Corporate Governance 2020 Comparisons

Last Updated June 22, 2020

Contributed By Wakhariya & Wakhariya

Law and Practice


Wakhariya & Wakhariya is a full-service law firm, founded in 1998, which advises international companies doing business in India on corporate, commercial, regulatory, compliance, governance and transactional matters. The firm specialises in providing critical, strategic and practical advice to international clients, which include Fortune 500 companies and lawyers in international law firms. The multi-dimensional practice broadly covers the following industry sectors: telecommunications and information technology, branded and generic pharmaceuticals, healthcare, oil and gas, renewable and sustainable energy, hotels and hospitality, textiles, civil aviation, professional services, food and beverages, metals and minerals, education and non-profit. The firm is located in Mumbai but has the ability to advise clients across India.

There are four principal forms of business organisation in India.

  • Companies incorporated under the Indian Companies Act, 2013, which include:
    1. a private limited company, which limits the number of shareholders and restricts the free transferability of shares;
    2. a public limited company, which may be listed on an Indian stock exchange and whose shares can be freely traded and transferred;
    3. a non-profit company, popularly referred to as a Section 8 company, whose objective is to promote arts, commerce, charity, education, science, social welfare and sports, and which intends to apply its profits, if any, in promoting its objects (it prohibits the payment of dividends to its members); and
    4. a one-person company, which has only one single shareholder, this is relatively new, introduced by the 2013 Act, and is not very popular yet.
  • Partnerships under the Indian Partnership Act, 1932; partnerships are very popular with small traders and businesses and require a partnership deed to be registered or filed.
  • Limited liability partnerships, under the Limited Liability Partnership Act, 2008; these were principally introduced to help professional and service organisations form partnerships with limited personal liability for partners.
  • Sole proprietorships, which are simply individuals doing business; this is the simplest form of business organisation and requires almost no registration or reporting for its formation.

India has always heavily regulated businesses. In the last decade, the emphasis has been more on regulation through self-reporting rather than licensing and approvals.

The principal source of governance is the Companies Act, 2013 (the Companies Act), Rules published under the Companies Act, and Notifications issued by the Ministry of Corporate Affairs (MCA).

Listed companies in India are required to also comply with the Securities and Exchange Board of India (Listing Obligations & Disclosure Requirements) Regulations, 2015 (SEBI Regulations) and the listing agreement with the Stock Exchange on which the company may be listed.

India has a very strong disclosure, governance and reporting policy with many of the disclosure and governance requirements mandatory. In the past couple of years, the government has started to suspend companies and disqualify directors of the companies that have not complied with disclosure, governance and reporting requirements.

There are many additional provisions that affect governance, like the Whistle Blower Policy, Corporate Social Responsibility and Related Party Transactions, all of which require the maintaining of detailed records, disclosure and reporting.

The SEBI Regulations restrict directors from serving on more than ten company boards, and broadly require every publicly listed company to meet the following requirements:

  • there must be at least one female director;
  • no less than 50% of the board must comprise non-executive directors;
  • the board constitutes the Audit Committee, the Stakeholders' Relationship Committee, the Risk Management Committee and the Related Party Transactions Policy;
  • there must be two independent directors if the paid-up capital is more than INR100 million, if there is turnover of more than INR1 billion or if their aggregate outstanding loans, debentures and deposits exceed INR500 million, and such directors are not entitled to any stock options; and
  • the independent directors must hold at least one meeting within the financial year, without the presence of non-independent directors and members.

SEBI has also framed regulations for the issuance of shares, foreign investment, the buy-back of securities and the prevention of insider trading.

The Indian Companies Act, 2013 is a successor to the Companies Act, 1956, which itself was a successor to the pre-independence British-legislated Companies Act, 1913.

The 2013 Companies Act has 29 Chapters, 470 Sections and 7 Schedules, which collectively list numerous provisions concerning independent directors, board constitution, general meetings, board meetings, board processes, related party transactions, audit committees, etc, with which every company has to comply. In addition, in the past six years the Ministry of Corporate Affairs has issued hundreds of notifications providing guidance on various provisions or requiring certain mandatory compliances, all to be filed online through an e-filing process and signed using a digital signature issued by a government-authorised agency, eliminating almost all paper filings.

The following are some of the major mandatory compliances:

  • board meetings must be held once every 120 days, with at least four meetings in a calendar year;
  • every company has to hold an annual general meeting (AGM) of the shareholders during the financial year, and no more than 15 months should elapse between two AGMs;
  • the company's balance sheet and profit and loss statements have to be audited by a statutorily appointed auditor;
  • auditors are subject to mandatory rotation/change every five years, and cannot audit more than 20 companies;
  • audited financial statements along with the director’s report, approved by the shareholders in the AGM, are to be filed with the Registrar of Companies (RoC);
  • directors have to annually submit detailed disclosures of their and their family’s interests in the company to prevent any conflicts of interest;
  • every change of director has to be reported within 30 days to the RoC;
  • a full-time company secretary and cost auditor shall be appointed if the company’s paid up capital or turnover is above a certain threshold;
  • every special resolution (ie, one requiring more than 75% of shareholders to approve) is to be filed with the RoC; and
  • every individual must mandatorily be registered in a government database and issued a Director Identification Number (DIN) before appointment as a director.


