Compliance And Legal: Birds of the same feather

Good corporate governance depends on compliance and legal going hand in hand. And, in the words of our PM, mere good governance is not enough; it has to be pro-people, pro-active...

The country has suffered potential losses of nearly '100,000 crore due to corruption cases reported in the media from October 2011 to September 2014 that exclude large scams such as 2G, Commonwealth Games, land allotments, chit fund/debentures and mining. Last year, India ranked 100th out of 176 countries in the Corruption Perception Index of Transparency International. Corruption will have a detrimental impact on the economy resulting in skewed distribution of wealth and inefficient utilization of resources. It is seen that if this trend continues, it will impact FDI inflow and also the licensing process with governments and various vendors will never come out of the grey clouds.

In India, till the onset of the Companies Act, 2013, certain sectors of industry witnessed a very sad reality. If certain things were not followed, the sector/industry was seen to have lost business edge. Clearly, to stay ahead in this competitive world, we need to improve our governance systems. Given the state of India's economic development, good governance is absolutely critical to give us a competitive edge and sustain growth. "Corruption invariably increases transaction costs and uncertainty in an economy while lowering efficiency by forcing entrepreneurs to divert their scarce time and money to bribery rather than production," said Naina Lal Kidwai.

In India unfortunately, compliance programmes used to be round table discussions or seminar debates. Policies were cosmetic and implementation was skeletal in the true sense. India is a land of over 1 million laws. I must say this is not an exaggeration. To have an effective compliance program, it would take a medium scale corporate at least 5 years to put to 'near perfection'. We have the SEBI who has been struggling to discipline and if required, punish erring companies but India needs much more.

Erstwhile, Union Corporate Affairs Minister Dr. M. Veerappa Moily launched a Legal Compliance Manual (LCM) in New Delhi. The objective of this manual was to ensure compliance with Central and State Laws and follow norms of good Corporate Governance. The LCM is developed by the Indian Institute of Corporate Affairs (IICA) in association with Intel Technology India Pvt. Ltd (Intel India).

Dr. Moily said the concept of corporate governance was at a threshold in our nation where norms required constant refinement to build a balance between voluntary and mandatory approaches. In an uncertain global scenario, it became pivotal to have a robust legal and compliance framework.

Corporate governance rules and mechanisms as they stand today in India have their genesis in the Anglo- Saxon model, which may not be wholly suited to Indian conditions. This series of papers analyses empirical data to test hypotheses on various topics of corporate governance and aims to contribute to improving the quality of business and regulatory decisions by basing them on researched facts rather than on anecdotal narratives. The study has 5 papers.

Corporate governance rules and mechanisms as they stand today in India have their genesis in the Anglo- Saxon model, which may not be wholly suited to Indian conditions. This series of papers analyses empirical data to test hypotheses on various topics of corporate governance and aims to contribute to improving the quality of business and regulatory decisions by basing them on researched facts rather than on anecdotal narratives. The study has 5 papers.

Paper 1: Corporate Governance in India: Tracing the journey

Paper 2: Effectiveness of RBI as a gatekeeper of corporate governance

Paper 3: Effectiveness of SEBI as a gatekeeper

Paper 4: Auditors as gate keepers of Corporate Governance

Paper 5: Relationship between earnings management and corporate governance characteristics in the Indian context

The results give sufficient grounds to believe that Indian Companies with better corporate governance characteristics as shown above would have lesser incentives for earnings management, thus strengthening the case for implementation of robust corporate governance norms.

IICA aims for capacity building and training in various subjects and matters relevant to corporate regulation and governance such as corporate and competition law, accounting and auditing issues, compliance management, corporate governance, business sustainability through environmental sensitivity and social responsibility, e-Governance and enforcement etc.

The long awaited Companies Act, 2013 came into play. The mantra of legal and compliance has now finally come to its finishing line. Companies Act, 2013 is out. Companies have to fulfil the requirements stated therein. Few provisions have already been published which can be found at: Immediate Compliance for Companies under Companies Act, 2013.

Some more provisions are stated hereunder:

1. Appointment of Company Secretary: Now, only a Public Limited Company whose paid up capital is more than 10 crore needs to appoint a whole time Company Secretary.
2. The company has to prepare its annual returns in Form MGT 7.
3. The annual returns, filed by a listed company or a company having paid up share capital of ten crores or more or turnover of fifty crore rupees or more shall be certified by a Company Secretary in practice and the same shall be in Form MGT 8.
4. The extract of the annual return to be attached with the Board's report shall be in Form MGT 9.
5. Borrowings can be only from directors. If the same is taken from any other person, then the same will be treated as deposits.
6. Unsecured loan can be taken from promoters only if any stipulation is imposed by the Financial Institution or Bank.
7. Section 185 of Companies Act prohibits loan to Directors.
8. As per section 177, the Audit Committee and as per section 178, the Remuneration Committee and Nomination Committee are required to be constituted in case of Public Companies having paid up capital of '10 crores or more or companies having turnover of more than '100 crore or more or having outstanding loans/debentures/ deposit exceeding '50 crore or more.
9. The companies having profit of more than '5 crore, net worth of '500 crore or more, or turnover of '1000 crore or more in any of the end of Financial Year, the company is required to incur expenses on Corporate Social Responsibility.
10. Every Listed Company and a public company having paid up share capital of '100 crore or more or turnover of '300 crore need to appoint a Woman Director.
11. Every Listed company and a public company having paid up share capital of '10 crore or more or turnover of '100 crore or more or have in aggregate, outstanding loans, debentures and deposits, exceeding '50 crore needs to appoint Independent Director on the board.
12. Unlisted public companies having paid up share capital of '10 crore or more or private companies having paid up share capital of '20 crore or more or all companies having paid up share capital of below threshold limit as specified above but having public borrowings need to retire their auditors as per time period specified in the Act in this behalf.

The above only shows that Good Corporate Governance can be achieved only with the co-ordination of the Company Secretary and the Legal Department along with other stake holders and they will have to work more closely to ensure that the implementation is on track.

The market globally has given good response and India makes its great leap towards a good corporate governance system with legal and compliance going hand in hand.

To conclude, I admire the following words of the Prime Minister- "Mere good governance is not enough; it has to be pro-people and pro-active. Good governance is putting people at the centre of the development process." These are the magical words of our Prime Minister, Narendra Modi.

It has been Mr. Modi's firm conviction that good governance alone is not enough; it has to be pro-people and pro-active. He believes there should be a tangible impact on the lives of the people through good governance.

Disclaimer - The above article is based on author's research and her views and do not form part of Wockhardt's view.