DR.

RAM MANOHAR LOHIA NATIONAL LAW

UNIVERSITY, LUCKNOW

SEMINAR PAPER

CORPORATE GOVERNANCE

IN INDIA
Under The Guidance of: Submitted By:

Dr. Manauj Kumar Abhishek Kumar Singh

Assistant Professor (Law) Enrollment No. 130101004, Section B

VIII Semester.

1
 India has been ranked in the seventh place in terms of corporate governance score in Asia
Pacific region, says a report by global brokerage firm CLSA.

According to the CLSA Corporate Governance Watch 2012 list1, produced in collaboration with
the Asian Corporate Governance Association, India's corporate governance score has improved
by 3 percentage points but ranking has remained the same." This is not due to a lack of
awareness by the regulators, but rather a piecemeal approach to reform and a lame duck
government unable to do anything meaningful given infighting among its allies," ACGA
Research Director Sharmila Gopinath said in the report2.

ABSTRACT
Corporate governance is defined as “the system by which companies are directed and
controlled”.3The separation of ownership and control in corporations with dispersed ownership
structure highlights the agency issue due to conflict between agents (managers) and principals
(shareholders). The endeavor of the corporate governance mechanism in such a context is to
monitor the management and ensure that it functions to maximize shareholder wealth. Corporate
governance issues in India are, however, due to a different agency problem that arises on account
of the conflict between dominant and minority shareholders. Therefore, the corporate governance
mechanism in India should focus on safeguarding minority shareholders from expropriation by
dominant shareholders. Assessment of protection given to minority shareholders in India under
the current regulatory framework suggests that on this attribute country does not fare well. There
exist laws on minority shareholder protection, but either they are not efficacious or not well
enforced. Commensurately, there exists a significant gap in Indian corporate governance
regulatory framework, which warrants utmost safeguards of minority shareholder rights. Policy
makers possibly can do this by creating a favorable environment and promulgating laws for
protection of their rights. The issue has serious ramifications on Indian economy that is looking
for greater foreign capital and investment to boost its economic growth.

1
http://www.financialexpress.com/news/india-ranks-7th-in-corporate-governance-in-asiapacificreport/1006729/
2
http://economictimes.indiatimes.com/news/news-by-company/corporate-trends/india-ranks-7th-in-corporate-
governance-in-asia-pacific-clsa/articleshow/16512858.cms
3
Cadbury Report,“Report of the committee on the Financial Aspects of Corporate Governance”, Financial
Reporting Council, GEE, London, 1992.

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RESEARCH METHODOLOGY
For the purpose of research, the researcher has used the Doctrinal Method of Research and based
on existing literature and earlier empirical research. The Research is entirely a Library-Based
Research, where the researcher has made use of books, law journals, magazines, law reports,
legislations, internet websites, etc., for the purpose.

SCOPE OF THE PROJECT

This research article will try to examine the legal framework of Upstream and Downstream oil &
gas sectors in India. It will also debate upon the factors affecting the competition between these
two. This paper will also try examining the historical analysis of policy and fiscal framework.

INTRODUCTION
Corporate Governance is essentially all about how corporations are directed, managed,
controlled and held accountable to their shareholders. The objective of any corporate governance
system is to simultaneously improve corporate performance and accountability as a means of
attracting financial and human resources on the best possible terms and of preventing corporate
failure.
With the rapid pace of globalization many companies have been forced to tap
international financial markets and consequently to face greater competition than before. Both
policymakers and business managers have become increasingly aware of the importance of
improved standards of Corporate Governance.
Corporate governance, in plain terms, refers to the rules, processes, or laws by which
businesses are operated, regulated, and controlled. The term can refer to internal factors defined
by the officers, stockholders or constitution of a corporation, as well as to external forces such as
consumer groups, clients, and government regulations. However, enforced corporate governance
provides a structure that, at least in theory, works for the benefit of everyone concerned by
ensuring that the enterprise adheres to accepted ethical standards and best practices as well as to
formal laws. To that end, organizations have been formed at the regional, national, and global
levels.

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 In recent times, corporate governance has received increased attention because of high-
profile scandals involving abuse of corporate power and, in some cases, alleged criminal activity
by corporate officers. An integral part of an effective corporate governance regime includes
provisions for civil or criminal prosecution of individuals who conduct unethical or illegal acts in
the name of the enterprise.

