Evolution of Body Corporates and Need of Corporate Stewardship In India

HISTORY OF BODY CORPORATES IN INDIA

“At the stroke of the midnight hour, when the world sleeps, India will awake to life and freedom…”

With the aforesaid iconic lines of India’s First prime Minister, hon’ble Pt. Jawaharlal Nehru, India attained its Independence and become an Independent Country, however, along with the Joy and the happiness of independence, India was also facing immense social and financial struggles. Apart of the aforesaid struggles like, Indo-Pak Partition, immediate wars, riots, “Poor and wrecked” situation of the Indian economy was a major challenge, that haunted Nation’s leadership of that time.

At the time of Independence, the Indian economy was majorly based on Agriculture and the situation of the other two Sectors i.e., “Industrial” and “Service” sector were in pity. The term “Company” or “Body Corporate” was still sound foreign term to the public at large, hence general public was afraid to invest their savings into the companies, due to which problem of money flow grown bad to worse.

On that time Companies in India were governed by the provisions of “Indian Companies Act, 1913” which came into force on First day of April, 1914, replacing that time existing “India companies Act 1882”. One of the main reasons of the disapproval of both the aforesaid companies Acts by the public, were the lack of trust, which grow due to the absence of Strong provisions of “Corporate Governance” in the statue. Mostly companies of that time in India were run by the rich and elite group of people, to which general public does not feel connected.

PREAMBLES AND BUILDING BLOCK OF CORPORATE SECTOR IN INDIA

In order to revive the sinking Indian economy and to boost a new life into the veins of Indian Corporate and Industrial Sector, Indian Government of that time took some serious and commendable steps, which included the enactment of several new Statue, acts and establishment & recognizing the statutory bodies. Some of the Major steps taken by the government of that time in aforesaid regard are as follow:

• “The Capital Issues (Control) Act”: By the virtue of this act, every company necessarily required to seek government permission to raise money by selling securities to the public. By this government was also empowered to regulate the price of the securities of the companies, who intended to sell its securities to the public.
• “The Securities Contracts (Regulation) Act” or popularly known as “SCRA” was major step taken by the Government of India, to regulate and recognizing the existing as well as the future stock exchanges of India. It also regulates the listing of companies and validity of derivatives contracts.
• “Foreign Exchange Regulation Act”, as the name suggest this act was one of the preliminary enactments in India, which was enacted to regulate the Foreign Exchange Transactions in India, which include controlling the flow of Foreign Currency and trading of both the Foreign and Indian Securities in India.
• “Companies Act, 1956” was the landmark act, passed by the Government of India, to repeal the existing Companies Act, 1913. This act empowered the government of India to make the provisions much relatable to the Indian Context, as previous act was made up by the Britishers, which was up to some extent not suitable for Indian condition.
• Recognizing the Existing Stock Exchange and establishing new ones: With the enactment of the Securities Contracts (Regulation) Act several existing Stock exchanges of that time such as Bombay Stock Exchange (BSE), Calcutta Stock exchange etc. were recognized and whole new world of possibilities were open for establishing new Stock exchange were unleashed.
• Nationalizing the Indian Banks: In the year 1969, cabinet of former Prime Minister of India, Smt. Indra Gandi, decided to nationalize 14 major Banks of India. It was a revolutionary step to encourage businesses and corporate in order to serve better the needs of the country’s economy.
• “Securities and Exchange Board of India” (SEBI) with the emergence of SEBI, the decades old “Capital Issues (Control) Act” was abolished. SEBI was formed to regulate the Securities Market in accordance with the requirements of modern times and to compete the international stock markets.

ORIGEN OF STEWARDSHIP IN THE FIELD OF CORPORATE GOVERNANCE

The word “Stewardship” has its origins from the combination of the Anglo-Saxon word ‘stig weard’ or ‘keeper of the hall’. when we combine the word “Steward” with “Corporate”, then the word “Corporate Steward” derived. It is relatable new terminology in business dictionary. The Corporate Stewardship refers to taking responsibility of the business entity and its effects on its stakeholders. This involves considering more than just the bottom line and looking at elements such as risk mitigation, values, ethics and morals

There is no specific definition of Stewardship is available under Company Act, 2013 till date, the meaning and scope of the Corporate Stewardship varies from person to person, depending upon their understanding and circumstances. The official term “Stewardship” can be traced backed in to the UK Stewardship Code (herein after referred as code), which was formulated in year 2010 first, then subsequently amended in year 2020 by the “Financial Reporting Council (FRC) ” which is an independent regulator of United Kingdom, mainly responsible for regulating auditors, accountants and actuaries, and setting the UK’s Corporate Governance and Stewardship Codes.
The code introduced the “Stewardship” as the responsible allocation, management and oversight of capital to create long-term value for clients and beneficiaries leading to sustainable benefits for the economy, the environment and society.

