Financial irregularities are a common occurrence in an economy, however, these days it has rampant. Since the NBFC crash has glaringly exposed India’s economic slowdown, more and more events of corporate mismanagement and grave fiduciary breaches have come to light.
From the meltdown of IL&FS to the liquidity crunch, the fault lines of an economic recession are visible. These can no longer be masked under erroneous reports or diversion tactics.
While the entire slowdown cannot be attributed to corporate mismanagement, it most certainly was a significant contributor to it. On paper, India has some of the strictest corporate laws; unfortunately, in practice, it fails to keep up. Corporate governance is a tough task, one that the governments have found to be particularly challenging.
What is corporate governance?
In India, the term corporate governance refers to a set of internal controls, that are put in place by law, to ensure greater transparency and accountability. These controls are implemented through policy and procedure that form the framework of the company, the way it deals with various stakeholders, for example, customers, management, the government, etc.
The core of such policies should be such that it upholds the principles of honesty, integrity, ethics and most of all, transparency. Corporate governance is the core of an organisation and must be adhered to while entering in any business-related practice.
Why is corporate governance important?
Corporate governance and risk mitigation go hand in hand. If company affairs are governed in a just manner, it will work efficiently and comply with every guideline. Regular due diligence and adherence to policies and law ensure that a company can fare well against any uncertainty. If the risk mitigation mechanism is functional, a company has a higher rate of survival for disruptions arising out of political, economic, and technological events.
While there exists no evidence to state that the relation between corporate governance and the market value of a company, it is well known that it boosts shareholder satisfaction. Corporate Governance in India is an indicator of the company valuations since the final goal of good governance is to maximise the interest of all stakeholders. The value a company has accumulated over the years can be tarnished by a single unlawful episode, therefore, internal controls at the right place are mandatory.
Over the last year, many cases of mismanagement, oppression and negligence have come to light and exposed scams and other financial malpractices. Investors, public and government organisations will have a hard time exercising faith in organisations that do not comply with the tenents of corporate governance. If a company has religiously maintained its compliance, they will naturally have the upper hand and enjoy greater trust from various stakeholders. This, in the long run, will also add to the company’s goodwill.
Ergo, corporate governance though cumbersome is set on sound principles that make sure each stakeholder is benefited, and no foul play can exist.
Has the government taken any steps to ensure the accountability of corporates?
After the shadow bank crisis, each pocket of the market demanded stringent company compliance. The demand was simple, more transparency and greater accountability. Some of these prayers have found answers in the form of the 2019 company law amendment, and the proposals made in the finance bill.
As per the changes, an auditor or an audit firm can be debarred by the National Financial Reporting Authority. This ban may continue for a period of six months to 10 years if there exists a case of proven misconduct.
Companies now must register charges (mortgages, etc.) on their property within a period of 60 days from the creation of such charges. NCLT can now remove company directors if it feels that they are not fit for office or have fraudulently conducted company affairs. The changes also included stringent Corporate Social Responsibility (CSR) compliance making it mandatory for every corporation to participate in CSR activities and programs. Non-compliance to the news CSR norms can result in penalties and even imprisonment.
Another exciting change that made its way in the finance bill was the reduction of a promoters’ stake in a company. The new norms have slashed their stake to 65 per cent from 75 per cent.
The cases of bad governance or even non-governance have triggered increased discussion. Since Indian corporations significantly add to the economy, they must aim to function seamlessly. The increase in the incidence of non-compliance has lowered the morales of investors both nationally and internationally.
In a time where the economy is showing clear signs of recession, companies must do everything in their means to increase the flow of investment in the country. Greater scrutiny of the company’s books or affairs will further the stakeholders’ morale.
Transparency is key to reciprocal accountability; it is the tool that helps us identify the deceptions corporations subject us to