Two major revelations in 2024 shook both the Indian corporate world and the stock market, both originating from the US. The first was an 'alleged' claim by short-seller Hindenburg that Madhabi Puri Buch, head of India's market regulator, had previously invested in offshore funds also linked to the Adani Group. The second was the fallout from US authorities' decision to charge Gautam Adani, the billionaire chairman and founder of the Adani Group, along with seven others, for allegedly agreeing to pay approximately $265 million in bribes to Indian government officials.
In 2024, corporate governance in India continued to evolve, with both progress and challenges. Transparency, a cornerstone of good governance, became increasingly important in light of global developments, market pressures, and regulatory changes. However, gaps in implementation remain, and several steps are needed to further improve transparency and accountability in India's corporate sector.
What India witnessed in 2024:
Increased focus on Environmental, Social, and Governance (ESG) factors:
Investors and regulators globally have been pushing companies towards greater transparency, particularly on environmental, social, and governance (ESG) metrics. In India, there has been a notable increase in corporate reporting on ESG parameters, spurred by the Securities and Exchange Board of India (SEBI) guidelines for Business Responsibility and Sustainability Reporting (BRSR).
By 2024, companies listed on the stock exchanges were required to adopt BRSR, which aims to improve transparency in reporting on sustainability and corporate social responsibility (CSR). This move helped in providing investors with more detailed and structured information, contributing to better decision-making.
SEBI's vigilance on related party transactions: The Securities and Exchange Board of India (SEBI) implemented stricter rules for related-party transactions (RPTs) to curb instances of conflicts of interest and enhance transparency. In 2024, SEBI strengthened its scrutiny of corporate governance practices and took action against companies that did not comply with these regulations.
Corporate governance reforms in listed firms: In an effort to tackle corporate frauds and financial misreporting, there was a heightened focus on the role of independent directors, the separation of roles between CEO and chairman, and improved oversight of audit committees. These reforms are designed to ensure transparency and accountability at the top echelons of companies.
Corporate scandals and governance failures:
Despite regulatory advancements, India witnessed significant corporate governance failures in some high-profile firms in 2024. For example, companies faced scrutiny for issues like financial misreporting, insider trading, and manipulation of stock prices. These scandals underscored the need for stronger mechanisms to ensure transparency.
The failure of some high-profile firms resulted in public outcry and the strengthening of legal actions by the regulators. High-profile cases of corporate fraud prompted the government to review its enforcement policies and reconsider penalties for non-compliance with governance norms.
Digital Transformation and Transparency:
As the use of digital tools and artificial intelligence (AI) became more pervasive, it was easier for investors and regulatory bodies to track real-time data on corporate actions. This shift helped in improving corporate transparency and made it easier to detect fraud and mismanagement.
Some companies began exploring blockchain for ensuring transparency in reporting financial transactions, contracts, and audits. The use of this emerging technology holds promise in enhancing corporate governance by reducing opportunities for manipulation and improving trustworthiness.
What Needs to Be Done
While India has made strides in corporate governance reforms, enforcement remains a challenge. Regulatory bodies like SEBI and the Ministry of Corporate Affairs (MCA) must ensure that companies strictly adhere to governance norms, and violations must lead to swift and strong action. This includes effective monitoring of RPTs, related party disclosures, and ensuring that all financial disclosures are accurate and timely.
Building ethical culture:
Companies must focus on cultivating an ethical corporate culture at all levels. Transparency cannot be mandated solely through regulations—it needs to be ingrained in a company’s ethos. Encouraging the development of internal compliance frameworks and fostering ethical behavior across the workforce will improve overall governance.
Whistleblower protection:
India needs to strengthen whistleblower protection mechanisms to encourage employees and insiders to report malpractices without fear of retaliation. Creating safe channels for whistleblowers will promote greater transparency in business practices.
Boardroom diversity and independence:
While reforms have aimed to make boards more independent, companies must do more to ensure that their boards are truly impartial and capable of holding management accountable. Independent directors should be empowered and held responsible for ensuring governance standards are met.
Promoting gender diversity in leadership:
Increased diversity at the decision-making level will foster a more inclusive and transparent corporate environment. India should encourage policies that bring women and other marginalized groups into leadership roles, ensuring a broader perspective on corporate governance.
Integrating Technology to Enhance Transparency
The adoption of AI for continuous auditing and the use of blockchain for secure, transparent transactions should be scaled up in India. These technologies can provide tamper-proof records of corporate activities, making financial reporting and audits more transparent and secure.
Digitisation of financial disclosures:
Companies must be encouraged to adopt digital platforms for financial disclosures, making data easily accessible to investors, regulators, and the public. This will help minimize the scope for fraudulent activities and enhance trust in the financial ecosystem.
Investor education and awareness:
Investors should be educated about the importance of corporate governance and its impact on their financial decisions. Regulatory bodies and organizations can promote programs that help investors understand how to analyze corporate governance practices and assess the risks associated with a lack of transparency.
Improved public-private collaboration:
Regulators should maintain an ongoing dialogue with the private sector to refine governance practices and address concerns from the business community. This will help in ensuring that regulations remain relevant and actionable in real-world corporate settings.
Conclusion
In 2024, India made significant strides in promoting transparency in corporate governance, particularly with the implementation of BRSR and tightening of regulations by SEBI and the MCA. However, the country still faces challenges such as inconsistent enforcement of governance rules, corporate scandals, and the need for more diversity in leadership roles.
To further improve transparency, India needs to enhance the enforcement of existing regulations, promote ethical corporate culture, integrate advanced technologies, and educate both companies and investors about the importance of good governance. These steps will ensure that the corporate sector in India operates with greater accountability, contributing to overall economic growth and public trust.