Legal

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This Blog is written by Kaviya Kannan from Kasturba Gandhi Degree College, Osmania University. Edited by Maulika Awasthi.

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INTRODUCTION

Corporate integrity means how corporations are managed in an undivided and complete form. Corporate integrity has increased its prominence over the decades. The word Corporate or Corporation is derived from the Latin term ‘corpus’ which implies a ‘body’.

The purpose of regulators for achieving corporate integrity is to help build an environment of transparency and accountability, essential for nurturing long-term investments, financial stability, and business integrity, thereby supporting stronger growth and more inclusive societies. The Principles of the regulators are intended to help policymakers evaluate and improve the legal and institutional framework for corporate governance, to support economic efficiency, financial firmness, and sustainable growth. This area has been having a speedy development especially after big corporate collapses; adequate measures were required to ensure adherence to good practices in corporate integrity as corporates have an impact on every individual, through its actions. Corporate integrity and governance, in the current scenario, is a very complex and controversial area of the law.[1]

SCOPE OF THE STUDY

In an age where capital flows worldwide, just as quickly as information, a company that does not promote a sense of strong, independent oversight, risks its very lucidity and future health. As a result, the link between a company and the regulators of the system has never been more crucial.

The first question that invariably occurs to an executive when confronted with the subject of corporate integrity is: “Why is this relevant to the success or failure of my company?” The answer is simple: without integrity, companies fail; probably in the medium or long-term. Corporate integrity is therefore vital to corporate success or failure and integral to the due diligence process carried out by any potential investor, acquirer, or merger partner. Corporate integrity is all about intensifying a company’s feasibility, competitiveness, and longevity by aligning commercial goals with honest and transparent ways of doing business throughout the company. Misinterpretation or ignorance of corporate integrity may greatly damage a company’s success. The adoption of mainstream strategy and management processes will enhance the success of the company.[2]

OBJECTIVE

The fundamental objective of regulators in corporate governance is to run a company most transparently and also boost and maximize shareholder value and protect the interest of other stakeholders. It should integrate all the participants involved in the process, which should be economic, and at the same time social. World Bank characterized corporate integrity or governance as a blend of law, regulation, and appropriate voluntary private-sector practices which enables the firm to attract financial and human capital to perform effectively, prepare itself by generating long term economic value for its shareholders while respecting the interests of stakeholders and society as a whole.

METHODOLOGY

An archival-based qualitative research approach using secondary data is applied for this article.

LITERATURE REVIEW

Corporate governance importance arises in modern corporations thanks to the separation of management and ownership control within the organizations. One of the main problems in achieving integrity is that the interests of shareholders are discording with the interests of managers. In this literature review, which is a collection of the volume of research on corporate governance and integrity, the importance of effective corporate governance will be evident. The review aims to examine the effectiveness of corporate integrity and its strong mechanism in running and managing business operations. The effectiveness of regulators in achieving corporate integrity in India through its laws and provisions is the main area of research in this review. The findings of most of the studies also show that effective corporate integrity reduces the ownership and control problems helping in drawing a clear line between a shareholder and the manager. Finally, from the discussion from all articles and papers, this review provides an overview of regulatory reforms to stabilize corporate governance in India.

SIGNIFICANCE OF THIS DEVELOPMENT

The concept of corporate governance and integrity has been attracting public attention for quite a while in India. The idea of integrity has been incepted with the major objective of important disclosure of information and data to the shareholders. Since then, corporate governance has navigated the Indian companies. As times changed, there was also a need for greater accountability of companies to their shareholders and customers. Progressive firms in India have voluntarily put in situ systems of good corporate governance. The financial crisis in emerging markets has led to renewed discussions and inevitably focused them on the shortage of corporate as well as governmental oversight.[3]

PROVISIONS

To ensure corporate integrity in India, many regulatory frameworks were introduced.

A. Companies Act, 2013

1) Section 134: It mandates to attach a report to every financial statement by the Board of Directors, containing all the details of the matter including the statement containing the director’s responsibility.

2) Section 177: It requires the Board of Directors of every listed company or any other class of committee to constitute an Audit Committee. It also provides the manner to constitute the committee.

3) Section 184: It mandates the Director to disclose his interest in any company or company, body corporate, firms, or any other association of individuals. The director is also required to disclose any interest at the first meeting of the board and if there is any change in the interest, then the first meeting held after such change.

 

B. Securities and Exchange Board Of India (SEBI), 1992

SEBI is a regulatory authority established on 12^th April 1992. SEBI was established to curb the malpractices while protecting the interest of its investors. Its main objective is to regulate the activities of the Stock Exchange and at the same time ensuring the healthy development in the Indian financial market.  To ensure good corporate governance, SEBI came up with detailed Corporate Governance Norms.

1. As per the new rules the companies are required to get the shareholders’ approval for RPT (Related Party Transactions), it also established a whistleblower mechanism, mandates to have at least one woman director in the Board and elaborated disclosures on pay packages.

