5 Chapter 2

“Corporate Governance is the application of best management
practices, compliance of law in true letter and spirit and

adherence to ethical standards for effective management and
distribution of wealth and discharge of social responsibility for
sustainable development of all stakeholders.”
The Institute of Company Secretaries of India1
Currently, Corporate Governance is a buzz word in the business and

corporate domain. A company is pondered as a social institution, networking with
society in many ways and touching its citizen’s life. The need to govern these
institutions in a rational manner is the concern of all cognizant citizens-
shareholders, employees, creditors, customers and government. The actual
essence of corporate governance is laid upon the principles of transparency,
accountability, fairness and responsibility. The application of these principles is
universal in nature. The notion may be complex but the principles are basically
simple and direct stimulating a good blend of legislative and ethical framework.
The key secret of corporate governance practice is to set a goal for attaining the
highest standard of
good governance, meticulously pursue it and thereby maximize value for the
shareholder, customers, employees, general public and last but not the least, the
government.2
The last decade of the twentieth century witnessed the opening up of the
Indian economy. The liberalization, privatization and globalization have resulted
in integration of India economy with the world’s economy in terms of product,
capital and labour market. This integration has augmented the spread of
capitalism and made the parameters like demand efficiency, corporate culture,
model code of conduct and business ethics, mandatory for the very survival and
growth of corporations in the world market place. In recent years, there have been
perceptible changes in the corporate ownership on account of the exponential
growth of capital market activities and active monitoring of corporate activities by
the financial institutions. The investors are demanding more transparency in
business operations, adequate and qualitative financial and non-financial
information and more accountability on company board than ever before.
In India, the concept of corporate governance is no longer a fashion

statement. The corporate law in India has concurrently witnessed waves after
waves of changes along with streamlining of relevant rules, regulations, code of
conduct and corporate governance mandate. It has been embedded in the statutes
namely Companies Act, 2013 and SEBI (LODR) Regulation. 2015. The corporate
failures and the rising dissatisfaction with the functioning of the corporations gave
rise to the need of reassuring the stakeholders; as a result, the emphasis was laid
on improving the corporate governance practices. Corporate Governance practices
were desirable from all quarter’s i.e. alert shareholders, cautious customers,
dedicated employees, conversant business associates, regulatory bodies,
Government and to a certain extent by the companies themselves to improve their
image in the eyes of the public3.
This Chapter acquaint about the origination and the enlargements of

corporate governance in India as well as about the brief summary of various
national as well as international committees which assisted the corporate
governance system to elevate in India, It highlights the corporate governance
pattern in different companies, their rules and Regulations. It also underlines how
Indian Regulation has upheld the essences of corporate governance of fairness,
accountability and transparency by restructuring the Regulation on the various
elements such as Board of Directors, Board Committees, policies and Disclosures,
Related party transaction, Whistle-Blower, etc. It establishes the inter-relation
between Compliance Risk and corporate governance. It also elucidates that Indian
corporate governance Regulations focuses on the protection of shareholders as
well as stakeholders rights. It also outlines the nexus between corporate
governance flaws and crime as well as scan the major corporate governance
failures in India.
2.1 HISTORICAL EVOLUTION OF CORPORATE

GOVERNANCE IN INDIA
The concept governance in India can be traced down from the ancient era.
There is a prodigious volume of resemblance in the governance structures of the
ancient kingdoms and modern corporations as is evident from the ancient text and
scriptures like Vedas, Manu Smriti, Somadevaneetistuti, Baharspatya Neetistuti,
Arthashastra etc. which focuses on good governance. All Upanishads, Vedas, and
the Epic Kavyas like Mahabharata, Ramayana and Bhagwad Gita highlight the
spirit of ethics being charted from within, be it Individual or be it the King or be it
the whole kingdom. Further, all religious knowledge or philosophical writing
comprise some evidence on governance.
Ramayana: This famous Grantha carries useful tips on ethics and values,
statecraft and politics, and even general and human resources management. With
Rama Rajya as a model for good governance, and contains comprehensive lessons
on good governance.4
Bhagwad Gita: The Bhagavad Gita emphasized the concept of duty and its
importance for good leadership. In the Bhagavad Gita, Lord Krishna motivates
and encourages leaders who govern to do their duties and not to run away from
the duties as he asserted that leaders should perform their prescribed duty, for
doing so is better than not working.5
Mahabharata: Shanti Parva which is the part of Indian Epic Mahabharata recites
the duties of the ruler, dharma and good governance, as counselled by the dying
Bhishmato Yudhishthira and various Rishis. Shanti Parva recites a theory of
governance and duties of a leader. The Shanti Parva dedicates over 100 chapters
on the duties of a king and rules of proper governance.6
Arthashastra7: Kautilya’s Arthashastra maintains that for good governance, all

administrators, including the king are considered servants of the people. Good
governance and stability are completely linked. If rulers are responsive,
accountable, removable, recallable, there is stability. If not there is instability.
These tenets hold good even today. Kautilya’s fourfold duty of a king–
The substitution of the state with the corporation, the king with the CEO
or the board of a corporation, and the subjects with the shareholders, bring out the
quintessence of corporate governance because central to the concept of corporate
governance is the belief that public good should be ahead of private good and that
the corporation’s resources cannot be used for personal benefit. Raksha – literally
means protection, in the corporate scenario, it can be equated with the risk
management aspect. Vriddhi – literally means growth, in the present-day context
8
126
can be equated to stakeholder value enhancement. Palana – literally means
maintenance/compliance, in the present-day context it can be equated to
compliance with the law in letter and spirit. Yogakshema – literally means well-
being and in Kautilya’s Arthashastra it is used in the context of a social security
system. In the present day context, it can be equated to corporate social
responsibility.
In the present day context, this addresses the ethics aspect of businesses
and the personal ethics of the corporate leaders. Balancing the interests of the
various stakeholders is again at the core of good corporate governance, is
highlighted in the Arthashastra and the other ancient texts. There is no
prescription in the scriptures that the interests of only selected few need to be the
concern of the king. This generic approach to across-the-board welfare of all the
citizens in the kingdom lends credence also to the modern theories of corporate
accountability to a wider group of stakeholders than merely to a single component
thereof comprising shareholders.8
Pre-liberalization
For the period of the preliminary years, Indian associations were destined
by provincial rules and the enormous mainstream of the rules and regulations
took into account the desires and willingness of the British Employers. The
Companies Act was introduced in the year 1866 and was gradually modernized in
1882, 1913 and 1932. Indian Partnership act was announced in the year 1932. The
diverse strategies which were on its concentration were managing office model to
corporate issue as people/business firms went into lawful contract with business
entities. It was categorized by mishandling/abuse of duties by managing expert on
account of
126
Chapter II: Unearthing The Aggrandizement Of Corporate
Governance In India: - Legislative Framework
dispersed proprietorship. The matters of benefit age and control were run down
prompting different clashes.9
The 1960s was a period of establishing up of modern events and cost in

addition to administration. The foundation was the interest for a lot of items for
which the Government controlled Fair Prices. This was the era when the Tariff
Commission and the Bureau of Industrial Costs and Prices were established by the
Government 1951 – India's development Regulation Act 1956 – Companies Act,
1956 came into the picture. Banking and development institutions were founded.
The phase between the '70s to mid-eighties was a time of Cost, Volume and Profit
examination, as a basic piece of the Cost Accounting capacity.10
Post Liberalization
The era of liberalization, privatization and globalization, transported with
it the difficulties related to governance practices in companies which were
encountered worldwide. Post-independence Indian governance practices were
taken on from the English legal system but there was an absence of appropriate
execution of those practices. The existing governance structure is the aftermath of
many intellectual and debates at the international and national level.
In India liberalization initiated in the year 1991 which lead to widespread

elongating modifications in both law and Regulations. Later liberalization, the
formation of the Securities and Exchange Board of India (1992) was an
outstanding improvement in the pitch of corporate governance and protection of
the minority investors’ rights. The notable work was made by the CII
(Confederation of Indian Industry Code) for enlargement of governance practices
and recommendations for elevation and modification regarding the same.
Countless committees were shaped
9
See, Ojha, Yogendra “Legal framework in corporate governance in India” Volume 3; Issue 2,
10
Ibid
127
International Journal of Advanced Research and Development; Page No. 994-998 (March
2018)
10
Ibid
128
to develop the governance pattern for Indian companies that still forms the spine of
corporate law in India.11
2.2 ENLARGEMENT OF CORPORATE GOVERNANCE IN

INDIA
As it is discussed in the above, the governance concept is not fresh to
India. The era of liberalization, privatization, and globalization have flourished
the corporate sector in India. The intensification progress of the corporate sector
has commanded a legal regime to govern such entities in India. Keeping pace with
the world, India has also developed a corporate governance regime through the
application and adoption of various national as well as the international
committee, reports, etc. which are been discussed below in detail.
2.2.1 Remarkable Footprint of International Corporate Governance Codes

in Building the Present Indian Corporate Governance Regime.
It is important to first discuss the international codes because these have a

noteworthy impact on the development of the present legal regime on corporate
governance in India. There are numerous national committees which were
constituted on the lines of these international codes.
2.2.1.1. Cadbury Committee (1992)12 (UK)

This report is considered as the “Magna Carta” of Corporate Governance.
The Committee on the Financial Aspects of Corporate Governance under the
chairmanship of Sir Adrian Cadbury was set up in May 1991 by the Financial
Reporting Council, the Stock Exchange and the accountancy profession in
response to continuing concern about standards of financial reporting and
accountability, particularly in light of the BCCI and Maxwell cases. The
Committee submitted its report in 1992 and developed a set of principles of
good corporate governance
11
Ibid
12
Cadbury Report, 1992 available on:
129
https://ecgi.global/sites/default/files/codes/documents/cadbury.pdf Visited on Nov 15, 2019
130
which were incorporated into the London Stock Exchange (LSE)’s Listing Rules.
It also introduced the principle of ‘comply or explain’. It made the following three
basic recommendations:
 The CEO and Chairman of companies should be separated;

 Boards should have at least three non-executive directors, two of whom
should have no financial or personal ties to executives;
 Each board should have an audit committee composed of non-executive
directors.
2.2.1.2. Greenbury Report (1995)13 (UK)

The Confederation of British Industry constituted a group under the
chairmanship of Sir Richard Greenbury to make recommendations on Directors’
Remuneration. The group submitted its report in 1995, its major findings were as
under:
 Constitution of a Remuneration Committee comprising of Non-Executive

Directors
 Responsibility of this committee in determining the remuneration of CEO
and executive directors
 Responsibility of the committee in determining the remuneration policy.
 Level of disclosure to shareholders regarding the remuneration of directors’.
 Remuneration should be linked more explicitly to performance.
These findings were incorporated in the Code of Best Practice on

Directors’ Remuneration of the Report. The majority of the recommendations
were incorporated in the Listing Rules of London Stock Exchange.
13
Greenbury Report, 1955 available on: https://ecgi.global/download/file/fid/9446 Visited on
Nov 15th, 2019
131
2.2.1.3. Hampel Report (1998)14 (UK)

The Hampel Committee was established in November, 1995 to review and
revise the earlier recommendations of the Cadbury and Greenbury Committees.
An important development was in the area of accountability and audit. The Board
was identified as having the responsibility to maintain a sound system of internal
control, thereby safeguarding shareholders’ investments. Further, the Board was
to be held accountable for all aspects of risk management. Recommendations of
this Report and further consultations by the London Stock Exchange became the
Combined Code on Corporate Governance. Hampel Committee laid down 17
principles of corporate governance.Summary of the important recommendations
of the Hampel Committee is:
 Good corporate governance should be principle-based not prescriptive

rules-based. It should not be a 'box-ticking exercise'
 Compliance with the principles of sound corporate governance should be
flexible relevant to each company's circumstances.
 Companies in their annual reports should explain how the broad principles
of corporate governance have been applied and explain the departure from
the best practice.
 The board of directors should include a balance of executive and non-
executive directors.
The majority of non-executive directors should be independent directors.
The roles of chairman and chief executive should be separate. Where these
roles are combined in one individual, a senior independent director be
identified to whom concerns may be conveyed. The board should be
accountable to the shareholders of the company.
14
Hampel Report, 1998 available on:
https://ecgi.global/sites/default/files/codes/documents/hampel.pdf Visited on Nov 15th, 2019
132
 Companies should set up the nomination committee to ensure that there is

a formal and transparent procedure for the appointment of new directors to
the board.
 The remuneration committee should consist of independent directors only.
The company should establish a formal procedure for developing policy
on executive remuneration and that policy be disclosed in the annual
report of the company.
 Companies should establish audit committees of at least 3 non-executive
directors two of which should be independent directors.
 Institutional shareholders have a responsibility to make considered use of
their votes.
 The external auditors should independently report to the shareholders.
2.2.1.4. Combined Code Corporate Governance (1998)15 (UK)

The recommendations Of the Cadbury, Greenbury and Hampel
Committees were consolidated in 1998 into the Combined Code of the UK. The
Combined Code is appended to the listing rules of the London Stock Exchange.
The Code applies to all companies incorporated in the UK and listed on the
London Stock Exchange. Those companies are required to report on their annual
reports show they have complied with the principles of the Code. The deviations
from the Code are required to be explained in the report. Failure to do so could
lead to punitive action from the Exchange including de-listing from the Exchange.
The Combined Code 1998 is self-regulatory, linked through the comply,

and explain' statement. The code consists of two parts: Part 1 contains the
•Principles of Good Governance"; Part 2 contains the ‘Code of Best Practice'. The
Code establishes main and specific principles of corporate governance, dealing
with four broad areas: directors and the board; remuneration of directors;
15
Combined Code Corporate Governance, 1998, available on:
https://www.frc.org.uk/getattachment/53db5ec9-810b-4e22-9ca2-99b116c3bc49/Combined-
Code-1998.pdf Visited on Nov 15th, 2019
133
accountability and audit; and the relationship with shareholders. Each area of the
code establishes principles and guidelines for the companies that come under its
rule. There has been a continuous revision of the Combined Code on Corporate
Governance.
According to the Code, the Chairman of the board should be seen as the
“leader” of the non-executive directors; institutional investors should be
responsible to make considered use of their vote, and all kinds of remuneration
including pensions should be disclosed.
2.2.1.5. The Blue Ribbon Committee (1999)16 (USA)

The Blue Ribbon Committee was set by the Securities Exchange
Commission, New York Stock Exchange, and the National Association of
Securities Dealers on 6th October 1998. The committee was headed by John
Whitehead and Ira Millstein. It submitted its report on Improving the
Effectiveness of Corporate Audit Committees in the year 1999. The
recommendations of the Blue Ribbon Committee report are mainly contributory
to strengthen the audit committee’s role in controlling unlawful financial and
auditing practices in US companies. The 10 point Recommendations of the Blue
Ribbon Committee
 Revise the definition of an independent director.

 Require an independent audit committee.
 Mandate written charter detailing responsibilities and duties.
 Mandate minimum audit committee size and increased financial literacy.
 Mandate Annual Public Disclosure of Audit Committee Activities.
 Clarify Oversight Responsibility for Outside Auditors.
 Mandate Discussion with Outside Auditor Regarding Independence.
 Require Outside Auditor to Discuss Quality of Financial Reporting with
the Audit Committee.
16
The Blue Ribbon Committee, available on:
134
https://www.sec.gov/news/press/pressarchive/1999/99-14.txt Visited on Nov 19th, 2019.
135
 Require Audit Committee Annual Letter to Shareholders
2.2.1.6. Sarbanes – Oxley Act. 200217 (USA)

The Act made fundamental changes in virtually every aspect of corporate
governance in general and auditor independence, conflict of interests, corporate
responsibility, enhanced financial disclosures, and severe penalties for willful
default by managers and auditors, in particular.
The summary highlights of the most important Sarbanes-Oxley sections for

compliance are listed below.
 SOX Section 302 – Corporate Responsibility for Financial Reports

 SOX Section 401: Disclosures in Periodic Reports
 SOX Section 404: Management Assessment of Internal Controls
 SOX Section 409: Real-Time Issuer Disclosures
 SOX Section 802 Criminal Penalties for Altering Documents
 SOX Section 806 – Protection for Employees of Publicly Traded
Companies Who Provide Evidence of Fraud
 SOX Section 902 – Attempts & Conspiracies to Commit Fraud Offenses
 SOX Section 906 – Corporate Responsibility for Financial Reports
2.2.1.7. OECD Principles of Corporate Governance (1999)18

The Organisation for Economic Cooperation and Development (OECD) is
one of the earliest non- governmental organisations to offer a global set of
principles of corporate governance. The OECD Principles of Corporate
Governance are developed in the aftermath Of the Asian Crisis in 1997. These
were endorsed by OECD Ministers in 1999 and have since become an
international
17
Sarbanes – Oxley Act, 2002 available on : http://www.soxlaw.com/ Visited on Nov 19th, 2019
18
OECD Principles of Corporate Governance, available on:
https://www.oecd.org/daf/ca/Corporate-Governance-Principles-ENG.pdf Visited on Nov
29th, 2019; See also Kumar Anil, Gupta Lovleen, et al., ‘Auditing and Corporate
136
Governance’
p. 151-181 (Taxmann, New Delhi, 3rd Edition/ December 2019)
137
benchmark for policymakers, investors, corporations, and other stakeholders

worldwide.
OECD Principles have advanced the corporate governance agenda and

provided specific guidance for legislative and regulatory initiatives in both OECD
and non-OECD countries. An important feature of the Principles is that they do
not explicitly require responsibility for implementation. Rather they are intended
to serve as a reference point to be used by policymakers and market participants
as they develop their own practices/codes.
The Principles were originally developed by the OECD in 1999 and

further updated in 2004. Following the request by the G20 Finance Ministers and
Central Bank Governors a draft of the revised Principles was presented and
discussed at the G20/OECD Corporate Governance Forum. The updated
G20/OECD Principles of Corporate Governance (the Principles) therefore provide
a very timely and tangible contribution to the G20 priority in 2015 to support
investment as a powerful driver of growth.
The Principles provide guidance through recommendations and

annotations across six chapters.
 Ensuring the basis for an effective corporate governance framework

 The rights and equitable treatment of shareholders and key ownership
functions
 Institutional investors, stock markets, and other intermediaries
 The role of stakeholders in corporate governance
 Disclosure and transparency
 The responsibilities of the board
OECD Principles offer a global set of principles of corporate governance

that serve the purpose of serving as a benchmark for policymakers. Since the
OECD
138
principles were agreed, codes and review committees on corporate governance

have proliferated in a number of countries of the world. The legal and regulatory
reforms in OECD member countries appear to be heading in the direction of
implementing the OECD Principles to produce a cost-effective fair and
transparent system that would balance the interest of business with those of
shareholders, creditors and others to improve the competitiveness of the business
and greater protection for investors. The OECD study, has, in fact, unified the
finest practice from all chief economies. It supports shareholder value as being the
accepted objective of the business. It also identifies the requirement to be
receptive to the demands and expectations of other stakeholders. The report also
stresses that the governments should have a diverse and central obligation in
framing a regulatory framework. It endorses additional efforts to inspire member
nations to create an empowering regulatory framework to support the
improvement of corporate governance.
2.2.2. National Initiatives in Building the Present Indian Corporate

Governance Regime.
The journey of governance can be trace down in India from the ancient
era. The Indian system to adopt governance trends for corporate was greatly
influenced by the ancient scripture as well as international codes. The visibility
for a proper governance system for corporates is highlighted under various
reports, acts, etc. which are discussed below.
2.2.2.1. Constitutional Mandate for Corporate Governance19

India is a welfare state and the constitution states the words, "We the
people of India". The corporate body is an instrument of the state. State wheels
the companies through the construction of rules and regulations. The government
is a significant managing body of corporate governance. The Directive Principles
of State policy which are stated in part IV of the Indian constitution aids to
answer
139
19
The Constitution of India, available at http://legislative.gov.in/sites/default/files/COI-
updated.pdf Visited Nov. 20th, 2019
140
certain social and economic goals for instant achievement by bringing about a
non- violent social revolution. Article 38 to Article 43 of the Indian Constitution
which highlights the socialist principles which are followed.
The views of democratic socialism are fabricated on an entire idea of

society. The steps were taken by the Government of India in 1991, designed at
economic liberalization, privatization, and globalization of the national economy
led India to employee restructuring process in order to befittingly answer to the
improvements happening world over. Indian viewpoint to advance the notion of
corporate governance was kick-started due to the enlargement of the importance
of corporate governance internationally.
2.2.2.2. The Companies Act, 195620

The Companies Act, 1956 was legislated with a view to unite and amend
the law relating to companies and certain other associations. Since its origin, the
Act has been amended numerous times to keep pace with the altering business and
economic situation, appearance of professionalism and spread of portfolio
awareness, etc. In the early 1990s, a necessity was felt to synchronize the
Companies Act with the developments taking place the world over to put in place
a standardized regulatory framework for the growth of Indian Corporate sector
Three unsuccessful attempts were made in 1993, 1997 and then in 2003 to rewrite
the company law. Companies (Amendment) Bill, 2003 which contained several
important provisions relating to corporate governance was withdrawn by the
Government in anticipation of another comprehensive review of the law. As many
as 24 amendments to this Act were made since 1956, of which the amendments
pertaining to corporate governance and corporate sector development through the
20
The Companies Act, 1956, available at:
https://www.mca.gov.in/Ministry/pdf/Companies_Act_1956_13jun2011.pdf Visited Nov.
23th, 2019
141
Companies (Amendments) Act, 199921, the Companies (Amendment) Act, 200022

and the Companies (Amendment) Act, 200123.
2.2.2.3. Securities Contract Regulation Act, 195624

It covers all types of tradable government paper, shares, stocks, bonds,
debentures, and other forms of marketable securities issued by companies. The
SCRA defines the parameters of conduct of stock exchanges as well as its powers.
2.2.2.4. Securities and Exchange Board of India Act (1992)25 (SEBI, Act)
This Act was enacted to protect the interests of investors in securities and
to promote the development of, and to regulate, the securities market and for
matters connected therewith or incidental thereto. It also prohibits fraudulent and
unfair trade practices relating to the securities market, promoting investor
education and training of intermediaries of the securities market, regulating the
substantial acquisition of shares and takeovers of companies, and also promotes
and regulates self-regulatory organizations. Accordingly, the Securities and
Exchange Board of India (SEBI) has made several efforts with a view to
evaluate the adequacy of
21
Buy back of shares (Section 77A), Issue of sweat equity shares (Section 79A), Establishment
of investor education and protection fund (Section 205(c)), Liberalization of Inter-corporate
loans and investment norms.
22
Penalties increased by almost ten times for non-compliance in various Sections of the Act:
Issue of shares with differential rights (Section 86), Passing of resolutions by postal ballot
(Section 192A), Directors' Responsibility Statement (Section 217(2AA)), Additional powers
and duties of auditors (Section 227), Minimum number of directors including election of
small shareholders' director (Section 252), Maximum number of directorships in companies
reduced from 20 to 15 (Section 275), Audit Committee (Section 292A)
23
Some of the amendments to the Companies Act which are remarkable and have a direct
bearing on improvement in the standards of corporate governance are explained: Passing of
resolution by Postal Ballot (Section 192A) Instead of transacting the business in the general
meeting, public listed company, resolutions relating to such business as the central
government may, by notification, declare to be conducted only by Postal Ballot, The
company when decides to pass resolution by postal ballot, it shall send a notice to all
shareholders by registered post, If a resolution requires requisites majority of the
shareholders by means of postal ballot, it shall be deemed to have been duly passed at a
general meeting convened in that behalf, Under Directors' Responsibility Statement
(217(2AA)) Section, the board's report shall include a 'Directors' Responsibility Statement'.
24
Securities Contract Regulation Act, 1956 available at
https://www.sebi.gov.in/acts/contractact.pdf Visited on Nov 20th 2019
142
25
SEBI Act, 1992 available at
https://www.sebi.gov.in/sebi_data/attachdocs/1456380272563.pdf Visited on Nov. 20th 2019
143
existing corporate governance practices in the country and further improve these
practices
2.2.2.5. The Confederation of Indian Industry (CII) Code (1998)26

