Corporate Governance in India Law and Practice

[The final version of this paper has been published as “Corporate Governance” in Linda
Spedding (ed.), India: The Business Opportunity (Lucknow: Eastern Book Company,
2016), pp. 289-342
http://www.ebcwebstore.com/product_info.php?products_id=100396]
CORPORATE GOVERNANCE IN INDIA: LAW AND

PRACTICE
Umakanth Varottil* & Richa Naujoks**
I. INTRODUCTION
The laws and regulations relating to corporate governance and continuing disclosures
play an important role in providing foreign investors with the requisite comfort as to the
level of maturity of an investment destination. Disclosure norms also provide the tools for
shareholders and other stakeholders to obtain information about a company. The
corporate governance norms indicate not just the level of transparency within the
corporate system, but they also impose certain costs of compliance and liability for non-
compliance. The question of liability is often of particular significance to foreign
investors who exercise oversight over their portfolio company in another country through
directors nominated by them. The investing company and the nominee director would
both need to obtain a sense of the potential exposure for the portfolio company’s non-
compliance with its corporate obligations.
This paper intends to provide investors and businesses with an overview of the
corporate governance, reporting and disclosure obligations of an Indian company, with
the objective of assessing both the protections afforded to the investors by the corporate
governance regime, as well as the costs of compliance for the company.
Viewed in the light of these objectives, the Indian corporate governance regime
represents a constant effort to strengthen standards to meet with the global requirements.
Its norms have drawn heavily from principles operating in the developed markets such as
the United Kingdom (UK) and the United States (US), which investors are generally
*
Associate Professor, Faculty of Law, National University of Singapore.
**
Partner, Nixon Peabody LLP, New York.
1
familiar with. However, distinctions often emerge in the manner in which these norms are
implemented in India, which we discuss in greater detail in this paper.
Although corporate governance in India has been developing since the late 1990s,
the last few years, with the passing of the Companies Act, 2013 and corresponding
revisions to listing requirements applicable to listed companies, represent a significant
shift in focus. The focus shifted from Central Government action in several respects to
shareholder, Board and Board Committee action. We see this as a recognition of the
limited role that the government should play in corporate governance and a growing trust
of, and effective utilization of, the more traditional bodies of governance over a company
such as independent directors.
The last few years have also seen an effort to utilise the corporate law regime to
achieve specific goals for India. One such measure is the requirement introduced in the
Companies Act, 2013 that companies of a certain size should spend at least 2% of their
average net profits during the three immediately preceding financial years on corporate
social responsibility (CSR), which we discuss in greater detail in this paper. In some
ways a significant deviation from what is generally meant by good corporate citizenship
in other parts of the world, this requirement at the same time attempts to address the
ground realities in India.
The corporate governance regime continues to develop, both in conjunction with

other corporate law regimes in the world, while at the same time attempting to address
unique issues faced in India. In the parts below we have attempted to highlight these
aspects while summarising the current corporate governance regime.
II. BACKGROUND TO CORPORATE GOVERNANCE IN INDIA
Corporate governance norms are best analysed in the specific context in which they
operate. Hence, we begin by examining the corporate landscape in India and the manner
in which governance norms have evolved and the motivations therefor.
A. Corporate Structures and Regulation
The corporate governance regime applicable to an Indian company varies depending

upon the type of company involved. The Companies Act, 2013 provides for the following
categories:1
1
It also provides for other types of companies such as the “one-person company” and “small
company”, but they are of less importance for our present purposes.
2
1. Private companies: Private companies have a minimum paid-up capital of Rs.
1,00,000, a maximum number of 200 shareholders, their shares are subject to
transfer restrictions and they cannot offer securities to the public.2 They are
subjected to minimal level of regulation under the Companies Act, 2013.3
2. Public Companies: Public companies are those that are not private companies,
and they must have a minimum paid-up capital of Rs. 5,00,000.4 Moreover, a
company that is a subsidiary of a public company in India would be deemed to be
a public company regardless of the nature of its incorporation.5 On the other hand,
the deeming provision will not apply to an Indian subsidiary of a foreign public
company which will continue with its original status.6 Hence, configuring the
shareholding and control structure of Indian companies ought to take these factors
into account because public companies are subject to a higher level of regulation
under the Companies Act, 2013.
3. Listed Companies: In addition to their regulation under the Companies Act as

public companies, companies that are listed on a stock exchange are also subject
to additional restrictions and disclosure requirements in their dealings with the
investing public at large. These requirements are primarily contained in the listing
agreement which is entered into between a listed company and the stock exchange
on which its securities are listed (the Listing Agreement).7 The provisions of the
Listing Agreement have more recently been subsumed into the Securities and
Exchange Board of India (Listing Obligations and Disclosure Requirements)
Regulations,2015 ( the LODR Regulations), which took effect from December
2015.Since the main thrust of the corporate governance regulation in India is on
listed companies, they will form the focus of the present paper, although relevant
Companies Act provisions (applicable to all companies) are also discussed where
relevant.
In addition to the three categories above, additional corporate governance requirements

may apply to companies that fall within a highly-regulated sector (such as electricity,
2
Companies Act, 2013, s. 2(68).
3
Private companies have been exempted from the application of several provisions of the
Companies Act, 2013. See, Ministry of Corporate Affairs, Government of India, Notification No. G.S.R.
464(E) dated 5 June 2015.
4
5
Companies Act, 2013, s. 2(71) proviso.
6
This has been clarified in Ministry of Corporate Affairs, Government of India, Clarification
relating to incorporation of a company i.e. company incorporated outside India, Circular No. 23/2014 dated
25 June 2014.
7
SEBI prescribes the format of the listing agreement, which is available at http://www.nse-
india.com/corporates/content/listing_agreement.htm.
3
banking and financial services) or those that are state-owned enterprises (“SOEs”), which
are also referred to as public sector undertakings . In addition, foreign companies have
additional filing requirements and obligations to disclose their foreign status in
prospectuses and other public announcements.8
The regulatory set-up varies depending on the type of company. Private

companies and unlisted public companies fall within the domain of the Ministry of
Corporate Affairs, Government of India (“MCA”) and are largely governed under the
Companies Act, 2013. Listed companies are additionally within the domain of India’s
securities regulator, the Securities and Exchange Board of India (“SEBI”), which obtains
powers under the Companies Act, 2013 as well as the Securities and Exchange Board of
India Act, 1992 (“SEBI Act”) and various regulations issued by SEBI thereunder. Listed
companies are also subject to the oversight of the stock exchanges, which exercise
powers under the Securities Contracts (Regulation) Act, 1956 and rules issued
thereunder.
In recent years, corporate law in India has undergone significant reform, and
continues to be in a state of transition. As of this writing, India’s Parliament has enacted
the Companies Act, 2013, which has become partially effective. The entire legislation is
expected to become effective progressively once the MCA notifies the relevant rules
under the legislation. Until then, the previous legislation, the Companies Act, 1956 will
continue to be in force on such matters. While most matters under the Companies Act,
2013 pertaining to corporate governance have already been notified, some aspects
relating to enforcement are yet to come into force. Hence, the discussion in this paper
captures both the statutes as appropriate.9
B. Corporate Landscape
Historically, the concept of corporate governance evolved as a measure to address the

classical agency problems between the managers of a company (who are the agents) and
the shareholders (who are the principal). Since the manager-agents may be disposed to
act against the real or perceived interests of the shareholder-principal, the applicable
corporate governance regime establishes a series of mechanisms to monitor the actions of
managers. Illustratively, this includes the introduction of independent directors on
corporate boards, oversight by the audit committee and the requirement of CEO and CFO
certification.
8
Companies Act, 2013, ss. 379-393.
9
References in this article to the “Companies Act” or the “Act” are intended to refer to both the
Companies Act, 1956 and the Companies Act, 2013.
4
It is pertinent to note that these norms evolved in the context of a modern corporation that
has diffused shareholding,10 where ownership is separated from management.11 These
characteristics are primarily displayed by companies in the US and the UK.
However, in India, companies display ownership patterns that are largely

consistent with the rest of the world: there is concentrated shareholding even in listed
companies whereby a dominant or controlling stake is held by a single shareholder or
group of shareholders. These are usually business families or the State.12 SOEs remain
closely controlled by either the Central Government or a State Government, although
many such companies have in recent years offered their shares to the public (known in
India as “disinvestment”).13 The remaining shareholding in companies is often diffused
and is held among institutions (such as foreign institutional investors, mutual funds and
other financial institutions) and retail investors (including individuals). In the last 15
years, promoter shareholding in Indian companies has averaged between 48% and 55%.14
In companies with concentrated shareholding (whether predominantly owed by

business families or the State), the promoters are able to determine the composition of the
Board. They are also in a position to nominate senior members of management;
furthermore, it is not uncommon to find a representative of the promoters in a senior
managerial position in the company. This arrangement obviously lacks true separation of
ownership and management. This gives rise to the agency problem whereby the minority
shareholders (principals) require protection from the actions of the promoters (agents)
and their managerial appointees.
At the same time, a few Indian companies have transformed themselves from
controlled ownership structures to dispersed structures through constant dilution of equity
through public offerings, preferential allotment of shares and mergers and acquisitions
activity. In the overall context, these companies represent a small share of the total
companies listed on Indian stock exchanges.
10
In this case, a large number of shareholders hold a small number of shares each in a company,
with no shareholder obtaining a dominant or controlling position.
11
These characteristics were first noted by Adolf A. Berle & Gardiner C. Means, The Modern
Corporation and Private Property (New York: The Macmillan Company, 1932).
12
In India, such controlling shareholders are usually referred to as “promoters”.
13
The specific features of public sector undertakings and the corporate governance regime
applicable to them are discussed in Part IX below.
14
For various studies regarding shareholding concentration, see Shaun Mathew, “Hostile Takeovers
in India: New Prospects, Challenges, and Regulatory Opportunities”, [2007] Columbia Business Law
Review 800; N. Balasubramanian and R.V. Anand, “Ownership Trends in Corporate India 2001 – 2011:
Evidence and Implications”, Indian Institute of Management Bangalore Working Paper No: 419 (2013),
available at http://ssrn.com/abstract=2303684.
5
C. Evolution of Corporate Governance Norms
The current state of play in Indian corporate governance can be better appreciated
through a brief historical account. Since India’s independence in 1947, company law has
been the source of corporate governance norms, with the primary statute being the
Companies Act, 1956. Prior to India’s economic liberalisation in 1991, businesses were
either controlled or tightly regulated by the State. Governance structures were opaque, as
financial disclosure norms were weak. As a result, the stock markets were under-
developed and illiquid.15
The new era of corporate governance in India began with the establishment of
SEBI in 1992. SEBI rapidly ushered in securities market reforms that gradually led to
corporate governance reforms as well. Curiously, the first corporate governance initiative
was voluntarily adopted by industry. In 1998, a code for “Desirable Corporate
Governance” was embraced by a few leading Indian companies.16 Thereafter, a
committee chaired by Mr. Kumar Mangalam Birla was appointed to promote and raise
the standard of governance in listed companies.17 That committee recommended the
imposition of certain corporate governance norms on listed companies as a mandatory
matter. This resulted in the introduction of Clause 49 into the Listing Agreement that was
made applicable to all listed companies of a certain size.
Thereafter, in the wake of the enactment of Sarbanes-Oxley Act in the US, SEBI
constituted the Narayana Murthy Committee to examine Clause 49 and recommend
changes to the existing regime.18 Following the recommendations of that committee, in
2004, SEBI issued a revised version of Clause 49, the implementation of which was,
however, delayed until January 1, 2006 because companies were not yet in a state of
preparedness to comply with its stringent requirements. Since then, Clause 49 became
mandatorily applicable to listed companies (barring very small companies)19 as well as
those that are seeking listing on a stock exchange. All of these measures have perceptibly
benefited the Indian corporate sector. The last few years have witnessed significant flows
of foreign capital into India, particularly those by foreign portfolio investors. This may
not have been so rapid without a corporate governance framework comparable to
15
Rajesh Chakrabarti, “Corporate Governance in India”, 20 Journal of Applied Corporate Finance
59 (2008).
16
Confederation of Indian Industry, Desirable Corporate Governance: A Code (1998), available at
http://www.nfcgindia.org/desirable_corporate_governance_cii.pdf.
17
Securities and Exchange Board of India, Report of the Kumar Mangalam Birla Committee on
Corporate Governance (Feb. 2000), available at http://www.sebi.gov.in/commreport/corpgov.html.
18
Securities and Exchange Board of India, Report of the SEBI Committee on Corporate Governance
(Feb. 2003), available at http://www.sebi.gov.in/commreport/corpgov.pdf.
19
These are companies with a paid-up capital of less than three crore rupees (INR thirty million) and
net worth of less than 25 crore rupees (INR 250 million) throughout their history.
6
international standards, which has provided comfort to investors investing capital in
India. On the primary markets front, Indian companies have succeeded in raising capital
through public offerings and qualified institutional placements, much of which has come
from foreign investors. The secondary markets too have attracted leading institutional
investors.
During this period, efforts were underway to revamp the Companies Act, 1956 by
replacing it with a new legislation. A committee was appointed under the chairmanship of
Mr. J.J. Irani to review the companies’ legislation. The committee issued a concept paper
followed by a report recommending new legislation.20 The Government accordingly
introduced the Companies Bill, 2008. In the interim, corporate India was rocked by a
massive corporate governance scandal involving Satyam Computers. In January 2009, the
chairman of the company confessed to fraud to the magnitude of over US$ 1 billion.21
This triggered renewed calls for strengthening corporate law and governance norms in
India. The subsequent version of the Companies Bill was referred to the Parliamentary
Standing Committee of Finance. Following the committee’s recommendations and
several rounds of consultation, the Companies Act, 2013 was passed by both Houses of
Parliament and received the assent of the President of India on August 31, 2013.22
A substantial part of the corporate governance provisions under the Companies

