India's Policy Transformation in Corporate Governance

Why in News?

India's economic trajectory was defined by two key policy shifts: the planned development of 1951 and the liberalization of 1991, both catalyzing growth through distinct government roles.

What is corporate governance?

• Corporate- A business organisation having a separate legal entity, ie an identity distinct from its owners, is called a corporation or a company in India.
• Section 2(11) of the Companies Act, 2013 defines "body corporate" or "corporation" to include
  • Private companies
  •  Public companies
  •  Personal companies
  •  Small companies
  •  Limited Liability Partnerships (LLPs)
  •  Foreign companies
  •  Companies incorporated outside India
• Corporate governance - It refers to the system of rules, practices, and processes by which a company is directed and controlled.
• It involves balancing the interests of a company's many stakeholders, such as shareholders, management, customers, suppliers, financiers, government, and the community.
• Importance - It ensures accountability, fairness, and transparency in a company's relationship with its stakeholders. 

How corporates are governed in India?

• Legislations
• • Companies Act, 2013 - It is the primary legislation governing corporate governance in India.
  • It includes provisions related to the composition & functions of the board, appointing auditor, disclosures, & shareholder rights.
  • Securities Contracts (Regulation) Act, 1956- It governs the listing of securities and enforces regulations for stock exchanges and listed companies, contributing to corporate governance.
• Regulations - SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 apply to listed companies.
• It mandate specific corporate governance norms, including board composition, audit committees, and the role of independent directors.
• Guidelines - National Guidelines on Responsible Business Conduct (NGRBC) was issued by the Ministry of Corporate Affairs.
• It encourage businesses to adopt sustainable and ethical practices.

What are the major episodes of policy transformations in India?

• First major transformation - The launch of the First Five-Year Plan in 1951 marked the beginning of India's planned economic development.
• The emphasis on public-sector development, particularly in heavy industries, with significant private investment was also taking place.
• Despite modest growth, it marked a substantial shift from the pre-Independence annual growth rate of 0.5%, achieving a nine-fold increase.
• Low growth episode– It was marked by droughts, a new agricultural policy, and political instability, this period saw relatively low economic growth.
• Second major transformation - The 1980s saw the beginning of higher growth, but a significant policy shift from public to private sector investment occurred after the 1991 liberalisation.
• The most profound change post-1991 was the financial liberalisation, including opening banking and mutual funds to the private sector and reforming the share market.
• New capital issues by non-government public limited companies grew significantly, from Rs.600 crore in 1981-82 to Rs.1.5 trillion in 2021-22.
• Evolution of India's trade patterns- India's share in world merchandise exports declined from 1.9% in 1951 to 0.4% by 1980 but has since recovered to 1.8%.
• India's share in global trade in commercial services increased from 0.6% in 1990 to 4.3% in 2023.

What are the challenges associated with corporate governance?

• Conflict of interest- Directors and management may face conflicts between their personal interests and those of the company, leading to unethical decisions.
• Lack of independence- Independent directors may not be truly independent, compromising their ability to provide unbiased oversight.
• Ineffective board functioning- Boards may be dominated by a few individuals, reducing their effectiveness in oversight and decision-making.
• Weak enforcement of regulations- Although laws are in place, the enforcement of corporate governance regulations can be inconsistent, allowing malpractices to persist.
• Transparency issues- Companies may fail to provide adequate and accurate information to stakeholders, undermining trust and accountability.
• Cultural and ethical deficiencies- A lack of emphasis on ethical behavior and corporate responsibility can lead to governance failures.

Political acceptability comes more readily to a government visibly involved in supporting non-corporate private sector, reducing income inequalities and regional disparities, and addressing caste concerns

What lies ahead?

• Shift to a neutral, market-friendly relationship to avoid cronyism and ensure fair competition.
• Reform PLI Scheme to foster a more dynamic corporate environment.
• Encourage the shift from family-managed to professionally managed enterprises through stronger competition.
• Raise the competence of the Competition Commission for enhancing private sector management dynamism.
• Regulate monopoly infrastructure to prevent private exploitation.
• Encourage companies to adopt and integrate ethical practices and corporate social responsibility into their business models.
• Utilize technology for better governance practices, such as digital voting platforms for shareholders and automated compliance monitoring systems.

References

1. Business Standard | Policy Transformations for Corporate governance
2. Investopedia | Corporate Governance