Considering the importance of the Cadbury Committee Report of the UK,
the CII took a special initiative on Corporate Governance, the first institution
initiative in Indian Industry. The objective was to develop and promote a code for
Corporate Governance to be adopted and followed by Indian companies, whether
in the Private Sector, the Public Sector, Banks or Financial Institutions, all of
which are corporate entities. The final draft of the said Code was widely
circulated in 1997. In April 1998, the Code was released. It was called Desirable
Corporate Governance: A Code. The CII came out with major recommendations,
which were desirable and voluntary in nature. Some of the illustrious
recommendations are as follows27:
 Emphasized on higher involvement of Non-executive directors and well-

defined responsibilities.
 Suggested restriction on directorship.
 Introduction of competent Independent Non-executive directors in listed
companies and Chairman is non-executive.
 Mandatory setup of the Audit Committee
 Major Indian stock exchanges should generally insist on a compliance
certificate, signed by the CEO and the CFO.
26
Desirable Corporate Governance: A Code, available at:
http://www.nfcg.in/UserFiles/ciicode.pdf Visited on Nov. 25th ,2019
27
See, Dr. Padhi Nayantara and Dr. Vagrecha Kamal. ”A Study on Corporate Governance
Practices of Indian Financial Sector Companies” , 16-17 (2017, Research Project Supported
by National Foundation for Corporate Governance (NFCG), School of Management Studies,
(IGNOU), New Delhi) available on
http://www.nfcgindia.org/pdf/Final%20NFCG%20Project%20Report-20072017.pdf Visited
on Nov 25th,2019
144
2.2.2.6. The Kumar Mangalam Birla Committee (2000)28

The desirable code of CII was well responded by the corporate sector as
some of the progressive companies adopted it. This initiated a contextual debate
on voluntary vs. mandatory approach on corporate governance, as it was felt that
under Indian conditions a statutory code would be more meaningful over
voluntary code. Consequently, the second major initiative was undertaken by
SEBI, by setting up a committee headed by Kumar Mangalam Birla in 1999, with
an objective of promoting and raising the standards of corporate governance. The
Committee in its report observed “strong Corporate Governance is indispensable
to a resilient and vibrant capital market and is an important instrument of investor
protection. It is the blood that fills the veins of transparent corporate disclosure
and high-quality accounting practices. It is the muscle that moves a viable and
accessible financial reporting structure”. The committee had two segments of
recommendations one mandatory recommendation and second non-mandatory
recommendations29.
 The focus of mandatory recommendation was improving in the quality of

financial reporting through its disclosures; making Audit Committee more
responsible; adoption of formal code of conduct by the Board; and inclusion
of business risks in the annual report, etc.
 Non-mandatory recommendation emphasized on the whistleblower,
evaluating the performance of non-executive directors and board members
training, etc. During 2000, SEBI Board accepted and ratified the key
recommendations of the Kumar Mangalam Committee and incorporated into
Clause – 49 of the Listing Agreement of the Stock Exchanges. The
recommendations were applicable on all listed companies having paid-up
capital of over Rs. 3 crore or net worth of over Rs.25 crore at any given
point of time. Adoption of these
145
28
Report of the Kumar Mangalam Birla Committee on Corporate Governance, available on
http://www.nfcg.in/UserFiles/kumarmbirla1999.pdf, Visited on Nov 25th 2019
29
Dr. Padhi Nayantara and Dr. Vagrecha, Supra Note, 27 at 17
146
recommendations was ultimately the responsibility of the Board of Directors of

these listed companies.
2.2.2.7. Clause 49 of SEBI Listing Agreement (2000)30

As a major step towards codifying the corporate governance norms, SEBI
enshrined Clause 49 in the Equity Listing Agreement (2000), which now serves as
a standard of corporate governance in India. With clause 49 was born the
requirement that half the directors on a listed company’s board must be
Independent Directors. In the same clause, the SEBI had put forward the
responsibilities of the Audit Committee, which was to have a majority
Independent Directors. Clause 49 of the Listing Agreement applies to companies
that wish to get themselves listed in the stock exchanges. This clause has both
mandatory and non-mandatory provisions.
Key Mandatory provisions are as follows: Composition of Board and its

procedure – frequency of meeting, number of independent directors, code of
conduct for Board of directors and senior management; Audit Committee, its
composition, and role, Provision relating to Subsidiary Companies, Disclosure to
Audit committee, Board and the Shareholders, CEO/CFO certification, Quarterly
report on corporate governance, Annual compliance certificate.
Key Non-mandatory provisions include the following: Constitution of

Remuneration Committee, Training of Board members, Peer evaluation of Board
members, Whistle Blower policy. In 2014, the clause 49 was amended to include
Whistleblower policy as mandatory provision.
30
Clause 49 of SEBI Listing Agreement (2000), available on
https://www.sebi.gov.in/legal/circulars/oct-2004/corporate-governance-in-listed-companies-
clause-49-of-the-listing-agreement_13153.html, visited on No. 25th,2019
147
2.2.2.8. The Report of Task Force on Corporate Excellence (2000)31

The Department of Corporate Affairs (DCA) constituted a study group
under the chairmanship of Dr P.L. Sanjeev Reddy, (Secretary, DCA) in May
2000, with a key task of examining ways to “operationalize the concept of
corporate excellence on a sustained basis” so as to “sharpen India’s global
competitive edge and to further develop a corporate culture in the country”. In
November 2000, the task force made various recommendations containing a range
of initiatives for raising governance standards. Amongst many, some of the major
recommendations are as follows:
 Higher delineation of independence criteria and minimization of interest-

conflict potential.
 Directorial commitment and accountability through fewer and more focused
board and committee membership.
 Meaningful and transparent accounting and reporting, improved annual report
along with more detailed filing with regulatory authorities, and greater
facilitation for informed participation using the advances in converging
information and communications technologies.
 Setting up of an independent, Autonomous Centre for Corporate Excellence to
accord accreditation and promote policy research and studies, training and
education, etc., in the field of corporate excellence through improved
corporate governance.
 Clear distinction between two basic components of governance in terms of
policymaking and oversight responsibilities of the board of directors, and the
executive and implementation responsibilities of corporate management
comprising of the managing director and his or her team of executives
including functional directors.32
31
The Report of Task Force on Corporate Excellence (2000), available on
https://www.mca.gov.in/Ministry/latestnews/Draft_Report_NareshChandra_CII.pdf, visited
on Nov 25th,2019
32
Dr. Padhi Nayantara and Dr. Vagrecha, Supra Note, 27 at 17-18
148
2.2.2.9. The Naresh Chandra Committee (2002)33

The Enron debacle of 2001 involving the hand-in-glove relationship
between the auditor and the corporate client, the scams involving the fall of the
corporate giants in the U.S. like the WorldCom, Qwest, Global Crossing, Xerox
and the consequent enactment of the stringent Sarbanes Oxley Act in the U.S.
were some important factors which led the Indian Government to wake up and in
the year 2002, Naresh Chandra Committee was appointed to examine and
recommend inter alia amendments to the law involving the auditor-client
relationships and the role of independent directors.34
Recommendations of the committee include at least 50% Independent

Director in the Board, the rotation of audit partner at every 5 years, Audit
Committee to set up with members from Independent Directors only, and
restriction of certain professional assignments for the auditors. In July 2003, Shri
Naresh Chandra was also assigned another key committee on small private
companies and limited liability partnership with an objective to remove the
bottlenecks in the existing legal framework being faced by these legal entities. 35
2.2.2.10 The Narayana Murthy Committee (2003)36

In the year 2002, SEBI analyzed the statistics of compliance with clause
49 by listed companies and felt that there was a need to look beyond the mere
systems and procedures if corporate governance was to be made effective in
protecting the interest of investors. SEBI, therefore, constituted a Committee
under the Chairmanship of Shri N. R. Narayana Murthy, for reviewing the
implementation of
33
The Naresh Chandra Committee (2002), available on
https://www.mca.gov.in/Ministry/latestnews/Draft_Report_NareshChandra_CII.pdf visited
on Nov. 25th,2019
34
See, The Institute Of Company Secretaries of India, Professional Programme Governance,
Risk Management, Compliances and Ethics 34 (M.P. Printers, New Delhi, June 2019)
35
36
The Narayana Murthy Committee (2003), available on
https://www.sebi.gov.in/reports/reports/mar-2003/the-report-of-shri-n-r-narayana-murthy-
149
committee-on-corporate-governance-for-public-comments-_12986.html, Visited on Nov 25th,

2019
150
the corporate governance code by listed companies and for the issue of revised
clause 49 based on its recommendations.37
This way, the committee had to work deeply to study seven important
parameters, which include, ease of implementation, transparency, verification,
importance, accountability, enforcement, and fairness. The Committee came out
with strong recommendations to enhance transparency. Key recommendations
related to independent directors, related party transactions, audit committees, risk
management, audit reports, directorships, codes of conduct, director
compensation, and financial disclosures.38
2.2.2.11 The J.J. Irani Committee (2005)39

The Government constituted a committee under the Chairmanship of Dr J.
J. Irani, Director, Tata Sons, with the task of advising the Government on the
proposed revisions to the Companies Act, 1956 with the objective to have a
simplified compact law that would be able to address the changes taking place in
the national and international scenario, enable adoption of internationally
accepted best practices as well as provide adequate flexibility for timely evolution
of new arrangements in response to the requirements of ever-changing business
models.40
The Committee recommended that effective measures be initiated for

protecting the interests of stakeholders and investors, including small investors,
through a legal basis for sound corporate governance practices. With a view to
protect the interest of various stakeholders, the Committee also recommended the
constitution of a “Stakeholders’ Relationship Committee” and provision of duties
of directors in the Act with civil consequences for non-performance.41
37
The Institute Of Company Secretaries of India, Supra Note 1 at 34
38
39
The J.J. Irani Committee, available on http://reports.mca.gov.in/Reports/23-
Irani%20committee%20report%20of%20the%20expert%20committee%20on%20Company
%20law,2005.pdf, visited on Nov 25th, 2019
40
The Institute Of Company Secretaries of India, Supra Note 1 at 34-35
151
41
Ibid
152
It is significant to mention here that in spite of various recommendations

made by the above Committees on corporate governance, the Committees
retained stillness on two foremost issues on corporate governance. They are:
a) Chairman and CEO duality (particularly in regard to separation of these

two posts, and
b) Appointment of the nomination committee.
2.2.2.12. National Foundation for Corporate Governance (2009)42

Recently, the Ministry of Company Affairs has decided to have an
umbrella agency of corporate governance which will set non-binding standards in
line with the principles developed by the Organization for Economic Co-operation
and Development (OECD). Inspired by the industry recommendations, the MCA,
in late 2009, released a set of voluntary guidelines on corporate governance. The
Guidelines were derived out of the unique challenges of the Indian economy and
took cognizance of the fact that all agencies need to collaborate together, to
ensure that businesses flourish, even as they contribute to the wholesome and
inclusive development of the country. The Guidelines emphasized that
responsible businesses alone will be able to help India meet its ambitious goal of
inclusive and sustainable all-round development. It urged businesses to embrace
the “triple- bottom-line” approach whereby their financial performance could be
harmonized with the expectations of society, the environment, and the many
stakeholders in a sustainable manner.43
42
National Foundation For Corporate Governance, available on
https://www.mca.gov.in/Ministry/latestnews/CG_Voluntary_Guidelines_2009_24dec2009.p
df, visited on Nov 26th, 2019
43
153
2.2.2.13. NASSCOM Recommendations (2010)44

Corporate Governance and Ethics Committee of the National Association
of Software and Services Companies (NASSCOM) issued recommendations in
mid-2010, focusing on the stakeholders of the company.
2.2.2.14. Shri Adi Godrej Committee (2012)45

The Ministry of Corporate Affairs constituted a Committee to formulate a
Policy Document on Corporate Governance under the chairmanship of Mr. Adi
Godrej with the President ICSI as Member Secretary/ Convener. The Policy
Document sought to synthesize the disparate elements in the diverse guidelines,
draw on innovative best practices adopted by specific companies, incorporate
current international trends and anticipate emerging demands on corporate
governance in enterprises in various classes and scale of operations. The Adi
Godrej Committee submitted its report which was articulated in the form of 17
Guiding Principles of Corporate Governance.46 The committee has given a
broader outline of various areas. Some of the highlighted issues are listed below:47
 Ensuring that a board functions effectively

 Focus on two primary dimensions of corporate governance that need to be
“balance act”, conformity (i.e. with laws, codes, structures and roles) and
performance.
 Significant “Board composition and diversity” needing to balance diverging
stakeholder interests. Criteria for ensuring diversity (including gender
diversity) on boards.
 To adopt a more professional, independent and transparent approach in the
“selection process” for appointing independent directors.
44
NASSCOM Recommendations, available on
https://www.excellenceenablers.com/pdf/NASSCOM-Corporate-Governance-and-Ethics-
Report.pdf, visited on Nov. 27th, 2019
45
Shri Adi Godrej Committee, available on http://www.nfcgindia.org/pdf/Guiding-Principles-
of-CG.pdf, visited on Nov. 27th, 2019
46
47
154
 Appointment of “lead director”

 “Continuing Board Training and Education”
 Other important issues including “Maintaining Board Confidentiality,
Succession Planning, Risk Management, Effective Crisis Management,
whistle Blower policy and Investor Activism” 2017
2.1.2.15. The Companies Act, 201348

The Companies Act, 2013 envisaged radical changes in the sphere of
Corporate Governance in India. It provided a major overhaul in Corporate
Governance norms and would have far-reaching implications on the manner in
which corporate operates in India in the coming times. The new Companies Act is
a historic piece of legislation aimed at improving transparency and accountability
in India's corporate sector. The Act provides the country with modern legislation
for the regulation of the corporate sector in India. The Act, amongst other aspects,
provides for business-friendly corporate Regulation, pro-business initiatives, e-
governance initiatives, good corporate governance, Corporate Social
Responsibility (CSR), enhanced disclosure norms and accountability of
management, stricter enforcement, audit accountability, protection for minority
shareholders, investor protection and activism and a better framework for
insolvency regulation and institutional structure. The Act is administered by the
Ministry of Company Affairs (MCA) and enforced by the National Company Law
Tribunal (NCLT) and the Special Courts.
2.2.2.16. SEBI (Listing Obligations and Disclosure Requirements) Regulations

(2015)49
With a view to consolidate and streamline the provisions of existing listing
agreements for different segments of the capital market and the provisions
48
Companies Act, 2013 available on
https://www.mca.gov.in/Ministry/pdf/CompaniesAct2013.pdf, visited on Nov 27th, 2019
49
SEBI (Listing Obligations And Disclosure Requirements) Regulations,2015, available on
https://www.sebi.gov.in/sebi_data/attachdocs/1441284401427.pdf, Visited on Nov. 27th 2019
155
pertaining to listed entities with the Companies Act, 2013, the SEBI notified SEBI
(Listing Obligations and Disclosure Requirements) Regulations, 2015 for the
listed entities having listed designated securities on recognized stock exchanges.
The provisions of Corporate Governance in SEBI (LODR) Regulations, 2015 are
discussed at relevant places in this study material.50
2.2.2.17 The Companies (Amendment) Act, 2017 51 – Key Changes For

Corporate Governance in India
In India, the Companies Act, 2013 regulates the incorporation of a
company, responsibilities of a company and its directors, and the dissolution of a
company. The 2017 Amendment Act consists of 93 amendments to the 2013
Companies Act, resulting in changes related to legal definitions, corporate
governance, and management compliance. It impacts different aspects of business
management in India, including key structuring, disclosure, and compliance
requirements. The Amendment Act also irons out existing policy inconsistencies
between financial regulatory mechanisms, such as the Securities and Exchange
Board of India (SEBI) and the Reserve Bank of India (RBI).
The key Changes Highlighted in the 2017 Companies (Amendment) Act:

Expansion of the Term ‘Related Party’ Definition of a Subsidiary Company,
Definition of Associate Company Simplification of the Private Placement
Process, Definition of Independent Directors: Simplification of Company
Incorporation, Remuneration to Management, Financial Statements and Annual
Returns, Ratification of Auditors and Audit Committee, Loans to Directors and
Employees etc.
50
51
The Companies (Amendment) Act, 2017, available on http://www.nfcg.in/UserFiles/THE-
COMPANIES-AMENDMENT-ACT-2017.pdf, Visited on Nov. 27th 2019
156
2.2.2.18. Uday Kotak Committee (2017)52

The SEBI Committee on corporate governance was formed in June 2017
under the Chairmanship of Mr. Uday Kotak. With the aim of improving standards
of Corporate Governance of listed companies in India, the Committee was
requested to make recommendations to SEBI on the different issues for improving
governance in the corporate body. On March 27, 2018, SEBI, after detailed
consideration and due deliberation, accepted several recommendations of the
Kotak Committee without any modifications and accepted a few other
recommendations with certain modifications as to timelines for implementation,
applicability thresholds among others. Some of the major changes accepted relate
to: Increasing Transparency -Enhanced Disclosure Requirements, Disclosure of
Utilization of Funds from Qualified Institutional Placement (QIP) /Preferential
Issues, Disclosures of Auditor Credentials, Audit Fee, Reasons for Resignation of
Auditors, Disclosure of Expertise/Skills of Directors, Enhanced Disclosure of
Related Party Transactions (RPT)-A, Mandatory Disclosure of Consolidated
Quarterly Results with effect from Financial Year 2019-2020, Reshaping the
Institution of the Board of Directors and Enhancing the Role of Committees of the
Board, Separation of the office of the chairperson (i.e. the leader of the board) and
CEO/MD (i.e. the leader of the management), Augmenting board strength and
diversity, Enhanced Quorum, Capping the Maximum Number of Directorships,
Expanded Eligibility Criteria for Independent Directors, Enhanced Role of
committees, Down-streaming Corporate Governance, Enhanced Obligations on
Listed Entities with Respect to Subsidiaries, Secretarial Audit to be Mandatory for
Listed Entities and their Material Unlisted Subsidiaries.53
52
Uday Kotak Committee, 2017 available on https://www.sebi.gov.in/reports/reports/oct-
2017/report-of-the-committee-on-corporate-governance_36177.html, Visited on Nov 27th
2019
53
157
2.2.2.19. Companies (Amendment) Act, 201954

On July 31, 2019, the Ministry of Corporate Affairs introduced the
Companies (Amendment) Act, 2019. The Amendment considers changes brought
in by the Companies (Amendment) Ordinance, 2018, (the "2018 Ordinance"), the
Companies (Amendment) Ordinance Act, 2019 and the Companies (Amendment)
Second Ordinance, 2019 (the "2019 Ordinances") to further amend the Companies
Act, 2013 (the "Act"). The changes are brought in, with the view to fill critical
gaps in the corporate governance & compliance framework.
The main reforms undertaken through the Amendment Act, 2019 include
the following: Re-categorising of offences which are in the category of
compoundable offences to an in-house adjudication framework. However, no
change has been made in respect of any of the non-compoundable offences. 
Ensuring compliance of the default and prescribing stiffer penalties in case of
repeated defaults.  De-clogging the NCLT by Enlarging the jurisdiction of
Regional Director (“RD”) by enhancing the pecuniary limits up to which they can
compound offences under section 441 of the Act, vesting in the Central
Government the power to approve the alteration in the financial year of a
company under section 2(41); and vesting the Central Government the power to
approve cases of conversion of public companies into private companies.  Other
reforms include re-introduction of the declaration of commencement of business
provision; greater accountability with respect to filing documents related to
creation, modification, and satisfaction of charges; non-maintenance of the
registered office to trigger de-registration process; holding of directorships
beyond permissible limits to trigger disqualification of such directors.
Other corporate governance-related reforms: Insertion of new section 10A

Commencement of business, etc., Registered Office of Company, Register of
54
Companies (Amendment) Act, 2019, available at
http://www.mca.gov.in/Ministry/pdf/AMENDMENTACT_01082019.pdf, visited on Dec
17th, 2019
158
significant beneficial owners in a company, Disqualifications from the

appointment of directors.
Additional Amendments: - Matters to be stated in the prospectus, Public

offer of securities to be in dematerialized form, Civil liability for misstatements in
the prospectus, Register of significant beneficial owners in a company,
Constitution of National Financial Reporting Authority (NFRA), Corporate Social
Responsibility, Investigation into affairs of Company by Serious Fraud
Investigation Office, Application to Tribunal for relief in cases of oppression, etc.,
Powers of Tribunal, Consequence of termination or modification of certain
agreements, Power of Court to stay or restrain proceedings, - Provisions relating
to filing of applications, documents, inspection, etc., in electronic form.
2.1.2.20. The Company Law Committee (CLC) (2019)55

The Committee was constituted by the Ministry of Corporate Affairs in
September 2019 to further decriminalize the provisions of the Companies Act,
2013 based on their gravity and to take other concomitant measures to provide
further Ease of Living for corporates in the country. The Committee has proposed
amendments in 46 penal provisions, so as to either remove criminality, or to
restrict the punishment to only fine, or to allow rectification of defaults through
alternative methods, which would lead to de-clogging of the criminal justice
system. The main recommendations of the Committee are as follows: Re-
categorising 23 offences out of the 66 remaining compoundable offences under
the Act, to be dealt with in the in-house adjudication framework wherein these
defaults would be subject to a penalty levied by an adjudicating officer. In
addition, the quantum of penalties recommended is lower than the quantum of
fines presently provided in the Act. Retention of status-quo in case of the non-
compoundable offences. Proposing benches of the National Company Law
Appellate Tribunal; Extending the applicability of Section 446B (lower penalties
for small companies and one-
55
Report of the Company Law Committee, available on
159
http://www.mca.gov.in/Ministry/pdf/CLCReport_18112019.pdf visited on 17th April 2020.
160
person companies) to all provisions which attract monetary penalties and

extending the benefit to producer companies and start-ups also; Providing power
to enhance the thresholds which trigger the applicability of Corporate Social
Responsibility provisions; Providing for an appeal against the orders of the
Regional Directors before the NCLT after due examination; Exempting certain
private placement requirements for Qualified Institutional Placements (QIPs) after
due consultation with SEBI.
2.1.2.21. Companies (Amendment) Bill, 202056

Recently, the bill to amend the Companies Act 2013 and decriminalize
various offences under it was introduced in Lok Sabha. The Ministry of Corporate
Affairs (MCA) wanted to facilitate ease of doing business in India. It also wanted
to decriminalize the Companies Act, 2013. The Bill also offers greater flexibility
to companies in meeting their corporate social responsibility obligations. The
government says the amendments in the existing Companies Act will help reduce
the burden on the National Company Law Tribunal.
Based on the recommendations of the CLC report, the Bill proposes to

decriminalize the Act under the following frameworks. Re-categorization of 23
compoundable offences to the IAM (In-House Adjudication Mechanism) -
Offences that do not involve objective determination and that is easily determined
by the MCA21 system may be treated as civil wrongs. The IAM framework will
determine these offences. The omission of 7 compoundable offences - These
offences proposed to be omitted are those that may be dealt with through other
laws, Limiting 11 compoundable offences to criminal fine only - These are
offences that are substantial enough to warrant criminal liability, but don’t
warrant punishment by incarceration upon conviction, Alternate framework for 5
offences - This proposal could better achieve the intended aim of certain penal
provisions in the
56
Companies (Amendment) Bill, 2020 available at
http://164.100.47.4/BillsTexts/LSBillTexts/Asintroduced/88_2020_LS_Eng.pdf visited on
161
17th April 2020
162
Act with the company liquidator, For this, the corresponding provisions of the
Insolvency and Bankruptcy Code (IBC) may be inserted. This bill is significant
because Lesser penalties for certain offences: For this, the Section 446B is
amended, Non-compliance by a certain type of companies or by any of its default
officer are only liable to one-half the penalty specified in the respective
provisions., Benefit to IDs: The amendments are vital for Independent Directors
(IDs) to dissociate them from personal liabilities of the operational lapses and
violations, The Ministry’s notification directs that unless there is sufficient
evidence, civil or criminal proceedings should not be initiated against the IDs, It
added that if the proceedings were already initiated, they must be reviewed and
these recommendations seek to accelerate the processes of rectifying defaults by
paying penalties, instead of fighting a criminal trial.
As it is visible from the above discussion, that various acts, reports, and
the committee on corporate governance of India are keeping pace with the ever-
demanding need to improve the legal regime of corporate governance in India.
India through its laborious efforts has updated its legal regime on corporate
governance to match with the international standard and also showcase the world
its attention towards better implementation for smooth running of corporates by
making them more transparent, accountable, and asserting fairness in their
working.
2.3. CORPORATE GOVERNANCE IN DIFFERENT COMPANIES