It is said that good corporate governance helps an organization achieve several objectives and
some of the more important ones include4:
• Developing appropriate strategies that result in the achievement of stakeholder objectives
• Attracting, motivating and retaining talent
• Creating a secure and prosperous operating environment and improving operational
performance
• Managing and mitigating risk and protecting and enhancing the company’s reputation.
Some aspects covered in the poll include:
• Corporate governance regulations in India
• Corporate governance concerns in India and role of independent directors and audit committees
in addressing these concerns
• Board practices, board oversight of risk management and the importance given to integrity and
ethical values
• Practices that are fundamental to improved corporate governance.

CORPORATE GOVERNANCE IN INDIA

Corporate governance and financial regulation in India was generally considered quite
poor until the economic reforms of the early 1990s. The Securities and Exchange Board of India
(SEBI) was established in 1992 by an act of Parliament, and SEBI was given the job of

4
http://www.amchamindia.com/CG_Survey_Report.pdf

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regulating stock exchanges, brokers, fraudulent trade practices, and other areas of corporate
activity5. As its power grew over the decade, SEBI started to play a much more active role in
setting minimum standards for corporate behavior. In addition, a voluntary code of corporate
governance was developed by the Confederation of Indian Industry (CII), a group of well-
regarded Indian firms.

Near the turn of the century, SEBI commissioned a series of projects to improve Indian
corporate governance by building on CII’s code (and by converting the voluntary code into a
mandatory one). This work would eventually lead to the Clause 49 reforms. The first SEBI
committee, comprised of 17 prominent business leaders and chaired by Kumar Mangalam Birla,
advocated a variety of new governance requirements— including a minimum number of
independent directors, the creation of audit committees and shareholders’ grievance committees,
and additional management disclosures on firm performance.

These recommendations were soon adopted, but, importantly, they were not imposed on
every public company through legislation (in contrast with Sarbanes Oxley in the United States).
Instead, SEBI implemented the Birla Committee reforms by modifying the listing requirements
for firms seeking to go public on an Indian stock exchange. Thus was born Clause 49, a new
collection of corporate governance obligations that individual firms would agree to when they
signed listing contracts with any stock exchange in the country. As part of a gradual roll-out
process, the Birla Committee reforms were not imposed immediately on all public firms. Instead,
they were made mandatory in 2001 for the largest Indian companies (and for newly listing
firms), and then expanded to smaller public companies over the next few years.

All of this seemed fine until 20026, when fallout from Enron, WorldCom, and other
corporate governance catastrophes caused Indian regulators to wonder whether Clause 49 went
far enough. SEBI decided to sponsor a second corporate governance committee chaired by
Narayana Murthy, the renowned leader of Infosys Technologies. The Murthy Committee went to

5
http://www.isb.edu/faculty/upload/Doc9112009128.pdf
6
http://www.ijcem.org/papers012012/ijcem_012012_03.pdf

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work and released its additional recommendations in 2003. SEBI quickly adopted these
suggestions and issued a revised Clause 49 in 2004.

The Murthy Committee reforms expanded on the Birla Committee’s work in several
areas. One main focus related to the qualifications for independent director status: a number of
specific requirements were added to disqualify material suppliers and customers, recently
departed executives, relatives, and other closely-related parties. A second set of changes affected
the audit committee: it was now required to meet more frequently (four times per year), and
members had to satisfy new financial literacy requirements. A third important change mandated
CEO and CFO certification of financial reports and internal controls. And a number of additional
shareholder disclosures, including expanded discussion of financial results, were added to the
Clause 49 requirements. As before, these reforms were phased in gradually; all public firms were
not required to comply with the Murthy Committee rules until January 1, 2006.

The fruits of this labor were generally well-received7, and Clause 49 seems to have
improved the overall state of Indian corporate governance. For example, a recent study by
Bernard Black and Vikramaditya Khanna argues that stock prices of imminently affected firms
jumped almost four percent when SEBI announced its decision to pursue the initial Clause 49
reforms. Similarly, the World Bank as part of its 2005 standards and codes initiative
benchmarked India’s regulatory framework to the OECD principles of corporate governance. It
announced that India has indeed come a long way over the past decade, reporting that “a series of
legal and regulatory reforms have transformed the Indian corporate governance framework and
improved the level of responsibility/accountability of insiders, fairness in the treatment of
minority shareholders and stakeholders, board practices, and transparency.”

