Indian MSMEs Can Immensely Benefit If They Undertake Corporate Governance

She was the national president of the Institute of Company Secretaries of India (ICSI)in 2016. Currently, she is the President of MSME Development Forum West Bengal. She was the first Indian registered insolvency professional and currently she also works as an independent director on various large-size companies like Emami, Balrampur Chini, among others.

Speaking to Bizz Buzz, Dr Mamta Binani, delves at length on wide-ranging issues - from corporate governance, MSME to advantages of One-Person Company and Section 8 companies, to mention a few

You have too many hats on your head. Let me start with corporate governance, an issue that is very close to your heart and is much talked about. What is the idea of corporate governance, if you could explain, for a layman?

So, if you can draw an inference, like if we live in a society, which we do, and we live in a family, there are certain rules and regulations, which everyone has to follow. Only when we follow that we feel that we are living in a civilized society, a cohesive society and then we feel that everyone is looking after each other and then we are living together.

Similarly, when a corporate is there, one has to always remember that an individual will come and go, but the corporate will remain forever. It is an immortal concept. If that immortal concept has to remain so, then there has to be certain rules and regulations in the format.

In corporate world, it is known as SOPs (Standard operating Procedure or Process). And obviously that needs to be dynamic because each day corporate is changing as the society and environment are also changing. Did we ever think before that climate change will come to us so heavily, Business Responsibility and Sustainability Reporting (BRSR) code will come on us heavily? Did we ever think that the winter will go away so quickly and we would have a winter of 15 days?

So, we can now see how changing dynamics of the climate is also playing heavily on us. Corporate governance is what then? Corporate governance is a framework. And a framework is definitely same for everyone. Now within that framework, a listed company will be exposed to tighter framework than a non-listed company. So, this structural framework is known as corporate governance. So, what is a company? A company is actually made of three constituents. One is the board that is the management, second is the shareholders that is the owners of the company and third is all the other stakeholders which is very large.

So, again for that matter, even environment is a stakeholder. Even if you are not a stakeholder in the company, you are not a shareholder in the company but you are a stakeholder because ultimately your money is involved. How? Your money goes into the bank as savings, bank lends the company a lot of funds, it's your money, which is also getting into the company's coffers. So now the government says that if that be the gamut of a company, then company has to be answerable and for the first time we saw that the Companies Act 2013, brought out a section, which deals with duties of directors.

Duties of directors also speak about the stakeholders, the environment, everything under the whole universe has actually come in there. So corporate governance is a summation of good practices, which one has to do and the government always believes in a carrot and a stick policy. I'm sure you understand rating, right? So if a corporate's ratings are good then the government says okay your rate of interest that you have to pay on a loan will also go down.

Therefore, they are incentivized to have a good corporate governance structure. Secondly, it says if you do not follow the governance norms then we would penalize you. At each and every step, it penalizes. What happens if the corporate gets penalized? It's a corporate who has to pay the money. It comes from the company’s coffer. It does not come from individual’s pocket.

Now it says, not only the corporate but even the directors will have to be penalized. They will be penalized and they will have to pay the penalty from their own coffers. And also other KMPs, for example, if there is a CFO, a CEO, a company secretary- they will also face the penalty.

There are different kinds of companies. Can there be a 'one size fits all' strategy for all?

Government has really heard your voice probably because you are trying to say that one size doesn't fit all. Right? So, therefore government says, okay, you have a small company, I have a big company, you have a big one, I have a small one. I am not making one size fit for all, I am making tailor-made for all. So, in the Companies Act, in 2013, there is a concept of one-person company. You can make a company with just one person. Otherwise, what is the definition of a company? Company means more than one. Otherwise, it will not be a company. So, one person company was never allowed. But in 2013, in the word company, they found that there is a hidden meaning. Absolutely. And the government allowed even one-person company. A lot of people don't understand why one person company is beneficial over a partnership firm or maybe a sole proprietorship. The government actually was under pressures as lot of these partnership and sole proprietorships were operating without any registration. When such companies were seeking loan from the banks, what used to happen was they got exposed to unlimited liability.

So, the government understood this and they said that why not give it a structure where a person can still have a corporate entity but with one person. But because a lot of people are not often comfortable with too many people in the business.

Nowadays, the Left hand does not even believe the Right hand. So, they said, OK, one person can also build up a company. So, they broke the definition and allowed one-person company. So one-person company, as I was mentioning, are small companies, where paid-up capital cannot be more than Rs 4 crore and the turnover cannot be more than Rs 40 crore. So, if you fall, so a government would say, I will not tag you as small company because you fall in that definition. You have to come and tell me that you are a small company.

Then, there is also a dormant company concept. For example, I have a company and in that company, I have just hold one rented property. I don't have anything else in that company. It's not functional. There are some definition criteria.

So, even you can tag your company as a dormant company, like you can have a Section-8 company, which is like an NGO. An NGO need not be only registered as a society under the Society's Registration Act or as a trust under the Indian Trust Act. It could also get registered as a Section 8 company under the Companies Act 2013.

Nowadays government has also introduced the concept of social stock exchange, where an NGO can actually go to the social stock exchange and raise funds for themselves. This is a unique concept and lot of people are not aware of this phenomenal thing that the government has come out with. Even a traditional NGO can be opened under a Section 8 company is what I am saying. Even a traditional NGO can get operated as a section 8 company.

So, one size fits all is not correct. Under the Companies Act 2013 government has said that if you are a small company, a dormant company etc. or a Section 8 company, there are lot less compliances which are applicable to you, which means savings of not only your efforts but also the cost.

You have been doing a lot of work, a lot of good work in fact, promoting some kind of bilateral business or exploring avenues where two neighbouring countries can team up. Have been doing at a business-to-business level or government to business level? What exactly you are doing?

I have been passionately doing it. Actually, I have a foundation also. And I have been passionately doing this because it's not only work alone that makes John a bright boy. John also has to do something more along with business because a payback to the society comes from many ways.

So, I quite passionately fold up my sleeves and unfold it quite many times to promote art, culture, economic ties. I'm very very upbeat about countries like Laos, Colombia, Cambodia, Bhutan, Bangladesh. Bangladesh is of course now going through ups and downs but then that's okay that will again come back. But let me tell you that business has not gone down. In Bangladesh, lot of these businesses which were happening, has actually gone up. I was quite surprised to know that.

MSMEs often shy away from the corporate governance and all these things, thanks to some kind of preoccupation that these are not for us and we cannot afford that either. So, what is your take on this?

Let me give you a very small example. When these sanitary pads, I don't remember which pad was this, I think Stayfree or Carefree, they started putting an ad that one rupee of their sales will be donated or they will use it for CSR purpose in whichever terms they mentioned. That found huge attractiveness and I saw this when my child was growing.

They used to think that we want to buy that one only because Re one is a huge margin on a packet of Rs 32 rupees or Rs 34 whatever it was costing. Re One was a huge giving away. But that one rupee of giving away added so much to their sales and so much to their well-being that that brand actually just pepped up.

Now, what is it that I'm trying to tell you that when we start doing compliances and when we are in a company format and if you're doing well, believe you me, there are investors in the market who are scouting for putting their money into the right stream of things. So the amount you spend more or the loss you incur, is not only covered up but in the long-run you reap rich dividends also.