Director Notes

A Brief Overview of
Corporate Governance Reforms in India
by Afra Afsharipour

Since the late 1990s, Indian regulators as well as industry representatives and companies
have undertaken significant efforts to overhaul the countrys corporate governance. These
reform initiatives have been revived or accelerated following the Satyam scandal of 2009.
The current corporate governance regime in India straddles both voluntary and mandatory requirements: for listed companies, the vast majority of Clause 49 requirements are
mandatory; it remains to be seen whether some of the more recent voluntary corporate
governance measures will become mandatory for all companies through a comprehensive
revision of the Companies Act.
Over the past 15 years there has been a sea change in
Indian corporate governance. The needs of Indias expanding economy, including access to foreign direct investment,
the increased presence of institutional investors (both
domestic and foreign), and the growing desire of Indian
companies to access global capital markets by being listed
on stock exchanges outside of India, have spurred corporate governance laws.1 Indias corporate governance
reforms were initially spearheaded by corporate India and
quickly became an important component of the work of
the countrys primary capital markets regulatory authority, the Securities Exchange Board of India (SEBI), and the
Ministry of Corporate Affairs (MCA).

No. DN-020

december 2010

Beginning in the late 1990s, the Indian government began to

undertake a significant overhaul of the countrys corporate
governance system.2 After lobbying by large firms and leading industry groups, SEBI in 2000 introduced unprecedented
corporate governance reforms via Clause 49 of the Listing
Agreement of Stock Exchanges.3 Clause 49, a seminal event
in Indian corporate governance, established a number of
governance requirements for listed companies with a focus
on the role and structure of corporate boards, internal controls and disclosure to shareholders. (See Clause 49: Details,
p. 7.) These reforms were phased in over several years, and now
apply to thousands of listed Indian companies. (See Corporate
Governance Developments in India: A Timeline, p. 2.)

Corporate Governance Development in India: A Timeline

Irani Committee
(MCA Appointed)

Enactment of Clause 49

Companies Bill (2009)

Considered

Chandra Committee
(MCA Appointed)
Clause 49 Amendments
Implemented

Murthy Committee
(SEBI Appointed)

CII CG Taskforce

1996

MCA Voluntary
CG Guidelines

1998

2000

2002

2004

Clause 49 Amended

Birla Committee
(SEBI Appointed)
CII Code

2006

2008

NASSCOM CG
Recommendations

2010
Listing Agreement Amended
CII CG Recommendations

Companies Bill (2003)

Considered

Satyam Scandal
Companies Bill (2008)
Considered

Indias corporate governance reform efforts did not cease

after adoption of Clause 49. In January 2009, the Indian
corporate community was rocked by a massive accounting
scandal involving Satyam Computer Services (Satyam),
one of Indias largest information technology companies.4
(See The Satyam Scandal, p. 4). The Satyam scandal
prompted quick action by the Indian government, including the arrest of several Satyam insiders and auditors,
investigations by the MCA and SEBI, and substitution
of the companys directors with government nominees.5
As a result of the scandal, Indian regulators and industry
groups have advocated for a number of corporate governance reforms to address some of the concerns raised by
the Satyam scandal. Some of these responses have moved
forward, primarily through introduction of voluntary
guidelines by both public and private institutions. However,
corporate governance measures through comprehensive revision of the Companies Act (1956)6 have yet to be
enacted.
This report briefly outlines the process undertaken to
reform Indias corporate governance laws. It also provides
an overview of Clause 49, the pending corporate governance-related provisions in the Companies Bill (2009),7 and
the MCAs Corporate Governance Voluntary Guidelines
(2009).8

Overall, Indias corporate governance reform efforts reflect

the following:

Significant industry involvement in assisting the government

with crafting corporate governance measures;

Substantial focus on improving the function and structure of

company boards, including (i) emphasis on the independence
of the board of directors, and (ii) an increased role for audit
committees; and

Noteworthy increase in disclosure to public shareholders.

The First Phase of Indias Corporate

Governance Reforms: 1996-2008
Indias corporate governance reform efforts were initiated
by corporate industry groups, many of which were instrumental in advocating for and drafting corporate governance guidelines. Following vigorous advocacy by industry
groups, SEBI proceeded to adopt considerable corporate
governance reforms. The first phase of Indias corporate
governance reforms were aimed at making boards and
audit committees more independent, powerful and focused
monitors of management as well as aiding shareholders,
including institutional and foreign investors, in monitoring management.9 These reform efforts were channeled
through a number of different paths with both SEBI and
the MCA playing important roles.

Director Notes A Brief Overview of Corporate Governance Reforms in India

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The role of industry Indias first major corporate governance reform proposal was launched by the Confederation
of Indian Industry (CII), Indias largest industry and business association. In 1996, the CII formed a task force to
develop a corporate governance code for Indian companies.
Desirable Corporate Governance: A Code (CII Code) for
listed companies was proposed by the CII in April 1998.10
The CII Code contained detailed governance provisions
related to listed companies, although it was voluntarily
adopted by only a few companies and did not result in
a broad overhaul of governance norms and practices by
Indian companies.11

Indian companies, banks and nancial

institutions (FIs) can no longer afford to
ignore better corporate practices. As India gets
integrated in the world market, Indian as well
as international investors will demand greater
disclosure, more transparent explanation for
major decisions and better shareholder value.

Strong corporate governance is thus

indispensable to resilient and vibrant capital
markets and is an important instrument of
investor protection. It is the blood that lls
the veins of transparent corporate disclosure
and high-quality accounting practices. It is
the muscle that moves a viable and accessible
nancial reporting structure. Without
nancial reporting premised on sound, honest
numbers, capital markets will collapse upon
themselves.
Birla Committee Report,
1999.

Desirable Corporate Governance,

Confederation of Indian Industry (CII), 1998.

SEBI-appointed committees and the adoption of Clause

49 Shortly after introduction of the CII Code, SEBI
appointed the Committee on Corporate Governance (the
Birla Committee). In 1999, the Birla Committee submitted a report to SEBI to promote and raise the standard of
Corporate Governance for listed companies.12 The Birla
Committees recommendations were primarily focused on
two fundamental goalsimproving the function and structure of company boards and increasing disclosure to shareholders. With respect to company boards, the committee
made specific recommendations regarding board representation and independence that have persisted to date in
Clause 49.13 The committee also recognized the importance of audit committees and made many specific recommendations regarding the function and constitution of
board audit committees.14 The Birla Committee also made
several recommendations regarding disclosure and transparency issues, in particular with respect to information
provided to shareholders. Among other recommendations,
the Birla Committee stated that a companys annual report
to shareholders should contain a Management Discussion
and Analysis (MD&A) section, and that companies should

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transmit certain information, such as quarterly reports and

analyst presentations, to shareholders.15

SEBI implemented the Birla Committees proposals less

than five months later, in February 2000. At that time,
SEBI revised its Listing Agreement to incorporate the
recommendations of the countrys new code on corporate
governance. These rulescontained in Clause 49, a new
section of the Listing Agreementtook effect in phases
between 2000 and 2003. The reforms applied first to newlylisted and large companies, then to smaller companies, and
eventually to the vast majority of listed companies.16
In the wake of the Enron scandal and the adoption of the
Sarbanes-Oxley Act in the United States, SEBI formed
the Narayana Murthy Committee in order to evaluate the
adequacy of the then-existing Clause 49, to further enhance
the transparency and integrity of Indias stock markets
and to ensure compliance with corporate governance
codes, in substance and not merely in form.17 The Murthy
Committee stated that recent corporate governance failures, particularly in the United States, combined with the
observations of Indias stock exchanges that compliance
with Clause 49 up to that point had been uneven, compelled the Committee to recommend further reform.18
Like the Birla Committee, the Murthy Committee examined a range of corporate governance issues relating to
boards and audit committees, as well as disclosure to shareholders. The committee focused heavily on the role and
structure of corporate boards and strengthened the director independence definition in the then-existing Clause 49,