Since 2006, the Ministry of Corporate Affairs (MCA) of the Government of India has promoted an electronic database called MCA-21 that houses the corporate governance and disclosure information of all the companies and LLPs incorporated or formed in India. In late April 2020, the MCA invited applications for access to this vast repository of data from researchers for various purposes, including how this data could be integrated with the databases of other government ministries and for ways of creating a corporate governance index.

Compliance Disclosure

Since July 2018, the MCA has issued a series of mandatory compliance disclosures intended to strengthen governance and weed out shell companies and dummy directors. This has included:

  • reconfirming director details and profile via an online video recording;
  • submitting ID and proof of address documents, which, for foreign directors, are required to be notarised and apostilled;
  • not registering persons in the national director’s database without a specific resolution by the company in which the director is to be first appointed; and
  • requiring companies to obtain detailed personal particulars of directors (like names of parents, spouses, and children) to maintain conflict of interest records in case of transactions with interested parties.

There are many privacy concerns with such information being given to the government, and many are also questioning its relevance. However, most are complying, at least for now, because the government marks companies that do not comply, as non-compliant, and suspends certain governance activities of such companies.

In January 2019, the MCA required companies to report if they were accepting loans and deposits from the public, and also to file a one-time report to disclose information of amounts not considered as deposits

In February 2019, the MCA mandated companies to report details of every person directly or indirectly holding or controlling 10% or more of the shares of the company. As with most Indian disclosures, this requires the controlling person to provide his or her father’s name, date of birth, passport number and similar personal information, which will all reside on a public database.

Also, in February 2019, the MCA required all companies to reconfirm their active and “in-compliance” status by filing particulars and photos of the building in which the company’s registered office is located, including one photo showing at least one director sitting in the registered office.

AGILE e-form

In March 2019, the MCA launched a new mandatory e-form, AGILE, through which a new company can obtain registration of its goods and service tax identification number (GSTIN), Employees Provident Fund Organization (EPFO) and Employee State Insurance Corporation (ESIC) simultaneously. This new AGILE e-form helps new companies to reduce their compliance burden and obtain multiple registrations in a single go.

In May 2019, the MCA notified that directors of companies that default in verifying their active status before the stipulated date, shall be held liable for that non-compliance. The intention behind this compliance requirement is to detect dormant and shell companies and update information on all active companies.

Minority Shareholders

In May 2019, the MCA notified new threshold limits for the number of shareholders required to file class action lawsuits against companies, allowing minority shareholders and investors to seek remedies such as:

  • restraining the company from committing acts which either violate or which are ultra vires its charter documents;
  • restraining companies from committing acts contrary to the Act; and
  • claiming damages or other appropriate action from directors, auditors, external advisors or any other person who has made incorrect statements or engaged in suppression of material facts or fraudulent conduct, etc.

Under the new thresholds, an application for class action can be filed by a member or members representing 5% of the total members of a company, or by one hundred members of a company, whichever is less. The same criterion is also applicable for depositors of deposit-taking companies. In the case of an unlisted company, a member or members holding at least 5% of the issued share capital can file for class action. For listed companies, this threshold limit is 2%.

Companies (Amendment) Act, 2019

In July 2019, the Ministry of Corporate Affairs introduced the Companies (Amendment) Act, 2019, introducing the following key changes:

  • restricting a company having share capital from commencing any business unless a declaration of commencement of business is filed by a director with the RoC;
  • changes in penal provisions regarding issue of shares at discount, default in filing of annual returns, alteration of share capital and appointment of key managerial personnel;
  • identification of every individual who is a significant beneficial owner in the company (defined as directly or indirectly holding 10% or more of shares in the company), and requiring those individuals to register their beneficial ownership with the MCA; and
  • prevention of oppression and mismanagement by empowering the government to initiate a case against that person and referring the same to the National Company Law Tribunal (NCLT).

Debenture Redemption Reserve

India has a unique requirement for the creation of a debenture redemption reserve (DRR). Every company that issues redeemable debentures is required to create a DRR of at least 25% of the outstanding value of the debentures for the purpose of their redemption. With a view to liberalising the legal framework surrounding issuance of debentures, the MCA, in August 2019, reduced this DRR requirement from 25% to 10%; non-banking financial companies (NBFCs) and housing finance companies (HFCs) were exempted from the creation of DRR in the case of public issues of debentures; and listed companies were completely exempted from creating DRR.

Independent Directors

Starting in October 2019, the MCA has required boards of directors to include the details of integrity, expertise and experience of independent directors hired during the year in their annual report to the shareholders.

