1 Legal and enforcement framework
1.1 Which legislative and regulatory provisions and codes of practice primarily govern corporate governance in your jurisdiction?
Corporate governance in India is primarily governed by the Companies Act, 2013 (Companies Act) and the rules formulated thereunder. Companies that have listed or intend to list specified classes of securities are also subject to requirements under the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015.
The Ministry of Corporate Affairs regularly issues rules, circulars and guidelines that companies must adhere to vis-à-vis Companies Act compliance. In addition, sectoral regulators (eg, the Securities and Exchange Board of India (SEBI), the Reserve Bank of India) have also issued specific corporate governance norms for the entities and activities that they regulate.
1.2 Is the corporate governance framework in your jurisdiction primarily based on hard (mandatory) law and regulation or soft (eg, ‘comply or explain') codes of governance?
The corporate governance framework in India is primarily based on mandatory law and regulation.
1.3 Which bodies are responsible for drafting and enforcing the rules and codes that make up the corporate governance framework? What powers do they have?
The central government, through the Ministry of Corporate Affairs (MCA), is the primary body responsible for drafting and enforcing the legislation that makes up the corporate governance framework for all companies. SEBI acts as the primary regulator responsible for drafting and enforcing the corporate governance norms for listed and to be listed companies. In addition, each sector-specific regulator (eg, the Insurance Regulatory Development Authority of India, the Reserve Bank of India) is responsible for drafting and enforcing the corporate governance norms for the specific entities and activities they regulate.
The powers conferred on the above bodies are wide and include the power to:
- call for information;
- conduct inspections;
- undertake search and seizure;
- order disgorgement;
- levy penalties;
- cancel certificates of registration; and
- order imprisonment for contravention of applicable laws.
Some of these powers are further enforced through specialised agencies. For instance, the Serious Fraud Investigation Office under the MCA has been set up to look into matters involving fraud. The National Financial Regulatory Authority has been set up under the Companies Act, 2013 to investigate and penalise professional misconduct by chartered accountants or auditors who may aid or abet any accounting fraud or misstatements by companies. In cases of fraud or mismanagement, the MCA may also approach the specialised tribunals referred to below to seek specific relief against the company or its management.
Disputes arising under the corporate governance framework in India fall within the remit of specialised tribunals such as the National Companies Law Tribunal, and appellate bodies such as the National Companies Law Appellate Tribunal and the Securities Appellate Tribunal, depending on the specific facts of the case.
2 Scope of application
2.1 Which entities are captured by the rules and codes that make up the principal elements of the corporate governance framework in your jurisdiction?
In general, all entities are subject to the corporate governance framework in India; however, the extent of compliance varies depending on the status of the entity and the sector in which it operates. For instance, listed companies are subject to the highest standards of corporate governance, with specific requirements prescribed for issues such as:
- board composition;
- board committees;
- related-party transactions; and
- managerial compensation.
Comparatively, unlisted public companies and private companies are subject to lower thresholds of compliance.
2.2 What exemptions, if any, from the principal elements of the corporate governance framework are available in your jurisdiction?
The expected standards of corporate governance are not uniform and vary on the basis of factors such as the ownership, size and status of companies. Generally, companies with listed equity and convertible securities are subject to the highest standards of corporate governance prescribed under the Companies Act, 2013 and the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015, as well as under sectoral regulations.
Comparatively, private companies are subject to lower thresholds and are typically exempt from requirements such as:
- the appointment of independent directors;
- disclosure requirements as applicable to listed companies;
- retirement of directors by rotation; and
- the constitution of certain committees.
Similarly, public companies with no listed securities are not required to comply with corporate governance norms that are applicable only to listed entities, unless otherwise prescribed by the sectoral regulator.
With effect from 1 April 2021, the following are no longer treated as ‘listed companies':
- companies that have only issued listed non-convertible securities on a private placement basis; and
- public companies whose equity shares are listed in a foreign jurisdiction.
Accordingly, these companies are exempt from the rigorous compliance standards that are otherwise applicable to listed companies.
2.3 What are the principal issues covered by the codes of governance in your jurisdiction?
The codes of corporate governance in India address several aspects of corporate governance. Company law provides for procedures to be followed in relation to the appointment, remuneration and removal of directors (including independent directors), auditors, key managerial personnel/executives. Aspects relating to the administration of companies –including the powers, duties and responsibilities of the board of directors and committees of the board – have been also been codified under the Companies Act, 2013, with specific emphasis on the duties of individual directors to the company and its shareholders. The rights and interests of shareholders, which are a crucial element of the corporate governance framework, have also been protected through statutory provisions.
The promotion of ethical conduct of business by companies and the procedures to be followed when carrying out transactions with related parties have also been addressed. Additionally, a company's responsibility to give back to society has been recognised by providing for a corporate social responsibility framework.
In addition, the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015 provide additional requirements with respect to corporate governance of listed entities.
3 Ownership and control
3.1 What are the typical ownership structures in your jurisdiction?
The dominant ownership structure for companies in India is the limited liability company, which can be further classified into forms such as:
- one-person companies;
- private companies;
- unlisted public companies;
- listed public companies;
- private companies with listed securities.
Other structures available under Indian law include:
- sole proprietorships;
- limited liability partnerships;
- public and private trusts; and
- companies formed with charitable objects.
3.2 How are companies typically controlled in your jurisdiction, both structurally and in practice?
Companies in India are owned by shareholders comprising a variety of categories, including retail investors, institutional investors, promoters and promoter group. The ownership of listed companies is typically more broad based, since they are subject to minimum public shareholding norms.
Control may be exercised through:
- board control;
- occupation of key managerial positions in the company;
- voting rights;
- control over the management and/or policy decisions of the company; and/or
- shareholdings, either directly or through other corporate vehicles.
4 The board: structure and appointment
4.1 How is the board typically structured in your jurisdiction?
Private companies in India must have a minimum of two directors, whereas public companies must have a minimum of three directors. The composition of a board is generally as follows:
- Every company must have at least one director who is resident in India.
- Executive and non-executive directors: Executive directors are in the full-time employment of the company and are generally responsible for the day-to-day management of the company's affairs. Non-executive directors are not involved in the day-to-day management of the company's affairs, but play a critical role in the decision-making process by providing insights and exercising their votes. Non-executive directors may or may not be independent.