Clause 49 of the Listing Agreement to the Indian stock exchange came into effect from
31 December 2005. It was formulated for the improvement of corporate governance in all listed
companies. Clause 49 of Listing Agreements, as currently in effect, includes the following key
requirements:
• Board Independence: Boards of directors of listed companies must have a minimum
number of independent directors. Where the Chairman is an executive or a promoter or related to

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http://www.acga-asia.org/public/files/ACGA_India_White_Paper_Final_Jan19_2010.pdf

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a promoter or a senior official, then at least one-half the board should comprise independent
directors. In other cases, independent directors should constitute at least one third of the board
size.
• Audit Committees: Listed companies must have audit committees of the board with a
minimum of three directors, two-thirds of whom must be independent. In addition, the roles and
responsibilities of the audit committee are to be specified in detail.
• Disclosure: Listed companies must periodically make various disclosures regarding
financial and other matters to ensure transparency.
• CEO/CFO certification of internal controls: The CEO and CFO of listed companies
must (a) certify that the financial statements are fair and (b) accept responsibility for internal
controls.
• Annual Reports: Annual reports of listed companies must carry status reports.

THE SECOND PHASE: CORPORATE GOVERNANCE AFTER SATYAM

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India‘s corporate community experienced a significant shock in January 2009 with damaging
revelations about board failure and colossal fraud in the financials of Satyam. The Satyam
scandal also served as a catalyst for the Indian government to rethink the corporate governance,
disclosure, accountability and enforcement mechanisms in place. As described below, Indian
regulators and industry groups have advocated for a number of corporate governance reforms to
address some of the concerns raised by the Satyam scandal. Industry response shortly after news
of the scandal broke; the CII began examining the corporate governance issues arising out of the
Satyam scandal. Other industry groups also formed corporate governance and ethics committees
to study the impact and lessons of the scandal. In late 2009, a CII task force put forth corporate
governance reform recommendations. In its report the CII emphasized the unique nature of the
Satyam scandal, noting that ―Satyam is a one-off incident . . . The overwhelming majority of
corporate India is well run, well regulated and does business in a sound and legal manner.
In addition to the CII, the National Association of Software and Services Companies
(NASSCOM, self-described as ―the premier trade body and the chamber of commerce of the
IT-BPO industries in India)8 also formed a Corporate Governance and Ethics Committee, chaired
by N. R. Narayana Murthy, one of the founders of Infosys and a leading figure in Indian
corporate governance reforms. The Committee issued its recommendations in mid-2010,
focusing on stakeholders in the company. The report emphasizes recommendations related to the
audit committee and a whistleblower policy. The report also addresses improving shareholder
rights. The Institute of Company Secretaries of India (ICSI) has also put forth a series of
corporate governance recommendations. Government response Satyam prompted quick action by
both SEBI and the MCA.
In September 2009 the SEBI Committee on Disclosure and Accounting Standards issued
a discussion paper that considered proposals for:
• Appointment of the chief financial officer (CFO) by the audit committee after assessing the
qualifications, experience and background of the candidate;
• Rotation of audit partners every five years;
• Voluntary adoption of International Financial Reporting Standards (IFRS);
• Interim disclosure of balance sheets (audited figures of major heads) on a half-yearly basis; and

8
http://www.ijcem.org/papers012012/ijcem_012012_03.pdf

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• streamlining of timelines for submission of various financial statements by listed entities as
required under the Listing Agreement
In early 20109, SEBI amended the Listing Agreement to add provisions related to the
appointment of the CFO by the audit committee and other matters related to financial
disclosures. However, other proposals such as rotation of audit partners were not included in the
amendment of the Listing Agreement. MCA actions inspired by industry recommendations,
including the influential CII recommendations, in late 2009 the MCA released a set of voluntary
guidelines for corporate governance. The Voluntary Guidelines address a myriad of corporate
governance matters including: independence of the boards of directors; responsibilities of the
board, the audit committee, auditors, secretarial audits; and mechanisms to encourage and protect
whistle blowing.

Important provisions include:

 Issuance of a formal appointment letter to directors.
 Separation of the office of chairman and the CEO. Institution of a nomination committee
for selection of directors.
 Limiting the number of companies in which an individual can become a director.
 Tenure and remuneration of directors.
 Training of directors.
 Performance evaluation of directors.
 Additional provisions for statutory auditors.

In discussing the voluntary nature of the guidelines, Corporate Affairs Secretary, R.

Bandyopadhyay, stated that the MCA did not want to enact a rigid, mandatory law. However, the
MCA also indicated that the guidelines are a first step and that the option remains open to
perhaps move to something more mandatory. In fact, certain voluntary aspects of the guidelines,
such as the separation of the office of chairman and CEO, have now been recommended for
enactment in amendments to the Companies Bill pending in Parliament.

