Name of the Author and Affiliation:
LAKSHITA MAHAJAN, INSTITUTE OF LAW, NIRMA UNIVERSITY.
Abstract:
Corporate governance basically means the structure that is provided to the rules and practices and processes, which go into governing the direct and control functions of a firm. The quest for transparency, accountability, and fair conduct in the relations of a corporation with all its stakeholders, including shareholders, employees, customers, and the community at large necessitates the existence of corporate governance. In India, the concept of corporate governance has emerged with an enormously intricate legal framework, which includes the Companies Act of 2013, SEBI guidelines, and other bodies. The COVID-19 pandemic gave the much-needed push for change, and governance, in specific, was revisited by firms around the globe. Sudden stoppages of all operations, supply chains, and workforce mobility demanded immediate adjusting of governance structures. This article presents an integrated summary of the changes observed and how corporate governance and law reforms have been framed post-pandemic for India, specifically talking about the areas, challenges, and opportunities while doing the discussion.
Keyword: Corporate Governance, Covid-19, Legal Reforms, Companies Act, Corporate Social Responsibility, SEBI, IBI, ESG
India’s Pre-Pandemic Corporate Governance Landscape:
India had already undertaken several landmark regulations to enhance corporate governance before the advent of the pandemic, and these were:
The Companies Act, 2013 brought in provision that could really enhance transparencies in the form of mandatory provision for independent directors, incorporation of audit committees, and imposition of strictures of CSR.
SEBI’s Listing Obligations and Disclosure Requirements (LODR), 2015 gave stringent mandatory disclosures to the list companies to strengthen investor protection.
The Insolvency and Bankruptcy Code (IBC), 2016, reformed the insolvency landscape by addressing corporate insolvencies in a time-bound manner.
The reforms still had a great deal of challenges in it, such as the IL&FS scam and the Nirav Modi fraud, which revealed failures in governance, failure in oversight mechanisms, and the lack of proper enforcement of regulations.
COVID-19 Pandemic Impact on Corporate Governance
The pandemic severely disarrayed business operations across sectors, leading to liquidity crises, operational inefficiencies, and workforce disruptions. This crisis exposed vulnerabilities within the governance structures of corporations, particularly when concerned with matters of risk management, oversight, and ability to adapt to unforeseen challenges. Key areas of impact included:
Board Oversight The pandemic only reminded boards that they have to be more proactive in managing crises. Here, companies had to be adaptive to the new environment within a short space of time. This included re-strategizing, financial planning, and stakeholder engagement.
Communication with stakeholders became essential. Transparency and time-bound communication issues cropped up, and companies were put on pressure to disclose the impacts on their operations and the health of their financials. In such environments, disclosure norms became more vital.
Corporate Social Responsibility (CSR): The pandemic brought an external unforeseen factor that made companies re-evaluate and refocus their CSR priorities. Several organizations diverted CSR funds to various health, vaccination, and workforce support activities undertaken by the initiatives of the pandemic.
Digital Transformation: With remote work becoming a new norm for most organizations, companies had to embrace digital transformation at speeds that no one ever previously saw. Online board meetings and shareholder engagement also increased the need for undertaking governance practices online; thus, changing how companies had to grapple with new technologies and cybersecurity threats.
Legal Reforms After Pandemic: Important Focus Areas:
In the post-pandemic period, legal reforms targeted the further strengthening of corporate governance in India. These reforms ensured more transparency, accountability, and sustainability but also answered to the problems unearthed by the pandemic. Some of the important legal changes are as follows:
Companies Act, 2013 Amendments[1]
As a measure of response to the pandemic, Ministry of Corporate Affairs (MCA) came up with many amendments in the Companies Act 2013. Among the notable amendments are as follows:
Relaxation of Compliance Requirements: As a measure of relief to ease the compliance burden during the pandemic, MCA issued various relaxations. For example, longer periods within which the annual general meeting was to be held and financial statements were due for filing from companies. These relaxations were most helpful for easing the burden of core functions of companies in times of crisis.
There are many reforms that have been adopted by Companies Act, such as liberalization of virtual board meetings and AGMs. Companies Act has undergone a lot of amendments so that it can embrace the pandemic as long-lasting influence. In this regard, the Companies Act amended to permit companies to hold board meetings and AGMs via virtual means, which is now a post-pandemic permanent feature. This has been efficient to various extents for conducting meetings where boards are geographically dispersed.
