ICLG - Corporate Governance Laws and Regulations - India Chapter covers common issues in corporate governance laws and regulations – including in management bodies, shareholders & other stakeholders, transparency & reporting, and corporate social responsibility.
1.1 What are the main corporate entities to be discussed?
This chapter will focus on public limited companies incorporated under the (Indian) Companies Act, 2013 (“Companies Act”), which have their equity shares listed on the Indian stock exchange(s). The information below will also be applicable to Indian listed companies whose depository receipts (issued on the back of shares) are traded on an overseas stock exchange under the status of a “foreign private issuer” and which are subject to the laws of their home state of incorporation.
1.2 What are the main legislative, regulatory and other sources regulating corporate governance practices?
The corporate governance practices of Indian listed companies are driven by a combination of mandatory requirements, voluntary guidelines and market forces. Illustratively, five governance regulations that are unique to India include the mandatory requirements for board evaluation, rotation of auditors, corporate social responsibility (“CSR”) spend, one female director and one-third independent directors (“IDs”) and disclosure of dividend policy by the top 1,000 companies. Further, regulation of transactions involving a “promoter” and “related party” are spotlighted to drive distinct governance considerations for Indian listed companies.
At the core, the Companies Act is the governing legislation and regulates, inter alia, the constitution of the Board of Directors (“Board”) and committees, their powers and responsibilities, rights of shareholders, annual and event-based disclosures, audit and financial statements, and prosecution procedures. The nodal authority under the Companies Act, the Ministry of Corporate Affairs (“MCA”), issues rules, circulars and guidelines. Notably, in 2019, the MCA released the National Guidelines for Responsible Business Conduct (“NGRBC”), which sought to adopt the Gandhian principle of trusteeship into the core responsibility of business to society and is aimed at nudging businesses to contribute towards wider development goals while seeking to maximise their profits. Additionally, listed companies in India are regulated by the Securities and Exchange Board of India (“SEBI”) and are subject to the regulations, rules and circulars issued by it.
Specifically for corporate governance, the primary regulations are the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“LODR Regulations”), which impose a range of substantive requirements on listed companies, including compliance with the principles governing disclosures and other obligations of listed companies, the rights of shareholders including special rights of minority shareholders and the responsibilities of the Board. Further, certain industry-specific regulators, such as the Reserve Bank of India (“RBI”) and the Insurance Regulatory and Development Authority of India (“IRDAI”), also prescribe governance norms, as some entities such as banks, insurance companies, stock exchanges, etc., have stricter governance norms. In its report on ‘Trend and Progress of banking in India 2022–23’, the RBI had recognised the need for the banking sector to strengthen corporate governance and risk management practices to build resilience in an increasingly dynamic and uncertain economic environment and issued instructions on Chairperson and Board meetings, composition of certain committees of the Board, age, tenure and remuneration of directors and appointment of whole-time director (“WTD”) for, inter alia, private banks. Similarly, in January 2021, SEBI had also issued a discussion paper on a review of governance and other related matters for stock exchanges to boost their corporate governance practices, and to facilitate better decision-making and risk management.
The consequences of director liability under various penal statutes such as, inter alia, labour and environmental legislations, the Insolvency and Bankruptcy Code, 2016 (“Bankruptcy Code”) and the Prevention of Money Laundering Act, 2002, also drive corporate governance practices of companies.
Corporate governance practices of Indian listed companies are also nudged by market forces, such as investor expectations, proxy advisor voting guidelines and recommendations, governance scorecard criteria and international best practices that are voluntarily adopted by Boards to unlock governance premium to share value. Recent trends of increased institutional ownership and increased participation of shareholders has also pushed Boards to consider good governance practices more closely.
1.3 What are the current topical issues, developments, trends and challenges in corporate governance?
Change has been the constant as far as corporate governance norms go in India. Over the last decade, India has seen multiple iterations of the roles and responsibilities of the Board through amendments and restatements of regulations and laws, mandatory business responsibility and sustainable reporting requirements, increased market awareness and expectations, proxy advisors, hyperactive business journalism and social media. This has moved the Environment, Social and Governance (“ESG”) debate into mainstream Board agendas. Key areas that are currently occupying the mind space of regulators, Boards and managements in India are:
1.4 What are the current perspectives in this jurisdiction regarding the risks of short-termism and the importance of promoting sustainable value creation over the long-term?