The inventiveness taken by the Government of India in 1991, aimed at
economic liberalization, privatization, and globalization which led to the
improvement of corporate governance mechanism in India. The machinery for
governing the actions of companies, all listed entities, banks, NBFCs, and
Insurance Companies are listed below:
163
Legislative Framework of Corporate Governance in India
 All Companies57 formed under Companies Act: Companies Act 2013

 Listed Entities: SEBI LODR Regulations, 2015
 Banking and Financial Institutions: RBI Circulars and Special Acts
 Insurance Companies: IRDAI Laws and Circulars
 Public Sector Enterprises : DPE Guidelines
 Multinational Companies : OECD Guidelines
2.3.1. Corporate Governance for All Companies Formed Under Companies

Act and Listed Entities.58
The companies in India are formed, registered, and regulated majorly by
the Companies Act, 2013. The former Companies Act 1956 was entirely restored
in 2013 and the new Act was framed which is momentous legislation with respect
to refining corporate governance. The Companies Act, 2013 evidently specifies
the attention of regulators toward improving the responsibility and accountability
of boards. The Act sketches numerous necessities for Governance, disclosures,
and enhanced roles, responsibilities, and liabilities of the board, its committees,
and independent directors. Selected Provisions of Companies Act, 2013 relating to
Corporate Governance are Appointment and maximum tenure of Independent
Directors; Appointment of Woman Director; Appointment of Whole-time Key
Managerial Personnel; Performance Evaluation of the Directors and Committee &
Board as a whole; Enhanced disclosures and assertions in Board Report, Annual
Return and Directors’ Report with regard to Managerial Remuneration, risk
management, internal control for financial reporting, legal compliance, Related
Party Transactions, Corporate Social Responsibility, shareholding pattern, public
money lying unutilized, etc. Stricter yet forward-looking procedural requirements
for Secretarial compliances and Secretarial Standards made mandatory; Enhanced
57
Section 2(20) of Companies Act, “Company” means a company incorporated under this Act
or under any previous company law.
58
164
compliances of Related Party Transactions and introduction of concept of arm’s

length pricing; Enhanced restrictions on appointment of Auditors and mandatory
rotation of Auditors; Separation of role of Chairperson and Chief Executive
Officer; Mandatory provisions regarding vigil mechanism; Constitution of
Nomination and Remuneration Committee; Constitution of CSR Committee,
Secretarial Audit, Rotation of Auditors, Constitution of NFRA.
All such provisions of new Company Law are helpful in providing a good
Corporate Governance arrangement. Further, the Companies (Amendment) Act,
2017 introduces several amendments to the Companies Act 2013, realigning
provisions to improve corporate governance and simplicity of doing business in
India while continuing to strengthen compliance and investor protection.
The Securities and Exchange Board of India (SEBI) is the prime

regulatory authority that regulates all aspects of the securities market enforces the
Securities Contracts (Regulation) Act including the stock exchanges. Companies
that are listed on the stock exchanges are required to comply with the Listing
Regulations, 2015. All the listed entities are controlled by the Securities and
Exchange Board of India. SEBI is a regulatory authority established on April 12,
1992, with the main resolution of restricting the malpractices and protecting the
interest of its investors. Its paramount aim is to regulate the activities of the Stock
Exchange simultaneously ensuring the healthy growth in the financial market. In
this regard, SEBI had issued detailed Corporate Governance Norms in the form of
Clause 49 of Listing Agreement which has been now revised and notified as to the
SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015.
Apart from these, a range of legislations like the Competition Act, the
Consumer Protection Laws, the labour laws, the environment laws, the anti-
money laundering laws, Insolvency and Bankruptcy Code, etc pursues to
guarantee good governance practices among the corporate. The Corporate
Governance rules and Regulations mentioned in Companies Act, 2013 and
SEBI (LODR) Regulation
165
2015 followed by Group entities/Subsidiaries, Family-owned Business are

discussed below.
2.3.1.1. Governance of Group Entities/ Subsidiaries59

A corporate group or group of companies is an association of holding and
subsidiary corporations that function as a single economic entity through a
common source of control. Most of the big family businesses, in India, run
through a group of companies such as the Tata group and Aditya Birla Group.
Controlling a company means having the control to appoint the majority of its
directors or significantly influence its decisions. The group may have a single
holding company or be a network of companies through cross-holdings.
According to Sec 2(27) of the Companies Act 2013, “control shall include the
right to appoint the majority of the directors or to control the management or
policy decisions exercisable by a person or persons acting individually or in
concert, directly or indirectly, including by virtue of their shareholding or
management rights or shareholders agreements or voting agreements or in any
other manner”.
Group companies produce a complex organizational structure causing in a

complicated governance environment. Boards have a fiduciary duty to work in the
best interest of the company. For the board of a holding company, the question is
to what extent should it be involved in the governance of its subsidiaries? To
appropriately carry out its fiduciary role the board must act independently and
objectively. The holding company often nominates its director or officers as
directors on the subsidiary company. It is challenging for the board of the
subsidiary to act in its own interest alone. If directors of subsidiaries act against
desires of the
59
Risk Management, Compliances and Ethics, 217-219 (M.P. Printers, New Delhi, June 2019).
See also, Dr. Dahiya K.L.(ed.) “Corporate Governance, Ethics and Social Responsibilities of
166
Business Lesson 1-12” (School of Open Learning, University of Delhi) available at

https://www.scribd.com/document/410856350/paper-4401-Lesson-1to12-2-pdf Visited on
Nov. 25th 2019
167
controlling authority the risk being removed from the board. As a result the interest
of the group or holding company gets priority over that of the subsidiary.
The board of the holding company requires to determine whether all

companies will have a single governance structure or each subsidiary can
determine their own governance systems. And how the parent board will monitor
governance of the subsidiaries and what will be the extent of oversight.
Subsidiaries may be categories in terms of the level of investment, strategic
importance, and risk to the group and appropriate governance mechanism
established.
In multinational groups with companies incorporated in different

countries, there is an additional problem of difference in-laws and Regulations.
While local governance Regulations are to be compiled by the subsidiary, its
governance system must be aligned with the holding company for smooth
functioning.
To protect the interest of shareholders of holding company and minority

shareholders of subsidiary certain provisions have been put in place both by the
Companies Act, 2013 and SEBI (LODR) Regulation, 2015.
 Board: At least one independent director on the board of directors of the

listed company shall be a director on the board of directors of any unlisted
material subsidiaries including foreign companies. The minutes of the
meetings of the board of directors of the unlisted subsidiary shall be placed at
the meeting of the board of directors of the listed company. The management
of the unlisted subsidiary shall periodically bring to the notice of the board of
directors of the listed company, a statement of all significant transactions and
arrangements entered into by the unlisted subsidiary. Significant transaction or
arrangement” shall mean any individual transaction or arrangement that
exceeds or is likely to exceed ten per cent (10%) of the total revenues or total
expenses or total assets or total liabilities, as the case may be, of the unlisted
168
material subsidiary for the immediately preceding accounting year.

(Regulation 24)
169
 Consolidated Financial Statements: If a company has one or more

subsidiaries, associate companies or Joint Ventures, it shall prepare a
consolidated financial statement of the company and of all the subsidiaries,
associate companies and joint venture in the same form and manner as that of
its own. In addition to the stand-alone financial statements of the holding
company, a consolidated financial Statement of holding company is to be
published to disclose details about subsidiary, associate Companies, and Joint
ventures. (Sec 129) The Balance sheet of the holding company shall
specifically disclose investments in the subsidiaries. The Profit and Loss
account of Holding company shall disclose (a) Dividends from subsidiary
Companies and (b) Provisions for losses of subsidiary companies. (Schedule
III) The holding company is required to (i) Place separate audited accounts in
respect of each of its subsidiary on its website and (ii) Provide a copy of
separate audited financial statements in respect of each of its subsidiary, to
any shareholder of the Company who asks for it. (Section 136).
On the other hand, the balance sheet of the subsidiary company should
disclose shares held by its holding company or its ultimate holding company
or subsidiaries and associates of the holding company and the ultimate holding
company. (Schedule III)
 Audit and Audit Committee: The statutory auditor of a listed entity shall
undertake a limited review of the audit of all the entities/ companies whose
accounts are to be consolidated with the listed entity. Besides audited annual
consolidated statements at least eighty percent of the quarterly consolidated
financial results, of each of the consolidated revenue, assets, and profits,
respectively, shall have been audited or subjected to limited review.
(Regulation 33).The audit committee of the listed company shall also review
the financial statements, of subsidiaries, in particular, the investments made by
the unlisted subsidiary. (Regulation 24) The board of a holding company can
authorize anyone to Inspection of books of account of any subsidiary
company. (Section 128)
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 Material Subsidiary: The listed company shall not dispose of shares in its
material subsidiary which would reduce its shareholding (either on its own or
together with other subsidiaries) to less than 50% or cease the exercise of
control over the subsidiary without passing a special resolution in its General
Meeting. The exception has been granted for divestment under a scheme of
arrangement duly approved by a court/ tribunal. (Regulation 24), Selling,
disposing and leasing of assets amounting to more than twenty percent (20%)
of the assets of the material subsidiary on an aggregate basis during a financial
year shall require prior approval of shareholders by way of the special
resolution, unless the sale/ disposal/ lease is made under a scheme of
arrangement duly approved by a Court/ Tribunal. (Regulation 24), Every
listed entity’s material unlisted subsidiaries incorporated in India shall
undertake secretarial audit and shall annex the report with its annual report.
(Regulation 24A) This will help improve the compliance of the group as a
whole.
The policy on material subsidiary shall be disclosed in the company’s web

site and in the annual report of the company or a web link provided in the annual
report. These regulations ensure that shareholders of the holding company can
monitor subsidiaries whose performance affects the performance of their
company even if they are unlisted.
2.3.1.2. Corporate Governance in Family-Owned Enterprises60

India relishes a rich and glorious history of the family-owned business. A
family business may be a company, partnership firm, HUF, or any other form of
business owned, controlled, and operated by members of a family. In India, the
widely held businesses are by families. Family businesses are generally operated
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Risk Management, Compliances and Ethics, 219-221 (M.P. Printers, New Delhi, June 2019).
Business Lesson 1-12” p. 201-203 (School of Open Learning, University of Delhi) available
at https://www.scribd.com/document/410856350/paper-4401-Lesson-1to12-2-pdf Visited on
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Nov 25th 2019
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with the ethos of “Family First”. Business decisions are taken while keeping the
family’s wellbeing in focus.
According to the Credit Suisse Research Institute’s (CSRI) latest “CS

Family 1000” report, India has 108 publicly-listed family-owned businesses, the
third-highest in the world. Family businesses are the major form of enterprise in
India and across the world, viz. Corporation houses like Suzlon, Tata, Birla, Bajaj,
Reliance, Godrej, Ford Motor, Tetra Pak, Wal- Mart, DuPont, Cadbury, Acer
Computers were started as family business. Several studies indicate that family
business carries the weight of economic wealth creation in all economies.
Family enterprises need governance just as much as any other structure

involving multiple persons with their varied, often competing, interests. Family
businesses institute a major portion of business in India and cannot be put on the
back seat. Their contribution to the country’s economy is enormous and if they
are not disciplined and properly governed, it unavoidably affects the national
economy. Strong governance measures in a family-owned business can efficiently
act as a prevention mechanism against a lot of pressures that may arise between
family members at a later stage. It is also vital for family businesses to adopt
effective corporate governance measures in order to be a strong competition to
other players in the global market. The utmost evident characteristic of a family-
owned business is that all the key managerial positions in such businesses are held
by family members. Non-family members may, of course, be employees of the
company, but the decision-making control typically vests with the members of the
family. This is probably the cause of why a lot of family businesses are not pro-
active in taking strict corporate governance measures in their activities – out of
fear of losing control over the business. These businesses derive their power from
the love, trust, and personal bond that the members share, but at the same time,
even slight flux or rivalry in the family could unpleasantly affect the business and
project a negative picture of the family firm in the market before prospective
investors.
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Family-owned companies are expected to more or less adhere to the same

corporate governance measures for their business like any other business. The
identical principles and practices that apply to any other business are essential for
the successful run of a family business as well. Some of these measures comprise
compliance with the Accounting Standards in the preparation of financial
statements by a company and its auditors, financial reporting as a measure of
transparency and accountability – providing essential financial information about
the company to all its shareholders and other stakeholders, regular board meetings
and appointment of independent directors along with other directors for an
accountable and transparent board of directors and whistleblower policies. Certain
provisions of Corporate Governance in a Family-Owned Companies have been
actively statutorily incorporated in the Companies Act, 2013 such as Independent
Directors and Women Directors, Corporate Social Responsibility, Audit
Committee, Nomination, and Remuneration Committee, Serious Fraud
Investigation, etc. However, there are some measures that family businesses
particularly need to lay extra focus on so that they may be successful in the long
run: Clear Demarcation between Business and Emotions, Clarity on Leadership,
and A participative decision making and democratically appointed board of
directors.
Major challenges/ Governance issues faced by family businesses:

 Managing the diverse opinions of family members in the business, solving
internal issues and disputes, etc is a challenge.
 Investors – both shareholders and creditors – may look with distrust on
family- controlled companies, because of the risk that the controlling family
may abuse the rights of other shareholders. So investors likely to scrutinize
such companies with care before taking the plunge and investing.
 There are also challenges of multiple stakeholders for the leadership position.
Very often, there is a lack of communication between the incumbent and
incoming generations. The incumbents do not know how to handle the
succession challenge, while the incoming generation does not know how to
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raise it. The families should choose their most competent member(s) to
manage the business, disregarding age, gender, or bloodline. However, the
post- succession role of the incumbent is not often planned to lead to
complications.
 Hiring external staff which may perceive that career advancement, freedom
and decision-making are solely the purviews of family.
 Although ownership and management succession are the key concerns of a
large number of business families, they do not devote enough attention to the
process involved. The succession dilemma is also closely related to the family
policy on entry of new generation, retirement of incumbents, and mechanisms
for resolving conflicts. The entry of new members from the family depends
also on the ‘space’ available in the organization, which in turn depends on the
success of the business. The younger generation may face difficulties in
proving themselves to the former generation.
 Change in mind-set: Differing views between the older generation and the
newer generation
 Lack of Competitiveness: Another source of the challenge is in the nature of
competitiveness. For instance, when the Indian economy was opened up in
1991, most Indian companies, of which a huge majority were family-owned,
were put under competitive pressures for the first time. Many firms,
particularly those that grew under government protection did not have a
strategy to respond and took it as a threat rather than an opportunity for a
variety of reasons. This created huge tensions in business families, sometimes
leading to the division of assets.
2.3.2. Corporate Governance of Banking and Financial Institutions61

Banking and financial institutions are considered the spine of any
economy. The working pattern of banking and financial institutions varies with
other corporate entities in numerous ways which mark good corporate governance
of banks uttermost serious and significant. RBI had undertaken quite a lot of
measures
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61
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to toughen corporate governance in the Indian banking sector. Various counseling

groups and review groups were designed to deeply study the banking sector in
India for the stimulation of effective corporate governance in these sectors.
In March 2000, an advisory group on corporate governance was formed

under the chairmanship of Dr R. H. Patil.
Subsequently, another consultative group was formed in November 2001

under the Chairmanship of Dr. A.S. Ganguly, with an objective to strengthen the
internal supervisory role of the Boards in banks. The Committee made several
recommendations for the effective functioning of banks which were circulated by
RBI for adoption by all banks.
On 20th January 2014, another Committee to Review Governance of

Boards of Banks in India was constituted by the RBI Governor under the
Chairmanship of P.J Nayak. The Committee had submitted its report with various
recommendations in May 2014.
Considering the recommendations of these advisory groups and the global

corporate governance experiences, the need to include a defined role of
supervisors, ensuring an environment supportive of the sound corporate
governance, effective organizational structure to have a responsible board of
directors, etc. was made. Another global initiative in 1999 of the Basel Committee
also brought important principles on corporate governance for banks.
The Indian banking sector includes Scheduled and Non-Scheduled banks,

co-operative banks, commercial banks dominated by the government-managed
banks including public sector banks, nationalized banks, and rural banks, etc.
These banks in our country have been established under different statutes.
The leading law relating to banking is governed by the Banking Regulation

Act 1949. The State Bank of India is governed by the State Bank of India Act, 1955.
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Nationalized banks are governed by the Banking Companies (Acquisition and

Transfer of Undertakings) Act, 1970 and the Banking Companies (Acquisition
and Transfer of Undertakings) Act, 1980. The private sector banks came into
being a company registered under the Companies Act (whether under the
Companies Act, 2013/1956 or under the Indian Companies Act, 1913 or prior to
that). The banks listed with the stock exchange have to adhere to the requirement
of the SEBI (Listing Obligations and Disclosure Requirements) Regulations,
2015.
Additionally, Foreign Exchange Management Act (FEMA), 1999,

Payment and Settlement Systems Act, 2007, New Companies Act, 2013 and other
directives/ Regulations/ guidelines/ instructions issued by RBI and SEBI from
time to time have created a constructive environment and upcoming scope for
enhancing corporate governance. This advancement in corporate governance and
banking industry experiences shaped the long way of growth and setting global
standards for corporate governance, which make it more tough and refined in
today’s time frame.
2.3.3. Corporate Governance Guidelines for Insurance Companies62

The Insurance Regulatory and Development Authority of India (IRDAI)
issued Guidelines on Corporate Governance for insurance companies vide circular
dated 5th August 2009. The Authority had also issued separate guidelines for
appointment/ reappointment and remuneration of MD/CEO/WTD as well as other
Key Management Persons (KMPs) and also the Appointment of statutory auditors
of insurers through various circulars.
The IRDAI reviewed the prevailing Guidelines in the light of changes

brought in by the Companies Act, 2013 vide Circular Dated 18th May 2016 to
safeguard that the structure, responsibilities, and functions of Board of Directors
and the management of the company recognize the expectations of all
stakeholders
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as well as those of the regulator. These guidelines are applicable to all insurers
granted registration by the Authority except:
(i) reinsurance companies may not be required to have the Policyholders’

Protection Committee; and
(ii) branches of foreign reinsurers in India may not be required to constitute
the Board and its mandatory committees as indicated herein.
Stewardship Code for Insurers in India

Insurance companies are major institutional investors in listed companies
and the investments are held by them as custodians of policyholders. So, the
insurance companies should have an active role in the general meetings of
investee companies and engage with the management at a greater level to improve
their governance. This will result in informed decisions by the parties and
ultimately improve the return on investments of insurers. In this regard, the
IRDAI has issued the Guidelines on Stewardship Code for Insurers in India in
March 2017. The code is in the form of a set of principles, which the insurers
would adopt.
2.3.4. Corporate Governance in Public Sector Enterprises63

Department of Public Enterprises (DPE) issues the corporate governance
guidelines for the Public Sector Enterprises for both at the center and state level.
The Government being the major shareholder in Public Sector Undertakings
(PSUs)/Central Public Sector Enterprises (CPSEs), it is the responsibility to set
the high standard of governance to be followed by these public sector enterprises.
As the government’s disinvestment strategy gathers momentum, there is a genuine
need to improve the levels of transparency and accountability within PSUs.
The Guidelines on Corporate Governance for CPSEs were introduced in

2007 for a period of one year to bring in more transparency and accountability in
the functioning of CPSEs. These Guidelines were of voluntary in nature. The
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Government have felt the need for continuing the adoption of good Corporate
Governance Guidelines by CPSEs for ensuring higher level of transparency and
decided to make these Guidelines mandatory and applicable to all CPSEs.
Accordingly, revised Guidelines on Corporate Governance for Central Public
Sector Enterprises was issued by DPE in 2010.
Apart from these instructions of DPE, the CPSEs are governed by the
Companies Act, 2013, and Regulations of various authorities like Comptroller and
Auditor General of India (C&AG), Central Vigilance Commission (CVC),
Administrative Ministries, other nodal Ministries, etc. In the case of Listed CPSEs
the Listing Agreement would also be applicable in addition to other applicable
laws and DPE Guidelines. For the purpose of DPE Guidelines on Corporate
Governance, CPSEs have been categorized into two groups, namely, (i) those
listed on the Stock Exchanges; (ii) those not listed on the Stock Exchanges.
CPSEs listed on Stock Exchanges: In so far as listed CPSEs are

concerned, they have to follow the SEBI (LODR) Regulations, 2015. In addition,
they shall follow those provisions in these Guidelines which do not exist in the
SEBI Guidelines and also do not contradict any of the provisions of the SEBI
Guidelines.
Unlisted CPSEs: Each CPSE should strive to institutionalize good

Corporate Governance practices broadly in conformity with the SEBI Guidelines.
The listing of the non-listed CPSEs on the stock exchanges may also be
considered within a reasonable time frame to be set by the Administrative
Ministry concerned in consultation with the CPSEs concerned. The non-listed
CPSEs shall follow the Guidelines on Corporate Governance on a mandatory
basis.
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Guidelines on Corporate Social Responsibility and Sustainability for Central

Public Sector Enterprises (With Effect from 1st April 2013)64
Prior to the notification of CSR Rules under the Companies Act 2013,
DPE Guidelines on CSR and Sustainability issued in December 2012, were
applicable to all CPSEs w.e.f. 01.04.2013. After the enactment of the Companies
Act 2013, all CPSEs shall have to comply with the provisions of the Act and the
CSR Rules. Along with these, Guidelines on Corporate Social Responsibility and
Sustainability for Central Public Sector Enterprises, 2014 have been notified by
DPE shall be applicable to all CPSEs
2.3.5. Corporate Governance in Multinational Enterprises65

