Corp Comm LegalExperts Corner

Corporate administration is to a huge degree, a lot of components through which outcast financial specialists shield themselves from confiscation by insiders (La Porta et al. 2000). The theme of corporate governance has attained prominence particularly since the 1980s and all the more so after the code of corporate administration issued by the Cadbury advisory group. The well-known Cadbury Committee characterised “corporate governance” in its report (Financial Aspects of Corporate Governance, distributed in 1992) as “the framework by which organisations are coordinated and controlled”.

In accordance with the Cadbury Council, the Kumar Mangalam Birla Committee additionally issued a code of corporate administration for organisations in India. As part of the corporate culture prevalent worldwide, directors are in charge of the administration of their organisations. The investors’ job in administration is to choose the director and the administrators and to fulfill themselves that a fitting administration structure is set up.[1]

I. Evolution of Legal Framework of Corporate Governance in India

  1. Prior to Independence and Four Decades into Independence

Indian associations/corporate entities were bound by colonial guidelines and a large portion of the principles and guidelines took into account the impulses and likes of the British employers. The Companies Act was enacted in 1866 and was amended in 1882, 1913 and 1932.  Partnership Act was enacted in 1932. These enactments had a managing organisation model as a focus as people/business firms went into a legitimate contract with business entities to manage the latter. This period was an era of misuse/abuse of resources and shunning of obligations by managing specialists because of scattered and unprofessional proprietorship.

Soon after independence, there was interest among industrialists for production of a lot of essential items for which the Government directed and dictated fair prices. This was the point at which the Tariff Commission and the Bureau of Industrial Costs and Prices were set up by the Government. Industries (Development and Regulation) Act and Companies Act were introduced into the legal system in 1950s. 1960s was a time of setting up of heavy industries in addition to the routine affairs. The period between 1970s to mid-1980s was a time of cost, volume and profit examination, as a vital piece of the cost accounting activities.

  1. Coming of Age

India has been distinctly looked upon by the associations/organisations worldwide with the objective of making inroads into untapped new markets. Dynamic firms in India made an endeavour to put the frameworks of good corporate administration in place from the word go, whether or not any regulations were in place. However, the scenario was not too encouraging, being too promoter-centric and good governance norms given a go by for the sake of convenience or comfort of the promoters.

Realising the need for governing the corporates more effectively and professionally to make them globally competitive, there have been a number of discourses and occasions prompting the advancement of corporate governance. The fundamental code for corporate administration was proposed by the Chamber of Indian Industries (CII) in 1998. The definition proposed by CII was—corporate governance manages laws, methods, practices and understood principles that decide an organisation’s capacity to take administrative choices—specifically its investors, banks, clients, the State and the representatives.

II. Reformation in Corporate Governance

  1. The First Phase of India’s Corporate Governance Reforms: 1996-2008

The primary or the first phase of India’s corporate governance reforms were focussed at making Audit Committees and Boards more independent, focussed and powerful supervisor of management and also of aiding shareholders, including institutional and foreign shareholders/investors, in supervising management. These reform efforts were channelled through a number of different paths with both the Ministry of Corporate Affairs (MCA) and the Securities and Exchange Board of India (SEBI) playing important roles.

(a) CII—1996

In 1996, CII taking up the first institutional initiative in the Indian industry took a special step on corporate governance. The aim was to promote and develop a code for companies, be in the public sectors or private sectors, financial institutions or banks, all the corporate entities. The steps taken by CII addressed public concerns regarding the security of the interest and concern of investors, especially the small investors; the promotion and encouragement of transparency within industry and business, the necessity to proceed towards international standards of disclosure of information by corporate bodies, and through all of this to build a high level of people’s confidence in business and industry. The final draft of this Code was introduced in April 1998[2]

(b) Report of the Committee (Kumar Mangalam Birla) on Corporate Governance

Noted industrialist, Mr Kumar Mangalam Birla was appointed by SEBI—as Chairman to provide a comprehensive vista of the concern related to insider trading to secure the rights of several investors. The suggestions insisted on the listed companies for initial and continuing disclosures in a phased manner within specified dates, through the listing agreement. The companies were made to disclose separately in their annual reports, a report on corporate governance delineating the steps they have taken to comply with the recommendations of the Committee. The objective was to enable the shareholders to know, where the companies, in which they have invested, stand with respect to specific initiatives taken to ensure robust corporate governance.

(c) Clause 49

The Committee also realised the importance of auditing body and made many specific suggestions related to the constitution and function of Board Audit Committees. At that time, SEBI reviewed it’s listing contract to include the recommendations. These rules and regulations were listed in Clause 49, a new section of the listing agreement which came into force in phases of 2000 and 2003.

(d) Report of the Advisory Group on Corporate Governance: Standing Committee on International Financial Standards and Code—March 2001

The advisory group tried to compare the potion of corporate governance in India vis-à-vis the international best standards and advised to improve corporate governance standards in India.

(e) Report of the Consultative Group of Directors of Banks—April 2001

The corporate governance of directors of banks and financial institutions was constituted by Reserve Bank to review the supervisory role of boards of banks and financial institutions and to get feedback on the activities of the boards vis-à-vis compliance, transparency, disclosures, audit committees, etc. and provide suggestions for making the role of Board of Directors more effective with a perspective to mitigate or reduce the risks.

(f) Report of the Committee (Naresh Chandra) on Corporate Audit and Governance Committee—December 2002

The Committee took the charge of the task to analyse, and suggest changes in different areas like—the statutory auditor and company relationship, procedure for appointment of Auditors and determination of audit fee, restrictions if required on non-auditory fee, measures to ensure that management and companies put forth a true and fair statement of financial affairs of the company.

(g) SEBI Report on Corporate Governance (N.R. Narayan Murthy)—February 2003

So as to improve the governance standards, SEBI constituted a committee to study the role of independent directors, related parties, risk management, directorship and director compensation, codes of conduct and financial disclosures.

(h) (Naresh Chandra Committee II) Report of the Committee on Regulation of Private Companies and Partnerships

As large number of private sector companies were coming into the picture there was a need to revisit the law again. In order to build upon this framework, the Government constituted a committee in January 2003, to ensure a scientific and rational regulatory environment. The main focus of this report was on (a) the Companies Act, 1956; and (b) the Partnership Act, 1932. The final report was submitted on 23-7-2003.

(i) Clause 49 Amendment—Murthy Committee

In 2004, SEBI further brought about changes in Clause 49 in accordance with the Murthy Committee’s recommendations. However, implementation of these changes was postponed till 1-1-2006 because of lack of preparedness and industry resistance to accept such wide-ranging reforms. While there were many changes to Clause 49 as a result of the Murthy Report, governance requirements with respect to corporate boards, audit committees, shareholder disclosure, and CEO/CFO certification of internal controls constituted the largest transformation of the governance and disclosure standards of Indian companies.[3]

  1. Second Stage of Corporate Governance—After Satyam Scam

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. 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 emphasised 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) 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.[4]

III. Legal Framework on Corporate Governance[5]

  1. The Companies Act, 2013.— consists of law provisions concerning the constitution of the board, board processes, board meetings, independent directors, audit committees, general meetings, party transactions, disclosure requirements in the financial statements and etc.
  2. SEBI Guidelines.—SEBI is a governing authority having jurisdiction and power over listed companies and which issues regulations, rules and guidelines to companies to ensure the protection of investors.
  3. Standard Listing Agreement of Stock Exchanges.—is for those companies whose shares are listed on the stock exchanges.
  4. Accounting Standards Issued by the Institute of Chartered Accountants of India (ICAI).— ICAI is an independent body, which issues accounting standards providing guidelines for disclosures of financial information. In the new Companies Act, 2013 Section 129 provides that the financial statements would give a fair view of the state of affairs of the companies, following the accounting standards given under Section 133 of the Companies Act, 2013. It is further given that the things contained in such financial statements should be in compliance with the accounting standards.
  5. Secretarial Standards issued by the Institute of Company Secretaries of India (ICSI).—ICSI is an independent body, which has secretarial standards in terms of the provisions of the new Companies Act. ICSI has issued secretarial standards on “Meetings of the Board of Directors” (SS-1) and secretarial standards on “General Meetings” (SS-2). Given secretarial standards have come into force from 1-7-2015. Companies Act, 2013, Section 118(10) provides that every company (other than one person company) shall observe secretarial standards specified as such by the ICSI with respect to general and Board meetings.

IV. Landmark Cases of failure of Corporate Governance

  1. Satyam Case

Satyam Computer Services scandal was a corporate scandal affecting India-based company Satyam Computer Services in 2009, in which Chairman Ramalinga Raju admitted that the company’s accounts had been manipulated. The Satyam scandal was a Rs 7000 crore corporate scandal in which accounts had been manipulated. On 7-1-2009, Ramalinga Raju sent an e-mail to SEBI, wherein he confessed to falsify the cash and bank balances of the company. Weeks before the scam began to unravel with his popular statement that he was riding a tiger and did not know how to get down without being killed. Raju had said in an interview that Satyam, the fourth largest IT company, had a cash balance of Rs 4000 crore and could leverage it further to raise another Rs 15,000-20,000 crore.

