20 Int. J. Corporate Governance, Vol. 10, No.

1, 2019

Corporate governance in India – battle of stakes

Neeti Shikha*
Symbiosis Law School Noida,
Uttar Pradesh, India
Email: neeti.shikha@gmail.com
*Corresponding author

Rishika Mishra
Naveen Vidya Bhawan School,
Jabalpur, Madhya Pradesh, India
Email: rishika.mishra@gmail.com

Abstract: Most of the business conglomerates in India are family-run entities

who govern the company, even from a back seat. The promoters, who are in
most corporate scenarios also the majority shareholders, rule the roost. The
minority shareholders and the board are held hostage to the former’s powers.
This paper explores the role of promoters in corporate governance in India
through two recent corporate debacles of Tata Sons and Infosys that have
brought to fore many glaring questions and harsh realities of the existing
governance systems including the role of promoters and independent directors
viz a viz the minority shareholders and separation of powers between the
promoters and the board. The paper discusses the efficacy of legal framework
in this regard and suggests fresh regulatory measures that could catalyse the
process of effective governance.

Keywords: corporate governance; promoters; shareholders; investor; Kotak

committee; remuneration committee; oppression and mismanagement.

Reference to this paper should be made as follows: Shikha, N. and Mishra, R.

(2019) ‘Corporate governance in India – battle of stakes’, Int. J. Corporate
Governance, Vol. 10, No. 1, pp.20–41.

Biographical notes: Neeti Shikha is an Associate Professor at the Symbiosis

Law School, Noida. She is also a Leader and Expert at the Goemin Bindt HTO
and an independent consultant at leading policy think tanks in India. In the past,
she has been the Executive Director in the Centre for Corporate and
Commercial Laws at the National Law University Jodhpur. She obtained her
PhD in Corporate Governance. She completed her LLM in International
Business Laws from the University College London, UK.

Rishika Mishra is an independent legal consultant and is involved in advising

small businesses on compliance. Previously, has worked as a legal consultant in
the Ministry of Shipping, Government of India and has experience of working
at the CIRC, New Delhi, and with eminent jurists and advocates of the
Supreme Court of India and the State High Courts. She is a post-graduate in
Law from the University College London, UK where she specialised in
international banking and finance laws.

Copyright © 2019 Inderscience Enterprises Ltd.

 Corporate governance in India 21

“The directors of the companies, being managers of other people’s money than
their own, it can well be expected that they should watch over it with the same
anxious vigilance with which the partners in a private coparcenary frequently
watch over their own.”
Adam Smith, Wealth of Nations 1776

1 Introduction

India has its own experience of Enron cohort where the CEO of Satyam Computer
Services confessed to manipulating the accounts by US$1.47 billion. Regulations relating
to corporate governance since then have only become stricter. Despite that, complaints of
gaps in good governance in companies have come to light. Examples of Kingfisher,
Sahara India, Sharadha Scam, Harshad Mehta scam among others, show how promoters
have duped innocent investors, big financial institutions and banks of their money,
despite strict regulatory mechanisms in form of law and legal institutions that exist in
India. The common thread in all these scams is that these involved India’s most
influential individuals and business groups that were riding on investors’ money worth
billions of dollars for which exaggerated assurances were given to the creditors. Their
businesses that were once driven by market buoyancy and easy liquidity partially because
they were loaned money despite poor records, were cusped by huge loan defaults,
financial irregularities and criminal charges.
Though the business landscape in India has metamorphosed dramatically1 and
shareholding patterns in Indian corporations witnessed a change with foreign investment
restrictions being relaxed, family owned businesses and promoter driven companies
continues to dominate the Indian business scenario.2 There is something innately wrong
with the Indian business landscape. The shareholding structure shows that there is
dominance of families or promoters on the board.3 Despite independent directors being
present on the board, the dominant shareholders seldom act in the interest of the minority
shareholders.4 In fact, there are evidences to suggest that when a minority shareholder or
an independent director on the board tries to raise a red flag, they are either silenced or
removed.
A lot may be accounted to the laws of the country that have allowed companies to go
public with only a small slice of the company, subject to mandatory public shareholding
requirements. As a result, Indian promoters typically hold vast stakes in their companies
and consolidate their holdings without attracting any penalties. Corporations that have
20 million or more shares outstanding and a market capitalisation of Rs. 10 billion
(approximately $217 million) are required to maintain a public shareholding of only
10%,5 while others must maintain 25% public shareholding.6 Theoretically, promoters
and those7 whose shareholding is aggregated with promoters (termed ‘persons acting in
concert’ with the promoters) can hold up to 75% in an Indian corporation.8
Since the beginning, companies have had families and ‘friends-of-the-family’
dominate their board.9 The loyalty of domestic financial institutions to Indian promoters
has made it difficult to oust the dominant promoters of a corporation.10 This has resulted
in a set pattern in Indian business where majority of companies have a family owned
business, dominated by shareholders from these families. Even where the companies are
promoter driven, the promoters occupy a lead role in decision making of the company
and most often influence the board with their decisions.
22 N. Shikha and R. Mishra