Corporations that have production operations in various countries for
many reasons including, securing supplies of raw materials, utilizing cheap
labour, taking advantage of local markets, saving tax differences, etc. the
economy has become a supremely important issue in this globalized world and
now all the companies are welcomed and appreciated to start their operations
internationally. Multinational enterprises have a strong impact on local and world
economies and playing an important role in international relations and
globalization. Multinationals are actually the best form of organization, making
the effective use of world resources and transferring technology between the
countries.
The OECD guidelines are essentially the recommendations undertake by

governments for multinational enterprises running in form of cleave countries.
Guidelines deliver willful principles and standards for responsible business
conduct in a very vast field including environment, employment, industrial
relation, human
64
Guidelines On Corporate Social Responsibility And Sustainability For Central Public Sector
Enterprises , available on
https://www.nlcindia.com/new_website/csr_new/Revised_CSR_Guidelines.pdf visited on
Nov. 29th, 2019
65
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Business Lesson 1-12” p. 203-205 (School of Open Learning, University of Delhi) available
at https://www.scribd.com/document/410856350/paper-4401-Lesson-1to12-2-pdf Visited on
Nov. 25th 2019
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rights competition taxation, science and technology. These guidelines have been
recognized by 41 countries. Many business codes are available now but OECD
guidelines are the only complete and authentic code that is multilaterally accepted
and governments are happy to promote it. The central objective is to lift
reasonable contributions that multinationals may make in environmental,
economic, and social progress.
The main feature of these guidelines is that the principles are non-binding
and these are on the will of enterprises, how successfully they are obeying with
their own circumstances, the goal of these principles is not to control the
enterprises, actually, these principles are worldly recognized and can encourage
mutual understanding and confidence between all stakeholders, due to its non-
binding nature, guidelines need support from the business community, labour
representative and non-governmental organizations for its success. These
recommendations have turn into a basic framework for many enterprises and
particularly large enterprises that have a big share in international investment.
International trade and investment make the relationship strong between OECD
economies and acceptance of national rights for all these enterprises played a
significant contribution to the economy of the host country as well. OECD
guidelines are complete in their connection with multinational enterprises.
Hence, from the above discussion, it is clear that the legal and regulatory
framework of corporate governance in India is mainly covered under the
Companies Act, 2013, Listing Regulations, 2015 and SEBI guidelines.
Corporate governance is a multifaceted notion, so it is important to study

the influence of these governance patterns on each feature. The Companies Act,
2013 as well as SEBI (LODR), 2015 have demarked various Regulations and
rules for good governance patterns which should be followed by the companies.
Some of them are discussed below in detail.
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2.4. CORPORATE GOVERNANCE AND BOARD OF DIRECTORS
“Heterogeneous BoDs with independent thinking enforce

governance, and diversity strengthens creativity.”
– Pearl Zhu66
The series of corporate failures due to misgovernance and subsequent

regulatory changes brought the role of directors as well as the corporate
governance into the limelight. Corporate Governance is concerned with the
functioning of the Board of Directors (BODs) –its structure, styles, process, their
relationships and roles, activities etc. it is two sides of the same coin. Therefore,
Boards of directors (BODs) is considered as a crucial part of Corporate
Governance. The Board of directors is an important element of Corporate
Governance. As Tricker says67, “Corporate Governance addresses the issues
facing Boards of Directors”. In this view, the main responsibility of governing a
company is upon the Board of Directors and, therefore, attention must be paid to
their roles and responsibilities. The roles of the Board of Directors and
shareholders are interactive and, therefore, the quality of governance depends
upon the level of interface set up by them. The boards are accountable in many
ways to the shareholders and stakeholders in a company. The directors are
required to attain a balance between competing interests of shareholders,
customers, lenders, promoters, and directors. Preferably, the board should be the
heart and soul of a company. Whether or not, the company grows or declines,
depends upon the sense of purpose and direction, the values, the will to generate
stakeholders’ satisfaction, and the drive to achieve them. The corporate board of
directors assists in corporate governance by supervising executive management
and makes strategic decisions for the company. The Board of
66
67
Jan, Sumaira & Sangami, Mohi-ud-Din “The Role of Board of Directors in Corporate
169
Governance Imperial Journal of Interdisciplinary Research” (IJIR) Vol-2, Issue-5, 2016
170
Directors can play an important role in making sure that an outward-looking

approach – including transparency, integrity, and win-win relationship – is valued
within a company and that these values are flourished at the company-wide
perspective.
The efficacy and drive of the corporate sector are considered the backbone
of any country’s economy. Under the companies’ jurisprudence, a company is
considered a legal and juristic person, separate from its members. The absolute
revolutionary, noticeable, and famous case in this context is that of Solomon v
Solomon & Co68. The attribution of legal personality to a company makes it
necessary that its business should be delegated to certain human agents. They are
the directors69 and jointly institute the uppermost decision-making body under the
Companies Act, 2013 known as Board of Directors70. The body of the board of
directors was founded on the foundation that a group of honest and reputable
people should see after the interests of the large number of shareholders who are
not openly involved in the management of the company. The board of directors
position is that of trust as the board is assigned with the obligation to act in the
greatest interests of the company.
2.4.1. Position of Director
The legal position of a director of a company has multi-dimensional

sides71. Due to such a position, many of his duties, obligations, and authorities
flows. The director occupying the position of an agent72 the broad principles of
the agency
68
{1897} AC 22 {1895-9} ALL ER Rep : It had been laid down that once a company is validly
constituted under the provisions of the company law, it becomes a legal person separate from
and capable of surviving beyond the lives of its members and it is immaterial whether any
member has a large or small proportion of the shares and whether he holds those shares
beneficially or as mere trustee.
69
Section 2(34) of the Companies Act, 2013
70
Section 2(10) of the Companies Act, 2013
71
See, Imperial Hydropathic Hotel v. Hamson (1882) 23 Ch D 1, A.J. Judah v. Rampada Gupta,
AIR 1959 Cal 715.
72
Ferguson v. Wilson (1866) LR 2 Ch 77, T.R. Pratt (Bombay) Ltd. v. M.T. Ltd AIR 1938 PC
171
159, Life Insurance Corporation v. Hari Das Mundhra (1966)36 Comp.Cas371, Gopal
172
would administer the relations of the director with the company and also govern
the third parties who deal with the company through its directors. He is also
considered as a trustee73 although not in the stringent sense of the position. Being
in the position of an agent or trustee the directors are obligated to display, utmost
care, skill, and diligence in the exercise of their powers and functions on behalf of
the company. Board of Directors also requires to observe severe obedience to
Laws, Regulations and also have to practice a high standard of corporate
governance.74
The transformation in the role and responsibilities of modern corporate

entities has given birth to the organic theory of corporate life. Under this “certain
officials are treated as an organ of the company; for whose action the company is
held liable just as a natural person is accountable for the action of his limbs.” 75
Thus, “the modern directors are something more than mere agents or trustees and
they are recognized to be the primary organ of the company.”76 It has been
observed that the directors represent the directing mind or will of the company. 77
The state of mind if these directors are treated by law as the state of mind of the
company.78
2.4.2. Role of Board of Directors

The Board of Directors plays a central role in ensuring good governance.
The involvement of the Board of directors is critical to the way a corporate body
Khaitan v. State AIR 1969 Cal 132 (136), N.Bella Gowder v. Tehsildar (1969)1 Comp LJ 34,
Aberdeen Railway Co v. Blackie, 282 Eq. R. 128, Percival v. Wright (1902) 2 Ch 421.
73
Great Eastern Railway v. Turner, (1872)8 Ch App 149, Syke’s Case (1872) LR 13 Eq 255,
York & North Midland Rly v. Hudson, (1853) 22 LJ Ch 529, Ramaswamy Iyer v. Brahmayya
& Co {1966} 1 Comp LJ, 107, Madras, Lands Allotment Co., Re, {1894} 1 Ch 616, 631,
Chevalier I. I. Iyyappan v. Dharmodayan Co., Trichur , AIR 1966 SC 1017, Baket v.
Gibbons [1972] 1 WLR 693, Percival v. Wright (1902) 2 Ch 421, Peskin v. Anderson, (2000)
2 BCLC
1, Coleman v. Mysers, (1977) 2 NZLR 225, Globe Motors V. Mehta Tej Singh, (1984) 55
Comp Cas 445 (Del)
74
See, Dr. Paranjape N. V., ’Company Law, 2013’ 367- 374 (Central Law Agency, Ninth
Edition,2018)
75
Observations made by Justice Talukda: in Gopai Khaitan v. State, AIR 1969 Cal 132 (138)
76
R. C. Beuthin, the Range of a Company’s Interests, (1969) 86 SALJ 155
77
Bath v. Standard Land Co. (1910) 2 Ch 408 (416), Daimler Co. Ltd. v. Continental Tyre &
173
Rubber Co. Ltd., (1916) 2 AC 307, Lennard’s Carrying Co. V. Asiatic Petrolium Co., (1915)
AC 305
78
Dr. Paranjape N. V., ’Company Law,2013’ 367- 374 (Central Law Agency, Ninth
Edition,2018)
174
conducts. The responsibilities of the board originate from law, custom, tradition,
and current practices. In this contemporary time transparency, disclosure,
accountability, issues of sustainability, corporate citizenship, and globalization are
just some of the concerns that the Boards have to deal with. In addition, the
Boards have to respond to the explosive demands of the marketplace. This two-
dimensional role of the Board of Directors is the cornerstone in evolving a sound,
efficient, vibrant, and dynamic corporate sector for attaining of high standards in
integrity, transparency, conduct, accountability as well as social responsibility.
The emphasis on the role of the Board of Directors in Corporate

governance has been stressed in the Cadbury Committee, the Kumar Mangalam
Birla Committee, J.J. Irani Committee, Adi Godrej Committee, and Uday Kotak
Committee.
2.4.3 Duties of the Directors

A director is “bound to take such precautions and show such diligence in
their office as a prudent man of business would exercise in the management of his
own affairs.”79Consistent with a director’s threefold duty of obedience, diligence,
and loyalty to the corporation he serves, the director should:-Act within the scope
of powers and authority of the Company and the Board as prescribed in the MOA,
AOA, bye-laws of the company and in existing laws, rules and Regulation.
Exercise their best care, skill80, judgment, and observe in the utmost good faith81
in the conduct and management of the business and affair of the Company. Act in
the best interest of the Company as well as the common benefit of the company’s
shareholders and stakeholders. A director’s office is one of trust and confidence.
The duties, liabilities and responsibilities which promote corporate governance
through the sincerest efforts of directors in efficient management and swift
79
Trustees of the Orange River Land & Asbestos Company vs. King (1892)
80
N Narayanan v. SEBI, (2013) 12 SCC 152. The case involved many SEBI violations
including insider trading.
81
See, Patel J in Bank of Poona Ltd v. Narayandas Shriman Somani, AIR 1961 Bom 252,253,
See also, Turner Morrison & Co. Ltd v. Shalimar Tar Products (1935) ltd, (1980) 50 Comp
Cas 296 (Cal), general statement of Duty of Good Faith.
175
resolution of critical corporate issues and sincere and mature decision making to
avoid unnecessary risks to the corporate entity and its shareholders. The duties of
the directors have been provided under Section 166 82of the Companies Act, 2013
and it applies to all types of directors including Independent Directors. As such, a
director must act in a manner characterized by transparency, accountability, and
fairness.
2.4.4. Liabilities of Directors

The ubiquitous issue of corruption and the high risk of internal fraud raises
serious concerns about the liability of corporate directors. Director liability in
India can be divided into two principal areas: (1) liability under the Companies
Act of 1956 (the 1956 Act), which has now transitioned to the Companies Act of
2013 (the 2013 Act); and (2) liability under other Indian statutes.
There has been a seminal shift in the Indian corporate legal regime with
the enactment of the 2013 Act and more recent amendments. For instance,
penalties under the 1956 Act that were seen as ineffective have been significantly
amplified under the 2013 Act. One of the key concepts of the Companies Act is
the meaning of the term “officer who is in default.” Under the act, liability for
default by a company has been imposed on an officer who is in default. By virtue
of their positions in the company, the managing director, the whole-time director,
and the company secretary directly fall within the scope of this term. Under the
1956 Act, certain key employees such as the chief executive officer and the chief
financial officer did not directly come within the ambit of the term, which raised
serious concerns because this personnel were viewed as key officials in any
company. The 2013 Act corrects this anomaly and significantly expands the scope
of the expression “officer in default.”83
82
Statutory formulation of Directors’ Duties, which have been spelled out in six points.
83
In Section 2(60) of the Companies Act, 2013
176
In the context of various shareholder disputes, the increased liability under

the 2013 Act could be a useful tool to increase pressure on defaulting directors,
nominating shareholders, or promoters. In addition, while resignation may protect
a director from subsequent defaults, an erstwhile director may still continue to be
liable for any defaults that took place during his or her tenure 84, as now clarified
under the Act. The 2013 changes to the act prompted concerns about the role,
accountability, and responsibility of non-executive, nominee, and independent
directors, who could be caught on the wrong side of the company’s disputes.
Under the 2013 Act, an independent director or a non-executive director

can be held liable under the 2013 Act only for acts of omission or commission by
a company that occurred with the director’s knowledge attributable through board
processes and the director’s consent or connivance or where he or she failed to act
diligently.85 This, to a certain extent, alleviates the concern surrounding
independent director liability. However, questions such as whether a director
acted diligently and whether knowledge could be attributed to a director by the
mere presence at board meetings still remain unanswered. Moreover, liability
faced by independent and nominee directors under various other enactments
remains a legitimate concern.
Directors may also face liability under other Indian laws. Such liability
may not always be foreseeable, and actions such as the dishonor of checks,
offenses under the Income Tax Act of 1961, violation of foreign exchange
regulations, breach of securities regulations, non-payment of provident fund
contributions, violation of the Shops and Establishments Act, or food adulteration,
etc. could result in liability that may not always be limited to the executive
directors. In addition, some statutes do not distinguish between executive and
non-executive
84
Section 168(2) of the Companies Act, 2013.
177
85
Section 150(12) of the Companies Act, 2013.
178
directors or base liability on the role a particular director was performing on the
company’s board.
Consequently, liability may be difficult to foresee or predict. While it is

difficult to provide any particular standard that will determine an individual’s
exposure to liability, a person will generally be held liable for wrongdoing
committed by a company if he or she falls into either of the following categories:
any person who, at the time the offence was committed, was in charge of and
responsible to the company for the conduct of its business; or any director,
manager, secretary, or other officers of the company: a. with whose consent and
connivance the offence was committed, or b. whose negligence resulted in the
offence.
The Indian Supreme Court has, in this context, ruled that a managing
director is prima facie in charge of and responsible for the company’s business
and can be prosecuted for misdeeds by the company. But only those officers of
the company who fall within the scope of the definition “officer who is in default”
are covered.86
A simple averment in a complaint that a director was in charge of and

responsible for the conduct of the business of the company is sufficient to state a
claim against an officer who is in default. In cases of fraud, it may be difficult to
have a clear line of demarcation as to whether the director could have prevented
the fraud if he or she had used due diligence. While the role of non-executive
directors may consist of providing strategic guidance, this more limited status
may not protect them from liability. Nor will being a nonparticipant at board
meetings. The law now requires directors to adopt an inquisitive approach and
question the company’s background information, how it was obtained, and the
decisions that are taken based on such information. With increasing global
interest in Indian
179
86
See Nat’l Small Indus. Corp. Ltd. v. Harmeet Singh Paintal & Anr., (2010) 3 S.C.C. 330
(India); K.K. Ahuja v. V.K. Vora, (2009) 10 S.C.C. 48 (India). 143
180
companies and a changing legal landscape, new players will continue to enter the
domain unaware of the possible consequences.
Consequently, director indemnification clauses in shareholder and director

agreements should be cautiously and thoroughly negotiated. Directors‟ and
officers‟ liability insurance is also a tool that is becoming increasingly popular in
India. Such insurance and indemnification should sufficiently cover the director
even after resignation. The Indian economy presents myriad and growing
opportunities but would be corporate directors and their lawyers should tread
carefully. Rapidly modernizing laws on director and officer liability require their
full attention.87 The directors may incur liability for acts without the authority of
the company (i.e. ultra vires acts) and they may also be held personally liable for
acts which are intra vires the company but beyond the scope of their authority if
they are not ratified by the company. The liability of directors can broadly be
classified into two heads, namely: (i) Criminal liability88 and (ii) Civil liability89
87
Director and Officer Liability in India Available on
http://www.nishithdesai.com/fileadmin/user_upload/pdfs/Research%20Articles/Director_and
_Officer_Liability_in_India.pdf (Visited on Nov. 25, 2019).
88
Some of the Sections in the Companies Act, 2013, which contain penal provisions under
which criminal proceedings against directors may be instituted are—
Untrue statement in the Prospectus [Section 26 (9)].
Furnishing false and incorrect in relation to registration of Company [Section 7 (5)].
Personation for acquisition of shares etc. [Section 381.
Violating rules relating to acceptance of Deposits [Section 73].
Contravention of provisions relating to loan by company [Section 67].
Undischarged insolvent acting as director [Section 164].
Default/failure to distribute dividend [Section 127].
Non-maintenance of proper books of accounts [Section 128].
Failure to lay financial statement (Balance-Sheet) [Section 129].
Failure to attach report of the Board with financial statement [Section 134].
Improper issue of securities/shares [Section 222].
Violating restrictions regarding contribution to political parties [Section 182].
Contravention of provisions regarding grant of loan to directors (Section 185].
False declaration of company's solvency [Section 305].
Offence regarding companies (Sections 336 to 339 and Section 347].
Non-compliance of the directions of the Central Government [Section 405].
Wrongfully obtaining possession of company's property [Section 521]
The above list is only illustrative and not exhaustive.
89
Directors may be liable to the company for ultra-vires acts, if the directors act malafide
misusing the powers bestowed on them, for any personal gain which he may have obtained
181
by
182
2.4.5. Different Provisions Dealing With Directors

The provision of corporate governance under Companies Act, 2013 and SEBI
(LODR) Regulation, 2015 regarding Board of Directors and Directors are as
follows:-
A. Composition And Size of Board90

Board composition91 is one of the most important determinants of board
effectiveness which was mentioned in Kumar Mangalam Birla Committee, J.J.
Irani Committee and Adi Godrej Committee. Beyond the legal requirement of
minimum directors, a board should have a judicious mix of internal and
independent directors with a variety of experience and core competence. The
potential competitive advantage of a Board structure comprising executive
directors and independent non-executive directors lies in its combination of – the
depth of knowledge of the business of the executives and the breadth of
experience of the non- executive/independent director. An aspect of Board
structure which is fundamental but is very less visited is that of the Board Size92.
Board size is also an important determinant of board effectiveness. The size
should be large enough to secure sufficient expertise on the board, but not so large
that productive discussion is impossible.
B. Selection And Appointment of Directors93

Board is critical to performance of the company and for this a robust
selection and appointment process for directors is must. The company must
ensure that the Board consists of members with the range of skills and capabilities
to meet its primary responsibility for promoting the interest of the company in a
way which
the use of information or opportunity available to him in his capacity as a director, Section
339 of the Companies Act, 2013, Section 35 of the Companies Act, 2013, etc.
90
91
Section 149 (4) under COMPANIES ACT, 2013 And Rule 4 of the Companies (Appointment
and Qualification of Directors) Rules, 2014 prescribes that the mentioned class or classes of
companies shall have at least two independent directors. Regulation 17 (1) under SEBI
(LODR) REGULATIONS, 2015.
92
Section 149 (1) under COMPANIES ACT, 2013 and Regulation 17(1) (a) under SEBI (LODR)
183
Regulations, 2015.
93
184
ensures that the interests of shareholders and stakeholders are promoted and
protected.
Both the Companies Act94 2013 and SEBI (LODR) Regulations95, 2015
provides for the mandatory constitution of the Nomination and Remuneration
Committee (NRC) for selection and appointment of directors. The NRC should
consider the selection and re-appointment of Directors and makes its
recommendation to the Board.
C. Disclosure on Remuneration96
Directors have no right to be paid for their services and cannot pay
themselves or each other or make presents to themselves out of company’s assets,
unless authorized to do so by the instrument which regulates the company or by
the shareholders at a properly convened meeting. The shareholders at a meeting
duly convened for that purpose can, if they think proper, remunerate directors for
their trouble or make presents to them for their services out of the assets properly
divisible amongst the shareholders themselves.”97 Keeping this view, the Kumar
Mangalam Committee and Dr. J.J. Irani Committee have mentioned that the
company must have a credible and transparent policy in determining and
accounting for the remuneration of the directors. This is also stated under Section
197 under Companies Act, 2013, Rule 5 of Companies (Appointment and
Remuneration of Managerial Personnel) Rules, 2014 and Regulation 34 (3) read
with Schedule V under SEBI (LODR) Regulations, 2015.
D. Appointment of Woman Director98

Gender Diversity is the way to create diversity without necessarily
increase in the board size. This diversity has been created in the boards of
corporate houses
94
Section 178 and Rule 6 of Companies (Meetings of Board and its Powers) Rules, 2014
95
Regulation 19 under SEBI (LODR) REGULATIONS, 2015.
96
The Institute of Company Secretaries of India, Executive Programme Company Law, 97
(M.P. Printers, New Delhi, May 2018)
97
Re Newman (George) & Co., (1895) 1 Ch 674 (686)
185
98
Das, Subhash Chandra, ‘Corporate Governance in India: An Evaluation.’112-113 (PHI
Learning Private Limited, 4th Edition, 2018)
186
all over the world at least a decade ago in order to improve the structure of
corporate governance and balance in the board activities. Improving gender
balance in the boardroom not only increases the performance of the board and
strengthens the businesses but is also good for the economy. In India gender
diversity has been recognized by Adi Godrej Committee as well as Section 149(1)
under Companies Act, 2013, Rule 3 of Companies (Appointment and
Qualification of Directors) Rules, 2014 and Regulation 17(1) (a) under SEBI
(LODR) Regulations, 2015, have been enacted in favor of inclusion of women
directors in the corporate boards.
E. Performance Evaluation of The Board And Management99

Board evaluation is a key means by which boards can recognize and
correct corporate governance problems and add real value to their organizations.
A properly conducted board evaluation can contribute significantly to
performance improvements on organisational; board and individual member level.
Board evaluation typically examines the roles of the Board and the entailing
responsibilities, and assesses how effectively these are fulfilled by the Board. The
stakeholders and investors are interested to know whether the members of Board
are effectively functioning individually and collectively. The Board at many times
requires new skills for promptly responding to the dynamic changing business
environment. Performance measurement, against the set benchmarks, in the form
of Board evaluation has the potential to significantly enhance Board effectiveness,
maximize strengths, tackle weaknesses and improve corporate relationships.
Annual assessment is a powerful tool to convert good boards into great boards.
The evaluation provides the board and its committees with the opportunity
to consider how group culture, cohesiveness, composition, leadership, meetings
information processes and governance policies influence performance. Board
Evaluation helps to identify areas for potential adjustment and provides an
187
99
188
opportunity to remind directors of the importance of group dynamics and effective

board and committee processes in fulfilling board and committee responsibilities.
Thus, Board evaluation contributes significantly to improved performance

at three levels - organizational, Board and individual Board member level. It also
improves the leadership, teamwork, accountability, decision-making,
communication and efficiency of the board. A commitment to annual evaluation
is a powerful change agent.
The Board evaluation sets the standards of performance and improves the
culture of collective action by Board. Evaluation also improves teamwork by
creating better understating of Board dynamics, board-management relations and
thinking as a group within the board. It helps to maximize board/ director
contribution by encouraging participation in meetings and highlighting the skill
gaps on the Board and those of individual members. Directors demonstrate
commitment to improvement, based on the feedback provided on individual and
collective skill gaps. Board evaluation is mentioned in Adi Godrej Committee,
Uday Kotak Committee as well as Companies Act100, 2013 and SEBI (LODR)
Regulations101, 2015.
F. Code of Conduct of Board of Directors And Senior Management

