There are four principal forms of business organisation in India, as set out below.

• Companies incorporated under the Indian Companies Act, 2013 (the "Companies Act" or the "2013 Act"), 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 the 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, to 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 sources of governance are the Companies Act, Rules published under the Companies Act, and Notifications and Circulars issued by the Ministry of Corporate Affairs (MCA). Limited liability partnerships (LLPs) are governed by the Limited Liability Partnership Act, 2008. 

Listed companies in India are also required to comply with the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015 (the "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 being mandatory. In the past few years, the government has started to suspend companies and disqualify directors of the companies that have not complied with the disclosure, governance and reporting requirements.

There are many additional provisions that affect governance, like the whistle-blowing policy, corporate social responsibility (CSR) and related party transactions, all of which require the maintaining of detailed records, disclosure and reporting.

The SEBI Regulations broadly require every publicly listed company to meet the following requirements.

Board Composition

• The Board of Directors shall have an optimum combination of executive and non-executive directors with at least one female director.
• No fewer than 50% of the board must comprise non-executive directors.
• The board of top 2,000 listed entities by market capitalisation shall comprise of no fewer than six directors.
• The chairperson of top 500 listed entities needs to be a non-executive director and not be related to the managing director or CEO.
• The quorum requirement of board meetings of top 2,000 listed entities is one third of its total strength or three directors, whichever is higher, including at least one independent director.
• A person should not be a director in more than seven listed entities.

Board Independence

• All listed companies in India are required to have independent directors on their boards. The quantum of independent directors depends on whether the company has a non-executive chairman or not. If the company has a non-executive chairman, then at least one third of the board must comprise independent directors. On the other hand, if the company does not have a non-executive chairman, then at least half of the board must be composed of independent directors and such independent directors are not entitled to any stock options.
• The board of the top 1,000 listed entities shall have at least one independent female director.
• The independent directors must hold at least one meeting within the financial year, without the presence of non-independent directors and members.

Mandatory Committees

• The board must constitute an Audit Committee, a Stakeholders' Relationship Committee, a Risk Management Committee, Related Party Transactions Policy and Vigil Mechanism.

Other Governance Requirements

• The board of every listed entity shall periodically review the compliance report pertaining to all applicable laws and steps taken to mitigate the non-compliances, if any.
• Top 1,000 listed entities shall undertake Directors and Officers insurance ("D and O insurance") for all independent directors of such quantum and for such risks as may be determined by its board of directors.
• SEBI has also framed regulations for the issuance of shares, foreign investment, the buy-back of securities and the prevention of insider trading.

The 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 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 nine years, the MCA 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.

Since 2006, the MCA 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. The MCA is working behind the scenes to determine how the vast data it gathers could be integrated with the databases of other government ministries and identify ways of creating a corporate governance index.

The following are some of the major mandatory requirements:

• 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 within six months of the close of 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 of companies with a certain threshold 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 three quarters of votes) 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.

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 costs to start 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 services tax (GST);
• obtain an employee provident fund and employee state insurance registration; and
• obtain a 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.

The Companies Act requires companies with a certain threshold of turnover or profitability to:

• establish a CSR committee;
• develop CSR policies;
• spend 2% of profits on these policies; and
• report on these activities to the shareholders in its annual report.

Companies are encouraged to focus their CSR activities on:

• eradicating poverty, hunger and malnutrition;
• improving education;
• promoting gender equality and female empowerment; and
• environmental sustainability.

Since the outbreak of the COVID-19 pandemic, CSR funds are also permitted to be used for alleviating pandemic-related hardship.

Prior to 2019, CSR spending was voluntary. After the 2019 amendment to the 2013 Act, it has been made a mandatory obligation for companies. As per the new amendment, a company has to transfer the unspent CSR amount to a government specified fund. Non-compliance with this requirement will attract penalties for the company and defaulting officers.

In 2021, new CSR rules have specified the reporting mechanism for companies. Companies to whom CSR is applicable have to prepare an annual report on CSR in the prescribed format and attach it to its board report. Companies exceeding the specific threshold of CSR obligations have to undertake an impact assessment by an independent agency. CSR activities have to be displayed on the company’s website.

