India: Corporate Governance

There are many types of companies, the most popular forms are: private limited and public limited companies. Both have their own advantages and disadvantages. However, it is governed in accordance with provisions of the (Indian) Companies Act, 2013 (“Companies Act”). It is formed by voluntary association of persons. The maximum number of members cannot exceed 200. The transfer of shares of a private limited company is typically restricted. It prohibits the entry of public through subscription of shares and debentures. According to the Companies Act, ‘public company’ means a company which is not a private company. As such, a public limited company is also governed in accordance with the provisions of the Companies Act. There is no limit on the number of members, and it is formed by the association of persons voluntarily. Transferability of their shares is not restricted, and the company can invite public for subscription of shares and debentures. Other differences between a private and public company include, and are in relation to, the composition of its board of directors (“Board”), constitution of committees including the audit committee, appointment of independent directors and in relation to retirement of directors by rotation.

In the recent past, private equity and institutional investors have increased focus on acquiring strategic and operational control over their portfolio companies. As a corollary of this, it is expected that corporate boards will be professionally managed (as opposed to being promoter family driven, traditionally). While the law requires a steady mix of executive and non-executive directors with the appointment of at least one female director, an active push is expected towards appointment of women directors which will increase gender diversity on corporate boards in India. However, establishing governance in current corporate cultures with novel resolutions, such as using performance evaluation as a minimum benchmark for director appointment, remains fundamental to develop a diverse yet competent governance pattern for companies. In this regard, we expect that a key focus will be on closing the pay-gap between male and female directors.

In line with global trends, we also expect a push towards environmental, social and governance (ESG) reforms as shareholder and social activism efforts converge. Subsequently, the independence of promoter-appointed-directors is often under question, as it is improbable for such directors to administer minority interests against the promoter. Therefore, many argue for putting limitations on the power of the promoters to make decisions concerning appointment of independent directors. Consequently, the removal of independent directors by promoters or majority shareholders has recently been put under prominence, with a significant rise in such instances where the decisions of independent directors to not agree with promoter decisions have not being taken positively. To this end, the International Advisory Board of Securities and Exchange Board of India (SEBI) has proposed an increase in transparency with regard to appointment and removal of directors. Lastly, challenges concerning executive compensation remain contentious especially when subjected to investor accountability.

The key corporate actors involved in the management of each type of entity are the shareholders, the Board and the management. Their respective roles and responsibilities are generally governed by applicable law (principally, the Companies Act and (where applicable), the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR Regulations) and the company’s constitutional documents.

Generally, the Board may exercise all the powers of the company, with certain matters reserved to shareholders (for example, amendments to the constitutional documents, alteration to the share capital, issuance of shares etc.).

The management is generally delegated the authority to manage the business on a day to day basis, under the overall supervision of the Board, with material matters requiring Board approval. The respective roles and responsibilities of the Board and management will typically be governed by their respective employment/ engagement agreements, as well as internal corporate policies. Many listed issuers will implement a schedule of matters reserved to the Board for approval, as well as bespoke delegations of authority for members of management.

The decisions or approval of the owners (i.e., the shareholders) are taken through meetings of the shareholders, also referred to as annual general meetings (“AGM”) and extra ordinary general meetings. The Companies Act requires that the proceedings of the shareholders’ meetings be recorded in writing in the minutes book maintained by the company.

At the core, the Companies Act and the corresponding rules are the governing legislations that regulate, amongst others, the constitution of the Board and committees, their powers and responsibilities, rights of the shareholders, audit and financial statements, annual disclosures etc. Ministry of Corporate Affairs (MCA) is the nodal authority under the Companies Act which issues guidelines and circulars from time to time.

Additionally, listed companies in India are regulated by the SEBI and are subject to rules and regulations issued by it. The primary regulation for corporate governance of listed companies is the LODR Regulations which sets out various regulatory requirements for a listed company such as disclosure obligations of a listed company, rights of the shareholders, responsibilities of the Board and committees etc. Further, certain sector specific regulators also issue governance norms such as the Reserve Bank of India (RBI) and the Insurance Regulatory and Development Authority of India (IRDA).

The governance practices of the listed companies are also influenced by various market forces such as the investor expectations, international best practices, governance scorecard criteria etc. which may be adopted by the Board voluntarily.

