A NOTE ON CORPORATE GOVERNANCE
Corporate Governance can be considered as the system by which companies are directed and controlled. It
is a set of standards which aims to improve the company’s image, efficiency, effectiveness and social
responsibility. The concept of corporate governance primarily hinges on complete transparency, integrity
and accountability of the management with an increasingly greater focus on INVESTOR PROTECTION
AND PUBLIC INTEREST.
The basic objective of Corporate Governance are enhancement of the long term shareholder value while at
the same time protecting the interests of the OTHER STAKE HOLDERS. From the Company’s
perspective, the emerging consensus is that the purpose of high standards of governance is to increase the
firm’s value, subject to meeting the corporations’ financial and other legal or contractual obligations. This
harmonizes the need for a company to strike a balance at all times between the need to enhance
shareholders’ wealth whilst not in any way being detrimental to the interest of other stakeholders in the
company, viz., suppliers, customers, creditors, bankers, employees of the company, the Government and
the society at large.
Corporate Governance measures can be adopted by a company purely voluntarily. It has to be
compulsorily adopted, if it is provided as a mandatory measure by the Companies Act, 1956, Sebi
A few of the steps prescribed/recommended for Corporate Governance under the Companies Act, 1956,
Sebi guidelines are as follows:1) S.58AA of the provides for certain special provisions for Small depositors. A ‘small depositor’ means a
depositor who has deposited in a financial year, a sum not exceeding twenty thousand rupees in a
company and includes his successors, nominees and legal representatives.
2) S.252 provides for a small shareholders’ right to have a director elected from among themselves. It
provides that a Public Company having a) paid up capital of Rs. Five Crores or more and b) 1000 or
more small share holders MAY have a director elected by such small shareholders in the manner as may
be prescribed. A ‘small shareholder’ means a shareholder holding shares of nominal value of Rs.
20,000/- or less in a public company to which this section applies. You may observe from the above
that it is not mandatory for a company to make provision for the appointment by its small shareholders
of their own representatives elected as a director. It is only an ENABLING provision which enables a
company to make such a provision, if it feels so voluntarily.
3) Listing Agreement:- Clause 49 of the listing agreement with the stock exchanges provides for corporate
Governance compliances for listed companies like,
Board Of Directors:- In case of non executive chairman, atleast one third of the Board should
comprise of independent directors and in case of an executive chairman, atleast half of Board should
comprise of independent directors. Even if the non-executive chairman is, in any way, connected or
related to the promoters of the company or the top management or to the management one level
below the top management, then the Board of directors of that company, even though it has a non-
executive director, should have at least half of its directors who are independent directors.
According to an amendment to clause 49 of the listing agreement notified by SEBI on 08/04/2008,
if the non-executive chairman is a promoter or is related to promoters or persons occupying
management positions at the Board level or at one level below the Board, AT LEAST ONEHALF OF THE BOARD of the Company should consist of independent directors.
The time gap between two board meetings is reduced to 3 months from earlier 4 months. There is
no time gap between two board meetings under the existing provisions of the companies Act,1956.
Definition of Independent Directors:- An Independent Director means a director, who, apart from
receiving directors’ remuneration, do not have any other material pecuniary relationship or transactions
with the company, its promoters, its management or its subsidiaries.
4) Audit Committee under Section 292 A of the Companies Act, 1956. S.292A of the Companies Act,
1956 provides that every public company, having a Paid up capital of not less than five crores of rupees
shall constitute a committee of the Board known a “Audit Committee” which shall consist of not less
than three directors and such number of 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.
5) Report on Corporate Governance:- The Company agrees that there shall be a separate section on
Corporate Governance in the Annual Report of the company with a detailed compliance report on
6) The Company shall obtain certificate from the auditors of the Company or the Company Secretary
regarding the compliance of conditions of Corporate Governance as stipulated in clause 49 of the
7) Establishment of Investor Education and Protection Fund by the Central Government under S.205C of
the Companies Act, 1956 is a part of the Corporate Governance measure.
8) Under Section 274(g) of the Companies Act, 1956, it is provided that a person shall not be a director of
any other PUBLIC COMPANY for a period of five years, if there is a failure on the part of the
Company in which he is at present a director in filing the Annual Accounts and Annual reports for
three continuous financial years or there is a failure for one year or more to repay the deposits or
interest thereon on due date or failure to redeem debentures on due dates, pay dividend etc.
9) The provision in the Companies Act, 1956 that a person who is indebted to a company for more than
Rs.1000/- or who is holding share of the company carrying voting rights cannot become the Auditor of
the company is also a step towards proper Corporate Governance.