In line with international markets, given the global outlook of domestic and international investors, Indian companies also face the pressures of quarterly earnings and the resultant effects of short-termism. However, there is a strong counterbalance that is presented through the structural ethos of being a predominantly family-controlled business environment where the inter-generational “promoter” mind-set allows for long-termism and sustainability to be part of the core decision-making methodology. There is also a slow change that can be seen in the attitude of institutional investors, from focusing only on financial performance to engaging with Boards on issues like transparency and disclosure, diversity, climate change, ESG and long-termism, due to the changing regulatory requirements for institutions to take up an active stewardship role.
The regulatory push for long-termism and sustainable business practices is also clear from the collective requirements of mandating a wholesome Board composition, making risk management a core responsibility of the Board, requiring active engagement with investors and disclosure of long-term and medium-term strategies. Since companies were forced to shift from a growth to a survival mindset amidst the current COVID-19 crisis, the long-term versus short-term nuance has also seen some active consideration by Boards and stakeholders.
2.1 What rights and powers do shareholders have in the strategic direction, operation or management of the corporate entity/entities in which they are invested?
Under the Companies Act, the day-to-day operations and management of a company is vested in the managing director (“MD”), under overall supervision of the Board. Often, controlling shareholders also hold management/Board positions in the company and exercise powers over its strategic direction.
For material matters, the law requires the shareholders to approve the relevant corporate action by way of an ordinary (simple majority) or special resolution (where votes in favour of the resolution is not less than three times the number of the votes, if any, cast against the resolution). Through a simple majority, shareholders can appoint or remove directors from the Board, except for IDs where the appointment and removal of whom requires a special resolution of the shareholders. The shareholders, through the Board, resultantly influence strategic decisions of the company. Amendments to charter documents, entering into a new line of business, a scheme for compromise or arrangement, sale of shares in a material subsidiary, etc., are subject to the approval of shareholders by way of a special resolution. In addition to these rights rooted in shareholder democracy, the law requires material related party transactions (“RPTs”) to be approved by shareholders who are not related parties to the company.
2.2 What responsibilities, if any, do shareholders have with regard to the corporate governance of the corporate entity/entities in which they are invested?
The Companies Act and the LODR Regulations do not per se impose responsibilities/obligations on shareholders for the corporate governance of the company, whether in the nature of fiduciary responsibilities of shareholders or otherwise. However, where a shareholder exercises a high degree of influence over the Board to be a “person in accordance with whose advice, directions or instructions the Board of Directors of the company is accustomed to act”, such shareholder would become an “officer in default” and carry the responsibilities and liabilities attached to such officer in default under the Companies Act. Institutional shareholders are increasingly carrying independent responsibilities for the governance of their investee companies, on account of responsibilities under their respective stewardship codes. Additionally, SEBI has recently imposed the requirement for periodic shareholders’ approval for any special rights granted to shareholders of a listed entity to address the issues of perpetuity of special rights.
2.3 What kinds of shareholder meetings are commonly held and what rights do shareholders have with regard to such meetings?
The Companies Act prescribes three kinds of shareholders’ meetings: AGMs; EGMs; and meetings convened by the NCLT. The law also provides that shareholders’ approval may be solicited through postal ballot (mandatory in certain cases). Since the COVID-19 pandemic, the MCA has also notified the rules pertaining to virtual AGMs and EGMs and provided certain other relaxations, on a temporary basis, which has currently been extended until September 30, 2024.
Every company is required to hold an AGM for conducting mandatory items of business, including the adoption of financial statements, rotation of directors, approval of (re)appointment of auditors, and declaration of dividend. For the top 100 listed companies, such AGMs are required to be held within a period of five months from the date of closing of the financial year, and they are required to live webcast the proceedings of the AGM. The Board may, whenever it deems fit, call an EGM to seek shareholders’ approval on corporate actions. The Board is also required to convene an EGM on the requisition of shareholders holding no less than 10% of the share capital. If the Board does not convene the meeting within a certain period, the requisitioners can convene the meeting themselves. This provision has been used in the recent past by certain shareholders for the removal of directors of listed companies.
A company is required to give 21 days’ notice (30 days in case of postal ballot) in writing for a shareholders’ meeting (unless the written consent of the shareholders holding at least 95% of the share capital is received for a shorter notice). Further, the company is required to, inter alia: provide sufficient and timely information concerning the date, location and agenda of the meeting; ensure equitable treatment vis-à-vis other shareholders; and protect and facilitate the exercise of right of shareholders to be informed of the rules, including voting procedures that govern the meetings and make disclosures of the proceedings to the stock exchanges. Shareholders of the company are entitled to attend meetings in person or through a duly authorised proxy, to ask questions, and to exercise their vote.
