Corporate governance awareness has heightened in India and there is a realisation that it is not all about compliances, says Subodh Kumar Agrawal, President of the Institute of Chartered Accountants of India (ICAI), in an interview to Team Inclusion. Highlighting the important role that ICAI plays as an accounting and auditing regulator, he says its accounting standards have succeeded in laying down the benchmarks of corporate governance
Question: What is your view on corporate governance? Why is it important?
Answer: Good corporate governance is the foundation on which an environment of trust, transparency and accountability is built. It ensures corporate regulatory compliance and enhances financial performance. With increased pace of globalisation, the relevance of corporate governance has gained renewed focus.
Q: What efforts ICAI is making to establish good governance practices?
A: The ICAI has all along endeavoured to encourage an appropriate level of corporate governance and provide assistance in laying down the benchmarks. To raise the awareness among business entities, both listed and unlisted, on the aspects and activities associated with good governance practices and help them through understanding of the subject, ICAI organises many conferences and seminars across the country. During the India Corporate Week celebrated by the Ministry of Corporate Affairs (MCA) every year, ICAI coordinates with the ministry in holding joint national programmes, one of the thrust areas being good governance.
In 2011, the MCA brought out the National Voluntary Guidelines on Social, Environmental and Economic Responsibilities of Business that mainstream the subject of business responsibilities. The guidelines are a refinement of the Corporate Social Responsibility Voluntary Guidelines, 2009
Annual accounts and audit is an essential foundation of good governance. ICAI plays an important role as an accounting and auditing regulator. It has been proactively formulating Accounting Standards (AS) for corporates as well as non-corporates. Recognising the need for international harmonisation, the standards issued by ICAI, named as IND AS, have now converged with International Financial Reporting Standards (IFRS) and notified by the MCA. While developing the AS, we took into consideration the requirements of corresponding standards of the International Auditing and Assurance Standards Board (IAASB) of the International Federation of Accountants.
Q: What are the guidelines on corporate governance? Are these voluntary or mandatory?
A: Corporate governance of listed entities is basically governed by SEBI’s Clause 49 of the Listing Agreement (which provides for both mandatory and non-mandatory requirements) and the Companies Act, 1956, especially its Section 292A. The MCA had come out with a set of recommendatory guidelines, namely, the Corporate Governance Voluntary Guidelines, 2009. In 2011, the MCA brought out the National Voluntary Guidelines on Social, Environmental and Economic Responsibilities of Business that mainstream the subject of business responsibilities. The guidelines are a refinement of the Corporate Social Responsibility Voluntary Guidelines, 2009.
Q: What can be done to ensure that the corporates have a strong ethics policy and adhere to norms?
A: By force of circumstances, business ethics concerns us like never before. It is a known fact that corporate governance is not all about compliances and it can’t be reduced to a box-ticking exercise. Instead, a clear understanding of the existing norms and adherence to those provisions in spirit could hold the key in building a credible organisation. Corporate governance practices comprise two basic components: formal rules (brought about by laws, rules and regulation) and informal rules (based on accepted business practices and ethical standards). The trust and confidence of the investor in a company is built not only on its financial performance but also on layers of its good conduct, culture and credibility. Experts say that the focus should not on corporate governance but good governance and it is ultimately substance over procedure. However, aspects like values, ethics, quality and integrity cannot be legislated.
Q: The SMEs generally lag behind in corporate governance. Amongst other things, it becomes a stumbling block in their growth. What kind of handholding can be done so that they become competitive and also somehow fulfill the criteria if they have to go for listing?
A: There are three things to be done. One, create awareness about governance practices among the stakeholders of the MSME sector. Second, help them transform from a proprietary structure to a formal structure by lowering the compliance cost. Finally, promote understanding of costs and benefits of such a transformation.
To help the SMEs to strengthen their corporate governance, it is essential to create awareness about the governance practices among the stakeholders of the MSME sector. Further, help them transform from a proprietary structure to a formal structure by lowering the compliance cost
Q: How does the Companies Bill, 2012 aim at improving corporate governance? How does it protect the shareholder interest?
A: In the Companies Bill, 2012, some of the significant provisions with regard to corporate governance aspects are:
(i) In prescribed class or classes of companies, there should be at least one woman director;
(ii) The definition of independent directors along with the code for independent directors introduced;
(iii) Concept of corporate social responsibility (CSR) introduced and the board to have a CSR committee;
(iv) Certain class of companies are required to appoint an internal auditor to conduct internal audit of the books of company. The internal auditor shall be a chartered accountant or cost accountant or such other professional as may be decided by board;
(v) Maintenance and allowing inspection of documents by companies in electronic form; and,
(vi) A vigil mechanism (whistleblowing). To promote shareholders’ interest, the Bill provides for them to have exit option if money raised has not been utilised. New clauses prohibiting insider trading of securities and forward dealings in securities have been introduced.
Q: Under the Bill, companies are required to spend at least 2 per cent of their average profit on CSR activities. Are there any challenges?
A: The challenge is to convince the corporates about the emerging concept of creating shared value in implementing their CSR initiatives so that business and society both are benefited.
Q: The government wishes the corporates to decide the areas of activities and strategies for CSR execution, with it playing a facilitating role. What role is this?
A: The government could help identify the CSR activities that may be undertaken in the local area surrounding the company. It could also give tax rebate on CSR spends.
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