Corporate Governance vis-à-vis Companies Act 2013
📘 Corporate Governance vis-à-vis Companies Act, 2013
✅ 1. What is Corporate Governance?
Corporate Governance refers to the framework of rules, practices, and processes by which a company is directed and controlled. It ensures transparency, accountability, fairness, and ethical business conduct in the interest of all stakeholders — including shareholders, employees, customers, and society at large.
⚖️ Key Principles:
Transparency
Accountability
Independence
Fairness
Ethical conduct
Responsibility to stakeholders
🏛️ 2. Evolution of Corporate Governance in India
Triggered by major scams (e.g., Satyam Scam, 2009).
Led to stronger regulatory frameworks.
The Companies Act, 2013 introduced significant reforms in corporate governance in response to past failures.
📜 3. Corporate Governance under Companies Act, 2013
The Companies Act, 2013 introduced comprehensive corporate governance norms, especially for listed companies and certain large unlisted public companies.
🔹 A. Board of Directors and Composition (Sections 149–172)
Section 149(1): Mandates a minimum number of directors (3 for public companies, 2 for private, 1 for One Person Company).
Section 149(4): Every listed public company must have at least 1/3 independent directors.
Section 149(6): Defines who qualifies as an Independent Director — must be free from any material or pecuniary relationship.
Section 151: Companies may have a small shareholders’ director.
Governance Role: Ensures diversity, independence, and objectivity in board functioning.
🔹 B. Audit Committee and Internal Controls (Section 177)
Mandatory for:
Listed companies
Public companies with paid-up capital ≥ ₹10 crores, turnover ≥ ₹100 crores, or borrowings ≥ ₹50 crores.
Responsible for overseeing:
Financial reporting
Auditor appointments
Internal audit
Whistleblower mechanisms
Governance Role: Enhances financial integrity and prevents fraud.
🔹 C. Nomination and Remuneration Committee (Section 178)
Required for listed and large public companies.
Recommends:
Appointment and removal of directors
Remuneration policies
Must ensure performance-linked and fair compensation.
Governance Role: Prevents excessive or unfair pay; ensures merit-based appointments.
🔹 D. Stakeholders Relationship Committee (Section 178(5))
Mandatory for companies with more than 1000 shareholders/debenture-holders.
Resolves grievances of stakeholders.
Governance Role: Strengthens investor relations and stakeholder trust.
🔹 E. Corporate Social Responsibility (CSR) (Section 135)
Companies with:
Net worth ≥ ₹500 crores or
Turnover ≥ ₹1000 crores or
Net profit ≥ ₹5 crores
Must spend at least 2% of average net profits on CSR activities.
Governance Role: Promotes ethical and responsible business toward society.
🔹 F. Disclosures and Transparency
Section 134: Directors’ Report must include:
Financial statements
Director responsibility statement
CSR, risk management policies
Related party transactions
Section 92: Annual Return
Section 129: Financial statements must comply with accounting standards.
Governance Role: Promotes openness and stakeholder confidence.
🔹 G. Serious Fraud Investigation Office (SFIO) (Section 211–212)
SFIO can investigate serious corporate frauds.
Strengthens enforcement of governance norms.
⚖️ 4. Key Case Law
🏛️ Tata Consultancy Services v. Cyrus Mistry (2021)
Supreme Court of India
Issue: Removal of Cyrus Mistry as Executive Chairman of Tata Sons.
Mistry alleged oppression and mismanagement.
Supreme Court upheld the decision of Tata Sons.
Corporate Governance Relevance:
Affirmed that decisions made with majority and in compliance with law are not automatically oppressive.
Highlighted the importance of boardroom discipline and management autonomy.
🏛️ Satyam Computer Services Ltd. Scandal (2009)
Not a case name but a key corporate governance failure
Falsification of accounts by the promoter Ramalinga Raju.
Exposed loopholes in audit and board oversight.
Result:
Strengthened provisions in Companies Act, 2013 (e.g., mandatory audit committee, independent directors).
Paved way for improved corporate governance norms.
🏛️ National Textile Workers’ Union v. P.R. Ramakrishnan (1983)
Supreme Court of India
Recognized that workers are also stakeholders in corporate governance.
Affirmed that governance must consider all stakeholders, not just shareholders.
🏛️ ICICI Bank v. Shareholders (Chanda Kochhar Case)
Accusations of conflict of interest and quid pro quo involving the CEO.
Highlighted the need for a strong and independent board to take action against top management when necessary.
Governance Impact:
Reinforced the need for transparency and disclosure in senior-level decision-making.
📊 5. Corporate Governance & SEBI (for listed companies)
Though this extends beyond the Companies Act, it’s important to note:
SEBI’s Listing Obligations and Disclosure Requirements (LODR) Regulations, 2015 impose stricter corporate governance norms on listed companies.
Aligns closely with the Companies Act provisions.
📌 6. Summary Table
| Corporate Governance Aspect | Companies Act Provision | Governance Role |
|---|---|---|
| Board Composition | Sec. 149 | Diversity and independence |
| Independent Directors | Sec. 149(6) | Objective judgment |
| Audit Committee | Sec. 177 | Financial integrity |
| Nomination Committee | Sec. 178 | Fair appointments |
| CSR | Sec. 135 | Ethical social responsibility |
| Disclosures | Sec. 134, 92 | Transparency |
| SFIO | Sec. 211–212 | Fraud detection |
| Stakeholder Grievance | Sec. 178(5) | Investor confidence |
✅ Conclusion
The Companies Act, 2013 marks a paradigm shift in corporate governance in India by making it more structured, transparent, and accountable. It incorporates global best practices, ensures independent oversight, mandates disclosures, and empowers stakeholders.
Corporate governance is no longer a matter of voluntary compliance — it is a legal and ethical obligation under the Act, and case law has reinforced its importance in protecting both corporate integrity and stakeholder interests.
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