Ramalinga Raju was convicted with 10 other members on 9-4-2015. Ramalinga Raju and three others were given six months jail term by Serious Fraud Investigation Office (SFIO) on 8-12-2014[6]. Even auditors Price Waterhouse Coopers (PWC) had to face a hard time.

  1. Ricoh Case

The saga at Ricoh India demonstrates that the radiance of good governance that is automatically ascribed to MNCs is not ensured the result. In spite of administrative interference after the Satyam scam and legislative amendments to tighten the governance framework [Companies Act, 2013, SEBI (Listing Obligations and Disclosure Requirements) Regulations, etc.] the Ricoh scene was almost a replica of the Satyam episode in terms of accounting fraud and resultant fraud of stock prices interestingly without any promoter being in the saddle. Just a few corrupt managers were sufficient to obliterate the system with the usual failure of the main regulating institutions such as the auditors, credit rating agencies, independent directors of repute, committees of directors including the powerful audit committees manned by independent directors, etc.

  1. ICICI Bank Scam Case

It was the role of the Board in hurriedly giving a clean chit to its CEO without the results of an independent investigation released in the public domain in an apparent case of alleged nepotism, and its refusal to take any questions on the matter.

  1. Kingfisher Airlines and United Spirits Case

Mainly regarding illegal internal corporate funding to parties, falsifying accounts. It was entirely evident that assets had been transferred from United Spirits Ltd. (USL) to subsidise Kingfisher, that United Breweries (UB) Holdings was utilised as a channel for raising loans and giving them to his group, that intercorporate credits were given to related groups without the Board’s approval, accounts were inappropriately expressed, reviews were stage overseen, etc. during the period Mr Vijay Mallya was responsible for USL.

Sad but true. The list is getting longer by each passing month and newer corporate frauds are being detected at companies and banks which used to be torchbearers of good corporate governance.

V. Suggestions

According to the concerns given above, there is a huge range of responsibilities upon the directors of the companies to comply with the standards and best practices given in different laws and guidelines. Apart from the laws and norms suggested by various institutions from time to time, the companies are also expected to act responsibly towards the society as a whole because the corporates are so big in today’s time, that they have some impact on each and every citizen of the country equally. The burden on the organisations has already reduced as they are made to follow fixed guidelines and they are not expected to make any amends to that. It is also very important that all stakeholders also demonstrate their interest and active participation in the decision-making processes to make it a contributory job altogether. Government, banks, RBI, statutory authorities, independent directors—all need to come together to have a cohesive, foolproof system to eradicate the malaise of corporate misrule.

*Bhumesh Verma is Managing Partner at Corp Comm Legal and can be contacted at

**Himani Singh is a Student Researcher with Corp Comm Legal (5th-year student, BA LLB, New Law College).

[1]Anubhav Pandey, Regulatory Framework for Corporate Governance in India, iPleaders, 20-5-2017 <>.

[2]   Smita Jain, Corporate Governance—National and International Scenario, 33rd National Convention of Company Secretaries, p. A-71 <>.

[3]   SEBI, Recommendations of the Narayan Murthy Committee on the Revised Cl. 49–Corporate Governance–Press Release, last updated on 15-12-2003 <>.

[4], What Changed in the Legal Landscape Post Satyam Scam, last updated on 11-1-2018 <>.

[5] Corporate Governance Framework in India, Mondaq, Vaish Associates, last updated on 8-1-2016 <>.

[6] 6 FE Online, Financial Express, last updated on 11-1-2018 <>.

Corp Comm LegalExperts Corner


Non-transparency and irregular reporting to Government and market regulators has been the primary cause of corporate corruption around the world. In any corporate set-up, invariably some of the employees are well versed with the workplace activities and are also aware of any kind of misconduct taking place. Despite being the first people to become aware of the wrongful deeds of the corporates, most of the times they choose to exercise a studied silence due to the apprehended retaliation that may follow by the powerful people in charge.

For any country to build on corporate governance, whistleblower protection must be given the highest priority. Corporate governance refers to ensuring the interests of all the stakeholders and taking efficient strategic decisions. Whistle-blowing mechanism is essential for proper administration and working of companies. Presently, there is no separate piece of legislation that addresses the issue of corporate whistleblowing in India. The Whistle Blowers Protection Act, 2011 came into being in the year 2014, which protects all those who give information regarding any corrupt practices related to the Government. Though this Act was the need of the hour, it has many discrepancies, one of them being, non-inclusion of corporate whistleblowing.

Whistleblowing is directly correlated to enhancing corporate governance in an economy. Whistleblowing mechanism ensures that the corporates do not take personally beneficial (to a selected few) decisions at the expense of other stakeholders. Despite being a non-mandatory provision, whistleblowing mechanism as per erstwhile Clause 49 of the Securities and Exchange Board of India (SEBI) Listing Agreement plays an extremely instrumental role in enhancing the corporate governance standards of the company.

Post the discontinuance of Clause 49, Regulation 18 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 [SEBI (LODR) Regulations] inter alia provides for a mandatory requirement for all listed companies to establish a vigil mechanism called “whistleblower policy” for directors and employees to report concerns about unethical behaviour, actual or suspected fraud or violation of the company’s code of conduct or ethics policy. In simplest terms, whistleblowing must be recognised as the practice of highlighting or alarming that some kind of unlawful, felonious, or wrongful act is taking place inside a company.

Whistleblowing Policy Framework in India

A SEBI Circular dated 26-8-2003 amended the principles of corporate governance as incorporated in the standard listing agreement. The amended principle made it mandatory for companies to have their own whistleblowing policy. This mechanism allows any irregularity prevailing in the company to be exposed by the employees wherein the same can be brought to the attention of the management. SEBI included these guidelines for companies in an amendment to Clause 49 of the Listing Agreement in August 2003.

The substance of Clause 49 can now be found in Regulation 18 of SEBI (LODR) Regulations. Regulation 18 is an agreement between stock exchanges and listed companies.[1] The Listing Agreement makes it mandatory for all listed companies to establish a mechanism called whistleblower policy. It provides a platform for its employees to report any kind of misappropriation, fraud or actual and any unethical behaviour to the Board.

As per these clauses, an employee wanting to report any kind of fraudulent activity or malpractice in the company must be given access to the company’s Audit Committee.[2] The company must thereafter transfer this information to all the employees working in it. The guidelines under Regulation 18 aim to create a sense of responsibility amongst the employees of a company and enlighten them about the fact that it is their right and privilege to be vigilant. As an extension to the right of the employees to blow whistle against the illegal acts, the company also affirms to protect such an employee from any kind of aggravation or termination.

Moreover, Section 177 of the Companies Act, 2013 provides that every listed company needs to establish a vigil mechanism for the directors and employees to report any frauds or misappropriations in the prescribed format. Accordingly, a code of conduct has been laid down by the company for its senior management executive and other top management members, which states the guidelines for their code of conduct.

Whistleblowing mechanism aims to create a balance between law and morality by compelling the employees to realise their responsibility towards the society. An effective policy could bridge the gap created by the fear of retaliation by powerful people upon unsavory disclosures. Employees often are at the risk of losing their job and are threatened and exploited if they decide to speak up against wrongful acts of companies. This fear of retaliation is further extended due to the confidentiality clauses in their employment contracts.

More often than not, employees are also afraid of speaking up due to the fear of defamation in the event of the information disclosed is not eventually true. The problems of whistleblowers are evident from the cases wherein several individuals have lost their life in India due to them standing up against unlawful acts of their companies.

Strengthening the Mechanism in India 

The increasing number of corporate scams make a strong whistleblowing mechanism the need of the hour. There are several stakeholders in the efficient functioning of a company and its proper administration is instrumental for the economy. The primary shortcoming of the Whistle Blower Protection Act, 2011 is its limited framework. The present Act only covers those whistleblowers that have exposed irregularity or corruption related to Government. While it ensures a healthy framework for government officials to blow the whistle, it is not applicable to corporate employees. It is essential for the law to have a broad coverage wherein it is applicable to public and private sector employees. The rationale behind the law is to protect any individual who upon disclosing any kind of misconduct of the organisation may be subjected to retribution outside the employer-employee relationship.

Another issue that needs a conclusive declaration is the defining scope of the Whistle Blower Protection Act, with respect to its applicability to public sector undertakings (PSUs). The Act provides a mechanism to investigate alleged corruption and misuse of power by public servants and also protect anyone who exposes alleged wrongdoing in government bodies, projects and offices. Presently, the Act allows disclosures that are prohibited by the Official Secrets Act, 1923 and extends only to public servants.