Over the past decade, the government of India has formulated many regulations and offered great incentives for the promotion of ESG standards. On the one hand, there are a multitude of incentives and subsidies in the form of business opportunities encouraging companies to embrace environmentally-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 MCA published the Corporate Social Responsibility Voluntary Guidelines (the "CSR Guidelines"), recommending that all businesses formulate a CSR policy; 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 reporting format for business, requiring certain specified disclosures and demonstrating the steps taken by companies to implement the ESG principles.

The NVGs define nine principles of responsible business conduct to be adopted by companies as part of their practices and mandates for preparing a business responsibility report by providing stakeholder information about the 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 in fulfilling 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 that:

• 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; and
• businesses should engage with and provide value to their consumers in a responsible manner.

Business Responsibility and Sustainability Reporting

In August 2012, 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. In May 2021, SEBI introduced a new reporting format, namely the Business Responsibility and Sustainability Reporting (BRSR), which is effective from the current 2022-23 financial year. The BRSR focuses on sustainability-related factors, in addition to the existing factors. 

The BRSR 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 must disclose their performance on ESG factors along with financial factors, which makes publishing BRSR essential.

The BRSR requires companies to detail the initiatives taken from an ESG perspective, in a prescribed standard template format which helps companies to publish their BRSR in a structured manner. It also helps the government in conducting a 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 (such as Global Reporting Initiative (GRI), Sustainable Accounting Standards Board (SASB), Task Force on Climate-related Financial Disclosures (TCFD) or Integrated Reporting) under which their BRSR 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, the NIFTY100 Enhanced ESG Index and the 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 the 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.

A company is managed by the board of directors, who are appointed by the shareholders. The Companies Act identifies certain officers as key managerial personnel who are responsible for the day-to-day operations and governance of the company, namely:

• 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 is authorised to appoint specific committees for specific purposes. In public companies, certain committees are mandatorily required.

Generally, the board of directors is responsible for the strategic decisions and day-to-day functioning of the company. However, certain major decisions which affect the rights of shareholders 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 (namely, special resolutions, which require more than three quarters of the shareholders voting in favour).

In general, decisions in all matters relating to the company are taken by the board of directors of the company by a majority vote of directors present and not disqualified or barred from acting due to a personal conflict of interest in the matter to be decided in the board meeting. In addition, directors may decide urgent matters through a written “circular resolution” (ie, resolutions passed by circulation to directors) outside of board meetings. 

Decisions by shareholders are taken in the form of an ordinary resolution or special resolution at the general meeting. For convening a general meeting, the company has to provide notice and other relevant information to the shareholders.   

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 and the winding-up of a company 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 a 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 outstanding loans 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:

• an Audit Committee;
• a Nomination and Remuneration Committee;
• a Stakeholders’ Relationship Committee; and 
• a CSR Committee.

Firstly, directors are usually named in the articles of association of the company at the time of incorporation. If they are not, the subscribers to the organising documents are deemed to be and become the first directors. The board of directors has the 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, issued a DIN and have given written consent for the appointment, which must be filed with the RoC. Since 1 June 2022, citizens of countries sharing a land border with India are required to obtain security clearance from the Ministry of Home Affairs, government of India before applying for a DIN. In addition, individuals who fall under this category must provide a declaration in this regard at the time of their appointment to the board of an Indian company.

Since 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 reports to the shareholders. Moreover, the MCA has clarified that independent directors have to pass a self-assessment test (with a 50% 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 laws, basic accountancy and other subjects that are required for the individual to perform as an independent director.

A director may be removed before the expiry of their 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); the Act casts specific onus on the KMPs for the governance of the company.

The Companies Act 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, they shall be liable to pay the company an amount equal to their gain.

A director is required to disclose their 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 includes, 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.

There are many privacy concerns with such information being given to the government, and many companies also question 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 addition, the Companies Act prescribes specific detailed rules on how contracts with interested directors are to be approved, including the 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 expected to act for the economic advantage of the company, without disregarding the interests of the members, employees or creditors.

The major responsibilities of the board include: 

• 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.