This paper investigates the two cases that have emerged in past one year, where red
flags were raised regarding corporate governance practices in India’s two best-governed
companies, Tata and Infosys.
The outgoing chairman of Tata Sons, Mr. Cyrus Mistry, claims to have questioned the
transactions that were not in the best interest of the company, while he was a minority
shareholder, but he was silenced. As a chairman of the company, he tried to take
decisions that did not get the approval of the promoter and the latter got him removed.
The independent director, who joined the dissenting voice of Mistry, was also ousted
through a board resolution. In the case of Infosys, the CEO had stepped down stating
continuous interference by the promoter as a reason. He complained of board
independence being compromised because of this.
While there are several governance issues that have been raised in these two cases,
not much evidence is available in public domain as the cases are still under investigation.
However, at the epicentre of the circle of corporate governance conundrums and
complaints lies a glaring issue of promoters’ undue interference and dominance at the
board level that sacrifices board independence.

1.1 Methodology
This paper will premise its findings on secondary research following analytical approach
in addressing the role of promoters, board independence and role of independent directors
in case of promoter driven companies.

1.2 Limitation of the study

Though an honest attempt is made to study the issues in Indian companies, this paper
nevertheless suffers from certain limitations. The finding on Tata’s and Infosys’ case is
premised on available information in public domain that is limited. While the
investigation is still going on in both the companies, with time more disclosure of such
information can strengthen the arguments raised in the paper. However, this paper can
serve as background for further research and it opens vistas of questions that can be
independently investigated, to study the overall corporate governance state in India.

1.3 Literature review

The terms ‘promoter family control’, ‘founding family control’, ‘ownership control’,
‘ownership concentration’ and ‘management control’ are used interchangeably in
literature. Anderson and Reef in their study submitted, “the family represents a unique
class of shareholders with poorly diversified portfolios, and are long term investors
(multiple generations), often controlling senior management positions.”11 This lead us to
conclude that family firms are those in which the founder and his or her relatives have a
majority stake in managing and controlling the affairs of the firm.12
As per Confederation of Indian Industry (CII) study (2001), 75% employment, 65%
of GDP and 71% market capitalisation in India is contributed by family business. An
interesting fact that the study shows is that only 38% family business in India survives
after 1st generation, 12% after second generation and only 3% after 3rd generation. Of
those that do last, 88% either disintegrate or completely vanish before the fourth
generation takes the reigns.
 Corporate governance in India 23

La Porta et al. in their study have documented that many large organisations tried to
adopt these family traits to compete more effectively and boost firm performance.13
Dhawan, used a primary study to identify the role of the board of directors in the
corporate governance practices of the large listed firms of India and concluded that
effective integration of the skills and knowledge base of the board is more important than
the size.14 In a similar study by Ghosh15 where he empirically studied the relationship
between financial performance and board parameters of Indian non-financial firms.; the
findings indicated that, after controlling for various firm specific factors, larger boards
tend to have a negative influence on firm performance, judged in terms of either
accounting or market-based measures of performance.
There have been several studies to show that quality of the board has a direct bearing
on the quality of corporate governance in a company. According to Monks and
Minnow,16 better board supervision can enhance the quality of decision making of
managers at firm level. Shleifer and Vishnu17 in their path breaking study noted that
effective corporate governance reduces the control right of shareholders and creditor on
managers.18 While corporate governance compliance is associated with cost, it is found
that investors are ready to pay a premium for a better governed company. A McKinsey
survey conducted in 2002 found that investors were willing to pay a premium of up to
25% for a well-governed company.19 Prasanna empirically proved that independent
directors do contribute significantly towards board independence. The factor analysis
suggests that the independent directors bring brand credibility and better governance,
contribute to effective board functioning, and lead the governance committees
effectively. The thesis of independent or outside directors improving corporate
governance is proved in another study done by Jackling and Johal20 where it is found that
greater proportion of outside directors on the board results in better firm performance.
However, there is a paucity of literature to evidence the actual influence of promoters on
the board.

