International Journal of Legal Studies and Research (IJLSR)

CORPORATE GOVERNANCE UNDER THE SEBI (LISTING

OBLIGATIONS AND DISCLOSURE REQUIREMENTS)
REGULATIONS 2015
Anuradha Roy Chowdhury (Ghosh)
Advocate and Guest Faculty at the West Bengal National University of Juridical Sciences,
Kolkata, anuradhaghosh@nujs.edu

Abstract

The importance of corporate governance in both developed and

emerging economies cannot be denied. In India, the securities
regulator SEBI was the first regulator of corporate governance
through Clause 49 of the Listing Agreement. In late 2015, SEBI issued
the SEBI (Listing Obligations and Disclosure Requirements)
Regulations 2015 which made comprehensive changes to the
regulation of corporate governance in listed companies. It has not
only given the Listing Agreement statutory status, it has made
significant structural and substantive changes in corporate
governance regulation. This article discusses and evaluates these
changes and highlights the impact of these on corporate governance in
India. It concludes that although the SEBI (Listing Obligations and
Disclosure Requirements) Regulations 2015 has made some laudable
improvements in the Indian corporate governance landscape, recent
corporate scandals have brought the regulation and its stringency into
question.

Key Words: Corporate Governance, LODR, SEBI.

1. Introduction

Corporate governance is an essential component of corporate and securities

regulation today, as both unlisted and listed companies or more broadly,
entities are obligated to meet certain standards of corporate governance.
Listed entities have certain obligations that they must meet to remain listed
on the stock exchange. These obligations range from requirements relating
to mandatory disclosures that listed entities must make to requirements on
corporate governance within these entities. Such obligations are usually
found in the Listing Agreement that entities enter into with stock exchanges
as well as in various regulations mandated by the securities regulator. A
Listing Agreement is essentially a contract that the listed entity enters into
with any stock exchange where it lists its securities. It is an agreement that

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Requirements) Regulations 2015

is mandated by statute1 because it places several obligations and duties on

the entity to as to safeguard the interests of public shareholders and maintain
the transparency of capital markets. The Indian securities regulator,
Securities and Exchange Board of India (SEBI) prescribes a listing
agreement format that must be adhered to by all companies enlisting on
either the National Stock Exchange or the Bombay Stock Exchange.

The Indian economy is still at a nascent stage, but it has expanded by leaps
and bounds in the last few decades. Balancing booming capital markets with
family run, promoter driven enterprises with large controlling shareholders
has meant that corporate governance has become a crucial component of
protecting shareholders, especially where there are public shareholders.
Corporate governance for listed companies in India was regulated by Clause
49 of the Listing Agreement. Clause 49 was a ‘watershed’2 regulation when
it was introduced by SEBI in 2000, following the recommendations of the
Birla Committee Report that highlighted that ‘strong corporate governance
is… indispensable to resilient and vibrant capital markets and is an
important instrument of investor protection.’ 3 Clause 49 made numerous
inroads towards establishing good corporate governance in India by
following the Birla Committees' two main aims: ‘improving the function
and structure of company boards and increasing disclosure to
shareholders’4. In relation to company boards, the Committee highlighted
the importance of board representation and independence as well the
importance of board committees like the audit committee. The Birla
Committee also made many recommendations to increase standards of
disclosure and transparency that were then adopted by Clause 49. Clause 49
was amended numerous times to tighten corporate governance in India after
corporate scams like the Satyam Scandal5.

In September 2015, SEBI issued the Securities and Exchange Board of India
(Listing Obligations and Disclosure Requirements) Regulations 2015

1
The Securities Contracts (Regulation) Act, 1956, §21 mandates that ‘where securities are
listed on the application of any person in any recognised stock exchange, such person shall
comply with the conditions of the listing agreement with that stock exchange’.
2
Umakanth Varottil, The Evolution of Corporate Law in Post-Colonial India: From
Transplant to Autochthony, 31 Am. U.Int’l L. Rev 253, 283 (2016).
3
Shri Kumar Mangalam Birla et al.,The Securities and Exchange Board of India, Report of
the Kumar Mangalam Birla Committee on Corporate Governance (1999), (Nov. 1, 2017,
10:30 PM) http://www.sebi.gov.in/ commreport/corpgov.html.
4
Afra Afsharipour,A Brief Overview of Corporate Governance Reforms in India, Director
Notes, 3 (2010).
5
See Palak Jagtiani, Corporate Governance:Scams and Solutions, VI (1) Bharati Law
Review 99 (2017).