The predominant Board structure for Indian companies remains one-tier. The Board consists of directors of the company and constituting a Board is a mandatory requirement under the Companies Act, commencing from the incorporation of a company. A Board is required to have a minimum of: (a) 3 directors, in case of a public company; (b) 2 directors, in case of a private limited company; and (c) 1 director, in case of one person company. Unless specifically permitted, a board may consist of maximum of 15 directors. Only individuals can be appointed as directors.

The Companies Act and LODR Regulations provide for the formation of an audit committee, a nomination and remuneration committee (NRC) and a stakeholders’ relationship committee (SRC). However, the recommendations of these committees are not binding on the Board as they are only advisory in nature. Specified companies are also required to constitute a corporate social responsibility (CSR) committee. The Board can delegate certain specified powers to a committee of directors, the manager or any other officer of the company.

Subject to the provisions of the articles of association (AOA) of a company, directors are appointed by the Board as an additional director and hold their office until the next AGM, at which their appointment must be approved by the company’s shareholders. Alternatively, directors can be appointed at a general meeting of the shareholders of the company.

An Indian public company is required to have at least two-thirds of its directors liable to retire from their position by rotation. Such directors are appointed by the shareholders in general meetings by an ordinary resolution of the company. Unless the AOA provide otherwise, the remaining directors of a public company and the directors of a private company, are also required to be appointed with shareholders’ approval.

Further, the appointment of independent directors (ID(s)) is approved at a shareholders’ meeting and is eligible for reappointment on passing of a special resolution by the shareholders and disclosure of the reappointment in the Board’s report.

Thus, in India, shareholders generally have a say in the appointment and reappointment of directors. In the absence of a higher requirement adopted by a company in its AOA, directors are appointed by a simple majority vote. The Companies Act also provides companies with an option to adopt a proportional representation mechanism for director appointments, so as to enable the representation of minority shareholders on the Board.

To ensure wider shareholder participation in listed companies, the Companies Act provides for the appointment of one director by small shareholders of the listed company, where ‘small shareholder’ means a shareholder holding shares whose nominal value does not exceed 20,000 rupees. The Companies (Appointment and Qualification of Directors) Rules, 2014 specify that a listed company may either opt to have a small shareholders’ director suo moto or appoint one upon receiving notice from at least 1,000 small shareholders of the company or one-tenth of the total number of small shareholders of the company, whichever is lower. A small shareholders’ director is an ‘independent director’ under the Companies Act and is not liable to retire by rotation, however, the tenure of such a director cannot exceed a period of three consecutive years, and such director is not eligible for reappointment at the end of the tenure. Subject to the provisions of the AOA of a company, the Board can appoint additional directors, alternative directors and nominee directors.

The shareholders have an inherent power to remove directors (including non-retiring directors) excluding directors appointed by the National Company Law Tribunal (Tribunal) and independent directors re-appointed for second term, by a simple majority vote, provided a special notice to this effect has been served on the company by shareholders holding at least 1 per cent of the total voting power or holding shares on which at least 500,000 rupees have been paid up on the date of the notice (Special Notice).

Generally, the Board is vested with the company’s management powers and the shareholders are only entitled to exercise control over those matters that are specifically reserved under the Companies Act or the company’s AOA (as the case may be) for shareholders’ approval. Thus, generally, the shareholders cannot interfere in the Board’s decision-making process or usurp any authority available to them. However, shareholders, by virtue of their authority to appoint or remove directors can control the overall Board composition and can sometimes transact such businesses, which for any reason may not be transacted by the Board, including resolving matters, in the event of there being a deadlock between directors or there being an inadequate quorum at the Board level (as the case may be).

The Companies Act specifically empowers shareholders holding at least 10 per cent of the paid-up share capital of the company to cause the company to notify its shareholders of any resolution proposed to be moved at a meeting of the shareholders, provided such a requisition is deposited with the company at least six weeks before the meeting in case the requisition would trigger the requirement of circulating a notice of the proposed resolution, and at least two weeks before the meetings for all other requisitions.

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 AOA may specify a higher minimum number of directors on the Board, and a company can appoint more than fifteen directors by passing a special resolution. The Companies Act has also introduced the concept of a ‘one-person company’, which can appoint a minimum of one director only.

