Below are highlights from ISS’ newly released 2024 Market IQ – India. The full report is available to institutional subscribers by logging into ProxyExchange then selecting the Governance Exchange and its Report Center tab and to corporate subscribers by logging into Governance Analytics then selecting the Governance Exchange and the Report Center tab.
Corporate governance reforms in India have undergone a significant overhaul since the late 1990s. In 2000, the Securities and Exchange Board of India (SEBI) introduced the first set of comprehensive corporate governance reforms via Clause 49 of the listing agreement of stock exchanges. Thereafter, the Companies Act, 1956 was repealed and replaced by a new set of laws under the Companies Act, 2013. The passage of the 2013 Act was followed by new rules thereunder, as well as the substitution of SEBI’s Listing Regulations in 2015 by the Listing Obligation and Disclosure Requirement (LODR) Regulation.
Key legal framework for corporate governance in India
The Indian framework on Corporate Governance has been broadly aligned with the global standards. Broadly, it can be described in the following:
Companies Act 2013
To simplify the corporate laws and provide a framework for faster economic growth, the Companies Act 1956 was comprehensively reviewed and replaced with a new Companies Act in 2013. The Act lead to many changes to the corporate governance norms and providing a formal structure for disclosure and transparency thereby enhancing the corporate governance norms.
The key governance changes included:
- Describing the qualifications to be appointed as Independent Directors along with laying down a code for Independent Directors.
- Capping the total tenure of Independent Directors to 10 years, two terms of five year each, for which they could serve on the Board.
- Mandatory appointment of one-woman director on board of each public sector company with capital in excess of INR 1 billion or turnover in excess of INR 3 billion
- Rotation of Audit firms, with two terms of five years each. Act had provided a transition window of three years which ended in 2017.
SEBI (LODR) Regulations 2015
SEBI intended to consolidate the provisions of existing listing agreements for different segments of capital markets and ensure better enforcement by converting contractual obligations into statutory requirements. Following were the critical provisions, amongst others, which were introduced by the SEBI LODR:
- The board of directors of top 1000 entities to have at least one-woman independent director.
- The nomination and remuneration committee (NRC) shall comprise of non-executive directors, with at least 66% of them being independent along with an Independent chair.
- Requirement of shareholder approval for material related party transactions despite the same being in ordinary course of business and arm’s length. Defining material related party transaction as those transactions that are equal or more than 10% of networth or turnover in previous year.
SEBI has undertaken significant regulatory changes with regular refinement of corporate governance standards by amending the LODR in various years since its adoption in 2015. Notably, in October 2017, the SEBI formed the Committee on Corporate Governance headed by Uday Kotak (the Kotak Committee) to undertake a comprehensive review of extant corporate governance norms in India. The committee considered several aspects of corporate governance, including corporate purpose and stakeholder interests, and focused on the business realities of Indian corporations, including the dominance of controlling-stockholders. The SEBI’s amended LODR regulations, to reflect, the recommendations of the Kotak Committee. In early 2021, the corporate social responsibility (CSR) framework in India has also been significantly amended. This was followed by changes to Regulations in relation to related party transactions.
Banking Regulation Act 1949 gives the Reserve Bank of India (RBI) the power to license banks, regulate shareholding and voting rights of shareholders, supervise the appointment of the board and management, regulate the operations of banks, lay down audit procedures, control mergers and liquidation, issue directives in the interests of public good and on banking policy and impose penalties.
Stewardship Code (for investors) – Since 2010, SEBI has pressed mutual funds and asset management companies to play a more active stewardship role regarding companies that they choose to invest in. Mutual funds were first asked to vote on shareholder resolutions, disclose their voting practices and publish their voting policies. This was followed by several additional directives and currently, beyond voting for or against, the funds are expected to articulate the rationale behind their voting decisions. This has resulted in a significant decline in abstention votes.
The report also provides an analysis of the different areas in which corporate governance takes precedence like board structure, diversity, director appointments, executive compensation, appointment of auditors, shareholder rights, capital structure, etc.
ESG reporting in India started in 2009 with the Ministry of Corporate Affairs (MCA) issuing the Voluntary Guidelines on Corporate Social Responsibility as the first step towards mainstreaming the concept of business responsibility. Since then, the reporting landscape has come a long way with the introduction of Business Responsibility Reporting (BRR), Corporate Social Responsibility (CSR), National Guidelines on Responsible Business Conduct (NGRBC) and now Business Responsibility and Sustainability Report (BRSR) (introduced through a SEBI circular dated 10 May 2021). BRSR is set to be the single source of sustainability-linked or non-financial information for companies in India and would replace the existing BRR framework.
By: India Research Team