- Independent directors: The board of directors of listed companies and public companies that meet minimum threshold requirements must appoint independent directors as members. These are non-executive directors whose primary role is to use their expertise and independence to protect the interests of stakeholders and ensure compliance with corporate governance norms.
- Managing director: A managing director is an executive director who is vested with substantial decision-making powers and is responsible for the day-to-day management of the company.
- Woman director: Specified listed companies and certain public companies must have at least one woman director on their boards.
4.2 Are board committees recommended or mandated? If so, which areas should/must they cover?
Board committees are mandated for certain companies depending on:
- their status (eg, public listed companies);
- the sector in which they operate (eg, non-banking financial companies); and
- the satisfaction of certain thresholds (eg, share capital, net worth, profits, turnover).
Some of the types of committees prescribed include the following:
- Audit committee: One of the most important committees of the board, the audit committee, among other things:
- oversees the appointment and remuneration of auditors;
- reviews and monitors auditor independence and compliance;
- examines financial statements and the auditor's report on the same, and related-party transactions;
- evaluates internal financial controls and risk management systems; and
- oversees compliance mechanisms.
- Nomination and remuneration committee: This committee identifies persons who are qualified to become directors and senior management personnel of the company and recommends their appointment and removal. It also specifies the criteria to determine the independence of directors, as well as the policy for the remuneration of directors, key personnel and members of senior management.
- Corporate social responsibility (CSR) committee: This committee is responsible for CRS policy making, implementation and supervision of CSR activities.
- Stakeholder relationship committee: This committee considers and resolves grievances and safeguards the interests of the security holders of the company.
- Risk management committee: This committee specifically oversees the risk management policies, systems and procedures in a company.
4.3 Are there any requirements or recommendations to appoint independent board members? If so, how is ‘independence' defined?
Yes, certain classes of companies (eg, listed companies and other companies based on the satisfaction of certain thresholds) are required to appoint independent directors. The independence of a director is determined on the basis of the following criteria:
- qualifications and expertise;
- absence of association as a promoter/key member/employee of the company or its holding, subsidiary or associate company (collectively, ‘company group');
- absence of a pecuniary interest (other than director's remuneration) in the company group, beyond specified limits;
- absence of a relationship/association with the promoters, directors, auditors or company secretary of the company group, beyond specified limits; and
- absence of voting rights, beyond specified limits.
The restrictions on association and relationship with the company group also extend to the relatives of the relevant director.
4.4 Do any diversity requirements or recommendations apply with regard to board composition?
Yes, diversity requirements are mandated for specified classes of companies. For instance, certain listed public companies must have an optimum combination of executive and non-executive directors (including independent directors), as well as having a woman director. Companies which are not subject to mandatory diversity requirements are encouraged to implement these requirements on a voluntary basis.
4.5 How are board members selected and appointed? What selection criteria (if any) apply in this regard?
Broadly, the selection and appointment of directors are subject to the articles of association of a company, as well as company law. Each person who seeks appointment as a director must:
- consent to the appointment;
- possess a director identification number; and
- not be disqualified from holding such a position under the company law/articles of association.
For certain specified companies, the criteria for the selection of directors are specified by the nomination and remuneration committee based on the above requirements.
Additionally, persons proposed to be appointed as independent directors are selected from a databank maintained by the Indian Institute of Corporate Affairs, and must satisfy the specified test for independence, as well as other prescribed qualifications.
The appointment of directors is completed only once it has been approved at a shareholders' meeting. However, in some cases the board may appoint a person as an additional director even if the appointment is not approved in a shareholders' meeting. The term of such additional director is then valid until the forthcoming annual shareholders' meeting, unless such appointment is approved by the shareholders.
4.6 How are board members removed?
A director of a company, unless otherwise specified, may be removed before the expiry of his or her tenure through a shareholders' resolution passed by simple majority. However, the removal of an independent director who has been reappointed for a second term requires a special shareholders' resolution (ie, a resolution passed with three-quarters majority). In each case, the director proposed to be removed must be provided with an opportunity to be heard.
Directors may also be removed by order of the National Company Law Tribunal if it is of the opinion that the affairs of the company are being conducted in a manner that is prejudicial or oppressive to any member, to the public interest or to the best interests of the company.
4.7 Do any tenure restrictions or recommendations apply to individual directors?
Yes, tenure restrictions apply to individual directors in certain classes of listed companies and all public companies. Unless the articles of a public company provide for the retirement of all directors at every annual shareholders' meeting, at least two-thirds of the total number of directors are liable to retire by rotation; they generally retire on a first in, first out basis or by lot if they were appointed on the same day. In the case of independent directors, the term can be extended up to five consecutive years. Additionally, a company cannot appoint a person as a managing director or a full-time director for a term exceeding five years at a time. Over and above this requirement, specific tenure restrictions do not typically apply in case of private companies.
4.8 What best practice is recommended when composing the board and appointing board members?
The following best practices are recommended for the composition of the board and the appointment of board members in all companies:
- Each company should define the specific qualifications and expertise that each type of director on the board should hold. In listed companies, the appointment and retirement of directors should be based on a clear policy. This policy should lay down the norms for evaluating the performance of board members, as well as principles to promote diversity of gender, transparency and accountability, social and ethnic backgrounds, and cognitive and personal strengths when making appointments to the board.
- Suitable candidates must be appointed immediately to fill any vacancy caused due vacation/retirement of a director's office.
- In listed companies, the board should be broad based, to include an optimum mix of executive, non-executive and independent directors. In addition, the independent directors should include at least one woman director.
- The chairman of the board and the audit committee should be independent directors.
5 The board: role and responsibilities
5.1 What are the primary roles and responsibilities of the board?
The board is responsible for the overall management of the affairs of the company. The board acts in accordance with the articles of association of a company and company law in discharging its obligations towards the company, its shareholders and other stakeholders. The board must meet regularly to discuss the affairs of the company and is expected to exercise its independent judgement, skill and diligence in the best interests of the company.
The board is also responsible for:
- selecting, compensating, monitoring and, where necessary, replacing key managerial personnel; and
- overseeing succession planning.
In companies that are required to have specialised committees, the board is responsible for defining the mandate, composition and working procedures of these board committees in accordance with regulatory requirements, while exercising oversight over their functioning.