Every listed company and such public companies with paid-up share capital of 1 billion rupees or more or turnover equal to or more than 3 billion rupees (as the case may be) are required to appoint at least one-woman director.

Further, listed companies (with a non-executive director) have to ensure that at least one-third of their Board comprises of IDs and public companies with paid-up share capital equal to or more than 100 million rupees or turnover equal to or more than 1 billion rupees or aggregate outstanding loans, debentures and deposits exceeding 500 million rupees (as the case may be) are required to have at least two IDs on their Board.

Further, a person cannot be appointed as director in more than 20 companies at a time, out of which not more than 10 can be public companies. For determining the limit of directorships of 20 companies, the directorship in a dormant company is not included. As regards listed companies, a director cannot be a member of more than 10 committees or a chairman of more than 5 committees (as the case may be) across all companies in which he or she is a director.

The LODR Regulations requires the Board of a listed company to have an optimum combination of executive and non-executive directors with at least one-woman director and not less than 50 per cent of the Board comprised of non-executive directors. Further, if it has a non-executive chairman, one-third of its directors are required to be IDs; this is 50 per cent if it has an executive chairman. Additionally, Board of the top 1000 listed entities is required to have at least one independent woman director.

Banking companies are subject to additional requirements as prescribed under the Banking Regulation Act 1949 and the guidelines issued by the RBI for directors’ qualifications and composition of Board.

Directors’ qualifications

The Companies Act only permits natural persons to be directors. It does not prescribe any nationality requirements for appointment of directors, however, all companies are required to have at least one director who has stayed in India for at least 182 days during the financial year.

The Companies Act prohibits the following from being appointed as directors:

• any person of unsound mind and has been so declared by a competent court;
• an undischarged insolvent;
• any person who has applied to be adjudicated as an insolvent, or has been convicted by a court of an offence involving ‘moral turpitude’ and has been sentenced to imprisonment for at least six months in respect thereof, and a period of five years has not elapsed from the date of expiry of the sentence;
• any person who is convicted of any offence and sentenced to imprisonment for a period of seven years or more;
• any person who has failed to pay calls on the shares of the Company for more than six months, or is subject to a court order disqualifying him or her, or is already a director in a company that has failed to file the financial statements or annual returns for any continuous period of three financial years or has failed to repay a deposit, debentures or the payment of dividends and such failure has not been remedied within one year of being appointed as a director;
• any person who has been convicted for an offence dealing with a related-party transaction under the Companies Act in the preceding five years; or
• any person who has not complied with the provisions of Section 165 (1) of the Companies Act which provides for the maximum number of permissible directorships.

The managing director “MD(s)”, whole-time director and manager cannot be below the age of 21 years or above the age of 70 years (although a person who has attained the age of 70 years can be appointed by passing a special resolution). A person who has attained the age of 18 years can enter into contracts and can be appointed as a director. A director must obtain a director identification number or any other identification number as may be prescribed by the central government, which will be treated as director identification number for the purposes of the Companies Act, before being appointed as a director.

Private companies, through their AOA, may provide for more grounds for disqualification of directors. Further, there are additional qualifications applicable to IDs, managers, MDs and full-time directors, in relation to, amongst others, age and criminal record.

India devises a two layered approach for the powers that members of a Board may exercise, i.e., roles and functions pursuant to various statutory provisions and actions undertaken to meet deliverables of the company in ordinary course of business. Both of these layers, however, are devoid of any strategic trajectory. The corporate governance codes also merely help in an ethical functioning of the company and are devoid of any strategic orientation. The key role which Board members can play is, first, prepare a long-term trajectory, set defined targets, and simultaneously, appoint persons/committees responsible for overlooking different parts of the plan. After devising the trajectory, the more important part is execution and timely alteration which requires timely diagnostics of its performance with inputs from expert advisors and setting Board meetings solely to evaluate alterations in trajectory vis-à-vis the needs of the new investors and shareholders.

Private companies have full flexibility as regards determining directors’ remuneration and the process that needs to be followed for such remuneration.

Listed public companies and other specified public companies must have an NRC, which would recommend a policy to the Board on the remuneration of directors, key managerial personnel (“KMP”) (a role akin to that of MD, but who need not necessarily be a Board member) and other employees. Public companies are required to determine remuneration payable to directors though their AOA or a shareholders’ resolution passed in a general meeting (as the case may be).

