THE IMPACT OF CORPORATE GOVERNANCE ON SHAREHOLDERS RIGHTS IN    INDIA

AUTHOR DETAILS

NAME: R. SIVA SHANKARAN

AFFLIATION: THE CENTRAL LAW COLLEGE, SALEM.

COURSE: B.A.,L.L.B

SEMESTER: 5^TH SEMESTER

 ABSTRACT:

            Corporate governance is the framework of policies, procedures, and guidelines that govern how an organization is run.  It entails striking a balance between the interests of all parties involved in business, such as the government, the community, shareholders, management, suppliers, and financiers.  Good corporate governance promotes trust and long-term growth by ensuring that businesses run in an open, accountable, and equitable manner.  In India, corporate governance which prioritizes openness, responsibility, and treating stakeholders, fairly is vital in determining shareholder rights.  Enforced by regulatory bodies like the Companies Act of 2013 and SEBI’s Disclosure Requirements and listing obligations, robust governance frameworks serve to safeguard the interests of majority and minority shareholders.   Better disclosure procedures, independent board compositions, and accountability frameworks that guarantee impartial decision-making are encouraged by these regulations.  Stronger investor confidence and increased investment are the result of effective governance, which protects shareholders interests and offers remedies for abuse of authority or insider control.  However, insufficient disclosure, conflicts of interest, and poor management can result from weak governance frameworks and have a detrimental effect on shareholder value.  Because corporate governance has a significant influence on shareholder rights in India and affects market trust and stability overall, it is imperative that governance practices are continuously improved in order to comply with international standards and safeguard shareholders interests.

KEYWORDS: Corporate Governance, Shareholders, Regulatory body, SEBI, Companies

INTRODUCTION:

A process, system, or system of values known as corporate governance makes sure that a business is run with the interests of its stakeholders, in mind.  A corporate governance system is a way of running a business.  It encourages accountability, honestly, fairness, and transparency within the organization.  Protection of shareholders interests, disclosure and transparency of business transactions, adherence to legal and legislative frameworks, moral business practices, and dedication to stakeholder value are all ensured by good corporate governance.  The Cadbury committee’s 1992 definition of corporate governance is the one that is most frequently used, which state that “the system by which companies are directed and controlled”, the board of directors is in charge of the business’s management. In terms of governance, shareholders, have the responsibility to select directors and auditors and to guarantee sound governance.

According to Organization of Economic Cooperation and Development (OECD) principles of corporate governance “corporate governance involves a set of relationships between a company’s management, its board, its shareholders and other stakeholders.  Corporate governance also provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined”.  In the World Bank publication corporate governance: A framework for practice, Sir Adrian Cadbury provides the following explanation in the foreword: corporate governance upholds equilibrium between social and economic objectives, as well as between personal and communal aspiration.

According to SEBI that the corporate governance as “acceptance by management of the inalienable rights of shareholders as the true owners of the corporation and of their own role as trustees on behalf of the shareholders.  It is about commitment to values, about ethical business conduct and about making a distinction between personal and corporate funds in the management of company”.

ORGIN AND EVOLUTION OF CORPORATE GOVERNACE:

            When joint-stock companies such as the Dutch and British East India companies first appeared in the 1600s, they introduced the idea of ownership separation from management, marking the beginning of corporate governance.  This model developed as businesses grew and professional managers assumed operational responsibilities during the Industrial Revolution.  The Great Depression of the 1930s revealed governance flaws, which prompted laws such as the 1934 U.S. Securities Exchange Act.  The 1970s saw a focus on shareholder value, which intensified in the 1980s as a result of corporate takeovers and pressure from acticist investors for higher return.  Transparency was encouraged by the Sarbanes-Oxley Act, which was a result of scandals like Enron in the early 2000s.  Corporate governance has prioritized sustainability, diversity, and wider stakeholder engagement in relation Environmental, Social, and Governance (ESG) factors since the 2010s.  These days, governance entails striking a balance between the interests of shareholders, social norms, openness, and moral management techniques.

HISTORICAL BACKGROUND OF CORPORATE GOVERNANCE IN INDIA:

            The number of goods and businesses on the market has skyrocketed in tandem with the expansion of technological innovations and breakthroughs.  Simultaneously, there were numerous frauds and scams occurring throughout the nation.  Among them are the frauds at Satyam Computers, Kingfisher Airlines, ILFS, PNB, and so on.  In order to prevent such frauds and scams and to hold company officials accountable, it became necessary to regulate the behavior of businesses and their management.  There have been two distinct stages in the development of corporate governance in India, they are

FIRST PHASE (1996-2008): In India, this stage marks the beginning of corporate governance, in this stage, the Security and Exchange Board of India and the Ministry of Corporate governance principles. Establishing audit committees and selecting independent directors and supervisors for a company’s internal management were the objectives.  A significant step and initiative was taken in 1996 by the confederation of Indian Industries (CII) to draft a code that ensures openness in business dealings, protects the interests of investors, implements international standards for information disclosure, and fosters confidence and trust among individuals.