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(LODR Regulations)6 to replace the old Listing Agreement including Clause

49.The LODR Regulations took effect from December 1, 2015. All the
regulations became effective with the exception of two—Regulation 23(4)7
and Regulation 31A8. These two regulations took effect from the day of the
notification of the LODR, September 2, 2015. Though SEBI did not indicate
the reasons for the immediate implementation of these two regulations, it
seems to indicate that by these two regulations SEBI immediately took into
effect the 2015 amendments of the Companies Act 2013.SEBI also
indicated that a new Listing Agreement would be created and listed entities
would have six months within which they would have to enter into the new
agreement with the stock exchanges. On 13th October 2015, SEBI issued a
circular containing the new Listing Agreement 9 which is considerably
abridged and merely states that the Issuer ‘covenants and agrees that it shall
comply with the following the SEBI (Listing Obligations And Disclosure
Requirements) Regulations, 2015 and other applicable regulations
/guidelines/circulars as may be issued by SEBI from time to time.’.10

There is a significant distinction between the old Listing Agreement and the
LODR Regulations because the regulations effectively give more power to
shareholders and convert contractual obligations into mandatory statutory
requirements. Prior to the passing of the LODR, the Listing Agreement was
merely an agreement between the exchange and the company and reference
to listing conditions was present in Section 21 and Section 23E of the
Securities Contract (Regulation) Act 195611.The LODR has been forged in
pursuance of SEBI’s statutory powers under the SEBI Act 1992. Section
11A (2) of the SEBI Act 1992 provides SEBI power to prescribe conditions
of listing 12 and the enactment of the LODR means that the penalty

6
Pursuant to its powers under § 11, § 11A(2) and §30 of the Securities and Exchange
Board of India Act, 1992 (15 of 1992) read with § 31 of the Securities Contracts
(Regulation) Act 1956 (42 of 1956).
7
Regulation 23(4) of the LODR deals with the approvals of shareholders and the voting of
related parties in the context of related party transaction.
8
Regulation 31A of the LODR deals with the disclosure of classes of shareholders and
conditions for reclassification of the same.
9
SEBI Circular, Format of Uniform Listing Agreement, 13.10.2015, available at:
,http://www.sebi.gov.in/cms/sebi_data/attachdocs/1444737188833.pdf. (Last visited on
Nov. 1,2017, 10:30 PM).
10
Id.
11
The Securities Contracts (Regulation) Act, 1956, §23E states that ‘Penalty for failure to
comply with provisions of listing conditions or delisting conditions or grounds.—If a
company or any person managing collective investment scheme or mutual fund, fails to
comply with the listing conditions or delisting conditions or grounds or commits a breach
thereof, it or he shall be liable to a penalty not exceeding twenty-five crore rupees.’
12
The SEBI Act, 1992, § 11A states that ‘(1) Without prejudice to the provisions of the
Companies Act, 1956(1 of 1956), the Board may, for the protection of investors, - (a)

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provisions in Section 15HB13 of the SEBI Act will apply. This significantly
increases the legal force behind provisions; it not only prescribes post-
listing obligations and disclosure requirements, but also provides
mechanisms for shareholders to enforce these post-listing requirements.
Legal experts stress that this enforceability is a ‘major step towards bringing
up the quality of post-listing disclosures to match primary market
disclosures, and will lead to better corporate governance practice.’14

This article highlights the key changes made to the regulatory ambience
because of the LODR. It places special emphasis on the impact of the
LODR on corporate governance and examines whether it will mean better
corporate governance for listed companies in the future. The article also
discusses some of the concerns in relation to ambiguities that remain despite
SEBI’s intention to consolidate and reduce overlapping.

2. Objectives of the LODR

The primary objective of the LODR is to ‘consolidate and streamline the

provisions of existing listing agreements for different segments of the
capital market.’15 These include not only equity and debt listings, but also
listing of preference shares, Indian depository receipts, mutual funds, and
any other security specified by SEBI. Thus, the Regulations use the term
‘listed entity’16 instead of ‘listed company’ to cover the appropriate entities