9
http://www.acga-asia.org/public/files/ACGA_India_White_Paper_Final_Jan19_2010.pdf

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 In recent years, more and more Indian companies have been raising capital overseas by
getting themselves listed on international stock exchanges. These efforts have been accompanied
by the Indian government's drive to attract more Foreign Direct Investment (FDI). Both factors
have gone hand in hand with the realization that if Indian companies want more access to global
capital markets, they will need to make their operations and financial results more transparent. In
other words, they will need to improve their standards of corporate governance. The Securities
and Exchange Board of India (SEBI), which regulates India's stock markets, took a major step in
this direction a year ago. It asked Indian firms above a certain size to implement Clause 49, a
regulation that strengthens the role of independent directors serving on corporate boards.

CRITICAL ANALYSIS
In May 2011, the Supreme Court has given a very fair judgment, with far-reaching
implications both for the government and India Inc., in the Reliance Industries Limited (RIL) vs
RNRL10 gas pricing case. It has established unequivocally that the production sharing contract
between the government and RIL overrides any private memorandum of understanding arrived at
between two individuals. In short, it refused to give sanctity to the Memorandum of
Understanding (MoU) signed between the two Ambani brothers. This principle had to be
established in the interest of corporate governance or it would have created havoc in the
corporate world with promoters of public limited, quoted companies coming together and
signing MoUs without a care for the shareholders and other stake holders in the company. Till
today the shareholders have not okayed the MoU entered into between Mukesh and Anil Ambani
when they divided between themselves the empire created by their father, Dhirubhai
Ambani.The second important aspect of the judgment is that the natural resources of a country
belong to the government and the government has the right to price it and prioritize the
beneficiaries. While it is a well known fact, even internationally, that natural resources belong to
the government, the government as a monopoly has the sacred responsibility to put the interest of
the nation before everything else when deciding on its use and sale price. This is where the
judgment has implications that go beyond the Ambani brothers. The petroleum minister has
expressed his happiness that the apex court has upheld his contention that the gas in this case
belongs to the government and RIL is only a contractor who can market the product. But it will

10
[2010]156CompCas455(SC)

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be the government that will decide at what price it should market it, and to whom it should
market it. This is a double-edged sword.

The problem in the Indian corporate sector (be it the public sector, the multinationals or
the Indian private sector) is that of disciplining the dominant shareholder and protecting the
minority shareholders. Aboard which is accountable to the owners would only be one which is
accountable to the dominant shareholder; it would not make the governance problem any easier
to solve. Clearly, the problem of corporate governance abuses by the dominant shareholder can
be solved only by forces outside the company itself.
Corporate governance abuses perpetrated by a dominant shareholder pose a difficult
regulatory dilemma in that regulatory intervention would often imply a micro-management of
routine business decisions. The regulator is forced to confine himself to broad proscriptions
which leave little room for discretionary action. Many corporate governance problems are ill
suited to this style of regulation.
The capital market on the other hand lacks the coercive power of the regulator. What it
has however is the ability to make business judgments and to distinguish between what is in the
best interests of the company as a whole as against what is merely in the best interests of the
dominant shareholders. The only effective sanction that the market can impose against an
offender is to restrict his ability to raise money from the market once again. Denial of market
access is a very powerful sanction except where the company is cash rich and has little future
needs for funds.

The past few years have witnessed a silent revolution in Indian corporate governance
where managements have woken up to the power of minority shareholders who vote with their
wallets. In response to this power, the more progressive companies are voluntarily accepting
tougher accounting standards and more stringent disclosure norms than are mandated by law.
They are also adopting more healthy governance practices. It is evident that these tendencies
would be strengthened by a variety of forces that are acting today and would become stronger in
years to come:

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  Economic reforms have not only increased growth prospects, but they have also
made markets more competitive. This means that in order to survive companies will
need to invest continuously on a large scale.
 Meanwhile, financial sector reforms have made it imperative for firms to rely on
capital markets to a greater degree for their needs of additional capital.
 Simultaneously, the increasing institutionalization of the capital markets has
tremendously enhanced the disciplining power of the market.
 Globalization of our financial markets has exposed issuers, investors and
intermediaries to the higher standards of disclosure and corporate governance that
prevail in more developed capital markets.
 Tax reforms coupled with deregulation and competition have tilted the balance away
from black money transactions. This makes the worst forms of mis-governance less
attractive than in the past.

While these factors will make the capital markets more effective in disciplining the
dominant shareholder, there are many things that the government and the regulators can do to
enhance this ability:
 Disclosure of information is the pre-requisite for the minority shareholders or for the
capital market to act against errant managements. The regulator can enhance the
scope, frequency, quality and reliability of the information that is disclosed.
 Regulatory measures that promote an efficient market for corporate control would
create an effective threat to some classes of dominant shareholders as discussed
earlier
 Reforms in bankruptcy and related laws would bring the disciplining power of the
debt holders to bear upon recalcitrant managements.
 Large blocks of shares in corporate India are held by public sector financial
institutions who have proved to be passive spectators. These shareholdings could be
transferred to other investors who could exercise more effective discipline on the
company managements.
Alternatively, these institutions could be restructured and privatized to make them more
vigilant guardians of the wealth that they control.