2.4 Do shareholders owe any duties to the corporate entity/entities or to other shareholders in the corporate entity/entities and can shareholders be liable for acts or omissions of the corporate entity/entities? Are there any stewardship principles or laws regulating the conduct of shareholders with respect to the corporate entities in which they are invested?
A company is typically seen as a distinct legal entity from the shareholders, and shareholders cannot be held liable for acts or omissions of the company or any other shareholder. However, as in many jurisdictions, courts in India have also lifted the “corporate veil” and imposed liability on shareholders where elements of fraud are found.
There are no statutory duties of shareholders with respect to the corporate entities, except in relation to certain disclosures (e.g. on acquisition of shares, and when such shareholder is a “related party”). However, shareholders who are “promoters” may be subject to certain distinct duties that emanate either from practices developed over time (for instance, promoter guarantees) or under law. Under law, promoters are subject to duties such as “lock-in” requirements after a capital issue or exit offer in the event of change in objects for which a company has raised money by way of public issuance, or from certain specific industry-/sector-driven requirements (for instance, the RBI has prescribed limits of promoter or promoter group shareholding in private sector banks in the interest of promoting diversified ownership of banks to enhance corporate governance). Please also see our response to question 2.2 above.
2.5 Can shareholders seek enforcement action against the corporate entity/entities and/or members of the management body?
Any shareholder can request the Registrar of Companies or the MCA to initiate an investigation into the affairs of the company for sufficient cause. The shareholder body (pursuant to a special resolution) can also require the company to intimate the Central Government for investigating the company. Shareholders may file complaints with SEBI, which complaints are typically captured by SEBI’s SCORES portal and shared with the companies, and such companies are required to take actions to resolve the issue within 21 calendar days and upload the actions taken on its website.
Additionally, the prescribed number of shareholders can file an application before the NCLT with evidence showing that they have good reason to believe that the affairs of the company ought to be investigated. Where the prescribed number of shareholders believe that the affairs of the company have been or are being conducted in a manner prejudicial to public interest, oppressive to such member or any other member(s) or prejudicial to the interest of the company, they may seek relief from the NCLT. Shareholders meeting the prescribed thresholds also have the remedy of filing a class action suit seeking damages/compensation against the company, its directors, auditors (firm and partners) or experts, consultants, advisors, etc. for fraud, unlawful or wrongful acts and for omissions. The rules enabling class actions suits have been notified recently and the jurisprudence around shareholder class actions is yet to evolve in India.
2.6 Are there any limitations on, or disclosures required, in relation to the interests in securities held by shareholders in the corporate entity/entities?
Every listed company (with the exception of public sector undertakings) is required to maintain a minimum public shareholding of 25%. Accordingly, promoters/controlling shareholders are restricted from holding more than 75% of the share capital (other than in very limited instances where there is a requirement to bring down the holding to 75% through specified means within prescribed timeframes). There are also restrictions on foreign shareholding of Indian companies in certain restricted sectors such as insurance, airlines, real estate, defence, etc.
Where an acquirer, together with its persons acting in concert, acquires 25% or more of a listed company and/or control (direct/indirect), it is required to make a mandatory tender offer to acquire at least 26% of the target company from the existing shareholders under the SEBI (Substantial Acquisitions and Takeovers) Regulations, 2011 (“Takeover Regulations”). A mandatory tender offer is also attracted where an acquirer (together with its persons acting in concert) holding between 25% and 75% acquires more than 5% of the target company in any given financial year. There are certain exceptions provided under the Takeover Regulations, exempting certain specific transactions from the requirement of mandatory tender offer.
Further, under the Takeover Regulations and the SEBI (Prohibition of Insider Trading) Regulations, 2015 (“Insider Trading Regulations”), shareholders are mandated to disclose the details of changes in shareholding in excess of prescribed thresholds.
Additionally, by virtue of an amendment to the LODR Regulations in June 2023, agreements to which certain covered persons are parties (i.e. shareholders, promoters, promoter group entities, related parties, directors, key managerial personnel and employees of a listed entity or of its holding, subsidiary and associate company) are now disclosable, if they directly, indirectly, actually or potentially: (i) impact the management or control of the listed entity; or (ii) impose any restriction or create any liability upon the listed entity. Such agreements are also disclosable if they have the purpose and effect outlined above, regardless of their actual or potential impact. Agreements creating obligation on parties to ensure that the listed entity shall or shall not act in a particular manner are also disclosable. The above disclosure obligations apply regardless of whether the listed entity is a party to such agreements.
2.7 Are there any disclosures required with respect to the intentions, plans or proposals of shareholders with respect to the corporate entity/entities in which they are invested?