specify, by regulations – (i) the matters relating to issue of capital, transfer of securities and
other matters incidental thereto; and (ii) the manner in which such matters shall be
disclosed by the companies; (b) by general or special orders – (i) prohibit any company
from issuing prospectus, any offer document, or advertisement soliciting money from the
public for the issue of securities; (ii) specify the conditions subject to which the prospectus,
such offer document or advertisement, if not prohibited, may be issued. (2) Without
prejudice to the provisions of section 21 of the Securities Contracts (Regulation) Act,
1956(42 of 1956), the Board may specify the requirements for listing and transfer of
securities and other matters incidental thereto.’
13
The SEBI Act, 1992, §15HB states that ‘Penalty for contravention where no separate
penalty has been provided.- Whoever fails to comply with any provision of this Act, the
rules or the regulations made or directions issued by the Board there under for which no
separate penalty has been provided, shall be liable to a penalty which may extend to one
crore rupees.]’
14
Jayshree P. Upadhyay, Farewell Listing Agreement, Welcome New Regulation, Business
Standard,November29,2015,availableathttp://www.businessstandard.com/article/opinion/fa
rewell-listing-agreement-welcome-new-regulation-115112900675_1.html (Last visited on
visited on Nov. 1,2017, 10:30 PM).
15
Press Trust of India, SEBI notifies revised Listing Regulations, Business Standard,
available at: http://www.business-standard.com/article/markets/sebi-notifies-revised-listing-
regulations-115090301315_1.html. (Last visited on Nov.12, 2017, 10:30 PM).
16
Regulation 2(p) of the LODR states that ‘"listed entity" means an entity which has listed,
on a recognised stock exchange(s), the designated securities issued by it or designated

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under the ambit of this regulation as some listed entities which may or may
not be companies but are body corporates. This consolidation is a move
away from the previous Listing Agreement whereby there were different
agreements prescribed for debt and equity securities. SEBI’s decision is so
as to ‘provide ease of reference by consolidating into one single document
across various types of securities listed on the Stock exchanges’17. Further,
by issuing these regulations, SEBI’s intention was to prevent any
‘overlapping or confusion on the applicability of these regulations’.18 This is
a welcome change which makes the compliance process significantly easier
for companies.

3. Structural Changes

The LODR Regulation is divided into two segments that make a distinction
between substantive provisions and procedural requirements.. The main
body of the regulations covers the substantive provisions and the procedural
requirements are included as Schedules. This is extremely beneficial
because since the substantive rules are based in broad terms, companies can
refer to the procedural rules to narrow their understanding of the
Regulations. In a further move to reduce ambiguities, SEBI has highlighted
that ‘the related provisions have been aligned and provided at a common
place for ease of reference.’19An example of this, as pointed out be SEBI, is
that all provisions that deal with material disclosures spread across the
LODR have been provided as a schedule to the regulations and that all
‘disclosures required to be made on the website of the listed entity have
been enumerated at a single place for ease of reference and all requirements
pertaining to disclosures in annual report have been combined.’20

Another significant change that has made is a move from a Principle based
approach (as observed in Clause 49) to a Principle cum Rule based
approach. The LODR Regulations specifically mention certain Principles
that underlie definite requirements prescribed in different chapters of the
Regulations and ‘in case of any ambiguity or incongruity between the
principles and relevant regulations, the principles specified (in this Chapter)
shall prevail’21.

securities issued under schemes managed by it, in accordance with the listing agreement
entered into between the entity and the recognised stock exchange(s).’
17
SEBI Press Release, SEBI (Listing Obligations and Disclosure Requirements)
Regulations, 2015 (Listing Regulations) PR No. 226/2015 September 03, 2015, available at
:http://www.sebi.gov.in/sebiweb/home/list/4/23/0/0/press-releases (Last visited on Nov.12,
2017).
18
Id.
19
SEBI, supra note 17.
20
SEBI, supra note 17.
21
Regulation 4 (3) of the LODR 2015.

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These Principles are incorporated in Chapter II of the LODR as Guiding

Principles. The Chapter starts by providing broad principles for periodic
disclosures by listed entities; these apply to all listed entities with listed
securities. There are 10 of these principles which reflect the International
Organization of Securities Commissions’ Objectives and Principles of
Securities Regulations of June 2010 22 . These broad disclosure principles
mention numerous issues ranging from the implementation of prescribed
accounting standards to various disclosure requirements as to timely,
accurate, adequate information which comply with the regulations in both
‘letter and spirit’23. Amongst other principles, the Regulations state that the
listed entity shall refrain from misrepresentation 24 and shall provide
adequate and timely information to recognised stock exchange(s) and
investors 25 . These provisions were not present in the previous Listing
Agreement.

Chapter II has also incorporated certain principles for corporate governance.

However it must be noted that the Principles do not apply to all listed
entities but only to a ‘listed entity which has listed its specified
securities.’ 26 The principles of corporate governance in Chapter II borrow
heavily from Clause 49 and are also in line with the OECD (Organisation
for Economic Co-operation and Development) Principles of Corporate
Governance.27 These Principles focus on the rights of shareholders, timely
information, the equitable treatment of all shareholders including foreign
and minority shareholders, the role of stakeholders in corporate governance,
disclosure and transparency and the responsibilities of the Board. The
responsibilities of the Board have been outlined in great detail, highlighting
that the Board not only has a role in reviewing and guiding corporate
strategy etc but also in monitoring implementation and corporate
performance.