As per the Companies Act, the total remuneration payable by a public company to its directors, including the MD and full-time director in a financial year cannot exceed 11 per cent of the net profits of the company in that financial year. Further, the remuneration payable to an MD, full-time director or manager (as the case may be) cannot exceed 5 per cent of the net profits of the company in that financial year; without first obtaining the approval of the shareholders of the company in respect of such remuneration in a general meeting. Nonexecutive directors’ remuneration is subject to an overall cap of 1 per cent of net profit, if the company has a MD, full time director or manager (as the case may be) and 3 per cent of the net profit in other cases. As per the Companies Act, a loss-making public company can only pay fixed remuneration to a managerial person and other directors (including an independent director) and any payment exceeding such limits requires the approval of Central Government. No such prior approval is required to determine the remuneration that may be paid to a managerial person or other director who is functioning in a professional capacity and possesses at least graduate level qualification with expertise and specialized knowledge in the field in which the company operates, provided such person does not hold any shares or interest in the company, its holding and subsidiary companies and is not related to any director of such company, its holding or subsidiary companies including for a minimum period of two years preceding his or her appointment.

Listed companies are required to disclose in their Board’s annual report: (a) all pecuniary relationship or transactions of the non-executive directors vis-à-vis the listed entity; (b) criteria of making payments to non-executive directors (if the same is disclosed on the company’s website then a reference of the same in the report); and (c) disclosures in addition to the Companies Act such as: (i) all elements of remuneration package of individual directors summarized under major groups, such as salary, benefits, bonuses, stock options, pension etc.; (ii) details of fixed component and performance linked incentives, along with the performance criteria; (iii) service contracts, notice period, severance fees; and (iv) stock option details, if any and whether issued at a discount as well as the period over which accrued and over which exercisable.

The Board represents the company and all actions taken by the Board in good faith and intra vires bind the company. The Board owes legal duties to the company and the directors are per se not agents or trustees (as the case may be) of the shareholders. However, the Board is expected to exercise its duties with the utmost care, diligence and skill while exercising its powers and any breach of duties or powers, may make it liable to the shareholders and to affected third parties, such as creditors, debenture holders, trustees or other persons dealing with the company.

Further, directors owe a fiduciary duty to the company and are expected to show utmost care, diligence and skill in the exercise of their powers and, where the company has violated any applicable laws, they are generally deemed to be an ‘officer who is in default’. They are also expected to execute their duties in a manner that does not conflict with their personal interests. The directors must act in accordance with the AOA of the company, should act in good faith to promote the objects of the company for the benefit of its members, and in the best interest of the company, its employees, its shareholders, the community and for the protection of the environment.

Board members as well as other officials are personally liable to the company for damages caused by their action or failure to act. Owing to the varied roles of the directors, the Companies Act follows the concept of ‘officer who is in default’ as persons responsible for the breach of the provisions of the Companies Act. The MD, whole-time director and KMP are the persons primarily responsible as ‘officer who is in default’ and in their absence and in the absence of any other director who has been entrusted with that specific duty, all of the company’s directors become liable. Employment contracts may set additional liability for directors and top executives.

As such, Companies Act does not permit the preclusion or limitation of directors’ liability. However, directors can be suitably insured and indemnified by companies against liabilities, to the extent not prohibited under the Companies Act. The LODR Regulations, with effect from January 1, 2022, specifically requires top 1,000 listed entities (by market capitalization of the preceding financial year) to undertake Directors and Officers insurance for all their independent directors of such quantum and for such risks as determined by the Board.

Members of the executive Board in private and public companies are primarily evaluated based on the company`s profitability. Some big companies use more sophisticated key performance indicators, like customer retention, project completion rates, marketing efforts etc., in addition to financial results.

Companies typically engage with their shareholders at their respective AGMs and extraordinary general meetings. The introduction of electronic voting and postal ballot facilities for a large number of matters requiring shareholders’ approval have enabled greater participation of small shareholders in decision making, including by eliminating the considerable time and cost expended by shareholders to attend such general meetings.

