Corporate Governance in India: Principles and Legal Framework

This article is written by Jeswino Justin, Christ Academy Institute of Law, B.Com LL.B,  5th year during his internship at LeDroit India

Scope of the Article

1. Introduction
2. Concept and Principles of Corporate Governance
3. Evolution of Corporate Governance in India
4. Legal and Regulatory Framework
5. Institutional Mechanisms
6. Challenges in Implementation
7. Case Studies
8. Recent Reforms and Trends
9. Comparative Perspective
10. Recommendations
11. Conclusion

Keywords

Corporate Governance • SEBI • Companies Act, 2013 • Board of Directors • Transparency • Accountability

Abstract

Corporate governance in India is seen as the power structure of rules, practices, and processes and that governed the corporations. It shows the world that if one business can be transparent, accountable and responsible, then investor confidence will rise. The Companies Act, 2013 and SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 brought a new phase in Indian corporate governance by accepting the concepts of board independence, audit accountability, and protection of stakeholders. In this article the author discusses the Indian corporate governance’s history, principles, and legal framework, along with notable judicial interpretations and recent regulatory reforms that still influence its jurisprudence.`

1. Introduction

Corporate governance is the pillar of a country’s economic structure, and its various forms are imposed by the stakeholders of the company, such as owners, managers, creditors, etc.Corporate governance practices and policies, in general, ensure that business ethics are observed even while profit making. They also help in creating the right atmosphere for stakeholder integration. Corporate governance in its most basic form links up ownership with control and makes certain that the person managing the company does so in the interest of the owner The introduction of the liberalization policy in India with the subsequent opening of the economy to foreign competition and investment during the early 1990s, made the idea of corporate governance come into the limelight.

The increased participation of investors made it necessary for companies to maintain and even improve their standards of disclosure, accountability, and ethical conduct. Nonetheless, the business landscape of India in the previous decades was nontransparent and board independence was not a priority at family-run enterprises and public sector undertakings. The corporate scandals in India in the late 1990s and early 2000s—most notably Satyam—made it very clear that an investor protection law and institutional framework backed by sound practices were necessary for restoring investor confidence.

Governance reforms were a global trend aligned with the patterns of big scandals, e.g. the Enron and WorldCom cases, which eventually saw the US introducing the Sarbanes–Oxley Act, 2002, and similar reforms in Europe and Asia. India followed the same path with such domestic developments as the Kumar Mangalam Birla Committee Report (1999) and Narayana Murthy Committee Report (2003), both of which highlighted board independence, disclosure, and ethical leadership.

2. Concept and Principles of Corporate Governance

Corporate governance indicates the rules, practices and processes through which a company is run and managed. It includes the interaction among the directors, management, shareholders, and other people involved, and gives the framework where the company’s goals are defined and accomplished. In India, the issue of governance was strongly highlighted by the Satyam case, which disclosed huge problems of internal controls, board decision-making and openness.

To corporate governance the basic principles of the above mentioned- transparency, accountability, responsibility, fairness, and independence – are the core principles that fight as the ethical and operational pillars of a strong governance framework.⁴

Transparency: It guarantees the stakeholders the availability of material information that is accurate, timely and sufficient to make decisions. For instance, the Securities and Exchange Board of India (Listing Obligations & Disclosure Requirements) Regulations, 2015 (LODR) require that listed companies report material events as soon as possible following their occurrence.

Accountability: It is the responsibility of the board of directors and top management to provide explanations for their actions and decisions; for example, Section 166 of the Companies Act, 2013 lays down the directors’ duties to act honestly and in the best interests of the company and its stakeholders.

Responsibility: It means that the enterprises are not only expected to follow the laws but also adhere to ethical, social and environmental standards. One of the manifestations is the mandatory CSR spending requirement set forth in Section 135 of the Companies Act.

Fairness: It demands that all the ground involving the stakeholders get fairly treated — among them are the minority shareholders, employees, and creditors.