Director Notes A Brief Overview of Corporate Governance Reforms in India

The Satyam Scandal

Satyam Computer Services was a publicly traded company listed on the Bombay Stock Exchange (BSE) and the
National Stock Exchange (NSE) in India, and cross-listed on
the New York Stock Exchange (NYSE) in the United States.
While Satyams promoters, represented by Mr. Ramalinga
Raju and his family, held 8 percent of the shares in the
company at the end of 2008, the company had a majority
independent Board of Directors comprised of several Indian
luminaries. Described as a gold-plated group, Satyams
independent directors included a Harvard Business School
professor, the then-dean of the Indian School of Business
and a former Indian cabinet secretary in India.a
In early 2009, Satyam experienced two related scandals,
the first an aborted related-party transaction involving the
companys promoters, the second the uncovering of colossal fraud in the companys financial statements.
The Maytas transaction On December 16, 2008,
Satyams Board convened a meeting to consider the
proposed acquisition of Maytas Infra Limited and Maytas
Properties Limited, companies focused on real estate
and infrastructure development.b Two major issues in
the proposed transaction surfaced. First, the Maytas
companies were focused on real estate and infrastructure development two industries unrelated to Satyams
core information technology business.c Second, the Raju
family owned approximately 30 percent of the Maytas
companies.d If effected, this related-party transaction
would have resulted in a significant amount of cash flowing from Satyam . . . to its individual promoters, the Raju
family.e While several of Satyams independent directors
questioned the proposed transaction, the board eventually adopted a resolution to proceed with the proposed
acquisition. Satyam notified the stock exchanges of the
board approval as required under the listing agreement.f
The market reacted badly to the news, and the company
quickly withdrew the Maytas proposal.g

Financial fraud On January 7, 2009, shortly after the

failed Maytas transaction, Raju confessed to falsifying the
financial statements of the company, including balance
sheet errors showing fictitious cash assets of over US
$ 1 billion.h The confession furthered revealed that the
proposed Maytas acquisitions were just illusory transactions intended to manipulate the balance sheet of Satyam
and to wipe out inconsistencies therein. i As a result of
this information, Satyams stock price dropped another 70
percent, essentially obliterating the wealth of the Satyam
shareholders. j
The aftermath As a result of the scandal, the MCA,
Government of India, and the SEBI initiated investigations.k
The police arrested Raju, Satyams managing director, and
the companys CFO within a few days of the confession.l
Two partners from Lovelock & Lewis, an Indian affiliate
of PriceWaterhouseCoopers and Satyams auditor, were
also arrested.m Further, the government nominated and
replaced remaining Satyam board members with candidates of its choice.n Under the new leadership, Satyam
was able to make a remarkable turnaround.o In April 2009,
Tech Mahindra purchased the company through a global
bidding process. p
The concerns raised by the Satyam scandal reverberated
in corporate India more broadly. For example, in a recent
study, the authors found evidence of mass resignations
of independent directors of Indian firms following Satyam
with at least 620 independent directors resigning in
2009 alone a figure that is . . . by far without precedent
globally.q
a

See Vikramaditya Khanna & Shaun J. Mathew, The Role of

Independent Directors in Controlled Firms in India: Preliminary
Interview Evidence, 22 NAT. L. SCH. IND. REV. 35, 41 (2010).

See Omkar Goswami, Satyam: The Tasks Ahead, Business Standard,

Jan. 21, 2009.

Umakanth Varottil, Evolution and Effectiveness of Independent

Directors in Indian Corporate Governance, Hastings Business Law
Journal, p. 334.

Director Notes A Brief Overview of Corporate Governance Reforms in India

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Id., p. 334.

Id., p. 334.

Id., p. 335; see also N Balasubramanian, Is corporate

governance mere lip service?, The Economic Times, Dec.
23, 2008; Satyam independent directors watching situation,
Hindu, Dec. 27, 2008.

See Varottil, Evolution and Effectiveness of Independent

Directors in Indian Corporate Governance, p. 335;
Somasekhar Sundaresan, Year of Al-Pervasive Poor
Governance, Business Standard, Dec. 29, 2008; see also S.
Nagesh Kumar, Independent Directors Put Tough Questions,
But Gave Blank Cheque, The Hindu, Jan. 14, 2009.

See It was like riding a tiger, not knowing how to get off
without being eaten, Financial Express, Jan. 8, 2009;
Mandar Nimkar, How much is Satyams stock actually
worth?, The Economic Times, Jan. 8, 2009; Heather Timmon
& Jeremy Kahn, Indian Company in a Fight to SurviveN.Y.
Times, Jan. 9, 2009.

Varottil, Evolution and Effectiveness of Independent

Directors in Indian Corporate Governance, p. 337.

Id.

See Oomen A. Ninan, Satyam Episode: SEBI Enquiries Will

Focus on Three Areas, The Hindu Business Line, Jan. 16,
2009; Souvik Sanyal, Government Refers Satyam Case to
Serious Frauds Investigation Office, The Economic Times,
Jan. 13, 2009.

See Satyam Fraud: Raju Sent to Central Prison; CFO

Vadlamani Arrested, The Economic Times, Jan. 10, 2009;
Satyams Raju Brothers Arrested by AP Police, The
Economic Times, Jan. 9, 2009.

m See Jackie Range, Pricewaterhouse Partners Arrested in

Satyam Probe, Wall Street Journal Asia, Jan. 25, 2009.
n

Mukesh Jagota & Romit Guha, India Names New Satyam

Board, Wall Street Journal, Jan. 12, 2009.

Varottil, Evolution and Effectiveness of Independent

Directors in Indian Corporate Governance, p. 338.

Id. at 59.

Khanna and Mathew, p. 36; see also Rajesh Chakrabarti,

Krishnamurthy Subramanian, and Frederick Tung,
Independent Directors and Firm Value: Evidence from an
Emerging Market 2 (June 28, 2010), available at http://ssrn.
com/abstract=1631710 (detailing exodus of independent
directors following the Satyam scandal).

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particularly to address the role of insiders.19 For example,

while the new definition actually encompassed the old, it
also indicated, among other things, that the director cannot be related to promoters or management at the board
level, or one below the board; an executive of the company
in the preceding three years; a supplier, service provider,
or customer of the company; or a shareholder owning 2
percent or more of the company.20 The Murthy Committee
also recommended that nominee directors (i.e., directors
nominated by institutions, particularly financial institutions, with relationships with the company) be excluded
from the definition of independent director, and be subject
to the same responsibilities and liabilities applicable to
any other director.21 In order to improve the function of
boards, the Murthy Committee recommended that board
members should also receive training in the companys
business model22 and quarterly reports on business risk
and risk management strategies.23
The Murthy Committee paid particular attention to the
role and responsibilities of audit committees. It recommended that audit committees be composed of financially literate members,24 provided a greater role for the
audit committee,25 and stated that whistleblowers should
have access to the audit committee without first having to
inform their supervisors. Further, the committee required
that companies should annually affirm that they have not
denied access to the audit committee or unfairly treated
whistleblowers generally.26
In 2004, SEBI further amended Clause 49 in response to
the Murthy Committees recommendations.27 However,
implementation of these changes was delayed until January
1, 2006 due primarily to industry resistance and lack of
preparedness to accept such wide-ranging reforms.28 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.

