Corporate governance and compliance are two interdependent concepts, with different meanings but they complement each other.
In today’s corporate world, the investors are more drawn towards those companies, whether they are promoter driven or shareholder driven, which embrace good corporate governance as their stake in corporate ownership makes their investments less susceptible to system risks.
Good corporate governance ensures transparency and accountability, and can prevent corporate scandals, fraud and issues pertaining to corporate liability.
Not only the investors, all the stakeholders including employees, shareholders, community, government agencies, rating agencies, researchers attach significant importance to governance, compliance, and sustainable issues.
In the recent times, the issue of corporate governance and compliance of regulated entities have gathered importance and rightly so as the country’s evolving fintech sector has been facing serious allegations over non-compliance issues.
The banking and financial sector, for instance, has been marked with financial scams over the years on account of non-compliance. Despite all the policies and regulations by RBI, the number of frauds in the banking sector during the first half of FY 24 has substantially increased to 14,483 from 5,396 cases in the same period of of FY23. Eyebrows may go up seeing the figures but at the core of the issue lies the absence of compliance and good corporate governance.
Corporate Governance and strict adherence to compliance is a no-tolerance zone for RBI. The RBI can penalize the Regulated Entities for violating the provisions of the RBI Act or the directions or orders issued by RBI under the RBI Act.
The penal action may also result in RBI cancelling the Certificate of Registration issued to the RE prohibiting them from accepting deposits and alienating their assets, or filing a winding-up petition.
It is critical to understand that any adverse action initiated by RBI erodes not only the value of the RE in the monetary sense but also erodes the confidence of the stakeholders which is like a death knell for the RE.
It may be pertinent to mention that from June 2023 – November 2023, the RBI undertook enforcement action against 146 REs which is a staggering number.
The RBI Governor Shaktikanta Das has from time to time laid down expectations from REs on corporate governance and emphasized the need for improved ethics and supervisory roles within the banking sector.
It may not be out of place to mention that on April 26, 2021 RBI issued Guidelines on Corporate Governance in Banks - Appointment of Directors and Constitution of Committees of the Board, same clarifies the appointment of a chairperson and conduct of meetings of the board; composition of important committees of the board; age, tenure, and remuneration of directors; and appointment of the whole-time directors. RBI has also issued a Notification dated 31.01.2024 on the Streamlining of the Internal Compliance monitoring function – leveraging the use of technology.
Basis the same the Regulated Entities (REs) are urged to conduct a thorough review of their current internal compliance tracking and monitoring procedures and implement necessary system changes or new ones by June 30, 2024.
In India, compliance and paperwork are closely connected. Compliance heavily relies on paperwork, with a large portion of documentation still being done manually and lacking digital capabilities. Employers face significant challenges in manual documentation due to the substantial volume of paperwork.
While there is no doubt, that regulated entities will have to strictly adhere to compliance and governance, but there is room for the authorities to consider transitioning to digital compliance management to attain timely and transparent adherence to regulations. This will automatically weed out the problem givers from the system and bring in more accountability in the Indian corporate ecosystem.
Corporate Governance and strict compliance with laws and regulations are there to stay. REs must not lose sight of the expectations of the regulator in this regard and strive to maintain the right value and reputation giving attention to this important aspect which is an integral part of business and is no longer a cost center. It is the very basis for creating unprecedented value.
Authored by Rajesh Narain Gupta, managing partner and Aniket Rajpurohit, principal associate at SNG & Partners