3. The Evolution of Corporate Governance in India

The Indian corporate governance notion has slowly changed over time, with the primary factors being economic reforms, corporate frauds, and the global regulation trends at the same time.The most significant turning point in the liberalization era of the 1990s was the gradual nullification of the family control and trust-based operations combined with the market discipline, investor participation, and regulatory oversight that came along.

Pre-Liberalization Period (Before 1991) In the period prior to India’s economic reforms, the corporate structure was very much characterized by the promoter’s control, which left almost no accountability and transparency in the system The Companies Act, 1956 was the chief law regulating corporations, but governance remained a secondary issue. Corporate boards were mostly a mere formality, and protections for minority shareholders were ineffective.

Post-Liberalization Reforms (1991–2000) The 1991 economic reforms brought a complete overhaul of India’s industrial and financial sectors resulting in the inflow of foreign capital and the growth of capital market activities. Among the contributors to this development was the establishment in 1992 of the Securities and Exchange Board of India (SEBI), which started to be a significant player in the regulation of public companies. The Confederation of Indian Industry (CII), realizing the necessity for better governance practices, came up with a voluntary Code of Corporate Governance in 1998 that laid the emphasis on board independence, audit committees, and disclosure norms  Soon after, the Birla Kumar Committee’s report (1999) resulted in SEBI

Institutionalization Phase (2000–2010) The 2000s years witnessed a lot of corporate scandals, among which the Satyam Computer Services scandal (2009) was the most pronounced, leading to a drastic exposure of board supervision, internal control, and auditor independence defects.The scandal induced the Naresh Chandra Committee (2002) and the Narayana Murthy Committee (2003) to suggest the ideas of very strict standards concerning board composition, audit independence, and director’s liability.The mentioned reforms have also bolstered SEBI’s Clause 49 requirements and turned the compliance into a necessity for all the publicly listed companies.

Modern Regulatory Era (2010–Present) The Companies Act, 2013 introduction acted as a catalyst in codifying the principles of corporate governance into law.Among the main traits are the establishment of independent directors (Section 149), audit committees (Section 177), vigil mechanism (whistleblower policy under Section 177), and Corporate Social Responsibility (Section 135). Moreover, SEBI’s (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR) gathered all corporate governance provisions into a one regulatory framework, thus putting Indian governance standards on par with the best practices worldwide

 In summary, India’s corporate governance saga is a gradual shift from relying on family ties and controlling the situation to being accountable through transparency over the period of statutory law, market regulation, and moral obligation.¹⁵

4. Legal and Regulatory Framework of Corporate Governance

The legal system of corporate governance in India has been developed through a variety of statutory laws, regulatory bodies, and voluntary codes of conduct. India’s current corporate governance structure is primarily based on the Companies Act, 2013, and the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, which together constitute the core of modern corporate governance in India.

1. The Companies Act, 2013 The Companies Act, 2013 was a watershed that also facilitated the transition from the older Companies Act, 1956 by embedding the values of openness, accountability, and protection of interests of stakeholders in the corporate sector.It was a progressive Act that provided for the appointment of independent directors (Section 149), audit and nomination committees (Section 177), and corporate social responsibility (CSR) obligations (Section 135).

With this, India became one of the very few jurisdictions in the world that have CSR endorsed by legislations. Moreover, the Act made significant improvements in the areas of disclosure, director accountability, and shareholder rights. A prescribed code of conduct for board members is established through Section 166, while detailed financial reporting and a statement concerning board accountability are the essential requirements of Section 134. The Ministry of Corporate Affairs (MCA) keeps on publishing circulars and notifications to update governance practices in accordance with the changing business environment.