Therefore, ordinarily it is not applicable to PSUs however, it may be argued that they fit the definition of public servants and hence fall under its ambit. While dealing with this question, the Supreme Court held that the protection by way of sanction under Section 197 CrPC is not applicable to the officers of government companies or the public undertakings even when such public undertakings are “State” within the meaning of Article 12 of the Constitution on account of deep and pervasive control of the Government.[3] Applicability of whistleblowing mechanism to PSUs shall further the interests of corporate governance in India.

When an individual decides to keep the societal interests above the interests of the company, he has to bear a substantial risk of retaliation. Therefore, the Government should provide incentives to these employees to encourage them to reveal the corrupt practices that they know about. These employees often put their job at risk and there should be compensation for coming out with the revelations. The compensation must include all losses and must replace the individual back in an identical position as before the disclosure. These individuals must also be provided protection against misguided disclosures made in good faith. Section 17 of the Whistle-Blowers Protection Act, 2014 provides punishment for mala fide or knowingly wrong/false reporting. However, in order to encourage employees to take risk, they must not be punished for wrong disclosures that are bona fide in nature.

Moreover, a systematic procedure must be present for ensuring an early disclosure of misconduct. The procedure for disclosure must be easily comprehensible and straightforward. The law should provide for reasonable procedures to invigorate and facilitate intramural procedures to disclose wrongdoing. The procedure should allow for easy access to legal advice to facilitate disclosures and reduce misunderstandings. The aim of the law should be to facilitate disclosures at the earliest stage to minimise the damage caused for big corporate scams. Further, in order to enhance transparency and promote corporate democracy, the disclosure should be published in reports for greater awareness. A special committee must be created for the disclosures to be made, giving the whistleblowing mechanism a separate institutional framework.


Over the years, several big corporate scams have shocked the global economy. Whenever we look back as to how we could have deterred these scams from taking place, the questions of corporate governance is always discussed. Looking at the various scams that have occurred over the last few years, it can be stated that if there was a proper whistleblowing mechanism in place for the employees to disclose the crookedness and misconduct, there was a strong probability that few of these scams could have been prevented. The lack of proper protection could have acted as a hindrance for the limited few who would have the courage to blow the whistle against their companies.

Scams such as Punjab National Bank, ICICI Bank, Satyam, Kingfisher, Enron among others have had drastic effects on millions of people. These corporates impact the life of these people on a daily basis and their interests must also be taken care of in the administration of big corporates. While it is a personal choice of the employees on their decision to blow the whistle against illegal activities taking place in companies, it is the duty of the Government to ensure a healthy and protective environment to encourage and allow them to do so. It would be interesting to see if we see a separate Whistle Blower Protection Act for the private sector in addition to the SEBI Regulations and Section 177 of the Companies Act, 2013.

*Bhumesh Verma is Managing Partner at Corp Comm Legal and can be contacted at **Abhisar Vidyarthi is a Student Researcher with Corp Comm Legal (4th-year student, Maharashtra National Law University, Mumbai).

[1]    Clause 49 of the Listing Agreement on corporate governance.

[2]    (2011). Whistle Blowing and Whistle-Blowers – A Diagnostic Approach to Human Resource Management Dimensions of Whistle Blowing Studies. Corporate Governance- Millennium Challenges, 253-269.

[3]    Punjab State Warehousing Corpn. v. Bhushan Chander, (2016) 13 SCC 44: 2016 SCC OnLine SC 632.

Op EdsOP. ED.

I. Introduction

The concept of stakeholder theory has been a part and parcel of corporate governance since the early 80’s. The scholarship in this area is evergrowing and is one of the key issues of debate and deliberations in most jurisdictions around the world. The idea of incorporating stakeholders into the management fold first emanated from the landmark work of Freeman, published in 1984.[1] He focused his notions of the stakeholder theory upon the creation of value for all and not just one stakeholder. The theory thus acts as a counterbalance to the traditional notion of shareholder theory which emphasises that the purpose of a business is the maximisation of value to shareholders. Stakeholder theory in contrast, has been described as the collection of metaphors, ideas and expressions that help a company achieve value for all intersections of stakeholder interests.[2] In this sense this theory is broader in its approach and does not consider stakeholder interests as a means to achieving the end of shareholder value creation only, but propounds for these interests being the very ends a company must concern itself with.

The classic tug of war between these two theories also raises some important questions which are specific to the role and duties the directors of the company have in this regard. For instance, should the focus of directors be all stakeholders or just shareholders, with whom the ownership of the company lies? The question is under great focus and scrutiny now more than ever, specifically by legislatures and institutional investors across the world. In India for example, consideration of stakeholder interest is now crystallised as a statutory duty upon the directors under Section 166(2) of the Companies Act, 2013. While the full extent and consequence of the duty itself or the claims for breach of such a duty is unknown due to legislative ambiguity and lack of judicial precedent, it is interesting to note that the idea of stakeholder and shareholder theories being binary opposites is slowly but surely evolving into a more conciliatory approach. In jurisdictions like the US and the UK, the staunch shareholder-centric approach is slowly giving way to the realisation of interests of other stakeholders as well. This position is in stark contrast with a country like Norway where the stakeholder interest will take supremacy over shareholder interest if it must. These positions are in turn different to the model followed in Canada or even South Africa where the focus seems to be more upon striking the balance of interests between all stakeholders by providing for enforcement rights. The position in Canada, as we will further examine, is thus different than most, for no other jurisdiction offers enforcement rights to its stakeholders, including India.

This paper thus aims to trace these very changes and trends in the perception of corporations, legislators and investors in deciding which theory and which practice is better suited for the increase of value to businesses. The paper compares instances that focus on a director duty model like the US and UK, to the accommodation of stakeholder interest based on a remedy-based model in Canada to stakeholders enjoying a hegemonic status as in Scandinavian countries. The paper then concludes with the views of the author having specific regard to the Indian context, in how and what might be the best way forward in advancing and reconciling stakeholder and shareholder interests in an economy such as ours, where the shareholding is closely held and not widely disbursed.

II. Jurisdictional Analysis

(a) Director Duty Model

(i) The United States

The idea of the supremacy of the shareholder is one that developed in the US.[3] The traditional notion of the shareholders being owners of the company and hence that the directors act as guardians of the shareholder’s property developed in the 19th century[4]. This was further crystallised by the landmark decision of Dodge v. Ford Motor Co.[5] wherein the court held, “A business corporation is organised and carried on primarily for the profit of the stockholders and the powers of the directors are to be employed for that end.”[6] What is however interesting to note is the fact that despite the ratio of Dodge v. Ford Motor Co.[7], academics often argue that Dodge does not abandon the idea of corporate philanthropy altogether, but propounds it to be something that is incidental to the main business of the corporation.[8] Other judicial decisions and statutes in the United States also seem to uphold this thesis. For instance, in cases such as A.P. Smith Mfg. Co. v. Barlow[9] or Davison v. Gillies[10] the Court upheld the company action that invested in and protected the stakeholder interest. There is also further evidence to suggest that even in the 19th century, certain statutory provisions made shareholders liable for payment of wages to the employees or the payment pending to creditors in cases of default.[11] Yet the idea was to ensure that such efforts that served interests beyond the shareholders, were to only remain incidental to the business in question and were never at the expense of shareholder interest. In this context one may say that shareholder supremacy was indeed the norm and might still be.

Even with recent debates and advancement of ideas of the changing norms of corporate governance and while it is well acknowledged that many jurisdictions in the US have specifically and statutorily recognised the idea of stakeholder interests, the fact that implementation of the same lacks uniformity or that they do not form part of a mandatory requirement seem to spell more harm than good. The pressure of having a duty to perform when it comes to the interests of the stakeholders is seriously lacking. For instance, out of the 31 States in the US that do recognise the idea of a stakeholder system, only two — New Mexico and Arizona, place a compulsory duty upon the directors to take into consideration the interests of the stakeholders in all cases.[12] In other cases the duty is voluntary and comes without the pressure of an obligation. What is even more problematic is the case of Connecticut, where a reverse process of moving from a limited mandatory duty upon directors to a fully optional regime, for larger corporations was introduced.[13] Even the State of Delaware, known to house the largest number of public corporations has failed to incorporate the stakeholder regime in its statutes.[14] What is however interesting to note is the fact that there seems to be judicial protection to these interests in Delaware.[15] Moreover, in Tennessee while the obligation to consider and enable stakeholder interest is missing, a director may not face adverse action in case he has indeed considered such interest.[16]

The application of the stakeholder theory in the US thus seems episodic in nature and in most cases it is confined only to instances of takeover or liquidation. Even in those cases where the interest is acknowledged, the stakeholders lack the means to enforce their rights for there is a serious lack of entitlement to bring claims for breach of duty by the directors against the stakeholders.

