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Sources of corporate governance rules and practices
Primary sources of law, regulation and practice
What are the primary sources of law, regulation and practice relating to corporate governance? Is it mandatory for listed companies to comply with listing rules or do they apply on a ‘comply or explain’ basis?
The concept of corporate governance has gained significance in India with the advent of the Companies Act, 2013 (the Companies Act), which, along with other relevant laws, has put in place strict provisions on governance and penal consequences for non-compliance with these provisions. As a result of this enhanced liability, companies have been taking measures to create a robust compliance system.
The Companies Act, which replaced the erstwhile Companies Act, 1956 on 30 August 2013, and the regulations issued by the Securities and Exchange Board of India (SEBI) are the primary sources of the Indian corporate governance regime. The provisions of the Companies Act have been notified in a phased manner.
The provisions of the Companies Act must be read with rules, notifications, orders, circulars and forms issued under the Companies Act by the Ministry of Corporate Affairs, Government of India (MCA). Unlisted and closely held Indian companies are subject to the corporate governance norms contained in the Companies Act. Schedule IV of the Companies Act contains a code for the professional conduct of independent directors (IDs), which applies to all public listed companies and certain classes of public companies. Compliance with the corporate governance provisions must be included in the board’s report.
The SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (the Listing Regulations) specify the obligations of ‘listed entities’, a term that includes not only those entities that have listed their equity shares, but also those that have listed other instruments, including non-convertible debt securities, non-convertible redeemable preference shares, perpetual debt instruments, perpetual non-cumulative preference shares, Indian depository receipts, securitised debt instruments and units issued by mutual funds. The Listing Regulations sets out the corporate governance principles applicable to listed entities.
The Listing Regulations make it mandatory for companies that have listed their equity shares and convertible securities to comply with certain requirements to ensure transparency in the management of such companies, such as inclusion of IDs, regulation of the remuneration of non-executive directors, constitution of various committees, disclosures on related party transactions (RPTs), accounting treatment, maintenance of a minimum frequency of meetings of the board of directors (Board) and limitation on the number of committees of which a director can be a chairman. The Listing Regulations also require the adoption of a written code of conduct for all members of the Board and senior management of every listed company.
Additionally, the following laws also deal with corporate governance initiatives:
- Securities Contracts (Regulation) Act, 1956;
- Securities and Exchange Board of India Act, 1992 and the rules and regulations framed thereunder;
- Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (the Takeover Code);
- Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015 (the Insider Trading Code);
- Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009;
- Depositories Act, 1996;
- Corporate Governance Voluntary Guidelines, 2009 issued by the MCA;
- National Voluntary Guidelines on Social, Environmental and Economic Responsibilities of Business, 2011 issued by the MCA; and
- Guidelines on Corporate Social Responsibility and Sustainability for Central Public Sector Enterprises issued by the Department of Public Enterprises, Ministry of Heavy Industries and Public Enterprises (effective 1 April 2014 and applicable only to public sector enterprises).
Non-compliance with the provisions of the Companies Act on corporate governance attracts monetary fines, imprisonment, or both. Further, any failure on the part of a listed company to comply with the Listing Regulations may lead, inter alia, to one or more of the following consequences: imposition of fines; suspension of trading; freezing of promoter or promoter group holding of equity shares; and other actions being initiated by SEBI, depending on who violated the provisions of the Listing Regulations.
A committee was constituted by SEBI under the chairmanship of Mr Uday Kotak, Executive Vice Chairman and Managing Director, Kotak Mahindra Bank (the Kotak Committee) in June 2017 with the aim of improving standards of corporate governance of listed companies in India. The Kotak Committee was requested to make recommendations to SEBI on the following issues (in the context of equity listed companies):
- ensuring independence in spirit of IDs and their active participation in the functioning of the company;
- improving safeguards and disclosures pertaining to RPTs;
- issues in accounting and auditing practices by listed companies;
- improving effectiveness of Board evaluation practices;
- addressing issues faced by investors on voting and participation in general meetings;
- disclosure and transparency related issues, if any; and
- any other matter, as the committee deemed fit pertaining to corporate governance in India.
The Kotak Committee submitted its report to SEBI on 5 October 2017, providing its recommendations on various issues. In its Board meeting dated 28 March 2018, SEBI accepted certain recommendations of the Kotak Committee (without any modification), such as recommendations pertaining to reduction in the maximum number of listed entity directorships, expanding the eligibility criteria for IDs, enhancing the role of the audit committee, nomination and remuneration committee (NRC) and risk management committee (RMC), and enhancing disclosure of RPTs and permitting related parties to vote against RPTs.
The Board of SEBI also accepted certain recommendations (with modification), such as recommendations pertaining to minimum number of directors in listed companies, number of woman IDs, separation of the roles of managing director (MD), chief executive officer (CEO) and chairman, quorum for board meetings, holding of annual general meetings (AGMs), and shareholders’ approval for royalty or brand payment to related parties.
Subsequently, SEBI notified the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) (Amendment) Regulations, 2018 (Amendment Regulations) on 9 May 2018 and issued a circular on 10 May 2018 to implement the recommendations of the Kotak Committee. Except where specific dates are provided in the Amendment Regulations, the Amendment Regulations will come into force on 1 April 2019.
What are the primary government agencies or other entities responsible for making such rules and enforcing them? Are there any well-known shareholder groups or proxy advisory firms whose views are often considered?
The primary Indian implementation entities of corporate governance initiatives are SEBI (the primary regulator of the Indian securities market and listed companies) and the MCA.
Other entities responsible for the enforcement of corporate governance issues include:
- the National Company Law Tribunal (the Tribunal) under the Companies Act, having quasi-judicial powers to decide certain matters under the Companies Act, including the protection of minority shareholders from oppression by majority shareholders and mismanagement, and its appellate authority, the National Company Law Appellate Tribunal (the Appellate Tribunal);
- the Registrar of Companies (ROC), which generally has its presence in every Indian state, and primarily ensures compliance by a company in relation to filings and disclosures under the Companies Act;
- the Regional Director (RD), to which certain powers of the central government have been delegated. There are seven RDs in India, each with their own territorial jurisdiction, in which they, inter alia, supervise the working of the relevant ROCs; and
- the Competition Commission of India (CCI), created under the aegis of the Competition Act, 2002, which regulates antitrust issues where a company’s action may have an adverse effect on competition in the relevant Indian market.
There are also other regulatory authorities that regulate companies engaged in specific sectors, such as Insurance Regulatory and Development Authority (for the insurance sector) and Telecom Regulatory Authority of India (for the telecom sector).
The concept of shareholder activist groups or proxy advisory firms is emerging in India. The SEBI (Research Analysts) Regulations, 2014 (the Analyst Regulations) define a ‘proxy adviser’ as any person who provides advice, through any means, to an institutional investor or shareholder of a company, in relation to exercise of their rights in the company including recommendations on public offer or voting recommendation on agenda items. Institutional Investor Advisory Services India Limited and InGovern, both established in 2010, are prominent proxy advisory firms operating in India. Stakeholders Empowerment Services, a corporate governance research and advisory firm, claims to be the first company to have registered as a ‘proxy adviser’ under the Analyst Regulations; however, these firms are not formally consulted by the authorities prior to promulgation of corporate governance initiatives. Usually, committee recommendations and proposed regulatory norms are put up for public comment by concerned authorities in order to ensure large-scale participation. The National Foundation for Corporate Governance, set up by the MCA as a not-for-profit trust, in association with the Confederation of Indian Industry, the Institute of Chartered Accountants of India and the Institute of Company Secretaries of India (ICSI), also provides a platform for spreading awareness regarding corporate governance issues.
Rights and equitable treatment of shareholders
What powers do shareholders have to appoint or remove directors or require the board to pursue a particular course of action? What shareholder vote is required to elect or remove directors?
Subject to the provisions of the articles of association (AOA) of a company, directors are appointed by the Board and hold their office until the next AGM, at which their appointment must be approved by the company’s members. Alternatively, directors can be appointed at a general meeting of the shareholders.
An Indian public company is required to have at least two-thirds of its directors liable to retire from their position by rotation. Such directors are appointed by the shareholders in general meetings by an ordinary resolution of the company, and they are required to retire within a maximum period of three years from their appointment date. Any reappointment of such directors requires fresh shareholders’ approval. Unless the AOA provide otherwise, the remaining directors of a public company and the directors of a private company (a company that restricts the number of its shareholders to 200) are also required to be appointed with shareholders’ approval.
Further, the appointment of IDs is approved at a shareholders’ meeting, and is eligible for reappointment on passing of a special resolution by the shareholders and disclosure of the reappointment in the Board’s report.
Thus, in India, shareholders generally have a say in the appointment and reappointment of directors. In the absence of a higher requirement adopted by a company in its AOA, directors are appointed by a simple majority vote. The Companies Act also provides companies with an option to adopt a proportional representation mechanism for director appointments, so as to enable the representation of minority shareholders on the Board.
