Corporate India has witnessed several regulatory and structural reforms in the area of Corporate Governance in the last few years. The most significant ones have been the move from the Companies Act, 1956 to the Companies Act, 2013 (CA 2013), and the coming into effect of SEBI LODR Regulations, 2015 (SEBI LODR), in place of Clause 49 of Listing Agreement. Both CA 2013 and SEBI LODR have significantly contributed to the strengthening of Corporate Governance norms, and to the increasing accountability of corporates, by promoting transparency through enhanced disclosures. Even after the coming into effect of these 2 enactments, both the Ministry of Corporate Affairs (MCA) and the Securities and Exchange Board of India (SEBI) have made a number of amendments to CA 2013 and SEBI LODR, in response to changing the business environment, and to address issues that the corporate world faces from time to time. Both MCA and SEBI have also constituted a number of committees over the years, to study the changing landscape of Corporate Governance, including changes in different countries.
The Board of a company, and the role that is plays, is vital to the functioning of a company. There is no doubt that a capable, diverse and active Board would drive good practices and policies in the company. The challenge however lies in making governance a part of the culture of the company, so that provisions of law are followed “in spirit” and not only “in letter”.
Board composition being the starting block for good Corporate Governance, both CA 2013 and SEBI LODR have a number of provisions relating to it. In the past, and to a certain extent even now, a number of Boards in India were/ are guilty of appointing friends of the promoters and/or the management as Independent Directors (IDs). Both the enactments have tried to strengthen the institution of IDs by having a number of provisions relating to them, such as definition of independence, disclosure relating to independence by the Director concerned, and also by the Board (stating that he/she is independent), as also by having a cap on remuneration paid to him/her. CA 2013 also introduced the requirement for appointing at least one woman director on the Board, to promote diversity. Going one step ahead, SEBI introduced the requirement of having at least one woman ID. While initially a number of companies had only one woman on their Boards, in response to this legal provision, increasingly more companies are having more women as Directors. Talent, and not tokenism, seems to be driving this. Now reasons behind the resignation of an ID have to be disclosed, and the ID concerned has to certify that there is no other material reason, than what has been stated.
India Inc has a large number of companies with a dominant promoter occupying the role of Chairman and Managing Director (CMD). There is great merit in separating these two roles, to ensure that there is a balance in corporate boardrooms. SEBI has mandated the separation of the two posts for top 500 companies by April 1, 2022. A few companies, without waiting for the deadline, have already taken steps in this regard.
The role and functioning of Board committees, which increasingly are playing an important role, too have been strengthened. While Audit Committee (AC) and Nomination and Remuneration Committee (NRC) existed under the Companies Act, 1956 too, CA 2013 mandated the formation of a Stakeholders Relationship Committee (SRC). This was in place of the erstwhile Shareholders Grievance Committee (which was mandated under the Companies Act, 1956). The name suggests that the intent of Regulators was to have the Committee focus on all the stakeholders of a company, rather than only on the shareholders. However, the expectations, set in motion by the change in name, have been belied since CA 2013 tasks the SRC with looking into the grievances of only the holders of securities. Another important committee of the Board is the Risk Management Committee (RMC). Although this committee is yet to find its place in the CA 2013, SEBI LODR has provided for it for the top 1000 companies. SEBI has been making efforts to further strengthen the committee by providing for at least one ID as member, and by expanding its role.
CA 2013 mandated the evaluation of the Board, its committees, the Chair and each Director. SEBI took out a Guidance note to help companies in the process of this evaluation. Over the years, there has been a change in mindset of companies. From being an entirely internal exercise, it is now conducted by external experts in a number of companies. To derive benefit from this process, more and more companies are seeing value in giving feedback to Directors, and some of them have also started publishing the action report in their annual reports.
Succession Planning is another area which has been in spotlight, especially owing to the focus on Business Continuity Plan during Covid times. It has also been stated as one of the important roles to be performed by the NRC, and in turn by the Board. While some companies have been putting in processes to ensure this, even for Board level positions, a lot more has to be done, especially by promoter run companies.
The role of Statutory Auditors has also been strengthened. From their appointment, to prohibition on certain non-audit services, CA 2013 has worked on strengthening their role. SEBI too has made a number of provisions relating to their resignation, and disclosing the reasons thereto. SEBI LODR has also mentioned that reporting of Internal Auditors directly to the AC is a good practice.
CA 2013 has also introduced Secretarial Audit, in order to have a report relating to compliance by companies with laws and regulation. SEBI LODR too has introduced a Secretarial Compliance Report, where not only compliance with regulations for the current year have to be reported, but also repeat non-compliances, with reasons for the same from the management of the company. Any fine or penalty charged by SEBI or Stock Exchanges too has to be reported.
Indian companies, without any doubt, are moving towards better governance practices, but there is much more to be done, especially by public sector companies. Changes in law and regulations to improve governance standards cannot always be the solution. Regulators on their part need to focus on implementation of existing laws and regulations, before mandating more.