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Legal Capsule: Corporate Governance in Listed Companies by Economic Laws Practice

The concept of corporate governance can be best described as a system of checks and balances within the corporate structure to facilitate long term value creation for stakeholders (and shareholders) due to the separation of ownership and management in companies. Sir Adrian Cadbury, in the UK Commission Report: Corporate Governance 1992 has correctly referred to ‘corporate governance’ being concerned with holding the balance between economic and social goals and between individual and communal goals. 

Evolution of Corporate Governance in India

The first reference to corporate governance in India’s legal framework can be found in the Companies Act, 1956. While our corporate governance norms have been developing over various years, the 2017 World Bank ‘Doing Business’ report ranks India at the 13th place in terms of minority protection, attesting to the progress made on this front in the recent years. 

The Satyam scandal in 2009, was a watershed moment in the history of governance regulation in India. Involving falsification of accounts by the top echelons of management and a fraud of over $1 billion dollars, this scandal motivated the Government of India to enact the Companies Act, 2013 which introduced wide-ranging changes to India’s corporate governance framework.

Evolution of Corporate Governance in India

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The LODR Regulations

The enactment of the 2013 Act brought about a shift from a voluntary approach to an ultra-mandatory approach towards corporate governance, with detailed governance norms being included in the primary legislation itself. Thereafter, the Listing Agreement was replaced by the SEBI (Listing Obligation and Disclosure Requirements) Regulations, 2015 (“LODR Regulations”), which dealt extensively with governance matters, replacing the regime under Clause 49 thereof. Based on core concepts of adequate, timely and accurate disclosures of material information to all stakeholders, equitable treatment of all shareholders, recognition of the role of all stakeholders in governance, effective board supervision of the management, the LODR Regulations prescribed standards of governance higher than that contained in the Companies Act, 2013, given that the interests of small, retail shareholders required additional protection from acts of the majority.


Conclusion

Corporate governance in India has indeed come a long way. While these developments will inevitably enhance the regulatory compliance burden on companies, this is undoubtedly an impressive array of measures when viewed from the lens of corporate governance. Gone are the days when investors (including shareholders) would shoot in the dark with respect to their investments, relying on hearsay and tip-offs from friends and family while praying that they are not taken for a ride by the promoters and management. In marked contrast, the Indian investor of today is sufficiently empowered by robust corporate governance norms to take informed decisions. With effective implementation of the evolving norms, the evolving next phase of corporate governance in India seems to be on a fitting course.

Venture Intelligence is India's longest serving provider of data and analysis on Private Company Financials, Transactions (private equity, venture capital and M&A) & their Valuations in India.

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