Enforcement of corporate governance in the Indian legal system

Abstract

Why do we have bad corporate governance? We have bad governance because the conventional methods we use allow us to have bad governance. We do not have one fundamentally correct way to organize and describe our enterprises that everyone accepts and follows. Instead, we have a myriad of different methods that are used for management and a myriad of different ways any enterprise can be presented. The concept of corporate governance has been attracting public attention for quite some time in both India and abroad. Financial crises in emerging markets have put corporate and governmental oversight in the limelight. The same is applicable to highprofile financial reporting failures in developed economies as well. The quality of corporate governance shapes the growth and the future of any capital market and economy, therefore there is increasing acceptance of the concept in industry and financial markets. Progressive firms in India have voluntarily put in place systems of good governance and related issues is an inevitable outcome of a process which leads firms to increasingly shift to financial markets as the pre-eminent source for capital. More and more organizations are realizing that good corporate governance is indispensible to effective market discipline. Good corporate governance helps an organization achieve several objectives and some of the more important ones include: • Developing appropriate strategies that result in the achievement of stakeholder objectives • Attracting, motivating and retaining talent • Creating a secure and prosperous operating environment and improving operational performance • Managing and mitigating risk and protecting and enhancing the company’s reputation. The fundamental objective of corporate governance is not mere fulfilment of the requirements of law but in ensuring commitment of the Board in managing the company in a transparent manner for maximizing long-term shareholder value. The financial markets become more robust and evolved through the years thanks to the crisis it has been facing one after the other. The markets first saw the scandal arising of the abuse of high yield junk bonds, derivatives and insider information. This was followed by the era of the LBO (leveraged buyout) craze. Following these the crisis where investors lost confidence in the financial markets came into picture in the 2000s. This crisis has led to the much talked about Sarbanes Oxley Act (SOX) and also in the amendment of Clause 49 in India by the Securities and Exchange Board of India. In the following we discuss corporate governance, the newly amended Clause 49, its necessity; various concerns addressed by this clause, comparison with Sarbanes Oxley act, certain aspects that we feel are loopholes in the current clause and what can be done to make them more robust.