Corporate Governance in India

• Corporate governance laws and regulations and continuing disclosures provide comfort to foreign investors and tools for shareholders to obtain company information
• Corporate governance norms represent transparency, costs of compliance, and liability for non-compliance
• The study intends assessing the protections afforded to investors by the corporate governance regime and the associated costs of compliance for companies
• Indian corporate governance strengthens standards to meet global requirements, drawing from principles operating in developed markets like the UK and the US

Corporate Governance Development in India

• India's corporate governance development began in the late 1990s, with significant shifts from the Companies Act, 2013
• This represents a recognition of the government's limited role and growing trust in bodies like independent directors
• The Companies Act, 2013 introduced a requirement for companies of a certain size to spend at least 2% of their average net profits on corporate social responsibility (CSR)

Corporate Governance Analysis

• Corporate governance norms are analyzed in the specific context in which they operate, examining the corporate landscape and the evolution and motivations of governance norms

Corporate Structures and Regulation

• The Companies Act, 2013 provides for the following categories of corporate structures:
  • Private companies
  • Public companies
  • Listed companies

Private Companies

• Minimum paid-up capital of Rs. 1,00,000
• Maximum 200 shareholders
• Shares are subject to transfer restrictions
• Cannot offer securities to the public
• Subject to minimal regulation under the Companies Act, 2013

Public Companies

• Public companies are not private companies
• Minimum paid-up capital of Rs. 5,00,000
• A company that is a subsidiary of a public company in India would be deemed to be a public company

Listed Companies

• Subject to additional restrictions and disclosure requirements contained in the listing agreement and the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR Regulations)
• Additional governance requirements may apply to companies in highly regulated sectors like electricity, banking, and financial services

Regulatory Setup

• The regulatory setup depends on the type of company; private and unlisted public companies are governed by the Ministry of Corporate Affairs (MCA) and the Companies Act, 2013
• Listed companies are also within the domain of India's securities regulator, the Securities and Exchange Board of India (SEBI)
• SEBI obtains powers under the Companies Act, 2013; Securities and Exchange Board of India Act, 1992; and regulations issued by SEBI
• Listed companies are subject to the oversight of stock exchanges and the Securities Contracts (Regulation) Act, 1956

Corporate Law Reform

• In recent years, corporate law in India has undergone significant reform and continues to be in a state of transition, with the Companies Act, 2013, becoming partially effective
• The provisions of the Listing Agreement are subsumed into the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations,2015 ( the LODR Regulations), effective December 2015

Corporate Landscape

• Historically the concept of corporate governance addresses the agency problems between managers, who are the agents, and the shareholders, who are the principal
• The applicable corporate governance regime establishes monitoring mechanisms, including independent directors, audit committee oversight, and CEO and CFO certification

Indian Company Ownership

• Indian ownership patterns include concentrated shareholding even in listed companies, where a dominant stake is held by a single shareholder or group
• The remaining shareholding is diffused among institutions and retail investors
• Promoter shareholding in Indian companies averaged 48% to 55% in the last 15 years
• In companies with concentrated shareholding, promoters determine the composition of the board and nominate senior management

Corporate Governance Norms

• Corporate governance norms evolved in the context of a modern corporation where ownership is separated from management, primarily displayed by companies in the US and the UK
• Indian companies display ownership patterns that are consistent with the rest of the world
• A few Indian companies have transformed themselves from controlled ownership structures to dispersed structures through constant dilution of equity

Evolution of Corporate Governance Norms

• Company law has been the source of corporate governance norms since India's independence in 1947, with the primary statute being the Companies Act, 1956
• Prior to India's economic liberalization in 1991, the governance structures were opaque
• The new era of corporate governance in India began with the establishment of SEBI in 1992
• In 1998, a code for “Desirable Corporate Governance” was embraced by a few leading Indian companies
• A committee chaired by Mr. Kumar Mangalam Birla was appointed to raise governance standards in listed companies
• Certain corporate governance norms were imposed on listed companies as a mandatory matter, which resulted in the introduction of Clause 49 into the Listing Agreement

Corporate Governance Today

• Clause 49 became mandatorily applicable to listed companies (barring very small companies) as well as those seeking listing on a stock exchange
• Efforts were underway to revamp the Companies Act, 1956 by replacing it with new legislation
• A committee was appointed under the chairmanship of Mr. J.J. Irani to review company legislation
• The Companies Act, 2013 was passed by both Houses of Parliament and received the assent of the President of India on August 31, 2013

The Board of Directors

• The Board of Directors oversees the business and management of a company and is governed by the Companies Act, 2013 and the LODR Regulations
• These matters include composition, independence, duties, and liabilities of directors

Board Composition

• Every public company must have a minimum of three directors, while a private company must have a minimum of two
• A company shall have a maximum of fifteen directors; can be increased with special resolution by shareholders
• At least one director must be a resident in India for at least 182 days in the previous calendar year
• A company must have an optimum combination of executive and non-executive directors; listed companies must have at least half of the Board comprising non-executive directors