The inclusion of these principles in the LODR is a welcome move – not

only does it incorporate certain overarching objectives that can be enlisted if
there is a gap in regulation, it also comes closer to adopting a cultural shift
in the perception of corporate governance in listed companies. It is the
22
See International Organization of Securities Commission, Objectives and Principles of
Securities Regulations, (2010), available at https://www.iosco.org/library/pubdocs/pdf/
IOSCOPD 323.pdf. (Last visited on Nov.12, 2017, 10:30 PM).
23
Regulation 4 (1) of the LODR 2015.
24
Regulation 4 (1) © of the LODR 2015.
25
Regulation 4 (1) (d) of the LODR 2015.
26
Regulation 4(2) of the LODR 2015.
27
Clause 49 had referred to the original OECD Principles formulated in 2004. However,
the OECD have since then released the ‘G20/OECD Principles of Corporate Governance’
(September 2015) and the LODR have referred to these.

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opinion of the author that any major impact of reform in corporate

governance will only be possible if there is a move from mere box-ticking
compliance to an internalisation of certain principles of good governance by
companies and their boards. A good way to ensure this is by the presence of
mandatory underlying principles that companies and regulators are
compelled to apply when the regulation is insufficient or lacks clarity.

4. Common Obligations on Listed Companies

There are certain common obligations that the LODR places on all listed
entities regardless of the type of listed security and these are contained in
Chapter III (Regulation 5 to Regulation 14) of the LODR. The Regulations
create a general obligation of compliance which states that ‘the listed entity
shall ensure that key managerial personnel, directors, promoters or any other
person dealing with the listed entity, complies with responsibilities or
obligations, if any, assigned to them under these regulations’ 28 .This
highlights that the LODR not only places certain obligations on the
company in its capacity as a separate legal entity but also places obligations
on the people affiliated with the company including the promoter. However
the responsibility of ensuring compliance of such persons is on the listed
entity and thus the liability too would fall on them.

Another common obligation that is created is the appointment of a

compliance officer. The compliance officer is a brainchild of the LODR,
and Regulation 6 29 states that a listed entity must appoint a compliance
officer who is a qualified company secretary. The Regulation also outlines
numerous obligations of the compliance officer which include the
responsibility of ensuring conformity with all applicable regulatory
provisions, co-coordinating with SEBI, the Stock Exchanges and
Depositories regarding compliance with rules, regulations and other
directives and ensuring that correct procedures have been followed. The
creation of the compliance officer effectively widens the responsibilities and
liabilities of the company secretary by making them solely responsible for
compliance with the provisions of the LODR. It is claimed by some that
this is a positive move that will ‘strengthen the compliance ecosystem in
listed companies’30 and will allow increased regulatory oversight.
The LODR also mandates the appointment of a Share Transfer agent if the
total number of security holders exceeds one lakh; otherwise the listed entity

28
Regulation 5 of the LODR 2015.
29
This Regulation will not apply to listed mutual funds that continue to be governed by the
provisions of SEBI (Mutual Funds) Regulations 1996.
30
The Hindu, Company Secretary to act as compliance officer: SEBI, available at:
http://www.thehindubusinessline.com/markets/stock-markets/company-secretary-to-act-as-
compliance-officer-sebi/article6622449.ece, (Last visited on 21 Nov. 2015 , 10:30 PM).

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shall have to be registered with the Board31. Certain other new requirements
have been created by the LODR such as the submission of information to
securities intermediaries 32 , the policy on preservation of documents as
approved by the board of directors 33 , filing of information with stock
exchanges in electronic platform34, listed entity ensuring that the proposed
scheme of arrangements etc. does not to violate, override, limit the
provisions of securities law 35 and the electronic payment of dividend
/interest /redemption /repayment amounts 36 .The LODR also mandates a
grievance redressal mechanism either through the SCORES 37 or other
electronic platform or system of the Board 38 as well as the filing of a
quarterly statement with the number of pending investors’ complaints at the
beginning and end of the quarter, highlighting the complaints received,
disposed off and that remained unresolved39. These highlight the LODR’s
commitment to ensuring that companies act responsibly towards their
investors and that shareholders receive information and protection.