(ii) The United Kingdom

Common law countries have traditionally understood and upheld the shareholder primacy theory. Even the Companies Act of the UK tends to describe a company as a collective of its shareholders.[17] In such a scenario, one may argue that the incidental standard of corporate philanthropy as existed in US also resonates in the UK where there is a strong emphasis on the principle agent relationship of the shareholders and the directors. This claim is also supported by the findings in the 1883 case of Hutton v. West Cork Rly. Co.[18] wherein it was held that if only the expenditure on charity was for the benefit of the company, would the same be allowed.[19] Thus the emphasis was on curbing the resources at the disposal of directors when it came to the protection of shareholders. This position was further reiterated in Parke v. Daily News Ltd.[20] in 1961.

It was only after two decades of the Parke decision that efforts to incorporate the interests of stakeholders and specifically those relating to employees of the company were introduced to the corporate body of law.[21] These were amendments to expand director duties to incorporate the stakeholder system by placing upon them the duty to, only consider, the general interests of the employees.[22] What is important however to note is the fact that this amendment had the effect of equating secured creditor claims with dues to the employees, thus reducing their vulnerability, but at the expense of another stakeholder in the process.

To further strengthen and acknowledge the legitimacy of stakeholder interests and considerations, the UK in 2006, amended its Companies Act to introduce the “enlightened shareholder value” (hereinafter “EVS”) model of governance. The approach is a cross between the shareholder approach and the stakeholder approach and as per the requirement of Section 172 of the UK Companies Act, 2006 requires that the directors treat the interests of the stakeholders as the means to the end of shareholder value enhancement.[23] Evidently, the stakeholder interest is subordinated to shareholder interest and in case of a conflict the latter shall prevail. The said amendment is applicable to all companies on an ongoing basis and bears on it a mandatory character as well.

A critical reading of the EVS amendment seems to suggest that the fact that other stakeholders have not been granted the same status as shareholders means that the amendment is not all that different from what existed prior to 2006. Perhaps the amendment was only an effort to codify what already existed and does not seem to alter the position of stakeholders considerably. Even with the conscious effort on part of the legislature to codify the theory of stakeholder interest, the same lacks enforceability much like in the United States and seems like a toothless provision. This claim is further strengthened by the fact that Section 172 of the Act is hierarchical in nature, placing shareholders interest above all other interests and reaffirming the notion that the EVS model might just be a lip service provision, only prima facie trying to keep up with the changing demands and interests of institutional investors.

(a) Remedy Model

This part of the paper will focus on the application of stakeholder theory primarily in Canada. Canada was one of the first common wealth systems to recognise the stakeholder principle of governance which received judicial backing in Teck Corpn. Ltd. v. Millar[24] in 1972. Much like the United States, Canadian law recognised the principle and allowed for cases of corporate philanthropy as early as 1965 by the enactment of the Canada Corporations Act.[25] The provisions of the said Act allowed corporations to make contributions for general or public object or to the welfare of current and/or former employees. Thus comparatively, the appreciation and acceptance of stakeholder interest above and beyond the shareholder interests was well in place in Canada and the same does not seem to have been borne out of a struggle or out of any judicial precedent as has been the case in a few jurisdictions.

Canadian legislation takes this approach a step further as well. It is important thus in this context to bring forth the unique and equitable provisions of the Canada Business Corporations Act (hereinafter the “CBCA”). The Dickerson Committee, that drafted the CBCA, did not consider shareholder supremacy a valid consideration. In doing so, they thus disbanded the idea of shareholders holding a proprietary right over the other stakeholders or the fact that the duty of a director was to primarily represent and protect their rights.[26] For the Committee, the shareholder was at a position that was just a little more than that of a mere security holder.[27] This had the effect of placing shareholders at a rough parity with other stakeholders like employees, creditors, etc. and takes away any special position that might have been granted to them in other jurisdictions.

It is in this context that the CBCA extends the remedy of derivative action suit and relief against oppression to stakeholders as well.[28] Section 238 of the CBCA equates the rights of shareholders and creditors and allows even directors or officers, including former employees and government officers, acting in public interest, the remedy actions aforementioned.[29] The Court is even empowered to determine who might be proper party in such cases, which further broadens the scope of the section. It is pertinent to note that traditionally and in fact even in most other jurisdictions across the world, this right is restricted only to shareholders. It is only in Canada as also in South Africa that this right of enforceability has gone beyond the traditional notions and to the stakeholders directly. How effective these remedy provisions have been is however still an open-ended question.

(b) Representational Model

The focus of this part of the paper would be on Scandinavian countries with strong stakeholder governance models and Germany that embodies a co-determination model. The model in Germany allows non-shareholder a representation on the Board of Directors thus allowing them a participative right.[30] It is needless to say that such representation must be substantial enough to allow a valid representation of stakeholder interest on board.

In Scandinavian countries, the position is at a stark contrast compared to the US or the UK for the stakeholder interests enjoy a hegemonic status since the 1970’s and shareholder interests, in fact, might be considered subordinate to them. The industry practice and companies further provide enough evidence in support of the said contention. While there are numerous examples of company practices demonstrating stakeholder supremacy in this context, for the purposes of this paper we would focus on the engagement practices of Norsk Hydro, a Norwegian extract company. The company is often acknowledged for its stakeholder engagement practices as is reflected in terms of its corporate policies that focus on collaborative efforts that ensure benefits to not just the shareholders but even more so to the stakeholders.[31] The focus thus is not the creation of value for the company through the stakeholders but the creation of value for both the company and the stakeholders at parity. The company also follows the trend of not just engaging with the stakeholders directly but accommodating and addressing these stakeholder concerns into best business practices.[32] Almost similar practices are followed by the Danish pharma giant Novo Nordisk.

It is, however, pertinent to note that in engaging in and implementing these stakeholder friendly-practices the idea of corporate ownership plays a major role. In Norsk Hydro, the 34% stake is held by the State itself which makes it easier for the voice of stakeholders to be heard in these corporations.[33] Similarly, in the case of Novo Nordisk, the majority stake is held by a corporate foundation. The ownership resting either the State or a corporate foundation is a common phenomenon in the Scandinavian region.[34] One may in such a scenario argue that the ease of incorporating and addressing stakeholder concerns over shareholder concerns and interests is in fact owed to the kind of corporate ownership pattern the corporation follows — thus where the ownership is stakeholder centric, the supremacy of the stakeholder interest would indeed be easy to establish.

III. Conclusion

The aim of this paper has been to put forth and portray the varied trends and approaches that there are to the emerging field of stakeholder engagement. The paper has covered the extreme examples of US and UK to Scandinavian Europe to finer and seemingly more balanced approaches followed by Canada. If the implementation of these approaches were to be adjudged in light of Section 166(2) of the Companies Act, 2013 the following similarities and observations would follow.

Much like the United States and the UK, the right of enforceability of the stakeholder interest claims is missing in the Indian context as well. The extent of the duty of the director and the nature of the duty of the director to the stakeholder is also vague and ambiguous. Further, much like the UK’s EVS model, Section 166(2) seems to only superficially do what it was intended to do. Despite being a mandatory duty upon the director the scope of enforcement of this duty vis-à-vis the shareholder interest and specifically when the majority shareholders in the Indian context represent the Board of Directors, seems to be amiss. Even the idea of having a representational board where in, like Germany, employees could form part of the board would be a futile exercise in the Indian context given that majority shareholding is family held in our country and that the board is often synonymous with the majority as well. Even the Scandinavian model would perhaps not be best suited in terms of Section 166(2) for corporate ownership patterns in India are not foundational. Perhaps the probability of the Canadian model functioning in the Indian context is the highest. How the Indian courts would ultimately rationalise the scope, nature and practical application of Section 166(2) is, for now, an open-ended question and it is only hoped that the shortcomings envisioned would be addressed sooner than later either through legislative intervention or through judicial interpretation, but either way for the benefit of the stakeholder.

 †  Final year student at JGLS, Sonipat.

[1]  Strategic Management: A Stakeholder Approach (Freeman, 1984); see also, The Scandinavian Cooperative Advantage: Theory and Practice of Stakeholder Engagement in Scandinavia, Robert Strand, R. Edward Freeman, CBS Center for Corporate Social Responsibility.

[2]  Ibid.

[3]  P.M. Vasudev, The Stakeholder Principle, Corporate Governance, and Theory: Evidence from the Field and the Path Onward, Hofstra Law Review, Vol. 41 Issue 2 Art. 6 (2012).

[4]  Santa Clara Revisited: The Development of Corporate Theory, 88 W. VA. L. Rev. 173, 200 (1985).

[5]  170 NW 668 (Mich 1919).

[6]  Ibid.

[7]  170 NW 668 (Mich 1919).

[8]  Ibid.

[9]  98 A 2d 581 (NJ 1953).