2 Understanding the corporate governance framework in India

Corporate governance in India developed around the same time as in UK and USA.
Recommendations of Cadbury Committee21 were universally received and several
countries, including India imbibed the platitudes of good governance as envisaged in the
Cadbury recommendations within their national governance framework. India too
spearheaded good governance in companies through various committees and
pro-business regulations. In the following paragraphs, the framework of corporate
governance that developed as an influence of the Anglo-Saxon model has been
discussed.22
The Indian debate on corporate governance took place around the same time as the
liberalisation of economy and globalisation of the Indian market. Liberalisation and
globalisation had a strong influence on corporate governance developments in India that
premised its laws on the Anglo-Saxon model. While it was a good practice to make laws
in consonance with global trends and practices, what was left unnoticed was that the
Indian business landscape was very different from that of UK and USA. While the latter
showed dispersed shareholdings, family and friends of family dominated Indian
businesses. The promoters had a strong influence on the business and business decisions.
24 N. Shikha and R. Mishra

In India, the corporate governance principles are largely based on the Anglo-Saxon
model of corporate governance in which independent directors play a pivotal role.23
However, in India most of the business powerhouses are predominantly family-run and
promoter dominated entities. As mentioned above, this is in sharp contrast to the
corporate sector in the US and UK where there is dispersed shareholding and
concentration of shareholding is less prominent.24 Since culture has a significant impact
on the corporate governance principles adopted by each country, the Anglo-Saxon model
seems to be working well in countries other than India because of the uniqueness of its
culture.25 Unlike US, in India, the presence of a relatively ‘weak’ board is a common
issue in large promoter-driven conglomerates and concerns regarding the exploitation of
minority shareholders at the hands of majority shareholders loom large.26
The corporate governance code proposed by the CII is modelled on the lines of the
Cadbury Committee in the UK. There were several Committees such as Kumar
Mangalam Birla Committee, Murthy Committee and Naresh Chandra Committee that
studied the state of corporate governance in India and provided recommendations to
strengthen the governance norms in the companies. Most of these recommendations
revolved around the role of independent directors, separation of audit, appointment and
remuneration committee and role of auditors. The Sarbanes Oxley Act of USA also
influenced these national committees. Beside the Anglo-Saxon laws, OECD reports on
corporate governance played a strong role in shaping up of the corporate governance
codes in India which finally emerged as ‘Clause 49 of the listing agreement’.27 Unlike the
Cadbury recommendations that were voluntary in nature, Clause 49 of the Listing
agreement was a mandatory provision for all the listed companies. The mandatory nature
of the governance code in India was a celebrated approach within the Indian legal regime
as it called for strict penalties for the defaulters. The recent recommendations of the Uday
Kotak Committee formulated by SEBI in June 2018 have also been discussed at length in
the paper.
It is beyond the scope of this paper to assess the merits and weaknesses of mandatory
codes of governance for corporations, but it can be submitted with certainty that nations
such as India, with mandatory governance codes have witnessed equal spate of scams and
corporate scandals.
The Indian Corporate Governance scenario is particularly worrying at a time such as
this when India is being projected as a future leader with a lucrative market for domestic
and foreign investors.28 In such an opportunistic scenario, weak governance norms, lack
of strict disclosure norms, absence of strong punitive action, non-compliance with
shareholder reporting norms, absence of prompt action against companies failing to
honour listing agreements, etc. have sowed the seed for future systemic risks, adversely
affected price discovery, limiting the depth and liquidity in the markets. Markets have
been trapped in a vicious cycle of disincentives for small investors limiting their
participation that in turn, limits the constituency for genuine reforms.29
The recent corporate governance abuse cases of the Indian IT conglomerate Infosys
and corporate powerhouse Tata Sons have rekindled this debate and posed a pressing
need to study the role of promoters while addressing the issues of separation of
ownership and control between the promoters and management, over-reaching powers of
the majority shareholders, unaccountability of the board of directors and lack of strong
regulatory and enforcement mechanisms. While it may be argued that in the past few
years due to liberalisation and privatisation, the questions of protecting the interests of the
non-controlling shareholders, enterprise performance and corporate social responsibility
 Corporate governance in India 25

have gained prominence,30 the gap between rhetoric and reality persists. The following
paragraphs will provide a factual insight into the Tata and Infosys case to help us
understand and evaluate the governance issues relating to promoters.

