MODULE I

INTRODUCTION TO CORPORATE GOVERNANCE

Over the past two decades, the investment world has seen a large number of scandals relating
to companies which are attributed to failure of governance. This has been caused due to a
combination of factors which can be principally classified into three corporate sins.

·The executive directors of the company lost the sense of business ethics and earnings
became the only motive. Directors were not prepared to show losses which led to the use of
unethical practices like forging books of accounts to show higher earnings.

·Other directors acted as a puppet in the hands of executive directors, approving improper
financial statements and condoning unfair practice. Managers awarded themselves huge
bonuses and stock options, often at the expense of other shareholders.

·Auditors colluded or failed to stop executive directors from using improper accounting
policies. In the process they lost their independence which they surrendered it in return for
high audit fees.

The area of corporate governance has acquired heightened attention in the last decade
because of various notable scandals and collapses cited from the USA (Enron, World com,
Tyco), the UK (the collapse of Maxwell publishing group), Germany (the cases of Holtzman,
Berliner Bank, and HIH), Korea (the widespread banking distress in 1997), Australia (Ansett
Airlines and One Tel), France (Credit Lyonnais and Vivendi), and Switzerland (Swissair),
India (Satyam and Reebok). The world reaction to these corporate wrongs was massive which
led to the development of law and codes for better corporate governance. Cadbury Committee
report 1992 (UK), Greenbury report 1995 (UK), The Combined code 1998 (UK), Turnbull
report 1999 (UK), OCED principles of corporate governance 1999 etc were some of the
international initiatives to regulate corporate affairs.

Especially the collapse of Enron in the USA in 2001 increased the importance of corporate
governance both in the USA and in other parts of the world.

II. CORPORATE GOVERNANCE-THE CONCEPT

Corporate refers to the most common form of business organisation, one which is chartered
by a state and given legal rights as an entity separate from its owners. This form of business
is characterised by the limited liability of its owners. The process of becoming a corporation,
called incorporation gives the company separate legal standing from its owners and protects
those owners from being personally liable in the event that the company is sued.

The concept of corporate governance is gaining momentum because of various factors as well
as the dynamic business environment. The principles of good governance are as old as good
behaviour, which needs no formal definition. However, in reference to the corporate world, it
has been defined by various persons, some of whom is described below just in order to satisfy
that the vital details and spirit of the term are not missed out. Sir Adrian Cadbury Committee,
which looked into corporate governance issues in U.K., defines Corporate Governance "as
the system by which the companies are directed and controlled. The basic objective of
corporate governance is to enhance and maximize shareholder value and protect the interest
of other stake holders".[1]Further the Kumar Mangalam Birla committee constituted by SEBI

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has observed that, "Strong corporate governance is indispensable financial reporting
structure."[2]According to ICSI, "We may define 'corporate governance as a blend of rules,
regulations, laws and voluntary practices that enable companies to attract financial and
human capital, perform efficiently and thereby maximise long term value for the shareholders
besides respecting the aspirations of multiple stakeholders including that of the society."[3]

Corporate governance is a multidisciplinary field of study it covers a wide range of

disciplines – accounting, consulting, economics, ethics, finance, law, and management[4].
The main function of corporate governance is to make agreements that describe the
privileges and tasks of shareholders and the organization. In case of disagreements because
of conflict of interest, it is the responsibility of corporate governance to bring everyone
together. It also has the function of setting standards against which corporations work can be
managed and administered [5]

Good governance is integral to the very existence of a company. It inspires and

strengthens investor's confidence by ensuring company's commitment to higher growth
and profits. It seeks to achieve following objectives:
(i) That a properly structured Board capable of taking independent and objective decisions is
in place at the helm of affairs;
(ii) That the Board is balanced as regards the representation of adequate number of non-
executive and independent directors who will take care of the interests and well being of
all the stakeholders;
(iii) That the Board adopts transparent procedures and practices and arrives at decisions
on the strength of adequate information.
(iv) That the Board has an effective machinery to sub serve the concerns of stakeholders;
(v) That the Board keeps the shareholders informed of relevant developments impacting the
company;
(vi) That the Board effectively and regularly monitors the functioning of the management
team; and
(vii) That the Board remains in effective control of the affairs of the company at all times.
The overall endeavour of the Board should be to take the organisation forward, to
maximise long-term gains and stakeholders' wealth.[6]

III. NEED FOR AND IMPORTANCE OF CORPORATE GOVERNANCE

The need for corporate governance has arisen because of the increasing concern about the
non-compliance of standards of financial reporting and accountability by boards of directors
and management of corporate inflicting heavy losses on investors. Many large corporations
are transnational in nature. This means that these corporations have impact on citizens of
several countries across the globe. If things go wrong, they will affect many counties, some
more severely than others. It is, therefore, also necessary to look at the international scene
and examine possible international solutions to corporate governance difficulties. Corporate
governance is needed to create a corporate culture of consciousness, transparency and
openness. It refers to a combination of laws, rules, regulations, procedures and voluntary
practices to enable companies to maximise shareholder's long-term value. It should lead to
increasing customer satisfaction, shareholder value and wealth. With increasing government
awareness, the focus is shifted from economic to the social sphere and an environment is
being created to ensure greater transparency and accountability.

It is integral to the very existence of a company and can be summarised in the following
points:

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a) Corporate scams: Scandals in the corporate world, whether centred around corruption,
bribery, fraud, or greed tend to have a significant impact on the economy as a whole. The
need for corporate governance is, then, imperative for reviving investors' confidence in
the corporate sector towards the economic development of society.

b) Wide Spread Shareholders: In today's era, a company has a very large number of
shareholders spread all over the world. The idea of shareholders' democracy remains
confined only to the law and the Articles of Association which requires a practical
implementation through a code of conduct of corporate governance.

c) Changing Ownership Structure: The pattern of corporate ownership has changed

considerably, in the present-day-times with institutional investors and mutual funds becoming
largest shareholders in large corporate private sector. These investors have become the
greatest challenge to corporate managements, forcing the latter to abide by some established
code of corporate governance to build up its image in society.

d) Globalisation: Desire of more and more companies to get listed on international stock
exchanges also focuses on a need for corporate governance. There is no doubt that
international capital market recognises only companies well- managed according to standard
code of corporate governance.

IV. ISSUES IN CORPORATE GOVERNANCE

Corporate governance has been defined in different ways by different writers and
organisations. Some define it in a narrow perspective to include in it only the shareholders,
while others want it to address the concerns of all stakeholders. Some talk about corporate
governance being an important instrument for a country to achieve sustainable economic
development, while others consider it as a corporate strategy to achieve a long tenure and a
healthy imagine. But to all, corporate governance is a means to an end, the end being long
term shareholder, and more importantly, stakeholder value. Thus, all authorities on the
subject are one in recognising the need for good governance practices to achieve the end for
which corporate are formed. Some governance issues are identified as being crucial and
critical to achieve these objectives.

These are:
·Distinguishing the roles of board and management: Constitutions of more and more
companies stress and underline that the business is to be managed "by or under the direction
of" the board. In such a practice, the responsibility for managing the business is delegated by
the board to the CEO, who in turn delegates the responsibility to other senior executives.
Thus, the board occupies the key position between the shareholders (owners) and the
company's management (day-to-day managers of the company).

·Separation of the roles of the CEO and chairperson: The composition of the board is a major
issue in corporate governance as the board acts as a link between the shareholders and the
management and its decisions affect the performance of the company. All committees that
studied corporate governance practices all over the world, starting with the Cadbury
committee, have suggested various improvements in the composition of boards of companies.
It is now increasingly being realised that the practice of combining the role of the chairperson
with that of the CEO as is done in countries like the US and India leads to conflicts in
decision making and too much concentration of power in one person resulting in unsavoury
consequences. Combining the role of both the CEO and chairperson removes an important

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check on senior management's activities. This is the reason why many authorities on
corporate governance recommend strongly that the chairman of the Board should be an
independent director in order to "provide the appropriate counterbalance and check to the
power of the CEO" (IFSA).[7]

·Directors and executive's remuneration: This is one of the mixed and vexed issues of
corporate governance that came into the limelight during the massive corporate failures in the
US between 2000 and 2002. Executive compensation has also in recent time become the most
viable and politically sensitive issue relating to corporate governance. According to the
Cadbury report: "The over- riding principle in respect of Board remuneration is that
shareholders are entitled to full and clear statement of directors present and future benefits,
and how they have been determined." Other committees on corporate governance have also
laid emphasis on other related issues such as " pay-for performance", heavy severance
payments, pension for non- executive directors, appointment of remuneration committee and
so on.

·Disclosure and audit: The OECD lays down a number of provisions for the disclosure and
communication of "key facts" about the company to its shareholders. The Cadbury Report
termed the annual audit as "one of the cornerstones of corporate governance". Audit also
provides a basis for reassurance for everyone who has a financial stake in the company. There
are several issues and questions relating to auditing which have an impact on corporate
governance. There are, for instance, questions such as: (i) How to ensure independence of the
auditor? (ii) Should individual directors have access to independent resource? Etc.

·Composition of the board and related issues: A board of directors is a "committee elected by
the shareholders of a limited company to be responsible for the policy of the company.
Sometimes, full time functional directors are appointed, each being responsible for some
particular branch of the firm's work".[8] The composition of board of directors refers to the
number of directors of different kinds that participate in the work of the board. Over a period
of time there has been a change as to the number and proportion of different types of
directors in the board of a limited company. The SEBI appointed Kumar Mangalam Birla
Committee's Report defined the composition of the Board thus:
"The Board of directors of a company shall have an optimum combination of executive and
non- executive directors with not less than 50 percent of the board of directors to be non-
executive directors. The number of independent directors would depend upon whether the
chairman is executive or non- executive. In case of a non-executive chairman, at least one-
third of the board should comprise independent directors and in case of executive chairman,
at least half of the board should be independent directors.[9]

V. INDIA AND CORPORATE GOVERNANCE

Corporate governance has played a very important role in the present economic condition of
India. India successfully started its move towards open and welcoming economy in 1991 by
following the LPG policy. From then onwards it has seen an amazing upward trend in the
size of its stock market, that is, number of listed firms was increasing proportionately [10] If
India wants to attract more countries for foreign direct investments, Indian companies have to
be more focused on transparency and 'Shareholders value maximization'[11]

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Kumarmangalam Birla Committee described the concept of corporate governance instead of
defining or giving a meaning of it. Three key constituents of corporate governance as the
shareholders, the Board of Directors and the Management and has attempted to identify in
respect of each of these constituents, their roles and responsibilities as also their rights in the
context of good governance. Fundamental to this examination and permeating throughout this
exercise is the recognition of the three key aspects of corporate governance; namely,
accountability, transparency and equality of treatment for all stakeholders.

The pivotal role in any system of corporate governance is performed by the board of
directors. It is accountable to the stakeholders and directs and controls the management. It
stewards the company, sets its strategic aim and financial goals and oversees their
implementation, puts in place adequate internal controls and periodically reports the activities
and progress of the company in the company in a transparent manner to the stakeholders. The
shareholders role in corporate governance is to appoint the directors and the auditors and to
hold the board accountable for the proper governance of the company by requiring the board
to provide them periodically with the requisite information, in a transparent fashion, of the
activities and progress of the company. The responsibility of the management is to undertake
the management of the company in terms of the direction provided by the board, to put in
place adequate control systems and to ensure their operation and to provide information to the
board on a timely basis and in a transparent manner to enable the board to monitor the
accountability of management to it.[12]

Naresh Chandra Committee 'Report of the Committee on Corporate Audit and Governance'
Shareholders
describe: are the owners
The fundamental of any joint-stock,
theoretical limited governance
basis of corporate liability Company, and
is agency are
costs.
principals. By virtue of their ownership, the principals define the objectives of a company.
The management, directly or indirectly selected by shareholders to pursue such objectives,
are the agents. While the principals might wishfully assume that the agents will invariably do
their bidding, it is often not so. In many instances, the objectives of managers are quite
different from those of the shareholders. Such misalignment of objectives is called the
agency problem, and the cost inflicted by such dissonance is the agency cost. The core of
corporate governance is designing and putting in place disclosures, monitoring, oversight
and corrective systems that can align the objectives of the two sets of players as closely as
possible and, hence, minimise agency costs.

Narayan murthy Committee on 'Report of the SEBI Committee on Corporate Governance'

commented on Corporate Governance in the following manner:[13]
·A corporation is a congregation of various stakeholders, namely, customers, employees,
investors, vendor partners, government and society. A corporation should be fair and
transparent to its stakeholders in all its transactions. This has become imperative in today's
globalised business world where corporations need to access global pools of capital, need to
attract and retain the best human capital from various parts of the world, need to partner with
vendors on mega collaborations and need to live in harmony with the community. Unless a
corporation embraces and demonstrates ethical conduct, it will not be able to succeed.
Ethics is concerned with the code of values and principles that enables a person to choose
between right and wrong, and therefore, select from alternative courses of action. Further,
ethical dilemmas arise from conflicting interests of the parties involved. In this regard,
managers make decisions based on a set of principles influenced by the values, context and
culture of the organisation. Ethical leadership is good for business as the organisation is seen
to conduct its business in line with the expectations of all stakeholders.

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·Corporate governance is beyond the realm of law. It seems from the culture and mindset of
management, and cannot be regulated by legislation alone. Corporate governance deals with
conducting the affairs of a company such that there is fairness to all stakeholders and that its
actions benefit the greatest number of stakeholders. It is about openness, integrity and
accountability. What legislation can and should do is to lay down a common framework- the
"form" to ensure standards. The "substance" will ultimately determine the credibility and
integrity of the process. Substance is inexorably linked to mindset and ethical standards of
management.

VI. CONCLUSION
In this paper, we saw how important it is for a company to follow good corporate governance
practices. The paper started going deep into the root cause of factors that affect corporate
governance such as distinguishing the roles of board and management, composition of the
board and related issues, choice of auditors and audit committee, directors and executives'
remuneration etc. Then we looked at the brief history of corporate governance in India. India
being an emerging economy needs to work more on regulating the corporate governance
policies. The future of corporate governance is becoming a little clear now; the investors are
promoted to behave more like owners rather than just traders. Independent directors have
more defined roles and responsibilities.

End-Notes
[1]TheCadbury Committee report, 1992( March 25th, 2018, 10:00 pm)
[2]Kumar Mangalam committee report(March 25th2018, 11:00 pm)
[3]ICSI,Corporate Governance Reporting( March 25th, 2018, 10:00 pm)
[4]S. Li and A. Nair, "Asian corporate governance or corporate governance in Asia?"
Corporate Governance: An International Review, vol. 17, no. 4, pp. 407-410, 2009.
[5]C. S. V. Murthy,Business Ethics and Corporate Governance, 2009
[6] Ruchi Kulkani and Balasundram Maniam,Corporate Governance- Indian
Perspective( March 25th, 2018, 10:00 pm)
[7] IFSA Guideline- Investment and Financial Services Association (1999). Corporate
Governance: A Guide for Investment Management and Corporations.
[8] Hanson, J.L.,A Dictionary of Economics and Commerce, 3rd Ed. London: The ELBS
and MC Donald and Evans Ltd.
[9][9]Rajagopalan, R.,Directors and Corporate Governance, 1stEd, Company Law. Institute
of India Pvt. Ltd. P. 136.
[10]L. Som, "Corporate Governance Codes in India," Economic and Political Weekly, vol.
41, no. 39, pp. 4153-4160, 2006.
[11]R. Ramakrishnan,Inter-relationship between business ethics and corporate governance
among Indian companies(2007).
[12] 'Draft Report of the kumar Mangalam Committee on Corporate Governance',
September 1999, Securities and Exchange Board of India (SEBI), February 2000, para 2.7
and 2.8 [13]Report of SEBI committee on Corporate Governance, 8 February, 2003.

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GLOBALIZATION AND CORPORATE GOVERNANCE
Globalisation can be marked as the impromptu movement of goods, services and capital. This
commentary does not mask all the prospects of globalization or global changing.
Globalization further should be a form which integrates world economies, culture, engineering
science and government. This is because globalization further involves the relinquish of
information, skilled member of the working-class mobility, the altercation of technology,
economic funds flow and geographic arbitrage between developed countries and developing
countries.
The enquiry is how a society will conform to this changing. Root of all companies must know
diverse effects of globalisation. Globalization has some opportunities and menaces. A
company might have learned how to retrieve it from some negative effects and how to earn
opportunities from this state of personal business.
Globalization affects the economy, business, life, society and the environment in different
ways:
• Increasing competition,
• Technological development,
• Knowledge/Information transfer,
• Portfolio investment (fund transfer between developed countries and emerging markets),
• Regulation/deregulation, International standards,
• Market integration,
• Intellectual capital mobility,
• Financial crisis-contagion effect-global crisis.

GLOBALISATION, CORPORATE FAILURES AND CORPORATE GOVERNANCE

Directors and CEOs of these corporations must be brought into consideration responsible for
all of those failures and these are examples of “corporate irresponsibility”. Many masses hold
the impression that if organizations had been to play responsibly, maximum likely company
scandals would stop.
Corporate governance protects firms in opposition to some long-term deprivation. When
groups have social responsibilities, they calculate their risk and the price of failure. Firstly, a
company has to have a duty to shareholders and additionally all stakeholders which means
that it has an obligation to all society. Corporate bankruptcies have a critical impact on all
society to boot. Unique, big scandals along with Enron have sharply affected the market and
the financial system. Various stakeholders (e.g., Worker, purchaser, client, providers and so
on.) In addition to shareholders and regulators of the firm have a duty to make sure proper
performance? Thus, corporate governance isn’t always only related to companies, but also
connected with all society. Hence the shifting view of company obligation shifts the focal
point from the actual hassle that society likes to speak.
Ace of the motifs for this close result is increasing competition among the agency and the
mart. Managers tend to turn a lot more formidable than before in their behaviour and
suffering in the globalized global. Therefore, we ought to recognize on corporate and

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managerial behaviour. The query is a way to act as a socially responsible supervisor and a
room to make up this crucial

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problem in enterprise life and in companionship. In the business international there are
constantly some regulations, standards and norms in addition to policies and some felony
requirements.
Nevertheless, to be socially accountable one should be greater than truly being a law-abiding
individual who has to be capable of coming out and being held answerable for decisions and
natural processes. The problem is the implication for all of those instructions for business
enterprise and managerial behaviour. Along the polar hand, one angle is that an employer is a
“legal character” and has the rights and obligations that belong with that status—which
include social duty. In the case of Enron, managers had been privy to all ordinances, yet
though they have got regarded all irresponsible and unethical troubles in the employer
control; they did now not change their method and conduct.
The conclusion is that it isn’t always usually viable to govern behaviour and company activity
with regulations, principles and norms. And then another question arises in this case, that if
the great unwashed do not see their responsibility and socially accountable activities and if
they do now not behave socially responsibly then, who will control this problem in
commercial enterprise lifestyles and within the marketplace. The theme is that the social
responsibility implication of the business enterprise cannot be managed through criminal
manner. This is the simplest social contract among managers and society and stakeholders of
the authority and for responsible and accountable behaviour.
Firms will consciously need to cognizance on creating cost now not simplest in monetary
phrases, but additionally in ecological and social terms. The task confronting the commercial
enterprise area is the way to set about assembly those expectations. Firms will want to change
now not simplest in them; yet, likewise within the manner they interact with their
environment.
Conclusion
Equally we can see, globalization has an enormous effect on society and business spirit which
can be apparent in a numeral of different ways. So business life requires more regulation and
proper and socially responsible behaviour than in front. In this chapter we have demonstrated
the relationship between corporate governance and globalisation. We pointed out that the
relationship between business failure and scandals, increased after globalization, and good
governance is needed to come up to this problem.

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MODULE II
ROLE OF DIRECTORS IN CORPORATE GOVERNANCE
The new Companies Act, 2013 makes a laudable contribution towards stipulation and
elucidation of the duties and responsibilities of the directors of a company, more so of public
limited companies. It removed the deficiencies of the old Companies Act, 1956 and improves
the growth and prosperity of the corporate world in India. It increased the ambit of director's
duties and responsibilities and explicitly clarifies (for providing a greater certainty to the
directors with regards to their responsibilities and conduct) them and thus, ensures a better
corporate governance and management.
The functioning of the corporate governance is concerned mainly with the Board of Directors.
Directors are appointed by the shareholders, who sets the overall policy for the company and
they appoint some persons to be the managing director/ executive director/ whole time
director by the prior approval of shareholders.
In Indian States Bank Ltd. v Sardar Singh[ii], it was held that the management of the
companies should be in proper hands and hence, the appointment of directors is strictly
regulated by the said Act. The success of the company depends upon the competence of its
directors.
The board's chief function is to monitor management on behalf of the shareholders. Thus,
directors and shareholders are influenced by each other and for quality governance, there must
be an interface between them. The directors have to maintain a balance between the
conflicting interests of shareholders, promoters, customers and directors. Therefore, they are
the heart and soul of a company.
Section 2(34) of Indian Companies Act, 2013 defines director as a person appointed to the
board of a company. [iii] This definition not only included de jure directors but also de facto
and shadow directors. A director is defined by the role he performs and his duties, rather than
by title. Thus, a director (in the eyes of law) could also be a person who controls the
management, direction, conduct or affairs of the company.
As per the Companies Act, 2013, Section 2(10) Board of Directors or Board, in relation to a
company, means the collective body of the directors of the company. [iv] A director can be a
full-time working director i.e. managing or whole time director. These directors look after the
day-to-day affairs of the company and are collectively known as management' directors.
A company also have non-executive directors who attend the board meetings and have no
link with company's daily activities. As per Clause 49 of the listing agreement, there are
independent directors also who are non-executive and they don't have a material relationship
with the company other than sitting in the board. There is another category of directors
known as shadow directors who are not officially appointed as directors but in accordance
with whose directions, the directors of a company are accustomed to act. [v] Thus, directors
are the key managerial persons of the company and plays a crucial role in corporate
governance.

THE BOARD OF DIRECTOR- ROLES AND RESPONSIBILITIES

The Board of Directors key function is to ensure the company's prosperity whilst meeting the
appropriate interests of the shareholders. However, the authority of the board is subject to the
limitations imposed by the Memorandum of Association, Articles of Association of the
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company and the relevant provisions of the Companies Act, 2013. [vi] When it comes to
public

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listed companies, securities are traded publicly and various other provisions like SEBI
regulations and guidelines in the listing agreement deserve consideration.

While private limited companies are closely held and run by the directors. Annual general
meetings in such companies are actually conducted as there are certain directions which can
only be given by a discussion in AGM. Rest day to day affairs of the company are taken care
of by the directors according to the provision of Companies Act, 2013 as it is not possible for
AGM to direct company in every matter.
Let us examine the role and responsibilities of Board of Directors in terms of Companies Act,
2013 and other legal provisions. Company is a legal personality and BOD's are its body and
mind.
The Board of Directors focuses on four key areas:
 by establishing vision, mission and values;
 by setting strategy and structure;
 by exercising authority
by delegating accountability to shareholders
and responsibility and be responsible to relevant
to management;
stakeholders. [vii]

As per Section 166 of the Companies Act, 2013 the duties of the director are:
 They should act in accordance with the Articles of a company.
 A director of the company shall act in good faith in order to promote the objects of the
company for the benefits of its members as a whole. It was also held in Bank of Poona
Ltd. v Narayandas that the good faith would require that all the endeavours of the
directors must be directed to the benefit of the company. [viii]
 A due and reasonable care, skill and diligence shall be exercised which performing
duties of a director. The Supreme Court in the case of Official Liquidator v. P.A.
Tendolkar, held that a director could be held liable for dereliction of duties if his
negligence is of such character as to enable frauds to be committed and losses thereby
incurred by the company. [ix]
 A director should never involve into a situation which directly or indirectly collides
with the interests of the company. In Walchandnagar Industries v Ratan chand, it was
held that the director's other duties would include duty to disclose interest to the
company and to ensure that his personal interest as an agent of the company do not
conflict with company's principal interest. [x]
 A director shall not attempt to achieve an undue gain for himself or his relatives and if
he is found guilty of making such undue advantage then he has to pay a sum equal to
that gain to the company. It was held in the case of Guinness plc v. Saunders that
director in question is bound to hand over the benefits, if any, that he might have
secured under the transaction and he cannot ask for set off for any claim that he may
have against the company. [xi]
 A director shall not assign his office and any assignment so made is void. [xii]
For better governance, the board should function as follows- the directors must be totally
committed to the company, should meet regularly and steer discussions properly. They
should set up their priorities and then acted upon them. They must have the courage to look
to any

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deteriorating situation related to stock market, finance and especially moral issues. They
should not exercise the powers for their own or in a fiduciary capacity but for a proper
purpose, for which they are given to them by the shareholders.
The Supreme Court in Eclairs Group Ltd and Glengary Overseas Ltd v JKX specified that the
proper purpose rule is not concerned with excess of power by doing an act which is beyond
the scope of the instrument creating it as a matter of construction or implication. It is
concerned with abuse of power, by doing acts which are within its scope but done for an
improper purpose. [xiii]
The directors must always look for the best interests of the company and should work
honestly and in good faith and if there is a conflict between their own interests and company's
then they must go in favour of the company's interest. The Board has a great responsibility of
recruiting the CEO of the company based on the market reports. They have to ensure that
processes are in place in order to maintain the integrity of the company and should also look
upon the company's compliance with all legal requirements.

ROLE OF INDEPENDENT DIRECTORS

The revised clause 49 of the listing agreement states that if a company has executive
chairman, then the Board requires to have at least 50 percent of independent directors and if a
company has non- executive chairman, then the independent directors required are one-third
of the board.
An independent director is a non-executive director who maintains integrity, sense of
accountability, tracks various activities of the company from failures to achievements, plans
strategically, degree of commitment and possess sense of devotion. Neither they possess any
financial relationship with the company (except the sitting charges) nor can own shares in the
company.
Some of the most significant duties and functions of independent directors as per Schedule IV
of the Companies Act, 2013 are:
 Help in bringing an independent and equitable judgement to the board;
 Safeguard the interests of all stakeholders, particularly the minority shareholder;
 Strive to the
balance attend all the meetings
conflicting of the
interest of the Board;
 Report concerns about unethical behaviour, actual or suspected fraud or violation of
the company’s code of conduct or ethics policy. [xiv]

Independent directors play a major role in improving the corporate credibility of the
company and in risk management. They also play a great role in various committees set up by
the company to ensure good governance. They should makeup at least two-thirds of the
directors in the audit committees of listed companies to oversee the financial reporting
process and disclosure of the company's financial information, ensure compliance with listing
and other legal requirements, disclosure of related party transactions and qualification in the
draft audit report, among other things. [xv]
Independent directors are responsible for formulating business strategies on behalf of the
shareholders and have to make sure that all business activities are compatible with all legal

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provisions. These directors have power to challenge the decision of management directors and
this protects the interests of shareholders and other stakeholders also.
Role of Board Committees
The committees are incorporated into the company to improve the corporate governance.
The Board (of the company) shall comprise of following committees:
Audit committee:
Section 292A of the Companies Act, 1956 states that every public limited company (whether
listed or unlisted) having a paid-up capital of at least Rs.10 crore should constitute a
committee of the board to be known as Audit Committee. [xvi]
The meetings of this committee should happen at least two to three times a year and
preferably before the date of each Board meeting. The act provides that the Audit Committee
shall consist of a minimum of three directors with independent directors forming a majority.
[xvii] The functions of the Audit committee shall include- the recommendation for
appointment, remuneration and terms of appointment of auditors of the company; review and
monitor of the auditor's independence and performance and effectiveness of audit process;
examination of the financial statement and the auditor's report thereon; Approval of any
subsequent modification of transaction of the company with related parties; Scrutiny of inter-
corporate loans and investments; Valuation of undertakings or assets of the company,
wherever it is necessary; Evaluation of internal financial controls and risk management
systems; Monitoring the end use of funds raised through public offers and related matters.
[xviii]
The committee can also call for the comments of the auditors about the internal control
systems and the review of the financial statement before the submission to the Board.[xix]
Satyam scandal is one of the biggest example of lacuna in internal auditing process. The
auditors work didn't yield any good result and they signed the financial statements without
any prior examination and hence were held responsible for fraud.
Nomination and Remuneration Committee:
the Objective of this committee is to lay down a framework in relation to the remuneration
and appointment of directors, Key Managerial Personnel and senior management personnel.
[xx] This committee consists of three or more non-executive directors out of which not less
than one-half shall be independent directors.[xxi] The functions of this committee are- it
should identify persons who are qualified to become directors and recommend their
appointment to the Board. [xxii]
It shall formulate the criteria for determining the qualifications of a director and recommend a
policy to the Board regarding the remuneration for directors and other employees. [xxiii] The
committee while formulating the policy for remuneration should take care that it is
reasonable and motivate directors of the quality required to run the company. [xxiv]
Stakeholders' relationship committee:
This committee shall be constituted if BOD of the company consists of more than one
shareholder, debenture-holders, deposit-holders or any other security holder during the
financial year. The said committee shall consist of a chairperson who shall be the non-
executive director and such other persons as may be decided by the Board. [xxv] The
objective of this committee is to solve the grievances of security holders of a company.

Page 14 of 76
As per the SEBI regulations, the committee shall meet at least once in year. The key to a
good governance is to conduct business in such a manner that the stakeholder's rights and
interests are protected and the transparency is maintained to ensure that the trust and
confidence of the stakeholder in the company remains unharmed. Thus, this committee plays
a great role in achieving the objective of good corporate governance.

STRUCTURE, SIZE AND COMPOSITION OF BOARD OF DIRECTORS

According to Section 149 of the Companies Act, 2013, every company must have a minimum
number of three directors in case of a public company, two in case of a private company and
one in case of a one-person company; and a maximum of fifteen directors (the number of
maximum directors can be increased by passing a special resolution). The Central government
may prescribe the class of companies who are required to have at least one women director.
Every public listed company shall have at least one-third of the total number of directors as
independent directors. [xxvi]
Under LODR (Listing obligation and disclosure requirement), for listed companies, the
members of the board shall have an optimum combination of executive and non-executive
directors and at least one women director. [xxvii] At least fifty percent of the board of
directors must be non-executive directors. The size of the board should not be too small or
big as small size allows for real strategic decisions, are more cohesive and productive and
monitor the firm more effectively while larger board results in diverse experience and
viewpoints. They involve high coordination cost and thus less effective in monitoring.
Diversity in case of large boards includes nationality, gender, technical expertise, academic
qualifications and age. Gender diversity is the relevant aspect of board diversity and
companies should have women in the board. The board would be considered effective by its
size, demographics and diversity.

POWERS OF BOARD OF DIRECTORS

As per Section 179 (1) of the Companies Act:
The Board of Directors of a company shall be entitled to exercise all such powers, and to do
all such acts and things, as the company is authorised to exercise and do unless barred by the
restriction on their power by the memorandum or articles or by the provisions of the
Companies Act. [xxviii]
It is not in dispute that directors while exercising their powers do not act as agents for the
majority of the members, so the resolution passed by the majority of members cannot
supersede director's power.
The powers of management are confined with the directors and they alone can exercise these
powers. The only way to overrule the BOD's of a company is by altering the articles of
association and refusing to re-elect the directors, whose actions they disapprove. [xxix] The
shareholders also can't take away the powers which are granted to them by the Articles.
Thus, the relationship between Board of Directors and the shareholders is not of
subordination but more of a federation. The powers granted to directors includes the right to
ask the shareholders if money is unpaid on their share, power to issue debentures, power to
invest the funds of the company, to grant loans or provide security in respect of loans, to
approve financial
Page 15 of 76
statement, amalgamations and mergers, to diversify the business of the company and the
power to authorize buy back.[xxx] Although, the directors can delegate these powers (by a
resolution passed at the meeting) to any committee of directors but still the principal powers
vests with the Board of directors themselves.
Apart from this, BOD has powers to fill up casual vacancies in the office of directors (Section
161), power to constitute audit committee (Section 177), to make donation to political parties
(Section 182), power to accord sanctions for specified contracts (Section 459), power to
receive notice of disclosure of director's interest (Section 184), power to appoint or employ a
person as Managing Director or Manager (Section 152 (2)), power to make a declaration of
solvency, where it is proposed to wind up the company voluntarily (305), power to approve
the text of advertising for inviting public deposits (Section 73). Some of the powers can only
be exercised by the resolution passed at the meeting by the consent of directors as per Section
180.

CONCLUSION
In the eyes of law, company is an artificial person which has no physical existence and no
body or soul. Therefore, directors are the persons who act on behalf of it. They are appointed
by the shareholders of the company to set the overall policy for the corporation. The BOD
assists in corporate governance by advising the executive management and by taking strategic
decisions. The role and responsibilities of the board of directors vary depending on the nature
of the position and the business entity they work.

REFERENCES;

I. XXXX
II. AIR 1934 ALL 855.
III. Indian Companies Act, 2013, Section 2 (34).
IV. Indian Companies Act, 2013, Section 2 (10).
V. Court Says 'Shadow' Directors Can Be Subject To Directors' Fiduciary
Duties' (Helix Law, 2020) accessed 1 December 2020.
VI. Board Of Directors | Roles | Duties & Responsibilities' (Accountlearning.com,
2020) accessed 2 December 2020.
VII. Ibid.
VIII. AIR 1961 Bom 252 at 253.
IX. {1973} 43 Com cases 382.
X. AIR 1953 Bom 285.
XI. {1990} 1 All ER 652 HL.
XII. Indian Companies Act, 2013, Section 166.
XIII. [2015] UKSC 71.
XIV. Indian Companies Act, 2013, Schedule IV.
XV. Who Are Independent Directors And What Role They Play - The Economic
Times' (The Economic Times, 2020) accessed 5 December 2020
XVI. Companies Rules, 2014, Chapter XII, Rule 6.
XVII. The Companies Act, 2013, Section 177 (2).
XVIII. The Companies Act, 2013, Section 177 (4).
XIX. The Companies Act, 2013, Section 177 (5).
XX. Taxguru LLP, 'Nomination and Remuneration Committee' (TaxGuru, 2020)
accessed 3 December 2020.
Page 16 of 76
 XXI. The Companies Act, 2013, Section 178 (1).
XXII. The Companies Act, 2013, Section 178 (2).
XXIII. The Companies Act, 2013, Section 178 (3
XXIV. The Companies Act, 2013, Section 178 (4).
XXV. The Companies Act, 2013, Section 178 (5).
XXVI. The Companies Act, 2013, Section 149 (4).
XXVII. Board of directors- Composition' (toppr, 2020)
https://www.toppr.com/guides/business-law-cs/elements-of-company-law-
ii/board-of-directors-composition/ accessed 1 December 2020.
XXVIII. Indian Companies Act, 2013, Section 179 (1).
XXIX. Sumaira Jan and Mohi-ud-din Sangmi, 'The Role of Board Of Directors In
Corporate Governance' (2016) 2 Imperial Journal of Interdisciplinary
research accessed 1 December 2020.
XXX. The Companies Act, 2013, Section 179 (3).

Page 17 of 76
INSOLVENCY AND BANKRUPTCY CODE
The Insolvency and Bankruptcy Code, 2016 (IBC) is the bankruptcy law of India which seeks
to consolidate the existing framework by creating a single law for insolvency and bankruptcy.
It was introduced amidst various other reforms introduced by the Government, with focused
emphasis on the Ease of Doing Business in India. Ease of Doing Business not only means
speedy and easy entry, and ease of carrying out operation of businesses; it also covers in its
ambit, the ease of exit.

The Insolvency and Bankruptcy Code, 2015 was introduced in Lok Sabha in December 2015.
It was passed by Lok Sabha on 5 May 2016 and by Rajya Sabha on 11 May 2016. The Code
received the assent of the President of India on 28 May 2016. Certain provisions of the Act
have come into force from 5 August and 19 August 2016. The Code has been amended
several times till June, 2020. The bankruptcy Code is a one stop solution for resolving
insolvencies which previously was a long process that did not offer an economically viable
arrangement. It was done to consolidate all the existing laws related to insolvency in India
and to simplify the process of insolvency resolution.

This Code applies to a company registered under the Companies Act 1956, a Limited liability
partnership, Partnership firms and Individuals. Under the Insolvency and Bankruptcy Code,
any financial creditor or an operational creditor can initiate corporate insolvency process
against a corporate debtor when the corporate debtor commits a default in repayment of
debts. Default involves non repayment of debt when it has become due and payable.

Hence, when any financial or operational creditor is not honoured duly, he can initiate
the insolvency proceedings against the corporate debtor.

IBC lays down strict time frame for each and every process for resolution process right from
admission of application, appointment of Interim Resolution Professional, lodging of claim,
formation of Creditors Committee, consideration of resolution plan and submission of plant
to adjudicating authority and its approval thereof. To effectively address the issues of
participation of various stake holders, the Code has divided creditors into two categories

Page 18 of 76
of Financial Creditors and Operational Creditors.
The IBC has 255 sections and 11 Schedules. IBC is divided into 4 parts i.e.

 Preliminary (Part I);

 Insolvency Resolution and Liquidation of Corporate Persons (Part II);
As per the data provided by National Company Law Tribunal (NCLT), total 19,771
 Insolvency Resolution and Liquidation of Individuals and Partnership Firms (Part
cases were
III);pending with NCLT benches on 30.09.2019, which include 10,860 cases
under Insolvency and Bankruptcy Code (IBC), 2016.

What is Insolvency & Bankruptcy Code?

 The Insolvency and Bankruptcy Code, 2016 (IBC) is the bankruptcy law of
India which seeks to consolidate the existing framework by creating a single
The IBC envisages filing of Corporate Insolvency Resolution Process (hereinafter referred to
law for insolvency and bankruptcy.
as CIRP) by the Corporate Debtor, Financial Creditor and Operational Creditor. However, in
 Insolvency and Bankruptcy Code, 2016 is considered as one of the biggest
neither of the said proceedings, time frame for filing of CIRP has been provided.
insolvency reforms in the economic history of India.
 This was enacted for reorganization and insolvency resolution of corporate
persons, partnership firms and individuals in a time bound manner for
maximization of the value of assets of such persons.
 IBC resolve claims involving insolvent companies. This was intended to tackle the
bad loan problems that were affecting the banking system. Two years on the IBC
has succeeded in a large measure in preventing corporates from defaulting on their
loans. The IBC process has changed the debtor-creditor relationship. A number of
major cases have been resolved in two years, while some others are in advanced
stages of resolution.

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It is imperative to point out that the IBC is silent on the time period within which a petition
for insolvency resolution is required to be filed. Some landmark cases in the Supreme Court
related to IBC will also be examined and hence will facilitate in giving us a clear overview of
whether or not the enactment has in anyway been detrimental to the well being of the
corporate dealing or if it has indeed been a game changer and has eased the burden as well as
quickened the pace of disposing off the cases and whether due to the power shift, it has given
an equal authority to the creditor to file for liquidation if he has been a defaulter

Need of Insolvency & Bankruptcy Code

There was no single law dealing with insolvency and bankruptcy in India. The liquidation of
companies and individuals were handled under various Acts (around 12 in number).

Some of them were:

 Presidency Towns Insolvency Act, 1909

 The Provincial Insolvency Act, 1920
It led to an overlapping jurisdiction of different authorities like High Court, Company Law
 Sick Industrial Companies Act
Board, Board for Industrial and Financial Reconstruction (BIFR) and Debt Recovery
 The Securitisation and Reconstruction of Financial Assets and Enforcement
Tribunal. This overlapping jurisdictions and multiplicity of laws made the process of
of Security Interest Act, 2002 (also known as the Sarfaesi Act)
insolvency resolution very cumbersome in India.
 Companies Act 2013

 Recovery of debts due to banks and financial Institutions Act

As per the World Bank data, it takes an average 4.3 years to wind up a company in India. It
is easier to start a business than to exit it. The new Insolvency and Bankruptcy Code seeks to
cut it to 1 year.
The new Code seeks to help banks and other creditors from recovering their loans from the
bankrupt companies in a timely and efficient way.

Page 20 of 76
Aims & Objective of IBC
The Code applies to companies, partnerships and individuals. It provides for a time-bound
process to resolve insolvency. When a default in repayment occurs, creditors gain control
over debtors assets and must take decisions to resolve insolvency within a 180-day period. To
ensure an uninterrupted resolution process, the Code also provides immunity to debtors from
resolution claims of creditors during this period. The Code also consolidates provisions of the
current legislative framework to form a common forum for debtors and creditors of all
classes to resolve insolvency. Under IBC debtor and creditor both can start recovery
proceedings against each other.

The main objective of this Code is:

 Consolidate and amend all existing insolvency laws in India.

Advantage to lenders for resorting to IBC
 To simplify and expedite the Insolvency and Bankruptcy Proceedings in India.



To protectinthe
Creditors interest
control as of creditors
most including
decision makingstakeholders in a company.
with the lenders.


To revive
Time theand
bound company in a time-bound
quick solution manner.
for stressed and NPA accounts.


To promote
Change entrepreneurship.
of management possible.


To
Brings financial lenders to to
get the necessary relief the creditors
a platform and consequently
- enabling increase
quick decision makingtheand
credit
supply
arrivinginatthe economy.
consensus quickly.


To workand
Prepare out examine
a new and timely recovery
resolution plan by procedure to be
professionals adopted by
appointed by creditors
the
banks, financial
ensuring fearlessinstitutions or individuals.
decision making.


To setapproval
Final up an Insolvency
by NCLTand Bankruptcy
(a legal Board ensures
entity) which of India.accountability and vigilance.
 Maximization of the value of assets of corporate persons.

Page 21 of 76
  Fair chance to viable and sustainable entities for time bound revival. In case
of unviable accounts, faster, transparent and smooth liquidation process.
 Clear and fair distribution of funds in case of liquidation. Government / Statutory
dues do not get priority.
 Protection of assets of secured borrowers with maximization of realization.
 Positive support from government for realization and resolution of NPAs.

Advantage to Borrowers to approach NCLT

 There is no need to pay Court Fee in NCLT (which is 5% or more in courts)

 In Courts generally it takes 3-4 years but not in NCLT because in NCLT we dont
approach for recovery of money.
 Less chances for settlement in less amount.
 Provides for time bound resolution forcing lenders to take a decisive action.
 A Resolution plan approved by NCLT has legal sanction and is binding on
all stakeholders.
 Transparent process under judicial supervision removes investigation and vigilance
fear from the lenders perspective which is expected to improve decision making.
 Preempt all creditors, legal cases and other recovery actions during
moratorium period.
 Not only loans, but all types of debt, including operational creditors and
government dues can be restructured/realigned/reduced under the Code.
 The Borrower has the option of applying himself under the code in which
case borrowers proposed IP would be appointed as IRP.
 Company to work under the control of IRP/RP who are supposed to preserve
the economic value of the company as a going concern entity.
 It can be used as a measure of last resort when other options like CDR, SDR, S4A
have been exhausted.
 Attracting investor (financial / strategic/ JV Partner) would be easier particularly
in case of unlisted companies.
 The Possibility of raising additional finance as the same will have priority as it will
form part of CIRP cost.

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IMPORTANT DEFINITIONS & CONCEPTS
Insolvency
legal terms, insolvency is a state where the liabilities of an individual or an organization
exceeds its asset and that entity is unable to raise enough cash to meet its obligations or debts
as they become due for payment. Technically insolvency could be a financial state when the
value of total assets of an individual or a group exceeds its liabilities.

Insolvency is the inability of a person or companies to pay their bills as and when they
becomes due and payable. It is a situation where individuals or companies are unable to
repay

their outstanding debt. If insolvency cannot be resolved, assets of the debtor may be sold to
raise money, and repay the outstanding debt.

The term Insolvency is a state whereas Bankruptcy is the effect of that act. In legal terms,
insolvency is a state where the liabilities of an individual or an organization exceeds its assets
and that entity is unable to raise enough cash to meet its obligations or debts as they become
due for payment. When an individual is unable to pay off his liabilities and debts then he
generally files for bankruptcy. Here the entity asks for help from government to pay off his
debts to his creditors.

The main reasons behind insolvency are primarily poor management and financial
constraints.

This is much more prevalent in smaller companies.

Some common rationale for insolvency are:

a. Bad debt- obviously money owned by customers

b. Management- failure to acquire adequate skills, imprudent accounting, lack
of information system
c. Finance- loss of long term finance, over gearing or lack of cash flow
d. Other- for examples excessive overheads etc.

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Bankruptcy
Bankruptcy is when a person or company is legally declared incapable of paying their due
and payable bills.

When an individual is unable to pay off his liabilities and debts then he generally files for
bankruptcy. Here is asks for help from government to pay off his debts to his creditors.
Bankruptcy could of two types, namely, reorganization bankruptcy and liquidation
bankruptcy. Usually people tend to restructure the repayment plans to pay them easily under
reorganization bankruptcy. And under liquidation bankruptcy, the debtor tends to sell of
certain of their assets to pay off their debts for their creditors.

The Blacks Law Dictionary defines the work Bankrupt as the state or condition of a person
who is unable to pay its debt as they are or has become, due. The condition of one whose
circumstances are such that he is entitled to take the benefit of the federal bankruptcy laws.
The term includes a person against whom an involuntary petition has been filed, or who
has filed a voluntary petition.

Under bankruptcy law, the condition of a person or firm that is unable to pay debts as they
fall due, or in the usual course of trade or business and financial condition such that
businesses or persons debts are greater than aggregate of such debtors property at a fair
value.

Insolvency Vs. Bankruptcy

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  Insolvent companies can reverse course by cutting costs, selling assets, borrowing
money, renegotiating debt or allowing themselves to be acquired by a larger
corporation that agrees to take over the insolvent companys debts in return for
control of its products or services.

Liquidation
Liquidation is the process of winding up a corporation or incorporated entity.

Default
Default means non-payment of debt when whole or any part or installment of the amount of
debt has become due and payable and is not repaid by the debtor or the corporate debtor, as
the case may be. In IBC, default means failure to pay whole or any part or installment of
amount of debt or interest due of minimum Rs.1 Crore. Default amount under section 4 of
IBC was Rs.1 Lakh, but after central govt. notification dated 24.03.2020, minimum default
amount raised to Rs.1 Crore.

FINANCIAL CREDITOR, OPERATIONAL CREDITOR & CORPORATE DEBTOR

It means any person to whom a financial debt and operational debt respectively, is owed and
includes a person to whom such debt has been legally transferred or assigned to. By
amendment in IBC, Homebuyers Recognized as Financial Creditors giving them due to
representation in the Committee of Creditors (CoC). Thus, now home buyers will be an
integral part of the decision making process.

The Code differentiates between both, financial creditors are those whose relationship with
the entity is a pure financial contract, such as loan or debt security and therefore is debt,
along with interest, if any, which is disbursed against the consideration for the time value of
money, whereas Operational creditors are those whose liabilities from the entity comes from
a transaction on operations. Operational Creditors includes government & employees or
workmen. A corporate debtor is the Corporate Person who owes a debt to any person.

Corporate Applicant
Corporate Applicant means:

Page 25 of 76
 a. Corporate Debtor, or
b. A Member or the partner of the corporate debtor who is authorized to make an
application for the CIRP under the constitutional documents of the corporate
debtor, or
c. An individual who is in-charge of managing the operations and resources of
the corporate debtor, or
d. A person who has control and supervision over the financial affairs of the
corporate debtor;

Committee of Creditors (CoC)

The committee of creditor formed under section 21 of the code and shall consist of all the
financial creditors of the corporate debtor. The interim resolution professional after collation
of claims and assessing the information of the debtor constitute a committee of creditors.

There voting share shall be determined on the basis of the financial debt owed to them.
Otherwise provided in the code, all the decisions of the committee of creditors shall be taken
by a vote of not less than 51%. It shall require a resolution professional to furnish any
financial information in relation to the corporate debtor during the resolution process.

Moratorium
The term Moratorium is nowhere defined in the Code, however, the term in basic parlance
means, a stopping of activity for an agreed amount of time. Under the Code, Moratorium
is actually described as a period wherein no judicial proceedings for recovery, enforcement
of security interest, sale or transfer of assets, or termination of essential contracts can be
instituted or continued against the Corporate Debtor.

The Adjudicating Authority [National Company Law Tribunal], whilst admitting a petition
against the Corporate Debtor is required to declare the moratorium period as described under
Section 14 of the Code.

The main purpose of declaring the moratorium period is to keep the Corporate Debtors assets
intact during the CIRP, which otherwise may be attached by any competent court of law

Page 26 of 76
during the pendency of proceedings against the Corporate Debtor. In other words, the
moratorium ensures that the time-bound completion of the CIRP and also that the corporate
debtor may continue as a going concern.

Apart from staying the pending proceedings, the moratorium also casts a bar upon the
directors of the company, who cannot use or take the amount available on the date of
declaration of the moratorium in the company. If the moratorium period is not declared, the
insolvency process will be frustrated which in turn will fail the objective of the Code.

Punishment - Under Section 74 of the IBC, officials of the corporate debtor who violate
provisions of moratorium can be imprisoned for a minimum of three years, which may be
extended up to five years. Such officials will also be fined a minimum of Rs 100,000 but not
more than Rs 300,000. Officials of creditors who knowingly and willfully authorize or permit
such contravention can be jailed for a minimum of one year, with a maximum tenure of five
years. Such officials will also be fined a minimum of Rs 100,000, with the maximum penalty
of up to Rs 10 million.

Further, the Honble National Company Law Appellate Tribunal, vide its recent judgment has
also held that in case any Director withdraws money from the account of the company during
the moratorium period, he will be held liable for the criminal offences of misappropriation
and breach of trust.

Resolution Applicant
As per the Code, a Resolution Professional has to appoint a Resolution Applicant who in-turn
is required to prepare different resolution plans for different stakeholders in corporate
insolvency resolution process. The code defines the resolution applicant under section 5(25)
as a person who submits a resolution plan to insolvency professional. A resolution plan
specifies the details of how the debt of a defaulting debtor can be restructured.

Corporate Insolvency Resolution Process (CIRP)

The creditors committee will take a decision regarding the future of the outstanding debt
owed to them. They may choose to revive the debt owed to them by changing the repayment
schedule or sell (liquidate) the assets of the debtor to repay the debts owed to them. If a
decision is not taken in 180 days, the debtors assets go into liquidation.

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The Insolvency & Bankruptcy Code ecosystem

 Insolvency and Bankruptcy Board (IBBI)

IBBI is an apex body governing Insolvency and Bankruptcy Code. It consists of
representatives of Reserve Bank of India, and the Ministries of Finance, Corporate
Affairs and Law. It is setting up the necessary infrastructure and accredits Insolvency
Professionals (IPs) and Information Utilities (IUs).It manages and controls Insolvency
Professionals, Agencies and Information Utilities set up under the Code.
 Insolvency Professionals (IPs)
IPs are licensed professionals registered with IBBI who act as Resolution
Professional/ Liquidator/ Bankruptcy trustee in an insolvency resolution process. A
Specialized category of officers is created to administer and enforce the resolution
process, manage the affairs of the corporate debtor and share information with
creditors to help them in decision-making. The adjudicating authority shall appoint an
interim resolution professional within 14 days from the insolvency commencement
date.
He shall collect the information relating to the debtors assets, finances and operations,
take its control and custody, receive and collate claims and constitute a committee of
creditors. The personnel i.e. managers and employees of the corporate debtors shall
extend cooperation to insolvency professional. He shall make efforts to preserve the
value of corporate debtors property and manage the operations as a going concern.
Within 7 days of the constitution of the committee of creditors, they should by a vote
of 66% resolve to appoint an interim resolution professional as resolution professional
or replace him by another one.

Some important duties and function of the Insolvency Professional:

 To make public announcement of insolvency process in English and local

language newspaper.
 To manage affair of the company as a going concern.
 To collect information relating to the assets, finances and operation of
corporate debtor for determining the financial position
 To collect all claims received from creditors and assess them.
Page 28 of 76
  To constitute a committee of creditors etc.
 To appoint to registered valuers to evaluate the assets.
 To coordinate with NCLT and IBBI.

Information Utilities
Information Utilities would collect, store and distribute information related to the
indebtedness of companies. A person registered with the Board as Information Utility i.e. a
person to whom the creditors report the financial information of the debt owed to them by the
debtors which include debt, liabilities and default.

Insolvency Professional Agencies

Insolvency Professional Agencies (IPAs) are enrolling insolvency professionals as
members. These agencies conduct an examination and certify these insolvency professionals
as well as defines their code of conduct for their duties and performance.

Currently, there are three IPAs:

i. ICSI Insolvency professional Agency

ii. Indian Institute of Insolvency Professionals of ICAI
iii. Insolvency professional Agency of Institute of cost Accountants of India

ADJUDICATING AUTHORITIES (AA)

Adjudicating Authorities (AA) have the exclusive jurisdiction to deal with insolvency related
matters.

 National Company Law Tribunal (NCLT) is the AA for Corporate and

A person aggrieved by the order of the Adjudicating Authority under Part III of IBC
LLP insolvency.
(insolvency resolution and bankruptcy for individuals and partnership firms), viz. DRT, may
 Debt Recovery Tribunal (DRT) would be AA for individual or partnership
prefer an appeal to the Debt Recovery Appellate Tribunal (DRAT) under Section 181. Thus,
Firms Insolvency.
statutory forums in the form of NCLAT and DRAT have been designated as the appellate

Page 29 of 76
authority under IBC for redressal of grievances arising out of an order of the Adjudicating
Authority under Part II and Part III of IBC respectively. Further, any person aggrieved by an
order of the NCLAT or DRAT may file an appeal to the Supreme Court on a question of law
arising out of such order. Thus, IBC provides for a three-tier adjudicatory mechanism, for
dealing with all issues that may arise in relation to the insolvency resolution and liquidation
for corporate persons and insolvency resolution and bankruptcy for individuals and
partnership firms, namely:

i. NCLT/ DRT;
ii. the NCLAT/ DRAT
iii. the Supreme Court.

It shall be the National Company Law Tribunal (NCLT) having the territorial jurisdiction
over the place where the registered office of the corporate person is located. Any insolvency
resolution, liquidation or bankruptcy proceedings shall stand transferred to NCLT.

Any person aggrieved by its order can prefer an appeal to the National Company Law
Appellate Tribunal (NCLAT) within 30 days of the NCLT order, which in turn can be
appealed to the Supreme Court within 45 days of NCLAT order on questions of law arising
out of such order. If both the Appellate courts are satisfied about the sufficient cause they
may extend the time for appeal by 15 days. No civil court shall have jurisdiction over the
matters of NCLT.

Applicability of code
Applies to whole of India including J&K and Ladakh.
Persons covered:

 Company
 Limit Liability Partnership
 An individual
 A Hindu Undivided Family
 A Partnership
 A Trust
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  Any other entity established under a statute, and includes a person resident outside
the India.

Who can approach

Any person whose amount is due with the Company or LLP (minimum amount 1,00,00,000)
can approach to NCLT (National Company Law Tribunal) under IBC (Insolvency and
Bankruptcy Code) 2016 for Liquidation of that Company / LLP.

Jurisdiction to file the application before NCLT

Jurisdiction as per the State in which Company (to whom we are filling a suit) is registered.
As per that state connected NCLT shall be the jurisdiction to file the petition.
Example is given as below:

Arnav who is service provider from Jaipur has given the services to ABC Private Limited Jaipur branch o
Mr. Arnav needs to file petition before NCLT Chandigarh Bench (Because Company is Registered in Gur

Ankur who is resident of Delhi, South Ex and working in a Company XYZ Private Limited as a manger in
Ankur needs to file petition before NCLT New Delhi bench (because Company is Registered in Delhi and

Applicability of Limitation Law

At the outset, it may be noted that the law of limitation would apply equally to an applicants
claim as well as claims of other creditor who submit proof of claim before the RP/liquidator.
As per the Act, being a general law, the right to sue accrues when the default has occurred
and the default should have occurred not beyond 3 years from filing of the application.
However, when introduced, the Code did not explicitly provide for applicability of limitation
law for matters under the Code- hence the anomaly.

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The issue of applicability of the Limitation Act to proceedings under the IBC emerged as a
moot point. The same was initially dealt with by the National Company Law Appellate
Tribunal (NCLAT) in Speculum Plast Private Limited Vs. PTC Techno Private
Limited and in Neelkanth Township and Construction Pvt. Ltd. Vs. Urban
Infrastructure Trustees Ltd wherein it was held that the Limitation Act will not be
applicable to proceedings under the IBC.

However, this position left litigants with many unanswered queries. Furthermore, having
realized the ambiguity with respect to the applicability of the Limitation Act upon
proceedings under the IBC, the Parliament inserted section 238A to the IBC through the
Insolvency and Bankruptcy Code (Second Amendment) Act, 2018 that took effect on 6th
June 2018. This states that the provisions of the Limitation Act will apply to proceedings
under the IBC.

238A. Limitation:
The provisions of the Limitation Act, 1963 shall, as far as may be, apply to the proceedings
or Appeals before the Adjudicating Authority, the National Company aw Appellate Tribunal,
the Debt Recovery Appellate Tribunal, as the case may be.

Furthermore, the Supreme Court in of B.K. Educational Services Private Limited Vs.
Parag Gupta and Associates clarified the applicability of the Limitation Act and held:
27 It is thus clear that since the Limitation Act is applicable to applications filed under
Sections 7 and 9 of the Code from the inception of the Code, Article 137 of the
Limitation
Act gets attracted. The right to sue, therefore, accrues when a default occurs. If the default
has occurred over three years prior to the date of filing of the application, the application
would be barred under Article 137 of the Limitation Act, save and except in those cases
where, in the facts of the case, Section 5 of the Limitation Act may be applied to condone the
delay in filing such application.

Conflict between Supreme Court & NCLAT

The Supreme Court in Gaurav Hargovindbhai Dave Vs. Asset Reconstruction Company
(India) Ltd., September 2019 held that the proceedings under section 7 of the IBC are an
application and not suits; thus they would fall within the residuary Article 137 of the

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Limitation Act and the right to apply will arise from the date of default.

It was again reiterated by the Supreme Court in Jignesh Shah Vs. Union of
India, September 2019that the right to apply under the IBC will be from date of default and
not from the date of enactment of the IBC, i.e., 1st December 2016.
While the abovementioned judgments were pronounced by the Supreme Court on 18th
September 2019 and 25th September 2019 respectively, the NCLAT has once again stoked
uncertainty by passing a judgment on 26th September 2019, whereby in B. Prashanth Hegde
Vs. SBI, 26th September 2019it applied article 137 and held that the right to apply under
section 7 of IBC will accrue on 1st December 2016, i.e., when IBC was enacted. The NCLAT
also held that since the banks have initiated proceedings under provisions of the
Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest
Act, 2002 (SARFAESI Act), the period of limitation will also be governed by articles 61 and
62 of the Limitation Act.

However, this reasoning of the NCLAT is contrary to the observation of the Supreme Court
in Jignesh Shah, wherein the Court stated that only the date of default will be relevant for
the purpose of winding up proceedings (and, by extension, to IBC applications). Having
noticed the divergent view of the NCLAT, the Supreme Court in Sagar Sharma Vs.
Phoenix ARC Pvt. Ltd., 30th September 2019 has made it loud and clear that the judgment
passed by the Supreme Court should be taken in letter as well as spirit and hence NCLAT
cannot, time and again, apply Article 62 to the applications made under the IBC.

However, even after such remarks from the Supreme Court, as recently as on 3rd December
2019, the NCLAT in Sesh Nath Singh Vs. Baidyabati Sheoraphuli Cooperative Bank
Ltd held that time spent in proceedings under the SARFAESI Act can be condoned by the
virtue of section 14 of the Limitation Act for the purpose of filing an application under the
IBC.

It is pertinent to mention here that under section 14 only such time can be condoned that was
spent in bona fide proceedings due to defect of jurisdiction. The NCLAT failed to notice that
proceedings under the SARFAESI Act before the enactment of IBC are not without defect
of jurisdiction and, therefore, the same cannot be used to condone the delay for filing a
petition under IBC.

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Conclusion
In view of the catena of judgments passed by the NCLAT and Supreme Court, it can be
ascertained that Article 137 will apply to proceedings filed under the IBC. However, the only
point that arises for the consideration is the interpretation of the term when the right to
apply accrues, since the Supreme Court and NCLAT have adopted opposite views regarding
the same.

However, the Supreme Court has affirmed that the right to apply accrues from the first date
of default irrespective of the fact that the IBC was enacted in 2016. It is also pertinent to
mention that the Supreme Court in the abovementioned judgments set aside the decision of
the NCLAT on the applicability of Article 137 from the date of enactment of IBC, but yet the
NCLAT is applying and referring to different provisions of Limitation Act such as section 14
and Article 61 to effectively bypass the ruling of the Supreme Court one way or another.
Hence, it was substantiated in clear words that the Limitation Act, 1963 is applicable to the
Insolvency and Bankruptcy Code, 2016.

KEY POINTS TO BE NOTED

 This act takes precedent over the DRT and SARFEASI ACT in insolvency
related issues.
 The Part III of the code (i.e. INSOLVENCY RESOLUTION AND
BANKRUPTCY FOR INDIVIDUALS AND PARTNERSHIP FIRMS) is not yet
enforced.
 The Insolvency & Bankruptcy Code, 2016, (IBC) classifies individuals into three
classes, namely, personal guarantors to CDs, partnership firms and proprietorship
firms, and other individuals, to enable implementation of individual insolvency in a
phased manner. The Central Government, vide a notification dated 15th
November, 2019, appointed 1st December, 2019 as the date for commencement of
the provisions of the Code relating to personal guarantors to CDs. It also notified
the following on the same day:

o The Insolvency and Bankruptcy (Application to Adjudicating Authority for

Insolvency Resolution Process for Personal Guarantors to Corporate

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 o The Insolvency and Bankruptcy (Application to Adjudicating Authority for
Bankruptcy Process for Personal Guarantors to Corporate Debtors) Rules,
2019.
 These Rules provide for the process and forms of making applications for initiating
insolvency resolution and bankruptcy proceedings against personal guarantors to CDs,
withdrawal of such applications, forms for public notice for inviting claims from the
creditors, etc.
 There are occasions when a Corporate Debtor (CD) takes a loan guaranteed by
another corporate person (corporate guarantor to the CD) or an individual (personal
guarantor to the CD). The lender may pursue a remedy against the guarantor or the
CD, being principal borrower, when there is a default in repayment of the loan. The
insolvency resolution of corporate guarantors to the CD and of personal guarantors
to the CD complement insolvency resolution of the CD. Accordingly, the IBC
provides that where an application for insolvency resolution or liquidation
proceeding of a CD is pending before a National Company Law Tribunal (NCLT),
an application relating to insolvency resolution or liquidation or bankruptcy of a
corporate guarantor or a personal guarantor shall be filed before the NCLT.
 It further provides that insolvency resolution, liquidation or bankruptcy proceeding
of a corporate guarantor or a personal guarantor of the CD pending in any court or
tribunal shall stand transferred to the NCLT dealing with insolvency resolution or
liquidation proceeding of such CD.

OFFENCES & PENALTIES

There are mainly two categories of punishment or fine under Part II of the Code:

1. Punishment for 3 to 5 years or a fine of Rupees 1 lakh to 1 Crore or both

officer of the Corporate Debtor within 12 months immediately preceding the insolvency commenc
Where any officer of the Corporate Debtor on or after the date of insolvency commencement date,

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 process, like does not disclose information, deliver property, books of
accounts, other information to resolution professional or falsifies the books of
Corporate Debtor or for willful and material omissions from statements
relating to affairs of Corporate Debtor or false representation to creditors;
o Where Corporate Debtor willfully and knowingly provides false information
in application made by the Corporate Debtor. But where any other person
other than Corporate Debtor furnishes false information in the application
made by Financial Creditors, shall only be punished with a fine and not
imprisonment.
2. Punishment for 1 to 5 years or a fine of Rupees 1 lakh to 1 Crore or both

o Where any officer of the Corporate Debtor has transacted for defrauding
creditors, like transfer of property in the form of gift/charge or other
forms;
o Where the Corporate Debtor or any of its official contravenes the
moratorium or the resolution plan.
3. Is there any imprisonment to debtor?

o No. There are no prisons for debtors in India and any such imprisonment will
be unconstitutional. However, you can go to prison if you commit any fraud
relating to the debts you owe. For example, if you take a housing loan using
fake papers or you take a business loan but transfer the amount to a friend
showing fake expenses, you can be prosecuted against for fraud.

IBC (Amendment) 2020

The Code has been amended time to time since its enactment to remove bottlenecks and to
streamline the Corporate Insolvency Resolution Process (CIRP) under the Code. In
December, 2019, the legislature introduced The Insolvency and Bankruptcy Code
(Amendment) Bill, 2019, however, the same could not be passed during the then parliament
session and was implemented by way of an ordinance w.e.f. 28.12.2019.

In 2020, the parliament passed the Insolvency and Bankruptcy Code (Amendment) Act, 2020
[No. 1 of 2020] (Amendment Act) and it received Presidents assent on 13th March, 2020.

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As per Section 1 (2) of the Amendment Act, the amendments deemed to have come in force
on 28th December, 2019. The Amendment Act has amended Sections 5, 7, 11, 14, 16, 21, 23,
29A, 32A, 227, 239 and 240 of the Code.

The Amendment Act has endeavored to remove various bottlenecks and practical difficulties
being faced while implementing the provisions of the Code and has also attempted to
streamline the Corporate Insolvency Resolution Process (CIRP).

THE HIGHLIGHT OF AMENDMENTS ARE:

 Central Govt. notified on 24.03.2020 that Due to the emerging financial distress faced
by most companies on account of the large-scale economic distress caused by COVID
19, it has been decided to raise the threshold of default under section 4 of the IBC
2016 to Rs 1 crore from the existing threshold of Rs 1 lakh;
 Insolvency commencement date is now the date of admission of an application
for initiating CIRP;
 IRP to be appointed on the date of admission of application itself;
 IRP shall continue to manage the affairs of a Corporate Debtor till the time the
resolution plan is approved by the Adjudicating Authority or an order for liquidation
of Corporate Debtor is passed;
 A minimum threshold has been provided for the Financial Creditors falling under sub-
section 6A of Section 21 and in respect of real estate allottees.
 During moratorium there shall not be termination of any licence, concession,
permit, quota, clearance or any other similar right during the moratorium period,
unless the Corporate Debtor does not default in necessary payment;
 Protection from prosecution granted to new management/ officials for
offences committed prior to commencement of CIRP;

Although the Amendment Act has cleared many doubts which subsisted earlier and paved the
way for the easy and speedy resolution process under the Code, however, has its own flaws
which may not be ultimately beneficial to all the stakeholders. One of such instances is
introduction of minimum threshold for a real estate allottee.

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The minimum threshold now introduced, shall result in making the remedy provided under
the Code to a real estate allottee, completely toothless, in as much as a real estate allottee is a
person, who invested his hard earned money in buying a property and shall now feel harassed
to find out 99 more buyers or 10% of the total number of buyers, before he could approach
the Court for redressal of his grievances.

Ultimately, this ought to have been kept in mind by the legislature that real estate allottees
were included in the definition of Financial Creditor after a huge number of defaults by real
estate developers across the country. This legislation so brought was a welfare legislation,
which has been diluted substantially to the grave prejudice of real estate allottees. As a matter
of fact, the validity of this amendment was challenged before the Honble Supreme Court of
India and the Honble Court has granted a status quo order in respect of pending matters. The
final order is still awaited.
CONCLUSION
The IBC has taken its first steps to regularize the insolvency process in India. It has amended
over 11 legislations in India, bringing about one of the most significant change to commercial
laws in India in recent times. However, this nascent legislation has been ridden with
controversies and speedy resolutions. It has also become a very important tool for banks to
regularize multitudes of non-performing assets plaguing the countrys economy.
Insolvency and Bankruptcy Code brought quite a few changes in the big business scenario in
the country. Brought forward to reduce the time it takes to deal with the issue of bankruptcy,
the code has morphed into something that is driving this country towards a new age of
economy. However, what this road of growth might lead to is yet to be seen. The best we can
do is making sure that our finances are in order and we never go insolvent.
With more than 11% of all loans in India being terms as bad loans, the IBC has become the
need of the hour. The IBC has brought a plethora of changes to insolvency laws in India and
aims to reduce the amount of bad loans that has saddled the economy over the last few years.
We are beginning to see this through various companies successfully concluding their
insolvency process. The first successful case of a CIRP was that of Bhushan Steel wherein
TATA Steel agreed to purchase Bhushan Steel for Rupees Thirty-Two Thousand Five
Hundred Crores.
With many more insolvency resolution processes in the pipe line, only time will tell if the
IBC will prove to be a successful tool with its objective of streamlining the insolvency
process in India.

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CORPORATE SOCIAL RESPONSIBILITY
What goes around comes around. Everything is connected to everything else. A man will
receive only the yield which he deserves a fruit of his snow. This is how the virtue of
responsibility drives one to do what is not harmful to another. A good citizen has the duty
to return what he gets from the society. Likewise, a company also has the duty to take the
responsibility of the activities which have an impact on the society and the environment.

Companies have responsibilities like protecting the environment and employing persons from
the minority groups. But these duties were questioned by the companies as they did not hold
themselves responsible. It was in 1972, that United Nations in Conference on the Human
Environment in Stockholm, Sweden while discussing its relationship between business
activities and their impact on community adopted various principles, one of which was that, “
in order to achieve a more rational management of resources and thus to improve the
environment, countries should also adopt an integrated and coordinated approach to their
development planning so as to ensure that development is compatible with the need to protect
and improve the environment for the benefit of their position.” And that’s how came the idea
of Corporate Social Responsibility (CSR).

Corporate Social Responsibility

A company is responsible for the repercussions its activities have on the community and it
has to take the initiatives as responsibility to make good for the harm done by it. The term
corporate social responsibility is synonymous with Corporate Citizenship. Corporate
social responsibility may also be referred to as “corporate citizenship” and can involve
incurring short-term costs that do not provide an immediate financial benefit to the
company but instead promote positive social and environment change. The initiatives and
efforts that a company takes as part of corporate social responsibility are more than what is
required by environmentalist.
Companies (Corporate Social Responsibility Policy) Rules, 2014 defines Corporate Social
Responsibility as: “Corporate Social Responsibility (CSR)" means and includes but is not
limited to (i) Projects or programs relating to activities specified in Schedule VII to the Act
or
(ii) Projects or programs relating to activities undertaken by the board of directors of a
company (Board) in pursuance of recommendations of the CSR Committee of the Board
as
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 per declared CSR Policy of the company subject to the condition that such policy will
cover subjects enumerated in Schedule Vll of the Act

The World Business Council for Sustainable Development defined Corporate Social
Responsibility as, “Corporate Social Responsibility is the continuing commitment by
business to behave ethically and contribute to economic development while improving the
quality of life of the workforce and their families as well as of the local community and
society at large.”
The World Bank defines Corporate Social Responsibility (CSR) as "the commitment of
businesses to contribute to sustainable economic development by working with employees,
their families, the local community and society at large to improve their lives in ways that are
good for business and for development."

Three Levels of Corporate Social Responsibility From The View Point of A Corporate

History
When oneAnd Evolution
evaluates of responsibility
social Corporate Social
fromResponsibility In India
the point of view of corporate, one
can decipher three levels of corporate social responsibility.
In India, the concept of corporate social responsibility has developed in phases. In the
The first level is the minimum compliance. Here the managers comply with the
19th century, business families like Tata, Birla, Godrej and others were inclined towards
minimum social requirements of the law. The corporate undertakes its business
social causes and they continue to do the same now that too in a larger scale. Between
initiatives within the ambit of law and does not go beyond that. This is guided by
transaction ethics.
The second level is enlightened self-interest. Corporate Social Responsibility is used here
as a strategic weapon to inform the marked that they are bigger and better than their
competitors. Investments in Corporate Social Responsibility today is said to bring long-
term benefits to the company with an understanding that the consumers the community and
the society at large would be more happy to transact with an organization that is engaged in
social activities. This is guided by recognition ethics and enlightened self-interest.
The third level of aims to actively improve society in general. This level of CSR is usually
seen in highly matured organizations. It is not dependent upon direct benefit to business.
The firm positions itself to CSR because it firmly believes it is in their DNA to be socially

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when the Indian companies were facing high taxes, licensing and restrictions, private
companies got involved in corporate malpractices. This is the time when legislations on
corporate governance, labour and environment issues were enacted. CSR was also given a try
to be implemented. Post-1980, when licensing was reduced to a certain extent, companies
became more willing to contribute towards the social causes as corporate social
responsibility. The Companies Act, 1956 had clear provision for CSR but the new Companies
Act, 2013 makes CSR mandatory for companies which fall within the ambit of section
135(1). The said section is to be read with the Schedule VII and Companies (Corporate
Social Responsibility) Rules, 2014.
CSR in India has evolved through different phases, like community engagement, socially
responsible production and socially responsible employee relations. Its history and evolution
can be divided into four major phases.

Phase 1 (1850 To 1914): The first phase of CSR is known for its charity and philanthropic
nature. CSR was influenced by family values, traditions, culture and religion, as also
industrialization. The wealth of businessmen was spent on the welfare of society, by setting
up temples and religious institutions. In times of drought and famine these businessmen
opened up their granaries for the poor and hungry. With the start of the colonial era, this
approach to CSR underwent a significant change. In pre-Independence times, the pioneers of
industrialization, names like Tata, Birla, Godrej, Bajaj, promoted the concept of CSR by
setting up charitable foundations, educational and healthcare institutions, and trusts for
community development. During this period social benefits were driven by political motives..

Phase 2 (1910 To 1960): The second phase was during the Independence movement.
Mahatma Gandhi urged rich industrialists to share their wealth and benefit the poor and
marginalized in society. His concept of trusteeship helped socio-economic growth. According
to Gandhi, companies and industries were the ‘temples of modern India’. He influenced
industrialists to set up trusts for colleges, and research and training institutions. These trusts
were also involved in social reform, like rural development, education and empowerment of
women.

Phase 3 (1950 To 1990): This phase was characterized by the emergence of PSUs (Public
Sector Undertakings) to ensure better distribution of wealth in society. The policy on
industrial licensing and taxes, and restrictions on the private sector resulted in corporate

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 malpractices which finally triggered suitable legislation on corporate governance, labor and
environmental issues. Since the success rate of PSUs was not significant there was a natural
shift in expectations from public to private sector, with the latter getting actively involved
in socio-economic development. In 1965, academicians, politicians and businessmen
conducted a nationwide workshop on CSR where major emphasis was given to social
accountability and transparency.

Phase 4 (1980 Onwards): In this last phase CSR became characterized as a sustainable
business strategy. The wave of liberalization, privatization and globalization (LPG),
together with a comparatively relaxed licensing system, led to a boom in the country’s
economic growth. This further led to an increased momentum in industrial growth, making
it possible for companies to contribute more towards social responsibility. What started as
charity is now understood and accepted as responsibility.
Corporate Social Responsibility In India: Features Under Companies Act, 2013

For decades, companies in India has been regulated and governed by the outdated Companies
Act, 1956. After years of debate and contemplation, The Indian Parliament passed the New
Companies Act, 2013. It is divided into 7 schedules, 29 chapters and 470 sections.

It has brought various new features to corporate legislation which include but are not limited
to mandatory spending on Corporate Social Responsibility of at least of 2% of net profit,
curbing corporate delinquency by introducing punishment for falsely including a person to
enter into an agreement with a bank or a financial institution to obtain credit facilities,
introduction of new entity called ‘one person company’, simplified the procedure for mergers
and acquisitions, limitation on the number of companies in which the same auditor may be
appointed, strengthening the role of women by stipulating appointment of at least one women
director in the board room, limit in the number of maximum partners etc.

The Companies Act, 2013 came into force on 12th September 2013. But the provisions of
section 135 relating to CSR came into effect on 1st April 2014. The features of Section 135
read with Schedule VII and (Corporate Social Responsibility Policy) Rules, 2014 are
described as below:

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 Companies Coming Within The Ambit of CSR Provisions:

As per Section 135(1) of The Companies Act, 2013, “every company having net worth of
The Policy recognizes that corporate social responsibility is not merely compliance; it is a
rupees five hundred crore or more, or turnover of rupees one thousand crores or more or
commitment to support initiatives that measurably improve the lives of underprivileged by
net profit of rupees five crores or more during any financial year shall constitute a
one or more of the following focus areas as notified under Section 135 of the Companies Act
Corporate Social Responsibility Committee of the board consisting of three or more
2013 and Companies (Corporate Social Responsibility Policy) Rules 2014:
directors, out of which one director shall be an independent director.” Thus every company
having net worth of rupees 500 crore or more or turnover of rupees 1000 crore of more or a
i. Eradicating hunger, poverty & malnutrition, promoting preventive health care &
net profit of rupees 5 crore or more in a financial year shall fall within the ambit of CSR
sanitation & making available safe drinking water;
provisions. This particular provisions is applied to all Indian Companies as well as Foreign
ii. Promoting education, including special education & employment enhancing vocation skills
Activities That Can Be Undertaken As CSR Initiatives
especially among children, women, elderly & the differently unable & livelihood
enhancement projects;
iii. Promoting gender equality, empowering women, setting up homes & hostels for
women & orphans, setting up old age homes, day care centers & such other facilities for
senior citizens & measures for reducing inequalities faced by socially & economically
backward groups;
iv. Reducing child mortality and improving maternal health by providing good hospital
facilities and low cost medicines;
v. Providing with hospital and dispensary facilities with more focus on clean and good
sanitation so as to combat human immunodeficiency virus, acquired immune
deficiency syndrome, malaria and other diseases;
vi. Ensuring environmental sustainability, ecological balance, protection of flora & fauna,
animal welfare, agro forestry, conservation of natural resources & maintaining quality of soil,
air & water;

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vii. Employment enhancing vocational skills
viii. Protection of national heritage, art & culture including restoration of buildings & sites of
historical importance & works of art; setting up public libraries; promotion & development
of traditional arts & handicrafts;
ix. Measures for the benefit of armed forces veterans, war widows & their dependents;
x. Training to promote rural sports, nationally recognized sports, sports & Olympic sports;
xi. Contribution to the Prime Minister‘s National Relief Fund or any other fund set up by
the Central Government for socio-economic development & relief & welfare of the
Scheduled Castes, the Scheduled Tribes, other backward classes, minorities & women;
xii. Contributions or funds provided to technology incubators located within
academic institutions, which are approved by the Central Government;
xiii. Rural development projects, etc.
xiv. Slum area development.

Explanation: For the purposes of this item, the term slum area ‘shall mean any area declared
as such by the Central Government or any State Government or any other competent
authority under any law for the time being in force.’

Benefits of A Corporate House Gets From Corporate Social Responsibility

1. Improves Public Image

2. Increases Media Coverage
3. Boosts Employee
4. Attracts & Retains Investors

Benefits A Non-Profit Corporate House Gets From Corporate Social Responsibility

1. Funding Via Matching Gift Programs

2. More Volunteer Participation
3. Forging Corporate Partnerships
4. Varied Sources of Revenue

CSR Initiatives Taken By Companies And Impact of Section 135

1. Tata Power: A subsidiary of Tata Power Company, Coastal Gujarat Private Limited
(CGPL), has their 4000MW Ultra Mega Power Plant in Kutch and the company, being
highly involved in Corporate Social Responsibility, set out to discover the crux of the issue

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about fixing it. In 2012, in partnership with Aga Khan Rural Support Programme, India,
CGPL launched a community-based sustainable livelihood programme. This initiative, called
Sagarbandhu, was focused in the villages of Modhva and Trigadi in Mandvi Taluka which
are the major areas where the fisher folk live and return to when the fishing season ends, and
do their alternative jobs, which are highly seasonal.

The Sagarbandhu programme went beyond just looking for way of providing the fisher folk
alternative employment for the rest of the year, but also inspired to help develop the
community and a sense of ownership and independence within the villagers. Activities
undertaken include VDAC formation, value chain analysis, revolving fund at the start of the
season, roof rain water harvesting, exposure visits, regular meetings, SHG formation,
drinking water and sanitation facilities, school-level interventions, and distribution of boat
lights, fishing nets and marketing equipment. Local institutions designed to help with the
development of the community were set up. These included Self Help Groups (SHGs) and a
Village Development and Advisory Council (VDAC). Through these, the fisher folk and
villagers are offered training on new and different fishing techniques. There has also been
improvements made to the infrastructure in the villages to provide easier access to local
markets.

The communities have been greatly encouraged by the initiative of CGPL and Aga Khan
Rural Support Programme and have responded with great enthusiasm. They then decided to
launch a second phase of Sagarbhandu in 2013 to help widen the scope of the programme and
reach more villages in the area. Once again, they were successful in their endeavors garnering
praise and enthusiasm from the fisher folk.

2. Cognizant: ‘The Cognizant foundation’ registered in 2005 as a "Charitable Company"

under the Indian Companies Act, the Cognizant Foundation helped underprivileged
members of Indian society gain access to quality education & healthcare by:

(i) Providing financial and technical support

(ii) Designing and implementing educational and healthcare improvement programs
(iii) Partnering with Non-Government Organizations (NGOs), educational institutions,
healthcare institutions, government agencies and corporations to raise the quality of life for
people across India

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(iv) Outreach was launched in the year 2007 when Cognizant crossed the second billion
dollar revenue mark and decided to celebrate this achievement by giving back to the
society. This programme is focused on using a combination of voluntary efforts from
Cognizant associates and funding from Cognizant to promote the cause of education. As
part of this programme, Cognizant adopts orphanages and educational institutions catering
to underprivileged children and helps them raise the required infrastructure and meet their
training needs

A team of Cognizant associates under the banner of Outreach, Cognizant's volunteer CSR
group that aims to make a difference to the education of underprivileged children, had started
raising funds to donate notebooks to underprivileged students in a government school in
Chennai. Today, this 'spirit of giving' has spread to over 44 schools across India.

3. Infosys: As a leading software company, Infosys is into the providing language and
computer education. Company has special program for unprivileged children by which the
company teaches them various skills and change their outlook too. Company also donates
carom, chess board, chocolates etc. to the needy ones. One of the Infosys team works with
Kaliyuva mane that is an informal school for droupouts. The company’s CSR activities
include blood donation camp, eye donation camp, foundation has been working in the sectors
of health care, education, environment preservation and social rehabilitation.

Infosys had spent a total of 239.54 Crores out of the mandated 243 Crores in 2014-15.
According to the Annual Report, the balance amount was spent in April 2015. Out of total
15% of contribution was to Akshaya Patra Foundation towards eradicating malnutrition and
hunger. Next top 5 grantees also include Chennai Mathematical institute, Ramakrishna
Mission, IISC Bengaluru, Infosys Science Foundation and Spark IT Training Program run
by the Infosys Foundation. Other allocations include donations to IIT Bombay under
healthcare and medical facilities and to Banerghatta National park towards destitute care and
rehabilitation.

4. Tata Consultancy Services (TCS): TCS is India’s largest software company and has alos
won the Asian CSR award for initiating community development work and implementing
various programs and devoting leadership and sincerity as ongoing commitment in

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incorporating ethical values.

Most focus of the company is on education sector. Company is working upon literacy
program that cares TCS designed computer based literacy model to teach adults and this
program is knows as adult literacy program. Company is also working upon environment
policy and has been developing environment friendly products and services.

TCS has also taken some footprints into the health sector too i.e. its actively supporting
children’s hospital in Mumbai. Success of all these CSR practices is shared by company with
a three dimensional framework that comprises employees, management and workplace.

More than 220 Crores were spent in 2014-15 against a mandated 285 Crore. 70% of the
expenditure was made through TCS foundation. The foundation does not have a separate
website and the details of implementing agencies of the foundation are also not given. Some
of the supported activities include Tech support for hospitals and child line software to track
missing children.

5. MRF: MRF is a public limited company having main objective to attain global standards
with ongoing continuous improvement by improving the quality of products and survives. Its
CSR focus areas are health care and education Centre. Company having its own coaching
center and career guidance seminars, for children of the weaker section of the society. Also
awards academic scholarships to the students of local government schools. Main objective
behind initiating educational initiatives is to ensure better quality of life to the future citizens
of India. Special focus is on women empowerment and social awareness. MRF also works
with the motto of prevention of diseases rather than cures and covers sections like
gynecology, dubieties, dental clinic, organizes awareness program for aids, alcoholism and
de-addiction etc.

6. Oil and Natural Gas Limited (ONGC): ‘Oil and Natural Gas limited’ is India’s largest
and most active company involved in exploration and production of oil. It contributes 77%
of India’s crude oil production and 81% of India’s natural gas production.

ONGC actively participates in CSR practices. Company has also received ‘Golden Jubilee
Award’ for practicing and initiating new corporate social responsibility. Company had and

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 has been working towards water management. ‘Project Saraswati’ was launched by ONGC
in North-West of Rajasthan in the year 2005. The basic aim of this project was to locate
fresh water unexploited deep ground water resources. Company also undertook education
activities in Dehradun, Andhra Pradesh and North- Eastern States. Its educational
initiatives includes activities like financial support for Bal Bhavan, Tamanna, school for
computer education for disabled children, giving of Bralle Machine for blind children.

ONGC has won ‘Golden Peacock Award’ for excellence in corporate social responsibility
in emerging economies’ in the year 2006- by world council for corporate governance, UK

In the year 2014-15, ONGC has spent only 75% of the budget is utilized. The project outlay
of Rs.660 Crore has been divided equally across five areas – Education including
Livelihood, Health, Environment, Infrastructure support near ONGC areas and Promotion
of artisans and sports. ONGC has registered a Foundation and recruitment is ongoing to
build the Foundation as an effective tool for implementing CSR policy.
Issues And Challenges of CSR In India

THERE ARE NUMBER OF ISSUES AND CHALLENGES TO THE SUCCESSFUL

IMPLEMENTATION OF CORPORATE SOCIAL RESPONSIBILITY IN INDIA.
THEY ARE ENUMERATED AS FOLLOWS: -
1. Lack of Awareness of General Public: In CSR Activities there is a lack of interest of the
general public in participating and contributing to CSR activities of companies. This is
because of the fact that there exists little or no knowledge about CSR. The situation is further
aggravated by a lack of communication between the companies involved in CSR and the
general public at the grassroots.
2. Need to Build Local Capacities: There is a need for capacity building of the local
nongovernmental organizations as there is serious dearth of trained and efficient
organizations that can effectively contribute to the ongoing CSR activities initiated by
companies. This seriously compromises scaling up of CSR initiatives and subsequently limits
the scope of such activities.
3. Issues of Transparency: Lack of transparency is one of the key challenge for the corporate
as there exists lack of transparency on the part of the small companies as they do not make
adequate efforts to disclose information on their programmes, audit issues, impact
assessment and utilization of funds. This negatively impacts the process of trust building

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among the

Page 49 of 76
companies which is a key to the success of any CSR initiative.
4. Non-Availability of Well Organized Non-Governmental Organizations: There is non-
availability of well-organized nongovernmental organizations in remote and rural areas
that can assess and identify real needs of the community and work along with companies to
ensure successful implementation of CSR activities.
5. Visibility Factor: The role of media in highlighting good cases of successful CSR
initiatives is welcomed as it spreads good stories and sensitizes the population about various
ongoing CSR initiatives of companies. This apparent influence of gaining visibility and
branding exercise often leads many non-governmental organizations to involve themselves in
event based programmes, in the process, they often miss out on meaningful grassroots
interventions.
6. Narrow Perception towards CSR Initiatives: Non-governmental organizations and
Government agencies usually possess a narrow outlook towards the CSR initiatives of
companies, often defining CSR initiatives more as donor-driven. As a result, corporates find
it hard to decide whether they should participate in such activities at all in medium and long
run.
7. Lack of Consensus on Implementing CSR Issues: There is a lack of consensus amongst
implementing agencies regarding CSR projects. This lack of consensus often results in
duplication of activities by corporate houses in areas of their intervention. This results in a
competitive spirit between implementing agencies rather than building collaborative
approaches on issues. This factor limits company’s abilities to undertake impact
assessment of their initiatives from time to time.

Recommendations
The following recommendations are listed for serious consideration by all concerned
stakeholders for their effective operationalization to deepen CSR in the company’s core
business and to build collaborative relationships and effective networks with all involved.
1. It is found that there is a need for creation of awareness about CSR amongst the general
public to make CSR initiatives more effective. This awareness generation can be taken up
by various stakeholders including the media to highlight the good work done by corporate
houses in this area. This will bring about effective change in the approach and attitude of the
public towards CSR initiatives undertaken by corporate houses.
2. It is noted that partnerships between 0all stakeholders including the private sector,
employees, local communities, the Government and society in general are either not effective

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or not effectively operational at the grassroots level in the CSR domain. This scenario often
creates barriers in implementing CSR initiatives. It is recommended that appropriate steps be
undertaken to address the issue of building effective bridges amongst all important
stakeholders for the successful implementation of CSR initiatives. As a result, a long term
and sustainable perspective on CSR activities should be built into the existing and future
strategies of all stakeholders involved in CSR initiatives.
3. It is found that corporate houses and non-governmental organizations should actively
consider pooling their resources and building synergies to implement best CSR practices to
scale up projects and innovate new ones to reach out to more beneficiaries. This will increase
the impact of their initiatives on the lives of the common people. After all, both corporate
houses and non-governmental organizations stand to serve the people through their
respective projects and initiatives. It is recommended that the projectisation, scaling up and
sustainability of CSR projects need to be safeguarded at all costs for their efficiency and
efficacy.
4. It is found that many CSR initiatives and programs are taken up in urban areas and
localities. As a result, the impact of such projects does not reach the needy and the poor in the
rural areas. This does not mean that there are no poor and needy in urban India; they too
equally suffer from want of basic facilities and services. While focusing on urban areas, it is
recommended that companies should also actively consider their interventions in rural areas
on education, health, girl child and child labor as this will directly benefit rural people. After
all, more than 70 per cent people still reside in rural India.
5. It is noted that the Government should consider rewarding and recognizing
corporate houses and their partner non-governmental organizations implementing
projects that effectively cover the poor and the underprivileged.
6. It is noted that CSR as a subject or discipline should be made compulsory at business
schools and in colleges and universities to sensitize students about social and development
issues and the role of CSR in helping corporate houses strike a judicious balance between
their business and societal concerns. Such an approach will encourage and motivate young
minds, prepare them face future development challenges and help them work towards
finding more innovative solutions to the concerns of the needy and the poor. It is
recommended that involvement of professionals from the corporate sector, non-
governmental organizations and business schools would be key in ensuring youth
participation in civic issues.

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Conclusion
Society’s expectations are increasing towards the social development by the companies. So, it
has become necessary for the companies to practice social responsibilities to enhance their
image in the society. Even though companies are taking serious efforts for the sustained
development, some critics still are questioning the concept of CSR. There are people who
claim that Corporate Social Responsibility underlies some ulterior motives while others
consider it as a myth. The reality is that CSR is not a tactic for brand building; however, it
creates an internal brand among its employees. Indulging into activities that help society in
one way or the other only adds to the goodwill of a company. Corporate Social Responsibility
is the duty of everyone i.e. business corporations, governments, individuals because of the
reasons: the income is earned only from the society and therefore it should be given back;
thus wealth is meant for use by self and the public; the basic motive behind all types of
business is to quench the hunger of the mankind as a whole; the fundamental objective of all
business is only to help people. CSR cannot be an additional extra - it must run into the core
of every business ethics, and its treatment of employees and customers. Thus, CSR is
becoming a fast-developing and increasingly competitive field. Being a good corporate
citizen is increasingly crucial for commercial success and the key lies in matching public
expectations and priorities, and in communicating involvement and achievements widely and
effectively.

After the enactment of the Companies Act-2013, it is estimated that approximately 2,500
companies have come in the ambit of mandated CSR; the budget could touch approximately
INR 15,000 – 20,000 crores. It is very likely that the new legislation will be a game-changer,
infusing new investments, strategic efforts and accountability in the way CSR is being
conceived and managed in India. It has opened new opportunities for all stakeholders
(including the corporate sector, government, not-for-profit organizations and the community
at large) to devise innovative ways to contribute to equitable social and economic
development. Currently, CSR in India is headed in a positive direction as there already exists
a multitude of enabling organizations and regulatory bodies such as the Department of Public
Enterprises (DPE), Ministry of Corporate Affairs (MCA), and Indian Institute of Corporate
Affairs (IICA). These institutions have already set the wheels in motion and are playing an
important role in making CSR a widespread practice and in ensuring success in reducing
inequalities without risking business growth.

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CORPORATE ENVIRONMENTAL LIABILITY

INTRODUCTION

India since time immemorial has been a worshipper of nature and environment. However,
with growing industrialisation the ethics and values have degraded which in turn also
degraded the environment. The judiciary then had to intervene between the nature and the
corporate world in order to maintain a balance and also preserve the environment. A concept
named “Corporate Social Responsibility” emerged which deals with the protection of the
environment. The responsibility of the corporate world in preserving the environment and in
the light of a pollution-free environment is referred to here as Corporate Environmental
Liability.

What is Corporate Environmental Responsibility?

Liability is a word which is viewed from two different perspectives; Accounting and Legal
perspective. Liability in accounting means the financial responsibilities of a business or
organization. Liability is also very important in the legal perspective, “A liability is a legally
enforceable obligation, whether it is voluntarily entered into as a contractual obligation, or is
imposed unilaterally, such as the liability to pay taxes. The law both establishes liabilities and
determines who is responsible for discharging them”[1].

Environmental Liability is the term used for the process by which the responsibility of cost of
damaging the environment is laid on the person who damages the environment. The principle
on which the concept of environmental liability operates is “the polluter pays principle” and
the “Doctrine of Public Trust”.

The Environmental liabilities imposed on the corporate derive from various sources like
statutes, regulations, ordinances, declarations and treaties passed in regional and international
level. Environment Liabilities can be imposed in the form of Compensation, Remediation,
Fines and Penalties, Compliance, Punitive Damages, Damages for Natural resources. The
sole reason for imposing environmental liability on corporations is to make them alert and
feel responsible about before or while causing any harm to the environment are made to
either reverse or restore the damage suffered by the environment or are made to pay
compensation, fine or chargers to cure the environmental at home. Thus, in short,

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environmental liability is imposed on the corporate referring and keeping them informed
about penalties, fine, or imprisonment for violating laws governing the environment.

Corporate Environmental Liability and India

India has a history of being compassionate towards the purity and power of the environment.
The world was a part of global industrialization and opening up of the markets. The Indian
companies were slowly introduced to the concept of CSR and also the concept of Corporate
Environmental Liability.

Several enactments were made by the government in order to tackle the degradation of
environment and they have been severely implemented over the recent times. The Indian
Constitution too recognizes “Right to Healthy Environment” as a fundamental right under
Article 21 as has been interpreted by the Supreme Court in Charan Lal Shahu case[2] , in the
case of Subhash Kumar[3] and also which was further reaffirmed in M.C Mehta v. Union of
India[4].

On the other hand the 42nd Amendment to the Constitution has imposed a duty on the State
and its citizens to protect and improve the environment by adding article 48A to the Directive
Principles of State Policy and Article 51 A(g) as Fundamental duty. These insertions to the
constitutions acted as a boost towards environmental jurisprudence in the country. Further the
Companies Act, 2013 also introduced the idea of CSR laid down in Schedule VIII of the act
which lists out CSR activities.

The eighties played a major judicial role in reaching new heights of jurisprudence especially
in environmental protection. The verdict in Municipal Council, Ratlam v. Vardhichand[5] is
considered to be a landmark case in that regard. The residents of the municipality were
suffering from a long time from the smell coming out of the open drains. The Apex court
identified the responsibilities of the local bodies towards the protection of the environment;
also it developed the law of public nuisance in the Code of Criminal Procedure (CrPC)[6] as
a proper instrument for performance of their duties.

In Vijay Singh Punia v. State of Rajasthan[7], 15% of the turnover of the dyeing and printing
industries was imposed as damages for causing water pollution.

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One of the worst Industrial disasters which India suffered was the Bhopal Gas leak
incident[8] in the year 1984. The event occurred 2 years before the Apex court evolved the
rule of Absolute liability.

In M.C Mehta v. Union of India[9] in the year 1987, Justice P.N Bhagwati laid down the
doctrine of absolute liability for the harm caused by the hazardous and inherently dangerous
industry by interpreting the scope of Article 32 to issue directions and orders in the respective
manner.

Indian Council for Enviro-Legal Action v. Union of India[10] , tells us a tragic story of the
village Bicchri in Rajasthan. The pure environment of the village became highly polluted by
the sludge emanating from the industries situated in vicinity. The Apex court directed the
Central Government to determine and recover the cost of remedial measures from the
respondents. Section 3 of the Environment protection Act empowers the Central Government
(or to delegate as the case maybe) to take all such measures as it deems fit for protecting and
improving the quality of environment.

The “Polluter pays principle” and the precautionary principle were accepted as a part of the
legal system in the Sludge case and also in the Vellore Citizens Welfare Forum case[11].

In Mohd. Hazi Rafeeq v. State of Uttaranchal, the Uttaranchal High Court referred to Article
48 and 51A (g) in order to stress the duty of the state to preserve and protect forest even at the
cost of business interest.

In Uttar Pradesh Pollution Control Board v. Mohan Meakins Ltd.[12], the matter was related
to the release of trade wastage or effluents by an industrial unit in the river Gomti. The
Directors of the company were accused under section 43 of the Water (Prevention and
Control of Pollution) Act, 1974. The Supreme Court held that lapse of a long period of time
cannot be considered as a condition to absolve the directors from the trial.

CONCLUSION

The growth of environmental law and a desire in the global forum to save the environment
has led the corporate sectors to live up or strictly follow the regulations and legislations laid
down by the government in order to have a pure and clean environment. However while
preserving and protecting the environment, industrialisation is also needed at the same time.

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 Thus, it is the need of the hour for both the government and corporate sector to maintain
the importance of both- industrialisation and environment protection.

[2] 1990 AIR 1480

[3] Subhash Kumar v. State of Bihar &Ors. [1991 AIR

420] [4] 1987 AIR 1086, 1987 SCR (1) 819

[5] 1980 AIR 1622

[6] Section 133 of CrPC which states of Conditional Order for Removal of Nuisance.

[7] AIR 2003 Raj 286

[8] Union Carbide Corporation v. Union of India (1990 AIR

273) [9] 1987 AIR 1086, SCR (1) 819

[10] 1996 SCC (3) 212

[11] AIR 1996 SC 2715

[12] SLP (Crl.) 3978 of 1999

TAX AND CORPORATE GOVERNANCE

While tax burden is always one of the primary concerns for corporate management and
finance, it is questionable whether tax has always been amongst the core factors of corporate
governance. Christian Nowotny (2008) points out possible reasons for this relative low
profile of tax as a corporate governance issue; tax is considered as too technical to be
discussed at the board of directors, and the minutes on the discussion of tax issues at the
board of directors may attract the attention of tax authorities, while corporate governance
codes are primarily designed for attracting investment. On the other hand, this traditional
relationship betwixt tax and corporate governance has been changing, and tax is pushing
forward its frontiers into what has traditionally been considered as corporate governance
affairs. Many tax authorities, particularly in the advanced member economies of the
Organisation for Economic Co- operation and Development (OECD), are adopting a new co-
operative compliance approach, which aims to ensure tax compliance through the voluntary
enhancement of internal control and corporate governance.

Page 56 of 76
2. Why Tax and Corporate Governance Related?

If tax authorities consider that good corporate governance and internal control are important
elements of tax compliance, to what extent tax are corporate governance and internal control
interlinked one another?

Corporate governance is the system by which companies are directed and

controlled (Cadbury Report (1992)). And the board of directors, the primary institution
driving corporate governance, is responsible for systems ensuring legal compliance including
that of tax laws.

A chief objective of corporate governance is the integrity of financial reporting, with which
listed companies are accountable to shareholders and the market. From a tax perspective,
reliable financial reporting is also the basis of tax compliance; in this regard, companies are
accountable to national treasuries and tax authorities as well.

The board is expected to set corporate strategies and provide leadership therefore. In order to
ensure high standard tax compliance, leadership and commitment on the part of management
are sine qua non; for high-level tax compliance requires beefing up internal control covering
the entire operations of company.

3. Co-operative Compliance Programmes

In tandem with international discussions on corporate governance and tax administration lead
by the OECD, tax administrations in many of the OECD member countries are implementing
a co-operative compliance programme, which typically targets large businesses.

In Japan, the National Tax Agency of Japan (NTA) is carrying out a programme to enhance
tax corporate governance, which was initiated as a pilot in 2011. The programme aims to
address the tax corporate governance of very large enterprises, numbering approximately 500
nationwide, on the occasion of tax audits. Figure 1 illustrates the process of the tax corporate
governance programme on the occasion of tax audits, set out by the NTA’s administrative
guidelines issued in June 2016.

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At the time of a tax audit, a tax auditor evaluates the effectiveness of tax corporate
governance, and then an audit executive of a regional taxation bureau holds a dialogue with
the top management of company. In response to the evaluation results, for company with
good tax corporate governance and of low priority for audit, the NTA will mitigate the
burden of audit and extend an interval between audits for one year. Whilst the audit interval
of large businesses varies, if the audit interval of company is every two years with one audit-
free year, the company may have two audit-free years as a result of an audit interval
extension. In return, during the audit-free years, the company is required to disclose
transactions with which the tax authority is liable to disagree, such as the reporting of large
extraordinary losses.

The State Agency for Tax Administration of Spain is also undertaking a co-operative
initiative. The Spanish Tax Agency and a group of large businesses jointly set up a Large
Business Forum in 2009, and the forum drew up a Code of Best Tax Practices in 2010. The
Code of Best Tax Practices aims to improve the application of the tax system, and contains a
series of recommendations for both companies and the Tax Agency. As of February 2018, the
code is adhered to by 136 companies.

4. What Tax Authorities Expect for Corporate Governance

Co-operative compliance programmes tend to set the strengthening of governance and

internal control as a prerequisite or an objective. In this regard, what do tax authorities expect
of companies?

As explained in Section 3., the Japanese NTA’s programme to enhance tax corporate
governance evaluates the effectiveness of tax corporate governance at the time of an audit,
and its 2016 administrative guidelines make clear five evaluation items:

1) Engagement and guidance of top management,

2) Organisation and functions of accounting and audit divisions,

3) Tax and accounting procedures with internal checks and balances,

4) Dissemination of information and recurrence prevention measures, and

5) Measures to control inappropriate acts.

It may be worth noting that the programme attaches importance to the first item, i.e.
engagement and guidance of top management; for the programme considers that the active
engagement and guidance of top management are indispensable for the enhancement of tax
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compliance. Each item has more detailed evaluation points. For example, with respect to the
first item, company will be asked whether company precepts, principles or compliance
guidelines refer to tax compliance.

The Code of Best Tax Practices made by the Large Business Forum of Spain also emphasises
the importance of the commitment of the board of directors, and recommends that the board
of directors should be fully informed of tax policies applied by company.

5. Conclusion

Tax authorities in many of the OECD countries have introduced a co-operative compliance
programme, which aims to enhance tax compliance based upon a co-operative relationship
betwixt a tax authority and taxpayers – typically large businesses. And the enhancement of
corporate governance and internal control is part and parcel of these co-operative compliance
programmes.

Whilst a co-operative compliance programme aims at the voluntary raise of compliance level
on the part of corporate taxpayers, high standards cannot be met without working on
governance and internal control. As Wolfgang Schön (2008) points out, company are not a
single individual, but a nexus of contracts, and tax obligations are allocated within the
organisation and legal framework of company. Even though management has willingness to
comply with tax rules, non-compliance could occur in business operations without the
knowledge of the management and accounting division.

Co-operative compliance programmes are intended to be beneficial both for taxpayers and tax
authorities. It can be said that enhanced governance and internal control are a key for a stable
relationship with the tax authorities.

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THE ROLE OF SEBI IN CORPORATE GOVERNANCE

Founded in 1988, the Securities and Exchange Board of India (SEBI) has the role to protect
investors and regulate the financial market. SEBI initiatives in corporate governance are
based on the Securities and Exchange Board of India Act and aim to prevent fraudulent
practices. The organization is responsible for enforcing rules and regulations to promote
orderly development in the stock market. As an investor, you must comply with these rules
and follow the code of conduct.

WHAT IS SEBI?

The Indian securities market is one of the most trusted in the world. However, things haven't
always been this way. Back in the '80s, everyone was trying to find loopholes in the system
and get rich through fraudulent schemes. Today, this market is tightly regulated by the
Securities and Exchange Board of India, whose role is to prohibit unfair trade practices and
protect investors' interests, among other functions.

The organization became autonomous and got the statutory status in 1992. Soon, it has
emerged as the regulator of stock markets in India, overseeing the activities of investors,
securities issuers and market intermediaries. SEBI is also responsible for carrying out
investor awareness and training programs and regulating major transactions. Furthermore, it
monitors credit rating agencies, custodians, bankers, brokers and other financial market
players.

Several departments exist within SEBI, including but not limited to the Corporation Finance
Department (CFD), the Legal Affairs Department, the Market Regulation Department and the
Office of International Affairs. The CFD, for example, oversees all matters related to
corporate governance and accounting standards. The Office of Investor Assistance and
Education (OIAE), on the other hand, handles investors' complaints, such as those related to
the transfer of shares.

SEBI GUIDELINES FOR CORPORATE GOVERNANCE

Corporate governance encompasses the mechanisms, rules and practices by which companies
are operated and controlled. It aims to mitigate conflicts of interest between shareholders and
promote ethical decision-making, transparency and integrity at the executive level. The role
of SEBI in corporate governance is to ensure these rules are implemented and followed by all
parties.
Page 60 of 76
For example, the organization ensures that companies issuing securities use fair practices and

ofdisclose
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corporate shareholders.and
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guidelineslisting
for corporate
governance are designed to provide a safe, transparent environment for investors and prohibit
fraudulent or unfair practices, like insider trading.

The role of SEBI in ensuring ethical standards among corporations became even more
important in 2018 when the organization imposed additional compliance conditions. For

instance,chairpersons
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one woman independent
must director
disclose related-party
transactions and hold a specific number of annual general meetings. SEBI initiatives in
corporate governance are largely based on the recommendations made by the Kotak
committee in March 2018 and aim to enhance transparency.

Narayan murthyonCommittee
commented on 'Report
Corporate of the SEBI Committee
Governance in the on following
Corporate manner:

·A corporation is a congregation of various stakeholders, namely, customers,

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·Corporate governance is beyond the realm of law. It seems from the culture and mindset of
culture of the organisation. Ethical leadership is good for business as the organisation is
management, and cannot be regulated by legislation alone. Corporate governance deals with
conducting the affairs of a company such that there is fairness to all stakeholders and that its

Page 61 of 76
actions benefit the greatest number of stakeholders. It is about openness, integrity and
accountability. What legislation can and should do is to lay down a common framework- the
"form" to ensure standards. The "substance" will ultimately determine the credibility and
integrity of the process. Substance is inexorably linked to mindset and ethical standards of
management.

KEY FUNCTIONS OF SEBI

In addition to its role in corporate governance, SEBI has protective, regulatory and
developmental functions. The organization protects investors by prohibiting malpractices
related to securities and promoting fair trade practices. Additionally, it aims to educate them
on money management, trading and finances in general.

Its regulatory functions have the role to ensure that corporations and financial intermediaries
alike follow its guidelines and code of conduct. The end goal is to keep the financial market
running smoothly.

The developmental functions of SEBI aim to promote computerized trading and modernize
the market infrastructure. These initiatives have led to a reduction in fraud and unfair
practices. For example, the organization requires companies that buy or sell stocks to register
for a dematerialization (Demat) account online, which helps reduce bureaucracy and
simplifies the process of holding investments. The Demat system allows traders to work from
anywhere and mitigates the risks associated with paper shares, such as trading delays or
thefts.

Page 62 of 76
CORPORATE GOVERNANCE AND ROC
The Registrar of Companies (ROC) as defined under Sub-Section 75 of Section 2 of the
Companies Act, 2013, is an appointment of the Ministry of Corporate Affairs which is
responsible for the regulation of Indian enterprises in Industrial and Services Sector. At
present, there are 22 Registrars of Companies holding offices in the major states of India.
Vested with a number of functions and equipped with a wide range of powers under the
Companies Act of 1956 and Companies Act of 2013, the ROC is responsible for fostering
business ethics in the current paradigm and plays a dominant role in facilitating business
culture.

Meaning and Scope of Registrar of Companies

According to Section 2(75), the term ‘Registrar’ means a Registrar, an Additional Registrar, a
Joint Registrar, a Deputy Registrar or an Assistant Registrar. ROCs as appointed under
Section 396 of the Act primarily have the duty of registering companies incorporated in the
respective States and the Union Territories. However, in addition to registration, there are the
number of other responsibilities that the ROC is conferred with. The Central Government
exercises administrative control over these offices through the respective Regional Directors
(RD) who are in-charge of the respective regions, each region comprising a number of States
and Union Territories.

Powers of the Registrar of Companies

Powers in Relation to Registration of Companies

Registration of a company formed under Section 3 of the Companies Act is obtained by filing
an application with the ROC in whose jurisdiction the registered office of the company is
situated under Section 7 of the Companies Act.

Section 7: Incorporation of Company and Certificate of Incorporation

The company is said to be born from the date mentioned in the certificate of incorporation
and the date appearing on it is conclusive even if it is wrong. Not only does the certificate
create the company, it also is “the conclusive evidence that all requirements of this act have

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been complied with in respect of registration and matters precedent and incidental thereto
and that

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the association is a company authorized to be registered and duly registered under this act”.
In other words, the validity of the certificate cannot be disputed on any grounds whatsoever.
This is illustrated by the decision of the Judicial Committee of the Privy Council in Moosa
Goolam Ariff v. Ebrahim Goolam Arif, in which Lord Macnaghten said:
“Their Lordships will assume that conditions of registration prescribed by the Indian
Companies Act were not duly complied with; that there were not seven subscribers to the
memorandum and that the registrar ought not to have granted the certificate, but the
certificate is conclusive for all purposes”.

Powers in Relation to Mortgage and Charges

Section 83: Power of Registrar to make entries of satisfaction and release without
intimation from company

By virtue of Section 83, the Registrar is allowed to make entries of satisfaction, etc, after
receiving evidence that,

 The debt for which charge is given has been paid or satisfied in whole or in part; or

 That a part of the property or undertaking charged has been released from the
charge or has ceased to form a part of the company’s property or undertaking.
The registrar may enter in the register, a memorandum of satisfaction in whole or in part of
the property or undertaking from the charge or has ceased to form a part of the company’s
property or undertaking even if no intimation to the effect has been received by him from the
company. Within 30 days of making such entry, the registrar has to inform the affected
parties.

Powers Related to Inspection, Inquiry, and Investigation

Section 206: Power to call for information, inspect books and conduct inquiries

As per the provisions of Section 206 of the Companies Act, 2013, the Registrar may require
any company to furnish information or explanation or produce any document, if after
scrutinizing any document or on receiving any information, he feels that such documents are
necessary.
The Registrar may also inform the company of facts, seek its reply and order an inquiry if he

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has reason to believe that the business of the company is being carried out for a fraudulent

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purpose, or not in compliance with the Act, after giving the company a reasonable
opportunity of being heard.

Section 209: Search and Seizure

The Registrar is empowered to obtain an order from the Special Court for the seizure of
books and papers of the company if upon receiving information or otherwise, he has reason to
believe that these books, papers of the company are likely to be altered, mutilated, falsified,
secreted or destroyed. The Registrar or Inspector is further allowed to take copies and
extracts of such documents.

Power of Registrar to Remove Name from Register of Companies

Section 248: Dissolved Companies

There may be a reasonable cause for the registrar to believe that:

 A company has failed to commence its business within one year of its incorporation;

 The subscribers to the memorandum have not paid the subscription money which
they had undertaken to pay within 180 days from the date of incorporation and
accordingly the declaration under Section 11(1) could not be filed within 180 days;
or

 The company is not carrying on any business for 2 immediately preceding

financial years and has not applied under Section 455 for obtaining the status of a
dormant company.
In such a situation, the Registrar has to send a notice to the company and all its directors
telling them that he has the intention to remove the name of the company from the register.
They are accordingly called upon to send their representations along with copies of relevant
documents within 30 days from the date of the notice.
Such removal can also be effected on the company’s own application. For this purpose, the
company has first to extinguish all its liabilities. It then has to pass a special resolution or
obtain the consent of 75% members in terms of the paid-up share capital. An application then
has to be filed in a prescribed manner with the Registrars of Companies for removing the
name of the Company on all or any of the grounds specified in sub-section (1).

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After receiving such an application, the Registrar needs to issue a public notice in a
prescribed manner and also in the Official Gazette for the knowledge of the general public.
On the expiry of time mentioned in the notice, and if not cause to the contrary is shown by
that time, the registrar has to strike off the name of the Company from the register. A
notice of this fact needs to be published in the Official Gazette and on the date of such
publication the company becomes dissolved.

Functions of the Registrar of Companies

Functions in Relation to Mortgage and Charges

The term ‘charge’ used in the instant section has been defined in Section 2(16) of the
Companies Act, 2013. It refers to an interest or lien created on the property or assets of the
company or on any of its undertaking or both as security and includes a mortgage. The
Registrar of Companies is vested with certain functions in relation to the registration of such
mortgage charges. These have been discussed section-wise as follows:

Section 77: Registration of Charges

According to Section 77, it is the duty of every company creating a charge to register the
particulars of the charge with the Registrar of Companies. A charge on the property or assets
of the company whether tangible or otherwise, situated in or outside India has to be
registered. It is required that this instrument of charge be in the prescribed form and be filed
with the prescribed fee within 30 days of its creation.
The Registrar can, however, permit for registration within the extended period of 300 days on
the payment of the prescribed additional fee. As per Section 77(2), the Registrar is required
to issue a certificate of registration in the prescribed form and manner to the company as well
as to the charge holder, as the case may be.

Section 78: Application for registration of charges

In case a company fails to register a charge, the charge-holder may apply to the Registrar of
Companies for registration along with the instrument under which the charge is created. The
Registrar is then required to give a notice to the company in order to enable it to inform
whether the company has itself created a charge and if it has not, then inform about the
reason for the
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same. Within 14 days, the Registrar is required to register the charge on payment of
prescribed fee.

Section 81: Registrar to keep the register of charges in respect of every company

According to this Section, the Registrar has been required to keep a register in the prescribed
manner, containing particulars of the charge registered under the Act, in respect of every
company. This Register can be inspected by any person after the payment of a prescribed fee.
The company is under a duty to forward to the registrar the necessary particulars in such form
and on payment of such fee as may be prescribed. The Registrar’s register has to show the
particulars relating to the charge such as the date of charge, the amount secured, the property
covered and the persons entitled to the charge and if a property already under a charge has
been purchased, the date of purchase. The same particulars have to be shown by the
company’s register.

Functions in Relation to Compliance of Statutory Requirements Under the Companies

Act

The ROC is entrusted with the duty to ensure that all statutory requirements under the
Companies Act are complied with. These include the periodic filing of Annual Returns and
Balance Sheets, Change of directorship of the company, registering companies incorporated
in the respective states and the Union Territories, etc.

Section 93: Return to be filed with Registrar in case promoters’ stake changes

According to this Section, all listed companies are required to file a return in the prescribed
form with the Registrar relating to change in the number of shares held by the promoters and
top 10 shareholders of such company. This return needs to be filed within 15 days of the
happening of such a change.

Section 157: Company to inform the Registrar of the Identification Number

Within 15 days of receipt of information from the director concerned of his Identification
Number, the company has to furnish this information to the Registrar or any other officer or
authority as may be specified by the Central Government.

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COMPETITION AND CORPORATE GOVERNANCE
Competitive business environment and appropriate good corporate governance have a nexus,
the former fuelling, influencing and impacting the latter and the latter seeking to meet the
challenge of the former. For corporate governance, inhering competition principles in policy
making would appear sine qua non. Competition has a strong correlation with economic
development. Corporate governance (designed to home in corporate performance leading to
economic development), consequently needs to fashion itself to meet competition and to steer
clear of indulging in (inadvertently or otherwise) anti-competitive practices. Corporate
governance needs to inhere the interests of consumers and economic development

By a perpetual monopoly, all the other subjects of the State are taxed very absurdly in two
different ways, first by the high price of goods, which, in the case of a free trade, could be
bought at much cheaper rates and secondly, by their total exclusion from a branch of
business, which it might be both convenient and profitable for many of them to carry on.

There is and can be no perfect competition in the real world. What one notices in the market
is a set of imperfectly competitive markets, where firms engage in strategic behaviour to
maximise their profits and to restrict the opportunities available to their competitors. This
kind of behaviour results in distortion of competition, exploitation of consumers and
imposition of various economic and social costs on society, adversely affecting its welfare in
general.

What is needed is appropriate behaviour on the part of manufacturers/suppliers and service

renderers, a significant proportion of whom constitute corporate entities not only in terms of
complying with the applicable laws and regulations and, in particular, complying with
Corporate Laws and Competition Law but also in terms of sub-serving the large societal
interest, namely, public and consumer interest.

This article addresses the relevance of competition to corporate governance, which, in turn,
impacts economic and social development of the countries where the corporates are situated.

Competition policy or competition regime seeks to maintain and encourage the competitive
process with a view to promoting economic efficiency and consumer welfare. Its objective
is
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to spur firms and individual players in the market to compete with each other to secure the
patronage of customers in terms of, inter alia, competitive prices, good quality and greater
choice for them.

The contours of competition regime vary significantly from country to country. The
differences are, by and large, reflected in the stated objectives of competition legislation
across the countries. The most common objectives, applied with varying emphasis in
different countries are economic efficiency, consumer welfare and public interest. In his
analysis of new concepts for competition policy and economic development, Singh (2002)
has suggested that standard objectives of competition regime should be reconsidered to bring
in notions, such as, inter alia, an optimal degree of competition as opposed to maximum
competition, an optimal combination of competition and cooperation between firms, dynamic
rather than static efficiency and consistency between competition and industrial policies. For
corporate governance, therefore, inhering competition principles in policy making would
appear sine qua non.

Corporate Governance and Consumer Interest

All corporate activities ultimately have at their consummating point, the consumer. Consumer
welfare and interest aim at the charter of economic liberty designed for preserving free and
unaffected competition as the rule of corporate governance. The premises on which the
charter rests are unrestrained interaction of competitive forces, maximum material progress
through rational allocation of economic resources, availability of goods and services of
acceptable and good quality at reasonable prices and finally a just and fair deal to the
consumers. Corporate governance has to factor these, if it has to live up to its responsibilities
by the country and its subjects.

At the micro level, for firms to remain competitive, they are now required to adopt global
strategies as a part of corporate governance. As the number, size and scope of activities of
multi-national companies, corporations and firms (MNCs) increase, more andmore of them
are forging and operating strategic alliances and their commercial practices are having an
increasing international dimension than ever before. These processes are resulting in
increased cross-border trade and at times anti-competitive practices. Suchpractices tend to
undermine the benefits of liberalisation in most countries. Corporate sector is not only made
up of MNCs but also is mostly constituting of small and medium industries. Corporate

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governance, therefore, would mean more of governance in the small and medium industries.
This does not imply that corporate governance in MNCs is not a candidate for sub-serving
competition principles. All corporates need to in-here competition principles in their
governance, be they big, medium or small in size and operations. But one distinction is worth
reckoning in the discussions in this article that MNCs by virtue of their size, clout and sweep
in their activities and presence in many countries could inject anti-competitive practices into
the market to the detriment of consumers and the interests of the countries concerned. The
thrust of this article is that corporate governance needs to be moulded in such a way that the
markets are driven by competition and that consumer interests are protected.
Role of Corporate Governance
Corporate governance is generally perceived to be focusing on shareholders' rights, conduct
and output of managers and performance of directors. Most companies lay stress on
encouraging investor confidence, on improving the quality of investment decisions, on
preventing idle capacity and even preventing a build-up of excess capacity and generally on
fostering their resiliency. In other words, corporates tend to fashion their governance on one
or more or all of the above objectives. But many corporates are prone to give inadequate
attention to the environment in which business is conducted. Environment includes the
degree of competition among firms, extant level of competition in the market, entry and exit
rules and the openness of the economy. With competition regime being ushered in or
strengthened in many countries, there is an increasing appreciation of the need to factor in
the competition principles in corporate governance. Business environment in its broadest
sense has a significant impact on the corporates' incentives to seek out and implement
competitive practices and strategies.
Competitive business environment and appropriate good corporate governance have a nexus,
the former fuelling, influencing and impacting the latter and the latter seeking to meet the
challenge of the former.
Competition Correlates with Economic Development
There is empirical evidence of the benefits of competition regime vis-á-vis economic
development, greater efficiency in international trade and consumer welfare listed in a
report (UNCTAD1997). The evidence, albeit referring to experiences of developed
countries, indicates substantial benefits from the strengthening of the application of
competition policy principles in terms of "greater production, allocative and dynamic
efficiency, welfare and growth." It further concludes that the consumer and producer
welfare and economic growth and competitiveness in international trade have all flowed out

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of competition policies,

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deregulation and surveillance over Restrictive Business and Trade Practices. Noting that
competition rewards good performance, encourages entrepreneurial activity, catalyses entry
of new firms, promotes greater efficiency on the part of enterprises, reduces cost of
production, improves competitiveness of enterprises and sanctions poor performance by
producers, the empirical evidence in the report suggests that competition ensures product
quality, cheaper prices and passing on of cost savings to consumers. The report also observes
that competition promotes two types of efficiencies, namely, static efficiency (optimum
utilisation of existing resources at least cost) and dynamic efficiency (optimal introduction of
new products, more efficient production processes and superior organisational structures over
time) (UNCTAD, 1997). Analysing the empirical evidence, the UNCTAD report has the
following to say :
In the Netherlands, it has been calculated that the average annual consumer loss arising from
collusive practices or restrictive regulations in several service sectors amounts to 4,330-5,430
million guilders (around $2.1-2.7 billion) (Hendrik P. van Dalen 1995). Data relating to the
United States show that a bid rigging conspiracy for the sale of frozen seafood which was
eventually prosecuted had an average mark-up over the competitive price over a one year
period of 23 per cent (LukeM.Froeb et al. 1993) and the break down of price-fixing
conspiracies in some industries has led to steep declines in manufacturing costs (Scherer and
David Ross 1990). It is true that cartels may sometimes facilitate adjustment, but vigorous
competition may sometime be as or more effective in forcing rationalisation of industries,
particularly in larger markets (Scherer and David Ross 1990). An examination of some
exempted rationalisation cartels in Germany (several different types of cartels are allowed
under the German competition law, subject to certain conditions) found that they had
promoted the viability of the producers in the industries concerned, but there was little
evidence that they had contributed to productivity and efficiency improvements, while they
had resulted in higher prices and less output (David B. Audretsch 1989).
There is enough testimony to underscore the benefits that flow from redesigned Government
policies in favour of competition. For instance, in the European Union, the implementation of
the policy of removal of barriers to trade is estimated to have increased income by 1.1-1.5 per
cent over the period 1987-93 and to have created 30,000-90,000 jobs and to have decreased
inflation by 1.0-1.5 per cent. Around half of this is attributed to increases in competition and
efficiency improvements (Commission of the European Communities 1996).
Competition therefore has a strong correlation with economic development. Corporate
governance (designed to home in corporate performance leading to economic development),

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consequently needs to fashion itself to meet competition and to steer clear of indulging in
(inadvertently or otherwise) anti-competitive practices.
Restricted Competition Impedes Good Corporate Governance
As noted earlier, competition influences and impacts corporate governance. TheLPG
paradigm drives markets for goods and services to be competition driven. But dominance,
oligopoly and monopoly prejudice competition. Ownership concentration, market
concentration and consolidation add to the prejudice. Compounding these are regulatory
barriers (brought about by the State) and firm-level practices limiting competition in
takeovers, divestiture and privatisation. The above said prejudice occurs in both developing
and developed countries. In this scenario, corporate governance is the causality because of
the fact that the corporates dominating the market are getting their rents and excessive profits
in the sub-optimal competitive environment. If the business environment is reasonably
competitive, corporate governance cannot afford to be slack or to be unmindful of
competitors and potential competition. Corporate governance manifests itself in terms of
supervision and timely decision-making by the Board of Directors or the Management.
Where competition is inadequate or sub-optimal, corporate governance tends to become loose
and slack, with decision-making in business matters by corporates delayed or postponed.

Restricted competition in the market for goods and services in developing countries can
injure the interests of consumers and retard economic development. State sponsored policies
may place restrictions on ownership and entry. Restrictions of this kind are driven by politics
or pressure groups or vested interests. They are generally justified in the name of "public
interest". Incumbent firms could enlarge their presence and interests taking advantage of the
protectionist policies of the State. In the process, such firms could well become monopolistic
or dominant. They may be enabled in this environment to make usurious profits in excess of
competitive returns. In the competition-lacking market environment, prices are likely to get
distorted and while incumbent dominant corporates take advantage of their market power
and reap profits, it is the consumer whose interest is prejudiced by way of higher prices etc.

State sponsored policies, particularly those which create entry barriers and which are
protectionist in nature afford easy profits for incumbent firms, who therefore have little or no
incentive to utilise their resources efficiently. Being insulated from competition, their
production costs are likely to be higher than if they had not been. Where competition is
present in ample measure, the firms, even if dominant, would be forced to cut costs, innovate

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and improve quality of their goods and services by adopting the best technical and managerial
practices. Sans competition, the incumbent firms may make poor investment decisions or
delay addressing business problems. Distorted prices, misallocation of resources and poor or
delayed decisions may all lead to consumer interest prejudice and to a resulting burden on the
society.
Ownership concentration and consolidation get aggravated, if there is no competition or there
is sub-optimal competition in the market. The predilection of incumbent firms to be major
market players and preferably to be dominant cannot be gain-said. If they are private firms,
they would like to continue to be so. Even if they would like to go public, they would not like
to give up control by retaining a controlling stake. A study by the World Bank (1999) shows
that in less competitive markets, a higher share of the leading firms remain private and that a
higher proportion of closely held firms are observed among publicly traded companies. In
closely held corporates and ownership concentration, there is always the possibility of
corporate insiders committing abuses using confidential information privy to the corporate.
Such a possibility may shy away minority shareholders and lead to the undermining of the
development of securities and capital markets.

Corporate Governance and Competition

It has been noted earlier that large and dominant firms seek to entrench themselves and
further their interests. Because of their size, dominance and financial clout, they are in a
position to call the shots regarding prices, quality and output. By forming cartels, they could
limit the output, create scarcity of goods and services in the market and increase the prices
beyond competitive levels. Excessive profits and rents are earned by dominant and
monopolistic firms leaving the consumers poorer and at their mercy. In a competitive
environment, incumbent firms may not be cornering excessive profits and usurious rents.
While profit making is justified and should be allowed, profiteering should be prevented.
Reasonable profit making will allow new parties into the market resulting in more supplies
(perhaps, better supplies in terms of quality) and lower prices driving down profitability. In a
market driven by competition, there is always an incentive to bring about technological
advances and innovations thereby providing the consumers with better quality products and
new products.

The arguments above bring into focus the need for good corporate governance. Good
corporate governance does not lie in eliminating competition by seeking Government

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intervention and policies of protectionist nature but lies in meeting competition headlong.
Meeting competition means enhanced operational efficiency, cutting costs, keeping down
administrative expenses and affording quality products at reasonable prices to the consumers
etc. Market power should be used constructively to sub-serve consumer interest and the
national interest. It should not be misused to merely entrench oneself in the market and to
make unreasonable profits. It is the responsibility of corporate governance to ensure the
constructive use of market power.

Corporate governance should ensure that the corporates do not indulge in anti-competitive
practices. Despite the temptation to cartelise and fix prices, a corporate entity or firm should
not lend itself to join other firms in the same line of production or service with the object of
colluding with them and drive the market with higher prices and lower output. In particular,
corporates should avoid colluding with competitors to the detriment of consumers. Collusive
practices include cartelisation, price fixing, limiting outputs, bid-rigging, market allocation by
territories or customers, limiting technical development etc. Enlightened corporate
management will steer clear of such collusive practices and will condemn them by bringing
action against colluding offenders responsible for adversely affecting competition in the
market.

The objective of competition is a free and fair market. It will lead to enhancement of
economic freedom and lower barriers to entry for new firms and competitors. In the long run,
firms which believe in good corporate governance are likely to succeed in the market and
also to foster a healthy competition in the market.

Good corporate governance in a competitive milieu is likely to serve the interests of

consumers and the society. LPG paradigm, if effectively implemented will have to focus on
competition principles, which should inform legislative and executive policies. While LPG
can stand on its own, it will stand better, if buttressed with effective domestic competition.
For buttressing domestic competition, every country needs to have a sound competition
policy and an appropriate competition law to enforce the policy. The competition policy to be
posited by the Government has therefore an important responsibility to ensure that the
corporate sector plays a just and equitable role through good governance. Governmental
policies should allow free play to market forces and promote a competition driven market. At
the same time, no corporate body should be allowed to abuse its position in the market,

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 particularly, its size, dominance and financial clout. Cartelisation and abuse of
dominance need to be frowned upon by the Competition Tribunal or Agency. Offenders
should be brought to book with deterrent punishments. Having said this, it is incumbent
on the corporates not only to follow the rule book on competition but meet competition
by way of being competitive and not by way of seeking rent and protectionist policies.
Competition Tribunals should be independent, transparent, accountable and free of
political influences. They should play the role of competition advocate and inculcate
competition culture in the market.

DISCLOSURES UNDER SEBI AND EFFECTS OF NON COMPLIANCE

The Securities Exchange Board of India (SEBI), on September 2, 2015, issued SEBI (Listing
and Disclosure) Regulations, 2015 (hereinafter referred to as 'Regulations') on listing of
different segments of the capital market and disclosure norms in relation thereto. These
regulations have been structured into one single document consolidating various types of
securities listed on the stock exchanges.

The latest set of norms provides broad principles for periodic disclosures by listed entities,
apart from incorporating corporate governance principles.

These regulations shall apply to the listed entity who has listed any of the following
designated securities on recognized stock exchange(s):

a. Specified securities listed on main board or SME Exchange or Institutional trading

platform;
b. Non-convertible debt securities, non-convertible redeemable preference
Shares, perpetual debt instrument, perpetual non-cumulative preference Shares;
c. Indian depository receipts;
d. Securitized debt instruments;
e. Units issued by mutual funds;
f. Any other securities as may be specified by the Board.

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The Disclosure aspect as in the framework of these Regulations has been discussed below in
brief:

PRINCIPALS GOVERNING DISCLOSURES

The listed entities which have listed securities shall make disclosures and abide by
certain obligations under these regulations, in accordance with the following principles:

i. Information shall be prepared and disclosed in accordance with applicable standards

of accounting and financial disclosure.
ii. The listed entity shall implement the prescribed accounting standards in letter and
spirit in the preparation of financial statements taking into consideration the interest of
all stakeholders and shall also ensure that the annual audit is conducted by an
independent, competent and qualified auditor.
iii. The listed entity shall refrain from misrepresentation and ensure that the information
provided to recognised stock exchange(s) and investors is not misleading.
iv. The listed entity shall provide adequate and timely information to recognised
stock exchange(s) and investors.
v. The listed entity shall ensure that disseminations made under provisions of these
regulations and circulars made there under, are adequate, accurate, explicit, timely
and presented in a simple language.
vi. Channels for disseminating information shall provide for equal, timely and
cost efficient access to relevant information by investors.
vii. The listed entity shall abide by all the provisions of the applicable laws including the
securities laws and also such other guidelines as may be issued from time to time by
the Board and the recognized stock exchange(s) in this regard and as may be
applicable.
viii. The listed entity shall make the specified disclosures and follow its obligations in
letter and spirit taking into consideration the interest of all stakeholders.
ix. Filings, reports, statements, documents and information which are event based or are
filed periodically shall contain relevant information.
x. Periodic filings, reports, statements, documents and information reports shall contain
information that shall enable investors to track the performance of a listed entity over
regular intervals of time and shall provide sufficient information to enable investors to
assess the current status of a listed entity.

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DISCLOSURE IN CORPORATE GOVERNANCE REPORT:
The following disclosures shall be made in the section on the corporate governance of the
annual report of the listed entities:

i. A brief statement on listed entity's philosophy on code of governance.

ii. Information, as prescribed in the Regulations, about the following:

a. Board of directors,
b. Audit committee,
c. Nomination and Remuneration Committee,
d. Remuneration of Directors,
e. Stakeholders' grievance committee,
f. General body meetings,
g. Means of communication,
h. General shareholder information,
iii. Other Disclosures:

a. Disclosures on materially significant related party transactions that may have

potential conflict with the interests of listed entity at large;
b. Details of non-compliance by the listed entity, penalties imposed on the
listed entity by stock exchange(s) or the board or any statutory authority, on
any matter related to capital markets, during the last three years;
c. Details of establishment of vigil mechanism, whistle blower policy, and
affirmation that no personnel has been denied access to the audit
committee;
d. Details of compliance with mandatory requirements and adoption of the
nonmandatory requirements;
e. Web link where policy for determining 'material' subsidiaries is disclosed;
f. Web link where policy on dealing with related party transactions;
g. Disclosure of commodity price risks and commodity hedging activities.

Where there is any non-compliance of any requirement of corporate governance report,

reasons thereof also needs to be disclosed.
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DISCLOSURE OF EVENTS OR INFORMATION

1. Every listed entity shall make disclosures of any events or information which, in the
opinion of the board of directors of the listed company, is material. Events specified
in Para (A) of Part (A) of Schedule III of the Regulations are deemed to be material
events and listed entity shall make disclosure of such events. The listed entity shall
make disclosure of events specified in Para (B) of Part (A) of Schedule III, based on
application of the guidelines for materiality, as specified.
2. The listed entity shall consider the following criteria for determination of
materiality of events/ information:

a. the omission of an event or information, which is likely to result in

discontinuity or alteration of event or information already available
publicly; or
b. the omission of an event or information is likely to result in significant
market reaction if the said omission came to light at a later date;
c. In case where the criteria specified in sub-clauses a) and b) are not applicable,
an event/information may be treated as being material if in the opinion of the
Board of Directors of listed entity, the event / information is considered
material.

The listed entity shall frame a policy for determination of materiality, based on
criteria specified above, duly approved by its board of directors, which shall be
disclosed on its website.

3. The board of directors of the listed entity shall authorize one or more Key Managerial
Personnel for the purpose of determining materiality of an event or information and
for the purpose of making disclosures to stock exchange(s) under this regulation and
the contact details of such personnel shall be also disclosed to the stock exchange(s)
and as well as on the listed entity's website.
4. The listed entity shall first disclose to stock exchange(s) of all events, as specified
in Part A of Schedule III, or information as soon as reasonably possible and not
later than 24 hours from the occurrence of event or information.

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 In case the disclosure is made after 24 hours of occurrence of the event or
information, the listed entity shall, along with such disclosures provide explanation
for delay. Disclosure with respect to the outcome of board meeting shall be made
within 30 minutes of the conclusion of such board meeting.
5. The listed entity shall, with respect to disclosures referred to in these regulations,
make disclosures updating material developments on a regular basis, till such time the
event is resolved/closed, with relevant explanations.
6. The listed entity shall disclose on its website all such events or information which
has been disclosed to stock exchange(s) under this regulation, and such disclosures
shall be hosted on the website of the listed entity for a minimum period of 5 years
and thereafter as per the archival policy of the listed entity, as disclosed on its
website.

LISTING AGREEMENT UNDER THE REGULATIONS

"Listing agreement" shall mean an agreement that is entered into between a recognised
stock exchange and an entity, on the application of that entity to the recognised stock
exchange, undertaking to comply with conditions for listing of designated securities;

On and from the commencement of these Regulations, all previous circulars stipulating or
modifying the provisions of the listing agreements including those specified in theses
Regulations, shall stand rescinded.

Accordingly, as per these Regulations, every issuer or the issuing company desirous of listing
its securities on a recognised stock exchange shall execute a listing agreement with such
stock exchange.

Where issuer or the issuing company has previously entered into agreement(s) with a
recognised stock exchange to list its securities shall execute a fresh listing agreement with
such stock exchange within 6 months of the date of notification of Securities and Exchange
Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015.

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