The Board shall lay down a code of conduct for all Board members and
senior management of the company. The code of conduct shall be posted on the
website of the company. All Board members and senior management personnel
shall affirm compliance with the code on an annual basis. The Annual Report of
the company shall contain a declaration to this effect signed by the CEO.
Mentioned in N.R. Narayana Murthy Committee. Section 149(8) under
Companies Act, 2013
100
Section 134(3) (p) deals with Broad Evaluation framework and parameters. Section 178 (2)
The Role of the Nominations and Remuneration Committee in performance evaluation of
directors. Schedule IV [Part II (2)] and Schedule IV (Part VII) Independent Directors’ role in
performance evaluation of Boards, non-independent directors and Chairperson. Schedule IV
Part V and Schedule IV Part VIII Performance evaluation of Independent Directors.
189
101
Regulation 17(10) and Regulation 19(4) read with Part D of Schedule II
190
provides that the company and the independent directors shall abide by the
provisions specified in Schedule IV. Regulation 17 (5) and Regulation 26 (3)
under SEBI (LODR) Regulations, 2015.
G. Independent Directors102
Independent Directors103 play a pivotal role in maintaining a transparent
working environment in the corporate regime. Independent directors are known to
bring an objective view in board deliberations. They also ensure that there is no
dominance of one individual or special interest group or the stifling of healthy
debate. They act as the guardians of the interest of all shareholders and
stakeholders, especially in the areas of potential conflict of interest.
Independent Directors bring a valuable outside perspective to the

deliberations. They contribute significantly to the decision-making process of the
Board. They can bring on objective view to the evaluation of the performance of
Board and management. In addition, they can play an important role in areas
where the interest of management, the company and shareholders may converge
such as executive remuneration, succession planning, changes in corporate
control, audit function etc.
The CII Task Force, Kumar Mangalam Birla Committee, Naresh Chandra
Committee, Narayana Murthy Committee, J.J.Irani Committee, Uday Kotak
Committee, Organization for Economic Co-operation and Development (OECD)
and California Public Employees Retirement System (CalPERS) all have stressed
the benefit and need for Independent director in a company for good governance.
Independent Directors constitute such category of Directors who are expected to
have impartial and objective judgment for the proper functioning of the company.
Some of the important provisions of Independent Directors are as follows:
102
103
Section 2(47) of the Companies Act 2013 provides that “independent director” means an
independent director referred to in sub-Section (6) of Section 149. And under Regulation
16(1)
191
(b) of SEBI (LODR) Regulations, 2015
192
 Role and Functions of Independent Directors are mentioned in

Schedule IV of the Companies Act 2013
 Duties of Independent Directors are mentioned in Schedule IV of the
Companies Act 2013
 Maximum Number of Directorship of Independent Directors: Section
165 under Companies Act, 2013 and Regulation 17A104 & Regulation
25(1)105 under SEBI (LODR) Regulations, 2015.
 Maximum Tenure of Independent Director: Section 149(10) & (11)
under Companies Act, 2013 and Regulation 25(2) under SEBI (LODR)
Regulations, 2015.
 Qualification of Independent Director: Rule 5 of Companies
(Appointment and Qualification of Directors) Rules, 2014 and the
qualifications of IDs are not specified in the Listed Regulation.
 Performance Evaluation of Independent Director: Section 178(2) read
with Schedule IV under Companies Act, 2013 and Regulation 17(10)106
and Schedule II & V under SEBI (LODR) Regulations, 2015.
 Separate Meeting of Independent Director: Section 149 read with
Schedule IV under Companies Act, 2013 and Regulation 25(3) under
SEBI (LODR) Regulations, 2015.
 Familiarisation Programme for Independent Director: An important
aspect of Board effectiveness would be appropriate attention to the
development and training of directors. Schedule IV under Companies Act,
2013 and Regulation 25(7) under SEBI (LODR) Regulations, 2015.
 Prohibited Stock Options For Independent Director: Section 197(7)
under Companies Act, 2013 and Regulation17 (6) (d) under SEBI (LODR)
Regulations, 2015.
104
Inserted by the SEBI (Listing Obligations and Disclosure Requirements) (Amendment)
Regulations, 2018, w.e.f. 1.4.2019.
105
Substituted by the SEBI (Listing Obligations and Disclosure Requirements) (Amendment)
Regulations, 2018, w.e.f 1st Oct 2018
106
Substituted by the SEBI (Listing Obligations and Disclosure Requirements) (Amendment)
Regulations, 2018, w.e.f. 1.4.2019
193
 Filing Of Casual Vacancy of Independent Director: Second proviso to

Rule 4 of Companies (Appointment and Qualification of Directors) Rules,
2014 with Schedule IV, Section VI and Regulation 25(6) under SEBI
(LODR) Regulations, 2015.
 Liability of Independent Director107: Section 149(12) and Regulation 25
(5) under SEBI (LODR) Regulations, 2015.
H. Additional Practices To Boost Board Effectiveness
 Separation of Role of Chairman and Chief Executive Officer 108: It is

perceived that separating the roles of chairman and chief executive officer
(CEO) increases the effectiveness of a company’s board. Provisions under
Companies Act, 2013: First proviso to Section 203(1) of the Companies
Act, 2013 provides for the separation of the role of Chairman and Chief
Executive Officer and the Regulation 17(1B) of SEBI (LODR)
Regulations, 2015 provides that effect from April 1, 2020, the top 500
listed entities shall ensure that the Chairperson of the board of such listed
entity
 Succession Planning109: Succession plans are used to address the
inevitable changes that occur when directors resign, retire or die. Attention
to succession planning can help ensure the board includes directors with a
balanced level of institutional knowledge and fresh perspectives. There is
no such provision under the Companies Act, 2013 but SEBI (LODR)
Regulations, 2015 have Regulation 17(4) for this.
 Appointment of Lead Independent Director110: Internationally, it is
considered a good practice to designate an independent director as a lead
independent director or senior independent director. It was mentioned in
107
SEC v. Raval, Civil Action No. 8:10-cv-00101 (D.Neb. filed Mar.15,2010), Bhopal Gas
Tragedy verdict
108
109
194
110
195
Adi Godrej Committee. The lead independent director must keep a keen
eye on whether the chair is performing their role to the board’s satisfaction
without losing objectivity or independence. They monitor the relationship
between the chair and the CEO and ensure that it is a well-functioning
working relationship without becoming too close or powerful. The lead
independent director also coordinates the activities of other non-employee
directors and advises the chairman on issues ranging from the schedule of
board meetings to recommending retention of advisors and consultants to
the management.
I. Key Managerial Personnel (KMP)

The Companies Act, 2013 has introduced numerous new concepts; one
amongst them is key managerial personnel (KMP), which had been a matter of
vagueness and legal scrutiny among the corporates since its commencement. Be
that as it may, the notion inarguably does have to its credit, numerous new ideas
that are envisioned to raise the level of professionalism and accountability in the
corporate dome. The concept of KMP is nothing but fetching together a group of
persons under one title, some of which already exist under the Companies Act,
1956.
As per section 2(51) of the Act111, KMP means the following person(s), if
appointed in a company, whether under a legal obligation under the Act i.e. under
section 203(1) of the Act112 or otherwise: the Chief Executive Officer (CEO) or
the Managing Director (MD) or the manager; the company secretary (CS); the
whole- time director (WTD); the Chief Financial Officer (CFO); and such other
officer as may be prescribed (none prescribed till date).
The mounting complications of modern business and corporate

management, chiefly in the wake of concentrated global as well as domestic
111
Companies Act, 2013
112
Companies Act, 2013
196
competition following liberalization of economic policies have employed greater

accountabilities on company directors. While the shareholders of the corporate
body, are its true owners, it is the Board of Directors which is liable for the
overall management of the company. The Board is accountable in numerous ways
to number of different stakeholders. The Directors are estimated to attain a
harmonious equilibrium between competing interest, viz., shareholders, investors,
consumers, employees, Government and the society at large. The Board should
preserve a proper balance between short-term priorities and long-term priorities of
the company. The Boards of directors are predictable to play sheet anchor
characters in corporate governance. Playing of such a character is likely when
there is clear-cut segregation and explanation of their duties and activities.
Keeping the spirit of corporate governance principles, the Companies Act, 2013
and the SEBI (LODR) 2015 have framed various Regulation regarding the role
and function directors, with a motive to discourage corporate crimes.
2.5. CORPORATE GOVERNANCE AND COMMITTEES
“Committees have become so important nowadays that

subcommittees have to be appointed to do the work”
– J. Peter113
With the expansion, due to globalization and the tangling of the borders,
the pressures on the board have intensified massively. The governing
requirements are manifold and the responsibility on the board is gargantuan. In
this setting, the stipulation to delegate oversight to a board committee has become
vital. Committees are generally designed as a means of refining board
effectiveness and competence, in areas where added concentrated, quantified and
technical debates
197
113
198
are necessary. However, it is to be taken into consideration that even though the
board delegates some of the responsibilities to a committee, the final
accountability lies with the board. The Companies Act, 2013 and SEBI (LODR)
Regulations, 2015 have delivered a very strong regulatory framework to highlight
the effectiveness of Board Committees as important to an effective Board.
2.5.1. Mandatory Committees of the Board

Under the Companies Act, 2013 and SEBI (LODR), Regulation 2015, the
following are the mandatory committees of the Board which are to be constituted.
2.5.1.1. Audit Committee:

Audit Committee is one of the main pillars of the corporate governance
mechanism in any company. The Committee is charged with the principal
oversight of financial reporting and disclosure and aims to enhance the confidence
in the integrity of the company’s financial reporting, the internal control processes
and procedures and the risk management systems. 114 Various International, as well
as National Committees such as Cadbury Committee, Hampel Committee, LSE
Combined Code, Blue Ribbon Committee, Cll, Kumar Mangalam Birla
Committee, Naresh Chandra Committee, Narayana Murthy Committee, J.J. Irani
Committee, Corporate Governance Voluntary Guidelines, Uday Kotak
Committee, have stressed the importance of audit committee and related issues.
 Constitution of Audit Committee115 is mentioned under Section 177(1) of the

Companies Act, 2013 read with rule 6 of the Companies (Meetings of the
Board and its Powers) Rules, 2014 and Regulation 18(1) of the SEBI (Listing
Obligations and Disclosure Requirement) Regulations, 2015. Under the
Companies Act, 2013, the Audit Committee’s mandate is significantly
different
114
115
In the case of Shruti Power Projects (P.) Ltd., In re, the National Company Law Tribunal,
Ahmedabad Bench, CP No. 5/441/NCLT/AHM/2017, dated April 13, 2017, opined that
where company had constituted audit committee and complied with requirement under
Section 177 though belatedly and punishment provided for said violation was fine only,
199
application of company for compounding offence under said Section was to be allowed.
200
from what was laid down under Section 292A of the Companies Act 1956, and
its scope and constitution have also been broadened.116
 Functions/Role of the Audit Committee are mentioned Under Section 177(4)
of the Companies Act, 2013 and Under Regulation 18(3) SEBI Listing
Regulations, 2015.
 Powers of the Audit Committee are laid down in Section 177 (5), (6) and (7)
of the Companies Act, 2013 and Regulation 18(2) (c) of the SEBI Listing
Regulations, 2015.
i. Auditors
Auditors are in charge for evaluating the validity and reliability of the
company’s financial statements. Statutory auditors are independent accounting
professionals that audit the financial statements on behalf of the shareholders to
make sure they provide a real and rational presentation of the financial standing of
the company. Thus it is the shareholders who appoint auditors in the Annual
General Meeting.117
The auditors must be a chartered accountant or a chartered accountant firm

and they must carry out their work with professional fairness and due care. They
should preserve a professional and independent relationship with the
management.118 Auditor Independence119 is a vibrant foundation of corporate
governance by certifying the credibility of the statistics conveyed by the financial
statements. It is hence serious that the auditors not only be independent but also
seen to be independent of the companies they are auditing. Auditors and the
independency of auditors had noteworthy dwelling in Sarbanes – Oxley Act,
Cadbury Committee, Hampel Committee, OECD, Naresh Chandra Committee,
J.J. Irani Committee, and Corporate Governance Voluntary Guidelines.
116
117
118
119
Sec 141 of Companies Act 2013
201
To safeguard the ‘independence’ of auditors appointed, the following key

aspects have been addressed by the Companies Act, 2013:
a) Auditor appointment and mandatory rotation120: The concept of

mandatory audit rotation is not new. There has been considerable interest in
mandatory auditor rotation as a means of strengthening auditor independence,
reducing the incidence of audit failure, improving the quality of audit and
protecting investors and other users of financial statements. Mandatory audit
firm rotation is defined in the Sarbanes-Oxley (SOX) Act. Mandatory audit
firm rotation is often discussed as a potential way to improve audit quality –
typically gaining attention when public confidence in the audit function has
been eroded by events such as corporate scandals or audit failures.121
b) Conflict of Interest: To avoid any conflict of interest and to ensure auditor’s
independence, it is essential that the auditor does not have any pecuniary
interest in the company being audited. In this context, the qualifications 122,
remuneration123, disqualifications124 powers and duties125 of auditors are been
embodied under the Companies Act. 2013.
c) Auditors Protection: To enable the auditor to function without fear of
removal, it is important to provide them protection from punitive action by the
management. Sec 140126 provides for the Removal, resignation of auditor and
giving of special notice.
d) Reporting of Fraud by Auditors to inform the Central Government Section
143 (12)127 of the Companies Act 2013 read with Companies (Audit and
Auditors) rules, 2015.
120
Section 139 of Companies Act 2013 mention the appointment and requires mandatory
rotation of auditors.
121
122
Sec 141 of Companies Act, 2013
123
124
Sec 143(3) of Companies Act, 2013
125
126
The Companies Act 2013
127
Amended by the Companies (Amendment) Act, 2015
202
ii. Constitution of National Financial Reporting Authority (NFRA)128

The National Financial Reporting Authority (NFRA) is an independent
regulator established under Section 132 of the Companies Act, 2013 to oversee the
auditing profession. It is similar to Public Company Accounting. Oversight Body
set by in the USA by the Sarbanes Oxley Act 2002.
The need for establishing NFRA has arisen on account of the need felt
across various jurisdictions in the world, in the wake of accounting scams, to
establish independent regulators, independent from those it regulates, for
enforcement of auditing standards and ensuring the quality of audits to strengthen
the independence of audit firms, quality of audits and, therefore enhance investor
and public confidence in financial disclosures of companies.
In accordance with provisions of section 132 of the Companies Act, 2013

and rules to be made thereunder, National Financial Reporting Authority (NFRA)
would perform the functions relating to making recommendations on framing
accounting and auditing policies/standards, monitoring and enforcing compliance
with such standards, overseeing quality of service of the auditing profession and
investigating and ordering action against professional and other misconduct as
provided under the Act.
2.5.1.2. Nomination and Remuneration Committee

This committee is established to categorize suitable candidates for various
director position, evaluate of board of directors, to make sure that remuneration
arrangements support the strategic aims of a business and enable the recruitment,
motivation and retention of senior executives while also complying with the
requirements of Regulation.129 Provision for the constitution and function of this
Committee is laid down under the Companies Act 2013 is Section 178(1) of the
Act read with rule 6 of the Companies (Meetings of the Board and its Powers)
Rules,
128
129
Indian Institute of Corporate Affairs, Corporate Governance, 1.113-1.115 (Taxmann, New
203
Delhi, 2015)
204
2014 and Rule 4 of the Companies (Appointment and Qualification of Directors)

Rules, 2014, and Regulation 19(1) Under SEBI (LODR) Regulations, 2015.
2.5.1.3. Stakeholders Relationship Committee

The main function of the committee is to consider and resolve the
grievances of security holders of the company. The role of the Stakeholders
Relationship Committee shall be to consider and resolve the grievances of the
security holders of the listed entity including complaints related to transfer of
shares, non-receipt of annual report and non-receipt of declared dividends. 130 Part
D of Schedule II of SEBI (LODR) Regulations, 2015 underlines the role of this
committee. Constitution / Composition of the Stakeholders Committee is
mentioned under Section 178(5) (6) and (7) of the Companies Act 2013 and under
Regulation – 20 of SEBI (Listing Obligations and Disclosure Requirements)
Regulations, 2015.
2.5.1.4. Corporate Social Responsibility Committee

Corporate Social Responsibility (CSR) is a concept whereby companies
not only consider their profitability and growth, but also the interests of society
and the environment by taking responsibility for the impact of their activities on
stakeholders, environment, consumers, employees, communities, and all other
members of the public sphere. For this purpose, the Section 135 (1) of the
Companies Act 2013 read with rule 3 of Companies (Corporate Social
Responsibility Policy) Rules, 2014, mandates that every company which fulfils
any of the following criteria during any of the three preceding financial years shall
constitute a CSR Committee.
2.5.1.5. Risk Management Committee

A business is exposed to various kinds of risk such as strategic risk, data-
security risk, fiduciary risk, credit risk, liquidity risk, reputational risk,
130
205
environmental risk, competition risk, fraud risk, technological risk etc. A risk
management Committee’s role is to assist the Board in establishing risk
management policy, overseeing and monitoring its implementation. This has been
laid under Regulation 21 of the SEBI (LODR) Regulation 2015 which deals with
the formulation of the Risk Management Committee.
2.5.1.6. Other Committees

In addition to the Committees of the Board mandated by the Companies
Act, 2013 or SEBI (LODR), Regulation 2015. Companies may also constitute
other Committees to oversee a specific objective or project.
After an exhaustive discussion on the subject of the various functions

carried out by each committee and their lending of crucial assistance to the
harmonious functioning of the company. It can be sum up that the committees
focus accountability on known groups. Despite the fact that the board as a legal
unit constantly retains responsibility for the work of its committees, the
committees because of its focus on the mandate, the size of the committee being
fairly smaller than the board tends to be more effective. On the other hand,
committees may dilute governance integrity to the magnitude that they may
obscure the direct board to CEO accountability and fragment the board’s
wholeness. For that reason, it is significant that there is clarity of delegation and it
should be warranted that committees are not put between the board and the CEO,
either by giving committees official instructional authority or by allowing them to
evaluate performance using their own criteria. These regulations of committees
were formulated with a view to uphold the principles of corporate governance and
curtail the crimes.
206
2.6. CORPORATE GOVERNANCE AND CORPORATE

POLICIES & DISCLOSURES
“The financial crisis is a stark reminder that transparency and

disclosure are essential in today’s marketplace.”
– Jack Reed131
One of the chief principle of corporate governance is transparency or

disclosures. Horning this principle forms the bases of any company to expand in a
progress way. The business incorporates a legal system and, for most legal
systems, it is an obligation in most countries to frame and release its policies and
statements. Many countries have advanced laws and procedures and have
formulated guidelines on how and when the accounting disclosures have to be
prepared. Companies issue this data in their compiled form of annual reports.
These disclosures are also made into other publications other than annual reports.
It is compulsory by law and regulators to reveal accounting policies to the
shareholder and stockholders of the business. Such disclosures are significant for
potential investors to decide on investment in the business or corporation. These
disclosures guarantee active and transparent communication that is broad,
rational, truthful, timely, clear, affordable and equally accessible by all
stakeholders, including the shareholders, investors, employees and customers, in
compliance with the governing regulations.
Policies are an indispensable component of every corporates and address

important issues. Employing policies during decision-making confirms that the
management is constant in its decisions. These policies must be efficiently
communicated amongst stakeholders. The company should offer easy access to
131
207
policies and also publicly disclose it. These policies assist as vital forms of
internal control, it reduce cost and help in building a learning culture. A Company
has to articulate thorough policies in varied areas of operations that support to
bring homogeneity in processes by accurately delineating the business approach.
Some of the policies are legally obligatory, some are organizational necessities
and some are voluntarily prepared as part of good governance.
a) The key policies required for companies under the Companies Act, 2013
include: Corporate Social Responsibility Policy under Section 135(4), Risk
Management Policy under Section 134 (3) (n), Vigil Mechanism Policy under
Section 177 (10), Nomination and Remuneration policy under Section 178 (3)
and (4).132
b) Policies under the SEBI (LODR), Regulations, 2015: Risk Policy
[Regulation 4(2)(f)(ii)(1)] Policy for Preservation of Documents, [Regulation
9], Policy for Determining ‘Material’ Subsidiary [Regulation 16(2)(c)] Policy
on Materiality of Related Party Transactions [Regulation 23(1)] Policy for
determination of materiality of events, Whistle Blower Policy [Regulation 22
and 46 (2) (e)] Policy Relating to the Remuneration of Directors, KMPs &
Other Employees [Part- D, Schedule II (1)] Policy on Diversity of Board
[Part-
D, Schedule II (3)] Dividend Distribution Policy Regulation 43A.133
c) Policies under other laws and voluntary policies: Insider Trading Policy: A
listed company has to also formulate Insider Trading Policy as per the
requirements of SEBI (Prohibition of Insider Trading) Regulations, 2015,
Policy for prevention of sexual harassment at workplace under the Sexual
Harassment of Women at Workplace (Prevention, Prohibition and Redressal)
Act, 2013.134
d) Voluntary Policies: In addition to above, the companies may also formulate
following policies: Code of business conduct & Ethics, Ethics policy,
132
133
208
134
209
Information security policy, Health and safety policy, Gender diversity policy,
Environmental policy, Policy on investor relations, Quality policy, Social
accountability policy, Communication policy, Investment and cash policy,
etc.135
2.6.1. Disclosure and Transparency Requirements

Disclosure and transparency are of utmost importance in a fiduciary
relationship between the directors and shareholders. Boards’ Report or Directors’
Report is an important tool for the stakeholders to judge or analyse the
performance and corporate governance measures adopted by the company.
Good corporate governance should guarantee that timely and correct

disclosure is made concerning all material matters relating to the company,
comprising its financial condition and fallouts. It is in the interest of each
company to be responsible for clear, timely and trustworthy facts that is
satisfactorily drafted, and to make important data likewise available to all
stakeholders136. Various International and National committees have always turn
the spotlight on disclosures and transparency requirements as one of the prime
most foundation for good corporate governance. This have been spotted in
Cadbury Committee, Greenbury Committee, Hampel Committee, LSE Combined
Code, OECD, Cll, Kumar Mangalam Birla Committee, Naresh Chandra
Committee, Narayana Murthy Committee, J. J. Irani Committee, as well as Uday
Kotak Committee. Information should be prepared and disclosed in accordance
with high quality standards of accounting and financial and non-financial
disclosure.
Reporting may mean to provide the information to the stakeholders as per

the requirement of the law. Reporting is not the new concept. The companies are
reporting through their annual report which is a comprehensive report on a
company’s activities throughout the preceding year. Annual reports are intended
to
210
135
Ibid
136
Ibid
211
give shareholders and other interested people information about the company’s
activities and financial performance. The annual report contains the financial
reporting as well as non-financial reporting137. Disclosure requirements are
covered under various enactments including Companies Act, 2013, and rules
made thereunder, Reserve Bank of India Act, 1934, Securities Exchange Board of
India (Listing Obligations and Disclosure Requirements) Regulations, 2015,
Sexual Harassment of women at workplace (Prevention, Prohibition and
Redressal) Act, 2013.
2.6.2. Disclosures: - Financial Reporting138

Financial reporting is the process of producing statements that disclose an
organisation’s financial status to management, investors and the government.
Financial reporting serves two primary purposes. First, it helps management to
engage in effective decision- making concerning the company’s objectives and
overall strategies. The data disclosed in the reports can help management discern
the strengths and weaknesses of the company, as well as its overall financial
health. Second, financial reporting provides vital information about the financial
health and activities of the company to its stakeholders including its shareholders,
potential investors, consumers, and government regulators. It’s a means of
ensuring that the company is being run appropriately.
Financial Reporting involves the disclosure of financial information to the

various stakeholders about the financial performance and financial position of the
organisation over a specified period of time. These stakeholders include –
investors, creditors, public, debt providers, governments & government agencies.
In case of listed companies the frequency of financial reporting is quarterly &
annual.
The main components of financial reporting are: The financial statements

(Sec 129) – Balance Sheet, Statement of Profit & Loss, Cash flow statement &
138
194
137
138
194
Statement of changes in stock holder’s equity, The notes to financial statements,

Quarterly & Annual reports (in case of listed companies), Prospectus (In case of
companies going for IPOs), Management Discussion & Analysis (In case of
public companies), Auditor’s Report (Sec 143)
The Institute of Chartered Accounts of India (ICAI) has issued various

accounting standards and guidance notes which are applied for the purpose of
financial reporting. This ensures uniformity across various diversified industries
when they prepare and present their financial statements.
Corporate reporting is an essential means by which companies

communicate with investors as part of their accountability and stewardship
obligations. The current financial reporting model was developed in the 1930’s
for an industrial world. In general, the model provides a backwards-looking
review of performance and does not provide enough relevant information for
decision- making today.
The financial reporting model is like “looking in the rear-view mirror,”

when in fact the road ahead is very turbulent and there are huge impacts on the
company, both societal and environmental. It is not necessarily the volume of
information, but the lack of a comprehensive story, which is where improvements
in corporate reporting are needed.
2.6.3. Disclosures: - Non-Financial Reporting139

