Corporate Governance 2019

Last Updated June 26, 2019

India

Law and Practice

Author



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-profits. The firm is located in Mumbai but has the ability to advise clients across all States.

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 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 seven to ten years, 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”).

Recent (2018-2019) changes have made many of the disclosure and governance requirements mandatory, and the government has started to suspend companies and disqualify directors of the companies that have not complied with governance and reporting requirements.

Listed companies in India are mandatorily 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.

There are also many additional provisions that affect governance, like the Whistle Blower Policy, Corporate Social Responsibility and Related Party Transactions.

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 or if there is turnover of more than INR1 billion, 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 person has to be mandatorily registered in a government database and issued a Director Identification Number (“DIN”) before appointment as a director.

In July 2018, the MCA required every director to reconfirm his or her director details/profile in the MCA database through a personal online “know your customer” ("e-KYC”) kind of process, which required submitting notarised documents (also apostilled for foreign directors) and an online video verification by the director. This is now an annual compliance requirement.

In November 2018, the MCA required all companies purchasing goods or services from Micro, Small or Medium Enterprises (MSMEs) to report payments outstanding for 45 days or longer on an annual basis.

A January 2019 notification requires companies to report if they are 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 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. 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 threatens to mark companies that do not as non-compliant, and may suspend certain governance activities of such companies.

In February 2019, the MCA also required all companies to reconfirm their active and “in-compliance” status by filing particulars and photos of the company and its registered office, including one photo showing at least one director sitting in the registered office.

No notable developments were identified.

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 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 such power by a board resolution, whether or not such 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.

Please see 4.1-2.

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

There are no relevant rules or requirements relating to the independence of directors and conflicts of interest.

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 himself or for his 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 presumption 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.

There are no other bases for claims or enforcement against directors.

The maximum ceiling for payment of managerial remuneration by a public company to its managing director, whole-time director or manager cannot 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.

There is no relevant information relating to disclosure of remuneration, fees or benefits payable to directors and officers.

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 Annual General Meeting 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 in case of any urgent matters that 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 1 to March 31. 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 such 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; and
  • 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. Each 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 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 proxy to attend and vote on his 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 law suits 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 Company 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 make a disclosure of the same 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 has to prepare and keep at its registered office books of account 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.

Please see 6.1.

Please see 6.1.

Under the Companies Act, certain prescribed categories of companies (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 for conducting the internal audit.

The auditor of a company is required to report to the company’s shareholders on the accounts examined by him and 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 such 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, among others.

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. For example:

  • companies in the telecommunications, drugs and pharmaceuticals, sugar and industrial alcohol, fertilizers 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
  • companies 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 is 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. 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

810 Maker Chambers V
221 Nariman Point
Mumbai 400021 India

+91 22 2283 5252

+91 22 2283 5255

shabbir@wakhariya.com www.wakhariya.com
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Law and Practice

Author



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-profits. The firm is located in Mumbai but has the ability to advise clients across all States.

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