The Takeover Regulations require that the acquisition or agreement to acquire more than 25% of the shares/voting rights or control of a listed company be subject to a mandatory tender offer obligation, as well as detailed disclosure obligations in the tender offer documents. A mere intention/plan/proposal of a shareholder that is unilateral in nature and not the subject matter of a binding arrangement may not attract the tender offer and disclosure obligations under the law. The disclosure obligations pertaining to shareholding (for instance, under the Takeover Regulations and the Insider Trading Regulations) get triggered upon acquisition of shares/voting rights or control of the listed company, or creation of encumbrance over their holding. Moreover, in case of, inter se, transfer of shares of a listed company between immediate relatives, the promoter/promoter group or a person acting in concert, the acquirer is required to give prior intimation of four working days prior to the date of the proposed acquisition. Additionally, the impact of the recent SEBI move (set out in detail in question 1.3 above) requiring top 100 listed entities to verify, confirm, deny or clarify market rumours with effect from June 1, 2024 on fund raisings, mergers and acquisition in the listed space, is yet to be seen.
2.8 What is the role of shareholder activism in this jurisdiction and is shareholder activism regulated?
There is no specific regulation of “shareholder activism” in India. On account of regulatory changes in the last decade with respect to e-voting and the exclusion of related party shareholders from voting on resolutions for RPTs, the ability and the actual exercise of activist shareholders’ influence on corporate decision-making is, however, palpably higher.
Virtual AGMs and EGMs in India, due to the COVID-19 pandemic, have led to an increase in shareholder opportunities to participate in the meetings owing to increased accessibility.
Proxy advisory firms, who have become a pillar of the securities market infrastructure, keep a close watch on corporate actions and provide considered opinions that are highly regarded by the investor community. There is also the effect of increased scrutiny, media coverage and social media bringing growing expectations from companies.
Institutional and retail shareholders have, in the recent past, made proactive efforts to direct the companies to take or refrain from taking actions, or to change or comply with its governance rules. A noteworthy instance in this regard is when an institutional investor has taken the Board of a company to NCLT for removal of the MD and appointment of an ID and EGMs have been called by minority shareholders to flag corporate governance issues.
3.1 Who manages the corporate entity/entities and how?
The Board, appointed by the shareholders, is entrusted with the duty of managing the company in accordance with applicable laws and the fiduciary responsibility to promote the object of the company and act in the best interest of the company, its employees, the shareholders, the community and protection of the environment. The day-to-day management of the company is vested in the MD and other key management personnel (“KMP”), such as the chief financial officer and the company secretary, under the supervision of the Board.
The Board is required to have an optimum combination of executive directors and non-executive directors (“NEDs”), with at least one female director (for a listed company). Where the Chairperson is a NED and not a promoter, or not related to the promoter or anyone occupying a management position, the law requires the Board to comprise a minimum of one-third IDs. Otherwise, at least half of the Board would have to be independent.
Moreover, certain listed companies (top 500 companies) were required to have a non-executive Chairperson (unrelated to the MD/CEO/promoter), with effect from April 1, 2022 (deferred from the earlier implementation date of April 1, 2020); however, SEBI vide its Board Meeting (PR No. 6/2022) dated February 15, 2022 decided that the provision mandating separation of the role of Chairperson and MD/CEO of listed companies be made applicable to listed entities on a “voluntary basis” due to the abysmal incremental improvement in compliance by the top 500 companies in the past two years. Further, the Boards are required to constitute an Audit Committee, Nomination and Remuneration Committee (“NRC”) and the Stakeholders Relationship Committee. The top 1,000 listed companies are also required to have a Risk Management Committee (“RMC”).
3.2 How are members of the management body appointed and removed?
The process of appointment and removal of directors and KMP is primarily governed by the Companies Act. The NRC is required to identify persons who are qualified to become directors and who may be appointed as senior management and make a suitable recommendation to the Board. The Board appoints the directors and the KMP. The directors’ appointment is required to be confirmed by the shareholders. By the amendment notified on January 24, 2022 (SEBI (Listing Obligations and Disclosure Requirements) (Amendment) Regulations 2022), SEBI has notified stricter norms for the appointment of candidates (including the MD or WTD) who were earlier rejected by shareholders at a general meeting. Following the amendment, the appointment/re-appointment of an earlier rejected candidate can only be done with prior approval of the shareholders. Further, LODR Regulations require a cool-off period of one year in case of an independent director who resigns from a listed entity to be appointed as an executive/whole time director on the Board of the listed entity, its holding, subsidiary or associate company or on the Board of a company belonging to its promoter group. Certain entities operating in specific sectors may require the approval of the regulator for the appointment of directors. For instance, certain banks require the approval of the RBI, prior to the appointment of an MD/CEO/Chairperson.