To ensure wider shareholder participation in listed companies, the Companies Act provides for the appointment of one director by small shareholders of the listed company, where ‘small shareholder’ means a shareholder holding shares whose nominal value does not exceed 20,000 rupees. The Companies (Appointment and Qualification of Directors) Rules, 2014 specify that a listed company may either opt to have a small shareholders’ director suo moto, or appoint one upon receiving notice from at least 1,000 small shareholders of the company or one-tenth of the total number of small shareholders of the company, whichever is lower. A small shareholders’ director is an ‘independent director’ under the Companies Act and is not liable to retire by rotation; however, his or her tenure cannot exceed a period of three consecutive years, and at the end of the tenure he or she is not eligible for reappointment.
Subject to the provisions of the AOA of a company, the Board can appoint additional directors, alternative directors and nominee directors.
The shareholders have inherent powers to remove directors (including non-retiring directors) by a simple majority vote, provided a special notice to this effect has been served on the company by shareholders holding at least 1 per cent of the paid-up share capital of the company or holding shares on which at least 500,000 rupees have been paid up on the date of the notice, at least 14 clear days prior to the ensuing general meeting (excluding the day when the notice is served and the day of the meeting), a copy of such special notice has been forthwith provided by the company to the directors proposed to be removed, and the directors are given an opportunity to present their case before the shareholders either in writing or at the general meeting convened to consider their removal. The company is required to give special notice to the members of a general meeting convened for such a resolution at least seven days before the meeting. Directors appointed by the Tribunal under the provisions of the Companies Act and directors appointed by the proportional representation mechanism cannot be removed by the shareholders. An ID who is reappointed for a second term can be removed by the company only by passing a special resolution.
Generally, the Board is vested with the company’s management powers and the shareholders are only entitled to exercise control over those matters that are specifically reserved under the Companies Act or the company’s AOA, for shareholders’ approval. Thus, generally, the shareholders cannot interfere in the Board’s decision-making process or usurp any authority available to them. However, shareholders, by virtue of their authority to appoint or remove directors, can control the overall Board composition and can sometimes transact businesses, which for any reason cannot be transacted by the Board, including resolving matters, in the event of there being a deadlock between directors or there being an inadequate quorum at the Board level. The Companies Act specifically empowers shareholders holding at least 10 per cent of the paid-up share capital of the company to cause the company to notify its shareholders of any resolution proposed to be moved at a meeting of the shareholders, provided such a requisition is deposited with the company at least six weeks before the meeting in case the requisition would trigger the requirement of circulating a notice of the proposed resolution, and at least two weeks before the meetings for all other requisitions.
Further, judicial pronouncements also suggest that when the directors act mala fide or act extraneously to their powers and are the wrongdoers, the shareholders are entitled to take steps for redressal.
What decisions must be reserved to the shareholders? What matters are required to be subject to a non-binding shareholder vote?
The Companies Act mandatorily requires shareholder approval for certain decisions including, among others, those relating to:
- change in name, registered office or authorised share capital;
- modification of the memorandum of association (MOA) and AOA of the company;
- issuance of shares on a preferential basis;
- issue of sweat equity shares;
- approval of audited accounts;
- declaration of dividends;
- appointment and removal of auditors;
- appointment and removal of directors and determining their remuneration;
- appointment of more than 15 directors to the Board;
- reappointment of IDs after the expiry of their term;
- approving loans to directors;
- disposal of a company’s undertaking;
- borrowing and investing a company’s funds beyond certain limits;
- approving any scheme of arrangement or compromise;
- reduction in capital;
- buy-back of securities;
- liquidation of a company;
- specified RPTs;
- application to change the status of the company to ‘dormant’;
- variation in the rights of shareholders; and
- approving the directors’ holding of an office of profit (other than that as MD or managers) with the company or its subsidiaries.
The Companies Act does not provide a mechanism for a non-binding shareholders’ vote. Though the primary authority to call general meetings and decide the agenda lies with the Board, the shareholders are permitted to requisition general meetings to carry out proposed business or demand the circulation of resolutions proposed by them for consideration at the ensuing Board-initiated general meeting. Any decisions on resolutions so initiated by shareholders, if approved by the requisite majority as prescribed under the Companies Act and the company’s AOA, bind the Board. For further information, see questions 3 and 7.
Disproportionate voting rights
To what extent are disproportionate voting rights or limits on the exercise of voting rights allowed?
Indian listed entities are prohibited from issuing shares in any manner that may confer on any person superior rights as to voting or dividend with regard to the rights on equity shares that are already listed as per regulation 41 of the Listing Regulations. However, private limited companies and unlisted public companies are permitted to issue equity shares with a disproportionate right as to voting, dividends or otherwise, subject, inter alia, to the existence of a specific authority in this regard in their AOA and shareholders’ approval. The preconditions to be met by a company for such an issuance are prescribed conditions, including having a consistent track record of distributable profit for the last three years, and at any time, shares with differential rights cannot exceed 26 per cent of the total paid-up equity share capital of the company (including equity shares with differential rights). Companies are not under any limitation while determining disproportionate rights. Though equity shares with zero voting rights are generally considered extraneous to the Companies Act, through an amendment to the Companies Act in June 2015, the restriction in the Companies Act in regard to non-voting equity shares has been made inapplicable to private companies, subject to appropriate authorisation in the AOA, and therefore, private companies, which are not subsidiaries of public companies, are able to issue equity shares with zero voting rights. This flexibility will benefit private companies that want to obtain equity funding without dilution of control.
Preference shareholders do not have voting rights at general meetings, except on resolutions that directly affect their rights. However, voting rights on a par with the equity shareholders accrue to them in the event of the company defaulting in the payment of dividends to preference shareholders for a period of two years or more.
Shareholders’ meetings and voting
Are there any special requirements for shareholders to participate in general meetings of shareholders or to vote? Can shareholders act by written consent without a meeting? Are virtual meetings of shareholders permitted?
Shareholders who are recorded in the register of members or in the records of the depository (for paperless shares) are entitled to attend and vote at general meetings. In the case of bearer securities (such as share stocks), when the shareholders present proof of ownership of the company’s shares, as per the AOA, they become entitled to attend and vote at general meetings.
Shareholders who are natural persons can either attend general meetings themselves or appoint a proxy to attend and vote at the meeting. Shareholders who are legal entities are required to appoint natural persons as their authorised representatives to attend and vote at general meetings. These representatives can exercise all powers of the original shareholders including appointing a proxy. Proxies are prohibited from speaking at the meetings and unless the AOA provide otherwise, they can vote only by poll (and not by show of hands). The Companies Act prohibits a person from acting as proxy on behalf of more than 50 members, and members whose aggregate holding in the company exceeds 10 per cent of the total share capital of the company. When there is a show of hands, every shareholder has one vote irrespective of his or her shareholding in the company and on poll (if requisitioned) every shareholder has voting rights in proportion to his or her share in the company’s paid-up equity capital.
If there are partly paid-up shares, voting rights are conferred based on the amount paid up on such shares and such rights would be unavailable on partly paid-up shares on which calls remain unpaid. For listed companies, and companies with more than 200 shareholders, approval on certain items requires the adoption of a postal ballot mechanism, in which votes are cast through postal ballots dispatched by the company to each of its shareholders individually. The Companies (Management and Administration) Rules, 2014 (2014 Rules) mandatorily require certain business to be transacted only by voting through postal ballot, including the following:
- alteration of the objects clause of the MOA;
- change in the location of the registered office outside specified limits;
- issue of shares with differential rights;
- buyback of shares; and
- the disposal of a company’s undertaking.
For voting rights available to preference shareholders, see question 5.
Shareholders may also participate in meetings through video conferencing and vote electronically through secure electronic platforms, as the 2014 Rules make it mandatory for listed companies and companies with more than 1,000 shareholders to provide an electronic voting facility to its members for all general meetings. A ‘virtual meeting’ of the shareholders of a company, that is, a meeting without any physical venue, is not permissible under the Companies Act, as minimum quorum requirements, which are applicable to shareholders’ meetings of public companies and private companies, require the requisite number of members to be personally present at the venue of such meeting.
Shareholders and the board
Are shareholders able to require meetings of shareholders to be convened, resolutions and director nominations to be put to a shareholder vote against the wishes of the board, or the board to circulate statements by dissident shareholders?
Typically, the Board convenes a company’s general meetings. However, shareholders holding 10 per cent of the company’s paid-up share capital, by a written notice, may requisition the Board to convene an extraordinary general meeting (EGM). If the Board fails to call a meeting within 21 days after the date of deposit of a valid requisition on a day not later than 45 days after the original requisition date, the shareholders may themselves proceed to convene an EGM within a period of three months from the date of the requisition.
Shareholders holding 10 per cent or more of the company’s total voting power may requisition the company to circulate, along with the notice of a general meeting, any resolution that they intend to move at such meeting, along with a statement of the proposed matter to be dealt with in the resolution. However, the Companies Act does not provide for the circulation of statements by the Board as received from dissident shareholders, who only have a right to discuss their views in a meeting and challenge the unfavourable decisions against them before the Tribunal in certain circumstances.
A company’s general meeting may be called with not less than 21 clear days’ notice. A general meeting may also be called at shorter notice (for which consent can be given in writing or in electronic form):
- in case of an AGM: with the consent of at least 95 per cent of the members entitled to vote at that meeting; and
- in case of any other general meeting: if the company has a share capital, then with the consent of the members holding majority in number of members entitled to vote and who represent at least 95 per cent of such part of the paid-up share capital of the company as gives a right to vote at the meeting; or if the company has no share capital, then with the consent of members holding at least 95 per cent of the total voting power exercisable at the meeting.
