UPSC » Governance Notes » India’s Corporate Governance Regulatory Framework

India’s Corporate Governance Regulatory Framework

In terms of structural and regulatory changes, India has seen a number of enactments, including the 2013 Companies Act and the regulations governing SEBI’s listing obligations and disclosure requirements. These enactments have significantly strengthened governance standards and increased accountability through disclosures.

  • The Companies Act, 2013 which has replaced the earlier Companies Act of 1956 covers laws relating to board composition, board meetings, independent directors, general meetings, related party transactions, financial statement disclosure obligations, and so on. The Act provides more opportunities for new entrepreneurs and enables wide application of Information Technology in the conduct of affairs by corporations.

⇒ The Securities and Exchange Board of India (SEBI) is a regulatory body that oversees listed firms and publishes rules to guarantee that investors are protected.

⇒ Companies whose shares are listed on stock exchanges are bound by the Standard Listing Agreement of Stock Exchanges. This agreement defines the rules, processes, and disclosures that companies must follow to remain as listed entities.

  • The Institute of Chartered Accountants of India (ICAI) is an autonomous body, which issues accounting standards, provides guidelines for disclosures of financial information.

⇒ The Institute of Company Secretaries of India (ICSI) is a self-governing group that establishes secretarial standards in accordance with the New Companies Act.

The Companies Act, 2013: 

  • The Government of India introduced the Companies Act, 2013 (“New Companies Act”), which replaces the Companies Act of 1956. The New Act focuses on corporate governance through board and board processes.
  • The New Act deals with corporate governance through the following provisions:

⇒  It introduced a major change in the structure of directors’ boards.

⇒ Every company is required to appoint one (1) director to its board.

⇒ Appointed directors will no longer be treated as independent directors.

⇒ Listed companies and certain categories of public companies are required to appoint independent directors and female directors to their boards.

⇒ The Act for the first time covers the functions of directors.

⇒ Listed companies and other public companies will be required to appoint at least one female director to its board.

  • It mandates following committees to be constituted by the board for prescribed class of companies:

⇒  Committee of Auditors

⇒ Committee on nominations and remuneration

⇒ Relationships with Stakeholders Committee

⇒ Committee on corporate social responsibility

CSR Amendments under the Companies (Amendment) Act, 2019:

  • The Companies (Amendment) Bill, 2019, was recently passed by the Lok Sabha. The legislation aims to improve corporate social responsibility (CSR) enforcement while also reducing the number of cases brought before the National Company Law Tribunal (NCLT).
  • It tightened CSR enforcement standards and ensured that non-compliance with company law regulations would result in harsher penalties.
  • It allowed companies to transfer unspent CSR monies to a separate account that had to be used within three years.
  • If the monies remain unused, they should be transferred to one of the funds listed in Schedule VII of the Act.

The Companies (Amendment) Bill, 2019: 

    • The Companies Amendment Bill (Amendment) of 2020 was passed by Parliament in 2020. The purpose of the bill is to alter the Companies Act of 2013.
  • Producer Companies: Under the 2013 Act, certain provisions from the Businesses Act, 1956 continue to apply to producer companies. This includes taking care of their members, holding meetings, and keeping track of their finances. Companies that specialise in the production, marketing, and marketing of agricultural products, as well as the selling of domestic industry items, are considered manufacturers. The Bill eliminates these restrictions and adds a new chapter to the Act that includes producer company-specific measures.
  • Offences are to be changed in three ways, according to the bill. For starters, it eliminates the punishment for certain crimes. Second, it eliminates the need for incarceration in some circumstances. Third, in some situations, it reduces the amount of the fine that must be paid.
  • Direct Listing in Foreign Jurisdictions: The bill gives the federal government the authority to allow certain types of public corporations to write security listings (as determined by the federal government) in foreign jurisdictions.
  • Exclusion from the Definition of “Listed Company”: The Bill empowers the central government to exclude companies that exclude specific categories of securities from the definition of “listed company” in agreement with the SEBI.
  • Non-Executive Directors’ Remuneration: If the company’s earnings are insufficient or non-existent in a particular year, the Act allows for specific arrangements for the payment of remuneration to the company’s executive directors (including the managing director and other full-time directors). The Bill further extends this requirement to nonexecutive directors, including independent directors.
  • Beneficial Shareholding: Under the Act, if an individual has a beneficial interest in a company of at least 10% shares or has substantial influence or control over the firm, he must declare his interest to the company. If it is deemed acceptable in the public interest, the central government has the ability to exempt any category of individuals from these restrictions.
  • Exemptions from Filing Resolutions: The Act requires that certain resolutions be filed with the Registrar of Companies. This includes the company’s Board of Directors’ choices to borrow money or make loans. Banking firms, on the other hand, are not required to file resolutions offering loans or providing guarantees or security for loans. Non-banking financial companies and housing financing companies are exempt from this rule.
  • Unlisted Companies’ Quarterly Financial Reports: The bill grants the government the power to compel unlisted companies to prepare and file quarterly financial statements, as well as to complete an audit or analysis of those results.
  • Firms with a CSR liability of up to Rs 50 lakh per year are free from forming CSR Committees under the bill. Furthermore, if a company spends more than its CSR commitment in a fiscal year, the difference will be applied to all subsequent fiscal years’ CSR responsibilities.
  • NCLAT Benches: According to the bill, the National Company Law Appellate Tribunal will be organised into benches. These are usually held in New Delhi or elsewhere.

Due to numerous changes in the business environment, corporate structure, stakeholder expectations, and various laws and government policies relating to corporations, corporate governance has become highly significant.