The shareholders have the power to remove a director (not being a director appointed by the NCLT), by giving such director a reasonable opportunity of being heard. Such a power has been upheld by the NCLT, in various matters, where removal of a director from directorship was held not to be an illegal or oppressive act under Sections 241–242 of the Companies Act. Apart from removal, the office of the director may be vacated/become vacant on certain grounds, including where the director suffers a disqualification under law.
Any change in the Board or KMP attracts immediate disclosure obligations under the LODR Regulations.
3.3 What are the main legislative, regulatory and other sources impacting on compensation and remuneration of members of the management body?
The law imposes statutory restrictions on the amount of remuneration that can be paid to the directors without obtaining shareholders’ approval. However, there are no restrictions on the remuneration payable to the members of management who are not directors. The NRC has the responsibility to formulate the criteria for determining remuneration, and is obligated to ensure that the remuneration payable to directors, KMPs and senior management involves a balance between fixed and incentive pay reflecting short-term performance objectives appropriate to the working of the company and its goals.
The Companies Act mandates that the total remuneration payable by a public company to its directors, including the MD, WTD and managers, cannot exceed 11% of the net profits of the company unless otherwise determined by the shareholders of the company. Within this limit, except with the approval of the shareholders by a special resolution, the remuneration payable to any MD, WTD or manager cannot exceed more than 5% of the net profits and, where there are more than one of such directors or managers, the remuneration payable to all such directors and managers must not exceed 10% of the net profits. The LODR Regulations require companies to obtain shareholders’ approval if the remuneration payable to one executive director who is also a promoter exceeds the higher of 2.5% of the net profits, or INR 5 million or 5% of the net profits where there is more than one such director.
In case of NEDs, shareholders’ approval by way of special resolution is required if the total remuneration to be paid to all NEDs together exceeds 1% of the net profits of the company, where the company has an MD, WTD or manager, or 3% otherwise. Additionally, the shareholders’ approval by way of special resolution is required if the remuneration payable to one NED exceeds 50% of the remuneration payable to all other NEDs. IDs can only be paid commission and sitting fees. The earlier restrictions on the payment of remuneration to NEDs and IDs have undergone a change, whereby NEDs and IDs may be paid remuneration despite the company having no or inadequate profit, subject to specific thresholds.
SEBI announced the SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021 on August 13, 2021. With the amendments, now share-based benefit schemes can also be provided to directors of group companies; thus, a director may not only receive share-based benefit schemes from the company but will also be eligible to benefits from its group companies.
The law imposes strict disclosure requirements on a company with respect to director and executive compensation. All listed companies must annually disclose the ratio of median employee remuneration and increase in percentage of remuneration for each director, CEO, company secretary or manager. The LODR Regulations require listed companies to disclose information on remuneration of senior officials just below the level of the Board.
3.4 What are the limitations on, and what disclosure is required in relation to, interests in securities held by members of the management body in the corporate entity/entities?
Please see our response to question 2.6 above. In addition, the Companies Act requires a director to make the following disclosures: (i) concern or interest including shareholding in any company or body corporate, firms or other association of individuals (including any change thereto); and (ii) the nature of the interest; and recuse from any discussion and voting, if the company proposes to enter into a contract or arrangement with a body corporate where one or more directors has more than 2% shareholding or is a promoter, manager or CEO of that body corporate. Additionally, under the Insider Trading Regulations, directors, promoters and promoter groups of a listed entity are mandated to disclose the details of changes in their respective shareholding in excess of prescribed thresholds.
3.5 What is the process for meetings of members of the management body?
Every company is required to have at least four meetings of the Board in a year, with no more than 120 days intervening between two meetings. The quorum for meetings of the Board of the top 1,000 listed companies, since April 1, 2019, and the top 2,000 listed companies with effect from April 1, 2020, has been set as one-third of the Board or three directors, whichever is higher, including one ID. The Code of Independent Directors under the Companies Act requires the IDs to hold at least one meeting in a year, without the attendance of other directors and members of management. Due to the COVID-19 pandemic, since March 2020, the MCA permitted holding of EGMs through video conferencing or other audio-visual means. This relaxation has been extended until September 30, 2024, vide a recent circular dated September 25, 2023.
