Governance Practice in Indian Private Limited Companies

In India most of the private companies were family-owned businesses, wherein the promoters were the Chairman / Directors of the companies. As per the Companies Act, two people can form a company. Therefore most of the private companies have a minimum of two Directors.

The private companies are not required to comprises of Board Chairman, therefore the person who are appointed as directors were take the major decisions without the consent of the other directors. This leads to glitch in the entire board system.

In few companies board meetings still in papers and not the real physical meetings were happening which is deviating the Companies Act, however, the CA does not emphasis more on the physical meeting for the private Companies. This leads to lapse of optimum utilisation of Company Secretary and their skills.

The paper meeting were prepared by CS with post-dated events, and there is no formal tracking of the major events of the Company. Also, there are too many subsidiary companies within the company which leads to lot of paperwork for the company secretary, instead of having number of subsidiaries those companies can be compressed into line of business within the parent Company.

As per the Companies Act, there is no mandatory of appointing CFO, however many Companies accommodate the position. Many private companies do not have a proper Financial management system and they don’t deal with investment activities to create a strong working capital structure. They concentrate only on the buy and sell transactions.

A good private company should have a great governance model like public companies. All the activities of the public companies are monitored by SEBI and filing of ROC and ITRs are their monitoring tools.

The Indian government should frame such rules to monitor the activities of the private companies, with strong set of rules, Audits and Inspections by ROC. The promoters were take advantage of the lapse in system. Especially frequent check of MOM, accuracy of form filling and the frequent change of managerial persons , resolutions of Board meetings etc.

Every private company should have Audit Committee, Nomination and Remuneration committee, Legal Counsel , Internal Control and Sexual Harassment Committee. Also, appointment of Independent Directors and Women Directors to safeguard the Interest of the company.

However, the present law does not emphasis the committee and Independent Directors. We need consistent Governance practise across all companies which falls under the definition of the Companies Act, then only strong governance model will be rationalized across the Country.

Many private companies does not have all the committee, code of conduct, Code of Ethics, Data privacy and Data protection, Succession plan, e.t.c. All the companies only focused mainly on the profit-making moto and not to create strong Internal operational Structure to establish the good Governance practise. Due to this reason many Company fall into the ambit of IBC.

The private companies should also publish the financial statement and Annual Report unlike public companies, therefore it’s easy to perform due diligence by the prospect investor, employee, prospect employee and Creditors as well. In the present scenario performing due diligence of the private Company is cumbersome.

In order to avoid all the ambiguity, the government should come forward and implement strict rule and adopting  Corporate Governance for the private limited companies in India.

Most of the private companies were foreign companies with foreign directors and they are unaware of the local laws. The Companies were advised by only Statutory Auditors. The concept has to change any person who is becoming directors should hold professional qualifications like Chartered Accountant, Chartered Secretary, Cost Accountant. If any of the Indian or foreign directors were not qualified, they should take separate exam to upskill the knowledge to become a Directors in India . Like the way Independent Directors exam conducted by IICA. 

The strong the Governance helps the Investor, small stake holder and Creditors interest protected, the MCA has to come up with the robust set of rules and allow competent directors to sit on the board to establish strong Corporate Governance.

The private companies in Indian running in different ways which has lot of glitches without proper governance, this situation should change and MCA, should come with lot of rules and laws to arrest the lapses in order to bring common Regulation, Governance and Monitoring framework. The company incorporation should be done only by Company Secretary profession instead of any other professional.
Private companies in India need a robust change in their operational models with good Corporate Governance and for that should appoint Governance professional, at the time of incorporation. 

Private companies needs robust changes in India, unlike public company the regulation should in place for any activities with relates to private companies, any deviation which leads to strict fines and imprisonment. Therefore, people who promote the company should have a fear to go wrong which significantly affects the investors, Lenders, creditors, e.t.c. 

The rules and frame work, needs to be robust unlike the countries  Singapore, Hong Kong, Australia, UK and US.  In, India MCA should pick up the best practise from Singapore Corporate  Governance model to have a greater governance across the Indian private companies.

The loops enjoyed by the company should be arrested by strong regulation, good Governance and Compliance.

In India, private companies plays a vital role for Indian economy therefore make them best place to work needs a great focus and to avoid them to fall into Insolvency, without having proper Governance structures, MCA, need significant remodelling framework on the laws and regulations and have a stringent mechanism to reduce the wrong doing and mismanagement in the Company. 

As per the above-mentioned points if the MCA, should focus to stabilise the private limited companies governance structure to mitigate the risks against the Investor, Lenders, customer and Creditors. 

If the above mention point were implemented for private companies then the chances of Insolvency and winding up will drastically come down and the Government get an insight of what went wrong with the Company to file the Insolvency, winding up and strike off  Companies and the Directors should be Liable and charge with strict punishments for deviating any of the rules, laws, non-compliance, falsification of accounts, e.t.c.

MCA, will come up with robust Governance and Compliance model to tighten the Operational and Governance model to protect and safeguard the Interest of Investor, customer, Lenders, Creditors by having transparent Corporate Operational frame work, if this happen India is the best place for foreign Investment eventually.

This article has been written by Suresh Kumar. He is Corporate Lawyer and Company Secretary in Chennai and has 17+ years of experience in the area of Finance, Compliance, AML, Company Secretary & Legal and Arbritation. He can also be reached at Ksures55@yahoo.co.in.