Corporate Governance refers to the process that ensures that business operations and management of corporate entities are carried out in accordance with the highest prevailing standards of ethics and effectiveness to safeguard the interests of all its shareholders. Simply put, it corresponds to the transparent, fair, and ethical administration of a corporation that offers maximum benefits to the shareholders.
This is an important topic for RBI Grade-B Main Exam, as well as for the interview, as direct questions from the need for corporate governance and recent developments in corporate governance have been asked in the past. This article introduces you to this topic. However, do study it in detail to ensure a good score.
Corporate governance is important as it ensures a strong financial system in the economy. Effective corporate governance will help an economy through financial development, building market trust, reducing vulnerability in the market; and making it possible to handle financial crises in an effective manner. It also reduces incidents of fraud.
To achieve efficient corporate governance in a country, it is important to have transparent internal & external audit systems. Efficient monitoring of these systems will ensure that financial records are not manipulated. However, achieving the highest level of corporate governance is not easy. It requires a strong team for the establishment of laws that bring about a change in the economy.
India has seen significant growth in corporate governance over the past years. The first phase of corporate governance made the Boards more independent; while focusing on the supervision of their management by shareholders and foreign investors. These reforms were channeled through the Ministry of Corporate Affairs and the Securities and Exchange Board of India (SEBI).
The second, and the most important, phase of corporate governance in the country started in 2009, after the Satyam scandal. The Companies Act was passed in 2013, which stipulated laws & provisions regarding the constitution of the board, processes, independent directors, disclosure requirements, and more.
After the Satyam scandal, SEBI laid out guidelines regarding the rules & regulations companies must follow to ensure the protection of investors. Further, the Institute of Chartered Accountants of India (ICAI) issued accounting standards for the disclosure of financial information, so as to protect investors and third parties. It can be said that corporate governance in India took real shape during its second phase; when reforms and regulations about financial reporting and disclosures were put into place.
Corporate governance has evolved significantly over the years, but has not completely succeeded in putting an end to the manipulation of books of accounts. Several scandals have come to light in the past. SEBI has had to carry out inquires for many clients in the country, which only goes to show that corporate governance still has a long way to go in India.
When the latest amendments and developments are evaluated, one can conclude the Government has become successful in increasing transparency in reporting. Independent directors have higher responsibility; and now there is more clarity with regard to disclosures. Business owners need to disclose details about related third-party transactions, and about the payment made to board members. This has helped increase consumer confidence in governance and in the financial statements filed by the companies.
The recent developments focus on the board, shareholders, and disclosure requirement. April 2019 saw several amendments that came into effect. These brought about a significant change in corporate governance in the country, in terms of listed companies, the board of directors, promoters, and investors. Majority of the amendments were dedicated towards the board; and laid emphasis on diversity, independence, and transparency. An additional layer of scrutiny for independent directors was also added, under Clause 49 of Listing Agreements.
The latest developments will bring about clarity and transparency in terms of party transactions, while granting more rights to shareholders. Annual reports will now be mailed to the shareholders; and will include disclosures regarding utilization of funds, changes in key financial ratios, credit rating, fees of the auditor, and more. When companies provide transparent and clear information to shareholders, it inherently increases the latter’s loyalty and trust.
Corporate governance in India has indeed come a long way. With the advances and recent developments, the statutory bodies in the country have taken a strong stand. This has helped ensure financial stability and disclosure. The confidence of investors and shareholders on the financial information shared by the companies has also improved.
This was a brief introduction to this topic. Go through the concepts and nitty-gritty of it at length to ensure you are able to answer the questions asked in the exam. Since RBI Grade-B, for both subject-centric papers, is an objective exam, you need to follow a smart strategy to crack the exam.
Our mentors are guiding RBI Grade-B aspirants to do just that! If you need further assistance in topics like these & more, you can check our detailed course for RBI Grade-B Exam Preparation. For more details, regarding the course deliverables, get in touch with our course counselors.