A prior notice of the Board meeting, along with an agenda (and description of the matters proposed in the agenda along with relevant documents) is required to be provided to every director. The notice should be given at least seven days prior to the meeting, provided that meetings can be held at a shorter notice to transact urgent business, if the same is approved by the requisite number of directors, or at least one ID, if any, is present at such meeting. Where the ID is not present at the meeting, the decision taken will have to be circulated to all directors for ratification and will become final only after ratification by at least one ID. The details of the meetings, including the resolutions passed and the discussions/dissent, are required to be documented in the minutes book maintained by the Board.
3.6 What are the principal general legal duties and liabilities of members of the management body?
The Companies Act codifies the duties of a director. The positive duties include to act in good faith, and to promote the objects of the company in the best interest of the company, its employees, shareholders, community and the protection of the environment. These duties must be exercised with due and reasonable care, skill and diligence and after application of independent judgment. The negative covenants prohibit a director from being involved in a conflict of interest situation, assign her office, or achieve an undue gain or advantage for herself, her relatives, partners or associates.
The Board carries several statutory duties, including the duty to appoint whole time KMPs, devise proper systems to ensure compliance with the provisions of applicable laws, ensure systems are adequate and operating effectively, and ensure that the company is in compliance with CSR obligations. Further, principles laid down under Chapter II of the LODR Regulations prescribe certain additional duties on the Board, which include: (i) monitoring the effectiveness of the governance practices and making changes as needed; (ii) reviewing and guiding corporate strategy, risk policy, annual budgets and business plans, setting performance objectives, monitoring implementation and corporate performance; (iii) selecting, compensating and monitoring KMP, and overseeing succession planning; (iv) ensuring the integrity of the company’s accounting and financial reporting systems; and (v) overseeing the process of disclosure and communications.
If a company commits an offence or is held liable for any non-compliance, liability on its officers, MD, and other directors attaches itself in two ways: (i) directly on an individual who has perpetrated the commission of an offence on behalf of the company can be made an accused, along with the company, if there is sufficient evidence of their active role coupled with criminal intent; and (ii) where the statute itself attracts the doctrine of vicarious liability by specifically providing for such liability. Additionally, the Companies Act also imposes liability on an “officer in default” who is defined to include a director who was aware of a contravention and did not object to the same or where the contravention happened with their consent or connivance, KMP, executive directors, or any person (not acting in a professional capacity) under whose instructions or advice the Board is accustomed to act, etc.
3.7 What are the main specific corporate governance responsibilities/functions of members of the management body and what are perceived to be the key, current challenges for the management body?
Please see our response to questions 1.3 and 3.6 above. The Companies Act also sets out distinct duties of IDs, including bringing an independent judgment to bear on the Board’s deliberations; satisfying themselves on the integrity of financial information; and safeguarding the interests of stakeholders, etc.
3.8 Are indemnities, or insurance, permitted in relation to members of the management body and others?
The Companies Act recognises the right of companies to obtain directors’ and officers’ insurance (“D&O Insurance”), where the premium paid on such insurance is not to be treated as part of remuneration unless such person is proved to be guilty. The LODR Regulations now mandate the top 1,000 listed companies to obtain D&O Insurance for all their IDs, of such quantum and for such risks as may be determined by the Board.
3.9 What is the role of the management body with respect to setting and changing the strategy of the corporate entity/entities?
The management of a company is responsible for setting the strategy of the company under the supervision of the Board. One of the key functions of the Board, as set out in the LODR Regulations, is reviewing and guiding corporate strategy and providing strategic guidance to the company (including the ability to “step back” and challenge the assumptions underlying the strategy, risk appetite, exposure, etc.).
4.1 May the board/management body consider the interests of stakeholders other than shareholders in making decisions? Are there any mandated disclosures or required actions in this regard?
As noted above, under the Companies Act, the directors are duty bound to act in the best interests of the company, its employees, the shareholders, the community and for protection of the environment. Given the statutory status of the five stakeholders who are to be treated at par, directors are required to weigh and balance the trade-offs between the interests of different stakeholders while making decisions.
Under the LODR Regulations, the sphere of stakeholders is broader, in that whilst they are not defined as such, a listed company is mandated to respect the rights of all stakeholders and provide an effective redressal mechanism for any violation of such rights. This is in addition to the specific obligation of ensuring that all stakeholders have access to reliable and adequate information on a timely basis to enable them to participate in the corporate governance process and providing them with an appropriate forum to enable them to freely voice their concerns. Please also see our response to question 4.3 below.
Additionally, the law sets out disclosure, reporting and filing requirements for companies that are both event-based and periodic. Under the Companies Act, these cover all companies (public and private) and most of such filings are available for public viewing in the database of the MCA, for a fee.
Additionally, the reporting requirements prescribed under the LODR Regulations apply to listed companies and all such information is available in the public domain (including on the company’s website). For details on the kind of information required to be disclosed, please see our response to question 5.2 below.