Corporate Social Responsibility (CSR): the norms for CSR had changed in the wake of the pandemic. Here, it was permitted that pandemic relief measures also came within the purview of CSR; the government included contributions toward PM CARES Fund and expenditure on COVID-19 vaccination and health care.
SEBI’s Reforms for Listed Companies[2]
SEBI, the central regulator of listed companies made many reforms in the wake of the pandemic to enhance corporate governance. Some key reforms include
Less stringent disclosure norms: The more stringent disclosure norms by SEBI toward listed companies, mainly relating to the containment of pandemic on their operations, financial situation, and risk management strategies. More detailed information on the liquidity position, debt obligation, and business continuity plans had been sought from the companies as well.
Independent Directors Strengthen: SEBI has, time and again reiterated that independent directors are indispensable to good governance. Post the pandemic, SEBI has introduced the guidelines of strengthening the role of independent directors by making greater disclosures on appointment, performance evaluation, and the independent criteria.
Risk Management Framework: SEBI made it compulsory for listed companies to have an appropriate framework for risk management for aversion of unexpected events such as COVID-19. Here, companies had to identify and protect against any risks related to supply chain interruptions, cyber threats, and financial issues.
IBC Amendments[3]
The IBC, 2016 was the corpus utilized in dealing with the corporate insolvency issues that crop up during the pandemic. However, being well aware of the exceptional crisis posed by the pandemic, the government temporarily amended the IBC by making the following inter alia amendments:
Suspension of Insolvency Proceedings: The government suspended fresh insolvency proceedings during 2020 for a period of one year to prevent being dragged into insolvency in pandemic-related financial stress. While suspending fresh insolvency proceedings, this was aimed at giving relief to those struggling with the liquidity issues.
Pre-Pack Insolvency Framework: The government issued a pre-packaged insolvency resolution process for Micro, Small, and Medium Enterprises (MSMEs) to produce a faster and quicker resolution mechanism. This framework allows financially distressed MSMEs to go into negotiations with creditors to settle insolvency under the provisions of IBC without undergoing a long-winding procedure.
Enhanced Focus on Environmental, Social, and Governance (ESG) Criteria
The post-pandemic world puts great emphasis on sustainability and corporate responsibility. Investor and regulators’ focus start to gradually shift toward ESG criteria associated with corporate governance. Some of the major elements include:
SEBI’s Business Responsibility and Sustainability Reporting (BRSR)[4]: SEBI has introduced the BRSR in May 2021. Under this frame work, disclosures from top 1,000 listed companies regarding their ESG initiatives have been made imperative. The previous BRR had replaced the earlier BRR that obligated companies to disclose information related to climate change, social impact, governance structure, and engagement with stakeholders.
Post-Pandemic ESG Investment Trends: Advances in ESG-oriented investments post-pandemic made companies plunge ESG considerations into their governance practices. Shareholders are increasingly demanding that companies commit to reporting sustainability.
Obstacles Facing the Implementation of Post-Pandemic Corporate Governance Reforms:
Despite the above positive developments to improve the corporate governance model following the pandemic, the following challenges persist:
Virtual Governance Adaptation: Virtual meetings are the new norm, yet with that comes issues related to cybersecurity and data privacy and decision effectiveness. The challenge is ensuring that virtual governance processes can be as robust as their analogue counterpart for most companies.
Ensure compliance by MSMEs: Larger Companies are more likely to adhere to the new norms of governance, whereas MSMEs are the ones who grapple with this issue as there is a lack of much-needed resources and knowledge. Reforms also suggest relief towards alleviating the compliance burden on MSMEs using pre-pack insolvency and other measures.
Company focus on short-term survival versus long-term sustainability: Companies have been obliged by the pandemic to focus on short-term survival in order to lose out on sustainability in the long run. As such, a lot of work remains to be done in how companies align short-term survival strategies with long-term sustainability.
Independent directors: SEBI has taken several steps to enhance the role of independent directors, but effectiveness in performing their new roles is still a challenge as many of the independent directors remain conflict-ridden and are, therefore, perceived not to act entirely independently.
The Road to Further Improvement:
The post-pandemic reforms will provide India with an appropriate opportunity to strengthen its corporate governance framework. The areas that should be focused on these features:
1) Adoption of technology in corporate governance sped up with the pandemic. Companies need to invest in those digital tools required for governance practices, increase transparency, and make decisions easier.