Act, 2013 came into effect April 1, 2014.23 Concurrently, SEBI, also brought about an
overhaul of the corporate governance provisions contained in clause 49 of the Listing
Agreement, which took effect from October 1, 2014.24 The revised corporate governance
provisions are now contained in the LODR regulations. Hence, in recent years, corporate
governance provisions relating to Indian companies have been considerably strengthened,
but they remain in the initial stages of implementation.
20
Expert Committee on Company Law, Report on Company Law (May 31, 2005), available at
http://www.primedirectors.com/pdf/JJ%20Irani%20Report-MCA.pdf.
21
Letter from B. Ramalinga Raju, Chairman, Satyam Computer Services Ltd., to the Board of
Directors, Satyam Computer Services Ltd. (Jan. 7, 2009), available at http://www.hindu.com/nic/satyam-
chairman-statement.pdf.
22
For a detailed discussion on the consultative process and the policy imperatives that were at play,
see Umakanth Varottil, The Evolution of Corporate Law in Post-Colonial India: From Transplant to
Autochthony (2015), available at http://ssrn.com/abstract=2557809.
23
Ministry of Corporate Affairs, Government of India, Notification No. S.O. 902(E) dated 26 March
2014.
24
Securities and Exchange Board of India, Corporate Governance in listed entities – Amendments to
Clause 36B and 49 of the Equity Listing Agreement dated 17 April 2014; Securities and Exchange Board
of India, Corporate Governance in listed entities – Amendments to Clause 49 of the Equity Listing
Agreement dated 15 September 2014.
7
III. BOARD OF DIRECTORS
Being responsible for overseeing the business and management of a company, the Board
of Directors constitutes a lynchpin of corporate governance. Given the pivotal role of the
Board, we discuss its composition, independence as well as the duties and liabilities of
directors. These matters are governed by the Companies Act, 2013 and the LODR
Regulations.
A. Board Composition
The Companies Act, 2013 provides that every public company shall have a minimum of
three directors, while a private company shall have a minimum of two.25 A company shall
have a maximum of fifteen directors, although this number may be increased by way of a
special resolution of the shareholders.26 At least one director is required to be resident in
India, such that the director has stayed in India for at least 182 days in the previous
calendar year.27
The composition requirements additionally provide for specific types of directors:
(i) Executive and Non-Executive Directors: A company must have an optimum

combination of executive directors (who devote their full time and attention to,
and are usually employees of, the company) and non-executive directors (who are
either business persons, professionals or other persons with expertise, credibility
or stature that are involved on a part-time basis with the affairs of the company).
Listed companies are required to have not less than half of the Board comprising
non-executive directors.28 Hence, executive directors cannot form a majority of
the Board.
(ii) Independent Directors: Matters pertaining to Board independence have acquired

substantial importance in India, both with listed companies and large unlisted
companies.29
(iii) Woman Director: Gender diversity on Indian corporate Boards has been
introduced through statute. The MCA has powers to require certain companies to
have at least one woman director. This applies to companies that have either (a) a
25
Companies Act, 2013, s. 149(1)(a).
26
Companies Act, 2013, s. 149(1)(b).
27
28
LODR Regulations, reg. 17(1)(a).
29
This is discussed in detail in sub-part C below.
8
paid-up capital of Rs100 crores, or (b) turnover of Rs. 300 crores.30 Due to
difficulties in implementing this provision, its applicability for existing companies
was extended until 1 April 2015. Although hundreds of companies complied with
this provision in the few weeks preceding this date,31 several others are yet to
appoint a woman director thereby resulting in potential action by the stock
exchanges.32 New companies must comply with the gender diversity requirement
within six months from the date of incorporation.33 Moreover, in case there is a
vacancy in the board seat occupied by a woman director, it must be filled by the
later of the date of a subsequent board meeting or three months from the date of
the vacancy.34
(iv) Small Shareholder Director: Small shareholders of a company have the right to
appoint a director by themselves. A “small shareholder” is one who holds shares
in a company with a nominal value not exceeding Rs. 20,000.35 A company may
either on its own accord or upon a request by a minimum number of small
shareholders hold an election by the small shareholders for the appointment of
such a director.36 The law prescribes details regarding the appointment and tenure
of office of a small shareholder director.37
B. Appointing a Director
Investors who seek to appoint a director on the Board of an Indian company should be
aware of certain aspects relating to the appointment and removal of directors and their
qualifications, all of which are contained in the Companies Act and the accompanying
rules. Directors are generally required to be appointed by a majority of the shareholders
in general meeting,38 whereby the appointment of each director is required to be voted
upon separately.39 At least two-thirds directors must be liable to retirement by rotation,
while the remaining directors may either be appointed in a manner specified in the
articles of association of the company or by shareholder majority.40
30
Companies (Appointment and Qualification of Directors) Rules, 2014, r. 3.
31
Anu Raghunathan, “Indian Companies Scrambled To Appoint Women Directors Before April 1
Deadline”, Forbes Asia (3 April 2015).
32
“NSE sends notice to companies without woman director”, Business Standard (22 July 2015).
33
Companies (Appointment and Qualification of Directors) Rules, 2014, r. 3, proviso.
34
Ibid.
35
Companies Act, 2013, s. 151, Explanation.
36
At least 1,000 small shareholders or one-tenth of the total number of small shareholders may
petition the company to hold an election for the appointment of a small shareholder director. Companies
(Appointment and Qualification of Directors) Rules, 2014, r. 7(1).
37
38
39
Companies Act, 2013, s. 162.
40
9
A person desirous of becoming a director must fulfil other administrative
requirements. For example, all directors must have a unique Director Identification
Number (DIN), which is then used to identify the director in any filing made by the
company or the director under the Companies Act.41 Prior to being appointed, or even
named director of a public company in a prospectus or other document, a person is also
required to file with the Registrar of Companies a consent to act as director.42 The
Companies Act also prescribes a list of circumstances where a person may be disqualified
from being appointed a director, including when the person is of unsound mind, an
undischarged insolvent, a convict for an offence with a prescribed minimum punishment
or when an order has been passed by a court disqualifying such person from being a
director.43 Additional factors for disqualification have been prescribed for managing
directors and whole-time directors.44
Among the various types of directors, recent corporate law reforms in India have
placed significant emphasis on independent directors, who have received extensive
treatment in the law. It is to this type that we now turn.
C. Independent Directors
The Companies Act, 2013 and the LODR Regulations provide in detail for the roles,
responsibilities and liabilities of independent directors.
1. Number of Independent Directors
The Companies Act, 2013 provides that certain classes of unlisted public companies and
all listed companies must have a minimum number of independent directors. On the
other hand, the LODR Regulations provides for a more onerous requirement depending
upon the status of the chairperson. Where the chairperson of the Board is a non-executive
director, at least one-third of the Board should comprise independent directors.
In case the company does not have a regular non-executive Chairperson, or if the
regular non-executive chairperson is a promoter or related to a promoter, then at least half
of the Board should comprise independent directors.45 The requirements are consolidated
in the table below:
41
Companies Act, 2013, ss. 153-158; Companies (Appointment and Qualification of Directors)
Rules, 2014, rr. 9-12.
42
43
44
45
LODR Regulations, reg. 17(1)(b).
10
Table A
Number of Independent Directors
Type of Company Applicability Number of Independent

Directors
Public Listed Companya Applies to all companies 1/3rd of the total number of
directors
Public Listed Companyb The company has an 1/2 of the total number of
executive Chairman; or it directors
has a non-executive
chairman who is a promoter
or related to a promoter
Unlisted Public Company • Having paid-up Two independent directors
share capital of Rs.
10 crore or more;
• Having turnover of
Rs. 100 crore or
more; or
• Having, in the
aggregate,
outstanding loans,
debentures and
deposits of Rs. 50
crore or more
a. Companies Act,2013, S.149(4);Reg.17(1)(b), LODR Regulations
b. Reg.17(1)(b), LODR Regulations
The LODR Regulations also requires that at least one independent director on a
listed company’s Board shall be a director on the Board of a material non-listed Indian
subsidiary company.46 For this purpose, a “material non-listed Indian subsidiary” means
an unlisted subsidiary, incorporated in India, whose income or net worth (i.e. paid up
capital and free reserves) exceeds 20% of the consolidated income or net worth
respectively, of the holding company and its subsidiaries in the immediately preceding
accounting year.47
46
LODR Regulations, reg. 24(1).
47
LODR Regulations, reg. 16(1)(c).
11
2. Definition of an Independent Director
In the context of Board independence, the definition of an independent director acquires

considerable importance. The Companies Act defines an “independent director” with
reference to the following criteria:48
An independent director is one who is not a managing director, whole-time

director or nominee director;
An independent director is one who, in the opinion of the Board, is a person of

integrity and possesses relevant expertise and experience. The skills, experience
or knowledge may be in one or more fields of finance, law, management, sales,
marketing, administration, research, corporate governance, technical operations or
other disciplines related to the company’s business;49
• Such a person must not be a promoter of the company, its holding, subsidiary or
associated company (the group), nor be related to promoters or directors of the
group;
• The independent director must not have a pecuniary relationship with the group or
their promoters or directors during the preceding two financial years;
• The independent directors’ relatives must not have had a pecuniary relationship or
transaction with the group that are material in nature;
• Such a person must not have held the position of a key managerial personnel or
employee of the group in the preceding three financial years;
• Such a person must not have been an employee, proprietor or partner in three
preceding financial years of any audit firm, company secretarial firm or cost audit
firm of the group, nor of a legal or consulting firm that carried out substantial
business with such companies;
• Such person must not hold more than 2% shares in the company either solely or
along with relatives;
48
49
12
• The independent director must not be a chief executive officer or holder of a
similar position in any non-profit organisation that receives substantial
contributions from the group.
In addition, the MCA is entitled to prescribe additional qualifications for independent

directors. An elaborate definition of independent directors makes Board independence
quite stringent.
3. Nomination and appointment of independent directors
Interestingly, under the Companies Act, 2013, one or more agencies may be designated
by the Central Government to create and maintain a databank of persons who are eligible
and willing to act as independent directors.50 This would make it easier for companies to
access appropriate individuals to take up the role of independent directors on their
Boards.
Although independent directors are required to be elected by shareholders, the

Companies Act, 2013 introduced the mandatory requirement of a Nomination and
Remuneration Committee (NR Committee) for the appointment of all directors, including
independent directors. Such an NR Committee must comprise a majority of independent
directors.51 The NR Committee’s role extends to formulating “the criteria for determining
qualifications, positive attributes and independence of a director”, and to identifying
individuals to be recommended to the B for appointment and also to carrying out the
evaluation of directors.52 The NR Committee requirement establishes an important step in
introducing greater transparency in independent director appointments, and enhances the
credibility of the process.
4. Tenure and number of directorships
Historically, independent directors have served on boards of Indian companies for long
periods of time. In order to ensure that elongated periods of familiarity do not impinge
upon the independence and monitoring role of independent directors, the Companies Act,
2013 introduced tenure requirements. An independent director is able to serve on a
company only for a term of five consecutive years, although such director may be
reappointed for another similar term through a special resolution (that requires a 75%
majority of shareholders exercising their votes).53 This would add a level of impartiality
to the actions of the independent directors.
50
51
52
Companies Act, 2013, s. 178(2),(3).
53
Companies Act, 2013, s. 149(10),(11).
13
Another constraint often faced in the context of Board independence is that the
more competent independent directors are in great demand, which requires them to serve
on numerous Boards. This would significantly dilute the time and attention they can
devote to each company. Hence, independent directors can serve on the Boards of no
more than seven listed companies.54
5. Role of independent directors
Previously, the law did not contemplate a specific role for independent directors.
However, the Companies Act, 2013 contains an elaborate list of roles and duties of
independent directors. They are required to safeguard the interests of all stakeholders,
particularly minority shareholders, balance the conflicts among various stakeholders, and
also act as a moderator in cases of conflicts. Independent directors normally perform a
strategic advisory role by acting as a sounding board to management. They also perform
a monitoring role by acting in the interests of various stakeholders.55 The roles and
responsibilities stipulated in the Companies Act, 2013 place considerable emphasis on the
monitoring role of independent directors, which has acquired great prominence. The Act
devotes an entire schedule laying out a code of conduct for independent directors.56 Some
of the key provisions are summarised below:
Table 2
Code for Independent Directors
Guidelines of • Uphold ethical standards of integrity and probity;

professional conduct • Act objectively and constructively;
• Exercise responsibilities in a bona fide manner in the
interest of the company;
• Devote sufficient time and attention towards informed and
balanced decision making;
• Not abuse the position to the detriment of the company;
• Assist the company in implementing best corporate
governance practices.
Role and functions • Help in bringing an independent judgment to bear on the

Board’s deliberations;
54
55
Vikramaditya Khanna & Shaun J. Mathew, “The Role of Independent Directors in Controlled
Firms in India: Preliminary Interview Evidence”, (2010) 22 National Law School of India Review 35.
56
Companies Act, 2013, Schedule IV.
14
• Objectively evaluate and scrutinise the performance of the
board and management;
• Verify the integrity of the financial information, controls
and risk management systems;
• Determine appropriate levels of remuneration of directors
and senior management;
Duties • Undertake appropriate induction and updating of skills;