Apart from financial reporting, the non-financial reporting under the
annual reports is also being made by the companies. It contains the information
relating to the company’s performance during the previous year, future
projections, award achievements and penalty imposed, if any by any regulators,
are apprised to the Stake holders by way of reporting in the annual report. Non-
financial reporting is the practice of measuring, disclosing and being accountable
to internal and external
139
195
139
195
stakeholders for organisational performance towards the goal of sustainable and

inclusive development.
Due to the negative externalities of economic development, the practice of

non-financial reporting started largely in response to pressure from non-
governmental organisations (NGOs) and civic society, which claimed that many
firms lacked social and environmental responsibility. It epitomizes that a
company’s financial health is dependent on much more than the assets on its
balance sheet and the movements on its profit and loss account. Non-financial
reporting is an opportunity to communicate in an open and transparent way with
stakeholders. In their non-financial reports, firms volunteer an overview of their
environmental and social impact during the previous year. The information in
nonfinancial reports contributes to building up a company’s risk-return profile.
Non-financial reporting includes-
A. Board’s Report140
The Board’s Report is the most important means of communication by the
Board of Directors of a company with its shareholders. It is a comprehensive
document which serves to inform the shareholders about the performance and
various other aspects of the company, its major policies, relevant changes in
management, future programmes of expansion, modernization and diversification,
capitalization or reserves, etc. The Board’s Report enables not only the
shareholders but also the lenders, bankers, government and the public to make an
appraisal of the company’s performance and provides an insight into the future
growth and profitability of the company.
The Companies Act, 2013 is based on enhanced disclosures and

transparency. The Board’s Report is a document, preparation of which requires
thorough understanding of the subject. The Act requires the Board of Directors to
140
The Institute Of Company Secretaries of India, Executive Programme Company Law 289-
290 (M.P. Printers, New Delhi, May 2018)
196
disclose on various parameters including the risk management, board evaluation,

implementation of Corporate Social Responsibility, a statement of declaration
given by independent directors. The Secretarial Audit Report is also required to
be annexed to the Board’s Report.
It is mandatory for the Board of Directors of every company to present

financial statement to the shareholders along with its report, known as the
“Board’s Report” at every annual general meeting. Apart from giving a complete
review of the performance of the company for the year under report, material
changes till the date of the report, the report highlights the significance of various
national and international developments which can have an impact on the
business and indicates the future strategy of the company.
The Board’s Report enables shareholders, lenders, bankers, government,

prospective investors, all the stakeholders and the public to make an appraisal of
the company’s performance and reflects the level of corporate governance in the
company.
The matters to be included in the Board’s Report have been specified in

Section 134 of the Companies Act, 2013 and Rule 8 of the Companies (Accounts)
Rules, 2014. Apart from this, under Sections 67, 92, 129, 131, 135, 149, 160, 168,
177, 178, 188, 197, 204 of the Companies Act, 2013, relevant information has to
be disclosed in the Board’s Report. The Board’s Report of companies whose
shares are listed on a stock exchange must include additional information as
specified in the SEBI (LODR) Regulation, 2015.
Disclosure in Board’s Report (Pursuant to the Companies Act, 2013)

Disclosures under Section 134(3), Issue of Equity Shares with differential
rights, Issue of Sweat Equity Shares, Details of Employees Stock Option Scheme
– section 62(1)(b), Restrictions on purchase by company or giving of loans,
Disclosures pertaining to Consolidated Financial Statements, Voluntary revision
of Financial Statements or Board’s Report – Section 131(1), Corporate
197
Social
198
Responsibility – Section 135, Re-Appointments of an Independent Director –

Section 149(10), Resignation of Director – Section 168(1), Composition of Audit
Committee – Section 177(8), Details of Vigil Mechanism – Section 177(10),
Related party transactions – Section 188(2), Disclosures pertaining to
remuneration of directors and employees – Section 197(12), Remuneration
received by MD and WTD from holding or subsidiary companies – Section
197(14), Secretarial Audit Report – Section 204 (1), Additional Disclosures by
Producer Company, Policy relating to the remuneration for the directors, key
managerial personnel and other employees – Section 178(4)
B. Corporate Social Responsibility Reporting141

The Board of the Company is mandated to prepare a CSR Report under
Section 134(3) (o) of the Companies Act, 2013. The Companies (CSR Policy)
Rules, 2014 provide for the format for reporting CSR activities annually. The
format for the annual report on CSR activities to be included in the Board’s
report. If the company has been unable to spend the minimum required on its CSR
initiatives, the reasons for not doing so are to be specified in the Board Report. If
a company has a website, the CSR policy and the report containing details of such
activities have to be made available on the company’s website for informational
purposes.
C. Corporate Sustainability Reporting142

The concept of sustainability reporting is of recent origin. Corporate
sustainability is an approach that creates long-term stakeholder value by
implementing a business strategy that considers every dimension of how a
business operates in the ethical, social, environmental, cultural, and economic
spheres. Sustainability reporting is a process for publicly disclosing an
organization’s economic, environmental, and social performance. Many
companies find that financial reporting alone no longer satisfies the needs of
shareholders, customers,
141
199
142
200
communities and other stakeholders for information about overall organizational

performance. Through sustainability reporting, organizations report on progress
against performance goals not only for economic achievements, but for
environmental protection and social well-being. A sustainability report also
presents the organization’s values and governance model, and demonstrates the
link between its strategy and its commitment to a sustainable global economy.
In line with the National Voluntary Guidelines on Social, Environmental

and Economic Responsibilities of Business and considering the larger interest of
public disclosure regarding steps taken by listed entities from an Environmental,
Social and Governance (“ESG”) perspective, SEBI decided to mandate inclusion
of Business Responsibility Reports (“BRR reports”) as part of the Annual Reports
for listed entities. SEBI in its (Listing Obligations and Disclosure Requirements)
Regulations, 2015 has mandated the requirement of submission of BRR for top
500 listed entities describing initiative taken by them from an environmental,
social and governance perspective in the prescribed format [Regulation 34(2)(f)].
Business Responsibility Report is a disclosure of adoption of responsible business
practices by a listed company to all its stakeholders.
The mandatory disclosures are also spread among various rules under
Companies Act 2013143, Under SEBI (Issue of Capital and Disclosure
Requirements) Regulations, 2009144, Under SEBI (Substantial Acquisition of
Shares and Takeovers) Regulations, 2011145, Under SEBI (Listing Obligations and
143
Rule 8 of Companies (Accounts) Rules 2014, Rule 8(13), Rule 12(9) and Rule 16(4) of
Companies (Share Capital and Debenture) Rules, 2014, Rule 5(1) of Companies
(Appointment & Remuneration of Managerial Personnel) Rules, 2014 and Rule 8 of the
Companies (Corporate Social Responsibility) Rules, 2014
144
Filing of offer document (Regulation 6), Copies of offer documents to be available to public
(Regulation 61) Manner of disclosures in the offer document (Regulation 57) Pre-issue
advertisement for public issue (Regulation 47) Issue opening and issue closing advertisement
for public issue (Regulation 48) Post-issue reports (Regulation 65) Post-issue Advertisements
(Regulation 66) Other Responsibilities [Regulation 69(4)]
145
Disclosure of acquisition and disposal (Regulation 29), continual disclosures (Regulation 30)
Disclosure of encumbered shares (Regulation 31)
201
Disclosure Requirements) Regulations, 2015146, Under SEBI (Prohibition of

Insider Trading) Regulations, 2015147.
So it can be sum up that, transparency is a pivotal feature in the market

based monitoring of companies and is central to shareholders’ ability to exercise
their ownership rights on an informed basis, which can help attract capital and
maintain confidence in the capital markets.
Adequate disclosure also helps improve public understanding of the

structure and activities of enterprises, corporate policies and performance with
respect to environmental and ethical standards, and companies’ relationships with
the communities in which they operate. Disclosures are made both through the
print media and the electronic media. Today corporates have to disclose
mandatorily under various legislations including the Companies Act, 2013, SEBI
(LODR) Regulations, 2015, Sexual Harassment (Prevention, Prohibition and
Redressal) Act, 2013 etc.
From the above discussion it is evident that, the prominence of good

Corporate Governance has also been gradually recognized for refining the firm’s
competitiveness, better corporate performance and better relationship with all
stakeholders, because of which the Indian Corporates have obliged to change their
principles of Governance. Therefore, Indian companies are now required to make
ever more elaborate disclosures than have been making until now, for which they
are also required to observe to the uniform and proper accounting standards, as
the standards decrease discretion, discrepancy and improves the utility of the
disclosure. The test in striking a fine balance between investor’s need for more
146
Intimations Prior Intimations (Regulation 29) Disclosures Disclosure of Events or Information
[Regulation (30)] Disclosure of Material events Disclosure of events on the applicability of
materiality guidelines, Disclosure of Other Events Disclosures in Financial Results
[Regulation (33)] Annual Report Disclosures [Regulation (34)] Website Disclosures
[Regulation (46)]
147
Disclosures of Trading By Insiders Regulation 6(2), Disclosures by Certain Persons – Initial
Disclosure (Regulation 7 (1)) Continual Disclosures: Regulation 7(2) Code of Fair
Disclosure (Regulation 8)
202
information and the company’s need to safeguard that disclosures do not

concession its competitive advantage. The Audit Committee strive for defense of
the interests of various stakeholders of an organization. It plays an essential role
in checking fraudulent reporting. Corporate Governance seeks to certify ethical
business conduct and includes the timely and accurate disclosure of financial
information. Thus, the study of practices of accounting standards is an significant
and appropriate issue of good Corporate Governance in the present-day
environment, as the standards are observed as a technical reply to call for better
financial accounting and reporting or as a replication of a society’s changing
expectations of corporate behavior and an automobile in social and political
monitoring and control of the corporates. Thus, with the above in mind it can be
affirmed that the Companies Act, 2013 and SEBI (LODR) 2015, have given the
required attention to the principle of transparency and disclosures, by
incorporating various regulations in its legal system.
2.7. CORPORATE GOVERNANCE AND RELATED PARTY

TRANSACTIONS & VIGIL MECHANISM
“Citizens never support a weak company and birds don’t build

nests on a tree that does not bear fruits”
Chanakya148
2.7.1. Related Party Transaction

The central purpose of commercial dealings and business goals is to
circulate and re-distribute societal capital for the benefit of those working for the
business. The higher and larger a company becomes, the further it diffuses into
the society. The grandiosity of a business is directly proportionate to its
influence on
148
From his work ‘ArthaSastra’ highlight the importance of good governance practices in a
203
company.
204
its stakeholder interests. In such conditions, even the minutest entrusted interest
would root adversarial consequences upon the community and stakeholders. One
of the governing measures is to regulate 'related party transactions', which if left
loose or un-scrutinized can crop many corrupt events in the company's working.
Narayana Murthy Committee as well as Uday Kotak Committee have greatly
emphasis on disclosure relating to related party transaction. The definition of
related party is given under Section 2(76)149 of Companies Act, 2013 and Clause
2(zb)150 of SEBI (LODR) Regulation, 2015 and related party transaction is defined
under Clause (zc)151 of SEBI (LODR) Regulation, 2015.
Related Party Transactions are not forbidden per se. The law in India does
not outlaw RPTs. As an alternative, the law puts into place a system of checks and
balances, such as requirements for sanction from the board of
directors/shareholders, timely disclosures and prior statutory approvals, to certify
that the transactions are piloted within appropriate boundaries. RPTs are required
to be bring about transparently, so as not to inflict a heavy burden on a company’s
resources, affect the optimum allocation of resources, distort competition or
siphon off public resources.152 They are controlled by certain conditions as
indicated in
149
―related party, with reference to a company, means— (i) a director or his relative; (ii) a key
managerial personnel or his relative; (iii) a firm, in which a director, manager or his relative
is a partner; (iv) a private company in which a director or manager is a member or director;
(v) a public company in which a director or manager is a director or holds along with his
relatives, more than two per cent. of its paid-up share capital; (vi) any body corporate whose
Board of Directors, managing director or manager is accustomed to act in accordance with
the advice, directions or instructions of a director or manager; (vii) any person on whose
advice, directions or instructions a director or manager is accustomed to act: Provided that
nothing in sub-clauses
(vi) and (vii) shall apply to the advice, directions or instructions given in a professional
capacity; (viii) any company which is— (A) a holding, subsidiary or an associate company
of such company; or (B) a subsidiary of a holding company to which it is also a subsidiary;
(ix) such other person as may be prescribed;
150
―related party means a related party as defined under sub-Section (76) of Section 2 of the
Companies Act, 2013 or under the applicable accounting standards: Provided that this
definition shall not be applicable for the units issued by mutual funds which are listed on a
recognised stock exchange(s);
151
related party transaction means a transfer of resources, services or obligations between a
listed entity and a related party, regardless of whether a price is charged and a "transaction"
with a related party shall be construed to include a single transaction or a group of
205
transactions in a contract: Providedthat this definition shall not be applicable for the units
issued by mutual funds which are listed on a recognised stock exchange(s);
152
206
Section 188 of the Companies Act, 2013 by the means of which they can be
released to the Board and shareholders for them to consent. A prior consent from
the Audit Committee is to be attained. If the transactions is within the meaning of
Section 188153, then these need to be disclosed in the Board Report for prior
approval154. If the transactions are further than the limits given under the Act, then
they need to be revealed in the General Meeting for approval by special
resolution. If the transactions are piloted and carried out in an unbiased,
justiciable manner without any dash of influence of the parties' relation upon itself
then such transactions have been exempted from compliance with Section 188 of
the Companies Act, 2013.
Given countless corporate fraud cases have had one or the other
connection to related-party transactions (RPTs)—Satyam, WorldCom, Enron, Jet
Airways, amongst others—RPTs are a tightrope for both corporate governance
and regulation. RPTs have been stare at with suspicion in India because Indian
business houses are often promoter-led. So, from the Bhabha committee (1952)
and the JJ Irani committee (2005) to the Companies Law committee (2016), all
have suggested some form of control; the Companies Act 2013 vested momentous
power to adjudge RPTs with the shareholders. According to the Act, RPTs, in
general, require the approval of the company’s board and audit committee. This
bodes very well for corporate governance and also controlling fraud. While the
decline in RPTs is an outcome of enhanced corporate governance—be it via
enhanced scrutiny, questioning, or the rise in awareness amongst shareholders
regarding such transactions—the fact is that there need to be provisions to guard
against activist investors vetoing RPTs wholesale, even when one makes eminent
business sense without running afoul of compliance.
153
The Companies Act, 2013
154
Section 134(3)(h) read with Rule 8 of Companies (Accounts) Rules, 2014 mandates that
Board‘s Report shall contain particulars of contracts or arrangements with related party as
referred in Section 188 of the Companies Act, 2013 in Form AOC-2[Rule 8 of Companies
(Accounts) Rules, 2014]. Regulation 27, 46 and 53 Details of all material transactions with
related parties shall be disclosed quarterly along with the compliance report on corporate
governance. The Listed Entity shall disclose the policy on dealing with RPTs on its website
207
and a web link thereto shall be provided in the Annual Report.
208
2.7.2. Vigil Mechanism/Whistle Blower

The term “whistle-blowing” births from the practice of British policemen
who blew their whistles whenever they observed the commission of a crime. The
term ‘whistle-blowing’ is a comparatively hot entry into the terminology of
corporate affairs even though the phenomenon itself is not novel. The concept of a
Whistleblower was present even in Ancient India. Whistle blowers are individuals
who uncover corruption and fraud in corporate by filing a law suit or a complaint
with Government authorities that stimulates a criminal enquiry into the
organizations alleged conduct. A whistleblower can be an employee, former
employee or member of a corporate, a government agency, who have inclination
to take remedial action on the misdemeanors.155
Prominence of Vigil Mechanism/Whistle Blowing can be trace down in

Sarbanes-Oxley Act, 2002 (SOX)156 Narayana Murthy Committee, J. J. Irani
Committee, National Voluntary Guidelines on Corporate Governance and Adi
Godrej Committee.
Vigil Mechanism is to be established under Companies Act, 2013 Section

177(9) read with Rule 7 of Companies (Meeting of Board and its Power) Rules,
2014 and under Regulation 22 of SEBI (LODR) Regulation 2015. The details of
establishment of such mechanism shall be disclosed by the Listed Entity on its
website and in the Board’s report.157
Whistle Blowing is an ethical thing to do. It addresses misconduct and

permits justice to reach the rock bottom of companies that otherwise may stay
unexposed. Honesty amongst employees helps to encourage loyalty towards the
company's mission. Similarly, transparency enables clear and effective business
communication. Whistleblowing is crucially important in shielding a company's
155
156
Section 302 of Sarbanes Oxley Act of 2002, an Act enacted by U.S. congress to protect
investors by improving the accuracy and reliability of corporate disclosures made pursuant to
the securities laws, and for other purposes contains following provisions for whistle-blowers.
157
209
stakeholder and ultimately protecting your organisation through battling fraud and
misconduct. The calamitous alternative is risking legal prosecution, major fines
and a public scandal, escorted by a considerable loss of reputation. Eliminating
these risks means that employees can focus on more chief matters, such as core
business needs and the organisation's success. On a larger scale, fraud costs
taxpayers an unwarranted amount of money every year. By encouraging a
whistleblowing culture we can crash down on fraud and prevent this unnecessary
loss of capital.
In this age of globalization, where economic motives precede over all

virtues and traditions; protection of larger public interest from great corporate
scandals has become matter of great importance. Corporate whistleblowing
worldwide is considered as one of the best tools to ensure good corporate
governance. Whistleblower policy has been recognized as one of the basic
features of corporate governance. Whistleblowing can be used as an avenue for
maintaining and promoting integrity by speaking truthfully about whist is right
and what is wrong. It is an approach that combines many things; it asserts rights,
protects interests, and influences justice. Whistleblowing is an important tool in
any organization’s corporate governance strategy as it empowers employees to act
on incidences of misconduct and help maintain a safe workplace while protecting
profits and reputation of the company. Further, the whistleblowing is an essence
of conscience keeping and the whistleblowers are the conscience keepers. A
conscience keeper has an obligation to blow the whistle i.e. raise an alarm
whenever he finds anything which is not as per standards of conscience. Thus, in
order to protect corporate conscience, it is necessary to protect conscience
keepers, i.e. whistleblowers.
Thus, with a view to elevate the principles of transparency and

accountability the related party transactions as well as the whistleblower
regulation are formulated under various regulations.
210
2.8. CORPORATE GOVERNANCE AND SHAREHOLDER

RIGHTS
“Shareholders have the right and obligation to set the parameters

of corporate behavior within which management pursues profit."
– Eliot Spitzer158
The presence of agency problem is well acknowledged in the corporate

governance. Ideologically the managers are agents who are expected to work in
the best interest of the principal i.e. the shareholders. In practice, on the other
hand, there is a robust probability that there may be an inconsistency between the
expectations of the shareholders and the activities of the management. For that
reason there is a requirement to lay down obviously the rights of the shareholders
and that of the management. Safeguard of shareholder rights is inviolable for good
corporate governance. It is one of the column of corporate governance. For the
effective working of the capital market, the essential obligation is that the investor
rights are well secured. The Preamble to Securities and Exchange Board of India
Act, 1992 also guarantees to protect the interest of investors.
Principle III of the OECD Principles on Corporate Governance states that

the corporate governance framework should ensure the equitable treatment of all
shareholders, including minority and foreign shareholders. The Sarbanes-Oxley
Act significantly increased the importance of investor relations in the financial
markets. The Kumar Mangalam Birla Committee have instigated for setting up
Shareholders/Investors’ Grievance Committee and Adi Godrej Committee
articulated on investor activism.
158
211
In the Indian context, the SEBI Act, 1992, the various SEBI regulations
and Guidelines and the Companies Act, 2013 enables the empowerment of
shareholder rights.
2.8.1. Rights of Shareholders
a) Under the Companies Act, 2013

 Right to receive copies of the following documents (Sec 136, Sec 190 and Sec
101)
 Right to inspect statutory registers/returns and get copies thereof on payment
of prescribed fees. (Sec 71, 71(13), Sec 87, Sec 94, Sec 119, Sec 189 Sec 170,
Sec
190.)
 Right to attend Meetings of the Shareholders and exercise voting rights at
these meetings either personally or through proxy.(Sec 96, 100, 105 and 107)
 Other Rights (Sec 44, Sec 46 to Sec 48, Sec 56 Sec 62 Sec 72 Sec 140 Sec 210
Sec 241 Sec 242)
 In case of winding up: Winding up of a company in case of oppression and
mismanagement (Sec 241 and Sec 242)
b) Rights of shareholders under SEBI (LODR) Regulations, 2015
Regulation 4(2) states that the listed entity which has listed its specified
securities shall comply with the corporate governance provisions as specified
in chapter IV which shall be implemented in a manner so as to achieve the
objectives.
c) Some of the guidelines are: SEBI (Issue of Capital and Disclosure
Requirements) Regulations, 2009, SEBI (Ombudsman) Regulation 2003,
SEBI (Prohibition of fraudulent and unfair Trade Practices relating to
securities market) Regulations 2003, SEBI (Prohibition of Insider Trading)
Regulations 2015.
d) In addition to the above, SEBI has set up a separate cell to address the
grievances of investors - SEBI Complaints Redressal System (SCORES).
212
Securities and Exchange Board of India (Investor Protection and Education
213
Fund) Regulations, 2009 to establish a Fund to be called the Investor

Protection and Education Fund.
2.8.2. Protection of Rights of Minority Shareholders159

“The protection of the minority shareholders within the domain of
corporate activity constitutes one of the most difficult problems facing modern
company law. The aim must be to strike a balance between the effective control of
the company and the interest of the small individual shareholders.”160 Similarly, in
the words of Palmer: “A proper balance of the rights of majority and minority
shareholders is essential for the smooth functioning of the company.” 161 The
modern Companies Acts, therefore contain a large number of provisions for the
protection of the interest of investors in companies. The aim of these provisions is
to require those who control the affair of a company to exercise their powers
according to certain principles of natural justice and fair play. 162Oppression and
Mismanagement163, Class Action Suit164, Representation on Board165, E-Voting,
Exit Rights166, Application for Relief to NCLT.
According to OECD principles (OECD, 2015) ‘the corporate governance

framework should protect and facilitate the exercise of shareholders’ rights and
ensure the equitable treatment of all shareholders, including minority and foreign
shareholders. All shareholders should have the opportunity to obtain effective
redress for violation of their rights.”
159
160
N.A. Bastin, “Minority Protection in Company Law.” (1968) JBL 320
161
Clive M. Schmitthoff and Curry (Eds.), Palmer’s Company Law (20 th Edn 1959) 492 on
Majority and Minority Rights
162
These principles are briefly summed up by K.W. Wedderburn. “Going the Whole Hogg v
Cramphorn Ltd 1967 Ch 254, See also by the same writer,” Unreformed Company Law”
(1969) 32 Mod L Rev 563.
163
Part XVI consisting of Sections from 241 to 246 of Companies Act, 2013 deals with
prevention of Oppression and Mismanagement
164
Section 245 under Companies Act, 2013
165
166
214
2.8.3. Institutional Investors Role in Promoting Good Corporate

