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INTRODUCTION
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Meaning:
A means whereby society can be sure that large corporations are well-run
institutions to which investors and lenders can confidently commit their funds.
Considering the ethical failures in the last several years and the resulting
crisis in confidence...A sincere commitment to creating and sustaining an ethical
business culture in public and private sectors (has never been so important).
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fulfilling the long-term strategic goal of the owners while taking into account
the expectations of all the key stakeholders, and in particular:
consider and care for the interests of employees, past, present and future
work to maintain excellent relations with both customers and suppliers
take account of the needs of the environment and the local community
Maintaining proper compliance with all the applicable legal and regulatory
requirements under which the company is carrying out its activities.
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HISTORICAL BACKGROUND
Duties of a King
Corporate governance …
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The Indian Companies Act of 2013 introduced some progressive and transparent
processes which benefit stakeholders, directors as well as the management of companies.
Investment advisory services and proxy firms provide concise information to the
shareholders about these newly introduced processes and regulations, which aim to improve
the corporate governance in India.
Corporate advisory services are offered by advisory firms to efficiently manage the
activities of companies to ensure stability and growth of the business, maintain the
reputation and reliability for customers and clients. The top management that consists of the
board of directors is responsible for governance. They must have effective control over
affairs of the company in the interest of the company and minority shareholders. Corporate
governance ensures strict and efficient application of management practices along with legal
compliance in the continually changing business scenario in India.
The fundamental objective of corporate governance is to boost and maximize shareholder value
and protect the interest of other stake holders. World Bank described Corporate Governance as blend
of law, regulation and appropriate voluntary private sector practices which enables the firm to attract
financial and human capital to perform efficiently, prepare itself by generating long term economic
value for its shareholders, while respecting the interests of stakeholders and society as a whole.
Corporate governance has various objectives to strengthen investor's confidence and intern leads to
fast growth and profits of companies. These are mentioned below:
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Improving performance
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Today a company has a very large number of shareholders spread all over the nation and even
the world; and a majority of shareholders being unorganised and having an indifferent attitude towards
corporate affairs. The idea of shareholders’ democracy remains confined only to the law and the
Articles of Association; which requires a practical implementation through a code of conduct of
corporate governance.
The pattern of corporate ownership has changed considerably, in the present-day-times; with
institutional investors (foreign as well Indian) and mutual funds becoming largest shareholders in
large corporate private sector. These investors have become the greatest challenge to corporate
managements, forcing the latter to abide by some established code of corporate governance to build up
its image in society.
Corporate scams (or frauds) in the recent years of the past have shaken public confidence in
corporate management. The event of Harshad Mehta scandal, which is perhaps, one biggest scandal, is
in the heart and mind of all, connected with corporate shareholding or otherwise being educated and
socially conscious.
The need for corporate governance is, then, imperative for reviving investors’ confidence in the
corporate sector towards the economic development of society.
Society of today holds greater expectations of the corporate sector in terms of reasonable price,
better quality, pollution control, best utilisation of resources etc. To meet social expectations, there is
a need for a code of corporate governance, for the best management of company in economic and
social terms.
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(v) Hostile Take-Overs:
Hostile take-overs of corporations witnessed in several countries, put a question mark on the
efficiency of managements of take-over companies. This factors also points out to the need for
corporate governance, in the form of an efficient code of conduct for corporate managements.
It has been observed in both developing and developed economies that there has been a great
increase in the monetary payments (compensation) packages of top level corporate executives. There
is no justification for exorbitant payments to top ranking managers, out of corporate funds, which are
a property of shareholders and society.
This factor necessitates corporate governance to contain the ill-practices of top managements of
companies.
(vii) Globalization:
Desire of more and more Indian companies to get listed on international stock exchanges also
focuses on a need for corporate governance. In fact, corporate governance has become a buzzword in
the corporate sector. There is no doubt that international capital market recognises only companies
well-managed according to standard codes of corporate governance.
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The board should ensure that the company has the right CEO.
The board should assess the company’s valuation and significant risks
and rewards as it focuses on the long-term interests of the company.