The directors of a company are expected to attend all general meetings of a company, and if any director is unable to attend a general meeting, the chairman of the meeting is required to explain the reason for such absence at the meeting. Such absence is, however, not violative of law. Specifically, the chairmen of the NRC, audit committee and the SRC, if constituted by the company, are required to attend general meetings of the company, and in their absence, another member of the above committees duly authorised by the relevant chairman, must attend the general meetings on behalf of the relevant chairman.

The concept of dual or multi-class capital structures or ‘differential voting rights’ (“DVRs”) (as commonly known in India), was first introduced in India in the year 2000. However, as a result of the stringent regulations framed by SEBI, such capital structures are not very common in India. This is especially true for public companies which are listed or intend to be listed on the stock exchange, since SEBI mandates that listed entities cannot issue shares with superior or inferior rights with respect to voting or dividend (as the case may be) over the other equity shares issued by a listed company. However, a listed entity having superior rights (“SR”) equity shares issued to such listed entity’s promoters or founders, may issue SR equity shares to its SR shareholders only through a bonus, split or rights issue in accordance with the provisions of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 and the Companies Act. Therefore, in the Indian context, examples of listed companies which have incorporated the DVR structure are few; but include marquee names such as Tata Motors Limited and Pantaloons Retail India Limited.

As regards unlisted companies, the Companies Act imposes certain conditions and also provides for caps on the issuance of such share. As a result, Indian companies which intend to issue such securities typically incorporate themselves as private companies.

However, given the popularity of these structures in overseas jurisdictions, SEBI has recently approved a framework for permitting companies in the ‘technology’ sector to have SR voting rights.

Companies must make periodic filings of their audited accounts (with the Board’s report and auditor’s report attached thereto) and an annual return with the regulator Registrar of Companies (RoC).

Additionally, corporate decisions with respect to, amongst others, changes in directorships, creation or satisfaction of charges on the assets, changes in authorised or paid-up share capital and changes in the registered office address , are also required to be filed by the company with the RoC. Further, companies are required to file with the ROC, amongst others, certain notices or advertisements (as the case may be) issued by the company, orders of the Tribunal, charter documents and amendments thereto.

In India, RoC filings are electronically effected through the MCA portal at http://mca.gov.in/mcafoportal/showEformUpload.do and can be inspected by any person registered with the portal upon the payment of a nominal fee of 100 rupees. Certified copies of filings can also be obtained.

The Companies Act also requires companies to make disclosures to its shareholders, by incorporating information into the general meeting notices, the Board’s report and the auditors’ report. For certain corporate actions, the stakeholders’ and other authorities’ disclosure is required to be made by way of notices and advertisements.

Listed companies are subject to additional disclosure requirements under the LODR Regulations; the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011; and SEBI (Prohibition of Insider Trading) Regulations, 2015 for better implementation of corporate governance initiatives.

Under the Companies Act, shareholders which meet the prescribed thresholds are entitled to make a request to the Board for calling a shareholders’ meeting. Such thresholds specified under the Companies Act include, in case of companies having a share capital, such number of shareholders who hold, on the date of the receipt of requisition for calling a shareholders’ meeting, at least one-tenth of the paid up capital and also carry the right to vote, and in case of companies not having a share capital, such number of members who hold, on the date of the receipt of requisition for calling a shareholders’ meeting, at least one-tenth of the total voting power of all the members having the right to vote.

However, the Companies Act requires that the matters intended to be considered at the meeting must be clearly set out at the time of making the request. Where such a request is made, the Board is mandated to call the meeting within twenty one days from the date of receipt of the request and on a day not later than forty-five days from the receipt of such requisition. Further, in case the Board does not call the meeting on receipt of such request, the shareholders who made the request are also permitted to call and hold a meeting themselves within a period of three months from the date of request.

In certain instances, for example, where a director is intended to be removed, a Special Notice is required to be first sent by the shareholders in order for the Board to consider such proposals.

As set out above, shareholders which meet the shareholding or voting rights related thresholds set out under the Companies Act, are entitled to make a request to the Board for calling a shareholders’ meeting. Under the Companies Act, the request for convening the meeting may be made either in writing or through electronic mode. However, the request must be made at least twenty-one days prior to the date of the proposed meeting. Further, the place, date, day and hour of the meeting and the matters intended to be considered at the meeting must be clearly set out at the time of making the request. The Companies Act also requires that the AGMs should be convened either at the registered office of a company or at some other place which is situated in the same city or town where registered office of a company is situated. However, other general meetings may be held at any place within India. Further, the notice for convening such meeting is required to be signed by all the members requisitioning such meeting and should be sent to the registered office of the company.