To promote the ease of doing business in India, the government has introduced new amendments to the Companies Act waiving off the criminal sanctions imposed for minor, technical or procedural defaults.

The Companies Amendment Act, 2019 recategorised 16 criminal offences to civil defaults. Further, the Companies Amendment Act, 2020 decriminalised more than 46 compoundable offences where originally imprisonment was a consequence of contravention. In addition, various penalties and fines have also been reduced. For example, imprisonment has been waived for contraventions related to:

• a buy-back of shares;
• the disclosure of interest by directors, financial statements and board’s reports;
• the formation of companies with charitable objects;
• the disqualification of directors; and
• the constitution of audit, stakeholder relationship, and nomination and remuneration committees.

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 authorise the payment of remuneration exceeding 11% of the net profits of the company. Unlike public companies, there is no statutory ceiling on the maximum amount of compensation that can be paid to the directors of private companies.

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 not entitled to any stock options.

Companies Act prescribes a penalty of INR100,000 for individuals and INR500,000 for companies in case of default in complying with the provisions related to managerial remuneration.

As per the Companies Act, 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 companies 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;
• the percentage increase in the median remuneration of employees in the financial year; and
• a list of the top ten employees who draw remuneration in excess of INR1.02 million.

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:

• 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.

In addition, shareholders in closely held companies may agree to or require other actions to be taken only by shareholder approval.

Every shareholder is entitled to participate in the general meetings of the company, and a certain specified number of shareholders may also request 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 1 April to 31 March. 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; 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 chairperson, 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 the number of shares they hold. Like in board meetings, there is usually a minimum quorum requirement in the articles and under the provisions of the Companies Act. 

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 their proxy to attend and vote on their behalf; however, the shareholders do not have a 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 the 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;
• an 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 an open offer;
• an acquirer who holds 25% or more, 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.

As of 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 their father’s name, their date of birth, passport number and similar personal information, which will all be stored on a public database.

In the past few years, the MCA 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.

Further, the SEBI Regulations require listed companies to report their shareholding pattern, corporate governance report, statement on investor complaints, financial statements with limited review by auditors on a quarterly basis to all stock exchanges where their securities are traded.

In January 2021, the MCA made changes to the format to be used for the reporting of financial statements whereby companies have to provide following additional information: 

• disclosure of shareholding of promoters;
• maturities of long-term borrowings;
• details of immovable property; 
• ageing schedule of capital work in progress, intangible property and trade payables and receivables; and
• disclosure of various financial ratios such at current ratio, debt-equity ratio, return of equity ratio, net capital turnover ratio and return of investment.

As per the new accounting rules, effective from 1 April 2022, companies using accounting software for maintaining books of accounts shall ensure that the software is capable of recording an audit trail for each and every transaction, creating an edit log with each change made in the books of accounts along with the date when such changes were made, and companies shall also ensure that the audit trail cannot be disabled. Lastly, the auditor has to certify in the audit report that the company has complied with the above requirements. Since August 2022, Indian companies that maintain their accounts in an electronic form at a location outside India are required to keep a backup of those records on a daily basis on servers physically located in India.

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

In addition to above, listed companies have to attach a report on corporate governance in its annual report. This report is required to include the composition of directors, attendance of directors in board and general meetings, the number of shares held by directors, and the skills and qualifications of the directors, etc. 

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. Such documents should give a true and fair view of the state of affairs of the company, and must allow reasonable free access and inspection to all shareholders. In addition, it is mandatory for every company to submit their audited financial statements and annual return to the MCA through an online portal.

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 SEBI Regulations.

Failure to comply with this requirement will result in substantial penalties for both the company and its officers who are in default. Furthermore, if non-compliance persists for more than three years, the MCA may remove the company's name from its records, and disqualify the director from serving as a director in any other company where they hold a position as a director.

Every company in India has to appoint an external independent auditor to audit its annual accounts. 

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

Listed companies, and other companies with certain thresholds of paid-up capital or outstanding loans, 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.

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 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, which 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, which 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 the 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 has 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 has 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 is 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 CSR Committee has 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 a net profit of INR50 million or more or a net worth of INR500 billion or more. This Committee formulates and recommends a CSR 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 awareness within the company.