[10]  (1879) 16 Ch D 347.

[11]  James Willard Hurst, The Legitimacy of the Business Corporation in the Law of the United States, 1780-1970, at 15 (1970).

[12]  98 A 2d 581 (NJ 1953).

[13]  Ibid.

[14]  Jeffrey W. Bullock, Delaware Division of Corporations, 2011 Annual Report, available at <>.

[15]  Unocal Corpn. v. Mesa Petroleum Co., 493 A 2d 946 at 958 (Del 1985).

[16]  Tennese Code 48-103-204- Corporation not liable for resisting merger, exchange, etc.

[17]  Adolf A. Berle and Gardiner C. Means, The Modern Corporation and Private Property 294 (Harcourt, Brace & World Inc. 1968) (1932).

[18]  (1883) 23 Ch D 654 (CA).

[19]  Ibid.

[20]  (1961) 1 WLR 493 : (1961) 1All ER 695.

[21]  Companies Act, 1948, 11 & 12 Geo. 6, Ch. 38.

[22]  Alfred F. Conard, “Corporate Constituencies in Western Europe”, 21 Stetson L. Rev. 73, 80-81 (1991).

[23]  The Stakeholder Approach Towards Directors’ Duties under Indian Company Law: A Comparative Analysis, Mihir Naniwadekar and Umakanth Varottil, NUS Working Paper 2016/006, NUS Centre For Law & Business Working Paper 16/03.

[24]  (1972) 33 DLR (3d) 288, 314-17 (Can. B.C. Sup. Ct.).

[25]  RSC 1970, c. C-32.

[26]  P.M. Vasudev, The Stakeholder Principle, Corporate Governance, and Theory: Evidence from the Field and the Path Onward, Hofstra Law Review, Vol. 41 Issue 2 Art. 6 (2012).

[27]  Ibid.

[28]  Canada Business Corporations Act, RSC 1985, c. C-44, §§ 238-241.

[29]  Ibid.

[30]  Companies Act, 1948, 11 & 12 Geo. 6, Ch. 38.

[31]  Strategic Management: A Stakeholder Approach (Freeman, 1984); see also, The Scandinavian Cooperative Advantage: Theory and Practice of Stakeholder Engagement in Scandinavia, Robert Strand, R. Edward Freeman, CBS Center for Corporate Social Responsibility.

[32]  Ibid.

[33]  Thomsen, S. and Hansmann, H., 2009, Managerial Distance and Virtual Ownership: The Governance of Industrial Foundations, Working paper, available at <>.

[34]  Ibid.

Corp Comm LegalExperts Corner

The impact and scale of corporate crimes has reached unascertainable heights in recent times. It seems corporate governance has gone for a toss. Most of the corporate crimes are backed by continuous and meticulous planning coupled with unethical activities conducted by individuals hiding behind the corporate veil. Corporate scandals like Enron, Satyam, Punjab National Bank, etc. have shown the level to which dishonest and fraudulent activities of corporations and/or their promoters/employees can be detrimental to the economy and society at large.

As observed in Standard Chartered Bank case in 2005, the position in India regarding criminal corporate liability is that corporations can be held criminally liable for offences that require compulsory imprisonment.[1] However, the Court ruled that since the corporations cannot be imprisoned, the imprisonment shall be substituted with compensation.

The deterrent effect of compensations and fines to the dishonest acts of corporations remains under question. The primary objective of criminal sanctions is deterring and ensuring that corporates do not indulge in criminal activities. A cost-benefit analysis is required to see whether monetary fines are deterrent enough. The large companies are financially sound and are capable of making calculations to afford the compensatory damages. As a result, more often than not, punitive fines imposed by the court do not act as an efficient deterrent for erring corporates.

In some cases, therefore, individual sanctions may be more effective tool for the courts. As corporate entities cannot be imprisoned, the courts have to pierce the corporate veil and imprison the real persons behind the fraudulent activities of the corporation. A company can act only through the agency of its officers (sometimes, at the behest of the promoters) — these individuals only are brain of these crimes. They possess the requisite “mens rea” as they hold the high managerial positions in the company. It was seen in the large-scale Enron scandal in America, that the judiciary had to punish all the individuals behind the scandal due to the size of the crime. Similar situation was experienced in India during the Satyam scandal wherein Ramalinga Raju and other Senior Managers of Satyam were imprisoned for cheating and breach of trust.

The legal proceedings in such cases remain quite complex, lengthy and tedious due to the involvement of a lot of documents and evidence. Due to the complex structure of these corporations, locating the real people behind the corporate veil becomes a tough nut to crack. Corporate democracy is also not a very well-functioning idea in corporations and influential and overpowering Board of Directors manage to find their way in everything. This further creates hurdles in collection of evidence against the high and the mighty.

Therefore, the courts may adopt a mixed model and need to impose sanctions based of the facts of every case. Both compensation and imprisonment are useful tools in the hands of the judiciary. They should work in tandem and must together act as a deterrent against complex corporate crimes. While imprisonment of individuals by piercing the corporate veil combats personal motives behind such activities, fines make the economic motive behind crimes redundant.

Newer and alternative forms of economic and social sanctions are needed to bar corporates from indulging in organised corporate crimes.[2] Putting restrictions on trade, forcing closure of company in case of continuing acts and earmarking corporations as fraud are some of the alternatives to the imposition of fines and imprisonment.

The economics behind criminal sanctions states that the probability of crimes is contingent upon the chances of being caught and the severity of the punishment.[3] With time, corporate crimes are becoming increasingly sophisticated and complex, thus difficult to point out. Moreover, as the activities take place with the shield of the veil, the directors are not scared to take dishonest decisions to serve their personal motives. In such cases, if the cost of being caught is limited to monetary penalties, it might not be enough deterrence for wealthy companies.

There is thus, a need to raise the fines to a level in which the corporations collapse or to impose strict individual sanctions. Ways and means should be found (if possible, even with the help of artificial intelligence) for better detection of such crimes as it would deter the individuals hiding behind the corporate mask from using the corporations for fulfilling malicious personal motives. This will further boost confidence in the system and better relations between shareholders and Board of Directors.

The legislature can ensure a better environment by promoting and strengthening corporate governance and creating more structured guidelines for corporations to follow. The importance of corporate governance is quite understated in India.

Corporate governance should seek to ensure the welfare of all quarters — be it the Board of Directors, shareholders and other stakeholders. Internal transparency is instrumental in ensuring a healthy relationship between the decision-makers and shareholders of a corporate entity. Therefore, good governance ensures that the rights of shareholders and the society dependent on the corporations are respected. Further, good governance ensures stability of stock prices of corporates and maintains goodwill for the company. Thus, an environment where good governance is the rule would see less dishonest corporate activities.

Given the social consequences of mismanagement in corporations, the idea of corporate democracy should be promoted and even small shareholders should take more interest in the meetings and be constantly involved in the operations of a company.

The legislature should streamline and consolidated a compact corporate governance code, rather than the regulations scattered in different and often disjointed legislations.

Mandatory compliance and adequate punishment for failure for adherence to corporate governance norms would give authenticity to such a code. As mentioned previously, the punishment must accompany a form of stigmatising or labelling of the company, as for the big corporations today, their image is hallmark of their existence.

[1]  Standard Chartered Bank v. Directorate of Enforcement, (2005) 4 SCC 530.

[2]  Angira Singhvi, Corporate Crime and Sentencing in India: Required Amendments in Law, 1 International Journal of Criminal Justice Sciences, 12 (2006), <>.

[3]  Roger Bowles, Michael Faure and Nuno Garoupa, The Scope of Criminal Law and Criminal Sanctions: An Economic View and Policy Implications, 35 Journal of Law and Society, 402 (2008), <>.


Corp Comm LegalExperts Corner


Corporate governance is the buzzword in corporate world these days. Having seen multiple financial and corporate frauds recently, India is certainly in need of a much better institutional system of corporate governance. Let us examine as to what steps the Securities and Exchange Board of India (SEBI) has taken in this direction.


The Institute of Company Secretaries of India has defined corporate governance as:

Corporate governance is the application of best management practices, compliance of laws in true letter and spirit and adherence to ethical standards for effective management and distribution of wealth and discharge of social responsibility for sustainable development of all stakeholders.[1]

Simplistically explained, corporate governance is nothing but a set of rules which the companies should comply with in order to maintain an effective management and for the protection of minority shareholders.

Reality check

In public opinion and experts’ view, corporate governance had been reduced to a mere adornment on parchment in India.  Despite multiple legal provisions in place, corporate scams to the tune of billions of dollars continue to rock the country on an alarming and continuous basis.

In order to effect a change and tighten corporate governance norms, SEBI constituted a committee under the stewardship of one of the most renowned Indian bankers, Mr Uday Kotak in June 2017 by SEBI. The Kotak Committee after due deliberation and consultation with experts submitted its report in October 2017. The report contains recommendations for revamping the extant corporate governance regime in India with respect to listed companies.

