5 Easy Ways To Facilitate All About Corporate Governance In India

WHAT IS CORPORATE GOVERNANCE IN INDIA?

The Institute of Company Secretaries of India defines corporate governance as follows:

“Corporate Governance is the application of the best management practices, compliance of law in true, letter and spirit of adherence to ethical standards for effective management  and distribution of wealth and discharge of social responsibility for the sustainable development of all stakeholders.”

Corporate Governance refers to an established framework of rules, values, morals, and principles based on which a company is governed. A company is a commercial or industrial enterprise constituting an association of people. The stakeholders of a corporation would include shareholders, employees, suppliers, customers and the whole society in general.

HISTORY OF CORPORATE GOVERNANCE IN INDIA

The concept of corporate governance emerged in the 1990s after the economy of India opened up to the foreign markets; in the era of Economic Liberalization, Privatization and Globalization. Industry Association Confederation of Indian Industry (CII) publicly introduced the code of Corporate Governance in 1998 that was to be followed by Indian Companies (listed), whether they belonged to the private or public sector including Banks and Financial Institutions.

Committee Recommendations

In 2000, The Securities and Exchange Board of India (SEBI) which is the body responsible for market regulation in India introduced Clause 49 in “the Listing Agreement of the Stock Exchanges”. The Clause was added after the recommendations from various committees.

The Birla Committee was set up in 1999. Some of the key Birla Committee recommendations which were adopted by the SEBI:

1. The Board of Directors should have a reasonable combination of Executive and Non-Executive Directors.
2. There should be Audit Committees with at least 3 independent directors. One of them should have knowledge of accounting and finance.
3. The company has to prepare an analysis report covering industry structure, the risks and threats, outlook, and internal control system for external review. Similarly, the Board has to conduct meetings in the gap of four months for the internal review of the Company.

The Department of Company Affairs (DCA) appointed the Naresh Chandra Committee in August 2002 to analyze various corporate governance issues. The recommendations touched on independent auditing and board oversight of management as well as financial and non-financial disclosures. It gave suggestions regarding the grounds of disqualifying auditors, and the compulsory rotation of audit partners.

SEBI set up the Narayana Murthy Committee in 2003 to review Clause 49  and to suggest ways to improve it. The Murthy Committee focused on the responsibilities of the audit committee, codes of conduct and financial disclosures and risk management.

Clause 49

SEBI announced the clause on 29th October 2004 after further recommendations. Clause 49  placed all the Listed Companies with a net worth of Rs 25 crore or more or paid-up capital of 3 crores or more as of 31st March 2003 under the Clause.  The Clause contains eight sections; concerning the Board of Directors, the Audit Committee, Remuneration Committees, Management, Shareholders, Board Procedure, Report on Corporate Governance and Compliance. It was ratified by the SEBI and acquired a mandatory status and was to be complied with by 31st December 2005.

In 2009, The Ministry of Corporate Affairs released a set of voluntary guidelines for corporate governance issues like the independence of the board of directors, mechanisms to protect whistleblowing, the audit committee, and secretarial audits. However, there was a shift to a more voluntary approach instead of the earlier mandatory approach.

Companies Bill (2008-2012)

In order to bring corporate governance in the fold of legislation instead of leaving it under the Listing Agreement, there was an effort to redraft the Companies Act, 1956. The government established an Expert Committee on Company Law on 2nd December 2004 to review the earlier Act. The Companies Act, 2008 was introduced in the Parliament based on the recommendations of the Expert Committee. However, the bill lapsed because of the dissolution of the Fourteenth Session of Lok Sabha. The same bill was introduced as Companies Bill, 2009 in the next session. The bill received many recommendations from the Parliamentary Standing Committee on Finance, as a result, the bill was withdrawn. The Bill met the same fate when it was introduced in the 2011 session.