2) Strengthened ESG Best Practices: Viewed through the lens of ESG factors, many investors are now demanding exposure to these. Companies should strengthen governance structures by putting sustainability and social responsibility at the heart. When the structure integrates ESG factors into boardroom discussions and decision-making processes, they are following long-term success.
3) Building capacity of MSMEs: Over areas of compliance and governance, they should be trained to support the changing landscape of governance through support over digital tools.
Conclusion
The pandemic has changed the landscape of corporate governance in India in a fundamental way. However, legal reforms aimed at improving the strength of governance practice, enhancing transparency, and promoting sustainability seem to underlie most of these answers. As the post-pandemic period unfolds, it may turn out to be the silver lining in the cloud through which India could construct a more resilient and accountable structure of corporate governance in the longer run for the future progress and prosperity of the country.
They must especially prioritize good governance practices in navigating this post-pandemic environment, invest in digital transformation, and embrace ESG principles to address the ever-evolving expectations of stakeholders and regulators. However, independent directors-the backbone for boardroom accountability-also face the dilemma of getting their mandates fulfilled. SEBI’s efforts notwithstanding, conflicts of interest, boardroom dynamics and cultural barriers still interfere with fully independent oversight of firms’ activities by independent directors. For independent directors to deliver robust checks on management in the future corporate governance of India, independence alone is insufficient; these directors must have autonomy, resources, and competence to ensure healthy oversight.
The pandemic has also highlighted the balance between short-term crisis management and longer-term sustainability. As survival-based short-term needs were overwhelming, companies will have to rebalance their focus going forward so that governance structures are strengthened enough to survive shocks but not at the cost of long-term objectives. Because of digital transformation, which the pandemic has speeded up, this part of companies’ strategic actions should remain the key enabler of good governance, allowing for better performance, better decision making, and much more transparency for different stakeholders.
Looking ahead, India stands at a crucial crossing where corporate governance issues need to be dictated. The reforms ensuing from the pandemic, though substantial in themselves, are but parts of a much larger evolution process of governance that is becoming more and more global. Indian companies have to integrate new regulations with a culture of ethical governance, sustainability, and stakeholder engagement to stay relevant and attractive for global investors. World has now become a global village; the proximity is now being constantly increasing. Thus, to accommodate more foreign investors in our Indian market, and making it a global marketplace, it is very important to have effective and consistent corporate governance.
While the pandemic has been labeled as a wake-up call, it clearly underlines the requirement for companies to be agile, resilient, and forward-looking in their governance practice. Steps leading to effective corporate governance are open-ended, and these will shape the business climate of India for years to come.
References:
https://www.independentdirectorsdatabank.in/img/newsletter/2021/61c40d95601f1.pdf
https://www.ecgi.global/publications/codes/countries/corporate-governance-in-india
https://www.drishtiias.com/to-the-points/paper4/corporate-governance-1
https://www.india.gov.in/topics/industries/corporate-governance
https://www.ibanet.org/article/008F143F-8F78-4EDA-B809-524BB871C45E
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3690805
https://www.russianlawjournal.org/index.php/journal/article/view/3531
[1] THE COMPANIES (AMENDMENT) ACT, 2020, Amendment No. 29 (2020) (India). https://www.mca.gov.in/Ministry/pdf/AmendmentAct_29092020.pdf
[2] SECURITIES AND EXCHANGE BOARD OF INDIA (PORTFOLIO MANAGERS) REGULATIONS, 2020, Regulation No. SEBI/LAD-NRO/GN/2020/03 (2020) (India). https://www.sebi.gov.in/legal/regulations/aug-2023/securities-and-exchange-board-of-india-portfolio-managers-regulations-2020-last-amended-on-august-18-2023-_76366.html
[3] THE INSOLVENCY AND BANKRUPTCY CODE (AMENDMENT) ACT, 2020, Amendment No. 1 (2020) (India). https://ibbi.gov.in/uploads/legalframwork/d36301a7973451881e00492419012542.pdf.
[4] (n.d.). Securities and Exchange Board of India. https://www.sebi.gov.in/sebi_data/commondocs/may-2021/Business%20responsibility%20and%20sustainability%20reporting%20by%20listed%20entitiesAnnexure1_p.PDF.