5. Corporate Governance Obligations of Certain Listed Entities

Chapter IV of the LODR states that the corporate governance obligations

only apply to those listed entities which have listed its securities, which
means a company which has ‘equity shares and convertible securities’40that
is listed on the main board or the SME Exchange or on institutional trading
platform. However there are some exceptions on the application of certain
corporate governance provisions on listed entities ‘having paid up equity
share capital not exceeding Rs. 10 crore and net worth not exceeding Rs. 25
crore, as on the last day of the previous financial year’41 and ‘entities which
have listed its specified securities on the SME Exchange’42.The Regulations
exempted are Regulation 17 (Composition of Board of Directors),18 (Audit
Committee), 19 (Nomination and Remuneration Committee), 20
(Stakeholder Relationship Committee), 21 (Risk Management Committee),
22 (Vigil Mechanism),23 (Related Party Persons), 24 (corporate governance
requirement with respect to subsidiaries), 25 (Obligations with respect to

31
Regulation 7 of the LODR 2015.
32
Regulation 8 of the LODR 2015.
33
Regulation 9 of the LODR 2015.
34
Regulation 10 of the LODR 2015.
35
Regulation 11 of the LODR 2015.
36
Regulation 12 of the LODR 2015.
37
SCORES (Sebi COmplaints REdress System) is SEBI’s centralised online system for
lodging and tracking complaints.
38
Regulation 13 (2) of the LODR 2015.
39
Regulation 13 (3) of the LODR 2015.
40
Regulation 2 (1) (zl) of the LODR 2015.
41
Regulation 15 (2) (a) of the LODR 2015.
42
Regulation 15 (2) (b) of the LODR 2015.

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independent directors),26 (Obligations with respect to Directors and senior

management) and 27 (other corporate governance requirements). This
exception is made so that smaller listed companies which involve less public
money are not unduly burdened by costly corporate governance measures
and to prevent the disincentive effect it may have on unlisted companies and
growing and issuing their shares in an Initial Public Offer.

5.1 Definitional Changes

The LODR, through Regulation 16 makes certain key definitional changes

that are significant to the regulation of corporate governance. One of the
significant definitions is that relating to the definition of “control” which is
to be the same as that in SEBI (Substantial Acquisition and Takeovers)
Regulations 2011 (The Takeover Code), which includes the right to appoint
majority of the directors, or to control the management or to control policy
decisions directly or indirectly by virtue of shareholding or management
rights or shareholders agreement or by voting agreements. The definition of
control under the Takeover Code has been debated abundantly 43 , but
incorporating it into the LODR means that there will confluence between
the two regulations.

The Regulation outlines that the definition of “independent directors” will

remain the same as under the previous Clause 49. The definition of
independence in Clause 49 was significantly broad44, but due to its close-
43
See Umakanth Varottil, Comparative Takeover Regulation and the Concept of ‘Control’,
Singapore Journal of Legal Studies 208-231 (2015), See Also SEBI, Discussion Paper on
Brightline Tests for Acquisition of ‘Control’ under SEBI Takeover Regulations , March 14
2016,available at: http://www.sebi.gov.in/sebi_data/attachdocs/1457945258522.pdf (last
visited on 21 Nov. 2015 , 10:30 PM).
44
Clause 49 (and Regulation 16 (2) (b) of the LODR) defines an Independent director’ as a
‘non-executive director of the company who:
a. apart from receiving director’s 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;
b.is not related to promoters or persons occupying management positions at the board level
or at one level below the board;
c.has not been an executive of the company in the immediately preceding three financial
years;
d.is not a partner or an executive or was not partner or an executive during the
preceding three years, of any of the following:
i. the statutory audit firm or the internal audit firm that is associated with the
company, and
ii. the legal firm(s) and consulting firm(s) that have a material association with
the company.
e. is not a material supplier, service provider or customer or a lessor or lessee of the
company, which may affect independence of the director;

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ended list of objective criteria it sometimes failed to appreciate the nuances

of certain situations which could be covered with a more subjective
definition. In that sense, the LODR’s preservation of the definition of
independent directors could represent a missed opportunity. The regulation
defines “senior management” as ‘officers/personnel of the listed entity who
are members of its core management team excluding board of directors and
normally this shall comprise all members of management one level below
the executive directors, including all functional heads.’45

Regulation 16 also defines “material subsidiaries” as a subsidiary ‘whose

income or net worth exceeds twenty percent of the consolidated income or
net worth respectively, of the listed entity and its subsidiaries in the
immediately preceding accounting year.’46 An important change is that the
earlier concept of “material non-listed Indian subsidiary’ has been
eradicated meaning that foreign subsidiaries of Indian listed companies
would fall within the ambit of the LODR. This move is a welcome one that
increases transparency and promotes better corporate governance between
companies and their subsidiaries.

5.2 The Board of Directors

The Board of Directors in a company plays arguably the most important role
in corporate governance as the protector of the shareholders’ interest.
Regulation 17 sets out the obligations relating to the Board of Directors
taking into account the optimum combination of executive and non-
executive directors, board meetings, sitting fees and remuneration. The
regulation is not markedly different from the previous requirements of
Clause 49 although Regulation 17 (9) now provides that the company has to
formulate a risk assessment and minimisation plan and the Board is
responsible for framing, implementing and monitoring the risk management
plan. This is further cemented by Regulation 21 of the LODR which
provides for the creation of a "risk management committee" for the top
100 47 listed entities. Risk management committees are an important
component of Boards in foreign jurisdictions and the LODR’s inclusion of
this is in keeping with international best practice.

