India, today, is a widely preferred business location for companies all over the world because of its robust regulatory framework, sustainable environment and a polished talent pool. However, was this the case in the earlier days after independence too? The answer, without any thinking is, a clear 'No'. So, what has made a difference? The answer to this question is the advancement that has been constantly and promptly captured and curated in the corporate governance sphere. Decades ago, there were a majority of family businesses which crowded the market, with minimal accountability and maximum resistance to regulations. When liberalization hit the economy, what came was a seismic shift in the manner in which corporations were governed in India.
Globalization and liberalization brought with themselves immense competition, wherein Indian companies had no choice but to up their standards by getting regulated and abided by the law. This is where the real shift started, from nepotic business houses to board-room supremacy. Therefore, it is safe to say that corporate governance in India has seen its evolution not in a linear motion but through blazing its own path through demands, crisis, reforms and necessities.
Companies Act, 1956
Right after independence, the nascent India had promulgated a primary law for the regulation of companies. The provisions under the Companies Act, 1956 lacked pro-investor mindset and lacked transparency making it vulnerable to mismanagement. They also seem weak when compared with the complex structures of companies in the globalized world. Many concepts like one-person company, corporate social responsibility, independent directors, business responsibility reporting etc. were also missing from the Companies Act, 1956.
Establishment of SEBI in 1992s
After the wave of globalization, liberalization and privatization hit the Indian economy, the major overhaul in the regulatory framework came with the establishment of Securities and Exchange Board of India (“SEBI”) in 1992. With SEBI, Indian corporate governance got a fresh perspective in the form of a watchdog preserving the rights of investors by promoting transparency and accountability of the corporates.
Voluntary Corporate Governance Guidelines, 2009
The Ministry of Corporate Affairs in India introduced the Voluntary Corporate Governance Guidelines, 2009 which introduced certain concepts to the corporate governance regime of India. These concepts which were not mandatory to adopt later went on to get embedded in the company law of India. These guidelines stressed upon the whistleblowing tools in the company, launched the concept of independent directors, gave a sneak peek to audit committee and suggested separation of Chairman and CEO roles.
Companies Act, 2013
After Companies Act, 1956, the introduction of Companies Act, 2013 brought with it a wave of transformation and a notch of maturity in the corporate governance structure of India. Concepts like appointment of independent directors, requirement of woman director, formation of committees, corporate social responsibility, extensive filings and disclosures saw a shift from being mere guidelines to legally binding provisions.
Environmental, Social and Governance Reporting
With the passage of time, Indian corporate governance saw a tremendous shift from being governed with an archaic law to getting regulated with the provisions which are at par with the global standards. The accountability of corporates has led to a point wherein certain mandatory filings are legally backed and account for the corporate responsibility. Not just this, earlier the filings and accountability were limited to the financials of a company, whereas now, the companies are required to include the Environmental, Social and Governance (“ESG”) factors too in their reports. This includes the filing of Business Responsibility and Sustainability Report, a concept introduced in 2021, required to be filed by top 1000 listed companies in India. The Business Responsibility and Sustainability Report includes certain long-term plans of the entity including critical factors like adherence to ethics, attentiveness towards sustainability and commitment to welfare.
The Way forward
The major shift of corporate governance in India captures the ability of Indian corporate laws to adapt with the changes in the global framework and in the society as a whole. When in 1956 the stature of companies was merely in the nature of domestic family businesses to being the humungous global entities serving as a means of both investment and income for the public. Now, companies being a popular investment vehicle for parking the hard-earned money of the public, which is in barter a major source for the capital of these companies, in return demand transparency and accountability. Therefore, the evolution of the corporate governance provisions in India is growing in the commensurate rate to align itself with the global standards.
Author: Adv. Varun Singh, Founder, Foresight Law Offices, India. Views are personal.