Other Director Requirements

• Matters pertaining to Board independence have acquired substantial importance in India, both with listed companies and large unlisted companies
• Gender diversity on Indian corporate boards has been introduced through statute; the MCA requires certain companies to have at least one woman director
• Small shareholders of a company have the right to appoint a director

Appointing a Director

• Investors who seek to appoint a director on the Board of an Indian company should be aware of certain aspects relating to the appointment and removal of directors and their qualifications
• The Companies Act and accompanying rules contain this information

Other Requirements

• Directors must fulfill administrative requirements like having a Director Identification Number (DIN)
• A list of circumstances where a person may be disqualified from being appointed a director exists
• Recent corporate law reforms in India have placed significant emphasis on independent directors

Independent Directors

• The Companies Act, 2013 and the LODR Regulations provide the roles, responsibilities, and liabilities of independent directors
• Certain classes of unlisted public companies and all listed companies must have a minimum number of independent directors
• The LODR Regulations has a more onerous requirement depending upon the status of the chairperson; where the chairperson of the Board is a non-executive director, at least one-third of the Board should comprise independent directors

Regulations

• If the company does not have a regular non-executive chairperson, or if the regular non-executive chairperson is a promoter or related to a promoter, at least half of the Board should comprise independent directors
• The LODR Regulations also requires one independent director on a listed company's board to be a director on the board of a material non-listed Indian subsidiary company
• The definition of an independent director acquires considerable importance in the context of Board independence, with reference to criteria defined in the Companies Act

Nomination

• the Central Government may designate one or more agencies to create and maintain a databank of persons eligible and willing to act as independent directors
• Companies can access appropriate individuals to take up the role of independent directors on their boards

Nr Committee

• The Companies Act, 2013 introduced a mandatory requirement of a Nomination and Remuneration Committee (NR Committee) for the appointment of all directors
• The NR Committee’s role extends to setting criteria for qualifications, positive attributes, and independence, and assessment of individuals to appointment

Director Tenure

• To ensure that elongated periods of familiarity do not impinge upon the independence and monitoring role of independent directors, the Companies Act, 2013 introduced tenure requirements
• The independent director can serve on a company for a term of five consecutive years, although the director may be reappointed for another similar term through a special resolution
• Independent directors can serve on the boards of no more than seven listed companies
• The Companies Act, 2013 contains a list of roles and duties of Independent directors

Independent Conduct

• Independent directors are required to safeguard the interests of all stakeholders, balance conflicts among stakeholders, and act as a moderator in cases of conflicts
• They also perform strategic advisory and monitoring roles

The Code for Independent Directors

• Set guidelines for professional conduct- uphold ethical standards of integrity and probity, act objectively and constructively, exercise responsibilities in a bona fide manner, devote sufficient time and attention, not abuse the position to the detriment of the company, and assist the company in implementing governance practices
• Roles and Functions: help in bringing an independent judgment to bear on the Board's deliberations
• Duties include- objectively evaluate the performance of the board and management, verify the integrity of the financial information, controls and risk management systems, and determine appropriate levels of remuneration of directors and senior management
• The manner of appointing one is to ensure appropriate balance of skills, experience and knowledge on the board

Additional Independent Codes

• Follow a letter of appointment to be finalized; detail terms prescribe and be transparent
• To be on basis of performance evaluation for Reappointment
• Separate meetings entail that the position of an independent director who resigns or is removed shall be replaced by another independent director.
• The independent director should be evaluated to be carried out by the entire board; extension of term depends on the performance evaluation

Board independence

• The more skilled and reputed directors may lack the motivation to act as independent directors which impact Board quality

Directors Duties and Liabilities

• The Companies Act, 2013 clarifies, redefines and enlarges the ambit of directors' duties and liabilities.
• Relates to codification of directors' duties, the constituencies that are the beneficiaries
• There were insignificant guidance of company law as regards their duties and liabilities

Director Actions

• To act in accordance with the articles of association of the company
• To act in good faith to promote the objects of the company;
• To act in the best interests of the company, its employees, the shareholders, the community and for the protection of the environment
• To exercise duties with due and reasonable care, skill and diligence and to exercise independent judgment;
• To not be involved in a situation of direct or indirect conflict with the interests of the company
• To not achieve any undue gain or advantage

Classification of Duties

• duty of care, skill and diligence
• fiduciary duties entail devoting time and attention, pursue through red flags to not expose the company to unnecessary risk.
• Fiduciary Duties put interest of the company over personal interests

Liabilities

• Directors are exposed to liabilities as a consequence of a breach of their duties.
• Liabilities may arise under various statutes, focus is on arising under company law that are statutory in nature.
• Penalties for any contravened section(s) 1 lake to 5 lakes