The SEBI chairman, Mr. Kumar Mangalam Birla, was instructed to establish a committee to address corporate governance.  In order to let the shareholders know where the company stands in the application of corporate governance, the committee recommended that the companies submit annual reports as well as reports on corporate governance.  It also acknowledged the audit committee’s significance and established the framework for its composition and operations.

A standing committee on international financial standards and codes was established in 2001 with the goal of comparing India’s corporate governance situation to international norms and proposing ways to make it better. Additionally, in April 2001, the Reserve Bank of India requested that a consultative group of bank directors and representatives from other financial institutions submit a report on board supervision, audit committees, transparency, information disclosure, and other topics.  The group was also asked to recommend ways to improve the role of the board of directors and successfully integrate corporate governance.  In 2003, SEBI submitted a second report covering topics such compensation, independent directors, and risk management

            SECOND PHASE (AFTER 2009): one of the largest scams in the nation is still the Satyam computers Scandal.  When it was made public in 2009, it caused the government to reconsider its stance on corporate governance.  The accountability of the policies and procedures put in place to stop these kinds of activities was directly called into question by this scandal.  In its report on the scandal, the CII referred to it as a “one-off incident.” According to the report, there are no such activities and the rest of the corporate sector is operating smoothly.  In order to prevent such actions in the future the Chamber of Commerce of IT-BPO and the National Association of Software and Services Companies (NASSCOM) established a committee on Corporate Governance and Ethics, and its committee is headed by Mr. N. R. Narayana Murthy.

PRINCIPLES OF CORPORATE GOVERNANCE:

Although each business may have its own set of values, all businesses must abide by a few fundamental corporations governance principles, they are:

Accountability: The board of directors and management are responsible for the assets, financial health, capital and investments, audits, litigation, liabilities, and other aspects of a business.  To establish trust and positive relationships with the shareholders, they must answer to them.

Transparency: The disclosure of information to shareholders and other interested parties about risks, finances, capital, loans, audits, and other matters by the board of directors and other managerial staff is another fundamental of corporate governance.  Transparency in the work is thus required.

Responsibility: The Board of directors is required to act in a way that is appropriate for the company’s operations and advantages.  They must possess the maturity and responsibility to make informed choices regarding all business-related issues.

Fairness: One of the most crucial corporate governance tenets is fairness, or non-bias.  Everyone needs to be treated fairly and equally, whether they are directors, shareholders, employees, or members, etc.

Management of risk: The idea that risks should be identified and managed in advanced rather than waiting for them to materialize and interfere with a company’s ability to operate smoothly is another crucial component of corporate governance.

NEED FOR CORPORATE GOVERNANCE IN INDIA:

            Every member of an organization has a unique attitude and perspective on the world.  To ensure that all shareholders and employees are satisfied, the management is expected to work in accordance with their needs and issues.  Only if a system exists that governs and controls each member’s behavior and conduct will this be feasible.  As the number of businesses has grown over time, so too has the need for investment, which presents another difficulty for businesses.  The only things that could win over any investor would be a healthy workplace and reliable business practices.  Therefore, it is necessary to adhere to appropriate management and governance as well as specific principles and guidelines in order to establish trust.

            A company has other obligation in addition to its professional dealings.  According to contemporary standards and values, a business must ensure that it does not break any laws, offend people’s religious feelings, pollute the environment, or fail to uphold its social obligations.  With corporate governance, this is feasible. Businesses operating in foreign markets and nations are expected to adhere to a set of rules in order to control their management at a high level and draw in more foreign investment.

SHARE HOLDER OR STOCK HOLDER:

            A person, corporation or other property owning organization that holds a minimum of one share in a business.  Shareholders, also known as members, are separate from the directors who oversee the day-to-day operations of the business.  In addition to obtaining capital gains through an increase in the values of their shareholding, shareholders usually want to partake in the company’s constitution and company law; they attend general meetings to settle issues of particular significance pertaining to the company’s business or corporate activity.

