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Corporate Governance in India

Corporate governance refers to the system of rules, practices, and processes by which a company is directed and controlled. India, corporate governance plays a crucial role in ensuring transparency, accountability, and ethical conduct within organizations.

In dia, the primary legislation governing corporate governance is the Companies Act, 2013. This act introduced several provisions aimed at enhancing corporate governance standards in Indian companies.

Key Provisions​

  1. Independent Directors: Section 149(6) of the Companies Act mandates that at least one-third of the total number of directors on the board must be independent directors.

  2. Board Diversity: Section 150 requires public companies to have at least one woman director on their boards.

  3. Audit Committee: Section 177 mandates the constitution of an audit committee consisting of not less than three members, all of whom should be non-executive directors.

  4. Related Party Transactions: Section 188 prohibits certain related party transactions without prior approval from the Central Government.

  5. Internal Financial Controls: Section 134(5) requires companies to establish internal financial controls and report on them in the annual report.

Case Laws​

Reliance Industries Ltd. v. Securities and Exchange Board of India (SEBI)​

This landmark case dealt with issues of corporate governance and insider trading. The Supreme Court upheld SEBI's order imposing penalties on Reliance Industries for violations of insider trading regulations.

Legal Section: Sections 24 and 27 of the SEBI Act, 1992

Tata Steel Ltd. v. V.K. Dhingra​

This case involved allegations of mismanagement and breach of fiduciary duties by the management of Tata Steel. The court emphasized the importance of proper corporate governance practices.

Legal Section: Sections 397 and 398 of the Companies Act, 1956

Illustrations​

Example 1: Compliance with Audit Committee Requirements​

XYZ Limited, a public company, was required to constitute an audit committee under Section 177 of the Companies Act. The company appointed three non-executive directors as members of the audit committee. However, two of the directors were also serving on other committees of the board, potentially creating conflicts of interest.

To address this issue, the company could consider:

  1. Appointing additional independent directors to serve exclusively on the audit committee.
  2. Implementing clear policies on committee memberships to prevent potential conflicts.
  3. Conducting regular reviews of committee compositions to ensure compliance with legal requirements.

ABC Private Limited, a closely held company, wanted to enter into a transaction with its promoter group company. Before proceeding, the company should:

  1. Obtain prior approval from the Central Government under Section 188 of the Companies Act.
  2. Ensure that the terms of the transaction are fair and reasonable.
  3. Disclose details of the transaction in the board report and annual return.

By following these steps, ABC Private Limited can ensure compliance with legal requirements while maintaining good corporate governance practices.

Conclusion​

Corporate governance is a critical aspect of business operations in India. By understanding and implementing the legal framework outlined in the Companies Act and adhering to best practices, companies can enhance transparency, accountability, and overall corporate performance. It is essential for law students and practicing lawyers to stay updated on these developments and their practical implications in the corporate world.

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