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COMPANIES BILL 2011

The new bill for the laws related to various company affairs of our nation. This new bill
was enacted by the parliament in its 62nd year GENERAL: An attempt was made to bring out
the most of republic after a important points into sharp relief through the new notification of such
is Companies Bill, 2011. The various mechanics involved like formation, management &made
by the Central administration, accounts, audits etc within the limits of a company will be
analyzed and governed on the Government.

The Bill has 470 clauses and 7 schedules as against 658 Sections and 15 schedules in the
existing Companies Act, 1956. The entire bill has been divided into 29 chapters.

The Bill empowers Central Government to make rules, etc. through delegated legislation
after having detailed consultative process (clause 470 and others). The Bill provides for self-
regulatory process and stringent compliance regime.

The essential features of the bill:

 Concept of One Person Company (OPC limited) introduced by Companies Bill, 2011
through Clause 2(62).

 In Clause 2(85) of Companies Bill, 2011, Small companies have been defined by
fixing maximum paid-up share capital not exceeding Rs. 50 Lakhs and such
companies will be required to follow less stringent regulatory provisions.

 In Clause 18 of Companies Bill, 2011, the proper provision for Conversion of

Companies already registered has been introduced.

 In Clause 7(1)(b) of Companies Bill, 2011, A provision has been made regarding
declaration to the effect that all the requirements of the Act in respect of registration
and matters precedent or incidental thereto have been complied with.

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 Company Secretaries continue to be recognized for the purpose of giving this
declaration.

 Introduction of e-governance: Another important feature added by Companies Bill,

2011 in corporate practice is formal introduction of much awaited concept of E-
Governance. E-Governance proposed for various company processes like
maintenance and inspection of documents in electronic form, option of keeping of
books of accounts in electronic form, financial statements to be placed on company’s
website, holding of board meetings through video conferencing/other electronic
mode; voting through electronic means. After the introduction of E-Governance
companies can maintain its statutory registers in electronic mode and hold its board
meetings through video conferencing.

 Board and governance : Appointment of Key Managerial Personnel [Clause 203(1)]

As per clause 203 of Companies Bill, 2011 the Company Secretaries are recognized
as whole-time key managerial personnel. Also Companies Bill, 2011 has made the
appointment of Company Secretary mandatory. As per clause 203 of Companies Bill,
2011, every company belonging to such class or classes of companies as may be
prescribed shall have the following whole-time key managerial personnel,—
Managing director, or Chief Executive Officer or manager and in their absence, a
whole-time director; and Company Secretary. Unless the articles of a company
provide otherwise, an individual shall not be the chairperson of the company as well
as the managing director or Chief Executive Officer of the company at the same time
[Proviso to Clause 203(1)]. Bill 2011, also provides the definition of Key Managerial
Personnel under Clause 2(51) of the Bill, which is as follows: “Key Managerial
Personnel”, in relation to a company, means—
(i) the Chief Executive Officer or the managing director or the manager;
(ii) the Company Secretary;
(iii) the Chief Financial Officer if the Board of Directors appoints him; and
(iv) such other officer as may be prescribed; Every Company Secretary being a
KMP shall be appointed by a resolution of the Board which shall contain the

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 terms and conditions of appointment including the remuneration. If any
vacancy in the office of KMP is created, the same shall be filled up by the
Board at a meeting of the Board within a period of six months from the date of
such vacancy [Clause 203 (2) & (4)] If a company does not appoint a
Company Secretary, the penalty proposed is: On company – one lakh rupees
which may extend to five lakh rupees. On every director and KMP who is in
default – 50,000 rupees and 1,000 rupees per day if contravention continues.

 Minimum period prescribed for at least one director on board to stay in India: This
kind of provision also prescribed for the very first time. Every company shall have at
least one director who has stayed in India for a total period of not less than 182 days
in previous calendar year [Clause 149(2)].

 Concept of independent directors: The concept of independent directors has also been
touched upon for the very first time under clause 149. All listed companies are
required to appoint independent directors. Such other public companies as may be
prescribed by the Central Government shall also be required to appoint independent
directors. At least one-third of the Board of such companies should comprise
independent directors. Nominee director appointed by any institution, or in pursuance
of any agreement, or appointed by any Government to represent its shareholding
shall not be deemed to be an independent director. As per first proviso to Clause
161(2) only an independent director can be appointed as alternate director to an
independent director. The Independent directors shall abide by a code provided in
Schedule IV to the Bill. Independent directors shall hold office up to two consecutive
terms. One term is upto five consecutive years.

