Why In News?

Union Minister Dr. Jitendra Singh emphasized that good corporate governance, transparency, and ethical entrepreneurship are central to development and institutional growth

What is Corporate Governance?

Corporate governance is the system of rules, practices, and processes used to direct and control a company.

  • Corporate Direction: Sets institutional rules, processes, and ethical standards to direct, monitor, and hold companies accountable.

  • Stakeholder Alignment: Balances competing interests among promoters, shareholders, lenders, employees, consumers, and civil society.

  • Fiduciary Duty: Requires boards to preserve solvency while preventing accounting fraud, tax evasion, and environmental damage.

  • Indian Framework: Integrates the Companies Act 2013, SEBI rules, and National Accounting Standards.

Importance of Corporate Governance

  • Mobilizing Capital: Global institutional investors and sovereign funds favor well-governed, transparent firms.

  • Protecting Domestic Savings: Shields over 16 crore Demat accounts and mutual fund investments from balance-sheet fraud.

  • Averting Credit Shocks: Prevents bank NPAs and systemic collapses like the 2018 Infrastructure Leasing & Financial Services (IL&FS) crisis. 

  • Lowering Borrowing Costs: Strong governance reduces credit default risks, securing cheaper debt.

What are the Main Pillars of Corporate Governance?

  • Accountability: Requires executives to submit audited balance sheets and risk assessments for annual shareholder approval.

  • Fairness: Ensures equal voting rights, fair dividend payouts, and legal protection for minority shareholders against promoter dominance.

  • Transparency: Mandates timely disclosure of material transactions, quarterly earnings, and executive compensation.

  • Responsibility: Enforces environmental compliance, labor standards, and the statutory 2% Corporate Social Responsibility (CSR) spending rule.

  • Independence: Empowers independent directors to oversee management and audits without promoter interference.

What is the Role of the Board of Directors?

  • Strategic & Fiduciary Oversight: Formulates risk frameworks, authorizes capital investments, and maintains financial stability.

  • Audit Committee Leadership: Uses an independent director-majority committee to oversee internal controls and external audits.

  • Nomination & Remuneration: Sets executive compensation aligned with long-term company health.

  • Stakeholder Grievance Redressal: Resolves investor disputes over share transfers, debentures, dividends, and disclosures.

  • CSR Monitoring: Manages and audits the mandatory 2% net profit spending on social and rural projects.

Framework For Corporate Governance

Companies Act, 2013: Codifies mandatory independent director quotas, one female director, secretarial audits, and statutory auditor rotation.  

SEBI LODR (Listing Obligations and Disclosure Requirements) Regulations, 2015: Enforces comprehensive listing obligations, independent board ratios, and strict disclosure thresholds for listed companies. 

National Financial Reporting Authority (NFRA): Exercises statutory powers under Section 132 to investigate auditor misconduct and penalize fraudulent accounting.  

Insolvency and Bankruptcy Code (IBC), 2016: Introduces a creditor-in-control mechanism to resolve non-performing corporate debtors and oust defaulting promoters.  

Securities and Exchange Board of India (SEBI) Prohibition of Insider Trading Regulations: Establishes a tracking matrix to penalize illicit trading driven by unpublished price-sensitive information.  

Business Responsibility and Sustainability Reporting Core (BRSR) Core Framework: Requires the top 1,000 listed entities to disclose verified Environmental, Social, and Governance (ESG) performance indicators. 

What are the Corporate Governance Challenges in India?

Promoter Dominance & Board Encroachment: Concentrated family ownership in over 60% of listed Indian corporations subjugates independent boards to promoter whims.

Compromised Independence of External Directors: Promoters handpick loyal associates as independent directors, neutralizing the oversight reforms proposed by the Uday Kotak Committee.

Related-Party Asset Siphoning: Layered shell companies funnel borrowed funds to promoter-controlled unlisted entities, as exposed in the ₹34,000 crore DHFL scam. 

Structural Auditor Conflicts of Interest: Statutory accounting firms derive lucrative non-audit consultancy revenues from corporate clients, impairing audit skepticism. 

Minority Shareholder Inaction: Retail investors rarely vote electronically on corporate resolutions, leaving excessive managerial compensation unchecked by public scrutiny.