Companies Act, 2013

After many rounds of redrafting, the Companies Bill was finally signed as Companies Act 2013 on 29th August 2013 by the Parliament. The Ministry of Corporate Affairs (MCA) administers the Act.  Some of the key features of the Companies Act, 2013 are as follows:

1. National Company Law Tribunal (NCLT), a tribunal to listen to cases related to Indian companies was introduced.
2.  Companies not engaging in business for consecutive two years can be declared dormant.
3. Companies are required to maintain documents electronically.
4. The Act empowered single entrepreneurs to start a company with limited liability protection as a One Person Company (OPC)
5. The company should have at least one woman director if it is a listed company with its securities listed on any stock exchange and/or if it is a company with a paid-up capital of 100 crores or more and a turnover for 300 crores or more.
6. The company must appoint an independent director, i.e someone who is not a promoter of the company or any of its subsidiaries and is not related to the directors or promoters of the company or any of its subsidiaries.
7. A Company must take an initiative to form a Corporate Social Responsibility (CSR) Committee and Policy and invest at least 2% of the average net profits of the three preceding financial years.
8.  A search and seizure order can be implemented against any company under investigation without an order form the Magistrate.
9. The Act also proposed to establish a National Financial Reporting Authority (NFRA) to assess the work of auditors and enforce accounting and auditing standards.
   Read Also: The 2018 Amendment to The Companies Act, 2013

PRINCIPLES AND OBJECTIVES OF CORPORATE GOVERNANCE

Corporate Governance tries to uphold a set of ideas and principles which are important for the health of any company as well as society:

All the corporate reforms and recommendations always try to increase transparency between the Corporation and its shareholders, investors and the society at large. It ensures the disclosure of financial information and management decisions especially in relation to the shareholders.

Corporate Governance upholds Independence of the Board of Directors who can make independent decisions for the good of the company as well as the investor. At the same time, it also holds them accountable to its investors.

Corporate Governance allows the Company to self-evaluate their practices in their internal board meetings to rectify their mistakes to avoid regulatory fines. An Independent Board is able to point out any potential dangers in the Company’s Management.

It is a known fact that the companies which follow the code of corporate governance are more successful in increasing premiums attached to their shares. It leads to an increase in the shareholder’s wealth as well as the Company’s positive presence in the market.

WHY IS CORPORATE GOVERNANCE IMPORTANT IN INDIA

There are many factors which make corporate governance a necessary tool for the economic growth of society as a whole.

In today’s era of globalization, a company might have shareholders spread over the whole country or the world. The unorganized nature of the shareholders calls for protecting their interests through a standard legal framework.

Mutual funds, as well as institutional investors (national as well as international), have become the largest shareholders in the present day. This change in the pattern of corporate ownership has also forced the hand of the corporate management to adhere to code to uphold their image.

Read Also: 5 Common Types of Business Disputes That Can Be Easily Avoided

In the eyes of the investors and the public, there is a lack of confidence in corporate regimes because of the ever-growing corporate scams. Some of the biggest names involved are Shara group’s chairman Subrata Roy who failed to pay over 20,000 crores to its more than 30 million small investors.  Diamond Jewellery designer Nirav Modi, who is currently an international fugitive is charged with committing 1.8 billion dollar fraud.

The monetary compensation of the Top Level Corporate Executives has increased a lot. The huge amount of compensation comes out of corporate funds which belong to the shareholders. This makes a code of corporate governance important to contain the indulgence of top-level management. Finally, the desire for companies for recognition in the international market makes the need for corporate governance greater.

Read Also: Know these legal requirements before starting an online business

Corporate Governance is not only a standard for a healthy society but also the very foundation of economic growth by keeping a check on an excess of wealth with a few. The society expects more from the corporate sector and to meet those social expectations, corporate governance is necessary.

Original blog is published at LEGODESK  please read the blog for more content and for legal help

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Ten Things That Happen When You Are In Frustration Of Contract

When a contract is entered into between two parties, specific duties and rights arise between those two parties. The frustration of contract is a scenario whereby some unforeseen events happens after the contract is entered into, which make the performance of the contract impossible. Such a situation is known as the frustration of the contract. The parties need not perform the contract; thereafter, they are relieved from the entire contractual obligation that arose from such contract.