Director Notes A Brief Overview of Corporate Governance Reforms in India

Corporate governance is the acceptance

by management of the inalienable rights
of shareholders as the true owners of the
corporation and of their own role as trustees
on behalf of the shareholders. It is about
commitment to values, about ethical business
conduct and about making a distinction
between personal and corporate funds in the
management of a company.
Murthy Committee Report, 2003.

Clause 49, as currently in effect, includes the following key

requirements:

Board Independence Boards of directors of listed companies must have a minimum number of independent directors.
Where the Chairman is an executive or a promoter or related
to a promoter or a senior official, then at least one-half the
board should comprise independent directors; in other cases,
independent directors should constitute at least one-third of
the board size.

Audit Committees Listed companies must have audit committees of the board with a minimum of three directors, two-thirds
of whom must be independent; in addition, the roles and
responsibilities of the audit committee are specified in detail.

Disclosure Listed companies must periodically make various

disclosures regarding financial and other matters to ensure
transparency.

CEO/CFO certification of internal controls The CEO and

CFO of listed companies must (a) certify that the financial
statements are fair and (b) accept responsibility for internal
controls.

Annual Reports Annual reports of listed companies must

carry status reports about compliance with corporate governance norms.

have led to proposed amendments to the Companies

Act, although such amendments have not yet resulted in
legislation.
In August 2002, the MCA formed the Chandra Committee.
Chaired by Shri Naresh Chandra, a former Cabinet secretary, the committee was charged with undertaking a wideranging examination of corporate auditing and independent
directors, although its report focused primarily on auditing
and disclosure matters.29 The Chandra Committee made a
series of recommendations regarding, among other matters,
the grounds for disqualifying auditors from assignments, the
type of non-audit services that auditors should be prohibited from performing, and the need for compulsory rotation of audit partners.30 While the recommendations of the
Chandra Committee did not result in legislative changes,
certain of its recommendations were incorporated in the
report put forth by the Murthy Committee.31
In December 2004, the MCA convened the Irani Committee,
led by J.J. Irani, a director of Tata Sons, Ltd.32 The Irani
Committee was charged with evaluating the Companies
Act, with a focus on combining internationally accepted
best practices in corporate governance with attention to the
particular needs of the growing Indian economy. Many of
the committees recommendations were incorporated into
proposed amendments to the Companies Act. These changes
would apply to all Indian firms and not just those listed on
the stock exchanges, and thus would introduce an entirely
new corporate governance framework for many Indian
firms. For example, the concept of independent director
is proposed under the bill to be introduced in the Indian
Companies Act for the first time.33 Companies that have
a prescribed minimum share capital are required to have a
board with at least one-third independent directors.

See Clause 49: Details, p. 7.

MCA-appointed committees and proposed amendments
to the Indian Companies Act In addition to SEBIs corporate governance reforms that are only applicable to listed
companies, the MCA undertook efforts in the early 2000s
to reform the Companies Act to reflect more rigorous corporate governance provisions for all Indian companies. To
date, the MCA has commissioned two separate committees
to examine the Companies Act with respect to corporate
governance provisions. The reports of these committees

Director Notes A Brief Overview of Corporate Governance Reforms in India

Corporate Governance goes far beyond access

to capital. Taking a narrow view of Corporate
Governance as limited to public issue of capital
and the processes that follow would be to the
detriment of corporate entities themselves.
Equally, the capital market regulator has to
play a central role in public access to capital
by the companies and must have the necessary
space to develop suitable frameworks in tune
with the uidity of the capital markets.
Irani Committee Report, 2005.

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Clause 49: Details

The main components of Clause 49 are summarized below:
Board of Directors:
Independence
Requirement 50 percent independent directors if Chairman is an
executive director or 33 percent if
Chairman is a non-executive.

Definition no material pecuniary

relationship or transactions with the
company, its promoters, its management or its subsidiaries, not related
to Board or one level below Board
and no prior relationship with the
Company for the last three years.

Nominee Directors of Financial Insti-

Broad role review statutory and

internal auditors as well as internal
audit function, oversee a companys
financial reporting process and
quality of disclosure of financial information, and review whistleblower
program if one exists, among other
things.

Powers to (i) investigate any activity within its terms of reference; (ii)
seek information from any employee; (iii) obtain outside legal or
other professional advice; and (iv)
secure attendance of outsiders with
relevant expertise, if necessary.

tutions considered independent.

Disclosures:
Board Requirements & Limitations
Meet four times a year (maximum
three months between meetings).

Director may be on at most 10 committees and chair of at most five.

Code of Conduct (Ethics) required.

Audit Committee:
Composition
At least three directors (two-thirds
must be independent).

All members must be financially

literate and at least one of them
must have accounting or related
financial management expertise.

Chairman of the committee should

be an independent director, who
should be present at Annual General
Meeting to answer shareholder
queries.
Audit Committee Role & Powers
Minimum of four meetings per year
(gap between meetings not exceed
four months).

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Related party transactions.

Accounting treatments and
departures.

mandatory recommendation with

their reasons should be specifically
highlighted.

For appointment or re-appointment

of a director, shareholders must be
provided with the following information: (i) a brief resume of the
director; (ii) nature of his expertise
in specific functional areas; and
(iii) companies in which he holds
directorships.

Information like quarterly results,

presentation made by companies
to analysts, etc., should be put on
the companys web-site and sent
in such a form so as to enable
the stock exchange on which the
company is listed to put on its own
web-site.
Certifications:

Risk management.
Annual report includes a detailed
chapter on MD&A, including a
discussion on industry structure and
developments, opportunities and
threats, segment-wise or productwise performance, outlook, risks and
concerns, internal control systems
and their adequacy, relating financial performance with operational
performance, and issues relating to
human resource development.

Proceeds from offerings.

Compensation for directors
(including non-executives) and
obtain shareholders approval.

Details of compliance history for

last three years.

CEO & CFO: financial statements;

effectiveness of internal controls;
legal transactions; and inform
audit committee of any significant
changes in the above.

Auditor or Company Secretary

certifies compliance with corporate
governance.
Other Recommendations:

Whistleblower policy is optional.

Independent directors lose status as
independent if they served nine
years at company.

Training board members.

Evaluate non-executive board
performance.