The board is also responsible for the conduct of ethical business and must monitor potential conflicts of interest of management, members of the board and shareholders, including misuse of corporate assets and abuse in related-party transactions. It is also the board's responsibility to assist independent directors in performing their role effectively and to assist any other committee appointed by the board.
5.2 How does the board exercise those roles and responsibilities?
The board performs its roles and responsibilities by holding regular meetings and steering discussions. In companies where board committees are specified, the board delegates certain functions to specialised committees, such as the audit committee, the nomination and remuneration committee, and the risk management committee. In addition, the board appoints key personnel with appropriate qualifications in the requisite field to ensure smooth and appropriate functioning of the company. The board may also periodically obtain advice from consultants and experts to carry out its responsibilities. In addition, the board engages with the statutory auditors to assess the financial controls and risk management framework.
5.3 What specific role does the board play in relation to: (a) Strategic planning? (b) Risk management? (c) Major and related-party transactions? and (d) Conflicts of interest?
(a) Strategic planning?
The board is responsible for charting out the future course that the company will take, including strategic planning and management. Specifically, the board's role in strategic planning includes:
- identification of priorities;
- goal planning;
- allocation of funds and resources; and
- monitoring and oversight of strategies.
As the plan progresses, the board may need to revisit the allocation of funds and consider the impact of acquisitions and divestitures.
(b) Risk management?
The board plays a crucial role in respect of risk assessment and management in a company, which is tied to its fiduciary duties. In listed companies, a specialised committee – the risk management committee – is constituted for this purpose. In cases where this is not mandated, the audit committee oversees risk management, along with the board. The board also engages with the auditors on an ongoing basis while discharging its functions on risk management.
(c) Major and related-party transactions?
The board– directly or indirectly, through various committees – is responsible for approving and supervising major and related-party transactions. Specified related-party transactions (eg, the sale, purchase or supply of goods; the sale, disposal or purchase of property) are subject to the approval of the board. These transactions may also be subject to the shareholders' approval if they meet the prescribed thresholds. Notwithstanding this, all related-party transactions require the prior approval of the audit committee.
Companies that have listed their specified securities must formulate a policy on the materiality of related-party transactions and on dealing with related-party transactions, including by setting out clear threshold limits. This policy must be reviewed by the board every three years. Such listed companies are also subject to disclosure requirements in respect of related-party transactions.
(d) Conflicts of interest?
The law prohibits directors from being involved in a situation that leads to a conflict of interest with the company. A director of a company cannot act to the detriment of such company, and must also recuse from voting on matters in which he or she may have an interest. Indian law also obliges directors to promptly disclose any conflict of interest.
5.4 Are the roles of individual board members restricted? Is this common in practice?
A company acts through its board, and to that extent, the board has very wide powers. However, the exercise of this power is subject to company law and such other sectoral regulation (eg, the listing regulations) as may be applicable. Company law specifies the duties of a director, which include:
- the duty to act in good faith for the benefit of the company;
- the duty to exercise reasonable independent judgement, due care, skill and diligence; and
- the duty to avoid conflicts of interest and not derive any undue gain or advantage for oneself or one's relatives.
The discharge of each director's roles and responsibilities is subject to such codified principles.
That said, the restrictions on and liabilities of individual board members may vary based on the roles they perform. To elaborate, executive directors play a more active role in the day-to-day management of the company and are thus subject to greater exposure in terms of liability in case of breach or non-compliance. In contrast, independent directors and non-executive directors (who are not key personnel or promoters of the company) are not involved in the day-to-day management of a company's affairs, and instead use their skills, expertise and independent judgement to protect the interests of the company and its stakeholders. They are, accordingly, held liable only if:
- they fail to act diligently; or
- an act or omission is undertaken with their knowledge and consent or connivance.
5.5 What are the legal duties of individual board members? To whom are these duties owed?
As part of the board, directors work cohesively to promote the efficient and prudent management of a company's affairs. Directors have fiduciary duties towards the company and its stakeholders. As members of the board, directors are expected to act in good faith in order to promote the objects of the company for the benefit of the members as a whole, and in the best interests of the company, its employees, the shareholders, the community and the environment.
Directors are also obliged to exercise their duties with reasonable care, skill and due diligence; and are expected to exercise their independent judgement while making decisions for the company. Directors must avoid situations where they may have a direct or indirect interest that conflicts, or may possibly conflict, with the interests of the company. Furthermore, directors should not make any undue gains or seek advantage for themselves or their relatives, partners or associates.
5.6 To what civil and criminal liabilities are individual board members primarily potentially subject?
Under company law, directors are subject to civil and criminal liability. The nature of liability is contingent on the nature of the contravention as well as the role performed by the director. Directors may be liable for breach of directors' duties (eg, failure to exercise due and reasonable care, skill, diligence and independent judgement), and in certain instances, for the acts and omissions of the company, as ‘officers in default'. For instance, directors may be subject to penalties and fines for violations such as:
- breach of directors' duties;
- failure of the company to file an annual return or distribute a dividend when it has been declared; or
- failure to make material disclosures.
On the other hand, directors are subject to criminal liability for misstatements in the prospectus, fraud and so on. That said, independent directors and non-executive directors (who are not key personnel or promoters of the company) are not involved in the day-to-day management of a company's affairs, and instead use their skills, expertise and independent judgement in protecting the interests of the company and its stakeholders. Unless otherwise specified, they are held liable only if:
- they fail to act diligently; or
- an act or omission was undertaken with their knowledge and consent or connivance.
Under the regulatory framework of the Securities and Exchange Board of India (SEBI), directors of listed and to be listed companies, as well as directors of entities regulated by SEBI, are subject to civil and criminal liability. Other sectoral regulators, such as the Reserve Bank of India and the Insurance Regulatory Development Authority of India, also have the power to investigate and penalise the conduct of directors of the entities they regulate.
6.1 What rights do shareholders enjoy with regard to the company in which they have invested?
Equity shareholders of private companies enjoy voting rights subject to the limitations set out in the articles of association of the company and the applicable provisions of the Companies Act, 2013. The shareholders may also enjoy additional rights – including affirmative rights and pre-emption rights – where these are agreed under shareholders' agreements.