Controlling shareholders’ duties
Do controlling shareholders owe duties to the company or to non-controlling shareholders? If so, can an enforcement action be brought against controlling shareholders for breach of these duties?
Controlling shareholders are expected not to oppress or act against the interests of the minority shareholders. Minority actions are allowed in cases of majority shareholders of a company proposing to benefit themselves at the expense of the minority, expropriating minority rights by carrying out modifications in charter documents or taking actions to oust the minority by the improper issuance of shares or otherwise.
Under the Companies Act, 100 shareholders in number or one-tenth of the total number of shareholders of a company, whichever is lesser; or shareholders holding not less than 10 per cent of the issued share capital of a company can bring actions against the controlling majority or the Board, where the affairs of the company are being conducted in a manner oppressive to any shareholder; or in cases of mismanagement prejudicing the interests of the company or the public at large.
In the dispute between Mr Cyrus Mistry and Tata Sons Limited, the Tribunal held that the term ‘issued share capital’ in the context of determining the qualification of shareholders to initiate an action for oppression and management before the Tribunal, includes preference capital as well, and therefore the complainants must, in aggregate, hold at least 10 per cent of the issued share capital of the company, which includes its preference capital, unless this requirement is waived by the Tribunal. On the issue of waiver of this requirement, the Tribunal held that such waiver is to be granted only in rare and compelling situations and further that the Tribunal shall only interfere if the actions of the Board or majority are unconscionable, unjust and fraudulent, so as to cause oppression to the complaining party. On appeal, the Appellate Tribunal noted that to form an opinion as to whether an application merits waiver, the Tribunal is not only required to form its opinion objectively, but also required to satisfy itself on the basis of pleadings or evidence on record as to whether the proposed application merits consideration. It further noted that the Tribunal is required to take into consideration the relevant facts and evidence, and is required to record reasons reflecting its satisfaction. It further noted that the Tribunal is not required to decide the merits of the application, but required to record grounds to suggest that the applicants have made out some exceptional case for waiver. The Appellate Tribunal held that taking into consideration the aforesaid facts and exceptional circumstances of the case as apparent from plain reading of the application and as some of them related to ‘oppression and mismanagement’, it was of the view that a case had been made for ‘waiver’.
To protect the interests of minority shareholders, the Companies Act also provides for class action by members of a company seeking restraining orders against certain actions of the company and for claiming damages or compensation from the company, its directors, auditors or any expert, adviser or consultant for any wrongful act or for any incorrect or misleading statement made to the company. The Companies Act provides that a class action may be initiated through an application to the Tribunal by at least 100 members of the company, or not less than 10 per cent of the total number of its members, whichever is lesser, or members holding 10 per cent of the issued share capital of the company. For companies that do not have a share capital, an application initiating a class action must be made by at least one-fifth of the total number of its members.
Can shareholders ever be held responsible for the acts or omissions of the company?
Generally, shareholders are not liable for the acts or omissions of a company. Shareholders’ liability, in any event, only extends to their contribution towards the company’s assets at the time of its winding up (without any limitation in cases of unlimited liability companies and to the extent of the amount unpaid on their shares or the amount guaranteed by them, in cases of limited liability companies).
Are anti-takeover devices permitted?
Certain provisions of the Takeover Code make hostile acquisitions relatively difficult by favouring existing controlling shareholders and management. Particularly, the requirement to disclose shareholdings upon crossing certain thresholds allows the controlling shareholders to keep an eye on ‘predators’. The Takeover Code provides for a compulsory offer of a minimum of 26 per cent of the paid-up capital by an acquirer, when the shares or voting rights held by him or her, and by persons acting in concert with him or her in the target company, entitle them to exercise 25 per cent or more of the voting rights in the target company.
The Takeover Code also necessitates the target company’s management to cooperate by requiring the letter of offer to include certain information of the target company, the authenticity of which is underwritten by the acquirer. Further, it also requires the target company’s Board to constitute a committee of IDs to provide the shareholders their unbiased recommendations on whether the offer should be subscribed to and such recommendations are published at least two working days before the tendering period. Availability of the option to persons other than the acquirer to make competing offers also makes the takeover process difficult.
Indian takeovers are also subject to the CCI’s scrutiny in cases where such a takeover can have an adverse effect on competition in a relevant Indian market.
Further, commercial contracts often have stringent ‘change of control’ clauses and may include the ‘brand pill’ provision, which prevents a hostile bidder from using the promoter’s brand where the promoter loses control over the target.
Issuance of new shares
May the board be permitted to issue new shares without shareholder approval? Do shareholders have pre-emptive rights to acquire newly issued shares?
Companies need shareholders’ approval through a special resolution (the number of votes cast in favour of the resolution by shareholders must be at least three times the number of votes cast against the resolution by shareholders) for the issuance of new shares and securities convertible into shares, except when such issuance is being effected through a rights issue, providing shareholders with a pre-emptive right to acquire newly issued shares in proportion to their existing contribution to the paid-up share capital of such company. Any offer to the public through prospectus by a listed company or a company intending to list its securities on any recognised stock exchanges in India must comply with the regulations issued by SEBI for such issuances.
Restrictions on the transfer of fully paid shares
Are restrictions on the transfer of fully paid shares permitted and, if so, what restrictions are commonly adopted?
Fully paid-up shares of public companies are freely transferable. Under the Companies Act, agreements between persons that restrict the transfer of such shares have been made enforceable as contracts. However, it is advisable to make the company a party to such an agreement restricting transferability to ensure that there is privity of contract, and the agreement is enforceable against the company.
It is mandatory for private companies to restrict transfer of their shares (including fully paid-up shares) by having specific provisions in their AOA and a private company may refuse to register a transfer of its shares pursuant to such a restriction. The affected transferee has the power to approach the Tribunal against the company’s refusal to register such transfer.
Compulsory repurchase rules
Are compulsory share repurchases allowed? Can they be made mandatory in certain circumstances?
Companies have to mandatorily redeem redeemable preference shares issued by them within a maximum period of 20 years from the issuance date. Such redemption is not a reduction in capital and companies are permitted to reissue the redeemed preference shares.
Equity shares have no such requirement; however, companies have the option to buy back equity shares under the voluntary route (up to 25 per cent of the aggregate paid-up capital and free reserves of the company by inviting shareholders to tender their shares) or via a reduction of capital approved by the Tribunal. Under the voluntary route, shareholders have an option not to tender their shares, unlike the Tribunal approved route, where once a reduction of capital is approved by the Tribunal and effected, it binds all the shareholders (including dissenting shareholders). Equity shares bought back or reduced in this way are necessarily extinguished, as Indian companies cannot hold their own shares.
Various authorities under the Companies Act are also entitled to direct a compulsory share repurchase, by a company or other shareholders, as a means of protecting minority interests, when there is oppression or mismanagement by majority shareholders. Further, the Companies Act allows an acquirer to acquire shares of the minority shareholdings, pursuant to a scheme approved by the shareholders holding nine-tenths of the value of the proposed transferable shares, unless an application has not been filed by the dissenting shareholders to the Tribunal, and if such an application has been filed, then the Tribunal has not objected to the same.
Do shareholders have appraisal rights?
The Companies Act requires the promoters and shareholders in control of a company to give dissenting shareholders an opportunity to exit the company if it intends to utilise money raised from the public through the prospectus for any object other than the object stated in the prospectus; and vary the terms of any contracts referred to in the prospectus, at the exit price, and in the manner prescribed by SEBI. Further, the Companies Act allows an acquirer to acquire shares of the minority shareholdings, pursuant to a scheme approved by the shareholders holding nine-tenths of the value of the proposed transferable shares, provided an application has not been filed by the dissenting shareholders to the Tribunal, and if such an application has been filed, then the Tribunal has not objected to the same.
SEBI amended the SEBI (Issue of Capital and Disclosure Requirements) (Second Amendment) Regulations, 2016 on 17 February 2016 to include a chapter on ‘Conditions and Manner of Providing Exit Opportunity to Dissenting Shareholders’ (Exit Regulations). The Exit Regulations clearly specify that they are applicable only if:
- there are identifiable promoters or shareholders in control of the company;
- the public issue was opened after 1 April 2014;
- at least 10 per cent of the shareholders who voted in the general meeting disagree with the proposal for amendment of the objects or contract; and
- the amount to be utilised for the objects specified in the prospectus is less than 75 per cent of the total amount raised by the public issue.
The Exit Regulations prescribe a market-linked mechanism for the determination of the ‘exit price’ at which the dissenting shareholders will be provided an exit by the promoter or shareholders in control. The Takeover Code has been amended to ensure that the requirement of making a public offer is not triggered by an acquisition by promoters or shareholders in compliance with the requirements of the Exit Regulations.
Dissenting shareholders have ample exit opportunities in cases of takeover and delisting. In such cases, the acquirer or the promoters, as applicable, are required to provide an opportunity for the shareholders to tender their shares at a fair value. The Takeover Code provides for a compulsory offer of a minimum of 26 per cent of the paid-up capital. For the delisting of its shares from stock exchanges, it is mandatory for the promoters to offer to purchase shares of all the non-promoter shareholders who wish to tender their shares, and to acquire at least 90 per cent of total issued shares of that class.
