiding shareholders, including institutional and foreign investors, in monitoring management.18 The Confederation of Indian Industry (CII): The CII, in 1998 proposed basic code for corporate governance, which was deals with the laws, regulations, practices and implicit rules that determines a company’s ability to take managerial decisions with shareholders and creditors and customers. In addition to this, the CII code emphasized on greater transparency in the listed company. Kumar Mangalam Report on Corporate Governance:19 In 1999, SEBI setup one committee and appointed Kumar Mangalam Birla as chairman to give a comprehensive view of the issues related to insider trading to protect the rights of various stakeholders. The Mangalam committee recommended the distinction the responsibilities and obligations of the board and the management in instituting the systems for good corporate governance and emphasized on the rights of shareholders in demanding corporate governance. This committee also recommended that the companies required disclosing separately in their annual reports, a report on corporate governance delineating the steps they have taken to comply with the recommendations of the committee. In 2000, on the basis of CII code and Kumar Mangalam Report, the department of company affairs prepared a report, which was known as report of the task force to achieve corporate excellence through corporate governance for the companies according to their size and 17
See Afra Afsharipour, Corporate Governance Convergence: Lessons from the Indian Experience, Northwestern Journal of International Law & Business 335 (2009); Rajesh Chakrabarti, Corporate Governance in India—Evolution and Challenges,2005. Available at http://ssrn.com/abstract=649857. (Last visited January 28, 2015). 18 V. Joshi, Corporate Governance: The Indian Scenario, Foundation Books (2004). 19 Report of the Kumar Mangalam Birla Committee on Corporate Governance, 1999. Available athttp://www.sebi.gov.in/commreport/corgov.html.(Last visited on January 26, 2015).
ISSN (O): 2278-3156
Vol. 4 No. 2 July 2015
351
International Journal of Law and Policy Review (IJLPR)
capabilities. Finally, SEBI incorporated and implemented Birla Committee’s report on corporate governance and enforced Clause 49, a new section of the listing agreement phase wise. RBI Report on Corporate Governance: In 2001, RBI produced two reports; first, report of the advisory group on corporate governance, which primary objectives was to compare the status of corporate governance in India with the internationally recognized best standards and recommend the good practices for better corporate governance in India. Second, RBI report on the consultative group of Directors of Banks, the report focused on the review the supervisory role of the boards of the bank and financial institutions for the better governance strategy by feedback on the functioning of the board.20 Naresh Chandra Committee: The Ministry of Finance and Company Affairs in 2002 established a committee known as Naresh Chandra committee and appointed Naresh Chandra as Chairman. The committee was framed to examine several corporate governance issues and to recommend changes in the diverse areas like the statutory auditor, procedure for appointment of auditors and determination of audit fee, certification of accounts and financial statement by management and directors. The committee submitted its report on December 2002 and recommended the role, remuneration and training etc. of independent directors & auditors and auditor-company relationship to strengthen corporate governance.21 N. R. Narayana Murthy Committee:22 The SEBI, in 2002 established another committee known as Narayana Murthy Committee under the chairmanship of Mr. N R Narayana Murthy, to review Clause 49 of the listed agreements and revisit The Companies Act 1956 & The Indian Partnership Act 1931. Finally in October 2004, SEBI 20
Aparna Sharma, Legal framework and Corporate Governance: An Indian Perspective, IJCEM International Journal of Computational Engineering & Management, Vol. 15 Issue 1, 2230-7893 (2012). Available at http://www.ijcem.org/papers012012/ijcem_ 012012_03.pdf (Last visited on January 28, 2015). 21 Report of the CII Task Force on Corporate Governance 2, 2009. Available at www. mca.gov.in/Ministry/latestnews/Draft_Report_NareshChandra_CII.pdf(Last visited January 28, 2015). 22 Report of the SEBI Committee on Corporate Governance, Available at http://www.sebi.gov.in/commreport/corpgov.pdf. (Last visited on January 28 2015).