• Obtain required information and professional advice and
opinion of outside experts;
• Ensure that their concerns are resolved or at least recorded
in the minutes of the board meeting;
• To ensure adequate deliberations before approving related
party transactions;
• Ensure that the company has an adequate and functional
vigil mechanism;
• Report concerns about unethical behaviour;
• Maintain confidentiality of sensitive information
Manner of • To ensure appropriate balance of skills, experience and

appointment knowledge on the board;
• Appointment of independent director to be formalized
through a letter of appointment setting out detailed terms as
prescribed;
• Terms of appointment to be made transparent and publicly
available.
Reappointment • To be on the basis of performance evaluation.
Resignation or • The position of an independent director who resigns or is

removal removed shall be replaced by another independent director.
Separate meetings • Independent directors shall hold a meeting among

themselves at least once a year;
• At such meeting, they shall review the performance of
management and also assess the quality and timeliness of
information flow.
Evaluation • Performance evaluation of independent directors shall be
15
Mechanism carried out by the entire board;
• Extension of term of an independent director shall depend
on the report of performance evaluation
In addition, independent directors are subject to the duties and liabilities under law that
are applicable to all directors.57
6. Evaluating the Effectiveness of Independent Directors
Although the institution of independent director was formally introduced into Indian
corporate governance norms in 2000, its effectiveness was found to be limited.58
However, the Companies Act, 2013 and the LODR Regulations have substantially
strengthened the position and role of independent directors, although they have
simultaneously enhanced their duties and liabilities as well. The new regime may be
considered too prescriptive in that it increases the cost of compliance by impeding
entrepreneurialism and innovation due to the excessive emphasis on monitoring.
Moreover, the onerous legal regime may operate as a disincentive from able and
competent individuals taking up the role of independent directors. The more skilled and
reputed directors may lack the motivation to act as independent directors that could
adversely affect Board quality. The resultant position is arguably the result of a reflexive
legislative and regulatory response to scandals that befell corporate India over the last
few years.
D. Directors’ Duties and Liabilities
The Companies Act, 2013 is momentous in that it clarifies, redefines and enlarges the
ambit of directors’ duties and liabilities. This Part deals with three principal aspects
relating to directors’ duties and liabilities, namely (1) codification of directors’ duties, (2)
the constituencies that are the beneficiaries of directors’ duties, and (3) directors’
liabilities under company law.
1. Codification of directors’ duties
Hitherto, directors had negligible guidance under company law as regards their duties and
liabilities. The pre-existing Companies Act, 1956 did not explicitly stipulate directors’
duties, which made it necessary to fall back on common law principles (articulated by
57
These are discussed in detail in sub-part D below.
58
Umakanth Varottil, “Evolution and Effectiveness of Independent Directors in Indian Corporate
Governance”, (2010) 6 Hastings Business Law Journal 281.
16
courts while delivering specific decisions). The statutory uncertainty was compounded by
the absence of significant cases of directors’ duties and liabilities before Indian courts.
This somewhat unsatisfactory situation has been addressed in the Companies Act,
2013, which is rather explicit about directors’ duties, and somewhat similar to the
codification of directors’ duties in the UK.59 The new provisions not only offer greater
certainty to directors regarding their conduct, but they also enable the beneficiaries as
well as courts and regulators to judge the discharge of directors’ duties more objectively.
The duties of directors are set forth in section 166 of the Companies Act, 2013, and
are principally as follows:
• To act in accordance with the articles of association of the company;
• To act in good faith to promote the objects of the company;
• To act in the best interests of the company, its employees, the shareholders, the
community and for the protection of the environment;
• To exercise duties with due and reasonable care, skill and diligence and to
exercise independent judgment;
• To not be involved in a situation of direct or indirect conflict with the interests of

the company; and
• To not achieve any undue gain or advantage.
These duties can broadly be classified into two:
(1) duty of care, skill and diligence; and
(2) fiduciary duties.
The duty of care, skill and diligence requires directors to devote the requisite time and
attention to affairs of the company, pursue issues that may arise through “red flags” and
take decisions that do not expose the company to unnecessary risks. Fiduciary duties, on
the other hand, require the directors to put the interests of the company ahead of their
own personal interests. Rules that prevent conflict of interest and self-dealing on the part
of directors are integral to this set of duties.
59
Companies Act of 2006 (UK), s. 172.
17
Section 166 also provides for the consequences of breach of these duties. Sub-
section (5) provides for civil liability that requires a breaching director to return any
undue gain or advantage received as a result of such breach. Sub-section (7) is a penal
provision that imposes a fine ofR symbol. 1 lakh toR symbol. 5 lakhs (i.e. INR 0.1
million to 0.5 million) on directors who have contravened the section.
2. Beneficiaries of directors’ duties
It is clear that directors ought to act in good faith for the benefit of the company. Since
the company is a separate legal personality, there is often the question as to who
represents the interests of the company. Generally, the interests of the company are said
to equate with the interests of the shareholders, while in the case of an insolvent company
(or one that is in the zone of insolvency) the creditors’ interests become paramount. The
question whether other stakeholders such as the employees, consumers, and the
community and society in general constitute the interests of the company leaves room for
some controversy.
Historically, company law in India did not directly address this question. As we
have seen before, the Companies Act, 1956 did not spell out directors’ duties and more
importantly in whose interests the directors ought to act. While it was generally
understood that companies had to cater to shareholder interests, other stakeholders too
received some amount of recognition under corporate law. This is because India’s
corporate law had been shaped by India’s socialistic origins whereby the role of corporate
law extends beyond merely the protection of shareholders. For instance, employees
obtain certain special rights under company law, such as preferential payment for dues in
case of winding up of a company,60 and also the right to be heard in case of significant
proceedings involving a company such as in a scheme of arrangement (merger, demerger
or other corporate restructuring)61 or in a winding up of the company.62 Furthermore, as
the Supreme Court of India has laid down in the context of mergers, “public interest”
constitutes an important element of Indian company law. Affected parties may exercise
remedies in case the affairs of a company are carried out in a manner prejudicial to public
interest, or if a scheme of arrangement is not in consonance with public interest.63
60
61
Companies Act, 2013, ss. 230-232. See also In Re, River Steam Navigation Co. Ltd., (1967) 2
Comp. L.J. 106 (Cal.); In Re, Hathisingh Manufacturing Co. Ltd., (1976) 46 Comp. Cas. 59 (Guj.);
Bhartiya Kamgar Sena v. Geoffrey Manners & Co. Ltd., (1992) 73 Comp. Cas. 122 (Bom.).
62
Companies Act, 2013, s. 282. See also National Textile Workers’ Union v. Ramakrishnan (P.R.),
A.I.R. 1983 SC 75.
63
Hindustan Lever Employees’ Union v. Hindustan Lever Limited, AIR 1995 SC 470.
18
The Act extends the stakeholder principle further while codifying directors’
duties. Section 166(2) provides:
166. Duties of directors.-(1)
(2) A director of a company shall act in good faith in order to promote the objects of the company
for the benefit of its members as a whole, and in the best interests of the company, its employees,
the shareholders, the community and for the protection of environment.
Even if there was a doubt under previous legislation as to the extent to which stakeholder
interests are to be considered by directors of a company,that has been put to rest in the
new legislation. In other words, shareholders are not the only constituency that deserves
the attention of directors; other constituencies such as employees and even the
community and the environment are to be considered by the directors.
This therefore clearly reinforces the stakeholder principle into corporate law. This
is also consistent with the historical understanding of corporate law in India that extended
beyond shareholder protection,64 but it is also buttressed by other provisions of the Act
such as those relating to CSR,65 which enlarge the boundaries of constituencies deserving
the attention corporate law and corporate boards.
While this approach is certainly advantageous from a broader philosophical

perspective, it could give rise to a number of practical issues that may arise in Indian
boardrooms. The attempt in this Part is only to set out some of these practical concerns
that require further consideration depending upon specific situations that may arise from
time to time.
First, directors may be confronted with a conflict between the interests of the
shareholders and those of other stakeholders. In that case, whose interests ought to be
preferred? For example, if a decision is made that benefits customers or employees, then
they may potentially breach the duty to act in the interests of the shareholders. In such a
case, a question arises as to whether the directors have breached their duties to the
company, giving rise to a legal claim against them.66 The Companies Act, 2013 has
preferred to adopt the pluralist approach by providing recognition to both stakeholders
and shareholders, without necessarily indicating preference to either. In a more practical
64
See, Umakanth Varottil, ‘The Evolution of Corporate Law in Post-Colonial India: From
Transplant to Autochthony’, NUS Law Working Paper No. 2015/001, available at
http://ssrn.com/abstract=2557809.
65
Companies Act, 2013, s. 135. This is discussed in Part VI below.
66
In the United States context, see Dodge v. Ford Motor Company, 170 NW 668 (Mich 1919).
19
sense, this means that the directors carry the burden of making the difficult choices in
determining the hierarchy of differing interests in a given set of circumstances.
Second, there could potentially be conflicts among the interests of various

stakeholders themselves. While shareholders’ interests are generally homogenous (except
for differences that could arise between the controlling shareholders and the minority
shareholders), stakeholders could possess vastly differing interests that may require
prioritization among themselves. This results in added determination and adjudication
responsibilities on the Board.
Third, shareholders’ interests are more tangible and measurable than stakeholder
interests. Shareholder interests are represented largely by financial parameters of a
company that indicate corporate performance (with the most common resultant indicator
being the share price of a company) as well as other indicators that may represent
corporate governance. Conversely, stakeholder interests are somewhat more intangible
and subjective in nature causing decision-making to be more difficult for the Board.
Finally, even if some of the aforesaid practical considerations can be addressed

through focused board measures and processes, the Companies Act, 2013 does not seem
to provide for remedies against breach of directors’ duties to take into account
stakeholder interests. Generally, for a breach of directors’ duties, the company could
initiate a legal claim against directors. If it fails to do so, shareholders have the right to
bring a derivative action against the directors on behalf of the company. However, other
stakeholders do not have similar legal claims against companies or boards for breach of
duties to act in their interests. Hence, their rights may not be justiciable in nature thereby
questioning the extent of their efficacy.
Unlike India, legal regimes in the US have addressed the tension between duties
owed to shareholders and stakeholders by creating specific entities where specified
stakeholder interests can trump those of shareholders. For instance, several US states
have adopted “benefit corporation” statutes which permit a corporation, in its articles of
incorporation, to list the stakeholders to which it owes duties. This is intended to allow a
board to deviate from the long-standing principle under US common law of the board’s
duty being to maximize long-term shareholder value.
20
3. Liabilities of directors
Being fiduciaries, directors are exposed to liabilities as a consequence of a breach of their

duties. While liabilities may arise under various statutes,67 the focus here is on liabilities
arising under company law. The first set of liabilities is statutory in nature, being
specifically set forth in the Act. These could be either civil liability requiring directors to
make payments to victims or the state, or they could be criminal liability resulting in fines
or imprisonment. The approach in the new regime has been to impose stiffer penalties in
case of a criminal offence so as to constitute a strong deterrent on director conduct that
falls short of the desired standards.
The second set of liabilities could arise from claims made against the directors
either by the company or the shareholders for breaches of directors’ duties. Since
directors owe the duties to the company, at the outset it is the company that can bring a
claim. Where the company is unable (or does not wish) to do so, it is open to the
shareholders to bring a derivative claim on behalf of the company to recover monies for
breach of directors’ duties. These claims are quite robust in theory, but are riddled with
tremendous difficulties in practice.68 At a substantive level, there are obvious
inadequacies regarding the types of remedies that can be exercised for breaches of
directors’ duties.69 Others relate to the speed and cost-effectiveness of bringing these
actions. Given the jaw dropping rates of docket explosion before the Indian courts, the
ability of shareholders or the company to bring a suit, and even more, to enforce a
successful claim against directors, is highly doubtful. It is not surprising that India
displays a rather meagre track record of civil claims against directors that have resulted in
payouts by them.
In order to obviate the difficulties (particularly on the procedural count) under the
pre-existing law, the Companies Act, 2013 institutes mechanisms that are novel in the
Indian context. The first is the establishment of a class action mechanism that allows a
67
See for instance, Section 27 of the Securities and Exchange Board of India Act, 1992, Section 287B
of the Income Tax Act, 1961, Section 42 of the Foreign Exchange Management Act, Section 141,
Negotiable Instruments Act, 1881. Several labour welfare legislation and environment protection
legislation too contain similar provisions. Generally, these statutes impose liability on directors only where
the offence was committed with the consent or connivance of, or is attributable to any neglect on the part
of, the director. It is also generally a defense to establish that the offence was committed without the
director’s knowledge or that the director had exercised all due diligence to prevent the commission of the
offence. However, whether a real or perceived risk to directors, such statutes, especially, environmental
statutes, have sometimes acted as a deterrent to foreign investors’ nominee directors from serving on
boards.
68
Vikramaditya Khanna & Umakanth Varottil, ‘The Rarity of Derivative Actions in India: Reasons
and Consequences’, in DW Puchniak, H Baum and M Ewing-Chow, The Derivative Action in Asia: A
Comparative and Functional Approach (Cambridge University Press, 2012).
69
Mihir Naniwadekar, ‘Remedies against Directors' Undue Gains: Personal or Proprietary?’,
IndiaCorpLaw Blog (September 12, 2013).
21
group of shareholders (constituting a minimum of 100 shareholders or those holding 10%
shares in the company) to bring an action on behalf of all affected parties, which includes
claims for compensation from directors for any fraudulent, unlawful or wrongful act or
omission or conduct on their part.70 More importantly, the Act devices a mechanism to
sidestep the regular court system by enabling such actions to be brought before a yet-to-
be-constituted National Company Law Tribunal (NCLT) that is expected to be speedier,
more efficient and cost-effective.71 Once these remedial mechanisms are in place, it is
likely that directors may be subject to greater scrutiny through the use of civil liability
suits by companies and shareholders.
At the same time, the severity of the liability provisions is softened through
certain mitigating factors that operate in favour of directors. First, the Companies Act,
2013, creates a specific safe harbor provision for independent directors. An independent
director is liable “only in respect of such acts of omission or commission by a company
which had occurred with his knowledge, attributable through board processes, and with
his consent or connivance or where he had not acted diligently.”72 While such a provision
for limitation of liability is useful, much would depend upon the manner in which courts
interpret it based on the specific facts and circumstances of individual cases. Clarity on
this count is yet elusive.73
Second, it may be possible for directors to obtain indemnities from the company.
Under the Companies Act, 1956, companies were constrained from providing such
indemnities, as they are not permitted to indemnify directors for negligence, default,
breach of duty and the like.74 The Companies Act, 2013, however, does not contain such
a restriction, which may confer greater flexibility on directors to seek indemnities from
the company in case they have to meet any liabilities, particularly if no fault can be
attached to the directors’ conduct.
Third, the practice of obtaining directors’ and officers’ (D&O) insurance has
already become prevalent in Indian companies, especially among the larger ones, and is
70
Companies Act, 2013, s. 245. As of this writing, however, the class action mechanism under the
Act is yet to be made effective. Class actions are discussed in detail in Part VII.C.3 below.
71
The potential establishment of the NCLT under the Act had been subject to constitutional
challenge. Recently, the Supreme Court upheld the validity of the NCLT subject to some changes in the
legislation. Madras Bar Association v. Union of India, Writ Petition (C) No. 1072 of 2013 (judgment dated
May 14, 2015). Based on this, it is expected that the NCLT will be established in due course.
72
73
A detailed analysis of the safe harbour provisions may be beyond the scope of this paper. For their
more elaborate discussion, see Umakanth Varottil, “Director Liability Under the New Regime:,
IndiaCorpLaw Blog (2014), available at http://indiacorplaw.blogspot.com/2014/06/director-liability-under-
new-regime.html.
74
22
only likely to grow in view of the expansive liability regime under the new law.75 In fact,
the Companies Act, 2013 implicitly recognises the ability of the company to incur the
premium expense in order to obtain D&O insurance policies.76 While obtaining adequate
levels of D&O insurance would be prudent for all boards and directors, regard must be
had to the fact that policies are usually accompanied by specific exceptions for fraud,
willful misconduct and other forms of intentional criminal conduct.
In concluding this sub-Part, it is clear that the new regime under the Companies
Act, 2013 not only codifies directors’ duties and expands their scope, but it also imposes
onerous duties and liabilities on directors of Indian companies, particularly independent
directors. At the same time, mitigating factors have been built into the law to make sure
that these more onerous duties and liabilities do not unduly discourage the appropriate
persons from serving on corporate boards. In this light, directors would be well advised to
(1) carefully assess the amount of time and effort they can expend on corporate boards
and (2) avoid the risks associated with too many directorships. As a concomitant, boards
must consider remunerating the directors appropriately to attract the required talent by
making it worthwhile for them to assume the increased levels of involvement and risk.
Boards and directors may also establish practical measures so as to operate in a manner
that is commensurate with the needs of the new era.
E. Board Proceedings
Every company is required to hold a meeting of its board of directors within 30 days of
its incorporation. Thereafter, the board must hold at least four meetings a year with a gap
of no more than 120 days between two meetings.77 The Companies Act, 2013 introduces
substantial flexibility in the manner in which the board meets, including through the use
of technology. Directors may either meet in person or through videoconferencing or other
audio visual means as long as the participants can be recognised and the proceedings
recorded and stored appropriately. The rules issued by the MCA spell out the detailed
manner in which board meetings are conducted by way of videoconferencing or other
audio visual means.78 In addition, directors are also able to pass resolutions by way of
circulation so long as the draft resolution and supporting papers have been circulated to
all directors at their registered addresses in India, and the resolution has been approved
75
Michael Lea and Abhimanyu Malkan, ‘The Changing Environment for D&O Insurance in India’,
D&O Diary (2013), available at www.dandodiary.com/2013/03/articles/international-d-o/guest-post-the-
changing-environment-for-do-insurance-in-india/.
76
77
78
Companies (Meetings of Board and its Powers) Rules, 2014, r. 3.
23
by a majority of the directors.79 However, the board can exercise certain powers only at a
meeting.80 These include:
• Making calls on shareholders in respect of money unpaid on shares;