The Tribunal may also order a company to make an exit offer to dissenting shareholders of a company proposing a compromise or arrangement with its members or creditors, if, in the opinion of the Tribunal, such an exit offer is necessary to effectively implement the terms of the compromise or arrangement. Further, in the case of a shareholders’ right variation (by way of a resolution passed with a three-quarters majority of the particular class), the holders of at least 10 per cent of the shares of that class, being dissenting shareholders, can apply to the court for the cancellation of the variation.
Responsibilities of the board (supervisory)
Is the predominant board structure for listed companies best categorised as one-tier or two-tier?
The predominant Board structure for Indian-listed companies remains one-tier. The Board consists of directors of the company. Only individuals can be appointed as directors.
The Companies Act and the Listing Regulations provide for the formation of an audit committee, an NRC and a stakeholders’ relationship committee (SRC). However, the recommendations of these committees are not binding on the Board as they are only advisory in nature. For instance, the Board is not bound by the recommendations of the audit committee as long as it discloses its non-acceptance of the recommendation along with the reason for such non-acceptance in the Board report.
Specified companies are also required to constitute a corporate social responsibility (CSR) committee.
The Board can delegate certain specified powers to a committee of directors, the manager or any other officer of the company.
Board’s legal responsibilities
What are the board’s primary legal responsibilities?
The Board’s primary responsibilities include managing the company’s affairs and assets and ensuring the company’s compliance with applicable laws. Apart from the powers specifically reserved for shareholders, the Board is entitled to exercise all powers and to do all acts and things, as the company is authorised to do, subject to compliance with applicable laws, the provisions of the company’s charter documents and the regulations, if any, made by the shareholders in a general meeting.
Besides, directors owe a fiduciary duty to the company and are expected to show the utmost care, diligence and skill in the exercise of their power and, where the company has violated any applicable laws, they are generally deemed to be an ‘officer who is in default’. They are also expected to execute their duties in a manner that does not conflict with their personal interests. The directors must act in accordance with the AOA of the company, should act in good faith to promote the objects of the company for the benefit of its members, and in the best interest of the company, its employees, its shareholders, the community and for the protection of the environment.
Regarding the shareholders, the primary responsibilities of the Board include finalising the company’s accounts and presenting them for shareholders’ approval, recommending dividends and convening shareholders’ meetings. The Companies Act and the Listing Regulations specifically provide that directors are generally liable to members of the company while carrying out the company’s business and are expected to act in good faith and promote the object of the company for the benefit of its members as a whole.
The Companies Act prescribes a binding ‘Code for Independent Directors’, which provides the standard for professional conduct for IDs (the Code).
Whom does the board represent and to whom does it owe legal duties?
The Board represents the company and all actions taken by the Board in good faith and intra vires bind the company. The Board owes legal duties to the company and the directors are per se not agents or trustees of the shareholders. However, the Board is expected to exercise its duties with the utmost care, diligence and skill while exercising its powers and any breach thereof may make it liable to the shareholders and to affected third parties, such as creditors, debenture holders, trustees or other persons dealing with the company.
The directors must act in accordance with the AOA of the company, should act in good faith to promote the objects of the company for the benefit of its members, and in the best interest of the company, its employees, its shareholders, the community and for the protection of the environment.
Enforcement action against directors
Can an enforcement action against directors be brought by, or on behalf of, those to whom duties are owed?
Directors can be held personally liable for, among others, illegal acts, fraud, negligence, conspiracy, breach of trust and duties, false representation, wilful contribution to tortious action, misappropriation of the company’s funds and assets, making improper payments including dividend payments and entering into contracts ultra vires. In such cases, the company or its shareholders (by means of derivative actions), along with the affected third parties, can sue the directors for such breaches, through class action (see question 8) or otherwise.
Care and prudence
Do the board’s duties include a care or prudence element?
Directors owe a fiduciary duty to the company and are expected to show the utmost care, diligence and skill in the exercise of their power and decision-making. They are expected to execute their duties in a manner that does not conflict with their personal interests and are required to disclose to the Board their direct and indirect interests in any business dealing concerning the company. If there is a conflicting personal interest, they are mandated to refrain from participating in such a decision-making process. However, in case of private companies, the interested director may participate in the meeting after disclosure of his or her interest.
In case of RPTs, the restriction on the member of a company (who is a related party) on voting on a shareholders’ resolution to approve any contract or arrangement which may be entered into by the company, is not applicable: in case of private companies; or in case of a company in which 90 per cent or more members, in number, are relatives of promoters or are related parties.
The Code for requires IDs to, inter alia, satisfy themselves on the integrity of the financial information of the company, and the robustness of its financial controls and systems of risk management, safeguard the interests of all stakeholders, particularly the minority shareholders, and seek clarification or amplification of the information provided to the Board, and where necessary, obtain and follow professional advice and the opinion of external experts at the expense of the company.
Judicial pronouncements suggest that the directors must use their skill reasonably and in sync with their knowledge and experience. They are expected to adopt the standard of care that an ordinary person might be expected to take in the circumstances and therefore they cannot be held responsible for mere judgement errors if they have acted in good faith.
Recently, the Amendment Regulations have amended the definition of the term ‘related party’ under the Listing Regulations to the effect that any person or entity belonging to the promoter or promoter group of a listed entity and holding 20 per cent or more of the shareholding in such listed entity will be deemed to be a related party. The Amendment Regulations have further amended the Listing Regulations to require the listed entity:
- to formulate a policy on materiality of RPTs and on dealing with RPTs including clear threshold limits duly approved by the Board; and
- to pass necessary resolution of shareholders for payment with respect to brand usage or royalty (for the transaction to be entered into individually or taken together with previous transactions during a financial year) exceeds 2 per cent of the annual consolidated turnover (as per the last audited financial statements) where no related party shall vote to approve.
Board member duties
To what extent do the duties of individual members of the board differ?
Directors can be executive or non-executive. Executive directors, such as managing and full-time directors, perform day-to-day management duties for the company in addition to being Board members.
The MD is entrusted with substantial management powers under the company’s AOA, other agreements, or resolutions passed by the shareholders or the Board. Full-time directors in the employment of the company are responsible for discharging duties as per their terms of employment and are usually assigned duties related to finance, human resources and legal compliance.
Non-executive directors are directors simpliciter who participate in the Board decision-making process and discharge other duties that may be entrusted upon them by the Board or the shareholders.
IDs take part in the decision-making process at the Board, audit, remuneration and CSR committee meetings (where their presence is mandatory). They bring about ‘independence’ to the decision-making process and generally ensure the company’s compliance with the corporate governance norms, as well as acting as a whistle-blower in the shareholders’ interest and in the larger public interest.
Owing to the varied roles of the directors, the Companies Act follows the concept of ‘officer who is in default’ as persons responsible for the breach of the Companies Act’s provisions. The MD, whole-time director and key managerial personnel (KMP) (a role akin to that of MD, but who need not necessarily be a Board member) are the persons primarily responsible as ‘officer who is in default’ and in their absence and in the absence of any other director who has been entrusted with that specific duty, all of the company’s directors become liable.
The Companies Act mandates that a majority of the directors comprising the audit committee must be persons having the ability to read and understand financial statements, and as stated in question 25, the Listing Regulations further require listed companies to ensure that all members of its audit committee are able to read and understand financial statements; and at least one member has accounting or related financial management expertise.
Delegation of board responsibilities
To what extent can the board delegate responsibilities to management, a board committee or board members, or other persons?
Among others, decisions that cannot be delegated include:
- making calls to shareholders with regard to unpaid share monies;
- approving the buy-back of securities;
- issuance of securities, including debentures;
- approving financial statements and the Board’s report;
- diversification of the business of the company;
- amalgamation, merger or reconstruction of the company;
- takeover or acquisition of a controlling or substantial stake in another company;
- filling in casual vacancies of directors;
- making political contributions;
- appointment or removal of KMP;
- appointment of internal and secretarial auditors;
- sanctioning contracts in which directors are interested;
- receiving notice of directors’ interests or shareholdings;
- appointment of an MD who is already MD in another company;
- making loans and investments in certain cases;
- approving a declaration of solvency in a voluntary winding up; and
- approving the advertising text for attracting deposits.
The Board, as it is under a fiduciary duty, cannot delegate functions that require judgement or discretion on its part. Further, items reserved under the company’s AOA or by the shareholders in a general meeting for the Board cannot be delegated.
Apart from the above decisions, the Board can delegate certain specified powers to committees of directors, the MD, the company’s executive or non-executive directors, the manager or any other principal officer of the company by means of a Board resolution.
Further, the powers of a company’s MD, who is entrusted with substantial management powers (including the power exercisable by the Board, which the shareholders intend to delegate to the MD), are often prescribed in the company’s AOA.
Non-executive and independent directors
Is there a minimum number of ‘non-executive’ or ‘independent’ directors required by law, regulation or listing requirement? If so, what is the definition of ‘non-executive’ and ‘independent’ directors and how do their responsibilities differ from executive directors?
‘Non-executive directors’ are not per se defined in the Companies Act or otherwise. The term is commonly used to refer to directors who are directors simpliciter and do not hold any managerial positions, apart from being a Board member.