Governance167
There is a conjoint connection between institutional investors and the
corporate governance of a company. The corporate governance practices followed
by a company determine the number of institutional investors and the investment.
Most if institutional investors would invest in companies whose governance
mechanisms are in place. The Institutional Investors use different tools like One-
to-one meetings, focus lists, corporate governance rating systems, etc. to assess
the health of Company before investing resources in it. The OECD principles
have advocated increased awareness amongst institutional shareholding and
increased participation of investors in the affairs of the company. The
Stewardship Code is a part of UK company law concerning principles that
institutional investors are expected to follow. Principles for Responsible
Investment (PRI) is an approach to investing that aims to incorporate
environmental, social and governance (ESG) factors into investment decisions, to
better manage risk and generate sustainable, long-term returns. The PRI is the
world’s leading proponent of responsible investment. The Code for Responsible
Investing in South Africa (CRISA) gives guidance on how the institutional
investor should execute investment analysis and investment activities and exercise
rights so as to promote sound governance. CalPERS believes that the Core
Principles (Global Principle) should be adopted by all companies across all
markets in order to establish the foundation for achieving long-term sustainable
investment returns through accountable corporate governance structures. India
regulate foreign institutional investment by SEBI (Foreign Institutional Investors)
Regulations, 1995.
The corporate governance in its narrowest as well as broadest

interpretation includes shareholder as the main fragment of the system. It can also
been affirmed that shareholders are one of the utmost important stakeholders of a
corporate. Keeping the legitimate rights of the shareholders, equitable treatment
amongst all
215
167
216
shareholders, meaningful engagement with them, etc. are all paramount in

confirming good corporate governance. Guarding the shareholder rights is the
essential expectation from any corporate. The higher level of corporate
governance which are in tune with its principles, the stronger is the company in
the eyes of the shareholders. Thus it can be confirmed that various corporate
Regulations in India uphold the rights of the shareholders.
2.9. CORPORATE GOVERNANCE AND STAKEHOLDERS
Creating a strong company culture isn’t just good business. It’s

the right thing to do, and it makes your company better for all
stakeholders - employees, management, and customers.
– Julia Hartz168
Corporate governance in its broadest sense includes not only the

shareholders but also stakeholders at large. The changing dimension of
accountability, transparency and fairness towards all stakeholders is the key to
success for a corporate. Stakeholder theory is a notion about how business really
works. For any business to be efficacious it has to construct value for customers,
suppliers, employees, communities and financiers, shareholders, banks, and other
people with the money. R. Edward Freeman169 defined Stakeholder theory in the
broad definition of a stakeholder is any group or individual which can affect or is
affected by an organization. The claims on corporate integrity are ominously
grander than the necessities of maximizing financial return to stockholders.
Stakeholder arrangement is the technique by which a company comprises people
who may be affected by the choices it makes or can impact the execution of its
168
169
R. Edward Freeman is a professor at the Darden School of the University of Virginia. He is
the author of several books on Stakeholder Management including the influential Strategic
Management: A Stakeholder Approach.
217
decisions. The Caux Round Table (CRT)170 is an international web of business

leaders working to encourage a morally and sustainable way of doing business.
The CRT relies on that its Principles for Responsible Business arrange for needed
foundations for a fair, free, and transparent global society. The CRT Principles for
Responsible Business are reinforced by more comprehensive Stakeholder
Management Guidelines covering each key element of business success:
customers, employees, shareholders, suppliers, competitors, and communities.
Clarkson introduced171 seven Principles of Stakeholder Management. The
Clarkson Principles are “meta-principles” that encourage management to embrace
specific stakeholder principles and then to implement them in accordance with the
norms listed.
2.9.1. Recognition of Stakeholder Concept in Law
 Section 135 Corporate Social Responsibilities, Section 166(2) and Role and
Functions of Independent Directors - Part II of Schedule IV Code of
Independent Directors Under the Indian Companies Act, 2013
 Under the Principles articulated under SEBI (LODR) Regulations, 2015: The
listed entity should recognise the rights of stakeholders and encourage co-
operation between listed entity and the stakeholders in the following manner:-
(i) The listed entity should respect the rights of stakeholders that are
established by law or through mutual agreements. (ii) Stakeholders should
have the opportunity to obtain effective redress for violation of their rights.
(iii) Stakeholders should have access to relevant, sufficient and reliable
information on a timely and regular basis to enable them to participate in
Corporate Governance process. (iv)The listed entity should devise an effective
whistle blower mechanism enabling stakeholders, including individual
employees and
170
The Caux Round Table was founded in 1986 by Frits Philips Sr, former President of Philips
Electronics, and Olivier Giscard d’Estaing.
171
The Clarkson Principles Of Stakeholder Management available on
https://www.rotman.utoronto.ca/-/media/Files/Programs-and-
Areas/Institutes/Clarkson/Principles-of-Stakeholder-Management.pdf, visited on Nov. 23th,
218
2019
219
their representative bodies, to freely communicate their concerns about illegal

or unethical practices.
2.9.2. In India, Ministry of Corporate Affairs prescribed the following voluntary

measures:-
a) Corporate social responsibility (CSR) voluntary guidelines, 2009 172: The

guidelines emanated from the fundamental principle that each business entity
should formulate a
CSR policy to guide its strategic planning and provide a road-map for its CSR
initiatives, which should be an integral part of its overall business policy and
aligned with its business goals. The CSR Policy should cover the core
elements of – Care for Stakeholders, Ethical Functioning, Respect for
Worker’s right and welfare, Respect for Human Rights, Respect for
Environment, and Activities for Social and Inclusive Development.
b) National Voluntary guidelines on social, environmental & economic
responsibilities of business, 2011173: It was released by the Ministry of
Corporate Affairs (MCA) in July 2011. The national framework on Business
Responsibility is essentially a set of nine principles that offer businesses an
Indian understanding and approach to inculcating responsible business
conduct. It represents the consolidated perspective of vital stakeholders in
India, and accordingly lays down the basic requirements for businesses to
function responsibly, thereby ensuring a wholesome and inclusive process of
economic growth.
172
Corporate Social Responsibility Voluntary GUIDELINES 2009, available at
https://www.mca.gov.in/Ministry/latestnews/CSR_Voluntary_Guidelines_24dec2009.pdf
visited on Nov 23th, 2019
173
National Voluntary guidelines on social, environmental & economic responsibilities of
business, 2011 available at
https://www.mca.gov.in/Ministry/latestnews/National_Voluntary_Guidelines_2011_12jul20
11.pdf visited on Nov 23th, 2019
220
c) National Guidelines on Responsible Business Conduct, 2019174: The Ministry

of Corporate Affairs has formulated the National Guidelines on Responsible
Business Conduct (NGRBC) by revising the National Voluntary Guidelines
on Social, Environmental and Economic Responsibilities of Business, 2011
(NVGs). The NGRBC has taken the requirement of responsible business to a
step further by identifying specific aspects of each Principle mentioned under
this, as a part of the duty and responsibility of the highest governance
structure of the business to oversee the implementation and adherence to these
guidelines in their business.
Every activity in the organization should be in the interest of all the

stakeholders since stakeholders provide resources that are more or less critical to a
firm’s long-term success. Sound corporate governance ensured that all
stakeholders are protected. Corporate governance will succeed if everybody feels
their responsibility. Corporate governance represents the values framework, the
ethical framework and moral framework under which business decisions are
taken. Corporate governance has succeed in attractive a good deal of public
interest because of its apparent importance for the economic health of corporation
and society in general. Moreover, with growing public awareness and interest in
globalization. With the opening of economies worldwide, the main thrust is to
enhance, competitiveness for sustainable development in the competitive
environment. Free and fair market economic rules should rightly establish.
Moreover, transparency and fairness in the market competitors should be ensured.
Thus it can be confirmed that various legislations have uphold that the
stakeholders interest should also form a part of good corporate governance
practice. It can be said that the responsibility on the corporates will be levied in
case the interest of the stakeholders are violated, which amplifies the liability of
the corporates.
174
National Guidelines on Responsible Business Conduct, 2019, available on
https://www.mca.gov.in/Ministry/pdf/NationalGuildeline_15032019.pdf visited on Nov. 23th,
221
2019
222
2.10. CORPORATE GOVERNANCE AND COMPLIANCE

MANAGEMENT
“It takes 20 years to build a reputation and five minutes to ruin

it. If you think about that, you’ll do things differently.”
– Warren Buffett175
Corporate accountability is on everyone's mind today. Business executives

face substantial gravity to comply with several regulations. Enlarged liability and
regulatory oversight have amplified risk to appoint where it stresses continuous
assessment of compliance management systems. Furthermore, the multiplication
of compliance requirements that organizations face rises the risk of non-
compliance, which may have prospective civil and criminal penalties.
2.10.1. Compliance with the Following Laws
 Pollution /Environment related pollution: Air (Prevention and Control of

Pollution) Act, 1981, Water (Prevention and Control of Pollution) Act, 1974,
Water (Prevention and Control of Pollution) Act, 1974, Environment
Protection Act, 1986
 Fiscal Laws: Income Tax Act, 1961, Central Excise Act, 1944, Customs Act,
1962, Wealth Tax Act, 1957, Central Sales Tax/State Sales Tax/VAT, Service
Tax. GST Tax.
 Securities Laws: SEBI Act, 1992, Securities (Contracts) Regulation Act,
1956 and rules made there under various rules, regulations guidelines and
circulars issued by SEBI, Provisions of Listing Agreement • Depositories Act,
1996
 Commercial Laws: Indian Contract Act, 1872, Transfer of Property Act,
175
214
1882, Negotiable Instruments Act, 1881
175
214
 Corporate & Economic Laws: Companies Act, 2013 and the Rules and
regulations framed there under, Secretarial Standards/Accounting
Standards/Cost Accounting Standards issued respectively. Foreign Exchange
Management Act, 1999 • Foreign Contribution (Regulation) Act, 2010. •
Competition Act. 2002.
 Labour Laws: Minimum Wages Act, 1948 • Payment of Bonus Act, 1965 •
Payment of Gratuity Act, 1972 • Employees' Provident Funds and (Misc.
Provisions) Act, 1952 Employees' State Insurance Act, 1948 • Factories Act,
1948 • Employees' Compensation Act, 1923.
2.10.2. Compliance Risk

Every organisation has a responsibility to identify existing and emerging
legislation, relevant to its business and ensure that risks that may arise from the
compliance requirements are well understood by the hoard and management. The
risks that may stem from non-compliance with the key legislative requirements
can be very costly and damaging to an organization and the custodians of
governance within the organisation. The consequences of non-compliance range
from penalties and fines, to imprisonment, withdrawal of licenses and reputation
risk which may individually and or collectively have a fundamental impact on the
organisation's sustainability as a going concern as well as the impact that a lack of
good corporate governance at the board and business levels can have on the
business. Many compliance regulations are enacted to ensure that organizations
operate fairly and ethically. For that reason, Compliance risk is also known as
integrity risk.176
2.10.3. Governance and Risk Compliance (GRC)

Compliance Risk management is part of the collective governance, risk
management and compliance (GRC) discipline. The three fields frequently
overlap in the areas of incident management, internal auditing, operational risk
assessment, and compliance with various regulations. Today, many
176
215
companies take an
176
215
integrated approach to these three areas, referring to them collectively as

Governance, Risk Management and Compliance (GRC).177
GRC is the integrated collection of capabilities that enable an organization

to reliably achieve objectives, address uncertainty and act with integrity.
Governance, risk and compliance (GRC) refer to a strategy for managing an
organization’s overall governance, enterprise risk management and compliance
with regulations. GRC is a set of processes and practices that runs across
departments and functions. GRC might be enabled by a dedicated platform and
other tools, although this is not mandatory. While organizations generally don’t
need to maintain a separate GRC department, most organizations have a team in
place to manage the GRC platform and tools. The scope of GRC doesn’t end with
just governance, risk, and compliance management, but also includes assurance
and performance management, information security management, quality
management, ethics and values management, and business continuity
management.178
Good governance and compliance practices are not an endpoint, but a path
towards creating a corporate environment of trust, transparency, and
accountability. The complexity of the risk landscape and the penalties for non-
compliance make it essential for organizations to conduct thorough assessments
of their compliance risk exposure. This is particularly true for those organizations
that operate on a global scale.179
A good ethics and compliance risk assessment includes both a

comprehensive framework and a methodology for evaluating and prioritizing risk.
With this information in hand, organizations will be able to develop effective
mitigation strategies and reduce the likelihood of a major noncompliance event or
ethics failure, setting themselves apart in the marketplace from their
competitors.180
180
Ibid
216
177
178
Ibid
179
Ibid
180
Ibid
216
Thus, policy-makers best serve the public interest when they allow for
flexibility in setting corporate governance rules. Companies also have a
responsibility to establish a corporate culture and tone at the top that promote a
values-based rather than compliance-based mindset to governance. Management,
internal auditors, boards of directors and external auditors share the responsibility
of executing their respective roles with healthy skepticism, transparency and
robust communication.181
The intricacy of the risk background and the penalties for non-compliance
make it indispensable for organizations to conduct thorough assessments of their
compliance risk exposure. This is predominantly correct for those organizations
that operate on a global scale. An upright ethics and compliance risk assessment
includes both a comprehensive framework and a methodology for evaluating and
prioritizing risk. The, policy-makers best serve the public interest when they
permit for flexibility in setting corporate governance rules. Companies also have a
responsibility to launch a corporate culture and tone at the top that encourage a
values-based rather than compliance-based mindset to governance. Management,
internal auditors, boards of directors and external auditors share the responsibility
of performing their respective roles with healthy skepticism, transparency and
robust communication. As it is seen that the principles of corporate governance
are articulated in spectrum of rules, if the corporate governance is to be followed
in the accurate sense then the compliance of law should be the paramount priority
of the company, if compliance of the law is not done properly then it attracts
liabilities on the corporates as well as the management.
2.11. GOVERNANCE FLAWS: RATIONALE FOR CORPORATE

CRIMINALITY
Corporate governance is essential for the success and sustainability of the
business over a period of time. When the set of rules and processes which form
the
181
Ibid
217
181
Ibid
217
governance mechanism of a firm are ineffective or fail, it can have disastrous

consequences for a business. In the past few years, corporate governance has
become a widely-discussed subject and a very important consideration for
investors around the world. Investors and governments have started demanding
better governance practices from all companies particularly after the wide
publicity over corporate scandals such as Enron, Parmalat, Xerox, World Com,
Satyam, Sahara and many others during early parts of this century.
Internal and External Corporate Governance mechanisms serve the aim of

guarding the interest of stakeholders of a company. Ineffectiveness of the board of
directors, inadequate internal controls or weak regulations may lead to a corporate
problem. Corporate failure may occur if these flaws are allowed to develop over a
period of time. The Governance flaws of collapsed companies may be classified
into the following broad categories:
2.11.1 Failure of the Board of Directors182: Failure of Board of Directors is the

most common Governance failure noticed in various corporate failures for
e.g. Satyam, World.Com and Enron. Some of the reasons are:
• Lack of Independence/Conflicts of Interest

• Lack of Strength of the Board
• Unwillingness of the Board to challenge the Dominating CEO
• Combination of the Role of Board Chairman and CEO
• Insufficient Skills of the Directors
Much discussion focuses on board and its role as the keystone for good
corporate governance. To this end, the law requires a healthy mix of executive
and non-executive directors and appointment of at least one woman director for
diversity. There is no doubt that a capable, diverse and active board would, to
large extent, improve governance standards of a company. The challenge lies in
rooting
182
See, Kumar Anil, Gupta Lovleen, et al., ‘Auditing and Corporate Governance’ p. 151-181
218
(Taxmann, New Delhi, 3rd Edition/ December 2019)
219
governance in corporate cultures so that there is improving compliance "in spirit".

Most companies' in India tend to only comply on paper; board appointments are
still by way of "word of mouth" or fellow board member recommendations. It is
common for friends and family of promoters (a uniquely Indian term for founders
and controlling shareholders) and management to be appointed as board members.
2.11.2 Controlling Dishonest CEO183

Corporate Governance hinges on an appropriate balance of accountability
between the board of directors and the executives led by the CEO. There is
imbalance with the CEO taking a dominating role and uses this position to pursue
his/her greediness, the result inevitably is Corporate failure as happened in the
series of collapses which took place one after the other since the turn of this
century. The COSO report 2010 states that CEO’s are involved in 72 per cent of
the 347 alleged cases of fraudulent financial reporting listed with SEC during
1998-2007 periods. The report indicates that in most major cases of fraudulent
reporting the CEO’s of the companies are the main instigators and it is a planned
initiative. The motivations of fraud ranges from the desire to meet the financial
expectations, to expropriating the funds, and include diversion of funds for family
concern, empire building ad to hide worsening business situation, increase
executive compensation and/or improved chances of gaining Debt and Equity
funding.
2.11.3. Defect in Corporate Strategies184

The key concern of the board is to frame corporate strategies in the finest
interest of the shareholders and also other stakeholders. The boards of failed
companies blundered in formulating strategies and policies in the interest of the
companies. In most cases the strategies were not clear being based on the whims
and fancies of the founders or over dominating CEOs in complete disregard to the
rights of the shareholders. The policies were excessively focused on short term
profits and share prices. The strategies were not in consonance with the resources
220
183
Ibid
184
See, Supra Note 174
221
and capacity of the company giving rise to excessive risk taking which could not
be controlled and ultimately lead to the collapse.
2.11.4. Collapse of Internal Controls185

Internal control mechanism within an organization provides checks and
balances ensures adherence to the legal requirements to prevent frauds, and to
ensure governance in the interest of the stakeholders. Breakdown in the internal
control systems made the companies vulnerable to pressures and problems which
eventually collapsed.
2.11.5. Faults in External Audit186

The corporate failures appearing one after the other question the utility
and efficacy of the external audit process. In almost all such cases either the
auditor applied faulty audit techniques or was negligent in performing their duties
or had the conflict of interest.
2.11.6. Deficient Regulatory Mechanisms187

Regulatory framework is designed to strengthen corporate governance by
requiring compliance with the rules and regulations. Weakening of the regulatory
mechanism, which may arise from oversight of the regulators or poor
implementation of the rules or lax rules or conflict of interest can compound
corporate problems and speed up the collapses. The enterprise response to
compliance mandates seems to be to create and implement whatever compliances
are prescribed - to ‘get it done’. The goal is to simply meet the ‘letter of the law’.
The effort is directed towards completing Compliance tasks as quickly as possible
so all could return to ‘real’ business tasks.
185
Ibid
186
Ibid
187
Ibid
220
2.11.7. Independency of Independent directors188

The whole edifice of good corporate governance is dependent on efficacy
and effectiveness of independent directors. Independent Directors are considered
as mentors of management and as supervisor who will ensure that management
action creates value to shareholders, responsible for protecting minority
shareholders’ interests as well. The regulator on its part has, time and again, made
the norms tighter – introduced comprehensive definition of independent directors,
defined a role of the audit committee, etc. Nevertheless, most Indian promoters
design a tick-the-box way out of the regulatory requirements. However, their role
has been questioned after four independent directors of Satyam Scandal resigned
and the recent case of removal of Chairman from Tata Sons. Independence, when
it comes to boards, allows a director to be objective and evaluate performance and
well-being of company without any conflict of interest or undue influence of
interested parties. After some of the largest corporate scams in country hit the
market in recent years following the increase in number of resignations by IDs,
there is a heightened focus on their role and responsibilities as custodians of
stakeholders’ interests. The critical reason for breakout of these scams is that most
Indian companies are controlled by promoters and independent directors are only
independent on paper. They are individuals familiar to a promoter or from a
known close group. This familiarity between promoters and independent directors
disturbs the true independent role of directors. Though the Code for Independent
Directors specified in Companies Act, 2013 underlines the role, functions and
duties of Independent Directors, concerns are being raised over their real
independence and effectively discharging their duties, role and responsibilities.
Though adequate independent directors have their presence in Enron, WorldCom
and Satyam’s Boards, their role has been inadequate in stopping these disasters
occur. The governance codes underlines that independent directors should ensure
individual views on various key company board issues including setting strategic
objectives and codes, appointment and remuneration of key persons. Though
Companies
188
Ibid
221
188
Ibid
221
comply with independence requirements for directors as per Companies Act and
SEBI Regulations, but will not consider its competencies and knowledge required
to ensure duties cast on him. Rather the appointment should focus on his skills
and experience that will add to board diversity, providing objective and
independent board evaluation, leadership abilities required to present the company
to the World at large.
The above discussion, helps to understand that violation of corporate

governance rules as well as not imbibing the true essence of corporate governance
i.e. following the spirit of law are the main reasons for corporate crimes in India.
The cases of Sahara, Satyam, etc. have the following flaws in corporate
governance which led to the biggest scams.
2.11.8 Landmark instances where crime was cultivated due to flaws in

corporate governance.
The above discussion have elaborated that India have developed a
handsome amount of legislation for governance of corporates. Many argues that it
was an antidote for scandals and crimes which hit the Indian economic market
time and again, which is true but after careful analysis it can be seen that these
scandals as well as corporate crime have a common string that is they had flaws in
implementing the governance regulations. Some of the renowned corporate
crimes are Bhopal Gas Tragedy. Uphaar Tragedy, Harshad Mehta Scam, Satyam
Scam, Sahara Scam, Kingfisher Scam, Punjab National Bank Scam, etc. The
flaws in some of the scams are discussed below in detail.
a) Satyam Computers Fraud189

“Play the game, transform the business," said the bright blue hoarding of
Satyam Computers greeting passengers at Bengaluru Airport. The tagline
acquired a whole new meaning on January 7, 2009 when the Chairman and
CEO of the
189
See, Singh, Dr. Vijay Kumar, ‘Corporate Power to Corporate Crimes: Understanding
Corporate Criminal Liability in India.’ P. 279- 282 (Satyam Law International, New Delhi,
222
2013)
223
company Mr. B. Ramalinga Raju made a confession that he inflated cash and
bank balances of Rs 5,040 crore and exonerated everybody from liability by the
statement “None of the board members, past or present, had any knowledge 01'
the situation in which the company is placed.190” Satyam, like Enron &
WorldCom, Fudged numbers and committed other frauds191.
Later, the confession turned out to be a Rs. 7,000 Crore fraud, one of its
kind in India192. Charges on Ramalinga Raju were brought for alleged criminal
conspiracy, criminal breach of trust, cheating, forgery, and falsification of records
under Sections 120B, 409, 420, 468, and 471 respectively and was put behind
bars. CID, SFIO and SEBI were investigating the fraud193.
The scam exposed the can of worms in the securities market Regulation in
India. It exposed the situation where red flags by agencies were not taken note
of194. The fraud exposed the weaknesses of the regulatory framework in India as
well as the failure of auditors. The issue of Insider Trading, undisclosed pledges,
and violation of takeover code were raised. At the time of writing the confession
Raju's
190
Many say that this was a planned move by Raju to evade prosecution in US (Rachna Monga
& Tejeesh NS Behl.) Further, a voluntary confession made the authorities soft on him, as
even after the confession police did not arrest him for two days. Some argue that Raju did it
to save Satyam. Had the fraud been discovered in the normal course of work, Satyam would
have imploded. By taking the entire blame upon himself, he saved the company. Bhandari,
Bhupesh, et.al., The Satyam Saga, Business Standard (2009) at p.51.
191
Agrawal, Amol, Satyam does an Enron!, http://mostlyeconomics.wordpress.com. Also see
Bhandari, id. at p. 60
192
As noted above, the modus operandi of the fraud was similar to Enron and WorldCom. It
seems that Raju started inflating the company's income some time in 2001; with the aim of
showing his customers that the company was big and growing at a fast clip. The Social
Responsibility activities (particularly the EMRI scheme) and association of renowned people
on the board of independent directors gave a lot of credibility to the company, which was
later exploited problems at Satyam came to light with the Satyam's Board clearing the
proposal to acquire Maytas Infra and Maytas Properties for Rs. 7,680 crore. This deal
neither gelled in with the MCA nor with the investors, hence later called off,
193
See "The Great Satyam Robbery", Business Today, February 8, 2009, at 41 (issue with a
cover story on Satyam Scandal).
194
CLSA had originally put out a report way back in 2001 on Satyam's "dubious accounting
practices." The then RPI MP Ramdas Athawale accused Raju and gang of tax fraud and
insider trading in 2003. But clearly, the company police — the independent directors on the
224
board, the external auditors, the banks, the stock exchanges and NSDL and CSDL were
either napping or in collusion.
225
share in Satyam was less than 3%. Whether a promoter's share can fall to such an
extent? Law had no answers to it and hurriedly SEBI incorporated Regulation 8A
in the Takeover Code195.
Satyam fraud is an ideal example for green-washing as the reputation

gained in years was used to perpetrate the fraud196. One of the exceptional factors
following the scam has been the outcome. This is probably the first instance,
anywhere in the world, of a company hit by a scam of this magnitude having
actually been saved. The most noteworthy thing was the handling of this scam by
MCA197. In just 100 days, the company had been stabilized and sold through due
process, after ensuring stability for employees and continuity of service for
customers198. After acquisition of Satyam by Tech Mahindra, it is known as
Mahindra Satyam199. Thus, Satyam Scam provides us with a barrel filled up with
food for thoughts on the issue of corporate crime. There are lessons to be learnt
from the fraud200, but the question is have we learnt any in the earlier spate of
frauds.
It is further interesting to note that SFIO had sought to withdraw the

complaint against Satyam Computer Services Limited the list of accused as all the
allegations were directed only against Raju and others who have been in-charge of
the management of the affairs of SCSL. However, this has been rejected by the
195
Also see Clause 35 and Clause 41 of the Listing Agreement; Amendments requiring
disclosure of pledged/encumbered shares of Promoters.
196
Golden Peacock Global Award for Excellence in Corporate Governance ( The Institute of
Directors, that had conferred the Golden Peacock Global Award to Satyam, has now stripped
the company of the laurel in view of the "falsification of the books of accounts") . UK Trade
& Investment India Business Award for corporate social responsibility,
197
The board of Satyam was replaced with a new one, which decided to appoint an independent
accounting firm (KPMG and Deloitte) to re-state the company's financials. The process of
sale of the company was finalized and Tech Mahindra won the bid for Satyam and acquired
the same, making the corporation a new entity, immune (practically) from the litigations
from the fraud committed by Ramalinga Raju.
198
Bhandari, Bhupesh, et.al., The Satyam Saga, Business Standard (2009) at p.x.
199
http://www.mahindrasatyam.com/
200
For example, see Mehra, Puja, "On the Trail of Fraud", Bitsiness Today, February 8, 2009
(providing six signals to detect a possible financial fraud, i.e. pricey acquisitions, large idle
cash reserves, capitalized expenses, rise in cash and bank balances, large revenue jumps, and
226
change in promoter shareholdings.
227
court201. This is an effort to erase the scar or scam over SCSL which is owned by
an independent entity (ruling out the naming and shaming)202. This raises the issue
of treatment meted out to the corporate bodies in a corporate crime ease.
Flaws in Corporate Governance: Reason for the Scandal