Adjudication Bottlenecks at National Company Law Tribunal (NCLT): Over 21,000 corporate cases clog company law tribunal benches, extending corporate insolvency resolution beyond 650 days. 

  • The National Company Law Tribunal (NCLT) is a quasi-judicial body that handles corporate civil disputes and insolvency proceedings under the Companies Act, 2013 

Superficial ESG Greenwashing: Enterprises publish selective, unverified sustainability metrics to attract ESG capital without implementing genuine industrial decarbonization. 

  • Greenwashing involves misleading marketing to make products or policies appear more eco-friendly than they are.

What are the Emerging Corporate Governance Risks?

Climate Risk: Abrupt decarbonization policies and climate disruptions impair asset valuations, creating material financial liabilities on balance sheets. 

Corporate Data Governance Mandates: Processing vast personal data footprints requires board-level controls to prevent statutory penalties under the DPDP Act, 2023.

Artificial Intelligence Vulnerabilities: Deploying automated algorithms creates corporate liabilities surrounding algorithmic bias, explainability failures, and consumer privacy violations. 

Digital Platform Monopoly Risks: Tech platforms face heightened antitrust actions over predatory self-preferencing, data cartels, and non-transparent pricing algorithms. 

Cybersecurity & Ransomware Exposure: Escalating digital attacks require boards to treat cyber resilience as a core enterprise solvency threat rather than a secondary IT task.

Way Forward To Improve Corporate Governance 

Priority Area

Specific Measure

Independent Directors

Make appointment and evaluation of independent directors genuinely shareholder-driven, reducing promoter influence over board oversight.

Audit Independence

Strengthen the Audit Committee’s ability to independently review auditor performance, internal controls and suspected fraud. 

Whistle-blower Protection

Ensure confidential reporting and protection from victimisation, with direct access to the Audit Committee in exceptional cases.  

Complex Corporate Structures

Strengthen beneficial-ownership disclosure and scrutiny of subsidiary-level transactions, where promoter-controlled structures can obscure value transfers.

Technology-led Regulation

Deploy AI and data analytics to identify unusual related-party transactions, accounting anomalies and connected-party networks before losses become systemic.

Executive Remuneration

Link senior-management pay to long-term performance, risk-adjusted returns and governance quality, rather than short-term earnings alone.

Investor Protection

Give minority shareholders stronger access to information and meaningful participation in material corporate decisions.

Faster Enforcement

Reduce the gap between detection and punishment through time-bound regulatory investigation and adjudication.

Conclusion

India must shift from mechanical checklist compliance to genuine accountability, where independent board vigilance, strict regulatory deterrence, and digital surveillance make ethical corporate stewardship the default choice.

Source: THEPRINT

PRACTICE QUESTION

Q. With reference to the corporate governance regulatory framework in India, consider the following statements:

1. The National Financial Reporting Authority (NFRA) was established as an independent regulator for auditors under the Companies Act, 2013.

2. Under Section 135 of the Companies Act, 2013, qualifying companies must spend at least 2% of their average net profits made during the three immediately preceding financial years on CSR activities.

3. The Companies Act completely prohibits the appointment of women directors to the Board of Directors of listed companies.

Which of the statements given above are correct?

(a) 1 and 2 only

(b) 2 and 3 only

(c) 1 and 3 only

(d) 1, 2, and 3

Answer: (a) 1 and 2 only

Explanation: 

Statement 1 is correct: The National Financial Reporting Authority (NFRA) was constituted on October 1, 2018, under Section 132(1) of the Companies Act, 2013, to act as an independent regulator for the auditing profession in India.

Statement 2 is correct: Section 135 of the Companies Act, 2013 mandates that qualifying companies must spend at least 2% of their average net profits made during the three immediately preceding financial years on Corporate Social Responsibility (CSR) activities.

Statement 3 is incorrect: The Companies Act, 2013 (under Section 149) and SEBI regulations do not prohibit women directors; rather, they mandate the appointment of at least one woman director on the boards of qualifying companies (such as listed companies and unlisted public companies meeting specific paid-up capital or turnover thresholds).