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In recent years, the ownership structure of companies has changed a lot. Public
financial institutions, mutual funds, etc. are the single largest shareholder in most of the large
companies. So, they have effective control on the management of the companies. They force
the management to use corporate governance. That is, they put pressure on the management to
become more efficient, transparent, accountable, etc. The also ask the management to make
consumer-friendly policies, to protect all social groups and to protect the environment. So, the
changing ownership structure has resulted in corporate governance.
Today, social responsibility is given a lot of importance. The Board of Directors have
to protect the rights of the customers, employees, shareholders, suppliers, local communities,
etc. This is possible only if they use corporate governance.
In recent years, many scams, frauds and corrupt practices have taken place. Misuse and
misappropriation of public money are happening everyday in India and worldwide. It is
happening in the stock market, banks, financial institutions, companies and government
offices. In order to avoid these scams and financial irregularities, many companies have started
corporate governance.
In general, shareholders are inactive in the management of their companies. They only
attend the Annual general meeting. Postal ballot is still absent in India. Proxies are not allowed
to speak in the meetings. Shareholders associations are not strong. Therefore, directors misuse
their power for their own benefits. So, there is a need for corporate governance to protect all
the stakeholders of the company.
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5. Globalisation :
Today most big companies are selling their goods in the global market. So, they have
to attract foreign investor and foreign customers. They also have to follow foreign rules and
regulations. All this requires corporate governance. Without Corporate governance, it is
impossible to enter, survive and succeed the global market.
Today, there are many takeovers and mergers in the business world. Corporate
governance is required to protect the interest of all the parties during takeovers and mergers.
7. SEBI :
SEBI has made corporate governance compulsory for certain companies. This is done
to protect the interest of the investors and other stakeholders.
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INDIAN SCENARIO
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INTERNATIONAL SCENARIO
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CORPORATE GOVERNANCE –
DEVELOPMENTS IN INDIA
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something. But when they understand the weight of their responsibilities, they’re
more inclined to make sure that they carry out their tasks properly. And when
they’re successful in this regard, they’re likely to feel a sense of accomplishment,
and this further fuels their desire to do better.
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secrets, corporate data, and client information are all kept safe from unauthorized
access from inside and out. Security is not just an IT concern anymore, unlike in
the past.
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REGULATORY FRAMEWORK
The Indian statutory framework has, by and large, been in consonance with
the international best practices of corporate governance. Broadly speaking, the
corporate governance mechanism for companies in India is enumerated in the following
enactments/ regulations/ guidelines/ listing agreement:
1. The Companies Act, 2013 inter alia contains provisions relating to board
constitution, board meetings, board processes, independent directors, general meetings,
audit committees, related party transactions, disclosure requirements in financial
statements, etc.
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Meetings" (SS-2). These Secretarial Standards have come into force w.e.f. July 1, 2015.
Section 118(10) of the New Companies Act provide that every company (other than one
person company) shall observe Secretarial Standards specified as such by the ICSI with
respect to general and board meetings.
LEGAL FRAMEWORK
The important legislations for regulating the entire corporate structure and
for dealing with various aspects of governance in companies are Companies Act, 1956
and Companies Bill, 2004. These laws have been introduced and amended, from time
to time, to bring more transparency and accountability in the provisions of corporate
governance. That is, corporate laws have been simplified so that they are amenable to
clear interpretation and provide a framework that would facilitate faster economic
growth.
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Companies Laws
The Ministry of Corporate Affairs (MCA) is the main authority for
regulating and promoting efficient, transparent and accountable form of corporate
governance in the Indian corporate sector. It is constantly working towards
improvement in the legislative framework and administrative set up, so as to enable
easy incorporation and exit of the companies, as well as convenient compliance of
regulations with transparency and accountability in corporate governance. It is
primarily concerned with administration of the Companies Act, 1956 and related
legislations.
1. The Companies Act, 1956 is the central legislation in India that empowers the
Central Government to regulate the formation, financing, functioning and winding up
of companies. It applies to whole of India and to all types of companies, whether
registered under this Act or an earlier Act. It provides for the powers and
responsibilities of the directors and managers, raising of capital, holding of company
meetings, maintenance and audit of company accounts, powers of inspection, etc.