The Companies Act requires listed companies to have at least one-third of their Board made up of IDs. Further, unlisted public companies with paid-up share capital exceeding 100 million rupees or turnover exceeding 1 billion rupees or loans, debentures and deposits exceeding 500 million rupees are required to have at least two IDs on the Board.
The Companies Act defines ‘independent director’ as a non-executive director who, among other factors:
- does not have any pecuniary relationship, other than remuneration as such director or having transactions not exceeding 10 per cent of his or her total income or other prescribed amount, with the company, its promoters, its directors, its senior management or its holding company, its subsidiaries and associates during the two immediately preceding financial years, which may affect the independence of the director;
- is not related to promoters or directors of the company or its holding subsidiary or associate company;
- has not been an executive of the company in the immediately preceding three financial years;
- is not a partner or executive or was not a partner or executive, during the preceding three years, of:
- the statutory audit firm or the internal audit firm that is associated with the company; or
- legal firms and consulting firms that have a material association with the company; and
- is not a substantial shareholder of the company, owning 2 per cent or more of the voting shares along with his or her relatives.
The Listing Regulations makes it mandatory for listed companies to have at least half of their Board made up of IDs if the Board chairman is an executive director, or a non-executive director who is a promoter or is related to the promoters or holds a managerial position at Board level or a level below that. In other cases, where the Board chairman is a non-executive director not falling into the category discussed above, listed companies are required to have at least one-third of their Board made up of IDs. The Listing Regulations further provide that IDs must be provided suitable training to familiarise them, inter alia, with the company, the nature of the industry in which the company operates, their role, rights and responsibilities in the company and the business model of the company; the details of such training imparted are to be disclosed by the company in its annual report.
Unlike executive directors, IDs are not responsible for day-to-day company management. They actively participate in the Board, audit, CSR and NRC decision-making process (where their presence is mandatory). They instil external and wider perspective, bring independence to the decision-making process and generally ensure compliance by the company with corporate governance norms. IDs are also expected to act as whistle-blowers and act in the shareholders’ and the public interest for the implementation of corporate governance norms. IDs of a company are required to hold and attend at least one meeting in a year without the attendance of non-independent directors and members of the management to review the performance of non-independent directors and the Board as a whole and the chairman, and assess the quality, quantity and timeliness of flow of information between the company’s management and the Board.
The Companies Act provides stringent qualifications for an ID and provides for detailed guidelines for appointment, roles and responsibilities of IDs with a view to ensure that they work in an objective manner in the Code for Independent Directors. While there is no minimum age requirement for IDs under the Companies Act, in view of the nature of their responsibilities, it is essential that a person sought to be appointed as an ID must have legal competence, relevant experience and expertise, and therefore must not be less than 18 years of age.
The Amendment Regulations have amended the definition of the term ‘independent director’ under the Listing Regulations to specifically exclude persons who constitute the ‘promoter group’ of a listed entity. The ID should also not be a non-independent director of another company on the Board of which any non-independent director of the listed entity is an ID. These amendments will come into force on 1 October 2018. The Amendment Regulations further requires every ID is required to submit a declaration at the first meeting of the Board in which he or she participates as a director and thereafter at the first meeting of the Board in every financial year or whenever there is any change in circumstances that may affect his or her status as an ID, that he or she meets the criteria of independence and that he or she is not aware of any circumstances or situation that could impair his or her ability to discharge his or her duties with an objective judgment and without external influence. The Board of the listed entity should take on record such declaration and confirmation after undertaking due assessment of the veracity of the same.
Board size and composition
How is the size of the board determined? Are there minimum and maximum numbers of seats on the board? Who is authorised to make appointments to fill vacancies on the board or newly created directorships? Are there criteria that individual directors or the board as a whole must fulfil? Are there any disclosure requirements relating to board composition?
Public and private companies are required to have a minimum of three and two directors, respectively, and a maximum of 15 directors. The Companies Act has also introduced the concept of a ‘one-person company’, which is required to appoint only one director. A company’s AOA may specify a higher minimum number of directors on the Board, and a company can appoint more than 15 directors by passing a special resolution.
Listed companies and public companies with paid-up share capital of 1 billion rupees or turnover exceeding 3 billion rupees are required to appoint at least one woman director.
Further, listed companies have to ensure that at least one-third of their Board comprises IDs, and public companies with paid-up share capital exceeding 100 million rupees, or turnover exceeding 1 billion rupees or aggregate outstanding loans, debentures and deposits exceeding 500 million rupees are required to have at least two IDs on their Board.
Further, a person cannot be appointed as director in more than 20 companies at a time, out of which not more than 10 can be public companies. For determining the limit of directorships of 20 companies, the directorship in a dormant company is not included. As regards listed companies, a director cannot be a member of more than 10 committees or a chairman of more than five committees across all companies in which he or she is a director.
The Listing Regulations requires the Board of a listed company to have an optimum combination of executive and non-executive directors with at least one woman director and not less than 50 per cent of the Board comprised of non-executive directors. Further, if it has a non-executive chairman, one-third of its directors are required to be IDs; this is 50 per cent if it has an executive chairman.
Banking companies are subject to additional requirements as prescribed under the Banking Regulation Act 1949 (the BR Act) and the guidelines issued by the Reserve Bank of India (RBI) for directors’ qualifications and composition of Board.
The AOA of a company may confer on the Board the power to appoint any person, other than a person who fails to get appointed as a director in a general meeting, as an additional director. Further, the Board if authorised by the AOA of the company or a shareholders’ resolution, may appoint a person as an alternate director for a director of the company, in his or her absence from India for a minimum period of three months, provided such person is not already an alternate director for another director of the company or holding directorship in the same company. The Board of public companies are empowered to fill any casual vacancy on the Board that may arise upon the office of a director getting vacated during his or her term in the normal course, subject to regulations in the AOA.
The Amendment Regulations have amended the Listing Regulations to the effect that:
- a person cannot be appointed or continue as an alternative director for an ID with effect from 1 October 2018;
- the Board of the top 500 listed entities by market capitalisation should have at least one independent woman director by 1 April 2019 and the Board of the top 1,000 listed entities by market capitalisation should have at least one independent woman director by 1 April 2020;
- there should be minimum six directors in the top 1,000 listed entities by market capitalisation by 1 April 2019 and in the top 2,000 listed entities, by 1 April 2020; and
- a person cannot be a director in more than eight listed entities with effect from 1 April 2019 and in not more than seven listed entities with effect from 1 April 2020. Further, a person cannot serve as an ID in more than seven listed entities, and a person who is serving as a whole-time director or MD in any listed entity shall serve as an ID in not more than three listed entities.
The Companies Act only permits natural persons to be directors. It does not prescribe any nationality requirements for appointment of directors; however, all companies are required to have at least one director who has stayed in India for at least 182 days in the previous calendar year. The Companies Act prohibits the following from being appointed as directors:
- any person of unsound mind;
- an undischarged insolvent;
- any person who has applied to be registered as an insolvent, or has been convicted by a court of an offence involving ‘moral turpitude’ and has been sentenced to imprisonment for at least six months in respect thereof, and a period of five years has not elapsed from the date of expiry of the sentence;
- any person who has failed to pay calls on his or her shares for more than six months, or is subject to a court order disqualifying him or her, or is already a director in a public company that has failed to comply with certain filing requirements or has failed to repay a deposit, debentures or the payment of dividends and such failure has not been remedied within one year of being appointed as a director; or
- any person who has been convicted for an offence dealing with a related-party transaction under the Companies Act in the preceding five years.
The MD, whole-time director and manager cannot be below the age of 21 years or above the age of 70 years (although a person who has attained the age of 70 years can be appointed by passing a special resolution). A person who has attained the age of 18 years can enter into contracts and can be appointed as a director. A director must obtain a director identification number or any other identification number as may be prescribed by the central government, which will be treated as director identification number for the purposes of the Companies Act, before being appointed as a director.
Private companies, through their AOA, may provide for more director disqualification grounds. Further, there are additional qualifications applicable to IDs (see question 22), managers, managing and full-time directors, in relation to, inter alia, age and criminal record.
Board composition disclosure
Every company is required to keep a register of its directors and KMP at its registered office, and it must report any changes in directorship to the ROC within 30 days. Information on composition of the Board also forms a part of the company’s annual return that is filed with the ROC. Every director is required to make disclosures of his or her directorship in all companies or any changes therein to companies in which he or she is a director. Also, a listed company must disclose its Board composition in its corporate governance report as part of its annual report under the Listing Regulations.
The director of a company is required to disclose his or her concern or interest in any company(ies) or bodies corporate, firms, or other association of individuals, at the first Board meeting in which he or she participates as a director and thereafter at the first Board meeting in every financial year or whenever there is a change in disclosures already made.
Is there any law, regulation, listing requirement or practice that requires the separation of the functions of board chairman and CEO? If flexibility on board leadership is allowed, what is generally recognised as best practice and what is the common practice?
The Companies Act prohibits the appointment of the same person as the chairman of the company as well as the MD or CEO of the company, unless the AOA provides otherwise or the company does not carry on multiple businesses. The Listing Regulations provide that a listed company may appoint separate persons to the post of chairman and MD or CEO; however, this is specified as a discretionary requirement, and listed companies may decide their own policy in this regard, subject to compliance with the Companies Act.