Some of the rights of a shareholder can be altered contractually through shareholders’ agreements. In case such alterations have been made, shareholders are entitled to exercise their rights and act in accordance with the rights and obligations agreed between themselves. Further, the company is bound by such alterations.

Any shareholder can file a request with the Registrar of Companies, or the MCA to institute an inquiry into the operations of a company for adequate cause. The body of shareholders (pursuant to a special resolution) can also necessitate the company to intimate the Central Government to administer an investigation into the company. The shareholders may also file complaints with SEBI, that are most often registered online on the by SEBI’s Complaints Redress System platform. These complaints are shared with the companies, which are then required to take resolving actions upon the complaint within a period of 30 days and provide authentication by uploading the set of actions undertaken, on its website.

Subsequently, where the prescribed number of investors have reason to believe that the affairs of their company are being or have been conducted in a manner oppressive to such member or any other member(s), or prejudicial to public interest or to the interest of the company itself, they may file an evidential appeal before the Tribunal, demonstrating sufficient reason to believe that the operations of the company ought to be inquired. Investors that meet the prescribed thresholds also have the option of filing a class action suit seeking relief from damages/ compensation against the company, its directors, auditors (firm and partners) or experts, consultants, advisors, etc. for fraudulent, unlawful or wrongful deeds and for omissions.

It is additionally important to note that, shareholders have the authority of removing any director prior to the expiry of their tenure by passing an ordinary resolution, provided that such a director was not appointed by the Tribunal or Central Government for prevention of oppression and mismanagement under Section 242 or was appointed under the principle of proportional representation under Section 163 of the Companies Act.

Increased focus on corporate governance and shareholders’ activism has seen a steady increase globally in the recent few years. In the Indian context, a key milestone which gave a fillip to the shareholders’ activism was the repeal and supersession of the then existing Companies Act, 1956 by the Companies Act in 2013. The subsequent framing of the rules under the Companies Act provided further clarity. Some of the key provisions introduced by the Companies Act included, the appointment of a director elected by small shareholders in publicly listed companies in order to improve governance. Additionally, introduction of enabling provisions for filing of class action law suits by the shareholders also provided an impetus. Indian law also permits minority shareholders to file claims of oppression and mismanagement against the company. The Government has recently set up specialized tribunals at the state and central levels to deal with such corporate matters.

The Companies Act requires every company (other than a one person company) to mandatorily hold at least one shareholders’ meeting i.e., AGM each year for considering certain specified business. In addition to such AGM, the shareholders as well as the company are entitled to hold other shareholders’ meetings. The Companies Act also specifies that the interim period between two such annual general meetings should not be greater than fifteen months.

A company is required to send a notice to all its shareholders prior to holding its AGM. Further, an explanatory statement has to be annexed to the notice setting out the background for each matter proposed to be considered. In the case of an AGM, the business typically transacted includes the presentation and consideration of the audited financial statements, the presentation and consideration of the annual reports prepared by the Board, the declaration of any dividend, the appointment of directors in place of those retiring and the appointment or ratification thereof (and the fixing of the remuneration of) the auditors. In addition to the above, other matters may also be considered at such AGMs.

As per the Companies Act, information setting out the material facts concerning each item of business that is to be transacted at a general meeting is required to be duly provided in order to enable members to understand the meaning, scope and implications of each of the items of business and enable them to take a decision thereon.

In addition to the above, publicly listed companies are also required to make public disclosures to their shareholders in accordance with the regulations framed by SEBI. The disclosure requirements are based on the materiality thresholds set out under the applicable SEBI regulations. However, all publicly listed companies are required to make the following disclosures on a quarterly basis: (i) statement on the status of investor complaints; (ii) compliance report on corporate governance; (iii) statement showing holding of securities and shareholding pattern; (iv) quarterly financial results; and (v) audit report in respect of reconciliation of share capital.