Corporate governance reports (and

disclose adoption, if any, of mandatory and non-mandatory requirements). Noncompliance with any

Director Notes A Brief Overview of Corporate Governance Reforms in India

The Irani Committee recognized that requirements of

special or small companies be accounted for through a
series of exemptions, so that smaller businesses would not
burdened with the same level of compliance costs as larger,
established corporations. In keeping with this theme, the
Irani Committee recommended a wider set of classifications for companies than just the public or private labels,
as the committee believed that the binary system of classification was too narrow to account for the varying needs
of companies with different sizes and resources.34 The
Committees goal was to expand the system of classifications and exemptions to tailor compliance costs to needs,
while maintaining sufficient regulatory stringency for large
listed companies that access public capital.35

The Second Phase of Reform:

Corporate Governance After Satyam
Indias 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.38 As described below, Indian regulators and

While there are many similarities between the corporate

governance provisions of Clause 49 and the recommendations of the Irani Committee, there were some significant differences with respect to the board of directors, in
particular as related to independent directors. As discussed
below, these differences are reflected in the proposed
amendments to the Companies Act.
On August 5, 2009, the Companies Bill, 2009 was introduced in the Lok Sabha, the directly elected lower house
of the Indian Parliament, in the same form in which it
was presented in 2008.36 (See Corporate Governance
Provisions of the Companies Bill (2009), at right).
However, passage of the bill has been deferred, and it is
expected that the Companies Bill will be further amended
as a result of an August 2010 report by the Standing
Committee on Finance of Parliament, which examined
the 2009 bill in great detail.37 According to the Standing
Committees report, the MCA has accepted that some of
the matters included in the 2009 Voluntary Guidelines,
discussed below, should be included in a revised bill. These
include the separation of the roles of chairman and chief
executive; the attributes and tenure of independent directors; board evaluation; the appointment of auditors; and
the rotation of audit partners and firms.
The table in the Appendix sets forth some of the existing
differences with respect to public company independent
directors among Clause 49, the Companies Bill (2009) and
the MCAs proposed amendments to the Companies Bill as
a result of the 2010 report by the Standing Committee on
Finance.

Director Notes A Brief Overview of Corporate Governance Reforms in India

Corporate Governance Provisions of the

Companies Bill (2009)
The current provisions of the Companies Bill as related
to the function and independence of the Board of
Directors and its audit committee include:
Auditors and Audit Committee

The Audit Committee shall consist of a minimum of

three directors with independent directors forming a
majority and at least one director having knowledge
of financial management, audit or accounts.

The chair of the Audit Committee must be an independent director.

Eligibility

A person shall be eligible for appointment as an auditor of a company only if he is a Chartered Accountant
in practice.

Where a firm is appointed as an auditor of a company,

only the partners who are Chartered Accountants in
practice shall be authorized by the firm to act and
sign on behalf of the firm.

None of the following persons shall be eligible for

appointment as an auditor of a company, namely: a
body corporate;a an officer or employee of the company; a person who is a partner, or who is in the employment, of an officer or employee of the company;
a person who, or his relative or partner is holding
any security of the company or its subsidiary of value
in terms of such percentage as may be prescribed;

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industry groups have advocated for a number of corporate

governance reforms to address some of the concerns raised
by the Satyam scandal.

In late 2009, a CII task force put forth corporate governance reform recommendations.41 In its report the CII
emphasized the unique nature of the Satyam scandal, noting that Satyam is a one-off incident . . . The overwhelming majority of corporate India is well run, well regulated
and does business in a sound and legal manner.42

Industry response Shortly after news of the scandal broke,

the CII began examining the corporate governance issues
arising out of the Satyam scandal.39 Other industry groups
also formed corporate governance and ethics committees
to study the impact and lessons of the scandal.40

is indebted to the company; or has given a guarantee or

provided any security in connection with the indebtedness of any third person to the company for such amount
as may be prescribed.

No person shall hold office as a director in more than 15

companies.
Independent Directors

Nonexecutive director (NED) of the company, other than

Powers and Duties of Auditors and Auditing Standards

a nominee director, who is a person of integrity and possesses relevant expertise and experience.

Every auditor of a company shall have a right of access

at all times to the books of account and vouchers of the
company, and may request any necessary information
from the officers of the company.

Who, neither himself nor any of his relatives has or had

any pecuniary relationship or transaction with the company, amounting to 10 percent or more of its gross turnover
or total income during the two immediately preceding
financial years or during the current financial year; holds
or has held any senior management position, position of
a key managerial personnel or is or had been employee of
the company in any of the three financial years immediately preceding the financial year in which he is proposed
to be appointed; holds together with his relatives 2 percent or more of the total voting power of the company.

The auditors report shall also state whether he has

obtained all the information and explanations which were
necessary for the purpose of his audit; whether proper
books of account as required by law have been kept by
the company; whether the companys balance sheet and
profit and loss account dealt with in the report are in
agreement with the books of account and returns; whether the financial statements comply with the accounting
standards and the auditing standards; the observations or
comments of the auditors which have any adverse effect
on the functioning of the company; whether any director
is disqualified from being appointed as a director under;
any qualification, reservation or adverse remark relating
to the maintenance of accounts and other matters connected therewith.
Appointment and Qualification of Directors

Meeting of the Board and Its Powers

The Board must meet a minimum of four times a year with

not more than 120 days between consecutive meetings.

The participation of directors in a meeting of the Board

may be either in person or through video conferencing or
such other electronic means, as may be prescribed.

The Board must establish the Audit Committee and the

Remunerations Committee.

Every listed public company having such amount of paidup share capital as may be prescribed shall have at the
least one-third of the total number of directors as independent directors.

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A body corporate is a defined terms under the India Companies Act,

and includes companies incorporated in or outside of India.

Director Notes A Brief Overview of Corporate Governance Reforms in India

Large, highly visible and publicized corporate

scandals often provoke legislative and
regulatory actions. CII advocates caution
against overregulating. It needs to be
recognized that while the super-structure
of corporate governance is built on laws and
regulations, these cannot be anything more
than a basic framework. Much of best-inclass corporate governance is voluntaryof
companies taking conscious decisions of going
beyond the mere letter of law.
Report of the CII Task Force on Corporate Governance,
Confederation of Indian Industries, 2009.

In addition to the CII, the National Association of

Software and Services Companies (NASSCOM, selfdescribed as the premier trade body and the chamber
of commerce of the IT-BPO industries in India)43 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.44 The Committee issued its recommendations in mid-2010, focusing on stakeholders in the company.
The report emphasizes recommendations related to the
audit committee and a whistleblower policy. The report
also addresses improving shareholder rights. The Institute
of Company Secretaries of India (ICSI) has also put forth a
series of corporate governance recommendations.45

In early 2010, SEBI amended the Listing Agreement to

add provisions related to the appointment of the CFO by
the audit committee and other matters related to financial
disclosures.47 However, other proposals such as rotation of
audit partners were not included in the amendment of the
Listing Agreement.48

MCA actions
Inspired by industry recommendations, including the influential CII recommendations, in late 2009 the MCA released
a set of voluntary guidelines for corporate governance.49
The Voluntary Guidelines address a myriad of corporate
governance matters including:

independence of the boards of directors;

responsibilities of the board, the audit committee, auditors,

secretarial audits; and

mechanisms to encourage and protect whistleblowing.50

Important provisions include:51

i.

Issuance of a formal appointment letter to directors.

ii.

Separation of the office of chairman and the CEO.

iii.

Institution of a nomination committee for selection of

directors.

iv.

Limiting the number of companies in which an individual can become a director.

v.

Tenure and remuneration of directors.

vi.

Training of directors.

vii.

Performance evaluation of directors.

viii.

Additional provisions for statutory auditors.

Government response Satyam prompted quick action by

both SEBI and the MCA.

SEBI actions
In September 2009 the SEBI Committee on Disclosure
and Accounting Standards issued a discussion paper that
considered proposals for:

appointment of the chief financial officer (CFO) by the audit

committee after assessing the qualifications, experience and
background of the candidate;

rotation of audit partners every five years;

voluntary adoption of International Financial Reporting Standards (IFRS);

interim disclosure of balance sheets (audited figures of major

heads) on a half-yearly basis; and

10

streamlining of timelines for submission of various financial

statements by listed entities as required under the Listing
Agreement.46

See MCA Voluntary Guidelines: A Closer Look, p. 12.