352
Vol. 4 No.2 July 2015
ISSN (O): 2278-3156
Panda / The Evolution and Current Revolution of Company Law & Corporate Governance
accepted the revisited recommendation by Murthy Committee on Clause 49 of listing agreement and other changes to Companies Act 1956. The committee report recommended related to Audit Committee, Nonexecutive directors, whistle Blower Policy and various parameters like fairness, accountability, transparency, and ease of implementation, verifiability and enforceability. Indian government, in the last decade, established several committees to develop corporate governance norms and bring better corporate policies & regulations. Most of the recommendations made out of these committees accepted by the government, to improve governance standard. In 2000, the Indian Code of Corporate Governance approved by Securities and Exchange Board of India (SEBI) and was implemented in stages over the following two years. There were significant amendment done in the Companies Act 1956 in 2002 and 2004 in areas such as postal ballots and audit committees. Later, the J.J Irani Committee review the Companies Act 1956 and its recommendations led to a rewrite of the law and a new Companies Bill, 2008.23 In 2008, the Satyam fraud led to renewed reform efforts by Indian authorities and regulators. SEBI also brought new amendments in February 2009 requiring greater disclosure by promoters (i.e., controlling shareholders) of their shareholdings and later changes to the Listing Agreement, including requiring listed companies to produce half yearly balance sheets.24 Similarly, in December 2009, the Ministry of Corporate Affairs (MCA) published a new set of “Corporate Governance Voluntary Guidelines 2009”, designed to encourage companies to adopt better practices in the running of boards and board committees, the appointment and rotation of external auditors, and creating a whistle blowing mechanism. The Companies Bill to the Companies Act 2013: Developments 2008: Companies Bill, 2008 was introduced in the Lok Sabha. 2009: Companies Bill, 2009 was reintroduced in the Lok Sabha. Bill was referred to the Standing Committee on Finance of the Parliament for
23
Expert Committee on Company Law, Report of the Expert Committee to Advise the Government on the New Company Law 3, 2005, available at www.primedirectors.com/pdf/JJ%20Irani%20Report-MCA.pdf. (Last visited onJanuary 28, 2015). 24 Id. at 23.
ISSN (O): 2278-3156
Vol. 4 No. 2 July 2015
353
International Journal of Law and Policy Review (IJLPR)
examination and report.25 2010: Report of the Standing Committee on Finance on Companies Bill, 2009 was introduced in the Lok Sabha. 2011: Companies Bill 2011 introduced in the Lok Sabha on December 2011. 2012: The Companies Bill, 2012 was introduced and got its assent in the Lok Sabha on 2012. 2013: Companies Bill 2012 passed by the Rajya Sabha on 8th August 2013. Further, this bill finally sent to president, after having received the assent of the President of India on 29 August 2013, it has now become the muchawaited Companies Act, 2013.26
III. COMPANIES ACT 2013 & CORPORATE GOVERNANCE: NEW EPISODE It has been seen that before Companies Act 2013, corporate governance was mainly being followed by the Clause 49. But the Introduction of Companies Act 2013, bring new provisions and regulations in corporate sectors. This Act deals with 470 sections spread over 29 chapters and 7 schedules, which replaced the old Act 1956. The basic objective of the Act is to promote self-regulation and introduces novel concepts including one-person company, small company and dormant company.27 It also promotes investor protection and transparency by including concepts of insider trading, class action suits, creation of a National Financial Reporting Authority and establishment of Serious Fraud Investigation Office for investigation of fraud. Further, a mammoth section 2 containing 94 definitions has been added for better clarity. A. CORPORATE GOVERNANCE KEY PROVISIONS: Following are the main provisions related to corporate governance that have been incorporated in the Companies Act, 2013. 25
See Chakshu Roy & Avinash Celestine, Legislative Brief: The Companies Bill, PRS Legislative Research2009. Available at http://www.prsindia.org/uploads/media/ac (Last visited on January 29, 2015). 26 Nitin Kumar, Companies Act 2013: An Analysis of Key Rules, Sai Om Journal of Commerce & Management, Vol 1, Issue 5(2014). 27 Geetika Vijay, Corporate Governance under the Companies Act 2013: A More Responsive System of Governance, Vol 4, Issue 4, Indian Journal of Applied Research, 2014.