On the other hand, equity shareholders of listed and other public companies enjoy a wide range of rights, including the right to:
- participate effectively and vote in general shareholders' meetings;
- participate in, and be sufficiently informed of, decisions concerning fundamental corporate changes;
- inspect the statutory register and minute books;
- receive copies of financial statements;
- be informed of the rules, including voting procedures, that govern general shareholders' meetings;
- have the opportunity to present questions to the board of directors, place items on the agenda of general meetings and propose resolutions (subject to reasonable limitations);
- participate in key corporate governance decisions (eg, the nomination and election of members of the board of directors);
- exercise ownership rights by all shareholders, including institutional investors;
- have access to an adequate grievance redressal mechanism; and
- protect minority shareholders from abusive actions by, or in the interests of, controlling shareholders (acting either directly or indirectly).
Even preference shareholders enjoy limited voting rights, which largely concern matters that directly affect the rights relating to:
- their preference shares;
- the winding up of the company; or
- the repayment or reduction of the share capital of the company.
6.2 How do shareholders exercise these rights? Do they have a right to call shareholders' meetings and, if so, in what circumstances?
Shareholders largely exercise these rights through their votes. Another avenue is to avail of legal remedies, such as:
- approaching the National Company Law Tribunal (eg, in case of oppression or mismanagement, or failure to hold an annual shareholders' meeting);
- filing a class action suit in specified circumstances; or
- for listed companies, approaching the market regulator – the Securities and Exchange Board of India (SEBI) – through its SEBI Complaints Redressal System portal.
The right to call meetings is available to any shareholder or group of shareholders holding:
- at least 10% of the paid-up share capital of the company, where the company has share capital; or
- at least 10% of the total votes of the company, where the company does not have share capital.
Any such shareholder may requisition the board to call a shareholders' meeting. However, if the board does not organise a shareholders' meeting within a specified timeframe, the concerned shareholder may call the meeting at the company's expense.
6.3 What influence can shareholders exert on the appointment and operations of the board?
Shareholders exercise significant influence on such matters, depending on the extent of their shareholding and voting rights. The appointment and reappointment of directors to the board of a company statutorily requires the approval of the shareholders. In fact, a listed company may even allow the appointment of a small shareholders' director on its board upon:
- notice of at least 1,000 small shareholders or 10% of the total number of small shareholders, whichever is lower; or
- a suo moto decision of the listed company.
In addition, the exercise of certain powers of the board requires the approval of the shareholders. Instances where shareholder approval is required include:
- the appointment and removal of directors and auditors;
- amendments to the charter documents of the company;
- the entry into new lines of business;
- material related-party transactions;
- reduction of share capital;
- issue of depository receipts; and
- issue of securities.
In certain cases, such approval is subject to higher thresholds – that is, through a special resolution (eg, the disposal of all or substantially all of the undertakings of the company; borrowings in excess of specified limits).
6.4 What are the legal duties/responsibilities and potential liabilities, if any, of shareholders?
Certain shareholders may be subject to legal duties or responsibilities under Indian law.
Mutual funds and alternative investment funds: From 2019, SEBI has mandated that all mutual funds and alternative investment funds must adopt stewardship codes on the discharge of their stewardship responsibilities, which entails active monitoring of and interaction with investee companies and disclosure of voting policy and activities. In addition, in March 2021, SEBI issued guidelines on voting by mutual funds in investee companies, which, among other things, identify the proposals on which mutual funds are mandatorily required to vote.
Promoters: If a shareholder is classified as a ‘promoter' in terms of the Companies Act, 2013/SEBI framework, that shareholder may be subject to additional requirements and liabilities, such as:
- minimum contribution requirements to an initial public offering;
- mandatory lock-in period after a capital issue or exit offer; and
- liability as a selling shareholder.
Sectoral regulators have set limits on the percentage of promoter or promoter group shareholdings that is permissible in the entities that they regulate (eg, banks or insurance companies) in order to facilitate and encourage a more diversified shareholding and in turn boost corporate governance.
Having regard to the changing investor landscape in India, SEBI recently initiated a consultation process to revisit the concept of promoter in the context of listed companies so as to assess shifting from the concept of promoter to the concept of ‘persons in control' or ‘controlling shareholders'. Such a change, as and when undertaken, is likely to lead to changes in the regulatory framework, including the reorientation of enforcement strategies.
Other ordinary shareholders have no specific legal duties or responsibilities from a corporate governance standpoint.
6.5 To what civil and criminal liabilities might individual shareholders be subject?
Principally, an individual shareholder is subject to limited liability, which is capped at the unpaid amount on its shares, if any. Therefore, if the shareholder owns fully paid-up shares, there is no additional liability to which it is subject.
However, if the shareholder is otherwise associated with the company as a key member/director/promoter, it may be subject to the duties and liabilities that apply to that role.
6.6 Are there rules governing the issuance of further securities in a company? Do rights of pre-emption exist and, if so, how do they operate? Can they be circumvented? If so, how and to what extent?
p>The issuance of further securities is primarily governed by the Companies Act, 2013. However, entities that are listed or to be listed are governed by the Companies Act, along with relevant regulations issued by SEBI based on the nature of securities sought to be issued. Additionally, directions, notifications and regulations issued by other sectoral regulators will apply.
Under Indian corporate law, shareholders generally enjoy pre-emption rights with regard to the issuance of securities on a rights basis and may also voluntarily relinquish such rights, unless otherwise provided. If the existing shareholders do not subscribe to the shares so offered, the board may dispose of such shares in a manner that is not detrimental to the existing shareholders of the company. Pre-emption rights in favour of shareholders may also exist by virtue of arrangements among the shareholders and the company or under the articles of association.
6.7 Are there any rules on the public disclosure of levels of shareholding and/or stake building?
Listed companies must disclose their shareholding patterns in respect of each class of securities periodically (ie, on a quarterly basis) and occasionally (ie, prior to listing of securities and upon certain capital restructuring events). The shareholdings of promoters and promoter groups, as well as of those shareholders holding stakes in excess of prescribed thresholds and so on, must be disclosed separately. Under the Companies Act 2013, all companies must disclose their shareholding patterns in the annual return to be filed with the Registrar of Companies.
The disclosure of shareholding and stake building is also governed by the SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 2011 (‘Takeover Code') and the SEBI (Prohibition of Insider Trading) Regulations, 2015 (‘PIT Regulations') which apply to listed companies. The Takeover Code requires disclosures:
- upon the acquisition of a certain percentage of the total shareholding or voting rights in a company; and
- upon a change in such percentage which exceeds a statutorily stipulated threshold.