• Authorizing a buy-back of securities;
• Issuing securities;
• Borrowing monies;
• Investing funds of the company;
• Granting loans or giving guarantees;
• Diversifying the business of the company;
• Approving an amalgamation, merger or reconstruction;
• Taking over another company; and
• Any other matter that the MCA may prescribe through rules.
The Companies Act, 2013 also prescribes the detailed procedure for sending notices to
directors and also the quorum requirements for board meetings.81 Listed companies are
also required to provide advance notice of board meetings to the stock exchanges.82
Similarly, listed companies must also inform the stock exchanges as to the outcome of
the meeting immediately after its conclusion.83
Companies are also required to prepare and maintain within 30 days of the
conclusion of each board meeting the minutes thereof that contain a fair and correct
summary of the proceedings.84 Moreover, the minutes must explicitly record any dissent
at the board meetings.85 The minutes of the board meetings of an unlisted subsidiary
company shall be placed at the board meeting of the listed holding company.86
In addition to the above, the Companies Act, 2013 provides that companies shall
comply with secretarial standards with respect to board meetings as specified by the
Institute of Company Secretaries of India (ICSI) and as approved by the Central
Government.87 Accordingly, ICSI has issued the Secretarial Standard 1 (SS-1) on board
79
80
81
Companies Act, 2013, s. 173-174.
82
LODR Regulations, reg. 29. The length of the notice depends upon the type of decision being
considered, as specified therein.
83
LODR Regulations, reg. 30, sch. II.
84
85
LODR Regulations, reg. 4(2)€.
86
87
Companies Act, 2013, s. s. 118(10).
24
meetings.88 SS-1 is mandatory and prescribes a set of principles for convening and
conducting board meetings and matters related thereto.
In all, the Companies Act, 2013 and the LODR Regulations confer tremendous
importance on the constitution, role, duties and liabilities of the board of directors of an
Indian company, and also prescribe in some detail the procedures to be followed in
carrying out board proceedings.
IV. EXECUTIVE COMPENSATION
The levels of executive compensation in Indian companies cannot be compared to some

of the excesses witnessed in the more developed markets, which attracted a great deal of
controversy in the wake of the global financial crisis. However, Indian pay-scales have
been witnessing a steady increase over the years, and the correlation between pay and
performance has been called into question in some companies. Compared to other
jurisdictions, India has had considerably tight restrictions on executive compensation, in
that senior management’s pay has not only been subject to regulatory caps in terms of
amounts that can be paid out, but such payments are also required to be approved by the
shareholders, thereby ensuring a safety hatch in terms of a robust “say on pay”
mechanism.
A. Quantum of Remuneration
The caps on remuneration applicable to various directors and senior managerial personnel
are somewhat complex, but are summarised below. Remuneration may exceed such caps
only through shareholder resolution and, in certain cases, the approval of the Central
Government.
Executives/Directors Cap or Limitation Statutory Basis
All managers and Managerial remuneration Section 197(1),

directors in the aggregate capped at 11% of the net Companies Act, 2013
profits in any financial
yeara
Managing director, whole- Remuneration capped at Section 197(1), proviso

time director, or manager 5% of net profits for one (i), Companies Act, 2013
88
The Institute of Company Secretaries of India, SS-1: Secretarial Standard on Meetings of the
Board of Directors, available at https://www.icsi.edu/docs/Website/SS-1%20Final.pdf.
25
of a public company such managerial person; if
which has profits in any there is more than one
financial year such person, the amount is
capped at 10% of net
profits for them together
Managing director, whole- Remuneration capped Schedule V, Companies

time director, or manager according to a sliding Act, 2013
of a public company scale depending on the
which has inadequate company’s capital. In
profits, or had no profits such cases, various levels
in any year of such of approval (Nomination
person’s tenure and Remuneration
Committee, shareholders,
or Central Government)
are also required
Non-executive directors Remuneration capped at: Section 197(1), proviso

(i), Companies Act, 2013
Ø 1% if there is a
manager, managing or
whole-time director
Ø 3% if there is no
manager, managing or
whole-time director
Non-executive directors Remuneration by way of Section 197(5),

of a public company with sitting fees, which is Companies Act, 2013
no or inadequate profits capped at Rs. 1 lakhb
Independent directors Sitting fees (subject to the Section 197(7),

cap above), Companies Act, 2013
reimbursement of
expenses and profit
related commissions as
approved by shareholders,
but they are not eligible
for stock options
26
a.”Net profits” are calculated in the manner stipulated in S.198, Companies Act, 2013.
b. R.4 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014.
A director who receives remuneration in contravention of the aforesaid requirements

must refund such sums to the company and, until such sums are so refunded, hold them in
trust for the company.89 Furthermore, contravention of the statutory provisions relating to
executive compensation is an offence punishable with fine.90 Another stringent measure
is one where a company is required to restate its financial statements due to fraud or non-
compliance with the aforesaid requirements,then the company shall recover from a
present or former manager of company any such excess payment.91
B. Approvals and reporting; Remuneration Committee
The Companies Act, 2013 mandates that every listed company must have a Nomination
and Remuneration Committee (NR Committee) that consists of at least three non-
executive directors, of which at least half shall be independent directors.92 Moreover, the
chairperson such a committee shall be an independent director.93 The NR Committee is
required to formulate a policy pertaining to remuneration of directors, key managerial
personnel, and employees.94 In doing so, it shall ensure that:95
• The level and composition of remuneration is reasonable and sufficient to attract,
retain and motivate directors of the quality required to run the company
successfully;
• Relationship of remuneration to performance is clear and meets the appropriate

performance benchmarks; and
• Remuneration to directors, key managerial personnel and senior management

involves a balance between fixed and incentive pay reflecting short and long-term
performance objectives appropriate to the working of the company and its goals.
This policy is required to be disclosed in the board report. Moreover, the MCA has
considerably enhanced the disclosure requirements by prescribing additional matters to
be specified in the board’s report.96 They include:
89
90
91
92
93
94
95
96
Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014, r. 5.
27
• The ratio of the remuneration of each director to the median remuneration of the
employees of the company;
• The percentage of increase in remuneration of each director, Chief Financial

Officer, Chief Executive Officer, Company Secretary or Manager, if any, in the
financial year;
• The percentage increase in the median remuneration of employees in the financial

year;
• The explanation on the relationship between average increase in remuneration and

company performance;
• Comparison of the remuneration of the Key Managerial Personnel against the

performance of the company;
• Key parameters for any variable component of remuneration availed by the

directors;
• Additional details regarding employees who are in receipt of remuneration in

excess of prescribed amounts during the financial year.
The LODR Regulations requires some additional disclosures as follows:97
• All elements of remuneration package of individual directors summarised under

major groups, such as salary, benefits, bonuses, stock options, pensions, etc.;
• Details of fixed component and performance linked incentives, along with the
performance criteria;
• Service contracts, notice period, severance fees;
• Stock option details, if any – and whether issued at a discount as well as the
period over which accrued and over which exercisable.
All of these provisions, both under the Companies Act, 2013 and the LODR, have
substantially enhanced the requirements for executive compensation. The combination of
caps, shareholder and NR Committee approval requirements and higher disclosure
97
LODR Regulations, sch. V, item C(5)(c).
28
requirements make the legal regime for executive compensation considerably stringent in
India.
C. Tata Motors: A Mini-Case Study
In 2014, Tata Motors, which is part of the Tata Group, approached the shareholders
seeking their approval for the payment of executive compensation to three top executives
of the company, including to the heirs of a former managing director. Such shareholder
approval was required because the compensation exceeded prescribed limits due to the
inadequacy of profits of the company for the relevant years.98 This required a special
resolution of the shareholder, i.e. 75% majority of the shareholders present and voting.
The reason for the prominence of this transaction involving executive compensation is
that in a shareholders’ meeting held in July 2014, Tata Motors failed to obtain the
requisite 75% majority, due to which the management’s proposal for payment of
executive compensation was defeated. Although the promoters supported the payment,
the resolution was opposed by about 64% of the company’s public shareholders in the
institutional category and about 30% public shareholders in other categories.99
The importance of this episode is that it signals that payment of executive

compensation is not a matter of course, especially for companies with inadequate profits.
Even though Tata Motors’ proposal was supported by some of the proxy advisory firms,
it was nevertheless defeated by the shareholders as being inconsistent with the
performance of the company.100 This suggests that shareholders (particularly institutional
shareholders) are becoming active in Indian companies when it comes to decisions such
as executive compensation, which accentuate the agency problems between shareholders
and management. This was so in the Tata Motors case wherein the proposals for
executive compensation involved professional managers rather than promoters.
Given this scenario, Tata Motors returned to the shareholders in January 2015 by
highlighting that the remuneration was in line with industry standards. This time,
however, shareholders appeared to accept the company’s line of argument and approved
the compensation.101 In all, this episode underscores the fact that shareholder approval of
executive compensation cannot be taken for granted, and in the context of greater
shareholder activism, such a “say on pay” requirement could operate as a significant
check against excessive levels of compensation.
98
Padma Venkat, CFA, “Institutional Investors Reject Tata Motors Pay Resolutions: Is Tide
Changing in India?”, CFA Institute Blog: Market Integrity Insights (23 July 2014).
99
Shally Seth Mohile & Anirudh Laskar, “Tata Motors shareholders reject proposals executive pay”,
The Mint (4 July 2014).
100
Shamni Pande & Jyotindra Dubey, “Salaries of Indian CEOs touch new highs amid talent war”,
Business Today (5 November 2014).
101
“Tata Motors wins investor nod for Slym’s salary”, Times of India (22 January 2015).
29
V. AUDITORS AND AUDIT COMMITTEE
Apart from the Board of Directors, the auditors provide another layer of oversight over
the company’s management, particularly in relation to financial matters. Most large
companies have an internal auditor, as well as external statutory auditors. Auditors must
be chartered accountants, which subjects them to regulation by the Institute of Chartered
Accountants of India (ICAI), which is a statutory body.102 Regulation by an independent
professional oversight body is usually an indicator of the level of competence of
members of a profession and chartered accountants. In addition to the Big Four
accounting firms, all of whom have a presence in India, several Indian firms of varying
sizes provide auditing and other accounting services.
The general provisions regarding auditor independence are contained in the

Companies Act, with the 2013 legislation providing for matters that would limit a
relationship of comfort between the company and its auditors, such as auditor and audit
partner rotation. The Companies Act, 2013 provides that statutory auditors should be
prohibited from providing certain non-audit services to their audit clients.
As the Board Committee responsible for the accounts and audit function, the
Audit Committee has also received much regulatory attention in recent years and both the
Companies Act, 2013 and the LODR regulations relating to the Audit Committee are
comparable to internationally recognised standards. Further, the Audit Committee or its
Chairperson is often the institution nominated in the LODR Regulationsin order to liaise
with shareholders and other stakeholders where an independent view is sought.
A. Auditors
Every company is required to appoint an auditor at its first annual general meeting, who
shall hold office from that meeting until the conclusion of the sixth annual general
meeting.103 The Board or Audit Committee, as the case may be, shall take into account
the qualifications and experience of the auditor to ensure that they are commensurate
with the requirements of the company. The Companies (Audit and Auditors) Rules, 2014
set out the detailed procedure regarding the selection and appointment of auditors.
102
The ICAI has been constituted under the Chartered Accountants Act, 1949.
103
30
1. Appointment of auditors
Only chartered accountants are eligible to be appointed as auditors.104 Moreover, where a

partnership firm is appointed as an auditor, only the partners who are chartered
accountants are authorised to act and sign on behalf of the firm.105 Similarly, a series of
disqualifications are prescribed that would prevent a person from acting as an auditor.106
In order to ensure independence, an auditor is prevented from rendering the following
services directly or indirectly to the company, its holding company or subsidiary:107
• accounting and book keeping services;

