What changes in the Indian Company Law recently enforce a greater need for corporate governance?
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Swarup Choudhury
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The Companies Act 2013 is a landmark legislation in the Indian Corporate Governance journey. The new set of rules and regulations have set a framework to create strong and effective measures which include:
1. Disclosure and transparency – Preparation of consolidated financial statements made mandatory for all companies with a subsidiary/JV/Associates; internal control reporting and internal audit made mandatory for specified class of companies including listed companies with board’s assurance required on internal control reporting.
2. Auditing – Mandatory auditor rotation for listed and other prescribed companies every five years depending on whether the auditor is an individual or a firm including approval of auditors by the shareholders at every annual general meeting of the company.
3. Board Structure and Responsibilities – Mandatory director appointments such as at least one India resident director for all companies to create accountability; at least one woman director for specified class of companies to bring in diversity of views; one-third of the board to be comprised of independent directors for specified class of companies and clear definition of role and responsibilities of independent director. With the roles of MD and Chairman diffused in some companies, it was observed that these should be split in order to tide over governance issues.
4. Corporate Social Responsibility – Mandatory for specified class of companies to make CSR contributions towards specified causes amounting to two per cent of the average net profit before tax for the last three financial years. It is mandatory for these companies to create a CSR committee with three or more directors with at least one independent director.
What is the current status of corporate governance in the pharma industry?
Pharma industry is very global in nature and essentially draws a lot of attention in the local and international markets that the companies have operations in. Add to that increasing US FDA control, patent issues, regulatory concerns and government pressures, companies are working at ironing out risk control with an increased awareness of the regulatory expectations and a focus on establishing sound corporate governance systems.
Does a rating system of corporate governance help as in US and Europe (AGR ratings)? Are companies in India rated too? Is such a process being initiated?
Rating systems on corporate governance serve as a quick reference point to get an objective and quantitative view of key accounting and corporate governance aspects. Quantitative ratings on corporate governance can help stakeholders in screening, compliance and risk monitoring in the companies of interest. For example, Thomson Reuters provides in-depth, objective and comparable ESG (Environmental, Social and Governance) data covering environmental, social, and corporate governance aspects for 4300+ companies globally including S&P 500, FTSE 250, the MSCI World Index, the 250 MSCI emerging markets companies etc. However, it should be kept in mind that qualitative factors such as quality of interactions at board meetings, active role played by independent directors play an equally important role. Some of the global rating data providers are already offering corporate governance ratings for key Indian companies and such ratings are also being offered by local rating agencies such as CRISIL, ICRA etc.
Pfizer is rated F with an AGR score of 1, whereas GSK is rated 52 but both had to pay $2.3 million and $three million respectively for allegations of fraud. How do rating models help then?
How aware and proactive are board members in India when it comes to corporate governance? What risk management systems are in place?
With the enhanced regulatory scrutiny, guidelines and general awareness on corporate governance, boards are increasingly becoming aware of their critical role and responsibilities in tackling issues around corporate governance. For example, the section 134 of the Companies Act mandates a Board of Director’s Report covering key elements like risk management policy, internal financial controls, board performance evaluation etc. This ensures that the board of directors adhere to key elements.
How do you hope to make board members more aware of corporate governance and the role they need to play?
Thomson Reuters is committed to create greater awareness of and establishing standards in corporate governance, board collaboration and transparency in India. We intend to achieve this through:
1. Thought leadership events
- In collaboration with IICA, we recently conducted a round table discussion on “Corporate Governance Standards in India – Gaps and Global Practices” hosted on the distinguished visit of The Lord Mayor of London, Alderman Fiona Woolf CBE. The round table brought diverse perspectives from the corporate sector, consulting, academia, legal and government professionals and delved deep on elevating corporate governance standards in India.
- We plan to follow this with a white paper on corporate governance covering the four broad themes discussed at the round table – board composition, global governance requirements, anti- corruption and fraud risk mitigation and corporate social responsibility.
2. Orientation programmes – Each orientation programme conducted by us for the board of directors comprehensively covers the roles and responsibilities of the directors as well as the Indian and global best practices. We have already conducted such programmes for public sector boards in India. We are now looking at expanding to other sectors in collaboration with the IICA.
Thomson Reuters Governance, Risk and Compliance (GRC) solutions are designed to empower audit, risk and compliance professionals, business leaders, and the boards they serve to reliably achieve business objectives, address uncertainty, and act with integrity.