The corporate governance model of Satyam had certain flaws, they are as follows:
 Small Holding of the Promoters: The promoters of the company held a small
percentage of equity. Their concern was that poor performance would result in
takeover or divesting of their control over the company. The promoters
especially Mr. Raju built up his clout in the company and outside by showing
fabulous results and floating success stories. The numerous awards conferred
on Mr. Raju placed him as the charismatic leader of the company. He had
unquestioned control over the company.
 Failure of the Board of Directors: The board of directors of Satyam had well
acclaimed persons as the members. The board failed miserably in its prime
duty of oversight. The fraud had been cooking in Satyam for years together.
The board of directors of the company composed of a majority of independent
directors, remained either ignorant of the whole scam or turned a blind eye to
wrong practices At the behest of the promoters the board cleared the deal of
acquiring family concerns of the promoters even though it was a major
departure from the normal activities and expertise of Satyam. It was clearly a
failure on the part of the board of directors of the company especially
independent directors who cleared the deal ignoring the interest of the other
(majority) shareholders.
 Failure of the Audit Committee: The audit committee of Satyam failed in its
duty to act a whistle blowers expose. As per the investigations of SFIO, on 18
201
http://www.moneycontrol.com/news/business/sfio-denied-permission-to-drop-scslsatyam-
fraud-case 592752.html Visited on nov. 30th 2019
202
There is further a proposal to merge Tech Mahindra and Mahindra Satyam. It is likely that
after integration the name 4Satyam' would be dropped. See
http://www.thehindubusinessline.com/industry-and-economy/info-tech/mahindra-satyam-
tech-mahindra-merger-by-yearendlarticle2836995.ece Visited on nov. 30th 2019
228
December 2008, two d after the Satyam board met and decided to acquire two
group firms—Maytas Infra Ltd Maytas Properties Ltd.—independent director
Krishna Palepu received an anonymous by an alias, Joseph Abraham. That
email exposed the fraud. Palepu forwarded the email to another independent
director, M. Rammohan Rao, Chairman of the Audit forwarded that email to
S. Gopalakrishnan, partner at Price Waterhouse, the companys auditors.
Gopalakrishnan told Rao over phone that there was no truth to the allegations
and assured him of a detailed reply in a proposed presentation before the
Audit Committee on 29 December. That meeting did not take place. A new
date—10 January—was fixed.
 Non-disclosure of the Pledging of Promoters' Shares: Another questionable
corporate governance practice in India is that of non-disclosure of pledging of
shares by the promoters or controlling shareholders. Mr. Raju had pledged
most of his promoters' stake to borrow funds. The lenders enforced the pledge
following a decline in market price of shares of the company resulting in a
decline in the shareholding held by Mr. Raju from 8.74 per cent in March
2008 to merely 3.6 per cent as on January 1, 2009. The stakeholders of the
company had no clue about the depleting shareholding of the promoters in the
absence of any disclosure.
 Flaws in External Audit: Satyam management had been inflating revenues and
underestimating liabilities for years together. Price Waterhouse (PW) India
was the auditors of the company since 2000. Satyam scam is the clear case of
audit failure as the auditors did not follow standard accounting and audit
practices. As per the investigation of the SEC, the five audit firms of Price
Waterhouse India- Lovelock & Lewes; Price Waterhouse, Bangalore; Price
Waterhouse & Co., Bangalore; Price Waterhouse, Calcutta; and Price
Waterhouse & Co., Calcutta- did not conduct the audit as per prescribed
standards. SEC lists two counts of non-adherence to auditing standards and
two early warnings being ignored by external auditors.
229
The Satyam fraud is a total failure of corporate governance. It provides

evidence that despite sound norms of corporate governance unscrupulous persons
have ways to circumvent the law. The Sawarn fraud has also highlighted the
multiplicity of regulators, courts and regulations involved in a serious offence by
a listed company in India. Some of the regulators investigating Satyam include:
the Ministry Of Corporate Affairs (Government of India) including the Serious
Fraud Investigation Office, the Registrar Of Companies in Hyderabad, the
Company Law Board; the Central Bureau of Investigation; Income Tax
Department; the Enforcement Directorate; the Provident Fund authorities; the
Securities and Exchange Board of India; and the Institute of Chartered
Accountants of India. The impact of several parallel investigations on the
successful prosecution of the accused is unclear. The wheels of justice grind
slowly in India. It will be interesting to see the outcome of the investigations in
India against professionals such as auditors and whether any proceedings are
initiated against the former independent directors or other employees of Satyam.
b) Sahara Case203
Securities Exchange Board of India v. Sahara India Real Estate Ltd.204 is
regarded as one of the landmark cases with reference to the power and jurisdiction
of SEBI in the case of corporate fundraising. Earlier SIRECL and SHICL floated
an issue of OFCDs and started collecting subscriptions from investors with effect
from 25th April 2008 up to 13th April 2011. During this period, the company had
a total collection of over Rs 17,656 crore. The amount was collected from about
30 million investors in the guise of a "Private Placement" without complying with
the requirements applicable to the public offerings of securities. The Whole Time
Member of SEBI while taking cognizance of the matter passed an order dated
23rd June, 2011 thereby directing the two companies to refund the money so
collected to the investors and also restrained the promoters of the two companies
including
203
https://indiankanoon.org/doc/158887669/ Visited on nov. 30th 2019
See, Anand Shivam, ‘Critical Analysis of Sahara Case,’ available on
https://blog.ipleaders.in/analysis-of-sahara-case/ Visited on nov. 30th 2019
230
204
C.A. No. 9813 of 2011 and C.A. No. 9833 of 2011
231
Mr. Subrata Roy from accessing the securities market till further orders. Sahara
then preferred an appeal before SAT against the order of the Whole Time
Member and after hearing the SAT confirmed and maintained the order of the
Whole Time Member by an order dated 18th October, 2011. Subsequently Sahara
filed an appeal before the Supreme Court of India against the SAT order.
The Supreme Court on 31st August, 2012 in one of its most anticipated
judgment of recent times has directed the Sahara Group and its two group
companies Sahara India Real Estate Corporation Limited (SIRECL) and Sahara
Housing Investment Corporation Limited (SHICL) to refund around Rs 17,400
crore to their investors within 3 months from the date of the order with an interest
of 15%. The Supreme Court while confirming the findings of the SAT has further
asked SEBI to probe into the matter and find out the actual investor base who
have subscribed to the Optionally Fully Convertible Debentures (OFCDs) issued
by the two group companies SIRECL and SHICL. It also authorised SEBI to take
legal recourse in case the appellant i.e. Sahara fails to comply with the said order.

 Sahara Group has taken advantages of loopholes in existing law. This
group has violated and manipulated various law: The Sahara tried to defeat
the provisions of various acts like SEBI Act, 1992, Companies Act, 2013
and jeopardized the lives of so many investors who mainly belonged to the
lower strata of the society and barely earned enough to keep their body
and soul together.
 Faulty Schemes (Non-disclosure/Non-Transparency): It tried to gamble
the life of majorly illiterate group of people who have less or no idea of
the financial position of a company and thus are ambiguous about
harnessing the opportunity to make benefit out of schemes such as OFCD
which requires knowledge about performance of the company and basic
knowledge about proper time to turn such debentures into shares which
will be a profitable for them. Such investors are unaware of the risk that
comes
232
along with such luring schemes and out of ignorance they put all their
money in one hope given by such unscrupulous managers of these
companies. This decision of the Supreme Court in every manner will be a
major precedent which will act as a deterrent for them not to involve
themselves in such incoherent schemes.
c) Kingfisher Airlines205
Kingfisher Airlines, Indian based airlines was established in 2003. It was
owned by the Bengaluru based United Breweries Group. Until December 2011,
Kingfisher Airlines had the second largest share in India's domestic air travel
market. Ever since the airline commenced operations in 2005, it reported losses.
The acquisition of loss-making Bangalore-based Air Deccan in 2007 made
matters worse. The company raised $ 100 million by various debt instruments
including GDRs in 2009. In the second quarter of 2009-10, Kingfisher reported
losses of
419.77 crores.
Meanwhile with the debt of the airlines mounting as it stood at 6,500

crores in September 2011, Kingfisher decided to exit low-cost business. That also
did not impact the operating losses. On 15 November 2011 the airline released
poor financial results, indicating that it was "drowning in high-interest debt and
losing money. In the 3rd quarter of 2011-12, loss of 444.20 crores was reported.
The matter became worse with the non-payment of service tax to the government
collected from the customers; default in clearing airport charges; failure to deposit
tax deducted at source (T DS); non-payment of salary to staff; and bouncing of
cheques etc. This resulted in frequent strikes of the staff; sick-leaves and non-
reporting of pilots; cancellation of flights and prosecution of the company
including criminal cases against the Chairman of the Kingfisher Mr. Vijay
Mallya.
233
205
Kingfisher Airlines Ltd vs Union Of India And 4 Ors. WPL/1684/2015
234
Finally in October 20, 2012, airlines permit was suspended by the Director
General of Civil Aviation (DGCA) which was not renewed despite several
political pressures. The consortium of banks including IDBI Bank and state Bank
of India (SBI) decided to start recalling their loans amounting 7,500 crores in
February 2013. The consortium declared Kingfisher as the top NPA and Mr
Mallya a wilful defaulter in July 2014 for failure to repay the heavy loan.
In February 2015, a 17 bank consortium led by SBI took possession of

Kingfisher House. CBI also conducted raids and searches on the offices of
Kingfisher in connection with IDBI loan of Rs 950 crores. CBI charged Mallya
with fraud and criminal conspiracy and sought his judicial custody. The
Enforcement Directorate also registered a money-laundering case against Mallya
and CFO of the airlines. The consortium moved petition with the Debt Recovery
Tribunal to attach the properties of the airlines. On March 8, 2016, banks moved
the Supreme Court to restrain Mallya from overseas but Mallya fled to UK, the
next day fearing arrest and prosecution in several criminal cases.

(t) Lack of Corporate Governance. Kingfisher was marred by poor corporate
governance since its inception Mallya is flamboyant in nature and tends to behave
like Richard Branson of Virgin Group. He floated the airlines as a gift to his son.
Both father and son lacked experience in airlines and with an ineffective board of
directors, they run the airlines at their whims and fancies. There was no single
CEO continued for one year in Kingfisher airlines and there were frequent
changes at the top level management.
(ii) Faulty Business Strategy. Frequent changes in the focus left the travelers
confused and losing their interest in the brand. The airlines was launched as all
economy class with food and entertainment system, later on, the focus was shifted
to luxury business class. After acquiring the Air Deccan the focus again shifted on
low-cost air travelling. Mallya thought that by providing more facilities he will be
235
able to attract more travelers. However, it was in contradiction to the very core
low cost operating structure and philosophy Deccan. The Deccan brand was
brought under the parent brand name and introduced as Kingfisher Red. This led
to a blurring of the brands as there was hardly any distinction between the full
service (represented by Kingfisher) and the low-cost brand. Both brands looked
similar and had a similar service. Kingfisher Red became neither full service nor
low cost.
(iii) Erroneous Expansion: Kingfisher airlines acquired the Air Deccan for the
sake of expansion. For acquiring international flight license there is a requirement
of at least five years of domestic experience. Mallya acquired Air Deccan to get
the international routes license but never tried to syndicate these two airlines. At
the top of it without stabilizing in the domestic market, Kingfisher forayed into
the international routes where the competition is very high. In experience and lack
of expertise in airlines industry started the process of downfall of Kingfisher.
(iv) Flawed Financial Model: Mallya's financial model was faulty based on
pledging one company or the other from the UB Group as guarantee/collateral.
Raising debts domestically for the airlines industry with low operating profits is
counter-productive and risky proposition. MalIya could have raised funds through
equity in April 2008 when his airline was merged with Air Deccan as Kingfisher's
stocks were high and its debt levels were still low at the time, but Mallya,
reluctant to accept terms of private equity investors chose not to do so.
Consequently Kingfisher became highly levered and with heavy losses, default in
servicing the loans and failure to pay salary and government dues become a
recurring phenomenon.
It can be affirmed that, flaws in applying of corporate governance

legislation is the reason for increasing corporate crimes in India. The above
discuss have confirmed the nexus between corporate governance and corporate
crime. It is witness that the famous scandals such as Satyam, Sahara, Kingfisher,
etc. had the common governance laws, which hampered the principles of
236
corporate governance
237
and affected not only the shareholders as well as the stakeholders at law. The
main drawback of the companies is they abstain from the true essence of
governance norms by just applying the letter of law rather than connecting to the
spirit of the law.
SUMMARIZING IN A NUTSHELL:-
To, sum up, this chapter deals with the historical evolution of the Indian
corporate governance system, which started from 1850, under the British Rule.
Ever since then the corporate governance system and practice in India have been
significantly influenced by the British system of governance. It also discussed the
corporate governance system in India, which started changing with the
liberalization of the Indian economy in 1991. And accordingly, the modifications
in corporate governance in many developed economies of the world had their
share of influence also on India’s corporate governance system.
It also studies, the influence of various international codes on the

evolution of Indian corporate governance. The researcher has discussed the
international codes before the national codes because as it is clear from the
discussion that Indian corporate governance model is a hybrid model as well as
our corporate framework is adapted from the British framework so the impact of
these western codes on our national committees was clearly evident.
It also scans how in the late 1990s and early 2000, the Government of
India, through her own Ministry (MCA) and SEBI, appointed several expert
Committees to suggest measures for improvement in the standards of corporate
governance. The constant efforts to update the corporate governance regime to
match the international regime were evident by the changes brought during these
years, which to a large extent were rewarding.
The following part, also discuss about the legislative framework of

corporate governance in different companies in India, such as Companies Act,
2013, SEBI (LODR) Regulations, 2015, RBI Circulars and Special Acts, IRDAI
238
Laws and Circulars and DPE Guidelines. From the discussion in this part, it is
clear that the Companies Act, 2013, and SEBI Regulations are the main body of
the regime for corporate governance in India.
The next part, study in detail the various aspect necessary for effective
corporate governance such as the board of directors, Board Committees,
disclosures, policies, compliance etc. The next part addresses the roles and
responsibilities of Boards of directors and their importance in good corporate
governance practices. It also discusses, the various functions carried out by each
committee and their lending of crucial assistance to the harmonious functioning of
the company.
It also examines in detail how Indian companies are now under different
acts required to make ever more elaborate disclosures. It also evaluates and scans
the concept of related party transaction and whistleblower and their importance in
the corporate governance system.
The next part deals with corporate accountability towards compliance of

various laws and Regulations in the country. And how a major portion of good
corporate governance lays on the foundation of complying with various rules and
Regulations of the country.
This succeeding part also elaborately expound on how the corporate

governance Regulation not only safeguards the rights of the shareholder but also
of the stakeholders. The rights of shareholders and stakeholder are discussed in
detail as well as how the Indian legal system advocate protection of both of them
for good corporate governance practices.
The last part, identifying and analyzing, the common governance issues in
India owing to which corporate crimes are still an intense debatable topic which is
discussed in the society. It also highlights that these governance issues are evident
in India due to corporate’s attitude of applying the letter of law rather than the
239
spirit
240
of the law, and due to this there is a rise of corporate criminality in India. This
part also helps to discover that corporate governance flaws are the reason for the
germination of crimes in India. From the study of these scandals, it can be a trace
that the corporate criminality is an offshoot of corporate governances flaws.
CONCLUSION
To conclude, it can be held that, Corporate Governance as is discussed
above is not a fashion statement for India. The Indian corporate governance
system has been influenced by much developed economics of the world. It is not
tough to comprehend that the existing governance standards are much upgraded
and superior to the preceding standards that existed in India. More and more
requirements have been comprised in the Regulations and enactments in order to
ensure full disclosures and transparency in the working of corporate management
and introducing more accountability to the stakeholders. It is anticipated that this
will go a long way in bringing more integrity and fairness, transparency and
disclosures, and accountability and responsibility in the functioning of corporates
towards attaining a new height of achievement of corporate governance standards.
It is fair to deduce that, the aim to involve this chapter is to excavate the
origination of corporate governance in India as well as the enlargement of Indian
corporate governance framework in the light of reports and recommendations of
various committees as well as to anatomize the prominence of principles of
corporate governance and their significance in the legislative framework of
corporate governance in India as well as to explore the corporate governance
flaws in India. This chapter also verifies how far the essence of accountability,
fairness, and transparency have been imbibed in the present corporate governance
legislative framework in India. The requirement to include this chapter was felt by
the researcher as this chapter will help to further study what will be considered as
a corporate crime as this chapter lays down the principles of corporate governance
which are positioned under different Indian legal regime and when these
principles are violated intentionally then it will highlight criminal liability on the
241
corporates.
242
This chapter is necessary to showcase that the ambit of the accountability of the
corporates is not limited to its shareholder but as discussed in this chapter, the
corporates will also be held accountable for the infringement of stakeholder’s
rights, which eventually widens the liability aspect of the corporates. The string
which flows throughout the thesis is the principles of the corporate governance
when these principles which are imbibed in framing corporate governance laws
are violated intentionally then corporate crime breeds. This chapter has outlined
that corporate governance flaws are the reason for the corporate crime which is
helpful to study the jurisprudential approach of corporate criminal liability
The next Chapter attempt to elucidate the notion of corporate crime as well
as expound the concept of corporate criminal liability. It will also analyze the
history and theories of corporate criminal liability. It will also evaluate the
intricacies associated with corporate criminal liability as well as review the
theories of corporate criminal liability and implementation of different
corporate criminal liability models in India and diverse legal system.
243

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“Corporate Governance is the application of best management

practices, compliance of law in true letter and spirit and

The Institute of Company Secretaries of India1

Currently, Corporate Governance is a buzz word in the business and

In India, the concept of corporate governance is no longer a fashion

This Chapter acquaint about the origination and the enlargements of

2.1 HISTORICAL EVOLUTION OF CORPORATE

Arthashastra7: Kautilya’s Arthashastra maintains that for good governance, all

The 1960s was a period of establishing up of modern events and cost in

In India liberalization initiated in the year 1991 which lead to widespread

2.2 ENLARGEMENT OF CORPORATE GOVERNANCE IN

2.2.1 Remarkable Footprint of International Corporate Governance Codes

It is important to first discuss the international codes because these have a

2.2.1.1. Cadbury Committee (1992)12 (UK)

https://ecgi.global/sites/default/files/codes/documents/cadbury.pdf Visited on Nov 15, 2019

 The CEO and Chairman of companies should be separated;

2.2.1.2. Greenbury Report (1995)13 (UK)

 Constitution of a Remuneration Committee comprising of Non-Executive

These findings were incorporated in the Code of Best Practice on

2.2.1.3. Hampel Report (1998)14 (UK)

 Good corporate governance should be principle-based not prescriptive

 Companies should set up the nomination committee to ensure that there is

2.2.1.4. Combined Code Corporate Governance (1998)15 (UK)

The Combined Code 1998 is self-regulatory, linked through the comply,

2.2.1.5. The Blue Ribbon Committee (1999)16 (USA)

 Revise the definition of an independent director.

https://www.sec.gov/news/press/pressarchive/1999/99-14.txt Visited on Nov 19th, 2019.

 Require Audit Committee Annual Letter to Shareholders

2.2.1.6. Sarbanes – Oxley Act. 200217 (USA)

The summary highlights of the most important Sarbanes-Oxley sections for

 SOX Section 302 – Corporate Responsibility for Financial Reports

2.2.1.7. OECD Principles of Corporate Governance (1999)18

benchmark for policymakers, investors, corporations, and other stakeholders

OECD Principles have advanced the corporate governance agenda and

The Principles were originally developed by the OECD in 1999 and

The Principles provide guidance through recommendations and

 Ensuring the basis for an effective corporate governance framework

OECD Principles offer a global set of principles of corporate governance

principles were agreed, codes and review committees on corporate governance

2.2.2. National Initiatives in Building the Present Indian Corporate

2.2.2.1. Constitutional Mandate for Corporate Governance19

The views of democratic socialism are fabricated on an entire idea of

2.2.2.2. The Companies Act, 195620

Companies (Amendments) Act, 199921, the Companies (Amendment) Act, 200022

2.2.2.3. Securities Contract Regulation Act, 195624

2.2.2.5. The Confederation of Indian Industry (CII) Code (1998)26

 Emphasized on higher involvement of Non-executive directors and well-

2.2.2.6. The Kumar Mangalam Birla Committee (2000)28

 The focus of mandatory recommendation was improving in the quality of

recommendations was ultimately the responsibility of the Board of Directors of

2.2.2.7. Clause 49 of SEBI Listing Agreement (2000)30

Key Mandatory provisions are as follows: Composition of Board and its

Key Non-mandatory provisions include the following: Constitution of

2.2.2.8. The Report of Task Force on Corporate Excellence (2000)31

 Higher delineation of independence criteria and minimization of interest-

2.2.2.9. The Naresh Chandra Committee (2002)33

Recommendations of the committee include at least 50% Independent

2.2.2.10 The Narayana Murthy Committee (2003)36

committee-on-corporate-governance-for-public-comments-_12986.html, Visited on Nov 25th,

2.2.2.11 The J.J. Irani Committee (2005)39

The Committee recommended that effective measures be initiated for

It is significant to mention here that in spite of various recommendations

a) Chairman and CEO duality (particularly in regard to separation of these