In discussing the voluntary nature of the guidelines,
Corporate Affairs Secretary, R. Bandyopadhyay, stated
that the MCA did not want to enact a rigid, mandatory
law.52 However, the MCA also indicated that the guidelines
are a first step and that the option remains open to perhaps
move to something more mandatory.53 In fact, certain
voluntary aspects of the guidelines, such as the separation
of the office of chairman and CEO, have now been recommended for enactment in amendments to the Companies
Bill pending in Parliament.54

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The guidelines are not intended to be a

substitute for or addition to the existing laws
but are recommendatory in nature. While it
is expected that more and more corporations
should make sincere efforts to consider
adoption of the guidelines, there may be
genuine reasons for some companies in not
being able to do so completely. In such a case
it is expected that such companies should
inform their shareholders about the reasons
for not adopting these guidelines either fully or
partially.

The top private sector firms have largely complied with

Clause 49 and appear to have benefited from the more robust
corporate governance rules imposed by Clause 49. For example, a recent event study of the impact of Clause 49 reforms
on the market value of Indian firms found a significant
rise in the share price of large firms following SEBIs initial
announcement to adopt corporate governance reforms similar to those proposed by the CII.61 Furthermore, the study
found that fast-growing and cross-listed firms both reacted
more positively than other firms, consistent with the theory
that faster-growing firms are more likely to raise equity
capital, and may benefit more from the bonding to good
governance and cross-listed firms may have greater investment by governance-sensitive foreign investors.62

MCA Voluntary Guidelines, 2009.

While large corporate entities have been relatively successful at implementing Clause 49s reforms, PSUs and
small- and medium-sized enterprises have struggled with
the implementation process. For example, in January 2006,
when revisions to Clause 49 went into effect, the top 10 private sector companies were all in compliance.63 In marked
contrast to top private sector companies, PSUs were mostly
noncompliant with Clause 49 by large margins at the time
it went into effect.64 Moreover, as of December 2009, 21 of
43 listed PSUs do not have the required number of independent directors under Clause 49.65

Compliance and Enforcement

Clause 49 sets forth a strong corporate governance framework, however, compliance with and enforcement of this
framework leave much to be desired. While many of the
largest independent public companies appear to have little
difficulty complying with Clause 49, public sector undertakings (PSUs)55 and smaller companies have struggled
to meet Clause 49s requirements. But, there has been little
effort to bring enforcement actions against non-compliant
companies.
Compliance Despite the fact that Clause 49s requirements have been in place for listed companies since 2006,
compliance remains incomplete across corporate India.56
Clause 49 compliance is reported by listed companies who
must submit a quarterly report, signed by the CEO or
the Compliance officer, to stock exchanges within fifteen
days from the close of quarter.57 Moreover, the companys
annual report must contain a separate section on corporate
governance. To date, companies listed on the NSE, which
has grown rapidly in the past several years, have more fully
complied with Clause 49 regulations than have BSE-listed
companies.58 As of December 31, 2009, 88 of the companies listed on the NSE, or approximately 6 percent, have
failed to submit Clause 49 compliance reports, while 1103
of the companies listed on the BSE have failed to submit
such reports.59 The compliance ratio of BSE companies is
quite low, at approximately 50 percent, when one considers that a large proportion of BSE companies are either
suspended or placed under the Z group of BSE.60

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Enforcement Clause 49 contained certain penalty provisions

for noncompliance. While the initial penalty for failure to comply with Clause 49 was delisting, severe financial penalties for
directors of non-compliant firms were introduced in 2004.66
Despite statutory penalties for non-compliance, there
appears to be little enforcement of Clause 49. To date,
SEBI has not provided much public disclosure regarding its
enforcement efforts. What is known, at least with respect to
large entities, is that there has been little use by SEBI of the
delisting enforcement measure provided under Clause 49,
even for companies that have failed to comply with Clause
49s board independence rules.67
SEBIs first enforcement actions were not brought until
2007, almost seven years after Clause 49 was put into place.
SEBIs 2007 adjudication proceedings were brought against
only 20 out of the hundreds of noncompliant companies.
Though it did not disclose all of the names of the companies, SEBI indicated 15 were private companies and five
were PSUs.68 However, SEBI later abandoned the enforcement actions against the PSUs after significant political
pressure.69

Director Notes A Brief Overview of Corporate Governance Reforms in India

11

MCA Voluntary Guidelines: A Closer Look

I. Board of Directors
Appointment of Directors

Companies should issue formal letters of appointment to

Non-Executive Directors (NEDs) and Independent Directors - as is done by them while appointing employees and
Executive Directors. Such a formal letter should form a
part of the disclosure to shareholders at the time of the
ratification of his/her appointment or re-appointment to
the Board.

The offices of chairman of the board and chief executive

officer should be separate.

The companies may have a Nomination Committee comprised of a majority of Independent Directors, including
its Chairman. A separate section in the Annual Report
should outline the guidelines being followed by the Nomination Committee and the role and work done by it during
the year under consideration.

Independent Directors and NEDs should hold no more

than seven directorships.

terms. They must leave for three years before serving

another term, and they may not serve more than three
tenures for a company.

Independent Directors should have the ability to meet

with managers and should have access to information.
Remuneration of Directors

NEDs should be paid either a fixed fee or a percentage of

profits; whichever payment method is elected should apply to all NEDs. NEDs paid with stock-options should hold
onto those options for three years after leaving the board.

Independent Directors should not be paid with stock options or profit-based commission.

The Remuneration Committee should have at least three

members, the majority NEDs, with at least one Independent Director. Their decisions should be made available in
the Annual Report.
II. Duties of the Board

Independent Directors

The Board should provide training for the directors.

The Board should put in place a policy for specifying posi-

The Board should enable quality decision-making by giv-

tive attributes of Independent Directors such as integrity,

experience and expertise, foresight, managerial qualities
and ability to read and understand financial statements.
Disclosure about such policy should be made by the
Board in its report to the shareholders. Such a policy may
be subject to approval by shareholders.

All Independent Directors should provide a detailed Certificate of Independence at the time of their appointment,
and thereafter annually. (The actual director is to certify
her independence based on the board policy as set forth
above. According to the MCAs Voluntary Guidelines,
the certificate of independence is to be provided by the
independent director and placed on the companys website and on the website of the stock exchange where the
companys shares are listed.)

12

Independent Directors should be restricted to six-year

ing the members timely access to information.

The Board should put in systems of risk management and

review them every six months.

The Board should review its own performance annually

and state its methods in its Annual Report.

The Board should put in a system to ensure compliance

with the law, which should be reviewed annually. All
agenda items should be assessed for its impact on minority shareholders.

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Conclusion
III. Audit Committee of Board

The Audit Committee should be composed of at least

three members, with Independent Directors in the
majority and an Independent Director as the chairperson.

The Audit Committee is responsible for reviewing the

integrity of financial statements, the companys internal
financial controls, internal audit function and risk management systems. The Audit Committee should also
monitor and approve all Related Party Transactions.

Since the late 1990s, significant efforts have been taken

by Indian regulators, as well as by Indian industry representatives and companies, to overhaul Indian corporate
governance. Not only have reform measures been put into
place prior to discovery of major corporate governance
scandals, but both industry groups and government actors
have sprung into action following the Satyam scandal. The
current corporate governance regime in Indian straddles
both voluntary and mandatory requirements. For listed
companies, the vast majority of Clause 49 requirements
are mandatory. It remains to be seen whether some of the
more recent voluntary corporate governance measures will
become mandatory for all companies through a comprehensive revision of the Companies Act.