The main objectives with which this Act has been introduced are to:- (i) help in
the development of companies on healthy lines; (ii) maintain a minimum standard of
good behaviour and business honesty in company promotion and management; (iii)
protect the interests of the shareholders as well as the creditors; (iv) ensure fair and true
disclosure of the affairs of companies in their annual published balance sheet and profit
and loss accounts; (v) ensure proper standard of accounting and auditing; (vi) provide
fair remuneration to management and Board of Directors as well as to company's
employees; etc.
Every company shall in each year, hold in addition to any other meetings, a
general meeting as its annual general meeting and shall specify the meeting as such in
the notices calling it; and not more than fifteen months shall elapse between the date of
one annual general meeting of a company and that of the next. At each annual general
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Meeting, every company shall appoint an auditor or auditors to hold office from the
conclusion of that meeting until the conclusion of the next annual general meeting and
shall, within seven days of the appointment, give intimation thereof to every auditor so
appointed.
Every auditor of a company shall have a right of access at all times to the
books and accounts and vouchers of the company, whether kept at the head office of
the company or elsewhere, and shall be entitled to require from the officers of the
company such information and explanations as the auditor may think necessary for the
performance of his duties as auditor.
The auditor shall inquire: - (i) whether loans and advances made by the
company on the basis of security have been properly secured and whether the terms on
which they have been made are not prejudicial to the interests of the company or its
members; (ii) whether transactions of the company which are represented merely by
book entries are not prejudicial to the interests of the company; etc.
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Every company shall keep one or more registers in which shall be entered
separately particulars of all contracts or arrangements, including the following
particulars to the extent they are applicable in each case, namely:- (i) the date of the
contract or arrangement; (ii) the names of the parties thereto; (iii) the principal terms
and conditions thereof; (iv) in the case of a contract or arrangement to which this Act
applies, the date on which it was placed before the Board; (v) the names of the directors
voting for and against the contract or arrangement and the names of those remaining
neutral. Further, every company shall keep at its registered office a register of its
directors, managing director, managing agent, secretaries and treasurers, manager and
secretary.
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Every public company having paid-up capital of not less than five crores of
rupees shall constitute a committee of the Board knows as 'Audit Committee' which
shall consist of not less than three directors and such number of other directors as the
Board may determine of which two thirds of the total number of members shall be
directors, other than managing or whole-time directors. The annual report of the
company shall disclose the composition of the Audit Committee. The auditors, the
internal auditor, if any, and the director-in-charge of finance shall attend and participate
at meetings of the Audit Committee but shall not have the right to vote.
The Audit Committee should have discussions with the auditors periodically
about internal control systems, the scope of audit including the observations of the
auditors and review the half-yearly and annual financial statements before submission
to the Board and also ensure compliance of internal control systems. It shall have
authority to investigate into any matter in relation to the items specified by the Board
and for this purpose, shall have full access to information contained in the records of
the company and external professional advice, if necessary. The recommendations of
the Audit Committee on any matter relating to financial management, including the
audit report, shall be binding on the Board. If the Board does not accept the
recommendations of the Audit Committee, it shall record the reasons thereof and
communicate such reasons to the shareholders.
Besides, a listed public company may, and in the case of resolutions relating
to such business as the Central Government may, by notification, declare to be
conducted only by postal ballot, shall, get any resolution passed by means of a postal
ballot, instead of transacting the business in general meeting of the company. Where a
company decides to pass any resolution by resorting to postal ballot, it shall send a
notice to all the shareholders, along with a draft resolution explaining the reasons
thereof, and requesting them to send their assent or dissent in writing on a postal ballot
within a period of thirty days from the date of posting of the letter. If a resolution is
assented to by a requisite majority of the shareholders by means of postal ballot, it shall
be deemed to have been duly passed at a general meeting convened in that behalf.
