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Corporate Governance - the consequences of non-adherence

Durga Rao 
Updated on 14 June 2016

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       We often hear about “Corporate Governance” while referring to some misdeed in some big listed Public Company.  We refer the term “Corporate Governance” pursuant to the listing agreement to be entered into by all listed Public Companies with the Stock Exchange. The listing agreement with the Stock Exchange is a law and to be adhered by the company. If the Company fails to adhere to the clauses in the listing agreement or the agreement, then, the consequences will follow and some times it may go to the extent of delisting.  But, what I stress is that the Corporate Governance is nothing but adhering to corporate regulations and especially the listing agreement with the Stock Exchanges. In view of its exposure, if the Company is a listed Public Company, the SEBI frames regulations from time to time and SEBI discharges the responsibility of investor protection by regulating the management of the companies directly and indirectly through intermediaries and stock exchanges.
       Thus, the term “Corporate Governance” can be specific and also general. As logically “Corporate Governance” is nothing but adhering to corporate regulations, in general, the term “Corporate Governance” can be understood as adhering to the provisions of law, the SEBI regulations, listing agreement with stock exchanges and the central government rules etc. Earlier, we used to find that the companies float the rules and regulations very frequently even if we assume the same as accidental or mistaken. The reasons are:
1.     The managerial personnel or the persons charged with the compliance are not able to follow the plethora of rules and regulations.
2.     The companies had to file the returns and reports manually with ROC etc.
With the MCA scheme, the companies now can no longer say that filing reports etc. with ROC is a risky process and they may not be excused normally when the issue of condoning the mistake is taken up. But, in view of many complications and plethora of corporate regulations, it is humanly possible that the Company may not strictly adhere to all corporate regulations and in the process there can be unintentional default. Now the issue is as to what happen if the company could not follow the rules and regulations or do not strictly adhere to “Corporate Governance”.
Firstly, the consequences will follow in the form of penalties and it includes delisting or banning the company from accessing the capital markets at times. It is a direct consequence of non-adherence to Corporate Governance.
Secondly, there can be indirect consequence and it is very very important to note. The indirect consequence is in the form of implications. For example, if a company fails to file a report of investment etc. the minority shareholder or a group in the company may allege that the company is shielding its investments in order to divert the funds and it can become very big issue. Thus, the indirect consequence, though we may not concentrate, is very significant than the direct consequence of non-adherence to Corporate Governance. Big Public Limited Companies usually do not take the risk and they will be engaging Whole-time Company Secretary to look after the secretarial issues apart from engaging many people to assist him. But, the closely held Public Companies may not be able to concentrate on these secretarial issues in many cases. The company may not have any intention to cheat anyone, but, still, it may have to face allegations.  In many applications under section 397/398 of the companies act, the minority shareholders or minority group attribute malafides on the part of the majority or the company referring to non-fling of some report or even not recording minutes in the prescribed form. The Company or the majority might have inadvertently not filed some report or not recorded something in its minutes, but, still, it gives rise to attribute malafides and the company may suffer. Even the adjudicating authority may take note of non-adherence to the rules and regulations. Thus, for no-fault, the company may have to suffer huge loss indirectly and it practically happens. It all exposes the significance of adhering to “Corporate Governance”.
 
Thus it is to be noted that adherence to ‘Corporate Governance” is very very significant and the impact of non-adherence will be drastic on the company and also shareholders at times.



Category Corporate Law
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Durga Rao 

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