2. Clause 35B of the Listing Agreement was amended by the regulatory agency. Now as per the amendment, Listed companies are required to provide the option of e-voting to its shareholders on all proposed or passed at general meetings.

3. Clause 49 of the Listing Agreement was also amended to strengthen the Corporate Governance framework for Listed companies in India. The revised clause prohibits independent directors from being eligible for any kind of stock option.

Institute of Chartered Accountants of India (ICAI), 1949

ICAI is a statutory body established by Chartered Accountants Act, 1949. It issues accounting standards for disclosure of financial information. Section 133 states that the Central Government may prescribe the accounting standards as recommended by ICAI. Accounting standards are provided for the sake of good corporate governance in a company. Some of the accounting standards issued by ICAI are: Disclosure of Accounting policies followed in the preparation of Financial statement, Determination of values at which the inventories are carried in a financial statement, cash flow statements for assessing the ability of an enterprise in generating cash, standard to ensure that appropriate measurement bases are applied to provisions and contingent liability, standard prescribing accounting treatment of cost and revenue associated with construction contracts.[4]

IMPACT

A lack of efficient corporate integrity at the executive and management level can lead to bad business decisions in the company, which can lower the net value of the company, making it more arduous for the business to meet its financial commitments. One of the examples being the Satyam scam which is considered India’s biggest corporate scam. The scam is about corporate integrity and governance which was regarded as the ‘Debacle of the Indian Financial System’. Ever since this scam, the concern for good corporate governance has increased exponentially. In general words, Corporate Governance means a set of rules and regulations by which an organization is governed, controlled, and directed. It is conducted by the Board of Directors of the concerned committee for the sake of the company’s stakeholders.

CASE LAW

SEBI v. Sun Pharmaceuticals

The Securities and Exchange Board of India (SEBI) found that Sun Pharmaceuticals had violated its listing and disclosure norms, by not revealing the related-party transaction with Aditya Medisales (AML), an entity owned by the drug maker’s promoters that distributed its formulation in India. The probe, however, did not confirm the alleged misappropriation of funds to the tune of Rs 42,000 crore, said two people who are aware of the development. SEBI initiated a probe after several allegations which were made by the whistle-blower in a 150-page complaint to the regulator accusing Sun Pharmaceuticals of committing corporate governance and tax-related offenses and securities market-related violations. Under Section 15 of the SEBI Act, it recommended adjudication proceedings against the pharma which calls for a financial penalty, if found guilty.[5]

ANALYSIS

A corporation can be considered as a pack of varied stakeholders, namely, customers, employees, investors, vendor partners, government, and society. A company should be fair and transparent to its stakeholders in its transactions. This has become crucial in today’s globalized business world where corporations have access to global pools of capital, need to attract and retain the human capital from various parts of the world, partner with vendors on collaborations, and need to live in harmony within the community. Unless a company embraces and demonstrates ethical conduct, it will not prosper. Corporate integrity is about ethical conduct in business. Ethics is concerned with the code of values and principles that permits an individual to choose between right and wrong, and thus, select from an alternative course of action.

CONCLUSION 

Corporate integrity roots from the culture and mindset of management, and cannot be regulated by legislation alone. Structures and rules are important because they provide a framework, which will encourage and enforce good governance; but these alone cannot raise the standards of corporate integrity. What matters is the way in which these are put to use. The extent of discipline, transparency, and fairness, and therefore the willingness showed by the companies in following the laws will be crucial in achieving the intended confidence of shareholders and other stakeholders and fulfilling the goals of the corporate.

REFERENCES

[1] Drik. G, Baur. 2008. Corporate integrity. Retrieved from https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1259947#:~:text=Corporate%20integrity%20is%20defined%20as,corporation%20are%20undivided%20and%20complete.&text=If%20both%20the

2] Shann Turnbull. 1997. Corporate Governance: It’s scope, concerns, and theories. Retrieved from https://www.academia.edu/30782546/Corporate_Governance_Its_scope_concerns_and_theories

[3] Lakshna Rathod. 2018. Why is corporate governance important? Retrieved from https://diligent.com/en-gb/blog/why-is-corporate-governance-important/#:~:text=Corporate%20governance%20is%20about%20enabling,how%20the%20company%20is%20operating.

4] Vaish Associates Advocates. 2016. India: Corporate governance framework in India. Retrieved from https://www.mondaq.com/india/shareholders/456460/corporate-governance-framework-in-india#:~:text=The%20Government%20of%20India%20has%20recently%20notified%20Companies%20Act%2C%202013,the%20board%20and%20board%20processes.&text=Every%20company%20is%20required%20to,resident%20director%20on%20its%20board.

[5] Sebi may reopen an insider trading case against Sun Pharma. 2018. Retrieved from
https://economictimes.indiatimes.com/markets/stocks/news/sebi-may-reopen-insider-trading-case-against-sun-pharma/articleshow/66887801.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst