Answer ... The key legislative and regulatory provisions and codes of practice that primarily govern corporate governance in India are:

• the Companies Act, 2013;
• the Securities and Exchange Board of India (SEBI) Act, 1992; and
• the various rules and regulations issued thereunder.

Additionally, there are sector-specific laws and regulations which, among other things, facilitate corporate governance in India, such as:

• the Reserve Bank of India Act, 1934 (for finance-related businesses); and
• the Insurance Regulatory and Development Authority Act, 1999 (for insurance-related businesses).

With effect from 1 April 2023, in the case of infrastructure investment trusts and real estate investment trusts, the applicable corporate governance norms are those prescribed by:

• the SEBI (Infrastructure Investment Trusts) Regulations, 2014; and
• the SEBI (Real Estate Investment Trusts) Regulations, 2014.

Codes and other guidelines that facilitate corporate governance include the Listing Obligations and Disclosure Requirements Regulations, issued by SEBI under the SEBI Act, which contains specific obligations in relation to corporate governance and the reporting of business responsibility and sustainability.

Answer ... Much of the corporate governance framework is based on mandatory obligations. Previously, some of the key provisions – such as the obligation to spend certain amounts on corporate social responsibility – could be avoided merely by explaining why such sums could not be spent. However, since 2021, in addition to having to provide such an explanation, companies must transfer the unspent funds to specified projects, publicly funded universities, specified institutes or similar. In other words, this obligation can no longer be avoided.

Answer ... The key bodies responsible for drafting and enforcing the rules and codes that make up the corporate governance framework are:

• SEBI; and
• the Ministry of Corporate Affairs.

Both have wide-ranging powers, including the power to impose penalties on defaulting companies, promoters and others.

Further, in the case of listed companies, stock exchanges have the power to freeze the shareholdings of promoters in case of default.

The National Financial Reporting Authority was established in 2018 under the Companies Act to, among other things:

• investigate matters of professional or other misconduct of auditors of certain prescribed class of companies; and
• where appropriate, impose penalties.

This body effectively oversees auditors.

Answer ... Most of the corporate governance rules and codes, as generally understood, apply to listed entities. The most stringent requirements apply to:

• the top 150 listed entities; and
• the top 1,000 listed entities.

Some corporate governance requirements also apply to material subsidiaries of listed entities, even if unlisted, whether in India or overseas. ‘Material subsidiaries’ are subsidiaries whose income or net worth exceeded 20% of the consolidated income or net worth of the listed entity and its subsidiaries in the immediately preceding accounting year.

Answer ... Listed entities whose paid-up share capital is less than approximately $1.5 million and whose net worth is less than approximately $3.5 million, as well as entities listed on the Small and Medium Exchange, are exempt from most of the corporate governance requirements prescribed under the Securities and Exchange Board of India Listing Obligations and Disclosure Requirements Regulations (LODR).

Additionally, most private limited and unlisted public companies (unless they are material subsidiaries of listed entities) need not meet the corporate governance requirements applicable to listed entities under the LODR.

Answer ... The principal issues covered by the codes of governance are as follows:

• the composition of the board of directors, including the requirement to have independent directors;
• the constitution of committees such as:
• • an independent audit committee;
  • a nomination and remuneration committee;
  • a stakeholders’ relationship committee; and
  • a risk management committee;
• the establishment of a whistleblower policy for directors and employees to report their concerns;
• framing policies, such as for related-party transactions;
• obligations imposed on:
• • employees;
  • senior management;
  • key managerial personnel;
  • directors; and
  • promoters;
• the recruitment of key managerial personnel;
• the disclosure of material events and information, and confirmation, clarification or denial of rumours in the mainstream media regarding any material event or information;
• the approval of any special rights to be granted to any shareholders; and
• the provision of a business responsibility and sustainability report on environmental, social and governance disclosures, and in the case of the top 150 listed entities, the procurement of certifications from an assurance provider regarding the same.

Answer ... Public listed companies are typically owned by the promoters/founders.

The term ‘promoter’ includes a person:

• who has control over the affairs of the company; and/or
• in accordance with whose advice directions or instructions the board of the company is accustomed to act.

However, the securities laws mandate that a minimum of between 10% and 20% (and other percentages in certain cases) of the shareholdings of listed entities must be held by the public.