 Board meetings through video-conferencing allowed now: Another master change

proposed in Companies Bill, 2011 under clause 173(2) is participation of directors at
Board Meetings has been permitted through video-conferencing or other audio visual

15
 means, provided such participation is capable of recording and recognizing. Also, the
recording and storing of the proceedings of such meetings should be carried out.

 Resignation of directors (clause 168): For the very first time something has been
proposed regarding resignation of directors through clause. Earlier there was no
section regarding this. A director may resign from his office by giving notice in
writing. The Board shall, on receipt of such notice, intimate the Registrar and also
place such resignation in the subsequent general meeting of the company [Clause
168(1)]. The notice shall become effective from the date on which the notice is
received by the company or the date, if any, specified by the director in the notice,
whichever is later [Clause 168(2)]. If all the directors of a company resign from their
office or vacate their office, the promoter or in his absence the Central Government
shall appoint the required number of directors to hold office till the directors are
appointed by the company in General Meeting [Clause 168(3)].

 Secretarial standards introduced and provided statutory recognition: Another major

proposal is for the first time, the Secretarial Standards has been introduced and
provided statutory recognition [refer Clause 118(10) & 205]. Clause 118(10) reads
as; “Every company shall observe Secretarial Standards with respect General and
Board Meetings specified by the Institute of Company Secretaries of India
constituted under section 3 of the Company Secretaries Act, 1980 and approved by
the Central Government.” Clause 205 casts duty on the Company Secretary to ensure
that the company complies with the applicable Secretarial Standards. It is the
beginning of a new era where non financial standards have been given importance
and statutory recognition besides Financial Standards.

 Secretarial audit (clause 204): In December 2009, the Ministry of Corporate Affairs
introduced Voluntary Guidelines on Corporate Governance which inter-alia
prescribed Secretarial Audit. The Parliamentary Standing Committee in its report
recommended introducing Secretarial Audit. For the first time Secretarial Audit as
been included in the Bill. The provisions of the clause relating to Secretarial Audit

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 are as follows: Every listed company and a company belonging to other class of
companies as may be prescribed shall annex with its Board’s report a Secretarial
Audit Report, given by a Company Secretary in Practice, in such form as may be
prescribed. It shall be the duty of the company to give all assistance and facilities to
the Company Secretary in Practice, for auditing the secretarial and related records of
the company. The Board of Directors, in their report shall explain in full any
qualification or observation or other remarks made by the Company Secretary in
Practice in his report. If a company or any officer of the company or the Company
Secretary in Practice, contravenes the provisions of this section, the company, every
officer of the company or the Company Secretary in Practice, who is in default, shall
be punishable with fine which shall not be less than one lakh rupees but which may
extend to five lakh rupees.

 Duties of directors [clause 166]: For the first time duties of directors have been
defined in the Bill. A director of a company shall:
i. Act in accordance with the articles of the company.
ii. Act in good faith in order to promote the objects of the company for the
benefit of its members as a whole, and in the best interests of the company, its
employees, the shareholders, the community and for the protection of
environment.
iii. Exercise his duties with due and reasonable care, skill and diligence and shall
exercise independent judgment.
iv. Not involve in a situation in which he may have a direct or indirect interest
that conflicts, or possibly may conflict, with the interest of the company.
v. Not achieve or attempt to achieve any undue gain or advantage either to
himself or to his relatives, partners, or associates and if such director is found
guilty of making any undue gain under sub-section (7),
vi. He shall be liable to pay an amount equal to that gain to the company.
vii. Not assign his office and any assignment so made shall be void. Penalty:

17
 viii. If a director of the company contravenes the provisions of this section such
director shall be punishable with fine which shall not be less than one lakh
rupees but which may extend to five lakh rupees.

 Managerial remuneration (clause 197): Provisions relating to limits on remuneration

provided in the existing Act being included in the Bill. Maximum limit of 11% (of
net profits) being retained. For companies with no profits or inadequate profits
remuneration shall be payable in accordance with new Schedule of Remuneration
and in case a company is not able to comply with such Schedule, approval of Central
Government would be necessary.

 Board meetings (clause 173) :First time length of Notice of board meeting along with
shorter notice provisions has been proposed via clause 173 (3). At least seven days’
notice is required to be given for a Board meeting. The notice may be sent by
electronic means to every director at his address registered with the company [Clause
173(3)]. A Board Meeting may be called at shorter notice subject to the condition
that at least one independent director, if any, shall be present at the meeting.
However, in the absence of any independent director from such a meeting, the
decisions taken at such meeting shall be final only on ratification thereof by at least
one independent director [1st & 2nd Proviso to clause 173].