Moreover, the MCA also clarified that independent directors would have to pass a self-assessment test (with 60% score in aggregate) to prove their competence, conducted by the Indian Institute of Corporate Affairs (IICA). The test will evaluate the directors based on their knowledge of the Companies Act, securities law, basic accountancy and other subjects that are required for the individual to perform as an independent director. The purpose of this test is to ensure that independent directors, appointed to protect the interests of minority shareholders and to keep an eye on the governance of the company, are qualified for the task. The IICA has also been authorised to maintain a data bank of candidates, who are eligible to become independent directors. The data bank shall contain certain details in respect of each person who are eligible and willing to be appointed as independent directors. The Institute shall provide the information available in the data bank only to the companies required to appoint independent directors, after conducting necessary due diligence.

Winding Up

In order to simplify the procedure to be followed by small companies closing their businesses, the MCA, in January 2020, amended the winding-up rules. Under these new guidelines, in effect from 1 April 2020, companies who have not taken deposits beyond INR2.5 million or have no secured loans beyond INR5 million, turnover beyond INR500 million or paid up capital beyond INR10 million can wind up their businesses without having to go to a tribunal. The rules mandate that the closure of the company will be carried out by the official liquidator hired by the government, who will take charge of the assets and deal with the claims of the company.


In February 2020, the MCA launched a new integrated web form (called SPICE+), which offers a wide variety of services related to various government ministries, thereby saving time and cost for starting a business in India. New companies, at the time of their registration, can, among other things, reserve the company’s name, obtain a Permanent Account Number (PAN), register for goods and service tax (GST), obtain Director Identification Number (DIN) for their directors through a single integrated e-form. Previously, each of these required separate applications, one after the other and each took a few days to a few weeks to be completed.

Additionally, all new companies incorporated through the SPICe+ form are mandatorily required to use the MCA’s AGILE-PRO e-form when opening the company’s bank account. This new web form facilitates on-screen filing and real time data validation for seamless incorporation of companies.

Companies Fresh Start Scheme 2020 and LLP Settlement Scheme 2020

In March 2020, the MCA declared a one-time relaxation for payment of additional fees by defaulting limited liability partnerships (LLPs) and companies to make good their default by filing pending documents and to serve as a compliant LLP or company in the future. The Companies Fresh Start Scheme 2020 and LLP Settlement Scheme 2020 both contain provisions for waiver of additional fees for filings as well as for giving immunity from penal proceedings, including relief against imposition of penalties for late submissions. These schemes have been made available for a limited number of months, within which the defaulting companies and LLPs have to complete their filings.

The Companies Act, 2013 requires companies to establish a corporate social responsibility (CSR) committee, develop CSR policies, spend 2% of profits on these policies and report on these activities to the MCA. Companies are encouraged to focus their CSR activities on eradicating poverty, hunger and malnutrition, improving education, promoting gender equality and female empowerment, as well as environmental sustainability. Since the outbreak of the COVID-19 pandemic, CSR funds are permitted to be used for alleviating pandemic-related hardship as well.

Over the past decade, the government of India has formulated many regulations and offered great incentives for promoting environmental, social and governance standards. On the one hand, there are a multitude of incentives and subsidies in the form of business opportunities encouraging companies to embrace environment friendly businesses and practices. On the other, the government has enforced stricter regulations and norms to achieve its sustainability objectives.

National Voluntary Guidelines

In 2009, India’s Ministry of Corporate Affairs published Corporate Social Responsibility Voluntary Guidelines, recommending that all businesses formulate a Corporate Social Responsibility (CSR) Policy, and since then sustainability disclosures have formed an integral part of the best practices of any company that wants to develop and demonstrate its green or community-oriented credentials.

In 2011, the CSR guidelines were superseded by the expanded and more detailed National Voluntary Guidelines (NVGs) on Social, Environmental, and Economic Responsibilities of Business, containing comprehensive principles to be adopted by companies as part of their CSR activities. This introduced a structured business responsibility reporting format, requiring certain specified disclosures and demonstrating the steps taken by companies to implement the environmental, social and governance (ESG) principles.

The NVGs define nine principles of responsible business conduct, to be adopted by companies as part of their practices, and mandates preparing a business responsibility report by providing stakeholder information about their initiatives, impacts and future course of action across ethics, transparency and accountability, product life-cycle sustainability, employees' well-being, stakeholder engagement, human rights, environment, public advocacy, inclusive growth, and customer value.

In 2019, the NVGs were revised and the MCA formulated the National Guidelines on Responsible Business Conduct (NGRBC). The NGRBC have been designed to assist businesses to fulfil their regulatory compliance requirements. The NGRBC are made applicable to all businesses, irrespective of their ownership, size, sector, structure or location. These new guidelines containing precise pillars of business responsibility (called principles), accompanied by a set of requirements and actions that are essential to the operationalisation of the principles, referred to as the "core elements". The principles highlighted in the NGRBC are set out below.

  • Businesses should conduct and govern themselves with integrity in a manner that is ethical, transparent and accountable.
  • Businesses should provide goods and services in a manner that is sustainable and safe
  • Businesses should respect and promote the wellbeing of all employees, including those in their value chains.
  • Businesses should respect the interests of and be responsive to all their stakeholders.
  • Businesses should respect and promote human rights.
  • Businesses should respect and make efforts to protect and restore the environment.
  • Businesses, when engaging in influencing public and regulatory policy, should do so in a manner that is responsible and transparent.
  • Businesses should promote inclusive growth and equitable development.
  • Businesses should engage with and provide value to their consumers in a responsible manner.