Regulation 18 which mandates an audit committee has not been much

f.is not a substantial shareholder of the company i.e. owning two percent or more of the
block of voting shares.
g. is not less than 21 years of age.’
45
Regulation 16 (1) (d) of the LODR 2015.
46
Regulation 16 (1) (c) of the LODR 2015.
47
As per Regulation 22(5) this is to be determined on the basis of market capitalisation, as
at the end of the immediate previous financial year.

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altered by the LODR. However there is some disparity in the qualifications

of audit committee members under the Companies Act 2013 and the LODR.
The Companies Act merely requires that a ‘majority of members of Audit
Committee including its Chairperson shall be persons with ability to read
and understand, the financial statement.’48 The LODR places a much more
stringent requirement on audit committee members as it mandates that it
must have ‘at least 1 member who possesses accounting or related financial
management expertise.’49

There are other Regulations that affect Board composition and its
committees and thereby enhance the corporate governance mechanisms that
apply to listed companies. These include the constitution of the nomination
and remuneration committee50 and the creation of a whistleblower policy51
which are now made mandated obligations rather than continuing as
voluntary as under Clause 49. Additionally, Regulation 46 requires entities
to disclose the members of all board committees on the company's website,
thereby reaching all shareholders and potential stakeholders in the public
whereas Clause 49 only placed a burden on the board to keep shareholders
informed. This highlights SEBI’s significant commitment to creating a
transparent and disclosure friendly capital market regime.

5.3 Independent Directors

There are also certain corporate governance obligations that are specifically
imposed on independent directors through Regulation 25. Most importantly,
Regulation 25 (5) stresses that the liability of the independent director is
only in respect of such acts of omission or commission that occurred with
his knowledge, attributable through processes of board of directors, and
with his consent or connivance or where he had not acted diligently with
respect to the LODR provisions.

The Regulation also outlines that a person cannot serve as an independent

director in more than 7 listed entities. It also highlights the requisite tenure
of independent directors, meetings and review in accordance to the
provisions of the Companies Act 2013. There are also mandatory
requirements placed on directors and senior management such as restrictions
on membership of committees, applicable code of conduct and disclosures.52
The regulatory pressures on independent directors place a significantly
onerous burden on independent directors which ‘may operate as a
48
The Companies Act, 2013, § 177 (2).
49
Regulation 18 (1) (c) of the LODR 2015.
50
Regulation 19 of the LODR 2015.
51
Regulation 22 of the LODR 2015.
52
Regulation 26 of the LODR 2015.

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disincentive from able and competent individuals taking up the role of

independent directors.’53 It could also be a tremendous financial burden on
companies due to the increased cost of compliance which may impede
‘entrepreneurialism and innovation due to the excessive emphasis on
monitoring.’54 Elsewhere, commentators have even questioned the utility of
the independent director in India, given its extremely different shareholding
structures and business landscape to those western economies where
independent directors were first launched. 55 However, this stringent
regulatory atmosphere must be seen in context of the fact that they are a
‘result of a reflexive legislative and regulatory response to scandals that
befell corporate India over the last few years.’56

5.4 Related Party Transactions

Related party transactions (RPTs) are those transactions that the company
enters into with any persons that are related to the company- these may
include its holding or subsidiary company, directors, controlling
shareholders or family members. Such transactions are prevalent where
there are large concentrated shareholdings and thus the LODR as well as the
Companies Act 2013 places significant importance on the regulation of
RPTs for good corporate governance.

The 2013 Act initially mandated that a special resolution must be passed for
specific RPTs exceeding a prescribed threshold, which was amended in
2015 to be an ordinary resolution. The Ministry of Corporate Affairs also
issued a circular explicating that ‘the term “related party” in the above
context refers only to such related party as may be a related party in the
context of the contract or arrangement for which the said special resolution
is being passed’ 57 , thus only those related parties who are related to the
particular transaction cannot vote on the proposed resolution. The LODR
some of these changes into account but is arguably much more stringent
both in terms of defining and RPT and in the approval process. It defines an
RPT as a ‘transfer of resources, services or obligations between a listed

53
Umakanth Varottil and Richa Naujoks, Corporate Governance, in Linda Spedding (ed.),
India: The Business Opportunity, 305, Lucknow: Eastern Book Company (2016).
54
Id.
55
See Umakanth Varottil, Evolution and Effectiveness of Independent Directors in Indian
Corporate Governance, 6 Hastings Bus. L.J. 281 (2010); See also Umakanth Varottil, A
Cautionary Tale of the Transplant Effect on Indian Corporate Governance, 21 National
Law School of India Review 1 (2009).
56
Varottil and Naujoks, supra note 53.
57
Ministry of Corporate Affairs, Clarifications on matters relating to Related Party
Transactions, General Circular No:3O/2O14, available at : http://www.mca.gov.in/
Ministry/pdf/ Circular_No_30_17072014.pdf (last visited on 30 Nov. 2017 , 10:30 PM).