NEED OF CORPORATE STEWARDSHIP IN INDIA

Indeed, Indian Government put commendable efforts to strengthen the Indian Corporate Sector by taking several landmark steps one after another, but ground realty was not turn out as expected. The prime reasons noticed behind the unexpected and dull result were the lack of experience, trust and skills, in short, the “Corporate Stewardship”.

As discussed above, even on that time the corporate Sector in India was still in its infant stage, which deeply required the care and helping hand of the someone who can act, the “steward”. In this regards government felt the requirement of the adequate professional who can act as the “Steward” of the Company. The quest for the search of the professional to act as the steward of the body corporate ended with the establishment of new profession named “Company Secretaryship”.

PROFESSION OF COMPANY SECRETARIES PERFECTLY FITS THE PROFILE OF “CORPORATE STEWARD”.

As discussed above, Stewardship is the art of conducting, supervising, or managing of something entrusted to one’s care. A Company secretary already shoulders a handful of responsibilities in a body Corporate, he holds a position of trust on the Board and have actively connected to almost every segment / department of Management. This ability of Company Secretary makes him / her a perfect candidate to act as the Corporate Steward of the Company. It has been evident that a Company Secretary plays an Important role, not only in the formulation of the Stewardship Code, but also act as the “Stewardship Officer” in many Stewardships Code of many companies.

BRIEF HISTORY OF THE PROFESSION OF COMPANY SECRETARY IN INDIA

Companies Act, 1956 came in to existence on 18th January 1956, with its enactment the previous Companies Act, 1913 was repelled. The provisions of the companies Act, 1956 were drafted very brilliantly, by keeping in the view of the need and situation of the Indian corporate Sector. However, the scope of Company Secretary in the original companies Act, 1956 enacted on 18th January 1956 was very limited. Sub-section 45 of Section 2 of the Companies Act, 1956 provide the definition of secretary, which was read as:

“secretary” meant the person, if any, who is appointed to perform the duties which may be performed by a secretary under this Act;”

As per the aforesaid definition the government did not prescribe any formal Qualification for a person who would be appointed as the Secretary of the company. However, the duties and responsibilities required to performed by the Secretary were immense, as secretary on that time was still counted as the officer of the company and officer in default.

Since the “Secretary” of the company holds a such vital position in the company, it was very important to him, to properly understand the modus operandi of operation of the company and its compliance with the relevant provisions of the companies Act, 1956 and other relevant laws applicable on the company. In this direction Company Law Board in year 1960 took a legendry step, by commencing the “Diploma course in Company Secretaryship ”. The main focus of the diploma course to convert the lay man into the person, with the capabilities to act as the secretary of the company, in true spirit.

The course proved an immediate success. Since the number of the student started sky rocketing, the government took the course to another level, by incorporating “Institute of Company Secretaries of India” a Company limited by Guarantee under section 25 of the companies Act, 1956, which took over the responsibility of Government to the conduct of Company Secretaryship examination.

Further, going forward in that director, the government enacted Company Secretaries Act, 1980, which came into force w.e.f. 1st January, 1981, vide notification No. S.O. 989(E), dated 27th December, 1980, see Gazette of India, Extraordinary, Part II, sec. 3(ii).

By passing the aforesaid act “Institute of Companies Secretaries of India” became a pioneer statutory body which is responsible for regulating the profession of Company Secretaries in India and Previous Institute of Company Secretaries of India, Section 25 company, limited by guarantee was stand dissolved.

With the incorporation of Companies Amendment Act, 1988, the definition of the Company Secretaries under Companies Act, 1956 was substituted as:

“secretary” means a Company Secretary within the meaning of clause (c) of sub-section (1) of Section 2 of the Company Secretaries Act, 1980 (56 of 1980), and includes any other individual possessing the prescribed qualifications and appointed to perform the duties which may be performed by a secretary under this Act and any other ministerial or administrative duties.

Recognition of the Practicing Company Secretary under companies Act, 1956:

With the newly incorporated definition of Company Secretary under full time employment, a new wing of the Company Secretaryship profession, was also inaugurated, i.e., Company secretary in whole-time practice. For that, through Companies Amendment Act, 1988 a new Clause (45-A), was inserted under section 2 of the Companies Act, 1956 which was read as:

“secretary in whole-time practice” means a secretary who shall be deemed to be in practice within the meaning of sub-section (2) of Section 2 of the Company Secretaries Act, 1980 (56 of 1980) and who is not in full-time employment;

15th day of June 1988 marked as another remarkable date, on which the Practicing Company Secretaries were recognized for certifying Annual Returns under the erstwhile Companies Act, 1956. Since then, 15th June of every year is celebrated as the PCS day.