In India, voting recommendations are provided by proxy advisory firms, which are regulated by SEBI under the SEBI (Research Analysts) Regulations, 2014 (Research Analyst Regulations). As per the Research Analyst Regulations, any person who provides advice, through any means, to institutional investors or shareholders of a company (as the case may be), in relation to exercise of their rights in the company including recommendations on public offer or voting recommendation (as the case may be) on agenda items, will fall under the definition of a ‘proxy advisor’

In addition to strengthening shareholders’ rights, the Indian Government passed the Insolvency and Bankruptcy Code, 2016 (IBC) to empower operational and financial creditors of companies to file applications against companies which default on the dues owed to such creditors. As per the Companies Act as well as the regulations framed by SEBI, all listed companies and other specific categories of companies are mandated to establish a vigil mechanism or a ‘whistle blower policy’ (as the case may be). Such mechanism enables directors and employees to report concerns about fraud and other unethical behavior.

Under the Companies Act, the directors of a company have a duty to act in best interest of the company, its employees, shareholders, community and protection of environment in a way which they consider to be in good faith in order to promote the objects of the company for the benefit of its members as a whole. Other fiduciary and legal duties of a director set out under the Companies Act are owed to the company and other stakeholders, rather than directly to shareholders, and include the following:

1. to act in accordance with the AOA of the company;
2. to perform his or her duties with due and reasonable care, skill and diligence and exercise independent judgment;
3. not to be involved in a situation in which he or she may have a direct or indirect interest that conflicts, or possibly may conflict, with the interest of the company;
4. not to achieve or attempt to achieve any undue gain or advantage either to himself or herself or to his or her relatives, partners, or associates and if such director is found guilty of making any undue gain, he or she will be liable to pay an amount equal to that gain to the company; and
5. not to assign his or her office and any assignment so made will be void.

Recently, there has been a paradigm shift globally from companies solely being driven by a profit motive to those following the ‘social welfare objective’. In the Indian context, a change has been brought around by the Companies Act, which requires the Boards of all companies to publish an annual report which, amongst others, should set out the following details: (i) the details about the policy(ies) developed and implemented by the company on CSR initiatives (if applicable); (ii) details of energy conservation setting out the steps taken or impact on conservation of energy, utilization of alternate sources of energy, and details on the capital investment made on energy conservation equipment; and (iii) details about technology absorption.

While there is no ‘stewardship code’ that is applicable to all companies in India, top publicly listed companies (based on market capitalization) in India are required to submit a ‘business responsibility report’ as per the requirements mandated under LODR Regulations. . Additionally, specific regulators have prescribed such code for the entities engaged in their respective sectors.

To give an example, the IRDA, requires insurance companies to comply with the stewardship code framed by the IRDA as per which the insurers are required to have a policy as regards their conduct at general meetings of the investee companies, and file a status report with the IRDA on an annual basis indicating the reasons/ justification for the deviation or non-compliance with the principles. SEBI has also recently framed a stewardship code for mutual funds and other investment funds.

The MCA has also published the National Guidelines on Responsible Business Conduct (NGRBC) which are designed to be used by all businesses, irrespective of their ownership, size, sector, structure or location. While the NGRBC is voluntary, it provides for a ‘Business Responsibility Reporting’ framework which sets out principle-wise performance indicators covering how well businesses are performing in pursuit of NGBRC.

Investors, for obvious reasons, have a deep-seated interest in performance of a company. However, the responsibilities and stewardship roles differ basis the typology of the investors. For instance, private equity and venture capital investors are directly responsible to their investors, and therefore, require a higher stewardship in the investee company with an aim to gain the highest return on investment (ROI). However, strategic investors are more oriented towards corporate governance compliances of the investee company as ethical malfunctions will bring disrepute to the investors. In general, investors, basis their investment, have the right to appoint directors in the investee company to ensure compliance with contractual and statutory obligations by the investee company. However, Indian law does not cast any specific corporate governance obligations on the investors.

The global pandemic has brought along with it a paradigm shift in investment objectives. Most of the changes hint at long term investments. This is because companies trying to stay afloat have sought for restructuring, the advantage of which is being taken by the large cap companies. Secondly, funds with adequate volumes of dry powder, again taking advantage of the pandemic, are seeking investments at much lower valuation than would otherwise be available in normal situations.