• internal audit;
• design and implementation of any financial information system;
• actuarial services;
• investment advisory services;
• investment banking services;
• rendering of outsourced financial services;
• management services; and
• any other kind of services as may be prescribed by the MCA through rules.
The Companies Act, 2013 has introduced strict norms pertaining to the term of auditors.
Listed companies and certain other prescribed classes of companies cannot appoint an
individual as an auditor for more than one term of five consecutive years, or an audit firm
for more than two terms of five consecutive years.108 However, in either case, the auditor
or audit firm may be eligible for reappointment after a “cooling off” period of five years
from the completion of the term.109 Subject to these, shareholders may resolve that in
case of an audit firm, the auditing partner and team shall be rotated at appropriate
intervals or that more than one auditor shall conduct the audit.110 However, these do not
in any way affect the right of the company to remove an auditor or an auditor’s right to
resign.
104
105
106
107
108
Companies Act, 2013, s. 139(2). The relevant classes of unlisted companies that fall within the
purview of this provision are prescribed in the Companies (Audit and Auditors) Rules, 2014, r. 5.
109
Companies Act, 2013, s. 139(2), proviso.
110
31
2. Powers and duties of auditors
The auditor of a company shall have access at all times to the books of account and
vouchers of the company and shall be entitled to obtain further information and
explanation from the management as necessary for the performance of audit functions.111
Based on enquiry into the requisite matters, the auditor is required to prepare a report for
the shareholders on the accounts examined and financial statements to be placed before
the shareholders.112 One provision that stoked a great deal of controversy relates to the
duty of the auditor to disclose frauds detected to the Central Government. The Companies
Act, 2013 in its original form provided that if an auditor has reason to believe that an
offence involving fraud is being committed against the company, then the auditor shall
immediately report the matter to the Central Government.113 Several concerns were raised
against this, as it would impose unduly onerous obligations on auditors to report even
miniscule violations. In order to address these, the Companies (Amendment) Act, 2013
softens the rigour of these provisions.114 The requirement of reporting to the Central
Government would arise only when the fraud involves significant amounts (as specified
in the Rules). In other cases, the auditor is only required to report to the Board, which
shall be disclosed in the Board’s report to the shareholders.
More generally, auditors owe a duty of care to the company whose audit they
perform.115 In case of negligence or misfeasance, auditors could be held liable both under
contract law as well as tort law. While case law on auditors’ liability is scant in India, one
significant decision of the Bombay High Court adopts a cautious approach as to auditor’s
liability:
The test is the standard of the ordinary skilled man exercising and professing to
have that special skill, but one need not possess the highest expertise or skill at the
risk of being found negligent. It is well established that it is sufficient if one
exercises the ordinary skill of an ordinary competent man exercising that
particular art. It hardly requires to be stated that burden to prove any action of
negligence rests primarily on the plaintiffs, who, to maintain action, must show
111
112
Companies Act, 2013, s. 143(2). The details to be contained in the audit report are prescribed in
the Companies Act, 2013, s. 143(3).
113
114
This is by way of amendments to the Companies Act, 2013, s. 143(12).
115
See Caparo Industries v. Dickman, [1990] 2 A.C. 605 (where the House of Lords held that
auditors’ duties are owed to the company in the interests of the shareholders, and that no duties are directly
owed to the shareholders). Consequently, while the company can initiate action against auditors for breach
of duties, shareholders cannot. Similarly, auditors do not owe duties to creditors of a company. See Al
Saudi Banque v. Clarke Pixley [1990] Ch. 313.
32
that he was injured by a negligent act or omission for which the defendant in law
is responsible.116
It was also recognised by the court that “the auditor does not conduct the audit with the
objective of discovering all frauds”.117 In an action, auditors are also known to resort to
several defences: that of contributory negligence and that the affected company seeks to
rely upon its own illegality (the latter being available in case of fraud committed by
company personnel). Auditors also tend to limit their liability expressly through contracts
with their clients, although the validity of such an approach yet remains untested.
Further, in the case of listed companies, auditors have been found to fall within
the regulatory domain of SEBI, which can initiate investigations into the conduct of an
auditor for alleged wrongdoing.118 Auditors are also subject to supervision by the ICAI.
In order to be able to carry on audit of companies, auditors must be registered with the
ICAI. In case of professional misconduct, the ICAI may initiate disciplinary proceedings
against auditors, including for suspension of the concerned auditor or for imposition of a
fine.
B. Audit Committee
The Audit Committee is a crucial mechanism in corporate governance, as it is intended to

ensure that the shareholders and other stakeholders receive credible information
regarding the company’s business and financial affairs that can enable them to make
appropriate investment decisions. The Audit Committee has been a mainstay of corporate
governance in India too as it was incorporated as a requirement for both listed companies
as well as certain unlisted companies.
Every listed company is required to constitute an Audit Committee.119 In addition,

unlisted public companies with any of the following characteristics must also establish
Audit Committees:120
• Paid up capital of Rs. 10 crores or more;

• Turnover of Rs. 100 crores or more;
• Aggregate outstanding loans or borrowings or debentures or deposits exceeding
Rs. 50 crores.
116
Tri-sure India Ltd. v. A.F. Ferguson and Co. [1987] 61 Comp. Cas. 548 (Bom.), at para 34.
117
Ibid, at para. 25.
118
Price Waterhouse & Co. v. Securities and Exchange Board of India, [2010] 160 Comp. Cas. 324
(Bom).
119
120
33
The Audit Committee must comprise a minimum of three directors, with a majority of
them being independent directors,121 with the independence requirement being raised to
two-thirds independent directors in the case of listed companies.122 A majority of the
Audit Committee members must have the ability to read and understand the financial
statements. Furthermore, in case of listed companies, all members of the Audit
Committee shall be financially literate and at least one member shall have accounting or
related financial management expertise.123 The chairman of the Audit Committee shall be
an independent director, and shall be present at the annual general meeting of the
company to answer shareholder queries.124
The terms of reference and role of the Audit Committee have been set out
extensively in the Companies Act125 as well as the LODR Regulations.126 These include
recommending for appointment of the auditors of the company, reviewing and
monitoring the auditors’ independence and performance, examining the financial
statements and auditor’s report, approving related party transactions and evaluating the
internal financial controls and risk management systems of the company.
Another important role of the Audit Committee in a listed company pertains to the
establishment and administration of a vigil mechanism, or whistleblower policy.127 This
requirement also arises in the case of the following types of unlisted companies:128
• Those that accept deposits from the public; and

• Those that have borrowed money from banks and financial institutions in excess
of Rs. 50 crores.
The vigil mechanism must enable directors and employees to report concerns about
unethical behaviour, actual or suspected fraud or violation of the company’s code of
conduct or ethics policy.129 Such a mechanism must also provide adequate safeguards
against victimisation of complainants, and shall allow direct access to the chairperson of
the Audit Committee in exceptional circumstances.130 On the other hand, in case of
121
122
LODR Regulations, reg. 18(1)(b).
123
LODR Regulations, reg. 18(1)(c).
124
LODR Regulations, reg. 18(1)(d).
125
126
LODR Regulations, reg. 18(3) read with sch. II, part C.
127
Companies Act, 2013, s. 177(9); LODR Regulations, reg. 22.
128
129
130
Companies Act, 2013, s. 177(10); LODR Regulations, reg. 22(2).
34
repeated frivolous complaints, the Audit Committee may initiate suitable action against
such a complainant, including by reprimanding the person.131
Clearly, the Audit Committee’s role has gained increasing prominence in Indian
corporate governance. However, there is a case for strengthening the requirements
relating to the Audit Committee, whereby companies themselves can play a pioneering
role by adopting best practice in the industry, both within India and internationally.132
VI. RELATED PARTY TRANSACTIONS
Related party transactions (“RPTs”) are those entered into between the company and any
person related to the company such as its holding company, subsidiary, director,
controlling shareholder or family members. Such types of transactions are quite common
in systems where there is concentration of shareholding and prominence of corporate
groups, with several Asian countries experiencing them. While RPTs can be value
enhancing in nature, they can also be potentially abusive in nature by transferring value
from companies (such as listed companies with a significant number of minority
shareholders) to other companies that are privately owned by the controlling
shareholders.133 In this context, the goal of regulation is to curb abusive transactions.134
A. Regulation of RPTs in India
Until recently, RPTs were subject to scant regulation in India. Under the previous version
of Clause 49, the Audit Committee was only required to ensure proper disclosure of
RPTs and it had no powers to approve (or reject) RPTs.135 However, the Companies Act,
2013 and the LODR Regulations bring about a paradigm shift in significantly tightening
the requirements for RPTs. This is arguably beneficial to minority shareholders as it
impinges upon the ability of companies and their controllers from carrying out value-
reducing transactions.
131
Companies (Meetings of Board and its Powers) Rules, 2014, r. 7(5).
132
See, Subrata Sarkar, “Audit Committee: Regulations and Market Response”, NSE Quarterly
Briefing No. 2 (July 2013).
133
This is also referred to as “tunneling”. For a discussion of tunneling in the context of Indian
companies, see Marianne Bertrand, et al., “Ferreting Out Tunneling: An Application to Indian Business
Groups”, (2002) 117(1) Quarterly Journal of Economics 121.
134
See, Vikramaditya Khanna, “Related Party Transactions”, NSE Quarterly Briefing No. 8 (January
2015).
135
Umakanth Varottil, “India’s Corporate Governance Voluntary Guidelines 2009: Rhetoric or
Reality?”, (2010) 22 National Law School of India Review 1.
35
At the outset, the Companies Act, 2013 defines a “related party” in relation to a
company to encompass persons such as directors, key managerial personnel and their
relatives, other firms or private companies where they are partners or directors, public
companies in which they hold more than 2% of the paid-up capital, and also holding,
subsidiary or associate of such company.136 The LODR Regulations extend this definition
to include entities that are treated as related parties under the relevant accounting
standards.137 It also defines a “related party transaction” as one which is a “transfer of
resources, services or obligations between a company and a related party, regardless of
whether a price is charged”.138
Certain types of RPTs require the consent of the directors of the company
signified through a resolution at a board meeting.139 These are:
• Sale, purchase or supply of any goods or materials;

• Selling or otherwise disposing of, or buying, property of any kind;
• Leasing of property of any kind;
• Availing or rendering of any services;
• Appointment of any agent for purchase or sale of goods, materials, services or
property;
• A related party’s appointment to any office or place of profit in the company, its
subsidiary or associate company; or
• Underwriting the subscription of any securities or derivatives thereof, of the
company.
The LODR Regulations provide that all RPTs require the approval of the Audit
Committee, although the committee may provide an omnibus approval for RPTs so long
as it lays down the criteria for the grant of such omnibus approval, which shall also lay
specifications and conditions.140
More importantly, the Companies Act, 2013 requires certain types of RPTs to be
approved by the shareholders, wherein any related party shareholder interested in the
transaction is disallowed from voting.141 This introduces the concept of a “majority of the
minority” voting and confers significant powers in the hands of the minority shareholders
to prevent abusive transactions. The relevant rules set out the types of companies and
136
137
LODR Regulations, reg. 2(1)(zb).
138
LODR Regulations, reg. 2(1)(zc).
139
Companies Act, 2013, s. 188(1). The procedures relating to the consideration of RPTs by the
board are contained in the Companies (Meetings of Board and its Powers) Rules, 2014, r. 15(1), (2).
140
LODR Regulations, 23(3).
141
Companies Act, 2013, s. 188(1), proviso.
36
transactions for which the shareholders approval is required.142 When the Companies Act,
2013 was enacted, the shareholder approval requirement for RPTs invited a great detail of
consternation on the ground that it would make it difficult to carry out business in the
normal course. This was particularly because shareholder approval was required through
a special resolution (75% majority), which was found to be a significant hurdle.
Consequently, by way of the Companies (Amendment) Act, 2013, the Government
reduced the shareholder approval requirement to an ordinary resolution (simple majority)
with a view to enhance the ease of doing business. While this change is welcome from
the perspective of companies, it arguably dilutes minority shareholder protection.
Certain transactions are exempted from the purview of Audit Committee and
shareholder approval requirements under the LODR Regulations.143 These relate to
transactions between two government companies, and transactions between a holding
company and a wholly owned subsidiary whose accounts are consolidated with such
holding company and placed before shareholders for approval at a general meeting.
Finally, disclosure requirements relating to RPTs continue to receive prominence.144

Details of material transactions with related parties are to be disclosed along with the
compliance report on corporate governance. Moreover, listed companies are required to
disclose the policy dealing with RPTs on its website, and provide a link in the Annual
Report.
In all, India has come a long way in regulating RPTs. A primarily disclosure-
based approach has been transformed into a tightly controlled regime whereby significant
RPTs have to pass muster with the Audit Committee, board and shareholders (without the
interested shareholder voting). However, some issues remain, such as the scope of the
definition of RPTs (which may not encompass potentially value-reducing transactions
such as minority squeeze outs), robustness of board independence in considering RPTs,
enforcement by the regulators and the ability of shareholders to become more active in
considering RPTs.145
B. Maruti Suzuki: A Mini-Case Study
Maruti Suzuki India Limited (MSIL) is a leading car manufacturer in India. It is currently
a subsidiary of Suzuki Motor Corp, Japan (Suzuki Japan), which holds 56.2% of its
142
Companies (Meetings of Board and its Powers) Rules, 2014, r. 15(3). These requirements are too
numerous to be detailed here.
143
144
LODR Regulations, reg. 53(f) and sch. V.
145
Vikramaditya Khanna, “Related Party Transactions”, NSE Quarterly Briefing No. 8 (January
2015).
37
shares, with the remaining 43.8% being held by the public, which includes institutional
investors. MSIL is listed on the The Stock Exchange, Mumbai and the National Stock
Exchange of India Limited.
On 28 January 2014, MSIL’s board announced its approval of a transaction with