Answer ... Typically, companies are controlled by the board of directors, where the controlling shareholder has its nominees constituting a majority on the board. However, due to statutory restrictions, a controlling shareholder who is a promoter may be able to control the board only if:

• he or she is not the chairman of the board; and
• the non-executive chairman of the board is not related to him or her or to certain other classes of persons.

Control is also obtained by owning a majority of the voting shares of the listed entity. Certain promoters also subscribe to shares with superior rights which provide them with a certain degree of control even if they are not the largest shareholders.

In practice, it is the promoters and the promoter group (eg, relatives of promoters or, in the case of a body corporate promoter, a subsidiary or holding company) that controls the listed entity.

Answer ... A public listed company must have at least three directors. If the public listed company is one of the top 2,000 listed entities, the board must consist of at least six directors.

In the case of a listed company:

• two-thirds of the directors must be independent directors; and
• there must be at least one woman director.

In the case of the top 1,000 listed entities, it is mandatory to have at least one independent woman director.

Where the chairman of the board is a non-executive director, at least one-third of the board must consist of independent directors. Where the entity does not have a regular non-executive chairperson, at least half of the board must consist of independent directors. However, if the regular non-executive chairperson is the promoter or a person related to the promoter or related to certain others (eg, persons occupying a management position at the board level or one level below), at least half of the board must consist of independent directors.

Where the listed entity has any outstanding shares which carry superior rights (ie, equity shares with superior voting rights as compared to all other equity shares), at least half of the board must consist of independent directors.

Answer ... Various committees are mandated by law, such as:

• the audit committee;
• the nomination and remuneration committee;
• the stakeholders’ relationship committee;
• the corporate social responsibility committee; and
• the risk management committee.

The role of the audit committee is to oversee the listed entity’s financial reporting process and the disclosure of its financial information to ensure that the financial statements are correct, sufficient and credible.

The role of the nomination and remuneration committee includes recommending to the board:

• all remuneration payable to the senior management; and
• the extension or continuation of the terms of appointment of independent directors.

The role of the stakeholders’ relationship committee includes:

• resolving grievances of shareholders; and
• reviewing measures taken for the effective exercise of voting rights by the shareholders.

The role of the corporate social responsibility committee is, inter alia, to:

• develop and propose to the Board a Corporate Social Responsibility Policy outlining the company's planned activities.
• suggest the allocated expenditure for the mentioned activities.
• regularly oversee and evaluate the company's Corporate Social Responsibility Policy.

The role of the risk management committee includes formulating:

• a risk management policy to identify internal and external risks, including financial, operational, sectoral, environmental, social and governance and cybersecurity risks;
• risk mitigation measures, including systems and processes for internal controls; and
• business continuity plans.

Answer ... Yes, there are requirements to appoint independent directors.

An ‘independent director’ is broadly defined as a non-executive director who:

• is not or was not a promoter of the company or related to the promoters or the directors; and
• has and had no material pecuniary relationship with the company or its holding or subsidiary company or associated company in the current financial year or during the preceding three financial years.

Answer ... Yes, there are requirements such as:

• to have women directors; and
• to have an optimum mix of executive and non-executive directors.

Answer ... To be appointed on the board, a person must first not be disqualified from acting as such.

The Companies Act states that a person will be disqualified from acting as a director if, among other things, he or she:

• is an undischarged insolvent;
• has applied to be adjudicated as an insolvent;
• has been convicted by a court of any offence;
• has been imprisoned for a minimum term of six months; or
• has been the subject of an order (which is in force) issued by a court or tribunal disqualifying him or her as a director.

The board members are appointed by the shareholders at the general meeting. However, a person may be appointed as an ‘additional director’ by the board itself for a limited term.

Answer ... Board members may generally be removed by the shareholders by passing a majority vote at a shareholders’ meeting. The exceptions are:

• those appointed by the National Company Law Tribunal pursuant to an application made to it for matters such as oppression or mismanagement; and
• those appointed in accordance with the provisions of proportional representation.

However, a reasonable opportunity to be heard must be provided to the director before removing him or her.

Answer ... Two-thirds of the directors of a public company are liable to retire by rotation at every annual general meeting. However, they can be reappointed at the meeting. Further, independent directors cannot be appointed for more than two consecutive terms of a maximum of five years each unless a cooling-off period of three years has elapsed in the meantime.

Answer ... The best practices for listed companies are statutory in nature, as outlined in the answers to questions 2.3, 4.4, and 5.1.