The Amendment Regulations have amended the Listing Regulations to the effect that the top 500 listed entities by market capitalisation should ensure that the chairman of the Board of such listed entity should be a non-executive director, should not be related to the MD or the CEO.
The Listing Regulations require certification by the CEO (or the chief financial officer (CFO) of the company) on certain operational matters and on adherence
In the Indian context, MD, who is a person entrusted with substantial management powers of a company, is equivalent to the CEO. The CEO or manager (and MD) are recognised as KMP by the Companies Act, who need not necessarily be directors of the company. While the Board chairman is primarily responsible for regulating the conduct of the Board meetings, the MD is responsible for managing the day-to-day affairs of the company and exercising powers as may be entrusted to him or her by the Board, shareholders or under the AOA.
Generally, closely held Indian companies have a ‘chairman and managing director’ who acts both as a CEO and Board chairman.
What board committees are mandatory? What board committees are allowed? Are there mandatory requirements for committee composition?
Audit committee and nomination and remuneration committee
Under the Companies Act, listed companies and public companies with paid-up capital exceeding 100 million rupees, or turnover exceeding 1 billion rupees, or aggregate outstanding loans or borrowings or debentures or deposits exceeding 500 million rupees have to constitute an audit committee and an NRC.
As per the Companies Act, the audit committee has to consist of at least three directors with IDs forming a majority, and a majority of its members must have the ability to read and understand financial statements. The Listing Regulations require every listed company to constitute an audit committee with a minimum of three directors, of which two-thirds and the chairman should be IDs; all members should be able to read and understand financial statements; and at least one member should have accounting or related financial management expertise. The prior approval of the audit committee is necessary for all RPTs.
In case of transactions other than those referred to in section 188 of the Act and where the audit committee does not approve the transaction, it should make its recommendation to the Board. In case any transaction involving any amount not exceeding 10 million rupees is entered into by a director or office of a company without obtaining approval of the audit committee and it is not ratified by the audit committee within three months from the date of transaction, such transaction will be voidable at the option of the audit committee and if the transaction is with the related party to any director or is authorised by any other director, the director will indemnify the company against any loss incurred by the company. These requirements are not applicable to a transaction, other than transactions referred to in section 188 of the Act, between a holding company and its wholly owned subsidiary company.
As per the Companies Act, the NRC should consist of three or more non-executive directors out of which at least half must be IDs. The chairman of the company (whether executive or non-executive) may be appointed as a member of this committee but cannot chair this committee. The Listing Regulations require listed companies to constitute an NRC with at least three non-executive directors and at least 50 per cent of the directors should be independent. The NRC is to be chaired by an ID.
The Amendment Regulations have amended the Listing Regulations to the effect that the quorum for a meeting of the NRC should be either two members or one-thirdof the members of the committee, whichever is greater, including at least one ID in attendance. Also, the NRC should meet at least once in a year. Further, the roles of NRC have been enhanced to include recommending to the Board all remuneration, in whatever form, payable to senior management.
The Amendment Regulations have amended the Listing Regulations to the effect that the role of the audit committee has been enhanced to include reviewing the utilisation of loans or advances from or investment by the holding company in the subsidiary exceeding 1 billion rupees or 10 per cent of the asset size of the subsidiary, whichever is lower.
Stakeholders’ relationship committee
Any company that consists of more than 1,000 security holders is required to constitute an SRC to consider and resolve the grievances of security holders of the company.
As per the Companies Act, the SRC should consist of a chairman who should be a non-executive director and such other members as the Board of the company may decide. The Listing Regulations require that listed companies should constitute an SRC whose chairman must be a non-executive director.
The Amendment Regulations have amended the Listing Regulations to the effect that at least three directors, with at least one being an ID, should be members of the SRC. Further, the chairman of the SRC should be present at the AGMs to answer queries of the securities holders, and the SRC should meet at least once in a year. The roles of the SRC have also been enhanced to look into various aspects of interest of the security holders of the listed company. Such roles include resolving the grievances of security holders of listed entities, and review of measures taken for effective exercise of voting rights by shareholders.
Every company with net worth exceeding 5 billion rupees or turnover exceeding 10 billion rupees or net profit exceeding 50 million rupees is required to constitute a CSR committee.
As per the Companies Act, the CSR committee should consist of three or more directors, out of which at least one director should be IDs. As per the Companies (CSR Policy) Rules, 2014, unlisted public companies or private companies that are not required to appoint an ID should have their CSR committees without such director. Further, a private company having only two directors on its Board should consist its CSR committee with two such directors.
In addition, the Board may constitute directors’ committees or other expert committees to assist them and to discharge their functions.
As per the Listing Regulations, the top 100 listed companies, determined on the basis of market capitalisation, also have to constitute an RMC, consisting of a director as the chairman, and senior executives of the company as members. The Amendment Regulations have amended the Listing Regulations to the effect that the RMC should meet at least once in a year. Further, the roles of the RMC have been enhanced to include looking after the cybersecurity functions of listed companies.
Is a minimum or set number of board meetings per year required by law, regulation or listing requirement?
A company must have at least four Board meetings in a year, such that not more than 120 days intervene between two consecutive Board meetings. The Listing Regulations impose a similar condition of there not being a gap of more than 120 days between two Board meetings.
The directors can participate in Board meetings either in person or through video conferencing or other prescribed audiovisual means. In case where there is quorum in a Board meeting through physical presence of directors, any other director can participate through video conferencing or other audiovisual means in such meeting on specified matters.
The Amendment Regulations have amended the Listing Regulations to the effect that the quorum for Board meetings of the top 1,000 listed entities by market capitalisation with effect from 1 April 2019 and of the top 2,000 listed entities by market capitalisation with effect from 1 April 2020 should be one-third of the total strength of the Board or three directors, whichever is higher, including at least one ID. The participation of the directors by video conferencing or by other audiovisual means will also be counted for the purposes of this quorum.
Is disclosure of board practices required by law, regulation or listing requirement?
As per the Listing Regulations, listed companies are required to submit quarterly and annual compliance reports to the stock exchanges containing specified information regarding the Board, including the composition of the Board and Board committees, remuneration of directors and RPTs approved by the Board, among other things. Furthermore, listed companies are required to have a separate section in the annual report of the company containing a detailed compliance report on corporate governance aspects.
As per the Companies Act, all companies are also required to provide details with regard to the Board and committees in the Board report (which is mandatory under the Companies Act and is to be presented by the Board at the AGM). The Companies Act additionally requires companies to submit in general meetings a directors’ responsibility statement and a declaration by the IDs verifying their independence based on the prescribed criteria. Companies that are required to constitute an NRC have to also submit the company’s policy on directors’ appointment and remuneration including criteria for determining qualification and independence of directors.
The Amendment Regulations have amended the Listing Regulations to the effect that:
- a listed entity is required to submit within 30 days from the date of publication of its standalone and consolidated financial results for the half year, disclosures of RPTs on a consolidated basis in the relevant accounting standards for annual results to the stock exchanges and publish the same on its website; and
- the annual report (prescribed under Schedule V of the Listing Regulations) should also include a disclosure of transactions of the listed entity with any person or entity belonging to the promoter or promoter group holding 10 per cent or more shareholding in the listed entity in specified format in relevant accounting standards for annual results.
Remuneration of directors
How is remuneration of directors determined? Is there any law, regulation, listing requirement or practice that affects the remuneration of directors, the length of directors’ service contracts, loans to directors or other transactions or compensatory arrangements between the company and any director?
Private companies have full flexibility as regards determining directors’ remuneration and the process to be followed in this regard.
Listed public companies and other specified public companies must have an NRC, which would recommend a policy to the Board on the remuneration of directors, KMP and other employees. Public companies are required to determine remuneration payable to directors though their AOA or a shareholders’ resolution passed in a general meeting. As per the Companies Act, the total remuneration payable by a public company to its directors, including the MD and full-time director in a financial year cannot exceed 11 per cent of the net profits of the company in that financial year. Further, the remuneration payable to any one MD, full-time director or manager cannot exceed 5 per cent of the net profits of the company in that financial year without obtaining the approval of the shareholders of the company in respect of such remuneration in a general meeting. Non-executive directors’ remuneration is subject to an overall cap of 1 per cent of net profit, if the company has a MD, full time director or manager, and 3 per cent of the net profit in other cases. As per the Companies Act, a loss-making public company can only pay fixed remuneration to a managerial person and any payment exceeding such limits requires the approval of central government. No such prior approval is required to determine the remuneration that may be paid to a managerial person who is functioning in a professional capacity and possesses at least graduate level qualification with expertise and specialised knowledge in the field in which the company operates, provided such person does not hold any shares or interest in the company, its holding and subsidiary companies and is not related to any director of such company, its holding or subsidiary companies including for a minimum period of two years preceding his or her appointment.
Listed companies are required to disclose in their Board’s report the ratio of the remuneration of each director to the median employee’s remuneration and as per the Listing Regulations, all fees or compensation of the non-executive directors, including IDs, shall be fixed by the Board and require shareholders’ approval (except for sitting fees), and remuneration details of all directors are required to be disclosed in the annual report of the listed entity.
