Fintech
Navigating the Future: The Crucial Role of Corporate Governance in Fintech
By Adelia Castelino – Co-founder & Managing Director, In-Solutions Global
India’s fintech industry, which is currently the third-largest globally, is expected to generate significant annual revenue of $70 billion by 2030, according to a recent report by Elevation Capital and McKinsey. In the dynamic world of fintech, where technological progress frequently surpasses regulatory frameworks, upholding ethical standards becomes crucial. This is where corporate governance emerges as a vital factor in guiding companies towards sustainable growth and ethical conduct.
Corporate governance frameworks are accountable for establishing transparent channels of communication with regulatory authorities, overseeing compliance at all levels within the organization, and implementing mechanisms to swiftly adapt to evolving regulatory environments. Essentially, it protects the interests of stakeholders and promotes responsible corporate behavior.
Evolution of Corporate Governance Framework in India
It was in 1992 when Sir Adrian Cadbury first established the concept of corporate governance and its formalization through the establishment of the renowned Cadbury Committee. The committee’s constitution emphasized that corporate governance aims to maintain a harmonious equilibrium between economic and social objectives, as well as individual and collective interests. The Organization for Economic Cooperation and Development (OECD) also defines corporate governance as the framework that guides the direction and management of business corporations.
Corporate governance is primarily characterized by four key principles: Accountability, Transparency, Fairness, and Independence. In order to establish Corporate Governance in India, a significant milestone was achieved through the implementation of the Kumar Mangalam Birla Committee Report. This report introduced essential concepts such as the Code of Conduct, the Audit Committee, and the inclusion of Clause 49 in the Listing Agreement.
Later, the Naresh Chandra Committee was assigned in 2002 to investigate the legislation surrounding the relationship between auditors and clients, as well as the role of Independent Directors in India. These recommendations held immense importance, particularly in the wake of major corporate collapses in the United States and the subsequent implementation of the strict Sarbanes Oxley Act.
The subsequent enhancement of the Corporate Governance framework by respective governments through reports such as the Narayan Murthy Committee Report (2003), Dr. JJ Irani Committee Report (2004), CII’s Task force on Corporate Governance (2009), MCA Policy Governance (2012), Companies Act 2013, SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, and the Uday Kotak Committee recommendations (2017).
Elements of effective corporate governance
Corporate Governance and Fintech Board Members: The first step in building a strong corporate governance structure in a fintech entity is to have a strong board that has solid expertise in banking, security, finance, and compliance with a pragmatic and forward-looking approach. Developing a robust board is crucial for fintech companies to stay abreast of compliance trends. The board should provide valuable expertise, essential abilities, and effective strategies to guarantee that the company fulfills or surpasses its compliance responsibilities.
Risk Mitigation in Fintech: Mitigation of risks should be one of the most important corporate governance principles of fintech entities. The entities should hire professionals like legal, cybersecurity, finance, and compliance experts for managing and mitigating risks that are operational, financial, regulatory, and reputational.
Navigating the Compliance Maze in Fintech
The most important challenge that fintech entities face is an ever-changing regulatory regime and keeping track of the latest compliance trends. Effective corporate governance serves as a guiding force for these companies amidst the complexities of compliance, ensuring adherence to financial regulations, and safeguarding against legal risks.
Another hurdle encountered by fintech companies is finding the right equilibrium between innovation and regulatory compliance. Striking this balance requires skilful effective corporate governance. Corporate governance emerges as the key element in managing this challenge, enabling the company to remain agile and innovative while maintaining a keen awareness of the evolving regulatory landscape.
Cybersecurity and Data Protection
Corporate governance is a vital link in building resilient risk management frameworks, employing cutting-edge technologies, and fostering a proactive approach to cybersecurity.
With the recent introduction of Data Privacy and Data Protection Act (DPDPA) 2023 by the Central Government, there is a strong need that the fintech entities should start working on strengthening the process of managing digital and digitised personal data and create a robust infrastructure.
The key governance mechanisms that this new legislation focuses on are on obtaining consent & notice, obligations of data fiduciaries, notification of personal data breach, cross border transfer of personal data, identification of Significant Data Fiduciaries, Data Protection officers (DPO’s) & understanding rights and liabilities of data fiduciaries. The penal provisions of this Act are quite stringent and the maximum penalty may lead up to INR 250 Crores.
The ESG Imperative
Today, Environmental, Social, and Governance (ESG) standards are gaining prominence in fintech and other industries. As societal expectations evolve, fintech companies are recognising the importance of sustainable and responsible business practices. Corporate governance, in this context, becomes a driving force in integrating ESG considerations into strategic decision-making, promoting long-term resilience and positive societal impact.
To enhance the governance standards of fintech entities, there are several key aspects of ESG that can be implemented:
India’s fintech industry, which is currently the third-largest globally, is expected to generate significant annual revenue of $70 billion by 2030, according to a recent report by Elevation Capital and McKinsey. In the dynamic world of fintech, where technological progress frequently surpasses regulatory frameworks, upholding ethical standards becomes crucial. This is where corporate governance emerges as a vital factor in guiding companies towards sustainable growth and ethical conduct.