Mandatorily requiring such disclosures helps to alert the company and the market of stake building and changes of control, if any. It also limits the possibility of a sudden hostile takeover. Additionally, every person, along with persons acting in concert, that holds 25% or more of the shares or voting rights of a company and any person that is classified as a ‘promoter' must disclose their aggregate shareholding and voting rights at the end of the financial year (ie, 31 March). Promoters must also disclose details of any encumbrance created on the shares of the company or any release of such encumbrance.
Additionally, the PIT Regulations require promoters, directors, key managerial personnel and such other connected persons as may be specified by the company to make an initial disclosure of their shareholding and continual disclosures of changes in shareholding based on certain specified thresholds.
7 Shareholder activism
7.1 What role do institutional investors and other activist shareholders play in shaping corporate governance in your jurisdiction?
Institutional investors and activist shareholders play an important role in shaping corporate governance, particularly by pressing for:
- quality disclosures;
- greater transparency and accountability; and
- the adoption of international best practices.
In addition, proxy advisers play an important role in shaping corporate governance in India.
7.2 Is there any legislation or code of practice which applies to institutional shareholders? If so, what issues does it primarily address and how is it policed/enforced?
p>While there is no legislation or code of practice that uniformly applies to all institutional shareholders, the Securities and Exchange Board of India (SEBI), in exercising its powers under the SEBI Act, 1992, has prescribed a mandatory stewardship code to be followed by mutual funds (MFs) and alternative investment funds (AIFs) in relation to their investments in listed entities, as well as certain guidelines on voting by MFs in their investee companies. This code requires MFs and AIFs to:
- discharge stewardship responsibilities (discussed below);
- intervene in investee companies; and
- manage conflicts of interest.
The stewardship responsibilities envisaged by SEBI involve monitoring and actively engaging with investee companies on various matters, including:
- performance (eg, financial, operational);
- corporate governance;
- material environmental, social and governance opportunities or risks; and
- capital structure.
In terms of the code, institutional shareholders must identify circumstances for active intervention in the investee company and the manner of such intervention. To this end, the institutional shareholders must put in place comprehensive policies and regularly assess the outcome of such interventions. Further, the voting guidelines for MFs identify certain proposals on which MFs are mandatorily required to cast their votes. The code and the voting guidelines will be enforced by SEBI in the exercise of its powers as the primary regulator for MFs and AIFs.
Also, different categories of institutional shareholders – such as MFs, AIFs and foreign portfolio investors – are regulated by SEBI separately through specific regulations, and a distinct code of conduct is set out in each of these regulations.
7.3 How do activist shareholders typically seek to exert influence on corporations in your jurisdiction?
The key card held by activist shareholders is their vote, through which they can exert influence on corporations. Upon acquiring a reasonable stake in the company, activist shareholders regularly liaise and interact with the board, providing strategic advice as and when necessary to ensure that the board is fully informed and considers the input of significant shareholders. Every listed company in India must also have a stakeholder relationship committee, where shareholders can voice their concerns. Shareholders generally use their votes for the appointment and removal of directors who make operational decisions for the company.
Other modes of influence include:
- requisitioning a shareholders' meeting;
- reporting to SEBI, via its SEBI Complaints Redressal System platform; and
- filing applications with the National Company Law Tribunals, if necessary.
Importantly, activist shareholders have increasingly been obtaining the advice of proxy advisers, which also play an essential role in shaping corporate governance in India.
7.4 Which areas of governance are shareholders currently focused on?
In line with international practice, shareholders are currently focused on:
- stakeholder primacy vis-à-vis shareholder primacy;
- COVID-19 crisis management;
- succession planning;
- director and management accountability and remuneration;
- compliances pertaining to related-party transactions;
- ways to avoid short termism and shift the focus from quarterly earnings to long-term goals;
- environmental, social and governance factors, with a greater focus on environmental and social factors (employees, consumer and community-related issues);
- board diversity and independent directors;
- virtual board and shareholders' meetings;
- directors' performance and contributions to the board, including number of directorships;
- emphasis on human capital;
- revaluation of risk management, technology and cybersecurity;
- capital management and longer-term strategy; and
- climate change risk, including zero emission rates.
7.5 Have there been any high-profile instances of shareholder activism in recent years?
Yes, in recent years, we have seen a few high-profile instances of shareholder activism in India, including the following:
- In one of India's fiercest corporate imbroglios, a minority shareholder who was the chair of a large investment holding company was ousted from his position and from various other directorships held on the board of group companies. This battle went through extensive litigation and was ultimately decided by the Supreme Court of India in favour of the majority shareholder.
- The CEO and a majority of the directors on the boards of two private sector banks were ousted by activist shareholders.
- A high-profile director appointed by a leading private equity investor was ousted by shareholders for lack of attendance.
- During COVID-19, the promoters of a listed company endeavoured to delist the company when the market value of shares of the company was relatively low. However, an institutional activist investor tendered its shares at a high price, compelling the promoters to withdraw the offer.
- There have been multiple instances where activist shareholders have blocked related-party transactions between group companies.
7.6 Is shareholder activism increasing or decreasing in your jurisdiction? If so, how and why?
Shareholder activism is certainly increasing in India, fuelled by a combination of factors, including:
- increased shareholder awareness;
- increased inflows from institutional investors such as private equity funds and foreign portfolio investors, particularly in the aftermath of the COVID-19 pandemic, where India is emerging as a significant constituent of the world economy;
- the growing influence of proxy advisers in India, which in turn has boosted shareholder activism and heighted the emphasis on corporate governance;
- a steady shift from promoter-backed companies to more professionally managed companies, which allows for diversity in shareholding as well as the implementation of better governance standards; and
- encouragement from SEBI through its requirement for mandatory stewardship policies.
8 Other stakeholders
8.1 What role do stakeholders such as employees, pensioners, creditors, customers, and suppliers play in shaping corporate governance in your jurisdiction? What influence can they exert on a company?