 One person companies (OPC) - option to hold AGM [clause 122]: One person
companies have been given the option to dispense with the requirement of holding an
AGM.

 Statutory auditors (clause 139):The provisions of Rotation of auditors and audit firms
are as follows: No listed company or a company belonging to such class or classes of
companies as may be prescribed, shall appoint or re-appoint—

(a) An individual as auditor for more than one term of five consecutive years; and
(b) An audit firm as auditor for more than two terms of five consecutive years:
Provided that—

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 (i) An individual auditor who has completed his term under clause (a) shall not be
eligible for re-appointment as auditor in the same company for five years from the
completion of his term;
(ii) an audit firm which has completed its term under clause (b), shall not be eligible
for re-appointment as auditor in the same company for five years from the completion
of such term: Provided further that as on the date of appointment no audit firm having
a common partner or partners to the other audit firm, whose tenure has expired in a
company immediately preceding the financial year, shall be appointed as auditor of
the same company for a period of five years:

 Board’s report (clause 134) : Board’s Report has been made more informative and
includes extensive disclosures like –
(i) extract of annual return
(ii) number of meetings of Board
(iii) report of the committee on directors’ remuneration
(iv) a declaration by independent directors wherever they are appointed
(v) particulars of loans, guarantees, or investments made
(vi) particulars of contracts or arrangements entered into

Explanation or comments on every qualification, reservation made –

a) By auditor in his report
b) By the Company Secretary in his Secretarial Audit Report

The Boards’ Report is to be signed by the Chairman if he is authorized by the

Board and where he is not so authorized, it shall be signed by at least two
directors, one of whom shall be a managing director, or where there is only one
director, by such director (Clause 134).

 Woman director (clause 149): At least one woman director being made mandatory in the
prescribed class or classes of companies.

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 Corporate social responsibility (clause 135): Every company having net worth of rupees
five hundred crore or more, or turnover of rupees one thousand crore or more or a net
profit of rupees five crore or more during any financial year shall constitute a Corporate
Social Responsibility Committee of the Board consisting of three or more directors, out
of which at least one director shall be an independent director.
The Corporate Social Responsibility Committee shall formulate and recommend
to the Board, a Corporate Social Responsibility Policy which shall indicate the activities
to be undertaken by the company as specified in Schedule VII (b) recommend the amount
of expenditure to be incurred on the activities referred to in clause (a); and The Board of
every company referred to in sub-section (1), shall make every endeavor to ensure that
the company spends, in every financial year, at least two per cent of the average net
profits of the company made during the three immediately preceding financial years, in
pursuance of its Corporate Social Responsibility Policy. If the company fails to spend
such amount, the Board shall, in its report made under clause (o) of sub-section (3) of
section 134, specify the reasons for not spending the amount.

 Share capital and debentures: Equity share capital has now been defined as: Equity share
capital, with reference to any company limited by shares, means all share capital which is
not preference share capital and Preference share capital with reference to any company
limited by shares, means that part of the issued share capital of the company which
carries or would carry a preferential right with respect to— payment of dividend, either
as a fixed amount or an amount calculated at a fixed rate, which may either be free of or
subject to income-tax; and repayment, in the case of a winding up or repayment of
capital, of the amount of the share capital paid-up or deemed to have been paid-up,
whether or not, there is a preferential right to the payment of any fixed premium or
premium on any fixed scale, specified in the memorandum or articles of the company
[clause 43].
If a company with intent to defraud, issues a duplicate certificate of shares, the
company shall be punishable with fine which shall not be less than five times the face
value of the shares involved in the issue of the duplicate certificate but which may extend

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 to ten times the face value of such shares or Rs.10 crore whichever is higher. Stringent
penalties have also been imposed for defaulting officers of the company [Clause 46(5)]

 Prohibition on issue of share on discount: A company cannot issue share at a discount.

Any share issued by a company at a discounted price shall be void [Clause (53)]

 Concept of ‘dormant companies’ are being introduced. This would allow a company to
remain on the Register of Companies with minimal compliance requirements even
without carrying on any operations.

COMPANIES BILL 2011 AND ITS IMPACT ON CORPORATE GOVERNANCE

The Companies Bill, 2011, is contemporary in concept and broad in its sweep. It should
stimulate business to gain critical mass and efficiency. Financial or corporate restructuring,
takeover of companies, merger inter-se foreign companies and Indian companies are covered.
Where public interest is involved, greater transparency is prescribed. The process has been
simplified for small companies. It still makes no provisions for migration of companies. The
NCLT, a specialized body, will both sanction and supervise implementation. It will truly be a
change agent.

