Primary Corporate Governance in India

Corporate Governance in India


Every continent and nation ought to be brought under the light of good corporate governance. How do we recognize whether a country is performing up to the mark or not? How is primary corporate governance in India ?

We look into various indices, statistical reports, conduct surveys and finally look into the gross domestic product of a country. In recent months, India has observed a sharp decline in its GDP growth rate to an 11 year low as of 2020. Apart from from a poor growth rate, India has been witnessing political unrests amidst elections and the pandemic in recent years.

According to Sir Adrian Cadbury, Corporate governance is the system by which companies are directed and controlled. Boards of directors are responsible for the governance of their companies.

The shareholders’ role in governance is to appoint directors and auditors and to satisfy themselves that an appropriate governance structure is in place. The responsibilities of directors include setting the company’s strategic aims, providing the leadership to put them into effect, supervising the management of the business and reporting to shareholders on their stewardship. The Board’s actions are subject to laws, regulations and the shareholders in general meeting.

What Is The Issue With Primary Corporate Governance In India?

When it comes to one of the fastest growing economies which is also the world’s second largest and perhaps one of the most diverse democracies, the primary issue with regards to corporate governance has multiple dimensions. Before moving on, it is important to understand is the root cause of the issue.

Growing Privatisation

Since the past couple of decades, there has been a consistent rise in the private sector which has been bolstered by increasing globalization. Corporate governance comes into play in order to articulate the notion of trust among the retail investors.

Tremendous capital is required by companies in order to survive. Companies need to focus on improving their footprint in the market especially in times like these where the Indian Rupee is going through a fall. 

Interests Of Retail Investors

Attracting retail investors by giving them hopes of higher profits alone would be absolutely imprudent. Therefore, the primary issue happens to be the fact that the retail investors are being taken for granted. The question arises naturally about the ways in which they are being taken for granted. First of all, there is a presence of nexus between the auditors and the board of directors which would allow corporates to evade taxes. One famous example happens to be the case of Satyam Computers Scam where many charges were slapped on the then chairman related to fraud, insider trading and misleading the investors. Secondly, insider trading is very common. We can best define insider trading as a bunch of shareholders having prior materialistic information with regard to the prices of the stock which other shareholders do not have. This directly violates the ethical code of conduct.

Cartels

Apart from the issues mentioned above which happen to be just the tip of the iceberg, a common trend of cartel formation is observed amongst some of the most influential companies in a particular market sector. 

This means that the minimum prices of a commodity are set by a group of companies in order to exploit the consumer base and garner profits unethically. There is a term called Corporate Social Responsibility which means that the Government of India directs companies earning beyond a certain amount, to donate 2% of their profits for a social cause but the companies use this as an opportunity to market themselves. 

For example, when a company organizes a marathon or donates books in a school, they would often print their posters on various places so as to compensate for the “loss”.

How Can We Improve Primary Corporate Governance In India ?

Corporate Governance becomes a very vast subject when it comes to a complex system of regulations and directions.

Acknowledgement Of Investor Sentiments

In my opinion, the first thing that could be done to address these issues is to understand the fact that investors’ sentiments are crucial for any organization. Investors look forward to transparency and smooth functioning of a company apart from its profits. In Australia, it takes only 100 investors to step up in order to call a board meeting if they are not satisfied with the board members and their functioning. This focuses on the fact that each and every investors’ opinion matters and needs to be acknowledged. 

Good corporate governance can be implemented by taking the rights of investors into consideration. This involves access to frequent, timely, relevant and tangible information on the corporation. Moreover, there should be strict rules against insider trading as a lack of these rules would lead to insecurity and uncertainty.

Timely Access To Information On Company Performance

Secondly, companies often give out their reports annually or semi annually. It would be even more helpful if corporates would start giving out crucial information on a rolling basis rather than in the form of “episodic” reports.

Regulatory Structure & Framework

Besides such measures, there ought to be a supervisory framework which would promote the market to be fair, keep the organization consistent with the rule of the law and also divide the responsibilities amongst itself and regulatory and enforcement authorities. One of the most important measures which would result in diminished corruption cases would be making changes in the universal policies common to all types of organizations.

Regulators should have policies based on the given company’s size, ownership structure,geographical spread, annual revenue and their balance sheet. This would wave off stringent policies applicable to smaller companies or startups whereas larger organizations would come under the radar of regulatory bodies with respect to ethics and fare functioning. 

Concluding Remarks

At a time when the GDP growth rate has fallen to -7% as of FY2021, the central government is in dire need to identify all possible root causes rather than engaging governing bodies such as the supreme court in affairs such as the construction of statues, new parliament buildings temples.

There needs to be an understanding of the primary corporate governance structure in India and the government and companies should work in that direction.

This article is authored by Abhishek Katti. He is a graduate of technology from NIT Allahabad. He writes about topics such as economy, financial planning, investments and wealth management.

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Post Author: Medha Rijal