English Law on the frustration of contract

The doctrine of frustration of contract was initially developed in the English laws. The case which developed this doctrine was Taylor v. Cardwell, whereby there was an opera house which was rented to hold concerts via contract between the parties. The opera house was subsequently destroyed by fire. The court held that the contract was frustrated as the subject-matter of contract on which the entire contract was made, was destroyed by fire and in no way, the contract could be further carried on.[1]

The doctrine of Frustration of contract under the Indian Law

As a general rule, once a contract is entered into between the parties, it has to be carried on according to such agreement. But there is an exception to this rule under the Indian Contract Act, 1872 under Section 56. The section reads as follows-

“Contract to do act afterward becoming impossible or unlawful.-A contract to do an act which, after the contract is made, becomes impossible, or, because of some event which the Promisor could not prevent, unlawful, becomes void when the act becomes impossible or unlawful.

Compensation for loss through non-performance of act known to be impossible or unlawful.-Where one person has promised to do something which he knew, or, with reasonable diligence, might have known, and which the promisee did not know, to be impossible or unlawful, such promisor must make compensation to such promisee for any loss which such promisee sustains through the non-performance of the promise.”[2]

Therefore, a contract to do anything which is made impossible or unlawful to execute thereafter becomes void. Compensation is also provided to the party who suffers a loss on such non- performance of the contract by the person who knew that the act was unlawful or impossible to perform.

The doctrine is based on the legal maxim “les non cogit ad impossibilia,” which means the law will not compel a man to do what he cannot possibly do. The apex court very well explained the doctrine in the case of Satyabrata Ghose v. Mugneeram, whereby, the court held that the word ‘impossibility of contract’ and ‘frustration’ could be used as a synonym. Where the contract cannot be performed because of the impossibility, then the person cannot be compelled to do that task.[3]

 Conditions necessary for Section 56

1. There should be a valid contract existing between the parties. The contract occurred between the parties should satisfy all the requirements of a valid contract set out by the Indian Contract Act, 1972.
2. The contract must be set to be performed. That means it has not been performed either wholly or has been performed only in part. Only if some part of the contract is yet to be performed, section 56 will find its applicability.
3. The contract has either becomes impossible or unlawful after that. The contract, after being entered into, should become impossible to perform or unlawful. The party should be unaware of this fact or else they will have to pay the compensation to the party suffering from such known frustration of contract.

Grounds of the frustration of contract may be the destruction of the subject –matter, non- occurrence of the contemplated events, death or incapacity, change of circumstances, government, administration or legislation intervention, the intervention of war, and such other circumstances.

Conclusion

The doctrine of frustration of contract can be very well be defined after reading Section 56 of the Indian Contract Act, 1872. It is made evident can frustration can be allowed into in two circumstances, i.e., the impossibility of performance of contract and illegality of contract. Adequate compensation is provided to the party who has in any of the circumstances of the frustration suffered loss by the party who has gained something from the frustration.

[1] Taylor v. Cardwell (1863) 3 B.& S. 826.

[2] Indian Contract Act, 1872, s. 56.

[3] Satyabrata Ghose v. Mugneeram (1954) AIR 44.

Eliminate Your Fears And Doubts About Concept Of Lifting Of Corporate Veil

Introduction To Lifting of Corporate Veil

The corporate veil is a concept which provides that the personality of a company has to be treated separately from that of its shareholders.  It also protects the shareholders from being held personally liable for the company’s debts and other obligations. The Cambridge Dictionary defines corporate veil as the idea that a company’s managers or shareholders are not legally responsible for the action of the company: Shareholders may hide behind the corporate veil, assured that their liability does not extend beyond the value of their shares.

The essential term that needs to be understood for this concept is what a company means. Section 2(20) of the Companies Act, 2013 defines a company as a company incorporated under the Companies Act 2013 or any previous company law.  A company is a separate legal entity and has a personality of its own.