RIGHTS OF SHAREHOLDERS IN INDIA:

            There are various rights has been given to shareholders in India, which was clearly recognized by the legislations called Companies act of 2013 and SEBI and those rights are:

1. Appointment of directors: The appointment of directors is a significant decision that share holders have to make. Director appointments are made by ordinary resolution passed by shareholders.
2. Appointment of company: The Companies Act of 2013 allows shareholders to appoint auditors, who are then chosen by the board at the annual general body meeting, with ratification typically lasting 5 years.
3. Right of Vote: The companies Act of 2013 mandates Indian Companies to hold annual shareholders’ meetings, where shareholders have final say, elect directors and auditors, declare dividends, and represent annual accounts, the companies act of 2013 states that a resolution adopted by the company’s members can only be approved by the shareholders’ votes. According to the act there are four types of voting was provided: a) Voting by the show of hands[1], b) voting done by polling[2], c) voting done by electronic means[3], d) voting by means of postal ballot[4].
4. Right to inspect registers and books: Shareholders, as primary stakeholders, have rights to view company books, registers, and accounts. They can examine financial records and status, and directors must present accounts to shareholders, if the company violates this amounts to a punishable offence under the act.[5]
5. Right to get the financial records: Shareholders have the right, as the company’s owners, to obtain copies of the financial statements, financial reports, or director reports upon request. Sending the company’s financial statements to each shareholder is the responsibility of the business. Additionally, shareholders have the right to obtain the share register at no cost.
6. Right to attend the AGM: An annual general meeting, or AGM, is a meeting of a company’s shareholders to discuss important decisions, elect directors, approve financial reports, and assess financial performance. It guarantees openness and accountability between the company’s owners and management and gives shareholders the ability to vote on significant issues and ask questions.
7. Others Rights under the Act: Right to call for general meetings, Right to get notice of the meetings, Right to appoint a proxy, Right to transfer ownership, Rights to use, Right to dividends, Pre-emptive right, Rights of minority shareholders against oppression and mismanagement, Right to get profit in any sale.

IMPACT OF CORPORATE GOVERANCE IN SHAREHOLDERS RIGHT:

      In India, corporate governance has a big influence on shareholders rights because it creates a structure that safeguards their interests and increases openness.  Effective governance procedures guarantee that businesses function morally, reducing conflicts of interest and protecting shareholders from possible management abuse.  In order to improve corporate governance standards, the Securities and Exchange Board of India (SEBI) rules and the companies Act of 2013 are essential.  By requiring the creation of audit committees, the appointment of independent directors, and the release of financial data, they encourage accountability.  Shareholders are empowered by these actions to actively engage in business affairs and make well-informed decision.

      Furthermore, minority shareholders rights are protected by efficient corporate governance systems, which give them the ability to express their concerns and have an impact on business decisions.  Better engagement between businesses and their stakeholders is facilitated by increased disclosure standards and shareholders activism, all things considered, strong corporate governance in India creates a climate in which the rights of shareholders are upheld, boosting investor confidence and enticing sustained capital market investment.  In the end, this makes the corporate sector more sustainable and accountable by bringing shareholders interests into line with the company’s.

CONCLUSION:

      To sum up, corporate governance is crucial in determining shareholders rights in India because it offers a structure that guarantees openness, responsibility, and fair treatment of shareholders.  Good governance practices protect minority shareholders, boost investor trust, and encourage sustained expansion.  The Securities and Exchange Board of India (SEBI) and other recent regulatory reforms have improved oversight by requiring more disclosure and board independence.  By taking these steps, conflicts of are lessened and management choice are more in line with the interests of shareholders.   

      Challenges in shareholder rights protection include concentrated ownership, promoter dominance, and governance norm enforcement.  Ethical practices, increased institutional investor participation, and increased retail shareholder awareness are crucial.  In general, maintaining equilibrium in the power relations between Indian shareholders and management requires a strong corporate governance structure.  Along with guaranteeing rights protection, it also helps create a more secure and alluring investment climate, which promotes economic expansion.  Constant work to strengthen governance procedures and uphold current legislation is required for long-term development.

REFERENCES:

1. Kanika choudhary, prof. (Dr) Monika Rastogi, Impact of corporate governance reforms on shareholder values, Vol. 10 Issue 6, EPRA International Journal of Multidisciplinary Research (IJMR), 2024
2. Securities and Exchange Board of India Act, 1992, Act No.15 of 1992
3. https://www.sebi.gov.in
4. The companies Act, 2013, Act No. 18 of 2013
5. https://www.legalseriveindia.com
6. https://www.indiacode.nic.in
7. https://indiankanoon.org

[1] The  Companies Act, 2013, section 107, Act No. 18 of 2013

[2] The Companies Act, 2013, section 109, Act No. 18 of 2013

[3]The  Companies Act, 2013, section 108, Act No. 18 of 2013

[4] The Companies Act, 2013, section 110, Act No. 18 of 2013

[5] Companies Act, 2013, section 136, 137, Act No. 18 of 2013