19 Aug 2021 Ankit Chadha

Governance 101: Know Everything About Corporate Governance in India

Corporate Governance | TRC Corporate Consulting

Why and how has corporate governance gained importance over time? One of the top reasons is the change in ownership patterns of the organizations- leading to the increasing demand for transparency and disclosures. Corporate governance also enables organizations in controlling risks and ensuring compliance, while meeting their objectives.

Corporate Governance in India is a system of principles, policies and procedures, defined responsibilities, and accountabilities, that is used by the stakeholders to stay updated and informed about the organization's proceedings and work through the conflicts of interest that might arise in an organization. It also assists in controlling the interaction amongst stakeholders and in shaping an organization's performance and directing its proceedings.

Corporate governance ensures organization's balanced and strong economic development and protection of shareholder's interests.  Its ultimate aim is to determine how to reach the most effective strategic decisions while keeping up with the legal guidelines and regulations; and the interest of the involved parties.

Why Has Corporate Governance in India Gained Significance? 

There are several reasons behind the significance and need of corporate governance in India. To meet the corporate governance needs effectively, it is inevitable to leverage corporate governance services from expert professionals who stay well-informed about the ongoing changes in the legal business environment and devise effective strategies in compliance with the laws. Find below a few reasons:

  • Changing Ownership Structure 

As the ownership structure of the companies is significantly changing- mutual funds, public financial institutions, etc., are becoming the largest shareholders in most of the sizeable companies and have majority control in the management. Therefore, for ensuring a transparent system, they push the management to integrate corporate governance in their system and make it more efficient, transparent, accountable, etc.

  • Importance of Social Responsibility 

As a part of Board of Director’s social responsibility, it is important for them to protect the rights of employees, shareholder, customers, etc.  And, this protection and transparency is possible by incorporating corporate governance.

  • Growing Number of Scams 

In recent years, scams and frauds are increasing every day in India. It is happening in companies, banks, financial institutions, etc.  To eradicate such financial irregularities and scams, corporate governance in India is important.

  • Takeovers and Mergers 

Internal auditing and corporate governance help secure the interest of all the involved parties in case of takeovers and mergers; otherwise, it might result in complications and unhealthy deals and relationships.

  • Globalization 

Globalization involves selling goods and services worldwide, which means the organizations need to manage and comply with foreign country's as well as home country’s rules and regulations. For this, it is important to have a corporate governance mechanism in place.

Need of Corporate Governance 

  1. Mandatory Under Certain Regulations 

There are certain acts that are formulated by certain authorities to govern the organizations and promote transparency in the organization’s functioning. A few major acts are listed below:

  • Companies Act, 2013 (it provides a formal structure for corporate governance in India through compliance norms)
  • Monopolies and Restrictive Trade Practices Act, 1969 (this was replaced by the Competition Act 2002)
  • Foreign Exchange Regulation Act, 1973 (replaced by Foreign Exchange Management Act,1999),
  • Industries (Development and Regulation) Act, 1951

In addition to several regulations, acts and guidelines by various regulators, even non-regulatory bodies publish codes and guidelines on the need of corporate governance from time to time. One such example is the Desirable Corporate Governance Code, formulated by the Confederation of Indian Industries (CII) in 2009. 

As an organization, it might get challenging to follow and incorporate such legislation in your corporate structure along with managing your core functions. Therefore, most organizations, irrespective of their size, should leverage the benefit of corporate governance services from expert professionals.

  1. Auditing and Corporate Governance 

Auditing and corporate governance is one of the most important elements of governance in compliance with the financial auditing and reporting controls. There are certain regulations, such as Sarbanes Oxley Act which have laid down regulations related to the need of corporate governance while performing the following functions:

It is advisable to hire a consulting firm specializing in finance functions, like TRC Corporate Consulting. They offer failproof auditing and corporate governance services in relation to internal auditing and financial controls. This helps organizations in staying protected against legal implications in future.

  1. Corporate governance and Executive Remuneration 

In respect of the director's remuneration, the overriding principle is that of disclosure and openness. The shareholders are entitled to a complete and clear statement of benefits available to the directors. This is to ensure that the remuneration level and composition is sufficient and reasonable as there exists a direct relationship between remuneration and performance.

Also, it should comply with the set guidelines under corporate governance reforms in India to have an organized and legally verified organizational structure.  Apart from this, certain disclosures need to be made in the corporate governance section of the annual report, such as remuneration package comprising of salary, benefits, bonuses, stock options, etc.; details related to performance-linked incentives, etc.; stock option details, etc.

  1. Management Structures and Processes 

This is an important element of corporate governance in India as the management structure and processes are of prime importance and pivot to an organization. There should be a clearly defined hierarchy and line of authority from top to bottom, i.e. top management, middle management and lower management. However, the scope of flexibility should always be there. To comply with the corporate governance laws and have an efficient management structure, you can consider leveraging services from experts.

A professional corporate governance consultant has the expertise and familiarity with management systems and procedures, which aids in comprehension of fundamental management concepts pertaining to corporate systems, partnerships, and policies. He/she may determine how "managing" is incorporated into a corporate governance system and procedures by understanding "the mechanisms and processes of managing" and its constituent components.

  1. Enhanced Institutional Investors Trust 

Fast-growing countries such as India have drawn significant stakes from foreign investors as well as major Indian financial institutions with global ambitions. This has resulted in substantial progress in the corporate governance practices of the investee firms. Many recent research studies indicate that businesses with strong governance systems achieve high risk-adjusted returns for their shareholders. As a result, if an organization requires institutional investor participation, it must convincingly improve the consistency of its corporate governance policies and comprehend the benefit of corporate governance.

TRC Corporate Consulting: A Leading Consulting Firm Offering Exceptional Governance Services   

In recent years, the trends ad structures of businesses have drastically changed. To incorporate the changes while maintaining transparency, it is inevitable to have a mechanism for corporate governance in place. It helps in smooth functioning,  successful collaboration with the foreign market and satisfied stakeholders.

We, at TRC Corporate Consulting, offer services to assist in creating a succession plan for influencing the organization and key executives, so that corporate governance can be transferred to the future generation. In addition, our professionals work with clients from various sectors and provide customized solutions, such as internal audit services, fraud detection, etc. which helps in enhancing the business's potential and having a well-designed structure in compliance with the laws and regulations.

Contact us to know more about our services!