Recently, SEBI considered these recommendations and has given its approval for some recommendations without any modification and some with modification. This article seeks to explore the key recommendations approved by SEBI and its implications on the corporate governance regime in India.

Key recommendations approved by SEBI

The following recommendations were accepted without any modifications by the SEBI:

(a) Disclosure requirements

The disclosure requirements of listed companies have been expanded. A listed company will now be required to make the following disclosures:

(i) Listed companies are now mandatorily required to disclose the utilisation of funds raised from preferential allotment and qualified institutional placement in their annual report.

(ii) Annual report should contain the disclosure of all the fees paid to statutory auditors. Additionally, the notice of annual general meeting (AGM)/extraordinary general meeting (EGM) being sent to the shareholders should contain disclosures pertaining to the proposed fee being paid to auditors and the basis of their appointment. If auditors are changed, then their reasons for resignation should be disclosed to the stock exchanges.

(iii) The expertise/skills of directors and Board members need to be disclosed.

(iv) A disclosure of related party transactions (RPT) on a consolidated basis in the prescribed format is mandated to be disclosed within 30 days of publication of consolidated half-yearly financial results to the stock exchanges. This is also required to be published on the listed entity’s website.

(v) Listed entities are also required to disclose in the annual report any transactions of the listed entity with any promoter or promoter group which holds more than 10% of the shareholding.

(vi) Consolidated quarterly results need to be mandatorily disclosed from the Financial Year 2019-2020.

(b) Appointment of independent Directors

No person who is a part of the promoter group can be appointed as an independent Director. Furthermore, in order to avoid “Board interlocks” persons who are non-independent Directors in some other entity in which a non-independent Director of the listed entity is an independent director will not be eligible to be appointed as an independent Director in the listed entity. Independent Directors need to submit a declaration stating that they fulfil the eligibility criteria as provided under the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015.

(c) Enhanced role of certain Board Committees

The role of certain Board Committees has been expanded. The Audit Committee is additionally charged with the responsibility for the utilisation of loans advanced by the holding companies to subsidiary companies in excess of Rs 100 crores or 10 per cent of the asset size of the subsidiaries.

Similarly, the Nomination and Remuneration Committee is now required to recommend payments of the senior management and the Risk Management Committee has also been made responsible for assessing cybersecurity threats.

(d) Reduction in directorships

The maximum listed companies in which one can hold directorships has now been reduced to eight (independent directorship being capped to maximum seven listed entities), with effect from 1-4-2019 and further reduced to seven listed entities from 1-4-2020.

(e) Material subsidiaries and secretarial audit

The meaning of material subsidiaries has been expanded to include subsidiaries which are worth 10% of the consolidated income or the net worth of the listed company. Offshore material subsidiaries are required to have at least one independent Director. Secretarial audit has also been made compulsory for listed companies and their unlisted Indian material subsidiaries from 1-4-2018.

The following recommendations were adopted by SEBI with certain modifications:

(a) Separation of key positions

The Kotak Committee had recommended that all listed companies with more than 40% public shareholding are required to have different persons appointed as Chairman and Managing Director/Chief Executive Officer by 1-4-2020. SEBI modified this recommendation to make it applicable to only the top 500 listed companies.

(b) Woman independent director

Kotak Committee recommended the appointment of at least one woman independent Director by 1-10-2018. SEBI made this applicable to top 500 listed companies (by market cap) by April 2019 and top 1000 listed companies by April 2020.

(c) Royalty payments to related parties

Kotak Committee had recommended that royalty or payments for brand usage made to related parties which exceed 5% of annual consolidated turnover shall require a prior shareholders’ approval. SEBI reduced this threshold to 2%.

(d) Change in implementation dates

Kotak Committee suggested certain procedural changes such as minimum number of directors for listed companies to be 6. SEBI modified this timeline and now the top 1000 listed companies are required to comply by 1-4-2019 and top 2000 listed companies are required to comply by 1-4-2020.

Further, AGM of top 100 listed companies should be held within 5 months after closing of the financial year instead of existing 6 months deadline. SEBI has accepted this proposal, however has adopted an implementation schedule different than what was suggested by the Kotak Committee.

Implications of the changes

The changes proposed by Kotak Committee and SEBI’s acceptance thereof are much needed steps towards changing the dilapidated corporate governance structure in the country. Minority shareholders are often targetted and their interests remain unprotected and vulnerable. The implications of the changes being brought about are as follows:

(i) The suggested and implemented changes could bring more transparency in the existing corporate structure. Disclosures are now mandated on a wide variety of things including appointment of Auditors and related party transactions. Such processes would be more inclusive towards minority shareholders and would afford them greater protection.

(ii) Certain disclosures have to be made to the stock exchanges. This would reduce, if not completely eliminate, chances of fraud.

(iii) The changes in the structure of independent Director appointments to prevent Board interlocks would help in avoiding conflict of interest situations. However, this may also create unnecessary difficulties in cases where an unintended Board interlock occurs.

(iv) Reducing the limit on maximum number of directorships a person can hold would ensure that directors devote proper quality time to their responsibilities.

(v) Separation of key positions would help decentralise the corporate structure and would prevent too much concentration of power in one hand.

(vi) Having at least one woman independent Director on Board, would bring about gender diversity.

(vii) SEBI has majorly restricted a lot of changes to top 500 or 100 listed companies. This modification would prevent the burden of compliances falling on mid and small-sized companies and would also act as a pilot test of the changes.


The Kotak Committee recommendations are definitely a whiff of fresh air in the “closed door” corporate governance structures. However, these changes can be efficient only if implemented properly. These alterations would bring about greater transparency and will boost shareholders’ confidence. SEBI would be required to ensure strict compliance in order to make efficient corporate governance a reality in the country.


*Bhumesh Verma is Managing Partner at Corp Comm Legal and can be contacted at and Soumya Shekhar is Research Associate.

[1]    <…/Corporate%20Governance.doc>, date visited 14-3-2018.

Corp Comm LegalExperts Corner

The last 15 months have been quite revolutionary in terms of an attempt to make India a transparent and global business hub as far as corporate governance is concerned. The Government has struck off more than 2,00,000 defunct companies and disqualified 3,00,000 individuals who were holding directorships in such companies. Further, the Government of India has amended the Companies Act, 2013 to make major changes to provisions pertaining to Directors’ disqualifications and launched a new scheme to enable companies to comply with the return filing provisions in the event of pending delays/defaults in return filing.

While the Union Government seeks to make Directors’ appointments/disqualifications a means to usher in much needed transparency in the operation of companies, its Condonation of Delay Scheme, 2018 also allows Directors having any disqualifications owing to the defaults in a previous company to act within time to correct such defaults and cure their own disqualification. This article analyses these developments to enable a nuanced understanding of these legal developments.

Changes in provisions on Directors’ disqualification

It is pertinent that Sections 164(1) and (2) of the Companies Act, 2013 read as follows:

164. Disqualifications for appointment of director.— (1) A person shall not be eligible for appointment as a director of a company, if—

(a) he is of unsound mind and stands so declared by a competent court;

(b) he is an undischarged insolvent;

(c) he has applied to be adjudicated as an insolvent and his application is pending;

(d) he has been convicted by a court of any offence, whether involving moral turpitude or otherwise, and sentenced in respect thereof to imprisonment for not less than six months and a period of five years has not elapsed from the date of expiry of the sentence:

*        *        *

(e) on order disqualifying him for appointment as a director has been passed by a court or tribunal and the order is in force;

(f) he has not paid any calls in respect of any shares of the company held by him, whether alone or jointly with others, and six months have elapsed from the last day fixed for the payment of the call;

(g) he has been convicted of the offence dealing with related party transactions under Section 188 at any time during the last preceding five years; or

(h) he has not complied with sub-section (3) of Section 152.

(2) No person who is or has been a director of a company which.—

(a) has not filed financial statements or annual returns for any continuous period of three financial years; or

(b) has failed to repay the deposits accepted by it or pay interest thereon or to redeem any debentures on the due date or pay interest due thereon or pay any dividend declared and such failure to pay or redeem continues for one year or more,

shall be eligible to be reappointed as a director of that company or appointed in other company for a period of five years from the date on which the said company fails to do so.

The aforesaid provision has been amended by the Companies (Amendment) Act, 2017, adding the following proviso to sub-section (2):

Provided that where a person is appointed as a director of a company which is in default of clause (a) or clause (b), he shall not incur the disqualification for a period of six months from the date of his appointment.