Business Responsibility Reporting

In August 2012, the Securities and Exchange Board of India (SEBI) issued the business responsibility report (BRR) norms that made it mandatory for the 100 largest listed companies to publish an annual business responsibility report, capturing the company’s non-financial performances through economic, environmental and social factors. In 2015, this requirement was expanded to the 500 largest companies and to the 1,000 largest listed companies in December 2019.

BRR requires companies to disclose their compliance with the nine principles of business responsibility, which include ESG factors. For Indian companies to attract future investment they have to disclose their performance on ESG factors along with financial factors, which makes publishing BRR and sustainability reports essential.

The BRR requires companies to detail the initiatives taken from an environmental, social and governance perspective, in a prescribed standard template format which helps companies to publish their BRR in a structured manner. It also helps the government in conducting comparative analysis across multiple entities.

Companies that follow an internationally accepted reporting framework to publish their sustainability reports, are not required to prepare a separate report. They have only to furnish the same to their stakeholders along with the details of the international framework under which their BRR has been prepared along with a mapping of how the principles contained in these guidelines apply to disclosures made in their sustainability reports.

Stock Exchange Disclosure and ESG Indices

In 2018, the Bombay Stock Exchange published a guidance document on ESG disclosures, which served as a comprehensive set of voluntary ESG reporting recommendations, guided by global sustainability reporting frameworks. This provides 33 specific issues and metrics on which companies should focus.

The National Stock Exchange (NSE) of India has launched two ESG indices, NIFTY100 Enhanced ESG Index and NIFTY100 ESG Index to appeal to those parts of the investment community looking to align their investment with ESG goals. The ESG indices cover a company’s:

  • impact on the environment, such as its carbon intensity, recycling and waste management processes and development of renewable energy;
  • social factors such as policies and the impact of a company’s activity on working conditions, human rights, health and safety norms and financial inclusion; and
  • governance factors measuring the effectiveness of processes and policies pertaining to corporate governance, business ethics, fraud, anti-corruption measures and public policy.

A company is rated based on three main areas: preparedness, disclosure and performance. Preparedness indicators measure effectiveness of a company’s policies, programmes and structures; disclosure indicators measure effectiveness of a company’s standards and reporting process; and performance indicators capture the company’s controversies and incidents and its response to them.

India has a population of 1.3 billion, second only to China. The bulk of this population live in rural areas. In urban areas and metropolitan cities there are large swathes of densely populated ghettos and slums, where social distancing is impossible and the spread of COVID-19 a nightmare for any administration. As of this writing (June 2020), India’s official count was around than 500,000 infections and about 16,000 deaths. This low count is possibly due to the government’s early and aggressive lockdown of the entire country, which is currently in its thirteenth week, with the distinct possibility of a further extension in areas where the infection continues to peak. As expected, the lockdown has had a serious negative impact on businesses and the economy. However, the government has been very proactive in supporting businesses and the economy. Within days of the lockdown, the MCA deployed a new web form called the Company Affirmation of Readiness towards COVID-19 (CAR-2020) purely as a confidence building measure to assess the readiness of companies to deal with the COVID-19 threat in India. In the six weeks of lockdown, various ministries of the government of India has offered the following measures to protect businesses and people from the negative consequences of the COVID-19 triggered lockdown.

The mandatory requirement of holding meetings of the board every 120 days has been extended by a period of 60 days for the next two quarters – ie, till 20 September 2020. Similar relaxation is already given by SEBI to listed companies.

The requirement of holding board meetings with the physical presence of directors – for the approval of certain restricted matters, such as annual financial statements, board reports, prospectus; and the approval of matters relating to amalgamation, merger, demerger, acquisition and takeovers – has been relaxed through 30 June 2020. Such meetings may now be held through video-conferencing or other audio-visual means.

The requirement for independent directors of a company to mandatorily hold at least one meeting in a financial year, without the attendance of non-independent directors and members of management, has for the financial year 2019–20, been made discretionary, and if the independent directors of a company have not been able to hold such a meeting, this shall not be viewed as non-compliance.

The Companies (Auditor’s Report) Order, 2020 – which stipulates a new format for the issue of audit reports in the case of statutory audits of companies under the Companies Act, 2013 and requires auditors to report more disclosures on core aspects of financial statement such as loan defaults, cash losses, immovable properties, etc – has been pushed back and is now applicable from financial year 2020–21, instead of 2019–20.

For newly incorporated companies, the time limit for submitting declaration for commencement of business within six months from incorporation has been extended by an additional six months.

The minimum residency in India requirement of 182 days for at least one director of a company has been dispensed with and defaulting companies shall not be treated as non-compliant for the financial year 2019–20.

The time limit for creating a deposit repayment reserve of 20% of public deposits maturing during financial year 2020–21 and investing 15% of debentures maturing during financial year 2020–21 in specified instruments has been extended from 30 April 2020 to 30 June 2020.

Spending of CSR funds for COVID-19 related health care, preventive health care, sanitation and disaster management is allowed as an eligible CSR activity.