Corporate governance in India is witnessing a shift from shareholder primacy to stakeholder primacy. The boards of companies must weigh and balance diverse interests of the company, its shareholders, its employees, the wider community and the environment. In fact, the listing regulations require every listed company to have a stakeholder relationship committee and identify certain rights of stakeholders vis-à-vis the listed company. The rights of stakeholders that are established by law or through mutual agreements must be respected and include:
- the opportunity to obtain effective redressal for any violation of their rights;
- access to relevant, sufficient and reliable information on a timely and regular basis, to enable them to participate in the corporate governance process; and
- an effective whistleblower mechanism in listed companies, to enable stakeholders – including individual employees and their representative bodies – to freely communicate their concerns about illegal or unethical practices.
Employees play an increasingly significant role in shaping corporate governance through the formation of trade unions and through the whistleblower and compliance mechanisms available in large companies. The directors owe fiduciary duties to employees and other stakeholders of the company. However, there is no statutory requirement to have an employee representative on the board.
Additionally, creditors play a critical role, since their rights have been recognised statutorily in terms of the Insolvency and Bankruptcy Code, 2016. And from a practical perspective, lenders tend to impose specific corporate governance standards that a borrowing entity must comply with in order to obtain funding. Holistically, the proliferation of stewardship practices in the insurance and mutual fund industry has increased accountability towards diverse stakeholders. Recently, Indian legal jurisprudence has also recognised a company's customers as among its stakeholders.
Whistleblowers from within a company have also been assisting the regulators in accessing the internal workings and management of companies, and have sounded timely alarms in cases of grave misfeasance or misconduct. Although prone to some level of misuse/abuse, the whistleblower route is a vital channel for information access and for regulators to initiate prompt action.
9 Executive performance and compensation
9.1 How is executive compensation regulated in your jurisdiction?
In India, executive compensation is statutorily regulated in terms of the Companies Act 2013, read with the relevant rules issued thereunder. The listing regulations also regulate executive compensation in the case of public listed companies.
Sectoral regulators may require additional compliance in this regard. For instance, the Securities and Exchange Board of India (SEBI) has issued circulars on the disclosure of executive remuneration paid to key management personnel and employees of mutual funds and asset management companies, as well as certain other regulated entities.
9.2 How is executive compensation determined? Do shareholders play a role in this regard?
For listed companies and specified public companies, the nomination and remuneration committee determines executive compensation, which is subject to specified limits and thresholds. The total remuneration payable to directors and managers of such companies must be within the statutory ceiling of 11% of net profits in a financial year. Certain sub-limits also apply within this ceiling, which clarify the maximum remuneration that can be offered to managing/full-time directors and other directors.
Shareholders play an important role in the determination of executive compensation. For certain listed companies, the compensation payable to non-executive directors – including the issuance of stock options – is subject to shareholder approval, except in certain specified cases. Additionally, shareholder approval is required every year where the annual remuneration payable to a single non-executive director exceeds 50% of the total annual remuneration payable to all non-executive directors. Moreover, certain thresholds and limits linked to net profits have been set to determine the maximum compensation payable to executive directors who are classified as promoters of such listed company.
The sub-limits above, and the maximum total remuneration payable where a company has inadequate or no profits, may also be determined with the shareholders' approval.
9.3 Do any disclosure requirements apply in relation to executive compensation?
Yes, executive compensation is subject to disclosure requirements. At the threshold, when appointing the managing director, an explanatory statement should be annexed to the notice issued to the shareholders, setting out the proposed remuneration. Also, every company must file an annual return and report disclosing the details of remuneration of directors, key managerial personnel and any other person that exceeds specified thresholds.
Specifically, listed companies must disclose:
- the ratio of the remuneration of each director to the median remuneration of company employees;
- the percentage increase in:
- the remuneration of the chief executive officer, the chief financial officer, the company secretary and each director or manager; and
- the median remuneration of employees in the financial year; and
- the average percentile increase in the salaries of employees other than managerial personnel in the last financial year and its comparison to the percentile increase in the managerial remuneration, accompanied with justification therefor.
Listed companies must also disclose the names of their top employees beyond specified remuneration thresholds.
The nomination and remuneration committee of every listed company and specified public companies must also formulate a policy relating to the remuneration of directors, key managerial personnel and other employees, which must be disclosed on the website of the company. The salient features of the policy and any changes thereto must further be disclosed in the board's report. Additionally, the auditor of the company must state in its report whether:
- the remuneration paid by the company to its directors was in accordance with the provisions of the Companies Act; and
- the remuneration paid to any director was in excess of the prescribed statutory limits.
Additionally, sector-specific regulations require the disclosure of executive compensation to the regulator.
9.4 Have any measures to address the gender pay gap been introduced in your jurisdiction?
Several measures have been adopted in India to address the gender pay gap. Recently, the Code on Wages was introduced, in addition to the constitutional guarantees available under Article 14 of the Indian Constitution. The code explicitly prohibits discrimination on the grounds of gender and any gender-based disparity in pay.
In certain cases, environmental, social and governance ratings, the recommendations of proxy advisory firms and shareholder activism operate as effective checks on the gender pay gap in listed companies.
9.5 How is executive performance monitored and managed?
While no specific parameters are laid down on how executive performance must be assessed, the nomination and remuneration committee of every listed company and specified public companies must specify the procedure for effective evaluation of the performance of its board, committees and individual directors. Practically, insofar as employees – including executives – are concerned, their performance is typically benchmarked and assessed vis-à-vis the performance of the company. The annual report must also include a statement indicating the manner in which the formal annual evaluation of the performance of the board, its committees and individual directors has been conducted.
Moreover, independent directors on the board must:
- adopt an objective view on the performance of the board and management;
- scrutinise the performance of the management in meeting agreed goals and objectives; and
- monitor the reporting of performance.
In particular, they should do so in separate meetings held by the independent directors in the absence of all non-independent directors.
9.6 What best practices should be considered with regard to executive performance and compensation?
Some of the following best practices should be considered with regard to executive performance and compensation:
- Public companies must disclose the relationship between the compensation actually paid and the financial performance of the company.
- Public companies must disclose detailed descriptions of:
- short-term and long-term incentive plans;
- stock awards, including restricted stock and performance shares;
- golden parachute or golden handshake clauses;
- severance pay-outs to executives; and
- bonuses which form a part of the executive compensation package.
- The evaluation of performance should not be limited to any specific metric; rather, various metrics should be employed, including financial, non-financial, market-based, strategic, operational, absolute and relative metrics. Financial metrics usually include profit, growth and return on investment; while non-financial metrics include customer satisfaction, innovation and safety. Market-based metrics include stock performance and total shareholder returns.