354
Vol. 4 No.2 July 2015
ISSN (O): 2278-3156
Panda / The Evolution and Current Revolution of Company Law & Corporate Governance
Definition & One Person Company: New definitions on accounting standards auditing standards, financial statement, independent director, interested director, key managerial personnel, voting right etc. The Act also introduced a new class companies called ‘One Person Company’ (OPC), by which individual can carry business with limited liability.28 Composition of Board & Board of Directors: The new Companies Act 2013 introduced few changes regarding composition of board. The Act provides that a company may have a maximum 15 directors on the board. However, on the requirement of more directors, the company needs special resolution and requires shareholders approval. For the first time, the Act also defines the role and responsibility of Board of Directors and makes them accountable more and more with company’s functions. Failure of these duties and responsibility will lead them to punish with fine.29 Independent Directors: The new Act, introduced the Concept of Independent Directors (IDs). It states that all listed companies must have at least one-third of the board as Independent Directors and the term of the IDs as five consecutive years.30 The Act also prescribes detailed qualifications for the appointment of an ID, such as independent director to be a person of integrity, relevant expertise and experience. About the duties of the IDs, the Act included professional conduct for IDs by prescribing facilitative roles, such as offering independent judgment on issues of strategy, performance and key appointments, and taking an objective view on performance evaluation of the board. This Act empowers the independence directors because of greater accountability and transparency in the company. 31 Women Director: This Act made mandatory for listed companies and certain other public companies by introducing the appointment of at least one women director on the board of company.32 So it’s directly pointing the companies to promote women employees by this Act. 28
See Section 2 (Sub-section 62) of the Companies Act 2013 See Section 149 of the Companies Act 2013 30 See Section 149 (Sub-section 4) of the Companies Act 2013 31 See Section 149 (sub-section 8) of the Companies Act 2013 32 See Section 149 (sub-section 1) of the Companies Act 2013 29
ISSN (O): 2278-3156
Vol. 4 No. 2 July 2015
355
International Journal of Law and Policy Review (IJLPR)
Committees of Board: The Act envisages four types of committees to be constituted by the board; such as (a) audit committee (b) nomination and remuneration committee (c) stakeholders relationship committee (d) Corporate Social Responsibility Committee (CSR). Basically, the Act designed these committees for better function of the board. 33 The function of the audit committee and the nomination and remuneration committee provide the back end infrastructure for boards, the stakeholder's relationship committee and CSR Committee have been entrusted with the task of interaction with key stakeholders. Corporate Social Responsibility: The Act established Corporate Social Responsibility (CSR) under Section 135. Through this provisions company who making profits has to spend on CSR related activities. Companies net worth of Rs 500 crore or more turnover of 1000 crore or net profit of Rs 5 crore, shall ensure that these company spends at least 2 percentage of the average net profits during every financial year. This Act under Clause 211, has given more power to SFIO to Investigate frauds in corporate sectors. It has the power to arrest in respect of certain offences and take action by penalty for frauds.34 This Act under Section 245 introduced provisions for class action under which it is provided that specified number of member(s), depositor(s) or any class of them, may file an application before the Tribunal seeking any damage or compensation or demand any other suitable action against an audit firm. The order passed by the Tribunal shall be binding on all the stakeholders including the company and all its members, depositors and auditors.35
IV. CORPORATE GOVERNANCE: SAFEGUARDS In India, frauds generally took place in procurement frauds, payrolls frauds, asset misappropriation, financial misstatement, corruption, bribery, tax evasion, piracy, intellectual Property (IP) fraud, kickbacks, accounting frauds, counterfeiting, white-collar crimes etc. In order to stop these growing frauds the new law has taken certain strong provisions and also reframed few existing authorities, such as (a) SEBI plans to tackle corporate frauds by listed firms and market entities through its newly set up Forensic
33
See Section 177, Section 178 and Section 135 of the Companies Act 2013 See Section 211 and Section 212 of the Companies Act 2013 35 See Section 245 of the Companies Act 2013 34
356
Vol. 4 No.2 July 2015
ISSN (O): 2278-3156
Panda / The Evolution and Current Revolution of Company Law & Corporate Governance
Accounting Cell, (b) The Companies Act 2013 proposes a national advisory committee on auditing and accounting standards etc. A: NATIONAL COMPANY LAW TRIBUNAL (NCLT) &NATIONAL COMPANY LAW APPELLATE TRIBUNAL (NCLAT): The Companies Act 2013 deals with National Company Law Tribunal (NCLT) and National Company Law Appellate Tribunal (NCLAT), in place of Company Law Board (CLB). The idea behind these mechanism is to handle the dispute arise, and to help to reduce the pendency of winding-up cases, shortening the winding-up process, and avoiding multiplicity and levels of litigation before high courts, the Company Law Board. In addition to that the Tribunals will also deals with merger and acquisition disputes and the dispute arising while converting public ltd. company to private ltd. According to the recent Act, new tribunal consists of both judicial members and technical members. However, the President is the head of the Tribunal, while the chairman is the head of Appellate Tribunal. But, the process of formation of the National Company Law Tribunal (NCLT) and the National Company Law Appellate Tribunal (NCLAT) has been kept in abeyance on account of a legal challenge in the Supreme Court to certain provisions of the Companies Act, 2013 relating to the constitution and composition of these bodies. The detailed procedure for transfer of pending cases will be finalized by the NCLT after it establish.36 Indeed this is a well step taken in this Act to smother governance and to speed up corporate redressal. B: NATIONAL FINANCIAL REPORTING (NFRA): The recent Act established two national level bodies, which will regulate standard of all types of reporting such as; financial as well as non-financial matters. Section 132 of the Companies Act 2013, deals with a new regulatory authority known as National Financial Reporting Authority (NFRA), replaced National Advisory Committee on Accounting Standards (NACAS). The basic objectives to establish this authority is to advice enforce and monitor the compliance of accounting and auditing standards as well as to act as a regulatory body for accountancy profession. This authority has the power to recommend to the CG on the formulation and lying down of accounting and auditing policies and standards for adoption by companies or their auditors, monitor and enforce the compliance with accounting standards etc. Further, the Authority has also given the power to investigate suo moto or a reference made to it by the CG by bodies corporate 36
Smt. Nirmala Sitharaman gave this information, MoS in the Ministry of Corporate Affairs in written reply to a question in the Lok Sabha on February 26, 2014. Available at http://pib.nic.in/ newsite/ Print Release. aspx? relid= 108 368(Last visited on February05, 2015).