A Prime Minister’s Citizen Assistance and Relief in Emergency Situations Fund (PM CARES Fund) has been set up for providing relief to persons affected by the COVID-19 pandemic; and contributions made to the PM CARES Fund have been made eligible to qualify as CSR expenditure of a company.

The National Company Law Tribunal (NCLT) has ordered that any interim order or stay order passed by the Tribunal under the Companies Act, 2013 shall continue till a future date of hearing.

The MCA has temporarily eliminated all additional fees payable for late filings from 1 April 2020 to 30 September 2020.

The MCA introduced the Companies Fresh Start Scheme, 2020 to provide an opportunity to companies to make good any filing related defaults, irrespective of duration of default, and make a fresh start as a fully compliant entity. The scheme incentivises compliance and reduces the compliance burden during the unprecedented public health situation caused by COVID-19. The scheme gives a one-time waiver of additional filing fees for delayed filings by the companies with the RoC during the currency of the scheme – ie, during the period starting from 1 April 2020 and ending on 30 September 2020, at the same time giving immunity from penal proceedings, including against imposition of penalties for late submissions.

A company is managed by the board of directors, who are appointed by the shareholders. The Companies Act, 2013 identifies certain officers as key managerial personnel, who are responsible for the day-to-day operations and governance of the company. These are a managing director, a whole-time director (ie, any director who is a full-time employee of the company), a CEO, a CFO and a company secretary (a governance professional licensed by the Institute of Company Secretaries of India).

In addition, the board of directors are authorised to appoint specific committees for specific purposes. In public companies, certain committees are mandatorily required.

The board of directors has wide powers to run the company. Directors take decisions through board resolutions passed by simple majority in regular board meetings or written “circular resolutions” (ie, resolutions passed by circulation to directors) that are passed outside of board meetings but require the unanimous written consent of all directors.

Certain decisions are reserved by the Companies Act (shareholders in closely held companies can also agree to reserve other decisions) exclusively for shareholders to decide, or require a super majority (called special resolutions, which require more than three quarters of the shareholders voting in favour).

Decisions such as an alteration of the memorandum or articles of the company, a change in registered office, a reduction in share capital, a change in the objects of a public company, the winding up of a company, etc, can only be taken by a special resolution.

Public and private companies are required to have a minimum of three and two directors, respectively, and a maximum of 15 directors. A company’s articles of association 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. Only individuals can be appointed as directors; corporations and associations cannot be directors.

While there is no general residency requirement for directors, every company is required to appoint at least one resident director (ie, a person who has stayed in India for a total period of not less than 182 days in the previous calendar year).

Listed companies and public companies with paid-up share capital of INR1 billion or turnover exceeding INR3 billion are required to appoint at least one female director.

The structure of the board is primarily one-tier. There is no distinction between the managerial board and the supervisory board, although the Companies Act recognises a category of directors as independent directors. It prescribes that listed companies and unlisted public companies with a certain level of paid-up capital, turnover or indebtedness should have a prescribed number of independent directors on their boards. This helps to ensure transparency in corporate governance and safeguard the autonomy of independent directors.

Directors play a dual role – one as an agent of the company and another as a person with a fiduciary duty to the company.

Contracts entered into by a director are binding on the company only if they are within the actual authority of the director, or if the articles of association of the company or the company’s by-laws provide for the delegation of that power by a board resolution, whether or not that power has actually been delegated.

It is a legal requirement for certain classes of companies to mandatorily have the following committees:

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

First directors are usually named in the articles of association of the company at the time of incorporation. If not so named, the subscribers to the organising documents are deemed to be and become the first directors. The board of directors has power to appoint additional directors from time to time, or to appoint directors to fill any casual vacancy arising due to the death or resignation of a director, but subject to the overall number specified in the articles of the company. Additional directors appointed by the board hold office only up to the date of the next AGM, at which time the shareholders may either appoint/confirm them as regular directors or appoint new directors.

Directors (other than first director, additional director, nominee director, alternate director and a director appointed in a casual vacancy) are always appointed by a company’s shareholders in a general meeting. Generally, vacancies to the board or appointment of additional directors are permitted to be filled by the board itself, but such directors are subject to reappointment by the shareholders at the next general meeting.

The Act permits employees to be appointed as directors and, in such cases, they are typically designated as “whole-time” directors. 

Directors cannot be appointed, until they are first registered in a national database and issued a DIN and have given written consent for the appointment, which must be filed with the RoC.

A director may be removed before the expiry of his or her term of office by an ordinary resolution passed in a general meeting of the shareholders after a special notice has been given.

In the case of public companies, the Act requires the CEO, managing director, CFO, company secretary and whole-time director to be designated as key managerial personnel (KMP), which casts specific onus on such KMPs for the governance of the company.

The Companies Act, 2013 prescribes that directors must not involve themselves in any situation in which they may have a direct or indirect interest that conflicts with the interests of the company. Also, directors must not achieve (or attempt to achieve) any undue gain or advantage either to themselves or to their relatives, partners, or associates. If a director is found guilty of making any undue gain, he or she shall be liable to pay the company an amount equal to his or her gain.