IV. Auditors

The Committee should be consulted on the selection

of auditors. The committee must be supplied with
relevant information about the auditing firm.

Endnotes
1

See Bernard S. Black & Vikramaditya S. Khanna, Can Corporate

Governance Reforms Increase Firms Market Value: Evidence from
India, University of Michigan Law School, Olin Working Paper No. 07002, Oct. 2007, available at www.ssrn.com/abstract=914440.

For a detailed history of developments in Indian corporate

governance, see Afra Afsharipour, Corporate Governance
Convergence: Lessons from the Indian Experience, Northwestern
Journal of International Law & Business 335 (2009); Rajesh
Chakrabarti, Corporate Governance in IndiaEvolution and Challenges
20 (Jan. 17, 2005) (unnumbered working paper), available at http://
ssrn.com/abstract=649857.

Circular, Securities and Exchange Board of India, Amendments to

Clause 49 of the Listing Agreement (Sept. 12, 2000), available at
http://web.sebi.gov.in/circulars /2000/CIR422000.html; Circular,
Corporate Governance in Listed CompaniesClause 49 of the Listing
Agreement (Aug. 26, 2003), available at http://web.sebi.gov.in/
circulars/2003/cir2803.html.

See James Fontanella-Khan, Timeline: The Satyam Scandal, Fin.

Times, Jan. 7, 2009; Indias Enron, The Economist, Jan. 8, 2009.

See Satyam Fraud: Raju Sent to Central Prison; CFO Vadlamani

Arrested, The Economic Times, Jan. 10, 2009; Satyams Raju Brothers
Arrested by AP Police, The Economic Times, Jan. 9, 2009; Jackie
Range, Pricewaterhouse Partners Arrested in Satyam Probe, The Wall
Street Journal Asia, Jan. 25, 2009; Mukesh Jagota & Romit Guha, India
Names New Satyam Board, The Wall Street Journal, Jan. 12, 2009.

The Companies Act, 1956, Acts of Parliament, 1956 (as amended)

provides the general legal framework for companies in India,
governing the incorporation, functioning, and winding up of Indian
companies. All registered companies in India, whether public or
private, are governed by the Companies Act.

See Companies Bill (2009), available at http://www.mca.gov.in/

Ministry/acts_bills.html; see also Ministry of Corporate Affairs,
Government of India, Companies Bill Introduced in Lok Sabha, Press
Release, Aug. 3, 2009, available at http://www.pib.nic.in/release/
release.asp?relid=51386.

Every auditor should provide a certificate stating

his/her/its arms length relationship with the client
company.

The audit partner should be rotated every three

years; the firm should be rotated every five years. Audit partners should have a cooling off period of three
years before they work with the client company again;
the firm should have a cooling off period of five years.

The Committee may appoint an internal auditor.

V. Institution of a Mechanism for Whistleblowing

The companies should ensure the institution of a

mechanism for employees to report concerns about
unethical behavior, actual or suspected fraud, or
violation of the companys code of conduct or ethics
policy.

The companies should also provide for adequate safeguards against victimization of employees who avail
of the mechanism, and also allow direct access to the
Audit Committee Chairperson in exceptional cases.

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Director Notes A Brief Overview of Corporate Governance Reforms in India

13

See Ministry of Corporate Affairs, Government of India, Corporate

Governance Voluntary Guidelines 2009 (December 2009), available
at http://www.mca.gov.in/Ministry/latestnews/CG_Voluntary_
Guidelines_2009_24dec2009.pdf.

Dhammika Dharmapala & Vikramaditya S. Khanna, Corporate

Governance, Enforcement, and Firm Value: Evidence from India
(Univ. of Mich. Law Sch., Olin Working Paper No. 08-005, 2007),
available at http://ssrn.com/abstract=1105732.

10 See Confederation of Indian Industry, Desirable Corporate

Governance: A Code (1998).
11 See National Foundation for Corporate Governance, Corporate
Governance in India: Theory and Practice (Sept. 2004).
12 Shri Kumar Mangalam Birla et al., the Securities and Exchange
Board of India, Report of the Kumar Mangalam Birla Committee on
Corporate Governance (1999), available at http://www.sebi.gov.in/
commreport/corpgov.html.
13 Id. 6.5, 6.9. The Committee recommended that at least half the
members should be independent (or one-third if the chairman of
the board is an independent director), and defined an independent
director as one who has no material pecuniary relationship[, other
than remuneration,] or transaction with the company [et al.]... which
in the judgment of the board may affect [the directors] independence
of judgment. Id. To ensure that directors give companies due
attention, the Committee also recommended that directors be limited
to holding a maximum of ten directorships and five chairmanships. Id.
11.2.
14 Id. 9.6. The Committee recommended that the audit committee
be composed of at least three directors, all nonexecutive directors,
a majority of independent directors, and at least one director with
financial and accounting knowledge. Id. The chair of the audit
committee should be independent. In addition, the Committee
recommended that the audit committee should meet at least three
times a year. Id. 9.7.
15 Id. 13.4, 14.7.
16 For a discussion of the phase-in process under the initial Clause 49
adoption, see Umakanth Varottil, Evolution and Effectiveness of
Independent Directors in Indian Corporate Governance, Hastings
Business Law Journal 281 (2010).
17 N.R. Narayana Murthy Et Al., the Securities and Exchange Board of
India, Report of the SEBI Committee on Corporate Governance 1.6
(2003), available at http://www.sebi.gov.in/commreport/corpgov.
pdf.
18 Id. 1.5.41.5.5.
19 Id. 3.10.14.
20 Id.
21 Id. 3.8.1.1, 3.8.1.2.
22 Id. 3.5.2.4.
23 Id. 3.5.1.7.
24 Id. 3.2.2.3.
25 Id. 3.4.1.5.
26 Id. 3.11.1.3, 3.11.2.4.
27 SEBI, Issues Under Clause 49 and Proposed Amendments 1 (2003),
available at www.sebi.gov.in/commreport/clause49.html.

