Opinion | Companies need to follow corporate governance norms
In order to ensure that companies in India follow/adopt corporate governance in their dealings, the law has provided for significant penalties in case of non-compliance
Corporate governance refers to a set of systems and principles by which a fair amount of transparency is brought in the functioning of a company, thereby ensuring sustainable development for all stakeholders. Corporate governance is also important for inculcating ethical standards in a company’s management.
The Companies Act, 2013, made significant changes in the way companies in India are governed. Key provisions related to corporate governance include composition of the board, functioning of independent directors, enhancing board responsibilities on financial reporting, related party transactions, compliance with the laws of the land and corporate social responsibility. Similarly, provisions have been laid down under the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015 (Sebi LODR) for enhancing transparency in transactions or dealings of a company. Recently, the Kotak committee led by Uday Kotak also provided recommendations in this space with the objective of improving corporate governance in listed companies. Some of the key recommendations are: the appointment of a lead independent director in case of non-independent chairperson, better interaction between the board and management, disclosure of skills of directors, and enhancing related party disclosures.
In order to ensure that companies in India follow/adopt corporate governance in their dealings, the law has provided for significant penalties in case of non-compliance. There are penalties under the Companies Act and Sebi LODR, thereby ensuring compliance with corporate governance provisions a mandatory affair.
Penalties under the Companies Act vary—from a fine of a few thousand rupees to imprisonment of up to 10 years. Provisions such as non-compliance with the appointment of directors, disclosure requirements related to board report/director responsibility statement, including internal financial controls, related party transactions, maintenance of books of account, preparation of financial statements, etc., can attract not only steep fines, but also imprisonment for six months to three years. Penal consequences related to fraud or false statements are the most stringent, attracting fines of up to three times the amount involved and imprisonment up to 10 years. The Act also has provisions where directors may end up vacating their office due to slippages in governance, such as failure to attend board meetings for a period of 12 months, non-disclosure of conflicts, etc.
The Companies Act not only provides penal consequences for the company and its officers/directors, but also has stringent penal provisions for auditors and professionals such as registered valuers. This includes not only fines, but also imprisonment and refund of remuneration where the contravention is done knowingly with an intent to deceive.
Under Sebi LODR, non-compliance of corporate governance requirements can result in penalties such as imposition of fines, suspension in trading of the securities and freezing of promoter holdings.
Thus, it is imperative that corporates adopt and follow the provisions of corporate governance as mandated under the Companies Act and Sebi LODR to ensure smooth running of the affairs in the best interest of the stakeholders. This shall, in turn, help in promoting a healthy culture of ethical conduct with higher economic efficiency in the operations of the companies.
Harpreet Singh is partner (Risk Assurance Services) at PwC India.
The views expressed are personal.