CG is understood as the system of rules, laws, practices and processes by which a company is directed, regulated and controlled. It is premised on four primary pillars of fairness, transparency, responsibility, and accountability which are universally applicable. CG is broadly comprised of a range of mechanisms, encompassing multifarious aspects which consist of numerous variables and information, for assessing the company’s overall performance. CG monitors the effectiveness of management of a company and ensures legal compliance by preventing irregular and/or improper behavior. A company’s CG structure is amongst the fundamental aspects that is considered by a prospective investor for assessing the level and quality of CG of the company, prior to making any investment in the same.

Further, the rapid pace of globalization and liberalization induced companies to have effective corporate governance strategy and to embrace improved standards of corporate governance to run their business. To limit the cases of frauds, malpractices and financial instability in companies, both policy makers and business managers focused on the significance of enhanced good corporate governance practices. At global level, Organization for Economic Co-operation and Development (OECD) and World Bank constantly worked upon for better corporate governance and adopted a set of principles to fortify the structure of companies. Similarly, in India several steps have been taken by Securities Exchange Board of India (SEBI), Ministry of Corporate Affairs (MCA), Reserve Bank of India (RBI) and Government of India (GOI) to improve the corporate governance in Indian companies.

Corporate Governance in view of the Companies Act, 2013

The Companies Act, 2013 (hereinafter referred to as the “Act”), introduced numerous balanced and innovative provisions were made under several heads to provide a rock-solid framework as a pre requisite for building a robust corporate governance structure.

A. Company to have Board of Directors

The Companies Act, 2013 provides that a public as well as a private company can have a maximum of fifteen directors on the board and appointing more than fifteen directors would require approval of shareholders through a special resolution in the general meeting. It also provides for at least one-woman director on the board for such class or classes of companies as may be prescribed. The act makes it obligatory for a company to have minimum one director who has remained in the country for a period of 182 days in the previous calendar year.

(Rule 3 of Companies (Appointment and Qualification of Directors) Rules, 2014)

The following class of companies shall appoint at least one-woman director-

(i) every listed company

(ii) every other public company having –

(a)paid–up share capital of one hundred crore rupees or more; or

(b)turnover of three hundred crore rupees or more:

Provided that a company, which has been incorporated under the Act and is covered under provisions of second proviso to sub-section (1) of section 149 shall comply with such provisions within a period of six months from the date of its incorporation: Provided further that any intermittent vacancy of a woman director shall be filled-up by the Board at the earliest but not later than immediate next Board meeting or three months from the date of such vacancy whichever is later.

(Rule 4 of Companies (Appointment and Qualification of Directors) Rules, 2014)

The following class or classes of companies shall have at least two directors as independent directors –

(i) the Public Companies having paid up share capital of ten crore rupees or more; or

(ii) the Public Companies having turnover of one hundred crore rupees or more; or

(iii) the Public Companies which have, in aggregate, outstanding loans, debentures and deposits, exceeding fifty crore rupees:

B. Number of Directorship

A person cannot become a director in more than twenty companies. But the condition is that out of twenty companies he cannot be the director of more than ten public companies.

C. Duties of the Directors:

Section 166 of the act stipulates certain duties of the directors of a company. These include:

D. Establishment of Committee

Section 177 of the act requires the BOD of every listed company and certain other companies to constitute an audit committee consisting of a minimum of three directors with the independent directors forming a majority. The majority of the members of the committee should have the capacity to understand financial statement so that they can monitor and find out fraudulent financial practices.

Section 178 of the act requires the BOD to constitute a nomination and remuneration committee comprising of minimum of three non-executive directors with one half independent directors. The committee decides the qualifications of both directors and senior management. The committee also makes recommendations with respect to the remuneration.

Section 178 (5) of the act requires every paper company having more than one thousand security holders to constitute a stakeholder relationship committee to resolve the grievances of security holders of the company.