- Public companies should consider embedding non-financial metrics relating to environmental, social and governance factors in their executive incentive plans; and executive compensation decisions should also be integrated with succession planning.
10 Disclosure and transparency
10.1 What primary reporting obligations relating to corporate governance apply in your jurisdiction?
In India, such obligations primarily apply to listed entities. Listed entities are mandatorily required to:
- make event-based disclosures (which may or may not be linked to materiality thresholds); and
- file quarterly compliance reports on corporate governance.
That apart, the Securities and Exchange Board of India recently issued a circular and amended the listing regulations to require the country's top 1,000 listed entities, based on market capitalisation, to file a business responsibility and sustainability report with effect from financial year 2022-23, which would include granular disclosures on climate and social-related issues, and could include cross-references to sustainability reports filed under internationally accepted reporting frameworks. For the financial year 2021-22, this reporting is voluntary. Additionally, in terms of the statutory audit that must be undertaken for listed companies, the report of the auditor and the notes to financial statements are also to include relevant information in respect of broader corporate governance-related compliance.
The key reporting obligations for listed companies in lieu of corporate governance are as follows:
- Board of directors:
- composition and categorisation of the board into promoters, executive, non-executive, independent and so on;
- attendance of each director at the different meetings;
- a matrix or chart setting out the skills, expertise and competence of the board of directors; and
- details of independent directors.
- Audit committee:
- composition, meetings and attendance during the year; and
- audit report.
- Nomination and remuneration committee:
- composition, meetings and attendance during the year; and
- performance evaluation criteria for independent directors.
- Remuneration of directors:
- criteria for making payments to non-executive directors;
- all transactions between non-executive directors and the listed entity; and
- complete details of compensation package.
- Stakeholders' grievance committee:
- number of shareholder complaints received;
- number not solved to the satisfaction of shareholder; and
- number of pending complaints.
- Other disclosures – for example:
- materially significant related-party transactions;
- non-compliance with prescribed penalties or strictures;
- details of whistleblower policy;
- presentations made to institutional investors and analysts; and
- general shareholder information.
Private and unlisted public companies must also file annual returns with the registrar of companies setting out details including:
- attendance and meetings of the board of directors; and
- remuneration of directors and key managerial personnel.
Like listed companies, certain classes of unlisted public companies must have independent directors, women directors and a nomination and remuneration committee to determine managerial remuneration. Such companies may also be required to submit annual and periodic financial reports, similar to interim financial results generated by listed companies.
10.2 What role does the board play in this regard?
The board plays an integral supervisory role, as it exercises oversight in matters of disclosure and transparency. For instance, it decides on the reporting and the quality of the disclosure of event-based information to stock exchanges in terms of the applicable framework. The various reports submitted by the board are verified by individual directors; and any misrepresentation, omission or non-disclosure may invite regulatory scrutiny and render the directors liable under applicable law.
10.3 What role do accountants and auditors play in this regard?
Auditors play a significant role in maintaining transparency and risk management. An auditor's report must be annexed to the financial statements of the company. This report is prepared after consideration of all materials necessary for conducting the audit. Accountants and auditors assess whether the company has adequate checks and balances in place to ascertain the accuracy of the financial statements, and run various checks to identify red flags indicating non-compliance or potential fraud. The report also contains certain confirmations regarding the financial health and going-concern status of the company. A corporate governance compliance certificate from the auditors or a company secretary must also be annexed to the directors' report. Additionally, for listed companies, where an auditor resigns, such resignation must be intimated immediately to the stock exchange along with detailed reasoning and particulars for the resignation.
10.4 What best practice should be considered in relation to reporting and disclosure?
While India already has extensive statutory reporting and disclosure requirements, for evolving areas of corporate governance such as environmental, social and governance (ESG) reporting, sustainability issues such as corporate climate disclosures and climate-related financial disclosures, including mitigation of carbon footprints, the regulator could adopt a ‘comply or explain' approach, which would give greater flexibility to companies while encouraging ESG reporting.
Additionally, following the COVID-19 pandemic, businesses could consider disclosing any material contractual modifications, recoverability and impairment of assets to ensure complete transparency to investors.
11 Audit and auditors
11.1 What rules relate to the appointment, tenure and removal of auditors?
Two types of auditors are recognised under Indian corporate law – statutory auditors and internal auditors. Statutory auditors must be appointed at the annual general meeting of every company. Internal auditors must be appointed by listed companies and certain classes of public and private companies based on stipulated financial thresholds. In addition, listed companies and certain classes of public companies must form an audit committee; and the appointment, tenure and remuneration of statutory auditors must be recommended by such committee.
The statutory auditors hold office for a period of five years. Listed companies and certain other specified companies cannot appoint an individual auditor for more than one term of five consecutive years. If an auditing firm is the auditor, it cannot be appointed for longer than two terms of five consecutive years each.
A statutory auditor can be removed before the expiry of its term if:
- prior approval of the central government has been obtained; and
- a special resolution has been passed by the company approving the removal of the statutory auditor.
In case of resignation, the statutory auditor must file a resignation statement with the company and the Registrar of Companies. In the case of listed companies:
- the reasons for resignation must be disclosed immediately and in any case within 24 hours of resignation; and
- other guidelines prescribed by the Securities and Exchange Board of India in this regard must be complied with.
11.2 Are there any rules or recommendations that limit the scope of services as regards the provision of non-audit services by an auditor?
Yes, the Companies Act, 2013 prohibits auditors from providing non-audit services directly or indirectly to the company, or its holding or subsidiary company, and from assuming any additional role or responsibilities that would affect or compromise their independence in any manner. ‘Non-audit services' include:
- accounting and book-keeping services;
- internal audit;
- design and implementation of a financial information system;
- actuarial services;
- investment advisory services;
- investment banking services;
- rendering of outsourced financial services;
- management services; and
- any other kinds of services as may be prescribed.
11.3 Are there any rules or recommendations which cap the remuneration of an auditor as regards payment for the provision of non-audit services?
The auditors of a company are prohibited from providing non-audit services.
12 Trends and predictions
12.1 How would you describe the current corporate governance landscape and prevailing trends in your jurisdiction?
India's corporate governance landscape is dynamic and evolving, in line with the international scenario. In particular, the following trends are worth highlighting.