Other Liabilities

• Could arise from claims made against the directors
• These claims are robust in theory, but are riddled with tremendous difficulties in practice
• Difficulties (on the procedural count) under the pre-existing law, the Companies Act, 2013 institutes mechanisms that are novel in the Indian context.
• a class action mechanism that allows a group of shareholders (constituting a minimum of 100 shareholders or those holding 10% shares in the company) to bring an action on behalf of all affected parties

Mitigating Factors for Severity

• softening due to factors that create a specific safe harbor provision for independent directors.
• Independent director is liable only in respect of commission by a company which had occurred with his knowledge, board processes, and diligently.
• Obtains Indemnities from the company.
• Practice of obtaining directors' and officers' (D&O) insurance has become prevalent Indian companies, among the larger ones,

Board Proceeding Details

• Expansive liability regime is in the view of growing, in fact are available to expand abilities of company- implicitly recognize the company to incur the premium expense/to obtain D&O insurance policies.
• Mitigating factors should encourage servicing the company.
• Carefully assess the time and effort in expended boards.
• Every company should hold meeting in directors in 30 days after formation, next for year, the board must hold at least four meetings gap should be 120 from 2M

Board Meeting Structure

• There can be director meetings in person or video conference as long as participants can be recognized, rules spelled out how video conferencing works
• Directors are also able to pass Resolutions by circulation supporting papers draft

Board Power

• The board can exercise certain power
• Making calls on shareholders of money unpaid shares/Buybacks/Issuing Securities/Borrows/Investment/Dividing business

Executive Compensation

• Flurry of excessive compensation in global financial crisis.
• correlation between/of pay VS performance has been called into question in some companies, had considerably tight restrictions,
• Pay has not only been subject to regulatory caps, but some payments are also required in shareholders approval, safety in terms to say

Quantum of Remuneration

• Caps that caps senior position personnel-are somewhat complex, but Summarized below
• Remuneration may exceed such caps only through shareholder resolutions, approval of central gov
• Schedule (for managing total all director remuneration) is capped at 11% net profits

Non-Executive Duties

• Have been capped at either 1%. Managing or whole time director, and 3% if no manager managing
• A director who receives remuneration in contravention of the receive company, keep refund.
• Contravention of fine, if statements due to fraud company shall excess payments from manager

Approvals and Reporting

• Compensation policy, have a remuneration (nomination) committee of non executive, with at least half as independent
• Reasonableness to attract, levels sufficient to, and be able to retain quality required.

Regulations with Nominations

• Relation with performance being clear
• Key personnel need to incentive on, balance fix, and reflect term goals.

Detailed Regulatory Obligations

• Enhanced disclosure requirements MCA, elements of directors summaries etc
• Contract/ severance Notice periods

Tata Motors Study

• Required special approvals for executives to exceed profit.
• Required special shareholder resolution for 75% vote approving, management failed to obtain support, 65.4% opposed
• signals that payments of executive compensation isn't for companies
• shareholders become active if decisions accentuate problem

Auditors and Audit Committee

• Apart from the Board of Directors, the auditors provide another layer of oversight
• Auditors must be chartered accountants, which subjects them to regulation
• The general provisions regarding auditor independence are contained in the Companies Act.

Other auditor regulations

• the 2013 legislation provides for matters that would limit their relationship
• Provides for rotation/ from not providing services
• as Board Committee responsible for the accounts and audit function
• Act 2013 and regulations international recognized standards

Auditors

• Every company is required to appoint an auditor at its first annual general meeting
• The Board or Audit Committee needs qualification with requirements

Additional Auditor Info

• Certain accounts and other classes company individual not appoint more than 1x 5yr.
• The auditor firm can't for 2x5Y
• Partner must be rotated appropriate intervals
• Has right to remove by company or resign

Audit Regulations

• Duty of shareholders as entitled vouchers of account

Audit committee details

• The audit cannot contact discover at will, several def- not conduct discovery
• Auditor has regulatory domain
• the crucial mechanism corporate governance receive create able shareholder to enable appropriate investment

Every Listing company is required an audited

• A limited 20% cap or more. turnover. over fifty corer

Required Committee

• With a least 3, Independent must have a two thirds
• has ability understand financial statements
• A chairman to answer inquiries
• The committee recommendations act, the auditing and monitoring
• Protect report/transactions

Audit role

• Administration of vigilance
• mechanism enable employee a ethic
• the authority the chair exception in events

Related party transactions

• Related party transactions, enter-company parties such the hold
• Trans in sharing is the common and can increase the transferring it.

Audit Regulations

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Share Holder Particpations

• the most majority in for those of type transactions
• transactions this to has the approval
• certain by auditor

Regulatory reforms toward greater participation

• The faculty system, permits to post to or to person
• The shareholders better and to try and have a vote given with code voting

Regulations

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