Thus, the new amendment has granted a time window to Directors to correct the position of the prior company in which he was appointed. So long as such corrections are done to alleviate the disqualifications mentioned under sub-section (2), the appointee can continue as a Director. Thus, candidates for directorship would need to be vigilant enough to ensure that no defaults either in filing statutory returns or defaults on deposits/debentures/dividends exist on the part of a prior company in which they are or were a Director. On the other hand, the inability/failure to make such corrections would render such Director disqualified even if such failure is unintentional. Clearly, by requiring appointed Directors to be responsible for companies they have left already the statute might be a case of overkill. Directors are faced with a new challenge in terms of compliance and the time window is most welcome in that regard.

It is pertinent that the Uday Kotak Committee on Corporate Governance in its chapter on Disclosures & Transparency Disclosures Pertaining to Disqualification of Directors has made a significant recommendation. The recommendation is that disclosures under the SEBI Listing Obligations and Disclosure Requirements (LODR) must also include a company secretarial certificate in the annual report that none of the Directors on the board of the company have been debarred or disqualified from being appointed or continuing as Directors of the companies by SEBI/MCA or any “such statutory authority”.

This goes out as a clear indication of where business regulation is headed as far as major companies are concerned. The Committee felt that investors are often unaware whether the Directors of the company have been debarred from acting as Directors of a company. The recommended changes in the Fifth Schedule to LODR have been suggested to resolve this anomaly. It is noteworthy that the recommended amendment also contains other “statutory authorities” within its ambit. It could mean NCLT as an example, thus indicating that even adverse orders by the same which invalidate or bar a Director would have to be adequately acted upon by listed companies as they must obtain the bona fide certificate from the company secretary concerned.

Changes with respect to the vacation of office of Director

It is clear from Section 167 of the Companies Act, 2013 that:

167. Vacation of office of Director.— (1) The office of a director shall become vacant in case—

(a) he incurs any of the disqualifications specified in Section 164:

Provided that where he incurs disqualification under sub-section (2) of Section 164, the office of the director shall become vacant in all the companies, other than the company which is in default under that sub-section.

This provision has been subjected to the following additions under the Companies (Amendment) Act, 2017:

  *        *        *

(b) he absents himself from all the meetings of the Board of Directors held during a period of twelve months with or without seeking leave of absence of the Board;

(c) he acts in contravention of the provisions of Section 184 relating to entering into contracts or arrangements in which he is directly or indirectly interested;

(d) he fails to disclose his interest in any contract or arrangement in which he is directly or indirectly interested, in contravention of the provisions of Section 184;

(e) he becomes disqualified by an order of a court or the tribunal;

(f) he is convicted by court of any offence, whether involving moral turpitude or otherwise and sentenced in respect thereof to imprisonment for not less than six months:

*          *        *

(g) he is removed in pursuance of the provisions of this Act;

(h) he, having been appointed a director by virtue of his holding any office or other employment in the holding, subsidiary or associate company, ceases to hold such office or other employment in that company.

The amendment significantly clarifies the effect of disqualification of a Director due to other reasons of grave non-compliance with the law. Now, no shadow of doubt remains regarding the effect of such disqualification. The office of the Director shall stand vacated when, for example the Director fails to comply with interest disclosure norms under Section 184 of the Companies Act, 2013. Another major takeaway is guidance as to the course best taken in situations of the kind witnessed in the Cyrus Mistry-Tata group litigation. Now onwards, it shall be far difficult for an ousted Director to seek a contrary order of reinstatement from the relevant tribunal. This is because the statute is straightforward in declaring that the office remains vacated the moment the removal of a Director is effectuated “in pursuance of the provisions of this Act”.

Shareholders of company can oppose a disqualified Director

In Nabendu Dutta v. Arindam Mukherjee[1] the Calcutta High Court adjudicated on the issue of locus standi of shareholders to seek declaration against the appointment of a disqualified Director. It was affirmed by the learned High Court that shareholders are vitally interested in proper and lawful management of company, inasmuch as they are represented by Directors, and obviously they must see that Company is managed and controlled by competent and untainted person to protect their interest. Thus, a shareholder has locus standi to challenge appointment of disqualified Directors. If a company mans the office of Director with disqualified persons, it certainly brings disrepute to the company itself and it may have adverse effect in the business of the company. It is significant that the judgment found the disqualifications to be a punitive measure for the benefit and protection of the deposit holders against failure, either wilful or otherwise in repayment of deposits on due date.

The judgment further affirmed that apart from the shareholder of a particular company in which tainted Directors are sought to be appointed from a defaulting company, any member of the public who is interested in terms of transactions with the limited company can also seek to set aside the appointment of the tainted Directors. The judgment rationalises the provision as being intended to identify those Directors under whose management the defaults were committed by any company.

Sections 164 and 167 of the Companies Act, 2013 apply retrospectively

The Kolkata Bench of Company Law Board in Raj Shekhar Agrawal v. Pragati 47 Development Ltd.[2] adjudged a case of oppression and mismanagement in which the issue of prospective application of Sections 164 and 167, Companies Act, 2013 was decided. The respondents filed an application praying for an order of injunction restraining/declaring as non est appointment of any advocate-on-record/counsel under claimed authorisation of erstwhile Directors of respondent Company, as they had vacated their offices in terms of Section 167(1). Further, the respondent submitted that all Directors vacated their offices in terms of Section 167(1) read with Section 164(2), due to default committed by erstwhile Directors in filing, the financial statements of the respondent company and its subsidiary companies for three consecutive years.

CLB held that provisions of Sections 164 and 167 have been notified with effect of 1-4-2014 and, hence, consequential action under Section 167(3) accrues on non-filing of financial statements for 3 years commencing from 1-4-2014. Therefore, based on the prospective application of notification of Sections 164 and 167, erstwhile Directors were held to continue to be validly and legally appointed Directors and hence, the said Board of Directors was competent to appoint the advocate by following the provisions of law. Thus, the timeline of obligations under Sections 164 and 167 of the Companies Act, 2013 would have to be calculated post-notification of the aforesaid sections.

In this regard, it is crucial to understand the difference between Section 196(3)(a) and Section 164 of the Companies Act, 2013. Section 196(3)(a) of the Companies Act, 2013 reads as follows:

196(3).— No company shall appoint or continue the employment of any person as managing director, wholetime director or manager who—

(a) is below the age of twenty-one years or has attained age of seventy years:

Provided that appointment of a person who has attained the age of seventy years may be made by  passing a special resolution in which case the explanatory statement annexed to the notice for  such motion shall indicate the justification for appointing such person.

In Sridhar Sundararajan v. Ultramarine & Pigments Ltd.[3] (‘SS’ & ‘RS’) a Single Judge of the Bombay High Court gave a significant judgment on whether the interpretation of aforesaid section could be applicable with respect to Section 164. The judgment held that a Director turning seventy years did not attract automatic “mid-stream” disqualification from appointment. In this case, RS was appointed as CMD of listed company on 13-8-1990. On 21-5-1998, SS was appointed as Director.

On 1-8-2012, RS was reappointed as CMD for term of five years till 2017. On same day, SS was also appointed as Joint-MD. The Companies Act, 2013 was enforced with effect from April 1, 2014. RS attained the age of seventy years on 11-11-2014. SS contended that on the 70th birthday of RS, he earned himself statutory disqualification.

The judgment held that Section 196(3) does not operate to interrupt appointment of any Director made prior to coming into force of the 2013 Act. It also does not interrupt the appointment of MD appointed after 1-4-2014 where at the date of MD‘s appointment/reappointment was below the age of seventy years but crossed that age during his tenure. It was held that there ought to be a contextual reading of the words in Section 196(3).

In ruling thus, the judgment drew parallels to Section 269 of the Companies Act, 1956 under which “there was no discontinuance” of existing Managing Director at the age of seventy years and the section applied only to his appointment (including re-appointment). The learned Single Judge relied on SC ruling in P. Suseela v. University Grants Commission[4] (2015) wherein it was held that “it is relevant to distinguish between an existing right and vested right. Where a statute operates in future it cannot be said to be retrospective merely because within the sweep of its operation, all existing rights are included.”

The aforesaid matter went on an appeal to the Division Bench of the Bombay High Court and an opposite judgment was rendered.[5] It was held that a Managing Director attaining seventy years would immediately stand disqualified whether or not the Managing Director was appointed before or after the enactment/commencement of the Companies Act, 2013.  The Division Bench held that disqualification for MD appointment on ground of age-limit would act automatically. RS was disqualified from continuing as MD, unless he fulfilled the requirements of the proviso i.e. company has to continue his appointment by a special resolution and, secondly, that resolution must state the reason why the continuation is necessary.

The judgment affirmed that parliamentary intention was to change earlier position by providing that person who has been appointed as MD before he was seventy years old is prohibited from continuing as MD once he has attained the age of seventy. It reasoned that the language of Section 196(3)(a) is plain, simple and unambiguous. The Division Bench rejected RS’s contention that Section 196(3)(a) is not applicable to MD’s  appointment before 1-4-2014. There is no distinction in the section between MD who have been appointed before 1-4-2014 and those after 1-4-2014. The Division Bench also rejected reliance on an old MCA Circular that clarified conditions specified in erstwhile Schedule XIII Part 1 of the old Companies. Act, 1956 which required satisfaction of the age requirement only at the time of appointment.