4.2 What, if any, is the role of employees in corporate governance?
Employees are an identified class of stakeholders to whom the directors owe a fiduciary responsibility under the Companies Act. There are, however, no requirements for mandatory employee representation on the Board. Senior management and KMPs carry various responsibilities that have an implication on the governance of the company, including obligations in respect of “interested” transactions, confirmations that the financial statements present a true and fair view of the affairs of the company, etc.
Listed companies and certain other companies meeting specified thresholds are also required to formulate a vigil mechanism for directors and employees to report genuine concerns. There has been an increase in the utilisation of this whistle-blower mechanism by junior employees (who otherwise may not have had any direct access or voice) to directly report concerns to the Board.
4.3 What, if any, is the role of other stakeholders in corporate governance?
As noted in our response to question 4.1 above, under the Companies Act, directors hold a fiduciary responsibility to non-shareholder constituencies such as employees, the community and to protect the environment. There is no stated hierarchy amongst the different sets of stakeholders as have been statutorily named, and it is expected that the directors duly consider the interests of all stakeholders while determining decisions. However, the Companies Act only recognises shareholders and depositors as classes of persons that can seek compensation/damages for loss caused for failure to perform their duties.
In addition, there are certain other stakeholders recognised through other enactments. Under the Bankruptcy Code, for instance, creditors’ rights have been given statutory status. The courts have, in the recent past, while adjudicating matters concerning fraudulent practices of companies, recognised customers as stakeholders.
4.4 What, if any, is the law, regulation and practice concerning corporate social responsibility and similar ESG-related matters?
Under Indian law, from a director’s fiduciary responsibility standpoint, the environment and shareholders have been placed on par. Section 166 of the Companies Act, which codifies the “Duties of Directors”, sets out that “protection of the environment” is a core stakeholder in whose best interest the directors must act. Also, as discussed above, SEBI introduced BRSR/BRSR Core reporting requirements to enable standardised disclosures on ESG parameters for the benefit of investors. Please also see our response to question 1.3 above.
Further, all companies that meet the prescribed financial threshold are required to establish a CSR committee to oversee the CSR policy and activities. The broad guidelines on what activities constitute as eligible CSR activities, are provided under the Companies Act. At least 2% of the average net profits of eligible companies during the three immediately preceding years are required to be spent on CSR activities in every financial year. Any surplus arising out of the CSR activities will not form part of the business profits of the company. The Board’s report is required to include a report on CSR, in the annual report, containing details of the CSR committee, a brief outline of the CSR policy, prescribed CSR expenditure, the amount spent and unspent, details of the implementing agency, etc.
5.1 Who is responsible for disclosure and transparency and what is the role of audits and auditors in these matters?
One of the key functions of the Board is overseeing the process of disclosure and communications. The Board is required to: ensure that all information that is material is subject to timely disclosure to the stock exchanges; approve the materiality policy; and authorise one or more KMP to determine the materiality of events and make due disclosures. Inadequate, delayed or misleading disclosures can invite regulatory action from the stock exchanges and SEBI.
Auditors are also mandated with obligations on reporting in financial statements as well as fraud, toward better disclosure and transparency. An auditor’s report is required to be attached to every financial statement of the company. As part of the auditor’s report, the auditors are required to seek all information and an explanation that is necessary for the purpose of the audit, and also provide certain confirmations regarding the financial wellbeing of the company, which includes an assessment of whether the company has adequate internal financial controls with reference to financial statements and the operating effectiveness of such controls, and disclosure of any non-compliance or fraud, or include qualifications in the audit report, which will be enclosed in the annual report, that is required to be disclosed to the stock exchanges and on the company’s website. A compliance certificate from either the auditors (or practising company secretaries) regarding the company’s compliance of conditions of corporate governance is also required to be annexed with the Board report.
5.2 What corporate governance-related disclosures are required and are there some disclosures that should be published on websites?
Listed companies are mandatorily required to make disclosures of events or information to the stock exchanges and on the company’s website, which: (i) in the opinion of the Board, are material; (ii) are deemed to be material as per the LODR Regulations; or (iii) are material as per the materiality policy formulated by the listed company. Companies must take into account the following criteria while determining the materiality of the matters to be disclosed: (i) whether the omission of an event or information is likely to result in discontinuity or alteration of an event or information already publicly available; and (ii) whether the omission of an event or information is likely to result in a significant market reaction if the said omission becomes known at a later date.