This feature was established by the Supreme Court of India in the case of Rustom Cavasjee Cooper vs. Union of India. The court stated that “a company registered under the Companies Act is a legal person, separate and distinct from its individual members. Property of the company is not the property of the shareholders”.

But this protection is not impenetrable, under the legal concept of the lifting of the corporate veil, the courts may hold the shareholders liable for the company’s obligations. At many times it happens that the corporate identity of a company is used to commit some fraud or illegal activity. In this situation, the concept of the lifting of the corporate veil is initiated. The corporate personality of the company is disregarded in order to look out who were the people involved in that fraudulent act. In simple words, the veil of separate corporate personality is lifted and the real culprits behind the veil are held liable, as an exception to the rule of protection under a corporate shell. In the United States, there are two important theories prescribed for the creation of piercing standard-

• Alter ego theory- consider (if there is) the distinctive boundaries between a corporation and it’s shareholders.
• Instrumentality theory- examines if the corporation has been used in any way by its shareholders for their own benefits instead of the corporate.

The basic concept of the lifting of the corporate veil can be categorized broadly under two categories-

1. Statutory Provisions
2. Judicial interpretation

1. Statutory Provisions

The Companies Act, 2013 provides various provisions which point out the person which should be held liable for the fraud or illegal activity. Section 2(60) of the act states that these people (directors or key managerial positions) are to be referred to as “officer who is in default”. Some of these provisions are listed below.

• Company’s name- When the approved name of the company is used, it makes the contract legally binding. If any representative or shareholder of the company enters in incorrect details of the company and sign on behalf of the company, should be held liable.
• Misstatement of the prospectus- If a person publishes false or untrue statements in a company’s prospectus, that person would be punished under Section 26 (9), Section 34 and Section 35 of the Act.
• Investigation of ownership of the company- section 216 of the Act states that inspectors can be appointed to investigate, by the central government, on matters relating to the company.
• Liability for fraudulent conduct- Section 339 of the Act provides that if it appears that fraudulent activities were being carried out in the name of the company, the court can hold the people involved liable.
• Inducing persons to invest- Section 36 of the Act states that any person who by false and deceptive measures, induces some other person to enter into an agreement will be held personally liable under Section 447 of the Act.

2. Judicial Interpretation

Besides Statutory provisions, the judiciary has played an important role in lifting the corporate veil as well. Some cases where the judiciary performed its role are listed below.

• In Tata Engineering and Locomotive Co. Ltd. v. the State of Bihar, the Supreme Court of India stated that a company is not allowed to lay a claim on the fundamental rights on the basis that the company is an aggregation of citizens. When a company is formed, the business that is carried by the company is the business of the company only, and not of the citizens who formed the company.
• Judiciary is empowered to lift the corporate veil if the conduct of a company is in conflict with the public interest. In Jyoti Limited vs Kanwaljit Kaur Bhasin And Anr., the Delhi High Court held that corporate veil can be lifted if the representative of the company commits contempt of the Court.

Conclusion

Many individuals try to misuse their power under the corporate shell for their own benefits as they are protected under the corporate veil. But the concept of the lifting of the corporate veil is a powerful weapon in the hands of the judiciary. It makes sure that no individual gets to perform illegal acts under the company name and walk free. It acts as a watchdog over companies. The personality of a company is surely separate from that of the shareholders of the company, but this doesn’t mean that the shareholders can do wrong hiding behind the corporate veil.

References-

• Companies Act, 2013
• 1970 A.I.R. 564
• [1964] 34 Comp. Cas. 458(SC), AIR 1965 SC 40
• 1987 CriLJ. 1282
  
  

Original blog is published at LEGODESK  please read the blog for more content and for legal help

Legodesk is a legal practice management tool using which lawyers can manage their matters, win new clients and do their legal research all in one platform. Legodesk’s unique case management features helps to keep your legal practice organized and accessible everywhere.