ISSN (O): 2278-3156
Vol. 4 No. 2 July 2015
357
International Journal of Law and Policy Review (IJLPR)
or persons into the matter of professional or other misconduct committed CA and CS firms. By doing this, this will create fear among the firms and corporates to be honest and transparent in financial and non-financial matters, which will lead a good governance atmosphere inside the company. C: INVESTOR AND EDUCATION PROTECTION FUND: Under Section 125 (5) of the Companies Act 2013, the Investor Education and Protection Fund (IEPF) Authority was established. And Investor Education and Protection Fund (established under section 125(1) of the Companies Act 2013) to educate and protect interest of investors, constituted and notified under section 125(5) of the Act and managed by the Authority. Now MCA has notified that under Rule 2012, Investor Education and Protection Fund made mandatory for every company to file e-form 5INV containing the information of unclaimed and unpaid amounts. Through this new rule, it is mandatory for the companies to declare, unclaimed amount (including interest on them) in their websites and also from the MCA IEPF website, as a result every year the shareholders and debenture holders will be able to know their unclaimed amount. This would bring clarity and transparency within the company to maintain account matters. The experts from the MCA and members from SEBI, RBI, Indian Company Law Services and eminent legal expert will monitor this authority D: SERIOUS FRAUD INVESTIGATION (SFIO): The Ministry of Corporate Affairs under resolution dated 2003, established the Serious Fraud Investigation Office (SFIO), to investigate corporate frauds. Under Section 211 of the Companies Act 2013, deals with SFIO, the Government has also granted statutory status to SFIO. According to MCA, in the last three years, 64 cases were referred to SFIO, out of which the SFIO completed 55 cases. SFIO has done an excellent job to detect corporate fraud of Rs 10,800 crore by investigation in nearly three-and half years. Now, Ministry of Corporate Affairs developed a “Fraud Prediction Model” in SFIO for generating early warning signals for prediction of fraud and malfeasance in the corporate sector. The ministry also set up a Highpowered Steering Committee with technical experts in various fields to design a comprehensive framework for a fraud prediction model. The Director of the SFIO, has got the power to arrest persons if he has reason to believe that such persons are guilty of certain offences, including fraud. Few important frauds cases where SFIO has taken string action and proved its efficiency, such as Satyam Scandal, Reebok and now Saradha Group scam. So the recent fraud in Saradha group is also an example that shows the need and importance for effective investigation and prosecution of corporate
358
Vol. 4 No.2 July 2015
ISSN (O): 2278-3156
Panda / The Evolution and Current Revolution of Company Law & Corporate Governance
fraud.37 From the above points it is clear that SFIO has got its wing now to take certain steps to investigate corporate frauds independently. E: SEBI Special Court to fast-track: The new Securities Law Amendment Act, 2014 proposed to setting up of a special SEBI court to fast track to strict the investigation and prosecution process, including by granting approval for search and seizure operations in suspected cases of frauds. The idea behind setting up a designated court is to hear SEBI cases, which will give the regulator for carrying out search and seizure operations, to crack down on fraudsters in the wake of several cases of illicit money-pooling activities, including by ponzi operators, across the country.38
V. CORPORATE GOVERNANCE: SEBI Securities Exchange Board of India (SEBI) was established to act like a watchdog to observe the activities of stock market and regulate stock market in 1988. During this period this was failed due to inefficient exercise and control over the stock market due to lot of malpractices in stock exchange. As a result in 1992, government of India brought a separate legislation by the name of SEBI Act 1992 and conferred the statutory power and had given SEBI the legal status. The main objectives of the SEBI are to protect the interest of investors and to promote the development of stock exchange, to regulate the activities of stock market and to regulate and develop a code of conduct for intermediaries such as brokers, underwriters, etc.39 It has been seen that SEBI played a major role for effective and transparent corporate governance. This is evident from the continuous updating of guidelines, rules and regulations by SEBI time to time. SEBI had constituted several Committees on Corporate Governance under the Chairmanship of Shri Kumar Mangalam Birla, another Committee on Corporate Governance under the Chairmanship of Shri N. R. Narayana Murthy to enhance the transparency and integrity of the market and for better corporate governance by amendments into clause 49 of the listing agreement. Now after the Companies Act 2013, through a circular dated April 17th 2014, SEBI released the amendments to clause 35B and clause 49 of the Equity Listing Agreement. It is required for the listed companies under the 35B norms to 37
