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Drawbacks in Indian Corporate Governance

Even though Indian corporate governance has made considerable progress in the past few years, there are still lingering obstacles and shortcomings that continue to exist within the system. Corporate governance can be likened to a comprehensive guidebook, dictating the principles by which a company operates.

In Indian corporate governance, there are a few notable drawbacks that should be highlighted.

Transactions involving Related-Party:
When companies engage in transactions with entities that are connected to their management or promoters, also known as related-party transactions, it can present a potential threat to the principles of corporate governance. Inadequate disclosure and scrutiny of these transactions can lead to a lack of transparency and give rise to conflicts of interest. In India, there have been instances where certain companies have entered into agreements with other companies that are owned by the same individuals. This practice may give rise to concerns as it could be utilized for the purpose of illicit money movement or potentially favouring specific individuals in an unjust manner.

Insider Trading:
In the realm of financial transactions, a clandestine practice known as insider trading emerges when individuals engage in the purchasing or selling of stocks from corporate entities by possessing undisclosed, privileged information. Pertaining to the Indian context, instances have arisen wherein influential figures within companies have partaken in this controversial act.

Compensation for Executives:
There is a growing concern regarding the excessive compensation of certain high-ranking executives in India, even in times when their respective companies fail to perform satisfactorily. These individuals often receive salaries and bonuses that far surpass what can be considered just and reasonable.

Dominance of Promoters:
In the realm of Indian business, a notable aspect is the prevalence of company setups wherein the promoters hold sway over both executive and board roles. This consolidation of authority has the potential to impede independent decision-making, thereby hampering the efficacy of board supervision.

Weaknesses in Board Independence:
While corporate governance norms stress the significance of having an autonomous board, there are instances where certain companies may lack an adequate count of independent directors. Moreover, the independence of these directors can be jeopardized as a result of personal or professional ties with the management of the company.

Shareholder Activism and Rights:
In India, the extent of shareholder activism and the utilization of shareholder rights is quite restricted. Shareholders, particularly those in the minority, may encounter difficulties when it comes to asserting their rights or ensuring that management is held responsible.

Inadequate Risk Management Practices:
There are certain companies that might have insufficient practices when it comes to managing risks, especially in terms of recognizing and reducing potential risks that have just emerged. This lack of precautionary measures can put the company at risk in terms of its financial stability and operational efficiency.

Financial Reporting and Disclosure Practices:
Although there have been some advancements, there are worries regarding the calibre and clarity of financial reporting from certain companies. Incoherent or deceptive revelations have the potential to undermine the confidence of investors and impede the process of making well-informed decisions.

Accounting Irregularities:
Certain corporations have been apprehended tampering with their financial records in order to present a more favourable facade than the actual reality. In order to achieve this deceptive objective, they resort to intricate accounting practices or even engage in fraudulent activities.

Enforcement and Regulatory Challenges:
Enforcing corporate governance norms can be quite a challenge, despite the fact that there are regulatory frameworks in place. The effectiveness of these regulations may be undermined by inconsistent enforcement and delays in legal proceedings.

Board Composition:
Critics have voiced their concerns regarding the composition of boards in numerous Indian companies. It has been argued that these boards frequently exhibit a lack of diversity and the absence of independent directors. Such a situation can give rise to conflicts of interest, thereby impeding the board's ability to effectively oversee affairs in a proper manner.

Ineffectiveness of Board Committees:
If board committees lack independence, expertise, or fail to operate diligently, their effectiveness may be compromised; however, regulatory requirements mandate the establishment of committees like audit and nomination committees.

Lack of Diversity:
The issue of gender diversity on boards continues to be a struggle for numerous companies in India. The lack of female representation in high-ranking leadership roles and board positions is a cause for concern, as it hampers the inclusion of diverse viewpoints within decision-making entities.

Stakeholder Engagement:
Engagement practices may have limitations in involving all stakeholders, including employees, customers, and local communities, with companies not fully considering or involving their interests.

Corporate Social Responsibility (CSR) Implementation:
The requirement for CSR initiatives may apply to specific companies, but the degree of effectiveness and authentic dedication to social responsibility can differ greatly. Instead of genuinely tackling significant social and environmental issues, certain companies may choose to engage in superficial CSR activities.

Inadequate Whistleblower Protection:
Employees may be discouraged from reporting unethical practices or corporate misconduct due to the potential lack of robust whistleblower protection mechanisms in some companies.

Lack of Succession Planning:
In the event of sudden management changes, uncertainties and disruptions can occur as a result of some companies lacking proper succession planning for key leadership positions.

To overcome these limitations, continuous endeavours must be made by regulatory authorities, corporations, and other stakeholders to augment clarity, responsibility, and comprehensive corporate governance benchmarks. Consistent revisions to regulations together with heightened consciousness regarding the significance of robust corporate governance methodologies can play a role in tackling these predicaments.

The Indian government and regulators have made efforts to rectify these concerns by enacting the Companies Act in 2013, which bolstered regulations governing the management of companies. However, there remains an imperative need to ensure that companies in India adhere to the rules ethically and equitably.

Written By: Md.Imran Wahab, IPS, IGP, Provisioning, West Bengal
Email: [email protected], Ph no: 9836576565

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