However, if a shareholder sends his assent or dissent in writing on a postal ballot and
thereafter any person fraudulently defaces or destroys the ballot paper or declaration of
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identify of the shareholder, such person shall be punishable with imprisonment for a
term which may extend to six months or with fine or with both.
The important step in this direction has been the Companies Bill, 2004, which
has been introduced to provide the comprehensive review of the company law. It
contained important provisions relating to corporate governance, like, independence of
auditors, relationship of auditors with the management of company, independent
directors with a view to improve the corporate governance practices in the corporate
sector. It is subjected to greater flexibility and self-regulation by companies, better
financial and non-financial disclosures, more efficient enforcement of law, etc.
This amendment to the Companies Act 1956 mainly focused on reforming the
audit process and the board of directors. It mainly aimed at:- (i) laying down the
process of appointment and qualification of auditors, (ii) prohibiting non-audit services
by the auditors; (iii) prescribing compulsory rotation, at least of the Audit Partner; (iv)
requiring certification of annual audited accounts by both CEO and CFO; etc. For
reforming the boards, the bill included that remuneration of non-executive directors can
be fixed only by shareholders and must be disclosed. A limit on the amount which can
be paid would also be laid down. It is also envisaged that the directors should be
imparted suitable training. However, among others, an independent director should not
have substantial pecuniary interest in the company’s shares.
SEBI Laws
Improved corporate governance is the key objective of the regulatory framework in the
securities market. Accordingly, Securities and Exchange Board of India (SEBI) has
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made several efforts with a view to evaluate the adequacy of existing corporate
governance practices in the country and further improve these practices. It is
implementing and maintaining the standards of corporate governance through the use of
its legal and regulatory framework, namely:-
Every recognised stock exchange shall furnish the Central Government with
a copy of the annual report, and such annual report shall contain such particulars as
may be prescribed. It may make rules or amend any rules made by it to provide for all
or any of the following matters, namely:- (i) the restriction of voting rights to members
only in respect of any matter placed before the stock exchange at any meeting; (ii) the
regulation of voting rights in respect of any matter placed before the stock exchange at
any meeting so that each member may be entitled to have one vote only, irrespective of
his share of the paid-up equity capital of the stock exchange; (iii) the restriction on the
right of a member to appoint another person as his proxy to attend and vote at a meeting
of the stock exchange; etc.
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This Act was enacted to protect the interests of investors in securities and to
promote the development of, and to regulate, the securities market and for matters
connected therewith or incidental thereto. For this purpose, the SEBI (the Board), by
regulation, specify:- (i) the matters relating to issue of capital, transfer of securities and
other matters incidental thereto; and (b) the manner in which such matters shall be
disclosed by the companies.
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A depository shall enter into an agreement with one or more participants as its
agent, in such form as may be specified by the bye-laws. Any person, through a
participant, may enter into an agreement, in such form as may be specified by the bye-
laws, with any depository for availing its services. Any such person shall surrender the
certificate of security, for which he seeks to avail the services of a depository, to the
issuer in such manner as may be specified by the regulations. The issuer, on receipt of
certificate of security, shall cancel the certificate of security and substitute in its records
the name of the depository as a registered owner in respect of that security and inform
the depository accordingly. A depository shall, on receipt of information, enter the
name of the person referred in its records, as the beneficial owner.
Every person subscribing to securities offered by an issuer shall have the option
either to receive the security certificates or hold securities with a depository. Where a
person opts to hold a security with a depository, the issuer shall intimate such
depository the details of allotment of the security, and on receipt of such information
the depository shall enter in its records the name of the allottee as the beneficial owner
of that security.
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beneficial owner, depository or participant, who shall submit a report of such enquiry or
inspection to it within such period as may be specified in the order.
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Several studies in India and abroad have indicated that markets and investors
take notice of well managed companies and respond positively to them. Such
companies have a system of good corporate governance in place, which allows
sufficient freedom to the board and management to take decisions towards the
progress of their companies and to innovate, while remaining within the
framework of effective accountability.