Answer ... The Companies Act prescribes duties of directors of all companies (whether listed or unlisted); while the Securities and Exchange Board of India Listing Obligations and Disclosure Requirements Regulations prescribe the responsibilities of the board of a listed company. The key duties and responsibilities include the following:

• to act in accordance with the articles of association of the company;
• to act in good faith to promote the objects of the company for the benefit of its members as a whole and in the best interests of:
• • the company;
  • its employees;
  • its shareholders;
  • the community; and
  • the environment;
• not to get involved in a situation where the director has or possibly may have a direct or indirect conflict of interest with the company;
• not to achieve or attempt to achieve any undue gain or advantage for:
• • the director personally;
  • his or her relatives; or
  • anyone associated with him or her;
• to review and guide corporate strategy, risk policy, annual budgets and business plans, overseeing major capital expenditures and acquisitions and divestments;
• to monitor the effectiveness of the company’s governance practices and make changes as needed;
• to select, compensate, monitor and, where necessary, replace key managerial personnel and oversee succession planning;
• to ensure a transparent nomination process for appointment to the board and ensure the diversity of the board;
• to ensure the integrity of the company’s accounting and financial reporting systems, including the independent audit;
• to ensure that appropriate systems of control are in place, including for:
• • risk management;
  • financial and operational control; and
  • compliance with the law and the relevant standards;
• where decisions of the board may affect different shareholder groups differently, to treat all shareholders fairly.
• to exercise objective independent judgement on corporate affairs; and
• in connection with the committees of the board, to ensure that composition and working procedures are well defined and disclosed by the board.

Answer ... The board exercises its roles and responsibilities through:

• decision making at board meetings; and
• the provision of accurate guidance and directions to shareholders and members of committees of the board.

Answer ... The specific role is mandated by the laws as stated in the answer to question 5. Specifically regarding related-party transactions, the board must formulate a policy on the materiality of the related-party transaction, including clear threshold limits.

Answer ... Roles are not restricted. However, the roles of executive, non-executive and independent directors are distinct.

Answer ... The legal duties are specified in question 5.1. The issues outlined in question 5.1 form part of the legal duties of individual board members and are prescribed under Section 166 of the Companies Act.

Answer ... Individual board members, key managerial personnel (KMPs) and officers who are in default may become subject to multiple civil and criminal liabilities.

Examples of KMPs include:

• the chief executive officer;
• the managing director;
• the chief financial officer;
• the company secretary;
• full-time directors; and
• managers.

Where a full-time director, a KMP or any person who, under the authority of the board or any KMP, is charged with any responsibility knowingly fails to take active steps to prevent any default or actively participates in any default, he or she will be considered an ‘officer who is in default’.

Criminal liabilities may arise due to actions such as:

• accepting or inviting deposits from the public or the non-repayment of deposits accepted, in contravention of the prescribed regulations;
• knowingly failing to distribute dividends which have been declared; and
• preparing financial statements which do not accord with the accounting standards or which do not provide a true and fair view of the state of affairs of the company.

Civil liabilities may arise due to matters such as directors violating the duty imposed on them not to procure any undue gain or advantage for themselves. If they do so, they will become liable to pay an amount equal to the gain procured back to the company and will become liable to a fine. Another example is that if the company fails to meet the corporate social responsibility obligations, every officer in default will become liable to a fine. Similarly, in the case of violation of the provisions relating to related-party transactions, directors and even employees may become liable to a fine.

Answer ... Shareholders have multiple rights prescribed under the law, such as the right:

• to vote;
• to receive dividends when declared;
• to seek the purchase of their shares if they are minority shareholders in certain situations;
• to procure copies of audited financial statements;
• to inspect the register of directors;
• to apply to the prescribed authorities to seek relief in case of oppression or mismanagement; and
• to initiate class action proceedings.

The Securities and Exchange Board of India Listing Obligations and Disclosure Requirements Regulations also specify various rights to be granted to shareholders, such as the right:

• to participate in and be sufficiently informed of decisions concerning fundamental corporate changes;
• to participate effectively and vote in general shareholders’ meetings;
• to ask questions of the board of directors;
• to place items on the agenda of general meetings; and
• to propose resolutions.

Additionally, some key shareholders can:

• negotiate special rights under shareholders’ agreements; and
• be issued shares with superior rights.

Answer ... They exercise such rights:

• at shareholders’ meetings; or
• by making applications to the company and/or the prescribed authorities.

Shareholders do have the right to call shareholders’ meetings. The Companies Act permits shareholders that hold at least one-tenth of the total paid-up share capital of a company to requisition an extraordinary general meeting.

