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MODULE – V:

Controlling Members’ Voting

Sources of corporate governance rules and practices

Primary sources of law, regulation and practice

The concept of corporate governance has gained significance in India with the advent of the
Companies Act, 2013 (the Companies Act), which, along with other relevant laws, has put in
place strict provisions on governance and penal consequences for non-compliance with these
provisions. As a result of this enhanced liability, companies have been taking measures to
create a robust compliance system.

The Companies Act, which replaced the erstwhile Companies Act, 1956 on 30 August 2013,
and the regulations issued by the Securities and Exchange Board of India (SEBI) are the
primary sources of the Indian corporate governance regime. The provisions of the Companies
Act have been notified in a phased manner.

The provisions of the Companies Act must be read with rules, notifications, orders, circulars
and forms issued under the Companies Act by the Ministry of Corporate Affairs, Government
of India (MCA). Unlisted and closely held Indian companies are subject to the corporate
governance norms contained in the Companies Act. Schedule IV of the Companies Act
contains a code for the professional conduct of independent directors (IDs), which applies to
all public listed companies and certain classes of public companies. Compliance with the
corporate governance provisions must be included in the board’s report.

The SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (the Listing
Regulations) specify the obligations of ‘listed entities’, a term that includes not only those
entities that have listed their equity shares, but also those that have listed other instruments,
including non-convertible debt securities, non-convertible redeemable preference shares,
perpetual debt instruments, perpetual non-cumulative preference shares, Indian depository
receipts, securitised debt instruments and units issued by mutual funds. The Listing
Regulations sets out the corporate governance principles applicable to listed entities.
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The Listing Regulations make it mandatory for companies that have listed their equity shares
and convertible securities to comply with certain requirements to ensure transparency in the
management of such companies, such as inclusion of IDs, regulation of the remuneration of
non-executive directors, constitution of various committees, disclosures on related party
transactions (RPTs), accounting treatment, maintenance of a minimum frequency of meetings
of the board of directors (Board) and limitation on the number of committees of which a
director can be a chairman. The Listing Regulations also require the adoption of a written
code of conduct for all members of the Board and senior management of every listed
company.

Additionally, the following laws also deal with corporate governance initiatives:

 Securities Contracts (Regulation) Act, 1956;

 Securities and Exchange Board of India Act, 1992 and the rules and regulations framed
thereunder;

 Securities and Exchange Board of India (Substantial Acquisition of Shares and

Takeovers) Regulations, 2011 (the Takeover Code);

 Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations,

2015 (the Insider Trading Code);

 Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements)
Regulations, 2009;

 Depositories Act, 1996;

 Corporate Governance Voluntary Guidelines, 2009 issued by the MCA;

 National Voluntary Guidelines on Social, Environmental and Economic Responsibilities

of Business, 2011 issued by the MCA; and

 Guidelines on Corporate Social Responsibility and Sustainability for Central Public

Sector Enterprises issued by the Department of Public Enterprises, Ministry of Heavy
Industries and Public Enterprises (effective 1 April 2014 and applicable only to public
sector enterprises).

Non-compliance with the provisions of the Companies Act on corporate governance attracts
monetary fines, imprisonment, or both. Further, any failure on the part of a listed company to
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comply with the Listing Regulations may lead, inter alia, to one or more of the following
consequences: imposition of fines; suspension of trading; freezing of promoter or promoter
group holding of equity shares; and other actions being initiated by SEBI, depending on who
violated the provisions of the Listing Regulations.

A committee was constituted by SEBI under the chairmanship of Mr Uday Kotak, Executive
Vice Chairman and Managing Director, Kotak Mahindra Bank (the Kotak Committee) in
June 2017 with the aim of improving standards of corporate governance of listed companies
in India. The Kotak Committee was requested to make recommendations to SEBI on the
following issues (in the context of equity listed companies):

 ensuring independence in spirit of IDs and their active participation in the functioning of
the company;

 improving safeguards and disclosures pertaining to RPTs;

 issues in accounting and auditing practices by listed companies;

 improving effectiveness of Board evaluation practices;

 addressing issues faced by investors on voting and participation in general meetings;

 disclosure and transparency related issues, if any; and

 any other matter, as the committee deemed fit pertaining to corporate governance in
India.