Section 135 of the act requires every company having net worth of Rs. 500 crore or more, or turnover of Rs. 1000 crore or more or a net profit of Rs. 5 crore or more during the immediately preceding financial year to constitute a corporate social responsibility committee so as to maintain a harmony between economic and social objectives of the company.

E. Disclosure of interest by Director

(1) Every director shall at the first meeting of the Board in which he participates as a director and thereafter at the first meeting of the Board in every financial year or whenever there is any change in the disclosures already made, then at the first Board meeting held after such change, disclose his concern or interest in any company or companies or bodies corporate, firms, or other association of individuals which shall include the shareholding, in such manner as may be prescribed.

(2) Every director of a company who is in any way, whether directly or indirectly, concerned or interested in a contract or arrangement or proposed contract or arrangement entered into or to be entered into

(a) with a body corporate in which such director or such director in association with any other director, holds more than two per cent. shareholding of that body corporate, or is a promoter, manager, Chief Executive Officer of that body corporate; or

(b) with a firm or other entity in which, such director is a partner, owner or member, as the case may be, shall disclose the nature of his concern or interest at the meeting of the Board in which the contract or arrangement is discussed and shall not participate in such meeting:

Provided that where any director who is not so concerned or interested at the time of entering into such contract or arrangement, he shall, if he becomes concerned or interested after the contract or arrangement is entered into, disclose his concern or interest forthwith when he becomes concerned or interested or at the first meeting of the Board held after he becomes so concerned or interested.

(3) A contract or arrangement entered into by the company without disclosure under sub-section (2) or with participation by a director who is concerned or interested in any way, directly or indirectly, in the contract or arrangement, shall be voidable at the option of the company.

(4) If a director of the company contravenes the provisions of sub-section (1) or subsection (2), such director shall be punishable with imprisonment for a term which may extend to one year or with fine which shall not be less than fifty thousand rupees but which may extend to one lakh rupees, or with both.

(5) Nothing in this section-

(a) shall be taken to prejudice the operation of any rule of law restricting a director of a company from having any concern or interest in any contract or arrangement with the company;

(b) shall apply to any contract or arrangement entered into or to be entered into between two companies where any of the directors of the one company or two or more of them together holds or hold not more than two per cent. of the paid-up share capital in the other company.

Why do Companies need good Corporate Governance?

Every company should have an ethical corporate governance code as it reduces the risk of fraudulent activities by the top management. Good corporate governance structure enables accountability in the organization and also makes sure that directors, management and employees do not indulge in fraudulent and unlawful activities. The company is responsible for the welfare of the shareholders, management and employees and it is very important to protect their rights. A transparent and ethical corporate governance structure will enhance investor’s trust. It will also have an internal control framework which helps in mitigating future risks. Poor corporate governance can always lead to conflict among the shareholders which can always tarnish a company’s image. Tarnished image of the company may also lead to dissatisfied and frustrated employees.

Some of the key corporate governance issues faced in today’s world:

These few issues are reminder that corporate governance is essential to protect investors and ensure that companies are held accountable for their actions. Stronger regulations and enforcement are needed to prevent scandals and protect the integrity of India's capital markets.

Companies Act, 2013 gives a lot of importance to ethical corporate structure by penalizing the officer in default if they do not comply with the same. A director or a KMP can be held liable for unlawful or illegal activities committed by him. It is the duty of the board of directors to have a good corporate governance practice in its company. Independent directors also play a vital role in having effective corporate governance by helping the company formulate policies and representing the shareholders’ grievances.

Conclusion

The Companies Act, 2013 empowers independent directors with proper checks and balances so that such extensive powers are not exercised in an unauthorized manner but in a rational and accountable way. The changes are a step forward in the right direction to smoothly run the management and affairs of the companies in the interest of stakeholders. These are all welcome changes in the globalised corporate world of today and they will strengthen the core corporate machinery by instilling strong corporate governance norms in a company leading to economic efficiency and higher ethical standards which will always inspire the company’s management to work in the direction to uphold its goals of maximization of wealth of stakeholders backed with good corporate repute.