Answer ... Depending on the size of their shareholding, shareholders can exert influence on the appointment and operation of the board.

Every director is appointed to the board at a general meeting, except for additional directors who may be appointed by the board but who will hold office only until the date of the next annual general meeting.

Further, certain material decisions cannot be taken by the board and need the approval of the shareholders. For example, the shareholders’ approval is required for decisions to:

• sell, lease or otherwise dispose of all or substantially all of the undertaking of the company; and/or
• borrow more than the aggregate of the company’s paid-up share capital and free reserves and securities premium.

Answer ... The liability of a shareholder of a company limited by shares is limited to the amount unpaid on the shares held by the shareholder.

However, if the company carries on business without having a minimum number of shareholders (seven in the case of a public company) for more than six months, and this is known to the shareholder concerned, it will be liable for all debts of the company contracted during that time.

Further, if any shareholder knowingly participates in the fraudulent conduct of the business of the company, it can become personally liable for all debts and liabilities of the company.

Answer ... Civil liability will arise from breach of any shareholders’ agreements or unpaid capital calls. Criminal liability will arise from:

• participation in any fraudulent activities; and
• other actions such as tampering of minutes or records of the company.

Answer ... Yes, rules governing the issuance of further securities in a company do exist. Rights of pre-emption also exist. As per the Companies Act, where a company wishes to raise further capital by issuing additional shares, such shares must be offered to the holders of equity shares in proportion to the paid-up share capital on those shares. However, if a special resolution is passed (ie, a resolution passed by a majority of 75% of the shareholders, in the case of public companies), such additional shares may be offered to any persons.

Answer ... Yes, there are rules on the public disclosure of shareholding and on stake building. These are mandated by the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011. Anyone that acquires shares or voting rights totalling 5% or more of the shares of a listed company must disclose its aggregate shareholding. Similarly, anyone holding 5% or more of the shares of a listed company must disclose any changes to its shareholding. Such disclosures must be made to the stock exchanges and to the concerned company within two working days of the acquisition.

Answer ... As they are more sophisticated than most individual shareholders, institutional investors play a positive role in shaping corporate governance. Similarly, activist shareholders in most cases promote corporate governance.

Answer ... Yes, a mandatory Stewardship Code applies to institutional investors such as mutual funds and alternative investment funds. This code was issued by the Securities and Exchange Board of India (SEBI) and requires institutional investors to:

• formulate a comprehensive policy on the discharge of their stewardship responsibilities;
• have a clear policy on managing conflicts of interest;
• monitor their investee companies;
• have a clear policy on:
• • intervention in their investee companies; and
  • collaboration with other institutional investors;
• have a clear policy on voting and disclosure of voting activity; and
• report periodically on their stewardship activities.

Institutional investors must publicly disclose some of the above policies.

Answer ... Activist shareholders may exert influence on their investee companies through various methods, including the following:

• voting against resolutions at general meetings;
• making applications to the National Company Law Tribunal (NCLT) for oppression or mismanagement;
• filing a class action application before the NCLT for relief such as:
• • restraining the company from committing an act which is ultra vires its memorandum or articles of association; or
  • restraining the company and its directors from acting on any illegal resolutions; and
• filing a complaint with SEBI through its Complaint Redressal System Platform or otherwise.

Answer ... Currently, most shareholders are focused on:

• environmental, sustainability and social issues;
• executive compensation issues;
• ethics; and
• succession planning, as many founders of blue-chip companies are close to retirement age.

Answer ... Yes, there have been many instances of shareholder activism in recent years. For example, in 2023, the media reported that proxy advisory firm Institutional Investor Advisory Services had asked the independent directors of a listed company to appoint an interim chief executive officer and investigate allegations against its chairman and managing director regarding a matrimonial dispute which could affect stakeholders.

Similarly, in the case of another listed company, newspapers reported that an institutional shareholder had sent a notice requesting that a shareholders’ meeting be convened for the removal of certain directors.

Answer ... It is increasing, primarily due to:

• heightened awareness of shareholders’ rights among various groups of shareholders; and
• the growing presence of foreign institutional and accredited investors.

Answer ... Yes, these stakeholders can also shape and exert influence on the company in connection with corporate governance.