The Amendment Regulations provides that approval of shareholders by special resolution is required to be obtained every year, in which the annual remuneration payable to a single non-executive director exceeds 50 per cent of the total remuneration payable to all non-executive directors. Further, the fees or compensation payable to executive directors who are promoters or members of the promoter group will be subject to approval of the shareholders by special resolution in general meeting if the annual remuneration payable to such executive director exceeds 50 million rupees or 2.5 per cent of the net profits of the listed entity, whichever is higher, or where there is more than one such director, the aggregate annual remuneration of such directors exceeds 5 per cent of the net profits of the listed entity. Approval of the shareholders in this case will be valid only till the expiry of the term of such director.
Length of director’s service contract or appointment
As per the Companies Act, two-thirds of a public company’s directors are liable to vacate their position by rotation within a maximum period of three years from their appointment date. MDs, full-time directors or managers can be appointed for a maximum period of five years at a time and in certain events the remuneration payable to managing or full-time directors or managers can be determined by the shareholders for a period of three years at a time.
As per the Companies Act, a public company is prohibited from advancing any loan to directors or providing guarantees or any other security in relation to a loan taken by its directors or any person in whom the directors may be interested, either directly or indirectly, except as a part of the conditions of service extended by the company to all its employees, or pursuant to a scheme approved by the members of the company by a special resolution. Finance companies may extend loans to their directors provided the interest charged by them is not below the RBI-prescribed threshold.
Additionally, a company requires Board approval, and in certain situations even shareholders’ approval, through a special resolution when it is entering into any contract or arrangement with a director of the company, as a director is a ‘related party’ to the company under the Companies Act. The provisions of the Companies Act pertaining to loans made or guarantee given or security provided by a company do not apply, amongst others, to any loan made by a holding company to its wholly owned subsidiary or any guarantee given or any security provided by a holding company in respect of any loan made to its wholly owned subsidiary; or any guarantee given or security provided by a holding company in respect of loan made by any bank or financial institution to its subsidiary company.
Banking companies are subject to further requirements in relation to the aforementioned, as have been prescribed under the BR Act and the guidelines issued by the RBI. The grant of loan by a banking company to its directors is restricted and the determination of terms of directors’ appointment and payment of remuneration to directors is subject to the approval of the RBI. The RBI has clarified that the approval process will involve an assessment of whether the compensation policies and practices followed by the concerned banking company are in accordance with the principles and implementation standards on sound compensation practices issued by the Financial Stability Board, an international body based in Basle, Switzerland monitoring the global financial system.
Remuneration of senior management
How is the remuneration of the most senior management determined? Is there any law, regulation, listing requirement or practice that affects the remuneration of senior managers, loans to senior managers or other transactions or compensatory arrangements between the company and senior managers?
The Companies Act and the Listing Regulations define ‘senior management’ as officers of the listed company who are members of the core management team of a company (excluding the Board) and are one level below the executive directors, including all functional heads.
CEOs, CFOs and company secretaries (who are employees and need not necessarily be directors), form the senior management. These appointments are also included within the definition of KMP in the Companies Act.
While the Companies Act regulates the remuneration payable by public companies to its directors and manager, it does not similarly restrict remuneration payable to other KMP. The NRC of a company is required to formulate and recommend to the Board a policy regarding remuneration of directors, KMP and other employees and ensure that remuneration to KMP and senior management involves a balance between fixed and incentive that reflects the short and long-term performance objectives appropriate to the working of the company and its goals. In terms of the Code for Independent Directors, IDs should weigh in on appropriate levels of remuneration for KMP and senior management.
Unlike directors, the appointment and remuneration of senior management is governed by the terms of their appointment and employment. There are no formal guidelines on matters pertaining to the advancement of loans to senior managers or other transactions between the company and senior managers. Therefore, companies are free to determine their policies in this regard. The terms of appointment and payment of remuneration to its senior officials by banking companies, however, remain subject to the approval of the RBI, as detailed in question 28.
D&O liability insurance
Is directors’ and officers’ liability insurance permitted or common practice? Can the company pay the premiums?
The Companies Act permits a company to obtain insurance on behalf of its KMP to indemnify them against any liability in respect of any negligence, default, misfeasance, breach of duty or breach of trust. The company can pay the premium and it would not be considered as a part of the remuneration of the director or officer; however, in the event that the director or officer is found guilty, the premium paid on any such insurance is to be treated as a part of their remuneration under the Companies Act.
The Amendment Regulations have amended the Listing Regulations to the effect that, effective 1 October 2018, the top 500 listed entities by market capitalisation should undertake directors and officers’ insurance for all their IDs of such quantum and for such risks as may be determined by the Board.
Indemnification of directors and officers
Are there any constraints on the company indemnifying directors and officers in respect of liabilities incurred in their professional capacity? If not, are such indemnities common?
As discussed in question 30, Indian companies can indemnify directors for liabilities related to negligence, default, misfeasance, breach of duty or breach of trust as regards the company. Further, as provided under the model AOA to the Companies Act, the company is required to, at its own cost, indemnify every officer of the company against any liability incurred by him or her in defending any proceeding (civil or criminal) in which judgment is given in his or her favour or in which he or she is acquitted or discharged.
These liabilities are different from those incurred by directors in the ordinary course of managing the company’s affairs, in good faith and within their authority. While dealing on behalf of a company in good faith, directors have been treated as the company’s agents and have accordingly been provided with safeguards as available to agents generally under the Indian Contract Act 1872, including a right to seek indemnity from the principal (the company).
Companies ordinarily insert specific provisions in the AOA providing for directors’ indemnities, to the extent not prohibited under the Companies Act.
Exculpation of directors and officers
To what extent may companies or shareholders preclude or limit the liability of directors and officers?
The Companies Act does not permit the preclusion or limitation of directors’ liability. However, as discussed in questions 30 and 31, directors can be suitably insured and indemnified by companies against liabilities, to the extent not prohibited under the Companies Act.
What role do employees play in corporate governance?
The Companies Act requires listed companies, companies that accept public deposits and companies that have borrowings exceeding 500 million rupees from banks and public financial institutions to establish a ‘vigil mechanism’ for directors and employees to report genuine concerns from a corporate governance perspective. The vigil mechanism is required to provide adequate safeguards against victimisation of persons who report concerns, and where necessary must provide direct access to the chairman of the audit committee.
The Listing Regulations incorporate the whistle-blower concept and provide that a listed company should have a vigil mechanism for directors and employees to report to the management concerns about unethical behaviour, actual or suspected fraud or violation of the company’s code of conduct. The vigil mechanism should provide for adequate safeguards against victimisation of any person who acts as a whistle-blower, including direct access to the chairman of the audit committee, in appropriate and exceptional matters.
Sometimes, individuals go out of the organisational hierarchy and make information available to the public or other external authorities, in order to effectively carry out the whistle-blowing function.
Board and director evaluations
Is there any law, regulation, listing requirement or practice that requires evaluation of the board, its committees or individual directors? How regularly are such evaluations conducted and by whom? What do companies disclose in relation to such evaluations?
The Companies Act requires listed companies, and public companies with paid-up share capital exceeding 250 million rupees, to disclose the manner in which formal annual evaluation has been undertaken by the Board of its own performance and the performance of the committees constituted by the Board and individual directors in the Board’s report. The aim of Board evaluation is to improve governance standards and update company practices, to ensure the growth of the company.
The NRC of each such company and the IDs have been made responsible for carrying out the evaluation of each director’s performance; however the Companies Act does not provide for the mode, manner and process to be followed for such evaluation. Directors on the Board of government companies are exempt from the evaluation requirement, provided that they are required to be evaluated by the ministry or governmental department that is administratively in charge of such a company as per its own methodology.
The Listing Regulations additionally require the Board of listed companies to undertake an evaluation of the performance of the IDs on the Board. The Amendment Regulations have amended the Listing Regulations to the effect that such evaluation of the IDs will include performance of the directors and fulfilment of the independence criteria as specified in the Listing Regulations and their independence from the management. The entire Board is required to participate in the evaluation of each ID, except for the individual ID being evaluated. The NRC of listed companies has been tasked with formulating the criteria for evaluation of performance of IDs, as well as the Board as a whole, which evaluation criteria is to be disclosed by the company in its annual report. The Board of listed companies is required to monitor and review the evaluation framework for the Board.
The ICSI published a ‘Guide to Board Evaluation’ in April 2015 (before the Listing Regulations came into effect) to provide guidance to companies on how to evaluate the performance of its Board with suggested parameters and sample models for evaluation. ICSI recommends that the evaluation process should include an analysis of the time spent by the Board in considering matters, and whether the terms of reference of various committees set up by the Board have been met, in addition to verifying compliance with the Companies Act, and also recommends involving an external expert for such evaluation, to add a level of independence to the exercise.
Disclosure and transparency
Corporate charter and by-laws
Are the corporate charter and by-laws of companies publicly available? If so, where?
The company is required to file its charter documents and any amendments thereto with the RoC, and they can be inspected and copies obtained online by any person registered with the MCA portal at http://mca.gov.in/mcafoportal/viewPublicDocumentsFilter.do upon payment of a nominal fee of 100 rupees.
What information must companies publicly disclose? How often must disclosure be made?
Companies must make periodic filings of the company’s audited accounts, the Board’s report, auditor’s report and annual return with the RoC.