In today's globalised world, corporations need to access global pools of capital
as well as attract and retain the best human capital from various parts of the
world. Under such a scenario, unless a corporation embraces and demonstrates
ethical conduct, it will not be able to succeed.
The credibility offered by good corporate governance procedures also helps
maintain the confidence of investors – both foreign and domestic – to attract
more long-term capital. This will ultimately induce more stable sources of
financing.
A corporation is a congregation of various stakeholders, like customers,
employees, investors, vendor partners, government and society. Its growth
requires the cooperation of all the stakeholders. Hence it imperative for a
corporation to be fair and transparent to all its stakeholders in all its transactions
by adhering to the best corporate governance practices.
Good Corporate Governance standards add considerable value to the operational
performance of a company by:
improving strategic thinking at the top through induction of independent
directors who bring in experience and new ideas;
rationalizing the management and constant monitoring of risk that a firm faces
globally;
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It also has a long term reputational effects among key stakeholders, both internally
and externally.
Also, the instances of financial crisis have brought the subject of corporate
governance to the surface. They have shifted the emphasis on compliance with
substance, rather than form, and brought to sharper focus the need for
intellectual honesty and integrity. This is because financial and non-financial
disclosures made by any firm are only as good and honest as the people behind
them.
Good governance system, demonstrated by adoption of good corporate
governance practices, builds confidence amongst stakeholders as well as
prospective stakeholders. Investors are willing to pay higher prices to the
corporates demonstrating strict adherence to internally accepted norms of
corporate governance.
Effective governance reduces perceived risks, consequently reduces cost of
capital and enables board of directors to take quick and better decisions which
ultimately improves bottom line of the corporates.
Adoption of good corporate governance practices provides long term sustenance
and strengthens stakeholders' relationship.
A good corporate citizen becomes an icon and enjoy a position of respects.
Potential stakeholders aspire to enter into relationships with enterprises whose
governance credentials are exemplary.
Adoption of good corporate governance practices provides stability and growth
to the enterprise.
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1. NO PROPER STRUCTURE
It is true that the ‘corporate governance’ has no unique structure or
design and is largely considered ambiguous. There is still lack of awareness about
its various issues, like, quality and frequency of financial and managerial
disclosure, compliance with the code of best practice, roles and responsibilities of
Board of Directories, shareholders rights, etc. There have been many instances of
failure and scams in the corporate sector, like collusion between companies and
their accounting firms, presence of weak or ineffective internal audits, lack of
required skills by managers, lack of proper disclosures, non-compliance with
standards, etc. As a result, both management and auditors have come under greater
scrutiny.
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2. NO GOVERNMENT SUPPORT
Strong governance standards focusing on fairness, transparency,
accountability and responsibility are vital not only for the healthy and
vibrant corporate sector growth, as well as inclusive growth of the economy.
Recent corporate scandals have led to public pressure to reform business practices
and increase regulation. The public outcry over the recent scandals has made it
clear that the status quo is no longer acceptable: the public is demanding
accountability and responsibility in corporate behavior. It is widely believed that
it will take more than just leadership by the corporate sector to restore public
confidence in our capital markets and ensure their ongoing vitality. It will also take
effective government action, in the form of reformed regulatory systems, improved
auditing, and stepped up law enforcement. These responses make clear that the
governance of corporations has become a central item on the public policy agenda.
The recent scandals themselves demonstrate that lax regulatory institutions,
standards, and enforcement can have huge implications for the economy and for
the public. Of course, government responses to scandals should be well considered
and effective.
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3. INSIDER TRADING
Corporate insiders like officers, directors and employees by the virtue
of their position have access to confidential information about the corporation and
may misappropriate that information to reap profits. In most countries, trading by
corporate insiders such as officers, key employees, directors, and large
shareholders may be legal, if this trading is done in a way that does not take
advantage of non-public information. However, the term is frequently used to refer
to a practice in which an insider or a related party trades based on material non-
public information obtained during the performance of the insider’s duties at the
corporation, or otherwise in breach of a fiduciary or other relationship of trust and
confidence or where the non-public information was misappropriated from the
company. Such corporate insiders use these information in such a way to reap
profits or avoid losses on the stock market, to the detriment of the source of the
information and to the typical investors who buy or sell their stock without the
advantage of “inside” information.