2. SEBI’s Regulatory Framework The securities and exchange board of India (SEBI) established the SEBI Act, 1992, and thus the SEBI Agenda Regulation, 1992, which plays a major part in the regulation of listed entities and the protection of investors. Among the many demands placed upon the listed companies in the framework of SEBI’s Listing Obligations and Disclosure Requirements (LODR), Regulations 2015 are board composition, independent directors, disclosure of material events, and related-party transactions. For example, Regulation 17 requires that if the chairperson of a company is an executive director then he/she should be accompanied by at least 50% independent directors on the board, while Regulation 23 deals with the approval and the transparency of the related-party transactions  In addition, SEBI has circulated different memorandums that have led to the promotion of up-to-date risk management and sustainability reporting through the adoption of the Business Responsibility and Sustainability Reporting (BRSR) Framework, thus making India one of the first countries in Asia to accept the ESG-based disclosure norms.
3. Committees and Self-Regulatory Initiatives Apart from the legal framework, the expert committees have been a series of expert committee reports that have played a vital role in shaping India’s governance standards. The Kumar Mangalam Birla Committee (1999), Naresh Chandra Committee (2002), and Kotak Committee (2017) made extensive enquiries and provided recommendations on board independence, audit transparency, and stakeholder engagement.The majority of their proposals were afterwards integrated into the Companies Act 2013 and the SEBI LODR framework thus ensuring that all companies follow the best corporate governance practices  Self-regulatory initiatives like the Confederation of Indian Industry (CII) Code of Corporate Governance (1998) also served as a voluntary model that impacted future regulatory policy.

4. Enforcement and Oversight In India, the enforcement of corporate governance takes place through a multi-level system. The Ministry of Corporate Affairs (MCA) is responsible for the compliance of companies and prosecutions under the Companies Act, while the Securities and Exchange Board of India (SEBI) is in charge of the supervision of listed firms and professional intermediaries. The National Company Law Tribunal (NCLT) and the Securities Appellate Tribunal (SAT) are amongst the quasi-judicial institutions that conduct the resolution of corporate disputes and appeals.

The Satyam Scam incident, comprising cases like Central Bureau of Investigation v. B. Ramalinga Raju & Ors., made the strong requirement for internal control and external audit mechanisms explicit.The subsequent reforms were directly dictated by such corporate collapses, thereby propelling Indian regulators towards stricter compliance standards and increased director accountability.

5. Case Studies in Corporate Governance in India

1. Satyam Computers (2009)

 The scandal of Satyam Computers is still known as one of the biggest corporate frauds in India, which led to the transformation of the country’s corporate governance system. In Central Bureau of Investigation v. B. Ramalinga Raju & Ors., (2015) 2 SCC 345, the amine of the founder-chairman Raju came to light when he admitted that through writing false accounting entries, making fake invoices, and creating non-existent assets he inflated revenues and profits by almost ₹7,000 crore.

 The whole affair highlighted the lack of effective internal control systems, the dependence of auditors, and the dominance of the board in the company.It caused the IT sector of India not only to suffer a loss of reputation worldwide but also to be affected by the sudden fall of investors. The government, however, utilized this opportunity to its advantage; it replaced the entire Satyam board, opened a forensic audit, and facilitated Tech Mahindra’s takeover of the company through a transparent bidding process that was monitored by SEBI and the Ministry of Corporate Affairs (MCA). One of the major results of such a case was the establishment of the National Financial Reporting Authority (NFRA) under Section 132 of the Companies Act 2013, which is a statutory watchdog for auditing and accounting standards.

The Satyam incident thus turned out to be a watershed moment, making regulators more demanding of auditing independence, whistleblower protection, and director accountability.

2. Tata–Mistry Dispute (2021)

 The case of Tata vs. Mistry has lent a different perspective to the issue of corporate governance conflicts across the board rooms of India’s most admired conglomerate. The matter highlighted when the board of directors in 2016 kicked out Cyrus Mistry, the Executive Chairman of Tata Sons Ltd. He then went on to file a complaint under the Companies Act, 2013 claiming oppression and mismanagement of the company activities.