Additionally, inter alia, when the company passes certain resolutions, there are changes in directorships, the creation or satisfaction of charges on the assets, changes in authorised or paid-up share capital or changes in the registered office address, the company must file such information with the ROC.
Further, companies are also required to file with the ROC, inter alia, certain notices or advertisements issued by the company, the orders of the Tribunal, charter documents and amendments thereto.
Indian RoC filings are electronically effected through the MCA portal at http://mca.gov.in/mcafoportal/showEformUpload.do and can be inspected by any person registered with the portal upon the payment of a nominal fee of 100 rupees. Certified copies of filings can also be obtained.
The Companies Act also requires companies to make disclosures to its shareholders, by incorporating information into the general meeting notices, the Board’s report and auditors’ report. For certain corporate actions, the stakeholders’ and other authorities’ disclosure is required to be made by way of notices and advertisements.
Listed companies are subject to additional disclosure requirements under the Listing Regulations, the Takeover Code and Insider Trading Code, for better implementation of corporate governance initiatives.
Do shareholders have an advisory or other vote regarding executive remuneration? How frequently may they vote?
See questions 28 and 29. For public companies, the remuneration payable to managing or full-time directors or managers can be determined by the shareholders for a period of three years at a time.
Do shareholders have the ability to nominate directors and have them included in shareholder meeting materials that are prepared and distributed at the company’s expense?
Under the Companies Act, each shareholder can nominate him or herself or another person as a director appointee for consideration of the shareholders at a general meeting by providing the company with at least 14 days’ notice and depositing a fee of 100,000 rupees with the company. The rules framed under the Companies Act provide that the company shall inform its shareholders of every nomination notice at least seven days before the general meeting, either individually through email or written notice to the shareholders, along with a notification on the website of the company, or through newspaper advertisements of such nominations, at the company’s expense. Upon a resolution passed by simple majority (unless otherwise provided in the AOA) in the general meeting, the nominee stands elected as a director. The company is required to refund the deposit to the nominating shareholder if the proposed person gets elected as a director, or gets more than 25 per cent of the total votes validly cast on the resolution at the general meeting.
The requirement of deposit of amount is not applicable in cases of appointment of an ID or a director recommended by the NRC, if any, or a director recommended by the Board of the company (if the company is not required to constitute an NRC).
Commonly, significant investors or joint venture partners have the right to nominate Board members via ‘pooling arrangements’ and other provisions inserted to that effect into the AOA.
Do companies engage with shareholders? If so, who typically participates in the company’s engagement efforts and when does engagement typically occur?
Companies typically engage with their shareholders at their AGM. The introduction of electronic voting and postal ballot facilities for a large number of matters requiring shareholder approval have enabled greater participation of small shareholders in decision making, including by eliminating the considerable time and cost expended by shareholders to attend general meetings.
The directors of a company are expected to attend all general meetings of a company, and if any director is unable to attend a general meeting, the chairman of the meeting is required to explain the reason for such absence at the meeting. Specifically, the chairman of the NRC, audit committee and the stakeholders committee, if constituted by a company, are required to attend general meetings of the company, and in their absence, another member of the above committees duly authorised by the relevant chairman must attend the general meeting. This standard has been introduced by the Companies Act and ICSI to ensure that at least one member of each of these committees is present at every general meeting to address shareholders’ queries, if any, concerning their respective committees.
On 7 November 2016 the India-UK Financial Partnership, which was formed in July 2014 to provide policy inputs to both governments in the financial sector, presented a paper titled ‘Responsible Shareholder Engagement - An Indian Stewardship Code’ to Mr Arun Jaitley, the Finance Minister of India. The report states that good corporate governance and effective investor stewardship are essential for corporate success and that institutional investors, in particular, have a fiduciary duty to actively and appropriately represent the interests of their investors, who are typically small investors, to the companies in which they hold investments. Specifically in regard to listed companies, the paper recommends the development of an ‘Indian Stewardship Code’ to be adopted by public and private mutual funds, insurance companies and foreign investors which will introduce a ‘voting plus’ and ‘comply or explain’ framework to create responsible shareholder engagement in India and a constructive and mutually beneficial two-way dialogue between shareholders and the Boards of listed Indian companies.
In March 2017, the Insurance Regulatory and Development Authority pioneered in India a stewardship code applicable for insurers. However, there is no common stewardship code in India yet that would be applicable to all institutional investors.
Are companies required to provide disclosure with respect to corporate social responsibility matters?
Under the Companies Act, the Board’s report should disclose the composition of the CSR committee, the details of the CSR policy developed and implemented by the company on CSR initiatives taken during the year, and the reasons for not spending the amount earmarked for CSR activities in a financial year (in case the company fails to spend such amount). The Board’s report should also include an annual report on CSR containing specified particulars. Companies should also disclose the contents of their CSR policies on their website, if any, in the prescribed manner.
The Listing Regulations require the top 500 listed entities based on market capitalisation (calculated as on 31 March of every financial year) to include in their annual report a business responsibility report describing the initiatives taken by them from an environmental, social and governance perspective, in the format as specified by the Board.
CEO pay ratio disclosure
Are companies required to disclose the ‘pay ratio’ between the CEO’s annual total compensation and the annual total compensation of other workers?
There is no specific requirement to disclose the pay ratio between the CEO’s annual total compensation and the annual total compensation of other workers. However, the Companies Act read with the relevant rules require every listed company to disclose, inter alia, the following in the Board’s report:
- ratio of the remuneration of each director to the median remuneration of the company’s employees for the financial year;
- percentage increase in remuneration of each director, CFO, CEO, company secretary or manager, if any, in the financial year;
- percentage increase in the median remuneration of employees in the financial year;
- number of permanent employees on the rolls of the company;
- average percentile increase already made in the salaries of employees other than the managerial personnel in the last financial year and its comparison with the percentile increase in the managerial remuneration and justification for the same and point out if there are any exceptional circumstances for increase in managerial remuneration; and
- affirmation that the remuneration is as per the remuneration policy of the company.
Gender pay gap disclosure
Are companies required to disclose ‘gender pay gap’ information? If so, how is the gender pay gap measured?
There is no prescribed requirement for companies to disclose ‘gender pay gap’ information.
Update and trends
Update and trends
Please identify any new developments in corporate governance over the past year (including any significant proposals for new legislation or regulation, even if not yet adopted). Please identify any significant trends in the issues that have been the focus of shareholder interest or activism over the past year (without reference to specific initiatives aimed at specific companies).
Certain new developments have taken place during the past year in relation to corporate governance in India. These include the following:
- The Companies Act has been further amended through the Companies (Amendment) Act, 2017, with effect from 9 February 2018 and 7 May 2018.
- The notified provisions relate, among others, to:
- under the explanation of the definition of ‘associate company’, the definition of ‘significant influence’ has been substituted by a new definition and a new definition of ‘joint venture’ has been introduced. Now, ‘significant influence’ means control of at least 20 per cent of total voting power, or control of or participation in the business decisions under an agreement, and ‘joint venture’ means a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement;
- the EGM of a company, other than of the wholly owned subsidiary of a company incorporated outside India, should be held at a place within India;
- the requirement for placing the matter relating to the appointment of an auditor of the company for ratification by members at every AGM has been done away with; and
- in case there is a quorum in a meeting of the Board through physical presence of directors, any other director may participate through video conferencing or other audiovisual means in such meeting on specified matters.
- The President of India gave his assent to the Fugitive Economic Offenders Ordinance, 2018 on 21 April 2018 following cabinet approval of the same. Although the Fugitive Economic Offenders Bill, 2018 was introduced on 12 March 2018 during the budget session, it could not be taken up for consideration. This proposed law seeks to deter economic offenders, against whom an arrest warrant has been issued in respect of a scheduled offence, from evading the process of Indian law by remaining outside the jurisdiction of Indian courts. It is also expected to help banks and financial institutions achieve higher recovery from the financial defaults committed by fugitive offenders. Cases or offences involving a total value of 1 billion rupees or more will come under the purview of this proposed law.
- SEBI had constituted the Kotak Committee in June 2017 with the aim of improving standards of corporate governance of listed companies in India. This committee submitted its report to SEBI on 5 October 2017. SEBI accepted certain recommendations of the Kotak Committee and the same have been incorporated in the Listing Regulations (as detailed out in our responses to the questions above).
The year 2017 witnessed an unprecedented number of cases in India where shareholders dissented against the Board and the management of the relevant companies. The issues that were most scrutinised by the shareholders of different companies were related to appointment of directors and their remuneration.
In one case, a company proposed an RPT where the company wanted to sell one of its properties to the chairman of the company and some of his relatives at a price that was much less than the market value. Most of the institutional investors as well as non-institutional investors voted against the proposal, and the proposal eventually failed to pass.
In another case, a company proposed to make an investment in one of its loss-making subsidiaries. Most of the institutional investors voted against the proposal. However, the proposal was passed because the promoters and non-institutional investors voted in favour of the proposal.
In yet another case, the co-founder of the company alleged lapses of corporate governance against the chairman and members of the Board. While the Board and the management tried to defend the allegations, the ultimate result was the departure of the chairman, the CEO and two other IDs from the Board.
Therefore, it can be seen that shareholders of Indian companies are taking more active roles in the running of the companies and putting their views forward in case they feel that certain proposed decisions could impact the company or such shareholders.