Suzuki Motor Gujarat Private Limited (Suzuki Gujarat), a wholly owned subsidiary of
Suzuki Japan.146 Under this arrangement, instead of establishing its own additional
manufacturing facility, MSIL will lease land in Gujarat to Suzuki Gujarat, which will
manufacture and supply cars to MSIL at cost of production plus incremental capital
expenditure. Suzuki Gujarat would manufacture vehicles exclusively for MSIL and in
accordance with its requirements.
Being an RPT, the proposal was severely criticized by MSIL’s institutional

investors. Questions were raised regarding transparency. Moreover, suspicion arose on
account of the timing of the transaction since it was announced months before the
Companies Act, 2013 was to take effect on 1 April 2014, which would impose the
requirement of obtaining the approval of the public shareholders of MSIL (i.e. an
“majority of the minority” vote). The collective support of leading institutional investors
led to their active protests to the company against the proposal and also a representation
to SEBI.
The fervent reaction of the institutional investors caused MSIL’s board to review
the proposal.147 From an operational standpoint, MSIL’s board clarified that Suzuki
Gujarat would operate on the basis that while it would not make any losses, it would also
not accumulate any cash surpluses.148 This is perhaps a measure to prevent the perceived
transfer of value out of MSIL. Other adjustments to the structure included that upon
expiry of the arrangement the assets of Suzuki Gujarat would be transferred to MSIL at
“book value” rather than “fair value”. The company also provided greater details of the
arrangement to the investing public. More importantly, the board decided that even
though the law did not yet require it, as a “measure of good governance” it would seek
the “majority of the minority” vote.149
The MSIL case may very well represent the dawning of a new era in the
regulation of RPTs in India. A transaction that may otherwise have been effected was
resisted by the institutional investors on the strength of the tightened legal regime on
146
Maruti Suzuki India Limited, “Maruti Suzuki Board Decision on Gujarat Project”, Press Release
(28 January 2014).
147
Nikhil Inamdar, “Have Independent directors finally found their voice?”, Business Standard (12
March 2014); Pankaj Doval & Sidhartha, “Suzuki’s Gujarat plan splits Maruti board”, The Times of India
(13 March 2014); “Maruti blinks in Gujarat plant standoff”, The Telegraph (16 March 2014).
148
Maruti Suzuki India Limited, “Information on Gujarat Project”, Press Release (26 February 2014).
149
Maruti Suzuki India Limited, “Information on Gujarat Project”, Press Release (15 March 2014).
38
RPTs. However, this is not the end of the MSIL story. As of this writing, the
shareholders’ meeting to seek a majority of minority vote is yet to be convened. How the
shareholders may respond remains to be seen.
This instance also highlights the need for companies with a broad shareholder
base to actively engage with their shareholders, especially institutional and activist
shareholders, before announcing changes in direction.
VII. SHAREHOLDER PARTICIPATION AND ACTIVISM150
Shareholder activism, a hitherto non-existent phenomenon in India, has become pervasive

in recent years. Consistent with reforms in several countries that seek to confer greater
power in the hands of shareholders, recent regulatory developments in India signify a
greater opportunity for shareholder participation in the form of postal ballot, e-voting and
the like. The rapid proliferation of proxy advisory firms, a hitherto non-existent
phenomenon in India, bestows shareholders with the advice necessary to exercise their
corporate franchise in an informed manner. The presence of activist institutional
shareholders such as private equity funds and hedge funds has already caused an
upheaval in some corporate boardrooms in India.
Historically, outside (non-promoter) shareholders, whether retail or institutional,

have been passive in India. They rarely participated in shareholders’ meetings. In any
case, the retail shareholders’ miniscule shareholding made their participation less
effective. Notably, however, even the institutional shareholders, both domestic and
foreign, who could have made a difference, either did not participate in the meetings or, if
they did, it was almost always to vote in support of management and the promoters.
Over the last decade, however, regulatory reforms in India have focused on
promoting shareholder participation in corporate decision-making. These have
significantly altered the nature of shareholder involvement in Indian companies, and
displayed signs of increasing activism among shareholders.
A. Regulatory Reforms Towards Greater Shareholder Participation
In 2001, the facility of voting by postal ballot was introduced.151 This system
permits shareholders to send in their votes by post instead of personally attending and
150
The discussion in this Part has been adapted from Umakanth Varottil, “The Advent of Shareholder
Activism in India”, (2012) 6 Journal on Governance 582; Umakanth Varottil, “Emergence of Shareholder
Activism in India”, NSE Quarterly Briefing No. 1 (April 2013).
39
voting at a meeting. While the postal ballot facility represented a sea change in terms of
providing a better option for retail shareholders to cast their corporate franchise, it failed
to make a serious impact.
Given the inadequate functioning of the postal ballot system, more recent
regulatory developments have sought to utilize technological advancements to enhance
shareholder participation and voting.152 On this occasion, the initiative emanated from
SEBI. In July 2012, SEBI amended the listing agreement requiring large companies to
provide electronic voting (e-voting) facilities in respect of matters requiring postal
ballot.153 According to this new dispensation, the top 500 listed companies on the
Bombay Stock Exchange and the National Stock Exchange were required to provide e-
voting facility with effect from October 1, 2012. Two agencies have already been
certified to provide e-voting platforms.154
The e-voting mechanism has now been codified in the Companies Act, 2013 and
the rules promulgated by the MCA.155 All companies whose shares are listed on the stock
exchanges as well as other companies that have at least 1,000 shareholders must offer the
option of e-voting to their shareholders. Under the amended Rules,156 shareholders may
opt for exercising their corporate franchise through “remote e-voting” without attending
the meeting, or to attend the meeting and cast their votes electronically at the venue.
Furthermore, in the context of a scheme of arrangement for reconstruction or
amalgamation, the Bombay High Court held that a resolution for approval of a scheme of
amalgamation cannot be passed by a shareholders resolution obtained by postal ballot
(which included e-voting) without conducting a meeting.157 In other words, postal ballot
and e-voting are only provided as an additional facility and cannot be in substitution of a
physical meeting of shareholders. All of these have the effect of enhancing retail
participation in shareholder decision-making of Indian companies.
Additional regulatory measures confer greater power to shareholders (particularly

the minority) on specific transactions that are likely to have a greater impact on them. For
151
This was introduced by way of the Companies Act, 1956, s. 192A, which came into effect on June
15, 2001.
152
The law explicitly recognizes the possibility of shareholder voting through electronic mode.
Companies Act, 1956, s. 192A, Explanation.
153
Securities and Exchange Board of India, Amendment to the Equity Listing Agreement – Platform
for E-Voting by Shareholders of Listed Companies, Circular CIR/CFD/DIL/6/2012 (Jul. 13, 2012).
154
These agencies are the Central Depository Services (India) Limited (CDSL) and the National
Securities Depository Limited (NSDL). Both these agencies have established e-voting systems, available at
http://www.evotingindia.com/ and https://www.evoting.nsdl.com/ respectively.
155
Companies Act, 2013, s. 108; Companies (Management and Administration) Rules, 2014, r. 20.
156
The Companies (Management and Administration) Rules, 2014, r. 20, was amended by way of the
Companies (Management and Administration) Amendment Rules, 2015.
157
[2014] 184 Comp Cas 441 (Bom).
40
example, the “majority of the minority” requirement has been imposed for larger
RPTs.158 Similarly, SEBI has introduced more onerous requirements for significant
transactions such as schemes of arrangement involving amalgamation or reconstruction
and also for reduction of capital.159 A company desirous of undertaking a scheme must
file a copy of the scheme with the stock exchanges before initiating the implementation
process. SEBI and the stock exchanges have a broader role in indicating their
observations on the proposal to the company. The company is required to notify its
shareholders as well as the court regarding the observations of SEBI and the stock
exchanges, so that any regulatory concerns may be taken into account both when the
shareholders consider the proposal for their approval and the court considers it for its
sanction. More importantly, in case of schemes involving transactions between related
parties, the proposal shall be carried out only if it receives the approval of a majority of
the public shareholders casting their votes. This ensures that non-promoter shareholders
are able to have a say in such transactions, which is also likely to enhance their
participation.
Other measures have been introduced to enhance participation by institutional

investors. For example, SEBI has sought to exhort a specific type of institutional investor,
i.e. mutual funds, to exercise their voting rights in investee companies in a responsible
manner. In 2010, SEBI issued a circular to mutual funds requiring them to “play an active
role in ensuring better corporate governance of listed companies.”160 Adopting a
“comply-or-explain” approach,161 SEBI requires asset management companies of mutual
funds to disclose on their websites and in annual reports their general policies and
procedures regarding the exercise of votes on listed companies.162 Moreover, they are
also required to disclose the specific exercise of voting rights in respect of identified
matters such as corporate governance, changes to capital structure, mergers, takeovers,
and the like.163
158
See Part VI.A above.
159
Securities and Exchange Board of India, Securities and Exchange Board of India, Scheme of
Arrangement Under the Companies Act, 1956 – Revised requirements for the Stock Exchanges and Listed
Companies, Circular CIR/CFD/DIL/5/2013 (Feb. 4, 2013); Securities and Exchange Board of India,
Scheme of Arrangement Under the Companies Act, 1956 – Revised requirements for the Stock Exchanges
and Listed Companies – Clarification, Circular CIR/CFD/DIL/8/2013 (May 21, 2013).
160
Securities and Exchange Board of India, Circular for Mutual Funds, SEBI/IMD/CIR No 18 /
198647/2010 (Mar. 15, 2010) [hereinafter the SEBI Circular for Mutual Funds].
161
In such an approach, although there is no compulsion to comply with such requirement, the
persons subject to it are required to make appropriate disclosures on whether they comply with the
requirement, or alternatively to explain the reasons for non-compliance. Anita Indira Anand, An Analysis of
Enabling vs. Mandatory Corporate Governance: Structures Post-Sarbanes Oxley, 31 DEL. J. CORP. L. 229,
229-30 (2006).
162
The SEBI Circular for Mutual Funds, para. 4(ii).
163
The SEBI Circular for Mutual Funds, para. 4(ii).
41
By imposing mandatory disclosure obligations and thereby enhancing
transparency, this compels mutual funds to take a more active and considered role while
exercising their voting rights on companies. This is particularly relevant because
institutional investors such as mutual funds possess significant shareholding (at least in
the aggregate, if not individually) with the power to tip the scales on key voting matters
such as mergers, change of control transactions, preferential allotments of securities and
the like. While SEBI’s circular technically applies only to mutual funds, its broader
message could well pave the way for greater participation by other types of institutional
shareholders.
B. Market-Driven Shareholder Activism
In addition to regulatory efforts, shareholders themselves have voluntarily begun to adopt

an activist stance. They have started to engage with management and promoters of
companies to pursue corporate policies that may enhance shareholder value. Investors
such as private equity funds, venture capital funds and even hedge funds, for example,
have begun the exercise of ‘relationship investing’, which involves the establishment of
a long-term relationship between the investors and the company. Where mere interaction
with management is found to be ineffective, activist investors typically advance to the
next stage of voting against the company’s resolutions. The ultimate option of
confronting management with efforts to displace them has been used elsewhere in the
world; but in India such option is quite daunting given that most companies are controlled
through a significant stake held by the promoter. On the odd occasion, activist investors
have also threatened and initiated legal action against companies.164
Activist investors are now effectively aided by the emergence of a set of corporate
governance intermediaries in the form of proxy advisors. While proxy advisors play a
significant role in influencing corporate decision-making internationally, the industry is
still nascent in India, having been established only as late as 2010. Proxy advisory firms
analyze corporate proposals and make recommendations to their clients, who are
primarily institutional investors, on the manner in which they should exercise their votes
at shareholders’ meetings. The firms also publicly announce their recommendations on
specific proposals, which can be utilized by retail shareholders too.
164
Shine Jacob & N. Sundaresha Subramanian, “TCI sues CIL execs over losses”, Business Standard
(13 October 2012); James Crabtree, “TCI turns up the heat in Coal India dispute”, The Financial Times (13
October 2012).
42
There are three proxy advisory firms established in India so far,165 and they have
already published several recommendations regarding corporate proposals pertaining to
various listed companies in India. It is difficult to determine the exact nature and extent
of the impact of the proxy advisory industry, given that it is relatively new. There is,
however, no doubt that the extensive discussion of their recommendations, particularly in
the financial press, provides a greater degree of information to shareholders in deciding
whether to approve or reject specific corporate proposals. This may have the ultimate
effect of raising transparency and governance standards in Indian listed companies.
C. Enforcement of Shareholder Rights
Shareholder suits form a useful method of enforcing corporate law and

governance norms through private mechanisms. The advantage of this method is that the
enforcement can be controlled by an affected shareholder rather than to rely upon public
enforcement that is controlled by the state. Under corporate law, shareholder may bring
principally two types of actions. The first is a derivative action, whereby a shareholder
may sue on behalf of the company in respect of a loss caused to the company. The classic
instance where derivative action is an effective shareholder remedy is when the directors
or officers of a company have breached their duties to their company, but the board
decides not to initiate legal action against them.166 In such a case, the derivative action
enables the shareholder to bring a suit on behalf of the company against the offending
party. If the suit is successful, the company will enjoy the remedies. For instance, any
recoveries under the suit will inure to the benefit of the company rather than the
shareholders. The second type is a direct action. Here, the shareholder brings a suit
against the company, its board, management or other shareholders for the breach of a
duty owed to the shareholder. In such case, the shareholder can bring a suit for its own
benefit and the remedies would inure to the benefit of the shareholder, who may enjoy it
directly.
Company law in India provides shareholders with the options of bringing both a
derivative suit and a direct suit if their interests are adversely affected and a cause of
action arises under law. However, these remedies are arguably not fully effective. The
remainder of this Part deals briefly with each of these types of actions and why they may
or may not be viable options to activist shareholders. Thereafter, we discuss the new
mechanism of class action introduced by the Companies Act, 2013.
165
They are (i) InGovern (http://www.ingovern.com/); (ii) Institutional Investor Advisory Services
(IIAS) (http://www.iias.in/); and (iii) Stakeholders Empowerment Services (SES)
(http://www.sesgovernance.com/).
166
It is understandable that the board members may not at all be motivated to initiate legal action
against one of their own.
43
1. Derivative Action
The derivative action mechanism has rarely been utilized in India by shareholders. One
study found that “[o]ver the last sixty years only about ten derivative actions have
reached the high courts or the Supreme Court. Of these, only three were allowed to be
pursued by shareholders, and others were dismissed on various grounds.”167 A number of
reasons have been proffered for this state of affairs.
First, neither the Companies Act, 1956 nor the Companies Act, 2013 statutorily
recognize derivative actions. One has therefore to rely upon common law to initiate such
an action by establishing that one of the exceptions to the rule in Foss v. Harbottle168
applies to the given case. The development of common law in this regard has been
unclear, making the use of derivative actions cumbersome. For example, a shareholder
bringing a derivative action must establish “fraud on the minority”169 and must also come
with clean hands.170 Second, there are procedural difficulties as well. Derivative actions
are considered to be representative actions under Order I, Rule 8, of the Civil Procedure
Code, which requires shareholders to obtain permission of the court before the suit can
proceed. Third, the costs of bringing a derivative action may be prohibitive, especially if
it involves a recovery suit. This is due to the existence of court fees and stamp duties
payable while initiating the suit, which varies from state to state. Fourth, countries where
shareholder actions have succeeded possess an active plaintiff bar, whereby plaintiff law
firms initiate actions on behalf of shareholders. Such an active plaintiff bar is non-
existent in India due to the prohibition against lawyers from charging contingency fees.171
The absence of a plaintiff bar offers a big blow to derivative actions because shareholders
who incur costs in initiating suits are unable to enjoy the benefits, which instead flow to
the company.172
Finally, the institutional environment required for a vibrant shareholder-friendly