Thus, the problems which could arise because of prospective applicability such as the exclusion of most pre-existing MDs from the operation of the mandate under the aforesaid section, have been permanently resolved by the judgment’s conceptual clarity.

Directors’ qualifications under the articles of association

In the judgment of the Madras High Court in Saraswathi Vilasam Shanmugha Nandha Nidhi Ltd. v. V.S. Daiva Sigamami Mudaliar[6] it was held that there is nothing in any provisions of the Companies Act which precludes a company from prescribing additional qualifications for directorship, if the articles so provide. There is nothing unreasonable in having a non-statutory minimum age-limit for Directors with a view to justify confidence in mature judgment.

Recent trends in disqualification of Directors

In a recent Madras High Court judgment in Bhagvan Das Dhananjaya Das v. Union of India[7] granted an interim stay against disqualification from directorship. The interim stay was granted in writ petitions filed challenging MCA order disqualifying petitioner from directorship, under Section 164(2) of the Companies Act. While the writ petition also seeks directions to MCA & ROC to permit petitioner to get appointed or reappointed as Director of any Company without any hindrance, the order has only granted an interim stay on the MCA order and final judgment is still awaited.

In another order by the High Court of Andhra Pradesh in Dr Reddy’s Research Foundation v. Ministry of Corporate Affairs[8] MCA directed DIN restoration of defaulting Directors in lieu of annual-filing completion. Thus, the order enabled directors to submit annual returns for Financial Years 2011-2012 to 2015-2016 and financial statements for 2012-2013 to 2015-2016. The order noted, “It appears that there is a lacuna in the procedure that is required to be followed by the companies, which are defaulted in filing their annual returns and the consequent disqualification of the Directors to rectify the defect.” The High Court noted that Rule 14 of Companies (Appointment and Qualification of Directors) Rules, 2014 prima facie provides for rectifying the defect by enabling defaulting companies to file returns.

The order stated, “The said Rule does not provide what is required to be done by the respective authorities.” In light of the fact that a defaulting company is allowed to rectify the defect by filing the returns which have not been filed earlier, the natural corollary of the same would be that the competent authority is required to take the same into consideration. As the filing has to be done through e-platform, the same cannot be done unless access is provided to it.

It is noteworthy that the order referred to the Report of Companies Law Committee that disclosed the anomaly in respect of disqualification earned by an individual not only with respect to a defaulting company but also with respect to other companies. The order states that rectification ought to be made restricting the scope of disqualification to defaulting company.

Condonation of Delay Scheme, 2018 as a cure for disqualifications of a Director

The Condonation of Delay Scheme, 2018 is a scheme of the Union Government under Sections 403, 459 and 460 of the Companies Act, 2013 which gives an opportunity to non-compliant companies to comply with the return filing provisions of the Companies Act. While on the one hand, the amendments encourage the appointment of only such Directors whose previous companies did not suffer from any defaults under the law, the CODS, 2018 offers Directors with disqualifications to correct affairs in their previous companies to be able to cure themselves of their disqualifications.

Para 2 of the said Scheme[9] lays down certain basic concepts underlying it. These concepts are as follows:

*          *        *

(ii) “overdue documents” means the financial statements or the annual returns or other associated documents, as applicable, in the case of a defaulting company and refer to documents mentioned in Para 5 of the Scheme.

      *        *        *

(iv) “Defaulting company” means a company which has not filed its financial statements or annual returns as required under the Companies Act, 1956 or the Companies Act, 2013, as the case may be, and the Rules made thereunder for a continuous period of three years.

(v) “Designated authority” means the Registrar of Companies having jurisdiction over the registered office of the company.

The beneficiaries of the Scheme would be defaulting companies which have not been deregistered i.e. removed from Register of Companies by the Registrar of Companies Such defaulting companies can file annual accounts or annual return which are overdue for filing till 30-6-2017. Companies which have been deregistered/removed from Register of Companies by Registrar of Companies are ineligible to avail this scheme.

The procedure for availing the Scheme involves the temporary reactivation of deactivated DINs of defaulting Directors. Defaulting companies shall complete pending filing by payment of additional fees as prescribed. Defaulting company shall file an e-Form “e-CODS along with a fees of Rs  30,000. If defaulting company does not file the requisite documents/e-Forms, the DIN of the Directors will be deactivated. Where a company has been restored after an application to NCLT, the DIN of such Directors would be reactivated, subject to company filing all overdue documents. Annual return, annual accounts/financial statements, submission of compliance certificate, appointment of auditors can be filed as part of the Scheme.

Registrar of Companies shall withdraw the pending prosecution, if any, before the court concerned in lieu of documents filed under the Scheme. However, this Scheme does not affect any action under Section 167(2) of the Act. This Scheme also does not affect civil and criminal liabilities as may be applicable on such disqualified Directors during the period of such disqualification.

The Scheme requires beneficiaries to disclose whether any appeal was filed against any notice issued or complaint filed before competent court for violating provisions of the Act. Disclosure about prosecution pending before any court against the company and its officers in respect of belated documents is also required.

The e-form also requires disclosure about any Director who is declared as proclaimed offender or facing criminal case for economic offences. It also requires a declaration that company has withdrawn existing appeals/writs before any court of law.

The significance of the CODS, 2018 is also understood in light of a Press Information Bureau (PIB) Press Release of 5 September 2017 which has introduced a number of restrictions on bank accounts of deregistered companies. The press release reads as follows:

“Department of Financial Services advises all banks to take immediate steps to put restrictions on bank accounts of over two lakh deregistered companies…Banks have also been advised to go in for enhanced diligence while dealing with companies in general. A company even having an active status on the website of the Ministry of Corporate Affairs but defaulting in filing of its due financial statement(s) or annual return(s) of particular of charges on its assets on the secured loan should be seen with suspicion as, prima facie, the company is not complying with its mandatory statutory obligations to file this vital information for availability to its stakeholders.”


The Union Government has amended the Companies Act, 2013 to make major changes to provisions pertaining to Directors’ disqualifications. These amendments are expected to usher in greater accountability in corporate governance. The Government’s new scheme to enable companies to comply with the return filing provisions in the event of pending delays/defaults in return filing would likely enable the formation of a robust culture of litigation free compliance. At the same time High Courts, Company Law Boards and National Company Law Tribunals have passed several major decisions in recent years which have significant impact on the aforesaid matters. These rulings should be able to give rise to new jurisprudence in company law which is consistent with the development needs of India. Adjusting to the new developments in the law presents new challenges for India Inc.


Bhumesh Verma is Managing Partner at Corp Comm Legal and can be contacted at and Somashish, Fifth Year B.A. LL.B. (Hons.) student, School of Law, Christ (Deemed to be University), Bangalore.

[1]    2003 SCC OnLine Cal 635 : (2004) 55 SCL 146.

[2]    LSI-985-CLB-2015-(KOL), decided on 17-9-2015 (Calcutta High Court).

[3]    2015 SCC OnLine Bom 3817.

[4]    (2015) 8 SCC 129.

[5]    Sridhar Sundararajan v. Ultramarine and Pigments Ltd., 2016 SCC OnLine Bom 10591 : (2016) 2 TMI 583.

[6]    1950 SCC OnLine Mad 116 : (1951) 21 Comp Cas 85.

[7]    WPs Nos. 25455 & 25456 of 2017, decided on 21-9-2017 (Madras High Court).

[8]    [2017] 144 SCL 571, decided on 24-10-2017 (High Court of Andhra Pradesh and Telangana).

[9]    Condonation of Delay Scheme, 2018, General Circular No. 16 of 2017.

Case BriefsTribunals/Commissions/Regulatory Bodies

Securities and Exchange Board of India: The interim order passed in accordance with Securities and Exchange Board of India Act, 1992, by Madhabi Puri Buch (Whole Time Member), directed the continuation of actions already taken against M/s Eskay K’n’it (India) Limited in regard to the previous orders and directed the shares held by promoters and directors in EKIL not to be allowed to be transferred for sale, giving thirty days limit to the company to file its reply.

The company has failed to submit the complete information sought from it violating Regulation 30 of Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015. Evidence has been produced regarding misrepresentation of financials, misuse of funds and books of accounts and submission of incomplete information to SEBI. Also, it has failed to provide the copy of contracts with customers, copy of lease agreement of plants and machinery with third parties and copy of contract with Asahi Industries Limited, leading to the suspicion about the genuineness of its transactions. [In the matter of M/s Eskay K’n’it (India) Limited, WTM/MPB/ISD/92/2017, decided on 21-11-2017]