Some critical residual areas deserve further consideration. The present law allows bodies
corporate, including partnerships, to merge; but not in the new law. The need now is greater for
mergers and demergers both ways between association of persons, firms, LLPs and companies,
as also inter-se between such bodies. The powers of the regional director for enabling merger or
demerger of small companies, etc, should be extended to other forms of organizations. It will fill
a vacuum under various laws, e.g., Partnership Act, Societies Registration Act, etc, for such
laws. Today, a charitable trust cannot merge into a charitable company or a simple firm into a
company or into another firm. This procedural law under a specialized body should enable
smooth transition of any operating enterprise from one legal entity to another.

The Bill provides, with RBI approval, the merger of foreign companies from prescribed
countries with companies in India (or vice versa). It should be amended to cover demerger. Laws

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for migration of companies are also needed. Both are international practices and relevant to
globalization.

A bold new measure is the share takeover process, whether under a scheme or by
contract. The director of the transferor company has to circulate and file their recommendation
and other prescribed information. If approved by shareholders (90% in value), then, after a due
process of offer to other shareholders, the acquirer can notify the tribunal about the abstaining
shareholders. The tribunal can then order transfer of the shares and pay them directly. It will
declare the acquirer as the shareholder. This will facilitate delisting of shares as also takeover of
non-listed companies. If any non-disclosed higher-price transaction takes place with the majority
shareholder, the latter has to share the surplus price with minority.

A company can, thus, adopt the international practice of making target company its
subsidiary but not a merger.

Merger, demerger and takeover of shares should all be covered under Section 232 by
appropriate redrafting. Small companies’ inter-se subsidiary company with holding company and
such other classes of prescribed companies can now merge by the sanction of the regional
director. A small company is one with net worth of less than 50 lakh and turnover below 2 crore.

The long-drawn-out court processes are not required. Prescribed information reports,
including liquidity report, to be filed and circulated; the RoC and OL are to file their objections
to the regional director who shall either register the merger or refer to NCLT for due process.
These companies also have the option to go directly to NCLT.

In all matters, the NCLT orders can now specifically prescribe measures for dissenting
persons; for allotment in tune with the FDI policy; adjustment of past capital registration fee
paid; and for abatement of any charges on assets. A non-obstante clause to order for transfer of
tenancies and leases held by the transferor company; as also order for a reasonable uniform
stamp duty throughout India to be paid to the state governments is urgently needed.

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CONCLUSION
In short, the key to better corporate governance in India today lies in a more efficient and
vibrant capital market. Over a period of time, it is possible that Indian corporate structures may
approach the Anglo-American pattern of near complete separation of management and
ownership. At that stage, India too would have to grapple with governance issues like
empowerment of the board. Until then, these issues which dominate the Anglo-American
literature on corporate governance are of peripheral relevance to India.

BIBLIOGRAPHY

Websites Referred:
 www.oecd.org
 www.cipe.org
 www.worldbank.org
 www.legallyindia.com
 www.sebi.gov.in
 www.acga-asia.org
 www.hidustantimes.com
 www.pcaobus.org
 www.prsindia.org
 www.nfcg.india.org

Articles Referred:
 Corporate Governance: The Foundation for Corporate Citizenship & Sustainable Business,
Global corporate Governance Forum, International Finance Corporation, World Bank
Group.
 Santosh Pande, Kshama V Kaushik, Study on the State of Corporate Governance in India-
Evolution, Issues and Challenges for the Future, IICA, Though Arbitrage Research
Institute, IIM-C.
 Real World Corporate Governance- A Programme for Profit Enhancing Stewardship, F.T.
Pitman, 1998

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Reports Referred:
 Irani Jamshed J., Report of the Expert Committee to Advise the Government on the New
Company Law, 2005.
 Securities and Exchange Board of India, Report of the SEBI Committee on Corporate
Governance (February 2003).
 Report of the CII Task Force on Corporate Governance, Confederation of Indian Industry,
Chaired by Naresh Chandra, November 2009.
 Vikramaditya Khanna; report on “The Economic History of the Corporate Form in Ancient
India”
 Prabhash Dalei, Paridhi Tulsyan and Shikhar Maravi; Corporate Governance in India: A
legal Analysis.
 Report of Asian Corporate Governance Association (ACGA) Hong Kong on “ACGA
White Paper on Corporate Governance in India”
 Jayanth Rama Varma, Corporate Governance in India: Disciplining the Dominant
Shareholder.

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