A director is required to disclose his or her interest in a contract or arrangement with a body corporate in which they hold more than 2% of the shareholding, or with a firm in which they are a partner, owner or member.

Prior to appointment and at the beginning of each financial year, every director is required to disclose the list of Indian public and private companies, foreign companies, partnerships, LLPs, trusts and non-trading organisations in which they are directors, partners, members or trustees (or have any other interest). In addition, they are required to disclose a list of relatives, which include, parents, spouse, children and siblings (including in each case step relatives). These disclosures are tabled in the first board meeting of every financial year and are intended to put the company on notice of the personal interests of the directors and the conflicts of interests that may arise due to them.

In addition, the Act prescribes specific detailed rules for how contracts with interested directors are to be approved, including exclusion of the interested director from participation in such board meetings.

The power of directors to manage a company can be restricted by the company's articles but, in reality, in most cases they can do anything that the company can do, generally acting in good faith and as a fiduciary of the company. The Companies Act lists the specific duties of directors as follows:

  • to act in good faith in order to promote the objects of the company for the benefit of its members as a whole;
  • to exercise duties with due and reasonable care, skill and diligence, in the best interests of the company, its employees and the shareholders;
  • to not be involved in any situation that may cause a direct or indirect conflict of interest with the business or interests of the company; and
  • to not obtain any undue gain or advantage, either for themselves or for their relatives, partners or associates.

A director owes a fiduciary duty to the company, and not to individual shareholders, creditors or fellow directors. Directors must act honestly, without negligence and in good faith in the bona fide interests of the company. While applying this rule, directors are not expected to act purely for the economic advantage of the company, disregarding the interests of the members, employees or creditors. The assumption is that a director, acting within his or her authority, has acted in good faith, though the act may have been foolish or wrong, unless proved otherwise.

The major responsibilities of the board include the following:

  • to review the annual budgets and business plans, and oversee major capital expenditures, acquisitions and divestments;
  • to monitor the effectiveness of the company’s governance practices;
  • to monitor and manage potential conflicts of interest of management and members of the board;
  • to maintain high ethical standards and take into account the interests of stakeholders; and
  • to facilitate the independent directors to perform their role effectively as members of the board of directors and also as members of any committees.

Directors are jointly and severally liable for losses suffered by the company on account of omissions and commissions in breach of their duties, and are personally liable to make good the losses suffered by the company.

Directors in breach of their duties can be removed or disqualified from the company by shareholders passing a general resolution. The Companies Act prescribes significant fines for breaches of directors’ duties.

Directors of a company can be held personally liable for illegal acts, fraud, wilful contribution to tortious action, negligence, conspiracy, misappropriating the company’s funds and assets, breach of trust and duties, false representation, and entering into contracts ultra vires, among other things. In such cases, the company or its shareholders, along with the affected third parties, can sue the directors for such breaches, through class action lawsuits or otherwise.

The maximum amount of managerial remuneration by a public company to its managing director, whole-time director or manager cannot ordinarily exceed 11% of the net profits of the company in a financial year. However, in a general meeting the company may, with the approval of the government, authorise the payment of remuneration exceeding 11% of the net profits of the company.

A director is permitted to receive remuneration by way of fees for attending board or committee meetings, or for any other purpose to be decided by the board. The amount of sitting fees payable to a director for attending the meetings of the board or committees can be decided by the board or the remuneration committee, subject to certain prescribed ceilings. The board may decide a different sitting fee payable to independent and non-independent directors other than whole-time directors. Independent directors are also not entitled to any stock options.

As per the Companies Act, 2013, listed companies are mandated to disclose specific details of the remuneration paid to the directors and officers of the company in their annual financial statements.

Listed company are obligated to disclose in the board’s report:

  • the ratio of the remuneration paid to each director to the median remuneration of the employees of the company for the financial year;
  • the percentage increase in remuneration of each director, CFO, CEO, company secretary or manager, if any, in the financial year; and
  • the percentage increase in the median remuneration of employees in the financial year.

Shareholders are the true owners of the company, and the highest governing body within the company structure. Certain types of actions by the company can be undertaken only by a shareholders’ resolution, which can be passed only in a shareholders' meeting, either by the AGM or by calling an extraordinary general meeting of shareholders.

The Companies Act mandatorily requires shareholders’ approval for the following decisions; in addition, shareholders in closely held companies may agree to or require other actions to be taken only by shareholder approval:

  • a change in the name, registered office or authorised share capital;
  • a modification of the memorandum of association and articles of association of the company;
  • the issuance of shares on a preferential basis;
  • the approval of audited accounts;
  • a declaration of dividends;
  • the appointment and removal of auditors; and
  • the liquidation of the company.

Every shareholder is entitled to participate in the general meetings of the company, and a certain specified number of shareholders may also requisition the board of a company to convene an extraordinary general meeting if any urgent matters need to be discussed.