See Giving teeth to Serious Fraud Office. Available at http://www.thehindu.com /opinion/op-ed/giving-teeth-to-the-serious-fraud-office/article4807786.ece(Last visited on February 25, 2015). 38 See Available at http:// freepressjournal .in/special- court-to-hear -sebi-matters-likelysoon/(Last visited on February 26, 2015). 39 See Available at http://www.sebi.gov.in/sebiweb/stpages/about_sebi.jsp(Last visited on February 28, 2015).
ISSN (O): 2278-3156
Vol. 4 No. 2 July 2015
359
International Journal of Law and Policy Review (IJLPR)
provide the option of e-voting to shareholders. Further, listed entities have to get shareholders’ approval for related party transaction, under clause 49.40 KEY AMENDMENTS: Shareholders Rights (Clause 49): All shareholders of same series of a class should be treated equally. Processes and procedures for general shareholder meetings should allow for equitable treatment of all shareholders. Foreign shareholders should also have voting rights. Company should devise a framework to avoid Insider trading and abusive self-dealing.41 Independent Directors (Clause 49): This enforces certain restrictions on the IDs such as Outside Directorship, tenure and stock option. On the listed companies, the maximum number of boards and boards of independent director restricted to 7, while the directorship would be capped at three if the person is serving as a whole time director in any listed company by SEBI. An ID can only hold office for two terms of five years each and on the reappointment for the second term has to be sought from shareholders through a special resolution. Except that there are certain mandatory provisions regarding IDs, these are Issue of formal letter of appointment to IDs and disclosure of such letter to shareholders and training of newly appointed and existing IDs.42 Related Party Transactions: According to recent amendment, it is mandatory for RPTs to take prior approval from the audit committee and require shareholder approval though special resolution and concerned related parties to abstain from voting on such resolutions. Mandatory of disclosure of policies on dealing with RPTs in website and annual report.43 Disclosure and Transparency (Clause 49): Under this clause, company has to ensure timely and accurately disclose information to its shareholders. The information provided by the channel should be equal, timely and cost efficient. Maintaining of minutes of the meeting should be taken care of by the company.
40
See http:// businesstoday. intoday. in/ story/ sebi-issues- detailed- corporate- governancenorms/1/205313.html(Last visited February 28, 2015). 41 Seehttp://www.sebi.gov.in/cms/sebi_data/attachdocs/1410777212906.pdf(Last visited on February 28, 2015). 42 Ingovern report on SEBI’s revision of the Clause 49 of the Equity Listing Agreement, Available at http://www.ingovern.com/wp-content/ uploads/ 2014/ 05/ Revised- Clause-49New-Corporate-Governance-Norms-for-India-Listed-Companies.pdf(Last visited on February 28, 2015). 43 Available at http://www.sebi.gov.in/cms/sebi_data/attachdocs/1410777212906.pdf(Last visited on February 28, 2015).
360
Vol. 4 No.2 July 2015
ISSN (O): 2278-3156
Panda / The Evolution and Current Revolution of Company Law & Corporate Governance
VI. CONCLUSION Corporate Governance is in its new form with many new visions for corporates. After the introduction of Companies Act 2013, Indian has really some of the best corporate governance laws. The new Companies Act 2013 introduced many significant changes in the provisions related to governance, e-management, compliance and enforcement, disclosure norms, auditors and mergers and acquisitions. Also, new concepts such as oneperson company, small companies, dormant company, class action suits, registered valuers and corporate social responsibility have been included. However, it’s time to watch the corporates, how they are going to monitor and implement these new laws to improve their governance standard for development and growth.
ISSN (O): 2278-3156
Vol. 4 No. 2 July 2015
361