For example, employees can act as whistleblowers to communicate their concerns about illegal or unethical practices. Whistleblowers are afforded statutory protection under the Securities and Exchange Board of India Listing Obligations and Disclosure Requirements Regulations (LODR). Similarly, under the LODR, it is mandatory for a listed company to establish a stakeholder relationship committee to investigate various concerns of certain stakeholders, such as debenture holders and other creditors.

Answer ... The total managerial remuneration payable by a public company to its directors, its including managing director and full-time directors, and its managers in respect of any financial year cannot exceed 11% of its net profits for that financial year, computed in a specified manner. However, the company in a general meeting may authorise the payment of remuneration exceeding 11% of its net profits subject to certain conditions.

The remuneration payable to any one managing director, full-time director or manager must not exceed 5% of the net profits of the company; and if there is more than one such director, the remuneration of all such directors and managers in total must not exceed 10% of the net profits of the company.

The remuneration payable to directors who are neither managing directors nor full-time directors must not exceed:

• 1% of the net profits of the company in the case of a managing or full-time director or manager; and
• 3% of the net profits in all other cases.

Additionally, where a company has defaulted in payment of dues to any bank or public financial institution or non-convertible debenture holders or any other secured creditor, the prior approval of the bank or public financial institution concerned or the non-convertible debenture holders or other secured creditor must be obtained by the company before obtaining the approval in the general meeting. Further, if, in any financial year, a company has no profits or its profits are inadequate, the company may not pay its directors – including any managing or full-time directors and managers or any other non-executive directors, including independent directors – by way of remuneration any sum exclusive of any fees payable to them, except in accordance with prescribed provisions or with the approval of the shareholders by way of special resolution.

Answer ... See question 9.1.

Answer ... Yes, each year the company must disclose the executive compensation of its directors and key managerial personnel by filing an annual return with the Ministry of Corporate Affairs. This must also be published on the company’s website and the link to the same must be disclosed in the board’s report.

Additionally, the auditor of a company must make a statement as to whether the remuneration paid by the company to its executives is within the limits prescribed by the law.

Answer ... Introduced in 1976, the Equal Remuneration Act required equal pay for equal or similar work. Today, the Code on Wages 2019 prescribes that there should be equal pay for equal or similar work regardless of the gender.

Answer ... See question 9.1 and 9.3.

Answer ... Best practices include the following:

• Comply with the provisions of the law in spirit in addition to the letter of the law; and
• Have a merit-based, transparent policy which is disclosed to all executives on the various parameters that will be considered in determining their compensation.

Answer ... This has been covered in the earlier responses. See questions 1.1, 2.2, 2.3, 5.1, and 9.3.

Answer ... This has been covered in the earlier responses. See question 5.

Answer ... This has been covered in the earlier responses. See question 4.2.

Answer ... This has been covered in the earlier responses. See questions 1.1, 2.2, 2.3, 5.1, and 9.3

Answer ... A listed company cannot appoint:

• an individual as an auditor for more than one term of five consecutive years; and
• an audit firm for more than two terms of five consecutive years.

Moreover, individuals or audit firms must observe a cooling-off period of five years before being considered for re-appointment.

Answer ... Auditors are not permitted to provide, directly or indirectly, the following services to a company which has appointed them as auditors:

• accounting and bookkeeping services;
• design and implementation of financial information systems;
• investment advisory services;
• actuarial services;
• investment banking services;
• outsourced financial services; and
• management services.

The auditors may provide other non-audit services subject to approval by the audit committee of the company.

Answer ... Yes, an auditor that provides permissible non-audit services to a listed company with a turnover of INR 500 million or more in a year cannot charge more than the statutory audit fees as remuneration for such services.

Answer ... Trends are robust. There has been an exponential increase in awareness of corporate governance issues and activism. The mainstream media have also been aggressively reporting various corporate governance issues.

Companies now understand that corporate governance is a key factor in boosting valuations and earning the trust of various stakeholders. Several promoters have faced the consequences of non-compliance and have become even more cautious of their actions.

Answer ... Given that the Securities and Exchange Board of India introduced significant amendments to the Listing Obligations and Disclosure Requirements Regulations recently, no reforms are expected in the next 12 months.

Answer ... The top tips for effective corporate governance are to:

• have robust internal policies in place; and
• provide regular training and educational programmes within the organisation for directors, key managerial personnel and other relevant stakeholders, to educate them about the nuances and liabilities associated with various corporate governance aspects.

The main trap concerns mindsets and ethical standards. If corporate governance is not taken seriously by the promoters, this will have a negative effect across all levels of management.