Executive compensation: The quantum of executive compensation, and in particular the performance-linked component, remains an intriguing issue. Especially following the COVID-19 pandemic, several companies have considered clawing back a certain percentage of compensation. There has also been a call to disclose certain provisions – such as severance pay-outs, non-compete fees and golden parachute provisions – which are usually found in the employment agreements of key managerial personnel.
Chairman emeritus: In a major and eminent corporate tussle, an interesting issue arose regarding the role and extent of influence exerted by persons occupying honorary positions on the boards of companies, and a need was felt to limit the exercise of such power.
Related-party transactions: These are largely perceived as transactions that may not be on arm's-length basis and have gained much importance over the years. When not undertaken in compliance with the law, related-party transactions have the potential to dilute value for the shareholders. Accordingly, corporate India has witnessed numerous instances of shareholder activism, as well as regulatory action where such transactions were undertaken not in the best interests of the company, but in order to perpetrate fraud or for private gain. Related-party transactions therefore strengthen the need for good corporate governance, by either:
- requiring companies to frame suitable policies and implement measures in lieu of transparency and accountability; or
- increasing the responsibility of audit committees to monitor adherence to such policies and measures, as well as the genuineness of such transactions.
Uniform Code of Conduct for Proxy Advisers: The role of proxy advisors has been increasing steadily in India. Therefore, the question of whether a uniform code of conduct is required for all proxy advisers – that is, not only those registered with the Securities and Exchange Board of India (SEBI), but also those that research and release recommendations in relation to companies incorporated and operating in India – has been mooted in academic circles.
Post-pandemic measures: Given the impact of the COVID-19 pandemic on the economy and business in general, boards have been confronted with the practical dilemma of balancing short termism and the focus on quarterly earnings with the long-term goals and sustainability of the company. In the aftermath of the pandemic, there has been a pressing need to preserve shareholder value, while also making some difficult decisions on issues such as:
- the nature of investors that may be brought into the company;
- a focus on environmental, social and governance (ESG) metrics; and
- budget allocations for research and development.
12.2 Are any new developments anticipated in the next 12 months, including any proposed legislative reforms?
Yes, the following developments are anticipated in the coming months.
Independent directors: In March 2021, SEBI issued a consultation paper on the review of regulatory provisions in relation to independent directors. The paper proposes a dual approval mechanism requiring a vote from non-conflicted/disinterested shareholders that would allow the cleansing of any vested interests that promoters may have in the appointment or removal of independent directors. It also considers the grant of stock options to independent directors as part of their compensation package, which is presently prohibited under Indian law.
Accredited investors: While the term ‘accredited investors' has been accepted globally and is understood to encompass informed investors and/or investors of certain financial means, with certain educational qualifications or meeting other defined criteria, India does not formally recognise the concept. SEBI has proposed a framework for the introduction of accredited investors under Indian securities regulation through a consultation paper issued in February 2021.
Business responsibility and sustainability reporting: In its recent board meeting, SEBI decided to introduce an obligation for the country's top 1,000 listed companies on the basis of market capitalisation to submit business responsibility and sustainability reports, with disclosures setting out granular details on climate change risk and the ‘social' element of environmental, social and governance reporting. This move is line with international practice, which is now witnessing a shift in focus from corporate social responsibility to sustainability as an important element of responsibility. This reporting will be voluntary for the financial year 2021–22, but will become mandatory from financial year 2022–23 onwards.
Segregation of the roles of the chairperson of the board and the managing director (MD)/ chief executive officer (CEO) in listed companies: With a view to reducing excessive concentration of authority in a single individual and avoiding conflict of interest, the top 500 listed companies (determined on the basis of market capitalisation) will be required to separate the roles of chairperson and the MD/ CEO, by 1 April 2022. This requirement was earlier slated to come into force from 1 April 2020 onwards, but was deferred for a period of two years.
Shifting from the concept of ‘promoter' to ‘persons in control'/ ‘controlling shareholders': Having regard to the changing investor landscape in India as well as the increased focus on better corporate governance, SEBI recently initiated a consultation process to revisit the concept of promoter in the context of listed companies so as to assess shifting from the concept of promoter to the concept of ‘persons in control' or ‘controlling shareholders'. SEBI has noted that in the recent past, with respect to the top 500 listed entities in terms of market value, the aggregate shareholdings by promoters is showing a downward trend, whereas, the shareholding of institutional investors is on the rise. If these changes in the nature of ownership are not suitably addressed, it could lead to situations wherein persons with no controlling interest and minimal/ minority shareholding will continue to be classified as promoters and continue to exert disproportionate influence over a listed entity, which is not ideal.
Such a change, as and when undertaken, is likely to lead to changes in the regulatory framework across sectors, including the reorientation of enforcement strategies by regulators.
Additionally, SEBI has been considering a review of the ownership and governance norms applicable to stock exchanges and depositories to facilitate the entry and operation of new players in this space.
13 Tips and traps
13.1 What are your top tips for effective corporate governance in your jurisdiction and what potential sticking points would you highlight?
Our top tips for effective corporate governance are as follows:
- Ensure that directors have adequate information: As directors have significant governance responsibilities, they must have reasonable access to all information that is required for them to make informed decisions. To that extent, greater interaction between the management and the board is recommended.
- Encourage shareholder activism and proxy advisory: Activist shareholders and proxy advisers are the most effective tool to improve corporate governance practices. They compel companies to adopt a more transparent approach and thereby increase accountability.
- Monitor performance: While India is incorporating international practices into its corporate law, it is also important to follow this up with periodic performance monitoring to assess how specific certain governance changes are affecting the performance of the company using both financial and non-financial metrics.
Some of the potential sticking points for effective corporate governance include the following:
- Rational apathy: While the Securities and Exchange Board of India is attempting to strengthen the role of non-conflicted and minority shareholders, it is confronted with the persistent problem of the rational apathy of public shareholders, who either are not informed or do not have the qualifications to assess whether a certain decision would be in the best interests of the company. Also, institutional shareholders which are controlled by the government face a large number of bureaucratic hurdles and are generally passive shareholders. Proxy advisory firms and responsible media coverage are on the increase in India and will likely have a positive impact on shareholder involvement.
Co-Authored by Vidhi Shah
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