 In the case of Cyrus Investments Pvt. Ltd. v. Tata Sons Ltd., (2021) SCC Online SC 273, the Supreme Court quashed the order of the National Company Law Appellate Tribunal reinstating Mistry. The Court concluded that the removal of Mistry by Tata Sons was a legitimate use of the board’s business judgment as long as it did not contradict the Articles of Association and the principles of fairness. The ruling made it clear that the courts would not interfere in the internal management of the companies unless there was clear-cut evidence of bad faith or statutory violations. The Court further stressed that the corporate boards have to find a middle path between autonomy and transparency that is still in line with their fiduciary duties and the interests of shareholders in the long run.

 This conflict brought about a debate across the country on key issues like democratic practices in the board rooms, rights of minority shareholders, and the regulation of family-controlled conglomerates. It also served to reinforce the view that good governance is a product of law and ethics, the former being a necessary evil while the latter being a virtue.

6. Recommendations 

Through the lens of corporate governance evolution in India, substantial advances have been seen alongside the persistence of some structural issues. The following reforms are suggested to promote the three principles of accountability, transparency, and sustainability in the Indian corporate world:

1. Strengthen Independent Directors’ Role One of the main roles of independent directors is to secure objectivity in the board and safeguard the interests of the minority shareholders. However, sometimes their power to do so is considerably reduced due to the lack of autonomy and inadequate evaluation methods. By introducing performance reviews and the independent nomination procedure—as done in the U.K. through the Corporate Governance Code—one will not only be helping independent director  accountability, but also increasing transparency. In addition, SEBI should guarantee that the criteria for independence and the annual performance assessment of the directors are disclosed properly in the company reports.

2. Enhance Enforcement Power To bring about a change in the enforcement side of things the regulatory bodies like SEBI and NFRA need to be given more control with the guarantee of adequate resources to make compliance happen in the first place. If these authorities are given the power to quickly impose fines and disqualify directors for noncompliance with governance standards, it will be a huge deterrent to such kinds of misbehaviors. Inter-agency cooperation among SEBI, MCA and SFIO can also be a very good way to improve enforcement efficiency.

3. Promote Ethical Leadership Very often corporate governance, or rather the lack of it, gets interpreted as being synonymous with compliance. It is really a matter of culture. To force the issue, boards should set up mandatory ethics or conduct committees, including independent directors and external experts, to pass judgment on corporate decision-making through an ethical prism. In fact, the cycle of regular ethics training and annual declarations of conflict of interest should be made a part of corporate life, thus ensuring leadership integrity that goes beyond statutory requirements.

7. Conclusion

 Indian corporate governance has come a long way and is no longer only compliance-driven. It is now a comprehensive framework that provides the basis for ethical, transparent, and sustainable businesses in India. One can trace the transition of corporate governance in India from the early regulatory approach under the Companies Act, 1956, through the more principles-based and stakeholder-oriented Companies Act, 2013, and SEBI’s Listing Obligations and Disclosure Requirements (LODR) Regulations, 2015, to the current situation, which is the latter as to global best practices. 

India’s transformation was expedited by a number of notorious corporate scandals like Satyam Computers (2009), which revealed the inadequacies of board oversight and audit mechanisms. This, at the same time, led to the creation of new institutions like the National Financial Reporting Authority (NFRA) and the introduction of new practices like Business Responsibility and Sustainability Reporting (BRSR) that will make corporations more transparent and accountable in their operations. At the same time, the above-mentioned reforms did not completely eliminate challenges; especially, issues regarding the independence of boards, ethical leadership, and the effectiveness of law enforcement are still present. 

Therefore, the resilience and the confidence of the investors in the market need to be supported by a governance culture that is built on utmost dedication rather than mere compliance with law. Moreover, the global corporate governance that once was only about the shareholders’ issues has now advanced to the stage where it is concerned with environmental, social, and governance (ESG) issues and thus, it is in line with the wider objectives of a sustainable and inclusive society. If India keeps up the pace with the current trajectory, it can soon be a regional frontrunner in ethical corporate governance, although that requires strong regulatory enforcement, more diversity, and deeper stakeholder engagement.