14

28 For an overview of implementation and enforcement issues

with respect to Clause 49, see generally Afsharipour, Corporate
Governance Convergence: Lessons from the Indian Experience;
Umakanth Varottil, A Cautionary Tale of the Transplant Effect on Indian
Corporate Governance, 21 Natl L. Sch. of India Rev. 1 (2009); Bala B.
Balasubramanian, , Bernard S. Black, and Vikramaditya S. Khanna,
Firm-Level Corporate Governance in Emerging Markets: A Case
Study of India (July 2, 2008, ECGI - Law Working Paper 119/2009;
2nd Annual Conference on Empirical Legal Studies Paper; University
of Michigan Law & Economics, Olin Working Paper 08-011; U of Texas
Law, Law and Econ Research Paper No. 87; Northwestern Law &
Economics Research Paper No. 09-14) available at http://ssrn.com/
abstract=992529.
29 See National Foundation, p. 8.
30 Id.
31 See Murthy Report, at 4.
32 Jamshed J. Irani et al., Expert Committee on Company Law, Report
of the Expert Committee to Advise the Government on the New
Company Law 3 (2005), available at www.primedirectors.com/pdf/
JJ%20Irani%20Report-MCA.pdf.
33 Id. at 23.
34 Id. at 1011.
35 Id. at 1112.
36 See Chakshu Roy & Avinash Celestine, Legislative Brief: The
Companies Bill, 2009, PRS Legislative Research (Aug. 18, 2009),
available at http://www.prsindia.org/uploads/media/Company/
Legislative%20Brief--companies%20bill%202009.pdf.
37 See Standing Committee on Finance (2009-2010), Fifteenth Lok
Sabha, The Companies Bill, 2009, Twenty-First Report (August 2010).
38 See Omkar Goswami, Aftermath Of Satyam, Businessworld (India),
Jan. 23, 2009; Prashant K Sahu, Sapna Dogra & Aditi Phadnis, Satyam
Scam Prompts Clause 49 Review, Business Standard, Jan. 14, 2009.
39 See CII Sets Up Task Force on Corporate Governance, Business
Standard, Jan. 12, 2009.
40 See NASSCOM Announces Formation of Corporate Governance and
Ethics Committee, Business Standard, Feb. 11, 2009.
41 See Naresh Chandra, Report of the CII Task Force on Corporate
Governance 2 (November 2009), available at www.mca.gov.in/
Ministry/latestnews/Draft_Report_NareshChandra_CII.pdf
[hereinafter CII 2009 Report].
42 Id. at 1.
43 NASSCOM, About Us, available at http://www.nasscom.in/Nasscom/
templates/NormalPage.aspx?id=5365.
44 NASSCOM, NASSCOM Governance And Ethics Committee Releases
ITs Recommendations For The IT-BPO Industry, April 27, 2010 available
at www.nasscom.in/Nasscom/templates/NormalPage.aspx?id=59083.
45 See Institute of Company Secretaries of India, ICSI Recommendations
to Strengthen Corporate Governance Framework (Dec. 2009), available
at www.mca.gov.in/Ministry/latestnews/ICSI_Recommendations_
Book_8dec2009.pdf.
46 SEBI Committee on Disclosures and Accounting Standards,
Discussion Paper on Proposals Relating to Amendments to the Listing
Agreement (Sep. 2009), available at www.sebi.gov.in/commreport/
amendproposal.pdf.

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47 These measures have been introduced through an amendment to

the Listing Agreement. See Securities and Exchange Board of India,
Circular No. CIR/CFD/DIL/1/2010 (Apr. 5, 2010), available at www.
sebi.gov.in/circulars/2010/cfddilcir01.pdf.

60 See Directors Database, http://directorsdatabase.com/; V.

Venkateswara Rao, Clause 49: Needed, better compliance, Business
Line, May 27, 2009.
61 See Black & Khanna, p. 1.

48 See Securities and Exchange Board of India, Circular No. CIR/

CFD/DIL/1/2010 (Apr. 5, 2010), available at http://www.sebi.gov.
in/circulars/2010/cfddilcir01.pdf.; see also Umakanth Varottil,
Indias Corporate Governance Voluntary Guidelines 2009: Rhetoric or
Reality? 13 (2010), available at http://papers.ssrn.com/sol3/papers.
cfm?abstract_id=1634821.

62 Id.
63 PSUs Fail SEBIs Clause 49 Test, Financial Express, Jan. 10, 2006.
64 Id.
65 PSUs Fail to Meet SEBI Criterion on Directors, Business Standard,
Dec. 26, 2009.

49 For detailed evaluation of the substance of the voluntary guidelines

and whether a voluntary approach is the correct approach, see
Varottil, Rhetoric or Reality.

66 See The Securities Laws (Amendment) Act, 2004 11, No. 1, Acts
of Parliament, 2005, available at http://indiacode.nic.in/fullact1.
asp?tfnm=200501.

50 See Voluntary Guidelines.

51 Id.

67 Inside Story: How they Saved Satyam, News Center, Jan. 26, 2010,
available at www.moneycontrol.com/news/business/inside-storyhow-they-saved-satyam_432170.html.

52 Corporate Affairs Secretary R. Bandyopadhyay: CSR is not

Charity -- its a Win-Win Situation, India Knowledge at Wharton,
available at http://knowledge.wharton.upenn.edu/india/article.
cfm?articleid=4488.

68 Press Release, SEBI, SEBI Initiates Adjudication Proceedings Against

20 Companies for Non-Compliance of Clause 49 Norms (Sept. 11,
2007), available at www.sebi.gov.in/press/2007/2007257.html.

53 Id.

69 During October and November 2008, SEBI passed a series of orders

involving several government companies, viz. NTPC Limited (8
October), GAIL (India) Limited (27 October), Indian Oil Corporation
Limited (31 October) and Oil and Natural Gas Corporation Limited (3
November), all available at www.sebi.gov.in.

54 See Standing Committee on Finance, at Annexure I.

55 PSUs are state-owned enterprises and represent the Indian
governments socialist policies prior to 1991. See Lawrence Sez &
Joy Yang, The Deregulation of State-Owned Enterprises in India and
China, 43 Comp. Econ. Stud. 69, 76 (2001).
56 See Varottil, Evolution and Effectiveness of Independent Directors in
Indian Corporate Governance, at 343-374.
57 Clause 49 (2004), at VI(ii).
58 NSE, Listing of Securities 38 (2009), available at http://nseindia.com/
content/us/fact2009sec3.pdf.
59 Corporate Filing & Dissemination System, Companies Not Complying
with Clauses 49 & 40A, http://www.corpfiling.co.in/notcomplying/
links.aspx (last visited April 6, 2010). As of December 2009, 4955
companies were listed on the BSE. BSE, Key Statistics, http://
bseindia.com/about/st_key/list_cap_raised.asp (last visited April
6, 2010). As of March 2009, 1432 companies were listed on the NSE.
NSE, Listing of Securities 38 (2009), available at http://nseindia.com/
content/us/fact2009sec3.pdf.

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Director Notes A Brief Overview of Corporate Governance Reforms in India

15

APPENDIX
Clause 49, the Companies Bill, 2009, and the Standing Committee on Finance Report:
Differences With Respect to Public Company Independent Director Provisions

Number of
Directors on
the Board

Minimum
Number of
Independent
Directors

Definition of
Independence

Clause 49

Companies Bill (2009)

MCAs Current Proposal in Response to

Standing Committee on Finance Report

(I)(A)(i): The Board of directors

of the company must have
an optimum combination of
executive and non-executive
directors

Clause 132(1): For public

companies, the Board of
Directors must have a
minimum of three directors
and a maximum of twelve
directors, excluding the
directors nominated by the
lending institutions.

Chapter XI Clause 132:

Clause 132(3): Independent

directors must comprise onethird of the board for listed
companies

Chapter XI Clause 132(3): Independent

directors must comprise one-third of the
board for listed companies.

Clause 132 (5): An

independent director is
defined as a non-executive
director

Chapter XI Clause 132(5): The definition

of independent director remains largely the
same as in the Companies Bill, 2009, except
as follows:

who in the opinion of the

Board, is a person of integrity and possesses relevant
expertise and experience;

who neither the independent director nor his/her

relatives:

(I)(A)(i)-(ii):

Where the chairman holds

an executive position in the
company or when the nonexecutive chairman is a promoter or a person related
to any promoter of the
company, at least one half
of the board should consist
of independent directorsa

Otherwise, one- third of

the board should consist of
independent directors.