legal atmosphere is absent in India. For instance, litigation could continue for years, and
167
Vikramaditya Khanna & Umakanth Varottil, “The rarity of derivative actions in India: reasons and
consequences”, in Dan. W. Puchniak, Harald Baum & Michael Ewing-Chow, The Derivative Action in
Asia: A Comparative and Functional Approach (Cambridge: Cambridge University Press, 2012), at p. 380
[hereinafter Khanna & Varottil].
168
(1843) 2 Har 461. Under this age-old rule, when an injury is caused to the company, it is only the
company that can initiate legal action against the wrongdoer, and shareholders are barred from doing so.
169
Arad Reisberg, Derivative Actions and Corporate Governance (Oxford: Oxford University Press,
2007), at p. 70.
170
This is because a derivative action under common law is considered an equitable remedy that
imposes such an onus on the plaintiff shareholder.
171
Bar Council of India Rules, Part VI, Chapter II, Section II, §20.
172
SEBI has introduced litigation funding with a view to funding shareholder action by recognized
investor groups. SEBI (Investor Protection and Education Fund) Regulations, 2009; SEBI (Aid for Legal
Proceedings) Guidelines, 2009. However, this mechanism is accompanied by several limitations that have
thus far hindered its effective utilization. Khanna & Varottil, at 394-95.
44
by the time a remedy is awarded by the court it may have become redundant due to the
lapse of time. Further, courts in India are unlikely to award significant damages, which
may make shareholder derivative litigation an uneconomical prospect.
Hence, while there does exist a legal mechanism for activist shareholders to
initiate derivative actions against errant managements, its effectiveness as a governance
tool is questionable in the Indian context given the reasons discussed above.
2. Direct Action
Unlike derivative actions, certain types of direct actions are statutorily available. The
Companies Act enables minority shareholders to initiate actions for oppression173 and
mismanagement.174 These rights by way of personal actions are available to minority
shareholders against the company and the controlling shareholders. These remedies are
quite broad in nature. Minority shareholders may bring the action before the Company
Law Board (CLB), which is a specialized body dealing with company law disputes.175 In
actions for oppression and mismanagement, the CLB has wide-ranging powers to pass
various types of orders, including to regulate the conduct of the company, to order a
buyout of the minority by the majority, and to make any provision that it finds just and
equitable in the circumstances.176
While the oppression and mismanagement remedies appear attractive to minority

shareholders, it is not easy to invoke these remedies. An action is not admissible unless it
carries enormous support among minority shareholders.177 While substantial minority
shareholders in unlisted companies may be in a position to invoke them, it is nearly
impossible for minority shareholders in listed companies (who usually hold less than
10%) to satisfy the threshold requirement. Moreover, even in terms of numerical
aggregation of 100 shareholders, the difficulties in organizing themselves will prevent
shareholders from coordinating to support any direct action. Even if these are satisfied,
the substantive law imposes onerous requirements on plaintiff shareholders. For example,
for the oppression remedy, mere isolated instances of abuse may not be adequate, and
173
Companies Act, 2013, s. 241; Companies Act, 1956, s. 397. Note that the provisions relating to
oppression and mismanagement under the Companies Act, 2013 are yet to be notified. Hence, on these
matters, the provisions of the Companies Act, 1956 would apply.
174
Companies Act, 2013, s. 241; Companies Act, 1956, s. 398.
175
The powers of the CLB will be taken over by the National Company Law Tribunal, once it is
constituted.
176
Companies Act, 1956, s.402. Under the Companies Act, 2013, this power would be transferred from
the CLB to the NCLT.
177
An action for oppression or mismanagement must carry the support of at least 100 shareholders in
number or such number of shareholders as hold at least 10% of the total issued shares of the company in
value. Companies Act, 2013, s. 244; Companies Act, 1956, s. 399.
45
there may be a need to demonstrate continuous acts or conduct that justifies the
invocation of the remedy.178
Therefore, while the remedies of oppression and mismanagement are quite

evolved in India and also confer wide powers to the CLB to mold a suitable remedy, their
practical utility is largely confined to companies with a limited number of shareholders,
and not for large listed companies with thousands of shareholders where even the
threshold requirements of bringing an action may not be ordinarily satisfied.
3. Shareholder Class Actions.
The Companies Act, 2013 has introduced another remedy for shareholders in the form
class actions as a method to ensure greater enforcement of corporate law. Section 245
provides that a certain number of shareholders or depositors can bring an action before
the NCLT. The action can be against the company for restraining it from various acts
such as those that are ultra vires the memorandum and articles of association, that are
based on a resolution of shareholders obtained through suppression of material facts, or
that are contrary to the provisions of the Companies Act or any other law.179 More
importantly, shareholders can claim damages for fraudulent actions, unlawful conduct or
misstatements made by the company and its directors, and in certain cases its auditors
(including the audit firm) or any expert or advisor or consultant of the company.180
Certain other provisions also support the creation of a regime for shareholder
actions. For example, failure to comply with an order of the NCLT will result in a
criminal offence.181 Moreover, the NCLT may provide that the cost of bringing the action
may be defrayed by the company or other responsible person.182 This is a key insertion
especially in derivative actions where shareholders may not have the incentive to initiate
an action if they have to directly bear the cost, while the ultimate relief will flow to the
company. The law also provides for consolidation of similar petitions, while also
specifying the manner in which the lead applicant will be chosen.183
Significant checks and balances have been introduced to ensure that only genuine
actions are entertained by the NCLT. First, there is a threshold limit in terms of the
support required for bringing an action. The action must be supported by at least 100
shareholders, or such percentage of total number of shareholders or those holding such
178
Shanti Prasad Jain v. Kalinga Tubes Ltd, AIR 1965 SC 1535, ¶20.
179
Companies Act, 2013, s. 245(1)(a)-(f).
180
Companies Act, 2013, s. 245(1)(g).
181
182
Companies Act, 2013, s. 245(5)(d).
183
Companies Act, 2013, s. 245(5)(a)-(b).
46
percentage of shares in the company as the Central Government may prescribe in the
rules.184 Second, the NCLT is required to consider a number of factors while considering
an application: whether the shareholders are acting in good faith or have any personal
interest in the action, or whether the act or omission involved has been authorised or
ratified by the shareholders.185 Third, frivolous and vexatious actions are discouraged by
conferring the NCLT with the powers to impose costs on the initiating shareholders while
rejecting applications on those grounds.186
In sum, while it is useful that the Companies Act, 2013 expressly provides for
statutory remedies in the form of class actions, it may not automatically result in greater
enforcement of corporate law through increased shareholder actions. One significant
advantage of the Act is that it takes shareholder actions (such as derivative actions)
outside the purview of the court and places them within the jurisdiction of the NCLT,
which, due to its specialised nature, is expected to be more efficient and time-sensitive
than the normal court system. However, with the imposition of significant limitations on
the ability of shareholders to bring an action, it is unlikely that there will be a spate of
such actions against companies. Nevertheless, the recognition of such remedies under
statute will provide some relief to affected minority shareholders.
In concluding this Part, we find that while shareholder activism does influence
corporate governance in several ways, not the least by publicizing governance failures
and drawing attention to specific issues that may be of relevance to the investing
community, we are far from finding any empirical correlation between shareholder
activism and corporate governance. If that link is not clear in developed markets such as
the US with companies that have diffused shareholding, we must accept shareholder
activism in insider economies like India that have controlled companies with some
amount of caution. While it would be rash to argue against activism, its impact must not
be overstated.
D. TCI vs. Coal India: A Mini-Case Study
This instance relates to the corporate dispute that unfolded early-2012 between Coal India
Limited (CIL), a government company that is listed on stock exchanges in India, and The
Children’s Investment Fund Management (UK) LLP (TCI), a hedge fund that held 1%
shares in CIL. The dispute arose because TCI sought that the Indian government’s
intervention in CIL’s affairs must be removed (although the Government held 90% shares
184
Companies Act, 2013, s. 245(3)(i)(a).
185
186
47
in CIL) and that the board must manage the company independently.187 TCI also raised a
number of specific issues regarding the management and governance of CIL. For
example, its grouse was that CIL was refusing to sell products at market prices due to
heavy government influence. Not satisfied with the responses received from CIL, TCI
initiated action against the company and its directors before a Kolkata court,188 and it also
simultaneously issued a notice initiating arbitrations under the provisions of the bilateral
investment treaties (BITs) that India has entered into with the UK and Cyprus.189
Around the world, TCI has a remarkably successful track record in forcing
managements to change their policies in response to its activist stance. However, in India
it was unable to replicate its feat as it decided to exit from its investment in CIL in
October 2014 due to which the legal actions were dropped.190 While this case study
indicates that investors are not hesitant to initiating legal action against companies on
matters relating to corporate governance, it also signifies the difficulties in succeeding in
such actions, including due to the inadequacies of legal remedies for investors in the
Indian context.
VIII. CORPORATE SOCIAL RESPONSIBILITY
Apart from shareholders, corporate law in India takes into account of the interests of
other stakeholders as well. Related to this is the newly introduced requirement of
corporate social responsibility (CSR), which has gained considerable traction. The
concept of social responsibility of corporations is not novel, and has been part of the
indigenous thinking in Indian business.191 After much debate, CSR found its place in the
Companies Act, 2013.
A. CSR Committee and Reporting
Certain types of companies are required to have a Corporate Social Responsibility

Committee (CSR Committee) of the board, which shall consist of at least three directors,
187
Letter dated Mar. 12, 2012 addressed by The Children’s Investment Fund Management (UK) LLP
to the Board of Directors of Coal India Limited.
188
Shine Jacob & N. Sundaresha Subramanian, “TCI sues CIL execs over losses”, Business Standard
(13 October 2012); James Crabtree, “TCI turns up the heat in Coal India dispute”, The Financial Times (13
October 2012).
189
Vidya Ram & Siddhartha P. Saikia, “Coal India issue: Investment fund TCI firm on action;
Ministry sees no need for arbitration”, The Hindu Business Line (29 May 2012).
190
James Crabtree, “Activist TCI drops Coal India campaign and sells stake”, Financial Times (14
October 2014).
191
For example, Mohandas K. Gandhi is credited with the idea of the trusteeship obligations of
businesses. See Colin Mayer, THE FIRM COMMITMENT: WHY THE CORPORATION IS FAILING US AND HOW
TO RESTORE TRUST IN IT (2013).
48
of which one shall be an independent director.192 This requirement is applicable to the
following types of companies:
• Having net worth of Rs. 500 crore or more;

• Having turnover of Rs. 100 crore or more; or
• Having a net profit of Rs. 5 crore or more;
The above requirements are determined with reference to each financial year. The
board’s report must disclose the composition of the CSR Committee. The role of the CSR
Committee consists of the following:
• Formulate and recommend to the board, a CSR Policy, which shall include certain
prescribed activities;
• Recommend the amount of expenditure to be incurred on the activities referred to
above; and
• Monitor the CSR policy from time to time.
Schedule VII of the Companies Act, 2013 lists out the activities that fall within the scope
of CSR. These include eradicating hunger, poverty and malnutrition, promoting
education, promoting gender equality, ensuring environmental sustainability, protection
of national heritage, art and culture, measures for the benefit of armed forces veterans,
training to promote sports and contribution to the Prime Minister’s National Relief Fund
or similar funds. The MCA has clarified that the entries in Schedule VII must be
interpreted liberally so as to capture the essence of the subjects enumerated therein, and
that the items enlisted in the Schedule are broad-based and are intended to cover a wide
range of activities.193
Further details regarding the CSR Committee and CSR Policy are prescribed in
the Companies (Corporate Social Responsibility) Rules, 2013. These Rules essentially
elaborate on the legislative provision and seek to operationalize them with some detail.
They also circumscribe the scope of CSR. First, CSR excludes “activities undertaken in
pursuance of the normal course of business of the company”.194 This appears somewhat
paradoxical in that the companies’ normal business conduct will not be taken into
account for CSR. Second, only CSR spending within India would be recognised under
the Companies Act, 2013.195 This may have some impact on Indian companies having
192
193
Ministry of Corporate Affairs, Government of India, Clarifications with regard to provisions of
Corporate Social Responsibility under section 135 of the Companies Act, 2013, General Circular No.
21/2014 (18 June 2014).
194
Companies (Corporate Social Responsibility) Rules, 2013, r. 4(1).
195
49
international operations, where CSR activities conducted in other jurisdictions would not
be taken into account for purposes of fulfilment of obligations under section 135. Third,
activities which are solely for the benefit of employees or their family members are
excluded from the scope of CSR activity.196 Understandably, this is a measure to ensure
that CSR commitments are more widely discharged, but it undermines the general
principle that employees are a key stakeholder in a company.
In terms of disclosure and reporting, once the board takes into account the
recommendations of the CSR Committee, it shall approve the CSR Policy and disclose
the contents thereof on the company’s website and also in the board’s report.197 The
board shall also ensure that the policy is appropriately implemented.
B. CSR Expenditure
One of the more significant aspects of CSR in India is the requirement for Indian
companies under the Companies Act, 2013 to incur a minimum spending on CSR
matters. The companies that are covered for the purposes of CSR (as indicated in sub-part
1 above) are required to spend in every financial year at least 2% of the average net
profits of the company made during the three immediately preceding financial years in
accordance with this CSR Policy.198 India is one of the only countries to require large
companies to incur such a financial outgo towards CSR matters. During the legislative
process prior to the enactment of the Companies Act, 2013, there was an intense debate
as to whether the spending requirements must be made mandatory, but in the end due to a
compromise the position resulted in a “comply-or-explain” approach although the
wording of the statutory provision largely operates as a mandate.199 While there is
strident criticism against such a broad and overarching CSR policy on various counts, the
requirements are here to stay.200
Some concerns continue to operate on the statutory treatment of CSR in India.