A newly incorporated company is required to hold the first AGM within a period of nine months from the date of closing of the first financial year and, in all other cases, within a period of six months from the date of closing of the financial year. The Companies Act requires every company to have its financial year from April 1st to March 31st. However, if a company is consolidating its financial statement with its overseas parent, which may have a different financial year, then the Indian company is permitted to have that different financial year with the prior approval of the National Company Law Tribunal.

Every meeting requires a valid notice (in writing or electronic form) to be given to all shareholders, accompanied by a statement that sets out material facts relating to the nature of business to be transacted at such meeting.

There are two types of meetings of shareholders prescribed under the Companies Act.

  • An annual general meeting, which must be held once every year within six months of the close of the financial year and no later than 15 months from the prior AGM.
  • An extraordinary general meeting, which can be called either by the board for a specific purpose or at the request of shareholders holding at least one tenth of the voting rights.

Meetings are to be presided over by the Chairman, who is elected by the members personally present in the meeting. Decisions are taken as either a "show of hands" or a vote. Every shareholder who attends, either in person or by proxy, has the same number of votes as their shares. Like in board meetings, there is usually a minimum quorum requirement in the articles.

A listed company is additionally required to provide the facility of remote e-voting to its shareholders, in respect of all shareholders' resolutions, and the results of each meeting are to be submitted to the relevant stock exchange within 48 hours of the conclusion of the shareholders' meeting.

Every member of a company is entitled to appoint another person or persons (whether a member or not) as his or her proxy to attend and vote on his or her behalf; however, the shareholders do not have any legal right to be accompanied by legal or other counsel.

A shareholder is entitled to certain information, rights and considerations by virtue of an ownership stake in the business. The company must protect and facilitate the exercise of shareholders' rights, such as:

  • the right to participate in decisions concerning fundamental corporate changes;
  • the opportunity to ask questions of the board of directors, to place items on the agenda of general meetings, and to propose resolutions, subject to reasonable limitations;
  • effective shareholder participation in key corporate governance decisions, such as the nomination and election of members of board of directors;
  • an adequate mechanism to address the grievances of the shareholders; and
  • the protection of minority shareholders from abusive actions by, or in the interest of, controlling shareholders.

The Companies Act contains provisions for shareholders’ litigation and allows class action suits to be filed by shareholders if they are of the opinion that the management of the company is being conducted in a manner that is prejudicial to the interests of the company or its members.

However, derivative shareholder lawsuits are not very common, and the law relating to derivative actions in India remains unclear. Under current law, a company (and by extension, therefore, the board of directors) still holds immense power and control over the shareholders. The Companies Act prescribes the minimum number of shareholders required to apply to the National Company Law Tribunal for the protection of shareholders but, in reality, there are still several hindrances that restrict shareholders from filing a lawsuit against the company’s management.

Shareholders in public companies have certain additional obligations when acquiring shares or exercising voting rights. Pursuant to the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (the Takeover Code):

  • no person can acquire more than 25% of the voting rights of a company without making a prior public announcement of an open offer for shares;
  • any acquirer holding 25% or more, but less than the maximum permissible limit, can purchase additional shares or voting rights of up to 5% every financial year (called the “creeping route” acquisition), without having to make any open offer;
  • an acquirer who holds more than 25% but less than the maximum permissible limit is entitled to voluntarily make a public announcement of an open offer for acquiring additional shares subject to their aggregate shareholding after completion of the open offer, not exceeding the maximum permissible non-public shareholding;
  • if the acquirer together with a person “acting in concert” acquires 5% or more shares or voting rights of the target company (together with the existing shares or voting rights held by them), the acquirer is required to disclose this to the stock exchange and the target company within two business days of the receipt of intimation of the allotment of shares or the acquisition of shares or voting rights; and
  • every person, together with a person acting in concert, holding shares or voting rights aggregating to 25% or more of the voting rights in a target company shall disclose their aggregate shareholding and voting rights within seven business days from the end of each financial year.

In the past few years, the Ministry of Corporate Affairs has made all forms of corporate governance reporting electronic, and has mandated detailed financial reporting by all companies, whether private, public or non-profit. Almost all of these filings are publicly available in the government database, and can be downloaded for a very small fee.

Annually, every company must report its audited financials within six months of the closing of the financial year, and include a Directors’ Report and a Directors’ Responsibility Statement. These reports are required to include detailed information about the company, including the number of board meetings held in the financial year, related party transactions, the performance of subsidiaries and joint ventures, and the appointment and resignation of directors and Key Managerial Personnel during the year.

The Directors’ Responsibility Statement must state that the applicable accounting standards have been followed, and that the directors have taken proper and sufficient care for the maintenance of accounting records. It must also provide information to various stakeholders regarding performance management of the company as to how diligently and ethically they are discharging their fiduciary duties and responsibilities.

Every company is required to prepare and keep at its registered office, books of accounts and other relevant books, papers and financial statements for every financial year, which give a true and fair view of the state of the affairs of the company, and must allow reasonable free access and inspection to all shareholders.

There are scores of other compliance and governance reports that have to be filed, which are either periodic or event-based. All event-based reporting or filing is required to be generally completed within 30, 45 or 90 days of the event.

