Context
- Confederation of Indian Industry (CII) launched a corporate governance charter for startups, including a self-evaluative scorecard.
About
- It will provide suggestions on corporate governance tailored for startups and offer guidelines suitable for different stages of a startup that aim to enhance governance practices.
- It comes at a time when startups such as Byju’s, BharatPe, and Zilingo have raised concern over governance standards in the past 12-18 months.
- Corporate governance in India is a set of rules, practices, and processes by which a company is guided and controlled.
- Self-Evaluative Governance: The charter includes an online self-evaluative governance scorecard that startups can use to evaluate their current governance status and its improvement over time.
- The tool allows startups to measure their governance progress, with score changes indicating improvements in governance practices as assessed against the scorecard from time to time.
- Startups will be structured across four key stages: inception, progression, growth, and going public.
- At the Inception stage, the startups must focus on board formation, setting the tone at the top, compliance monitoring, accounting, finance, external audit, policies for related-party transactions, and conflict resolution mechanisms.
- In the Progression stage, a startup may additionally focus on the expansion of board oversight, monitoring key business metrics, maintaining internal controls, defining a hierarchy of decision-making, and setting up an audit committee.
- For the Growth stage, the startups must also focus on building stakeholder awareness towards the vision, mission, code of conduct, culture, and ethics of an organization, form board committees, ensure diversity and inclusion on the board, and fulfill statutory requirements, according to the Companies Act 2013 and other applicable laws and regulations.
- At the Going Public stage, a startup must expand its governance in terms of monitoring the functioning of various committees, focus on fraud prevention and detection, minimize information asymmetry, plan for succession, and evaluate board performance.
- Valuation: Startups may strive for long-term value creation rather than short-term valuations. The valuations of businesses should be kept as realistic as possible.
- Long-Term Goals: The needs of the business entity should be separated from the personal needs of its founder(s), but at the same time, the goals and needs of the founders, promoters, and initial investors should be aligned with the long-term goals of the business.
- Separate Legal Entity: The startup should be maintained as a separate legal entity with the organization’s assets distinct from the founders’ assets.
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Confederation of Indian Industry (CII) – The Confederation of Indian Industry (CII) is a non-government, not-for-profit, industry-led, and industry-managed business association organization playing a proactive role in India’s development process. – Founded in 1895, CII has members from the private and public sectors, including small and medium-sized enterprises and multinational corporations, and an indirect membership of enterprises from national and regional sectoral industry bodies. – CII charts change by working closely with governments and thought leaders and enhancing efficiency, competitiveness, and business opportunities for the industry.
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What is Corporate Governance?
- Corporate governance is the system of rules, practices, and processes by which a company is directed and controlled.
- It involves balancing the interests of a company’s stakeholders i.e. shareholders, customers, suppliers, the government, and the community.
- Corporate Governance consists of;
- Explicit and implicit contracts between the company and the stakeholders for the distribution of responsibilities, rights, and rewards.
- Procedures for reconciling the conflicting interests of stakeholders by their duties, privileges, and roles.
- Procedures for proper supervision, control, and information that flows to serve as a system of checks and balances.
Regulatory Framework for Corporate Governance in India
- The Companies Act, 2013: It contains provisions like the Composition of the Board of Directors, Admitting Women Director and Independent Director, Directors Training and Evaluation, Constitution of Audit Committee, Risk Management Committee, Subsidiaries Companies Management, etc.
- Securities and Exchange Board of India (SEBI): SEBI is a regulatory authority to curb the malpractices in the financial market and protect the interest of its investors. It regulates the activities of the Stock Exchange and ensures the healthy development of the financial market.
- Standard Listing Agreement of Stock Exchanges: It is the basic document that is executed between companies and the Stock Exchange when companies are listed on the stock exchange. The main purpose of it is to ensure that companies are following good corporate governance.
- Institute of Chartered Accountants of India (ICAI): It issues accounting standards for disclosure of financial information.
- Institute of Company Secretaries of India (ICSI): It issues secretarial standards as per the provision of the Companies Act,2013.
Challenges in Corporate Governance In India
- Getting the board right: In India, it is a common practice for friends and family of promoters to be appointed as board members.
- Performance evaluation of directors: To achieve the desired results on governance practices, there is often a call for results of performance evaluation to be shared with public. However corporate firms do not share it sometimes to avoid public scrutiny and negative feedback.
- Removal of Independent Directors: In most cases, the major issue in corporate governance arises as independent directors are easily removed from their positions by the promoters if they do not side with the promoters’ decisions.
- Founders Control and Succession Planning: In India, founders’ ability to control the affairs of the company has the potential to derail the entire corporate governance system. Unlike developed economies, in India, the identity of the founder and the company is often merged.
- Risk Management: The board is only playing an oversight role in the affairs of a company. However, there is a need for framing and implementing the risk management policy.
Committees for Resolving Issues
- Kumar Mangalam Birla Committee: It was set up to suggest suitable recommendations for the Listing Agreement of Companies with their Stock Exchanges.
- The Committee evolved a Code of Governance which was accepted by SEBI and a new Clause 49 was inserted into the Listing Agreement of Companies with their Stock Exchanges.
- N R Narayan Murthy Committee: Based on the recommendations of this committee SEBI published a revised Clause 49 which included amendments /additions to provisions relating definition of independent directors, strengthening the responsibility of Audit Committees, and requiring Boards to adopt a formal Code of Conduct.
Importance of corporate governance
- Strengthens investor confidence: Strong corporate governance maintains investors’ confidence in the financial market, as a result of which companies can raise capital efficiently and effectively.
- International flows of capital: It enables companies to reap the benefits of the global capital markets which will contribute to economic growth.
- Increased Productivity: It also minimizes wastages, corruption, risks, and mismanagement.
- Brand Image: It helps in the brand formation and development of a company. It ultimately increases capital flows from foreign institutional investors (FII) and foreign direct investment (FDI).
| Startups in India
– An entity shall cease to be a Startup on completion of ten years from the date of its incorporation/ registration or if its turnover for any previous year exceeds one hundred crore rupees. – There are over 99000+ startups recognized by the government of India as of 2023. a. 49% of them have a base in Tier 2– Tier 3 cities. b. These startups are spread over 669 districts from 36 States and Union Territories of India. – As of 2023, India is home to 108 unicorns with a total valuation of $ 340.80 Bn. a. Unicorn is a term used in the venture capital industry to describe a privately held startup company with a value of over $1 billion. |
Startups in India
- An entity shall cease to be a Startup on completion of ten years from the date of its incorporation/ registration or if its turnover for any previous year exceeds one hundred crore rupees.
- There are over 99000+ startups recognized by the government of India as of 2023.
- 49% of them have a base in Tier 2– Tier 3 cities.
- These startups are spread over 669 districts from 36 States and Union Territories of India.
- As of 2023, India is home to 108 unicorns with a total valuation of $ 340.80 Bn.
- Unicorn is a term used in the venture capital industry to describe a privately held startup company with a value of over $1 billion.