First, the requirement for companies to incur expenditure on CSR activities makes it
more in the nature of corporate philanthropy than social responsibility. Second, it has
been argued that such an expenditure requirement makes it akin to an additional form of
196
197
198
199
Umakanth Varottil, Companies Bill, 2011: CSR, INDIACORPLAW BLOG (Dec. 16, 2011), available
at http://indiacorplaw.blogspot.in/2011/12/companies-bill-2011-csr.html.
200
For a growing literature on CSR in India, see Afra Afsharipour, Directors as Trustees of the
Nation? India's Corporate Governance and Corporate Social Responsibility Reform Efforts, 34 SEATTLE U.
L. REV. 995 (2011); Caroline Van Zile, India's Mandatory Corporate Social Responsibility Proposal:
Creative Capitalism Meets Creative Regulation in the Global Market, 13 ASIAN-PAC. L. & POL'Y J. 269
(2012); Afra Afsharipour & Shruti Rana, The Emergence of New Corporate Social Responsibility Regimes
in China and India, 14 U.C. DAVIS BUS. L.J. (forthcoming, 2014).
50
taxation.201 Third, there is a concern that such a CSR requirement represents the
abdication of state’s responsibilities in favour of the private sector.
Despite these criticisms, the Government remains steadfast in its approach

towards implementing the provisions of the Companies Act, 2013 relating to CSR, and
has even appointed a committee to suggest measures for monitoring the implementation
process.202 Given the sweeping legislative changes brought about in India on CSR, the
developments in India are being closely watched by the rest of the world.
IX. CORPORATE GOVERNANCE IN STATE-OWNED ENTERPRISES203
State-Owned Enterprises (SOEs) form an important part of the industrial and commercial
sectors in India.204 Being substantially owned by the Government, they face business
challenges as well as corporate governance issues that are somewhat unique in nature.
A. The Evolution of SOEs in India
The origin of SOEs can be attributed to the economic policy of the Government of India
immediately following independence. The “mixed economy” model laid tremendous
emphasis on the role of the state in economic development. During this period, several
SOEs were established that continue to operate to date. Subsequently, in the 1960s and
1970s, several industries (primarily banks) were nationalized by the Government, which
also contributed heavily to the SOE pool.
Although SOEs enjoyed limited competition from the private sector during their
initial years, that position substantially changed in 1991 with economic liberalization,
whereby they were exposed to competition from the expanding private sector. In the post-
liberalization phase, the Government followed two parallel strategies in dealing with
SOEs. On the one hand, effort was made towards disinvestment and privatization of
SOEs. While waves of privatizations were attempted, sustained efforts towards that end
were stymied due to political considerations. Hence, on the other hand, the process of
professionalizing SOEs were continued to confer greater freedom and flexibility to their
201
Pratap Bhanu Mehta, “The great armtwist”, Indian Express (29 November 2011).
202
Ministry of Corporate Affairs, Government of India, Constitution of a High Level Committee to
suggest measures for improved monitoring of the implementation of Corporate Social Responsibility
policies by the companies under Section 135 of the Companies Act, 2013, General Circular No. 1 of 2015
(3 February 2015).
203
The discussion in this Part had been adapted from Umakanth Varottil, “Corporate Governance in
State-Owned Enterprises”, NSE Quarterly Briefing No. 9 (April 2015).
204
In India, SOEs are also referred to as public sector enterprises (PSEs) or public sector
undertakings (PSUs).
51
management so as to enable them to compete effectively with the private sector. It is
expected that the privatization process will witness resurgence.
B. Corporate Governance Framework for SOEs
When it comes to governance and management, SOEs are subject to different levels of
regulation. Most SOEs in India are structured as government companies. Hence, they
would be subject to the general principles of corporate law, primarily the Companies Act.
Corporate law in India recognizes the special nature of SOEs and provides certain
dispensations under law. For example, the Government may stipulate that certain
provisions of the Companies Act are not applicable to SOEs.205 Given that the Companies
Act, 2013 introduced stringent measures relating to corporate governance, the standards
applicable to SOEs are similarly enhanced. Where SOEs are established under special
statutes, they are governed by those statutes. SOEs listed on a stock exchange are also
governed by the LODR Regulations, which stipulate the corporate governance norms for
listed companies.
In addition, Central Public Sector Enterprises (CPSEs) are also subject to the
Guidelines on Corporate Governance for CPSEs issued by the Department of Public
Enterprises (DPE), Government of India. These guidelines were introduced on a
voluntary basis in 2007, but were subsequently made mandatory for CPSEs in 2010.206
These guidelines also encompass unlisted CPSEs, which are not covered by the LODR
Regulations. They relate to matters such as board of directors, audit committee,
remuneration committee, subsidiary companies and disclosures.
Finally, SOEs are subject to additional checks and balances that are beyond those
applicable to companies in the private sector. Given that SOEs are substantially owned by
the Government, they are subject to the expansive transparency requirements set out by
the Right to Information Act, 2005, which is a momentous piece of legislation in India.
Similarly, rulings of the Supreme Court of India have unequivocally treated SOEs as
“state” under the Indian Constitution that allows affected persons to institute legal
proceedings against them by way of writ petitions. Hence, SOE decision-making is
subject to review by the court against the touchstone of constitutional principles. The
operations and management of SOEs are also subject to oversight by the Comptroller and
Auditor General and the Central Vigilance Commission.
205
For example, see Ministry of Corporate Affairs, Government of India, Notification G.S.R. 463(E)
(5 June 2015).
206
Department of Public Enterprises, Government of India, Guidelines on Corporate Governance for
Central Public Sector Enterprises (CPSEs) (14 May 2010).
52
All of these demonstrate the rather onerous nature of governance and management
requirements applicable to SOEs.
In terms of management structure, although the Government of India is the owner

of shares in CPSEs, the Ministry that exercises domain over the industry in which the
relevant CPSE operates wields substantial power. Hence, power is overtly concentrated
in the Government, but in practice it is rather diffused due to the several Ministries that
oversee the operation of different CPSEs. The DPE has been established to ensure
coordination among the various Ministries in their actions relating to CPSEs, but it is
only a coordinating body and exercises limited direct powers.
At the same time, the Government has been cognizant of the need to confer
greater powers and flexibility to the CPSEs to manage their businesses and to operate in
markets alongside private sector competition. In the post-liberalization era, CPSEs were
categorized into Maharatna, Navaratna and Miniratna to confer greater autonomy and
flexibility to their managements. CPSEs which are larger, more profitable and whose
securities are listed on the stock exchange enjoy greater autonomy compared to their
smaller and less profitable siblings.
C. Corporate Governance: Issues and Challenges
Indian companies are replete with concentrated shareholding structures due to which
corporate governance is required to address the agency problem between the controlling
shareholders (i.e. promoters) and the minority shareholders. However, even in companies
with concentrated shareholding, the issues may vary according to the precise nature of the
controller. For example, where the controller is a private owner (such as a business
family) with identifiable ownership, the corporate governance concern relates to whether
such a controller can obtain private benefits of control and extract value from the
company to the detriment of the minority shareholders. This occurs through RPTs and
similar methods of tunneling wealth. Corporate governance norms address these types of
conduct through measures that deal with RPTs, such as through a review of the
transaction by an independent committee of directors and obtaining a shareholder vote in
which the interested shareholder cannot participate.
However, when it comes to SOEs, although the state is a controlling shareholder,

its role does not fit within the above paradigm. At one level, the state may be considered
as a single controller, but that notion would be rather superficial. Unlike a single private
controller, the state is not a unitary actor. Different governmental bodies and agencies
may carry differing interests that may be difficult to reconcile. In that sense, the state’s
position could be akin to that of a group of controllers with no coherence in approach.
53
Moreover, the state’s incentives as a controller are likely to be very different from that of
private controllers. The state as a controller is unlikely to indulge in transactions that
benefit it financially. But, other considerations may operate. For example, the state may
pursue transactions that help achieve certain political goals that are detrimental to the
financial interest of the firm (and thereby its minority shareholders). For example, Indian
SOEs have been subject to criticism on the ground that they have sold their products at
less than market price (effectively operating as a subsidy) to achieve political goals of the
state, thereby depriving minority shareholders of wealth maximization through their
investment. Unlike the case of private controllers, the diverse goals and political
considerations surrounding SOEs make it more difficult to regulate from a governance
perspective.
Given the current situation regarding corporate governance of SOEs in India, it is

beyond doubt that there is considerable room for improvement, and much scope for
further reform. It would be imprudent to impose governance norms on SOEs in a manner
similar to private companies. The state is a unique type of shareholder and governance
norms require targeted treatment. International bodies such as the OECD and the World
Bank have issued guidelines for governance of SOEs. While international experience
may be relevant, care must be taken to ensure that any adoption pays attention to the
unique circumstances that prevail in India.
D. SOEs in India: Governance in Practice
The nature of corporate governance problems faced by SOEs in India is evident from
anecdotal evidence through case studies. One episode relates to the lack of compliance by
SOEs of basic corporate governance norms.
After Clause 49 was amended with effect from January 1, 2006 to introduce
stringent board independence requirements for listed companies (including SOEs), a
study found that nearly 13% companies were yet to appoint the minimum number of
independent directors representing a failure to even “check the box”.207 The principal
offenders turned out to be the SOEs and not private sector companies. In a string of cases,
SEBI initiated action against several SOEs for non-compliance with Clause 49. However,
the actions were subsequently dropped by SEBI on the principal ground that in the case
of the government companies involved the articles of association provide for the
appointment of directors by the President of India (as the controlling shareholder), acting
207
N. Balasubramanian, Bernard S. Black & Vikramaditya Khanna, Firm-Level Corporate
Governance in Emerging Markets: A Case Study of India 5-6 (2008), available at
http://ssrn.com/abstract=992529.
54
through the relevant administrative Ministry. SEBI found that despite continuous follow
up by the government companies, the appointments did not take effect due to the need to
follow the requisite process and hence the failure by those companies to comply with
Clause 49 was not deliberate or intentional.
This episode does not augur well for corporate governance in India. Compliance
or otherwise of corporate governance norms by SOEs has an important signaling effect.
Strict adherence to these norms by government companies may persuade others to follow
as well. But, when SOEs violate the norms with impunity, it is bound to trigger negative
consequences in the market place thereby making implementation of corporate
governance norms a more arduous task.
Another episode demonstrates the tension between the public policy

considerations or political goals of the state as a controlling shareholder on the one hand
and the interests of the minority shareholders in SOEs on the other. Several SOEs in the
natural resources sector have been selling their produce at a substantial discount to
international market prices. For example, oil companies were selling at subsidized prices
despite increase in international market prices. Similarly, Coal India Limited was selling
coal to utility companies much below international market price. While these moves
benefited consumers and satisfied political considerations, it was the minority
shareholders who bore the brunt of these decisions by the SOEs. There was effectively a
transfer of value from the minority shareholders to consumers as stakeholders. Arguably,
the boards of these companies were hamstrung as they were operating under the influence
of the Government, and they were unable to protect the interests of the minority
shareholders.208
The lessons from these episodes indicate not only the continued influence of the
government (and its policies) on the decision-making and operations of the SOEs but also
the disregard for minority shareholder interests.
X. CONCLUSION
Over the last decade, giant strides have been taken by the Indian industry as well as SEBI
and other regulatory authorities to enhance the standards of corporate governance in
India. The flurry of regulatory activity during this period is evidence of the emphasis
placed on corporate governance. Globalization and internationalization of capital markets
are said to be driving forces behind this phenomenon, which has resulted in significant
inflows of foreign institutional capital into India.
208
For a discussion on Coal India, see Part VII.D above.
55
Nevertheless, it is hard to conclude that the regime is yet satisfactory. Despite
rapid enhancements of corporate governance norms, Indian industry has not been devoid
of governance failures, with Satyam being the prime example. These instances have
revived a whole new wave of reforms that have culminated with the enactment of the
Companies Act, 2013 and the LODR Regulations, which can be expected to significantly
impact Indian industry in the near term. Greater effort is required to further identify the
problems that are unique to the Indian business context, and to address them through
measures that resonate well with Indian businesses from a range of perspectives,
including economic, social, political and cultural.
It is worthwhile to note that corporate governance extends beyond the legal

sphere, and beyond compliance with rules and regulations. Emphasis ought to be placed
on substance over form. Corporate governance ought not to be confused with mere
“check the box” requirements, but should be imbibed within the corporate culture and
ethos of various business players. Any regulatory effort towards enhancement of
corporate governance should take cognizance of this phenomenon.
*****
56

Corporate Governance in India Law and Practice

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[The final version of this paper has been published as “Corporate Governance” in Linda

CORPORATE GOVERNANCE IN INDIA: LAW AND

Umakanth Varottil* & Richa Naujoks**

The corporate governance regime continues to develop, both in conjunction with

II. BACKGROUND TO CORPORATE GOVERNANCE IN INDIA

A. Corporate Structures and Regulation

The corporate governance regime applicable to an Indian company varies depending

3. Listed Companies: In addition to their regulation under the Companies Act as

In addition to the three categories above, additional corporate governance requirements

The regulatory set-up varies depending on the type of company. Private

Historically, the concept of corporate governance evolved as a measure to address the

However, in India, companies display ownership patterns that are largely

In companies with concentrated shareholding (whether predominantly owed by

A substantial part of the corporate governance provisions under the Companies

The composition requirements additionally provide for specific types of directors:

(i) Executive and Non-Executive Directors: A company must have an optimum

(ii) Independent Directors: Matters pertaining to Board independence have acquired

1. Number of Independent Directors

Type of Company Applicability Number of Independent

In the context of Board independence, the definition of an independent director acquires

An independent director is one who is not a managing director, whole-time

An independent director is one who, in the opinion of the Board, is a person of

In addition, the MCA is entitled to prescribe additional qualifications for independent

3. Nomination and appointment of independent directors

Although independent directors are required to be elected by shareholders, the

4. Tenure and number of directorships

5. Role of independent directors

Guidelines of • Uphold ethical standards of integrity and probity;

Role and functions • Help in bringing an independent judgment to bear on the

Duties • Undertake appropriate induction and updating of skills;

Manner of • To ensure appropriate balance of skills, experience and

Reappointment • To be on the basis of performance evaluation.

Resignation or • The position of an independent director who resigns or is

Separate meetings • Independent directors shall hold a meeting among

Evaluation • Performance evaluation of independent directors shall be

6. Evaluating the Effectiveness of Independent Directors

1. Codification of directors’ duties

• To act in accordance with the articles of association of the company;

• To act in good faith to promote the objects of the company;

• To not be involved in a situation of direct or indirect conflict with the interests of

• To not achieve any undue gain or advantage.

These duties can broadly be classified into two:

(1) duty of care, skill and diligence; and

(2) fiduciary duties.

2. Beneficiaries of directors’ duties

166. Duties of directors.-(1)

While this approach is certainly advantageous from a broader philosophical

Second, there could potentially be conflicts among the interests of various

Finally, even if some of the aforesaid practical considerations can be addressed

Being fiduciaries, directors are exposed to liabilities as a consequence of a breach of their

• Making calls on shareholders in respect of money unpaid on shares;

IV. EXECUTIVE COMPENSATION

The levels of executive compensation in Indian companies cannot be compared to some

Executives/Directors Cap or Limitation Statutory Basis

All managers and Managerial remuneration Section 197(1),

Managing director, whole- Remuneration capped at Section 197(1), proviso

Managing director, whole- Remuneration capped Schedule V, Companies