INDIAN VERSION OF STEWARDSHIP CODE AND ITS SCOPE

Need of Stewardship Code in India

Institutional Investors such as Mutual Funds, SME Funds, Social Venture Funds, Infrastructure funds are the pillars of Indian Capital Market and plays a decisive role in the success or failure of any public issue. It is a well-known fact that amount invested by the public financial institutions, belong to the General Public. Since these institutions invest the Funds raised from the general public, the proper care required to be undertaken, for the safeguard of public interest.

The importance of institutional investors in capital markets across the world is increasing the world over; they are expected to shoulder greater responsibility towards their clients / beneficiaries by enhancing monitoring and engagement with their investee companies. Such activities are commonly referred to as ‘Stewardship Responsibilities’ of the institutional investors and are intended to protect their clients’ wealth. Such increased engagement is also seen as an important step towards improved corporate governance in the investee companies and gives a greater fillip to the protection of the interest of investors in such companies.

SEBI has already implemented principles on voting for Mutual Funds through Circulars dated March 15, 2010 and March 24, 2014, which prescribed detailed mandatory requirements for Mutual Funds in India to disclose their voting policies and actual voting by Mutual Funds on different resolutions of investee companies

INTRODUCTION OF INDIAN STEWARDSHIP CODE 2019

As corporate sector in India grows, the need of our own Stewardship Code was strongly felt. In this direction Securities and Exchange Board of India formulated our own version of Stewardship Code. SEBI through its circular No. CIR/CFD/CMD1/168/2019 , dated 24th day of December 2019 introduce Indian’s own version of Stewardship Code, which come into effect from the Financial Year beginning from April 01, 2020. Through the Stewardship Code 2019, the institutional investors in Indian Capital Market are asked to act in transparent manner, and to be truly accountable to their clients and beneficiaries.

The Stewardship Code 2019 constitute several Principles to protect the interests of investors in securities and to promote the development of, and to regulate the securities market. A brief gist of the principles formulated under the code are reproduced below:

• Institutional Investors should formulate a comprehensive policy on the discharge of their stewardship responsibilities, publicly disclose it, review and update it periodically.
• Institutional investors should have a clear policy on how they manage conflicts of interest in fulfilling their stewardship responsibilities and publicly disclose it.
• Institutional investors should monitor their investee companies
• Institutional investors should have a clear policy on intervention in their investee companies. Institutional investors should also have a clear policy for collaboration with other institutional investors where required, to preserve the interests of the ultimate investors, which should be disclosed.
• Institutional investors should have a clear policy on voting and disclosure of voting activity.
• Institutional investors should report periodically on their stewardship activities.

SCOPE AND BROAD CONTENTS OF STEWARDSHIP POLICY/CODE OF THE INSTITUTIONAL INVESTORS:

As per the clauses of the Stewardship Code, 2019 the Public Financial Institution (investee company) shall require to formulate a comprehensive policy on discharge of their stewardship responsibilities. Following are the scope and Broad content of the Stewardship Policy, required to be formulated by the Public Financial Institution:

• Mowhich the potential conflicts may be identified, traced and redressed in the most rightful manner.
• Active Intervention in the Investee Company: Public Financial Institution should consider intervening in the acts/omissions of an investee company, in which it has invested an amount of the Company. The Company should intervene if, in its opinion any act/omission of the invesztee company is considered material on a case-to-case basis.
• Voting and voting activity: Public financial Institutions should formulate the policy through which their investors of the company may exercise their voting rights and vote on shareholder resolutions of investee companies.
• Reporting of Stewardship Activities: A summary of resolutions voted in favour or against or abstained from voting be reported to the investor of the company and the same be uploaded on website of the Company

CONCLUSION:

The Corporate sector in India has been playing a lead role in nation building, which we are continually witnessing since decades. Companies Secretaries is serving the nation in different roles. With the time several recognitions from the different statutory and international bodies, give us the opportunities to do our best. Corporate Stewardship is a relatively newer term for Indian corporate Sector, it may be proved as the new area of practice for Company Secretary, as Compliance, management and Stewardship is indulged into the spirit of the Company Secretary. I hope in the coming future this Corporate Stewardship will also extend to the other sector of the Indian Corporate Sector, to take Indian economy to a new height.

References and sincere Thanks:

(i). https://www.sebi.gov.in/legal/circulars/dec-2019/stewardship-code-for-all-mutual-funds-and-all-categories-of-aifs-in-relation-to-their-investment-in-listed-equities_45451.html

(ii). https://www.icsi.edu/media/portals/86/The%20Company%20Act,%201913.pdf

(iii) https://egazette.nic.in/(S(5bqu5vtwb3wkfgo2hpewo5do))/default.aspx#

(iv) https://www.frc.org.uk/getattachment/5aae591d-d9d3-4cf4-814a-d14e156a1d87/Stewardship-Code_Final2.pdf