Additionally, as per the amendments to the LODR Regulations in June 2023, SEBI has introduced qualitative thresholds for determining materiality of events/information and accordingly, listed entities are required to mandatorily disclose events or information whose value or expected impact in terms of value exceeds: (a) 2% of turnover, as per the last audited consolidated financial statements of the listed entity; (b) 2% of net worth, as per the last audited consolidated financial statements of the listed entity, except in case the arithmetic value of the net worth is negative; and (c) 5% of the average of the absolute value of profit or loss after tax, as per the last three audited consolidated financial statements of the listed entity.
Companies are also required to prepare and publish on their websites and submit to the Registrar of Companies an annual report, which, amongst other matters, contains the audited financial statements, a report of the Board, a corporate governance report, management discussions and analysis, etc. The report on corporate governance in a company’s annual report must include, inter alia: a brief statement of the company’s code of governance; the Board, including details of Board committees like the audit committee and nomination and remuneration committee; the remuneration of directors; general shareholder information; and means of communication.
Specifically as regards the disclosures on the website, listed companies are required to maintain a functional website containing (under a separate section) the basic information about the company and mandatory disclosures, such as the annual report including financial statements, Board report, corporate governance report, contact information of the designated officials responsible for assisting and handling investor grievances, and details of establishment of vigil mechanisms, etc. The disclosures of material events or information are required to be hosted on the website for at least five years.
5.3 What are the expectations in this jurisdiction regarding ESG- and sustainability-related reporting and transparency?
Under NGRBC and the BRSR, India has moved toward internationally accepted sustainability reporting frameworks. As stated above in response to question 1.3, SEBI has approved BRSR Core in July 2023, containing a limited set of key performance indicators under each of the ESG attributes/areas, for which listed entities will be required to obtain assurance. Additionally, listed entities are required to make disclosures and obtain assurance as per BRSR Core for their value chain. SEBI has also approved a framework for regulation of ERPs, as well as the procedural/disclosure requirements and obligations applicable to them.
5.4 What are the expectations in this jurisdiction regarding cybersecurity and technology-related reporting and transparency?
SEBI is cognisant that, with rapid technological advancement in the securities market, there is a greater need for maintaining robust cyber security and to have a cyber-resilience framework to protect the integrity of data and guard against breaches of privacy. All listed entities are required to submit a quarterly corporate compliance report that discloses the details of any incidents of cyber security, data loss or breaches. For the top 1000 listed entities, SEBI also mandates formation of RMC, which is tasked with the formulation of a comprehensive risk management policy covering cyber security related risks. The Board of Directors of listed entities are also mandated to define the role and responsibility of the RMC, specifically including cyber security related role.
Additionally, SEBI has prescribed a cyber security and cyber resilience framework for various market participants, such as mutual funds, asset management companies, portfolio managers, stock brokers, depository participants, KYC registration agencies, registrar to an issue, share transfer agents, and market infrastructure institutions such as stock exchanges, clearing corporations and depositories. These broadly include formulation of a cyber security policy, conducting periodic cyber audits, certification requirements from management regarding adequacy of cyber security measures put in place for identification/detection and closure of vulnerabilities in the organisation’s IT systems.
Similarly, other sectoral regulators have also provided cybersecurity frameworks for entities regulated by them. For instance, RBI has prescribed the same for banks including the obligation to report details on information security incidents, including cyber-incidents. RBI’s framework on outsourcing also requires regulated entities to ensure that cyber incidents are reported by the service provider without undue delay, such that the incident can be reported by the regulated entity to the RBI within six hours of detection by the service provider.
Separately, the Indian Computer Emergency Response Team (“CERT-In”) has issued certain directions in relation to cybersecurity obligations upon Indian companies (“Cyber Security Directions”) under Section 70B(6) of the Information Technology Act, 2000 read with the Information Technology (The Indian Computer Emergency Response Team and Manner of Performing Functions and Duties) Rules, 2013. These apply to: (a) computer resources, persons or entities located in India; and (b) actions involving a computer, computer system or computer network location in India. The Cyber Security Directions require all entities in India to appoint a point of contact to liaise with CERT-In, maintain ICT logs for up to 180 days, and report broadly defined “cyber security incidents” to CERT-In (including within as little as six hours from the incident being brought to the notice of the entity). Lastly, the recently enacted Digital Personal Data Protection Act, 2023 (“DPA”) that is yet to come into force, contains certain additional obligations upon ‘data fiduciaries’ to notify personal data breaches to the newly introduced Data Protection Board, as well as any individuals that may be impacted as a result. Significantly higher penalties have also been introduced for failure to comply with the breach reporting obligations in the DPA (up to INR 200 crore).
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