(I)(A)(iii)(a): An independent
director is defined as a nonexecutive director who

apart from receiving directors remuneration, does not

have any material pecuniary
relationships or transactions with the company, its
promoters, its directors, its
senior management or its
holding company, its subsidiaries and associates which
may affect independence of
the director;

For public companies, the Board of Directors must have a minimum of three directors and a maximum of fifteen directors,
excluding the directors nominated by the
lending institutions;

a company may appoint more than fifteen

directors after passing a special resolution
and after obtaining prior approval of [the]
Central Government in this regard.

Neither an independent director nor his/

her relatives may have a pecuniary relationship or transaction with the company, its
holding, subsidiary or associate company,
or its promoters, or directors, amounting
to two per cent or more of the companys
gross turnover or total income, during the
two immediately preceding financial years
or during the current financial year.

a Promoter and promoter group are defined to include: (i) the person or persons who are in overall control of the company, (ii) the person or persons who
are instrumental in the formulation of a plan or program pursuant to which securities are offered to the public, and (iii) the person or persons named in the
prospectus as promoters. See Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009, Gazette of India,
section III(4), subsecs. 2(1)(za)-2(1)(zb) (Aug. 26, 2009), available at http://www.sebi.gov.in/Index.jsp?contentDisp=Section&sec_id=1.

16

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APPENDIX (continued)

Clause 49

Definition of
Independence
(continued)

is not related to promoters

or persons occupying management positions at the
board level or at one level
below the board;

has not been an executive

of the company in the immediately preceding three
financial years;

Companies Bill (2009)

- has or had a pecuniary relationship

with the board amounting to 10%
or more of the companys gross
turnover or total income during the
two immediately preceding financial
years or during the current financial
year;

is not a partner or an executive or was not partner or an

executive during the preceding three years, of any of the
following:

- is or has been an employee or a

partner, in any of the three financial
years immediately preceding the financial year in which he is proposed
to be appointed, of

- the legal firm(s) and consulting firm(s) that have a

material association with
the company.

- (A) a firm of auditors or company

secretaries in practice or cost auditors of the company or its holding,
subsidiary or associate company; or

is not a material supplier,

service provider or customer or a lessor or lessee
of the company, which may
affect independence of the
director;

- (B) any legal or a consulting firm that

has or had any transaction with the
company, its holding, subsidiary or
associate company amounting to
ten per cent. or more of the gross
turnover of such firm;

is not a substantial shareholder of the company i.e.

owning two percent or
more of the block of voting
shares.

- holds together with his relatives two

per cent. or more of the total voting
power of the company; or

An independent director may not

be related to promoters, directors
or senior management.

- is a Chief Executive or director,

by whatever name called, of any
nonprofit organisation that receives
twenty-five per cent. or more of its
income from the company, any of its
promoters, directors or its holding,
subsidiary or associate company
or that holds two per cent. or more
of the total voting power of the
company; or

is not less than 21 years of

age.

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- holds or has held any senior management position, position of a key

managerial personnel or is or had
been employee of the company
in any of the three financial years
immediately preceding the financial
year in which he is proposed to be
appointed;

- the statutory audit firm

or the internal audit firm
that is associated with the
company, and

MCAs Current Proposal in Response to

Standing Committee on Finance Report

who possesses such other qualifications as may be prescribed.

Director Notes A Brief Overview of Corporate Governance Reforms in India

17

APPENDIX (continued)

Maximum
Number
of Board
Membership

Clause 49

Companies Bill (2009)

MCAs Current Proposal in Response to

Standing Committee on Finance Report

Clause 146: An independent

director can be a member
of a maximum of fifteen
boards.

Chapter XI Clause 146:

(1) No person shall hold office as a director in
more than twenty companies at the same time:

(I)(C)(ii): An independent
director can be a member of
a maximum of ten boards,
or a maximum of five chairmanships.

Provided that the maximum number of public

companies in which a person can be appointed as a director shall not exceed fifteen;

Provided further that the maximum number of

listed companies in which a person can be appointed as a director shall not exceed seven;

Provided also that subject to the provisions

of the first and second proviso, Central
Government may, on an application made by
any person in this behalf, permit him to be
appointed as director in more than twenty
private companies if the Central Government
is satisfied that it is necessary to allow such
permission, keeping in view the nature and
working of such private companies.

(2) In case a person is a managing or wholetime director in a listed company, the number
of public companies in which such a person
can be appointed as non executive director,
shall be restricted to ten and the number of
listed companies in which such a person can be
appointed as a non executive director, shall be
restricted to two.

Limits on
Tenure

18

Annexure (I)(D)(1): Nonmandatory requirement that

after serving nine years, an
independent director is no
longer independent.

No limits on the tenure of an

independent director.

Director Notes A Brief Overview of Corporate Governance Reforms in India

Chapter XI -New sub-clause 132(7):

No independent director shall have a tenure

exceeding, in the aggregate, a period of six
consecutive years on the Board of a company.

A period of three years must elapse before

such an individual is inducted in the same
company in any capacity.

No individual shall have more than two tenures as independent director in any company.

www.conferenceboard.org

About the Author

About the Series Director

Afra Afsharipour is Assistant Professor of Law at University of

California, Davis School of Law. Professor Afsharipour conducts
research on comparative corporate law, corporate governance,
corporate social responsibility, mergers and acquisitions, and
transactional law. Prior to joining the Davis faculty, Professor
Afsharipour was an associate in the corporate department of
Davis Polk & Wardwell, where she advised clients on domestic and
cross border mergers and acquisitions, public and private securities offerings, and corporate governance and compliance matters.
She also served as a law clerk to the Honorable Rosemary Barkett
of the Eleventh Circuit Court of Appeals. She received a J.D. from
Columbia Law School, and a B.A. from Cornell University.

Matteo Tonello is Director of Corporate Governance Research at

The Conference Board in New York. For The Conference Board,
Tonello has conducted governance and risk management analyses
and research in collaboration with leading corporations, institutional investors, and professional firms. Also, he has participated
as a speaker and moderator in educational programs on governance best practices. Recently, Tonello served as the co-chair
of The Conference Boards Expert Committee on Shareholder
Activism and as a member of the Technical Advisory Group to The
Conference Board Task Force on Executive Compensation. Before
joining The Conference Board, he practiced corporate law at Davis
Polk & Wardwell. Tonello is a graduate of Harvard Law School and
the University of Bologna.

Professor Afsharipours scholarship has appeared in a number of

law reviews, including the Columbia Law Review, the Vanderbilt Law
Review, the UC Davis Law Review, and the Northwestern Journal of
International Law and Business. In addition, Professor Afsharipour is
a contributing editor at the M&A Law Prof Blog.

About Director Notes

Director Notes is a series of online publications in which The
Conference Board engages experts from several disciplines of business leadership, including corporate governance, risk oversight,
and sustainability, in an open dialogue about topical issues of concern to member companies. The opinions expressed in this report
are those of the author(s) only and do not necessarily reflect the
views of The Conference Board. The Conference Board makes no
representation as to the accuracy and completeness of the content.
This report is not intended to provide legal advice with respect to
any particular situation, and no legal or business decision should be
based solely on its content.

About The Conference Board

The Conference Board is the worlds preeminent business membership and research organization. Best known for the Consumer
Confidence Index and the Leading Economic Indicators, The
Conference Board has, for over 90 years, equipped the worlds leading corporations with practical knowledge through issues-oriented
research and senior executive peer-to-peer meetings.

For more information on this report, please contact:

Matteo Tonello, LL.M., S.J.D., director, corporate governance, at 212 339 0335 or matteo.tonello@conferenceboard.org.
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