Corporate governance frameworks are accountable for establishing transparent channels of communication with regulatory authorities, overseeing compliance at all levels within the organization, and implementing mechanisms to swiftly adapt to evolving regulatory environments. Essentially, it protects the interests of stakeholders and promotes responsible corporate behavior.
Evolution of Corporate Governance Framework in India
Expand
Corporate governance is primarily characterized by four key principles: Accountability, Transparency, Fairness, and Independence. In order to establish Corporate Governance in India, a significant milestone was achieved through the implementation of the Kumar Mangalam Birla Committee Report. This report introduced essential concepts such as the Code of Conduct, the Audit Committee, and the inclusion of Clause 49 in the Listing Agreement.
Later, the Naresh Chandra Committee was assigned in 2002 to investigate the legislation surrounding the relationship between auditors and clients, as well as the role of Independent Directors in India. These recommendations held immense importance, particularly in the wake of major corporate collapses in the United States and the subsequent implementation of the strict Sarbanes Oxley Act.
The subsequent enhancement of the Corporate Governance framework by respective governments through reports such as the Narayan Murthy Committee Report (2003), Dr. JJ Irani Committee Report (2004), CII’s Task force on Corporate Governance (2009), MCA Policy Governance (2012), Companies Act 2013, SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, and the Uday Kotak Committee recommendations (2017).
Elements of effective corporate governance
Corporate Governance and Fintech Board Members: The first step in building a strong corporate governance structure in a fintech entity is to have a strong board that has solid expertise in banking, security, finance, and compliance with a pragmatic and forward-looking approach. Developing a robust board is crucial for fintech companies to stay abreast of compliance trends. The board should provide valuable expertise, essential abilities, and effective strategies to guarantee that the company fulfills or surpasses its compliance responsibilities.
Risk Mitigation in Fintech: Mitigation of risks should be one of the most important corporate governance principles of fintech entities. The entities should hire professionals like legal, cybersecurity, finance, and compliance experts for managing and mitigating risks that are operational, financial, regulatory, and reputational.
Navigating the Compliance Maze in Fintech
The most important challenge that fintech entities face is an ever-changing regulatory regime and keeping track of the latest compliance trends. Effective corporate governance serves as a guiding force for these companies amidst the complexities of compliance, ensuring adherence to financial regulations, and safeguarding against legal risks.
Another hurdle encountered by fintech companies is finding the right equilibrium between innovation and regulatory compliance. Striking this balance requires skilful effective corporate governance. Corporate governance emerges as the key element in managing this challenge, enabling the company to remain agile and innovative while maintaining a keen awareness of the evolving regulatory landscape.
Cybersecurity and Data Protection
Corporate governance is a vital link in building resilient risk management frameworks, employing cutting-edge technologies, and fostering a proactive approach to cybersecurity.
With the recent introduction of Data Privacy and Data Protection Act (DPDPA) 2023 by the Central Government, there is a strong need that the fintech entities should start working on strengthening the process of managing digital and digitised personal data and create a robust infrastructure.
The key governance mechanisms that this new legislation focuses on are on obtaining consent & notice, obligations of data fiduciaries, notification of personal data breach, cross border transfer of personal data, identification of Significant Data Fiduciaries, Data Protection officers (DPO’s) & understanding rights and liabilities of data fiduciaries. The penal provisions of this Act are quite stringent and the maximum penalty may lead up to INR 250 Crores.
The ESG Imperative
Today, Environmental, Social, and Governance (ESG) standards are gaining prominence in fintech and other industries. As societal expectations evolve, fintech companies are recognising the importance of sustainable and responsible business practices. Corporate governance, in this context, becomes a driving force in integrating ESG considerations into strategic decision-making, promoting long-term resilience and positive societal impact.
To enhance the governance standards of fintech entities, there are several key aspects of ESG that can be implemented:
- Conducting an assessment of the impact and materiality of ESG measures.
- Evaluating the current ESG initiatives in the areas of environment, social responsibility, and governance, and planning for the future.
- Developing action plans for ESG that address important topics such as climate change mitigation, resiliency and adaptation, diversity, equity, and inclusion (DEI), as well as good governance and stewardship.
The Road Ahead
As governments worldwide seek to catch up with the fast-paced changes in the industry, fintech firms must adapt to a myriad of rules and guidelines.There have been a few recent instances of serious corporate governance lapses in many B2C companies around financial and compliance and governance-related issues. However, staying abreast of regulatory changes is not only a legal requirement but also a strategic necessity. The central bank has been monitoring the fintech space lately to ensure financial stability and take a proactive approach in mitigating lapses and initiating strict governance across industries.
Going forward, governance structures in the fintech sector need to be dynamic, adapting to the evolving threat landscape, and ensuring that companies are prepared for both known and unforeseen risks. Only then can the core objectives of corporate governance and its principles including transparency, accountability, fairness, equity, and responsibility, be effectively attained.