The Kotak Committee submitted its report to SEBI on 5 October 2017, providing its
recommendations on various issues. In its Board meeting dated 28 March 2018, SEBI
accepted certain recommendations of the Kotak Committee (without any modification), such
as recommendations pertaining to reduction in the maximum number of listed entity
directorships, expanding the eligibility criteria for IDs, enhancing the role of the audit
committee, nomination and remuneration committee (NRC) and risk management committee
(RMC), and enhancing disclosure of RPTs and permitting related parties to vote against
RPTs.

The Board of SEBI also accepted certain recommendations (with modification), such as
recommendations pertaining to minimum number of directors in listed companies, number of
woman IDs, separation of the roles of managing director (MD), chief executive officer (CEO)
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and chairman, quorum for board meetings, holding of annual general meetings (AGMs), and
shareholders’ approval for royalty or brand payment to related parties.

Subsequently, SEBI notified the Securities and Exchange Board of India (Listing Obligations
and Disclosure Requirements) (Amendment) Regulations, 2018 (Amendment Regulations)
on 9 May 2018 and issued a circular on 10 May 2018 to implement the recommendations of
the Kotak Committee. Except where specific dates are provided in the Amendment
Regulations, the Amendment Regulations will come into force on 1 April 2019.

Responsible entities

What are the primary government agencies or other entities responsible for making
such rules and enforcing them? Are there any well-known shareholder groups or proxy
advisory firms whose views are often considered?

The primary Indian implementation entities of corporate governance initiatives are SEBI (the
primary regulator of the Indian securities market and listed companies) and the MCA.

Other entities responsible for the enforcement of corporate governance issues include:

 the National Company Law Tribunal (the Tribunal) under the Companies Act, having
quasi-judicial powers to decide certain matters under the Companies Act, including the
protection of minority shareholders from oppression by majority shareholders and
mismanagement, and its appellate authority, the National Company Law Appellate
Tribunal (the Appellate Tribunal);

 the Registrar of Companies (ROC), which generally has its presence in every Indian
state, and primarily ensures compliance by a company in relation to filings and
disclosures under the Companies Act;

 the Regional Director (RD), to which certain powers of the central government have
been delegated. There are seven RDs in India, each with their own territorial
jurisdiction, in which they, inter alia, supervise the working of the relevant ROCs; and

 the Competition Commission of India (CCI), created under the aegis of the Competition
Act, 2002, which regulates antitrust issues where a company’s action may have an
adverse effect on competition in the relevant Indian market.
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There are also other regulatory authorities that regulate companies engaged in specific
sectors, such as Insurance Regulatory and Development Authority (for the insurance sector)
and Telecom Regulatory Authority of India (for the telecom sector).

The concept of shareholder activist groups or proxy advisory firms is emerging in India. The
SEBI (Research Analysts) Regulations, 2014 (the Analyst Regulations) define a ‘proxy
adviser’ as any person who provides advice, through any means, to an institutional investor or
shareholder of a company, in relation to exercise of their rights in the company including
recommendations on public offer or voting recommendation on agenda items. Institutional
Investor Advisory Services India Limited and InGovern, both established in 2010, are
prominent proxy advisory firms operating in India. Stakeholders Empowerment Services, a
corporate governance research and advisory firm, claims to be the first company to have
registered as a ‘proxy adviser’ under the Analyst Regulations; however, these firms are not
formally consulted by the authorities prior to promulgation of corporate governance
initiatives. Usually, committee recommendations and proposed regulatory norms are put up
for public comment by concerned authorities in order to ensure large-scale participation. The
National Foundation for Corporate Governance, set up by the MCA as a not-for-profit trust,
in association with the Confederation of Indian Industry, the Institute of Chartered
Accountants of India and the Institute of Company Secretaries of India (ICSI), also provides
a platform for spreading awareness regarding corporate governance issues.