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entity and a related party, regardless of whether a price is charged.’ 58

Moreover, to capture more transactions within the materiality requirement
and to increase transparency, a transaction is defined so that it encompasses
a ‘group of transactions in a contract.’59 This definition captures many more
transactions than the significantly narrower definition in the Companies Act
201360and thus captures many more transactions.

Approvals for listed companies are also significantly more onerous than
under the Companies Act. Any RPT by a listed entity will require both audit
committee approval prior to entering into the transaction61 as well as board
approval 62 . The audit committee also has the authority to give omnibus
approval to some RPTs, although such approval must be reviewed quarterly
Moreover, any “material” RPT will also require approval by shareholders
through an ordinary resolution to synchronise with the 2015 amendment in
the Companies Act. A RPT is considered to be “material” if the
‘transaction(s) to be entered into individually or taken together with
previous transactions during a financial year, exceeds ten percent of the
annual consolidated turnover of the listed entity as per the last audited
financial statements of the listed entity.’ 63 Under the LODR, Regulation
23(4) and 23(7) states that while approving material RPTs, all related parties
whether or not concerned with the particular RPT, must abstain from
exercising their votes. This is however, despite the Ministry of Corporate
Affairs’ circular which allows non-interested related parties to vote for
approving a particular RPT. It thus seems that the approval process for
RPTs under the 2015 Regulations continue to remain stricter than the
Companies Act. The only transactions that remain outside the purview of
this stringent approval process are those between two government
companies and between a holding company and its wholly owned
subsidiary.64

The regulation of RPTs in India has been made significantly more rigorous
by the Companies Act and the LODR: ‘a primarily disclosure-based
approach has been transformed into a tightly controlled regime.’65 However
some issues remain with the regulation of RPTs. Firstly the definition under
58
Regulation 2(1) (zc) of the LODR 2015.
59
Regulation 2(1) (zc) of the LODR 2015.
60
The Companies Act 2013, §188 stresses that a transaction with a related party would not
require any prior board approval as long as they are ‘transactions entered into by the
company in its ordinary course of business other than transactions which are not on an
arm‘s length basis’. The LODR makes no such exceptions.
61
Regulation 23 (2) of the LODR 2015.
62
The Companies Act 2013, §188.
63
Regulation 23 (1) of the LODR 2015.
64
Regulation 23 (5) of the LODR 2015.
65
Varottil and Naujoks, supra note 53, at 326.

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the LODR as highlighted above, may leave some value-reducing

transactions out of the purview of the LODR, such as minority squeeze
outs66. Secondly, there is some concern that there will difficulty in enforcing
the RPT regulation since its enforcement is divided across SEBI, the
judiciary, and the National Company Law Tribunal which may lead to
‘transactions slipping between the cracks’ 67 , especially as ’judicial and
tribunal enforcement structures are too slow and cumbersome’68.

5.5 Other Corporate Governance Requirements

There are also certain other corporate governance requirements that are
placed on companies such as a quarterly compliance report.69 There are also
certain discretionary requirements such as the rights of a non-executive
chairman, shareholder rights, modified opinion in audit report, separation in
role of chairperson and chief executive officer and the reporting of the
internal auditor70.

It is submitted that the separation in the role of chairman and CEO is

problematic. There has been a significant theoretical debate in relation to
whether the role of the chairman and CEO should be held by the same
person or bifurcated 71 . More importantly though, Section 203 of the
Companies Act mandates that the CEO and chairman are not to be the same
person unless the articles of the company provide otherwise or the company
does not carry multiple businesses. Thus, though Section 203 is not absolute
it is more stringent than the LODR which sees this as a discretionary
requirement.

Certain specific corporate governance requirements with respect to

subsidiaries are also prescribed in Regulation 24. These include keeping one
director of an unlisted subsidiary company as an independent director on the
Board of the listed parent company, the responsibility of the audit
committees of the listed company towards the subsidiary amongst others72.