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This case testifies the fact that the SEBI lacks the thorough
investigative mechanism and a vigilant approach due to which the culprits are able
to escape from the clutches of law. In most of the cases, SEBI failed to adduce
evidence and corroborate its stance before the court. Unlike the balance of
probabilities that is required in proving a civil liability, a case involving criminal
liability requires the allegations to be proved beyond reasonable doubts. Therefore
there should be thread bare investigation and all the loopholes if any should be
properly plugged in.
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ownership and management have become widely separated, the owners are unable
to exercise effective control over the management or the Board.
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OTHER WEAKNESSES
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Set out below are top ten issues affecting corporate governance practices in
India.
Enough has been said on board and its role as the cornerstone for good
corporate governance. To this end, the law requires a healthy mix of executive
and non-executive directors and appointment of at least one woman director for
diversity. There is no doubt that a capable, diverse and active board would, to
large extent, improve governance standards of a company. The challenge lies in
ingraining governance in corporate cultures so that there is improving
compliance "in spirit". Most companies' in India tend to only comply on paper;
board appointments are still by way of "word of mouth" or fellow board member
recommendations. It is common for friends and family of promoters (a uniquely
Indian term for founders and controlling shareholders) and management to be
appointed as board members. Innovative solutions are the need of the hour – for
instance, rating board diversity and governance practices and publishing such
results or using performance evaluation as a minimum benchmark for director
appointment.
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5. Accountability to Stakeholders
6. Executive Compensation
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In India, founders' ability to control the affairs of the company has the
potential of derailing the entire corporate governance system. Unlike developed
economies, in India, identity of the founder and the company is often merged.
The founders, irrespective of their legal position, continue to exercise significant
influence over the key business decisions of companies and fail to acknowledge
the need for succession planning. From a governance and business continuity
perspective, it is best if founders chalk out a succession plan and implement it.
Family owned Indian companies suffer an inherent inhibition to let go of control.
The best way to tackle with this is widen the shareholder base - as PE and other
institutional investors pump in capital, founders are forced to think about a
succession plan and step away with dignity.
8. Risk Management
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engage and understand the specialists in their firm. The board must assess the
potential risk of handling data and take steps to ensure such data is protected
from potential misuse. The board must invest a reasonable amount of time and
money in order ensure the goal of data protection is achieved.
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LISTING AGREEMENT
SEBI has amended the Listing Agreement with effect from October 1,
2014 to align it with New Companies Act.
1. Board of Directors
2. Audit Committee
3. Disclosure Requirements
To certify to the Board that they have reviewed the financial statements and the
same are fair and in compliance with the laws/ regulations and accept
responsibility for internal control systems.
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CASE STUDY
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CONCLUSION
Same is the situation with the Indian government and SEBI both have
not been successful to curb insider trading. Though SEBI is now making some
efforts to prevent insider to trade in stock exchange and disturb the main
functioning of it. Efforts made by SEBI on a slow pace which needs to be fasten
up otherwise this kind of activities will loses the trust of general investors.
For a long time, India was a managed, protected economy with the
corporate sector operating in an insular fashion. But as restriction have eased,
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Indian corporations are emerging on the world stage and discovering that the old
ways of doing business are no longer sufficient in such a fast-paced global
environment.
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rnance&gclid=EAIaIQobChMI_s7xn8zh4AIVV6SWCh3URAvAEAAYASAAEgIbPfD_BwE
https://books.google.co.in/books?hl=en&lr=&id=x4qqbgaaqbaj&oi=fnd&pg=pp1&
dq=corporate+governance:+principles,+policies+and+practices&ots=g16hccztby&s
ig=ag68hhvdt_zgzklcff8gyyjdtdk#v=onepage&q=corporate%20governance%3a%20
principles%2c%20policies%20and%20practices&f=false
https://global.oup.com/ukhe/product/corporate-governance-
9780198702757?cc=gb&lang=en&
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