Publicly listed companies also have to report various events to the stock exchanges within 24 to 48 hours (and sometimes even sooner), in accordance with their listing agreement or the rules of the Securities and Exchange Board of India.

Under the Companies Act, certain prescribed categories of company (including every listed company) are required to appoint an internal auditor to conduct the internal audit of the functions and activities of the company. The audit committee of the board, along with the internal auditor, is responsible for formulating the scope, functioning and methodology of the internal audit.

The auditor of a company is required to report to the company’s shareholders on the accounts examined by him or her and on the various financial statements that a company is statutorily required to file at every general meeting.

Listed companies, and other companies with certain thresholds of paid-up capital or indebtedness, can appoint an individual as an auditor, who can hold office for a maximum of one term of five consecutive years, while an audit firm can hold office for not more than two consecutive terms of five years each. Such auditors or audit firms are not eligible for re-appointment to the same company as auditor for at least five years from the time of completion of their previous term. A person cannot be appointed as the statutory auditor of more than 20 companies.

Auditors may be removed from their office before the expiry of their term only by a special resolution of the shareholders, and only after being given an opportunity to explain their position. The Companies Act provides for the various eligibility requirements, qualifications and disqualifications of auditors. Only qualified chartered accountants can be auditors and, in the case of audit firms, the majority of the partners of those firms practising in India should be qualified chartered accountants.

Auditors are required to prepare the audit report in accordance with the Company Auditor’s Report Order (CARO), 2016, which requires an auditor to report on various aspects of the company, such as fixed assets, inventories, loans given by the company, deposits, cost records, the utilisation of funds and the approval of managerial remuneration.

The government has also prescribed the Cost Records and Audit Rules, 2014, which require companies in certain sectors meeting certain turnover thresholds to mandatorily appoint a cost auditor and have its cost records audited. These companies include:

  • those in the telecommunications, drugs and pharmaceuticals, sugar and industrial alcohol, fertilisers and petroleum products sectors are required to appoint a cost auditor if their overall annual turnover within a financial year is INR500 million or more and the aggregate turnover of the individual product or service for which cost records are to be maintained is INR250 million or more; and
  • those in the arms, ammunitions and explosives, iron and steel, tanks and fighting vehicles, port services, aeronautical services, textiles, electronic machinery, ores and mineral products sectors are required to appoint a cost auditor if their overall annual turnover within a financial year is INR1 billion or more and the aggregate turnover of the individual product or service for which cost records are to be maintained is INR350 million or more.

The board of directors must prepare a report detailing the development and implementation of a risk management policy for the company, including identification of any risk elements that may threaten the existence of the company. Further, in the case of listed companies, the directors' report must contain the directors' responsibility statement indicating the adequacy and effectiveness of the internal financial control mechanism adopted by the company.

The board of directors is also required to constitute the following committees in connection with the management of risk and internal controls in a public company or companies that meet certain thresholds.

  • An audit committee of a minimum of three directors, with the independent directors forming a majority. The Audit Committee recommends the appointment, remuneration and terms of appointment of auditors of the company, reviews and monitors the auditor’s independence and performance, examines the financial statement and the auditors’ report, and has the authority to investigate any of these matters.
  • A nomination and remuneration committee of three or more non-executive directors, of which no less than one half are required to be independent directors. This committee identifies persons who are qualified to become directors and who may be appointed to senior management positions.
  • A stakeholders' relationship committee, chaired by a non-executive director and such other members as may be decided by the board. This committee considers and resolves the grievances of stakeholders of the company where there are more than 1,000 shareholders, debenture-holders, deposit-holders and any other security holders at any time during a financial year.
  • A corporate social responsibility committee of three or more directors, of which at least one director has to be an independent director, if a company has a turnover of INR10 billion or more or net profit of INR50 million or more or net worth of INR500 billion or more. This committee formulates and recommends a corporate social responsibility policy to the board, and monitors its implementation by the company.

In addition, every company – private or public, and irrespective of its size, capital, turnover or net profit – is required to constitute an internal complaints committee under the Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act, 2013. This committee is required to have four members (the most senior female employee as its chairperson, two other female employees or employees who understand women’s issues, and one member from an external NGO involved in women’s issues). This committee is popularly referred to as the POSH (Prevention of Sexual Harassment) committee and is required to investigate, report and recommend action on every complaint of sexual harassment it receives, and to organise periodic lectures, workshops or seminars for gender sensitisation within the company.

Wakhariya & Wakhariya

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Mumbai 400021

+91 22 2283 5252

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Law and Practice in India


Wakhariya & Wakhariya is a full-service law firm, founded in 1998, which advises international companies doing business in India on corporate, commercial, regulatory, compliance, governance and transactional matters. The firm specialises in providing critical, strategic and practical advice to international clients, which include Fortune 500 companies and lawyers in international law firms. The multi-dimensional practice broadly covers the following industry sectors: telecommunications and information technology, branded and generic pharmaceuticals, healthcare, oil and gas, renewable and sustainable energy, hotels and hospitality, textiles, civil aviation, professional services, food and beverages, metals and minerals, education and non-profit. The firm is located in Mumbai but has the ability to advise clients across India.