66
See Vikramaditya Khanna & Umakanth Varottil, Regulating Squeeze Outs in India: A
Comparative Perspective, NUS Law Working Paper 2014/009, July 2014, available at:
,https://law.nus.edu.sg/wps/pdfs/009_2014_Umakanth%20Varottil.pdf last visited on 30
Nov. 2017 , 10:30 PM).
67
Vikramaditya Khanna, Related Party Transactions, NSE Quarterly Briefing No.8
(January 2015) available at:,https://www.nseindia.com/research/content/res_QB8.pdf (last
visited on 30 Nov. 2017 , 10:30 PM).
68
Id.
69
Regulation 27 of the LODR 2015.
70
Schedule II, Part E of the LODR 2015.
71
See Shivam Bhardwaj and Shreyangshi Gupta, Anatomy of the Great Divide- Separating
the Roles of the Chairman and CEO, 8 NUJS Law Review 129 (2015).
72
Regulation 24 of the LODR 2015.

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6. Disclosures of Certain Listed Entities

Apart from corporate governance requirements, another very important

aspect of the LODR are the numerous disclosures that it mandates under
Chapter IV. Disclosures are important from a corporate governance
standpoint as well as from a general point of view as they promote not only
transparency in and between companies but also in capital and securities
markets. Although a detailed analysis of the disclosure requirements are
beyond the purview of this article, some of the important highlights,
especially in relation to corporate governance are outlined below.

As highlighted earlier, Chapter II of the LODR highlights that listed entities

which have listed securities shall make disclosures and abide by certain
obligations under these regulations, in accordance to certain principles. The
LODR mandates numerous disclosures that a listed entity must provide. One
of the main disclosures that is required are of ‘any events or information,
which in the opinion of the board of directors of the listed company, is
material.’ 73 The listed entity shall determine the materiality using certain
criteria as specified in Regulation 30(4). Certain disclosures are “deemed
material” by the LODR. These include all restructuring transactions by the
entity, whether it is a direct or indirect acquisition or agreement to acquire
control, shares or voting rights or any schemes of arrangement such as an
amalgamation, merger, demerger or restructuring as well as any sale or
disposal of any units, divisions or subsidiaries. Any internal capital
restructuring such as the ‘issuance or forfeiture of securities, split or
consolidation of shares, buyback of securities, any restriction on
transferability of securities or alteration in terms or structure of existing
securities’ 74 will also be deemed material. Deemed materiality will also
apply to such as board decisions that directly impact shareholders such as
dividends, cash bonuses, buy-backs etc as well as knowledge of any
fraudulent activity by the promoter, key managerial personnel or the
company itself.75

Certain other events, which are not deemed material events and information
must also be disclosed if they trigger certain thresholds. These events
include the commencement or postponement of commencement date of any
commercial production or operations, any alterations to the general
character and nature of the business due to any strategic, technical,
manufacturing, or marketing tie-up, effects due to changes in the regulatory
framework; the granting, withdrawal, suspension or cancellation of licenses;

73
Regulation 30 (1) of the LODR 2015.
74
Paragraph 2, Part A of Schedule III of the LODR 2015.
75
See Part A of Schedule III of the LODR 2015 for the entire list.

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and litigation, disputes or regulatory assessment and their impact amongst

others.76The significant array of disclosures that are deemed material or can
become material highlights the significance that SEBI and the LODR place
on disclosures and promoting transparency.

However, there are some practical considerations that must be taken into
account. Firstly, timely compliance with these disclosure obligations (and
indeed the corporate governance obligations) will involve significant cost
and resources, especially for smaller listed companies. Secondly, lack of
compliance with the LODR will have significant consequences for
companies. Due to the structural changes in the nature of the Listing
Agreement, and the statutory status that it now enjoys, any non-compliance
with the provisions of the LODR will invoke the stiff penalty clauses under
the SEBI Act. This is apart from Regulation 98 of the LODR that states that
contravention by the listed entity or any other person will also result in
imposition of fines, suspension of trading, freezing of promoter or promoter
group holding of designate securities or any other action as SEBI specifies.

7. Conclusion

The significance of corporate governance to Indian listed companies and

capital markets cannot be denied. SEBI has increased the importance of
corporate governance in listed companies through its visualisation of the
Listing Agreement as a regulation rather than a contract, which has much
more significant consequences attached to it. The provisions of the LODR
have also taken a rigorous approach to corporate governance and have in
many ways gone above and beyond the Companies Act 2013 to create a
regulatory atmosphere that is so stringent that many companies have
struggled to comply with it. However, despite this, in 2017, two corporate
governance scandals in mammoth Indian listed companies, the Tata Group
and Infosys, have highlighted that stringent regulation may not be sufficient
to instill good corporate governance in companies. The LODR must be
complied with in accordance to its own principles- in letter and in spirit.

76
See Part B of Schedule III of the LODR 2015 for the entire list.

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