3 Tata and Infosys debacle: the inside story

Before moving on to the role of promoters viz. a viz. the role of independent directors
and the corporate boards, we need to highlight the facts underlying the events that
transpired within the closed bounds of the corporate boardrooms of Infosys and Tata
Sons.

3.1 The Infosys story

Earlier this year, Vishal Sikka, CEO of Infosys, India’s second biggest IT conglomerate
resigned from his post amidst wide public and media glare stating personal distractions
and friction with the founders of the company. Vishal Sikka was the only non-founder
appointed as CEO. Since 2014, Infosys has been tackling concerns of executive pay hike
and shareholder approval, excessive say of the founding members of the company in its
management, payments made for the Panayi acquisition31 after an anonymous complaint
was received by SEBI and the US Securities and Exchange Commission, awarding of an
exorbitant severance package to its Rajiv Bansal, ex-CFO and appointment of Punit
Sinha as independent director to the board.32 Although the internal investigations and
findings of any wrongdoing by the management are not available in the public domain
and the company has continually stated that all the decisions have been made bona fide in
line with the best interests of the company, the rifts between the founders and
management have caught much attention owing to the greater issues of corporate
governance such as the role of the board, independent directors and founders/promoters
that have been unveiled.33
The timelines of the Infosys case suggest governance issues to be the main cause of
the a rather abrupt exit. It is for consideration that the Infosys case is also uniquely
complicated since the promoters had completely severed themselves from the company in
that they were not even the members of the board of the company.34
In such a scenario, questions arise as to the level of influence of the promoter in the
day-to-day management and operations of the company and whether they have a
legitimate say in decision-making especially when the challenges facing the company
concern transparency, accountability, fairness and trust.
The whole Infosys story is seen as one emanating out of sheer unhappiness of its
promoter Narayan Murthy, who was no longer in the management of the company and
who’s affairs were looked after by the board of directors. According to him, the decisions
taken by the board of directors especially in the above-mentioned situations of high
severance package was indicative of breach of corporate governance. It has been alleged
by the outgoing CEO that Narayana Murthy kept on interfering with the functioning of
the CEO without holding any management position in the company.
It is interesting to note here that Murthy who is the promoter and cofounder of the
company made an exit from the executive position of the company without ensuring a
formal mechanism by which his conservative thinking of not paying high severance
26 N. Shikha and R. Mishra

package to an outgoing director could be implemented. The promote continued to

participate in the company’s decisions occasionally to set them right. This constant
participation of the promoter is against the spirit of board independence that has been
elaborated below. The fact that his promoter’s shares in the capital of the company are to
the extent of 12.75% only, raises some serious concerns on shareholder’s democracy
within the company.
One may wonder what a promoter should do in cases where though his umbilical cord
with the company is cut but the emotional chord remains intact. It is suggested that in
such cases, the promoter should use proper channels and mechanisms to address his
grievances and afford his suggestions. In case of Infosys, instead of addressing his views
through a proper channel, i.e., shareholders meeting or even an extraordinary general
meeting, the promoter exercised extraordinary behaviour through pulls and pressures on
the company’s present management.
This leaves a lot of scope for discretion and discriminatory practices within the
company. Further, such ‘informal’ tactics leaves room for undocumented decisions and
reasons for any decisions, leaving shareholders and investors uninformed of what
transpires in a boardroom.

3.2 The Tata Sons story

Infosys is not the first and only case of failure of corporate governance. Cyrus P. Mistry,
chairman, Tata Sons was removed in a full-strength board meeting on 24 October 2017 in
an unprecedented move by Tata Sons, founded by Ratan Tata, claiming non-performance
and sudden loss of confidence. In a series of events that transpired in the week after that,
Cyrus Mistry attributed his ouster to governance issues primarily related to the role of
independent directors and the separation of powers between the Promoters and the
management. Two directors of the directors who had lauded Cyrus Mistry’s performance
also voted in favour of his removal as a chairman. In his email written to the directors of
Tata Sons, he has categorically stated that he was a ‘lame duck’ chairman and that the
independent directors were mere postmen who could not enjoy any discretion or
independent judgment.35 After his appointment, the articles of association of the company
were modified and rules of engagement between the trusts, board and the chairman were
changed creating alternative power centres without any formal accountability.36

3.3 Taking stock of the stock market

The day Vishal Sikka, the CEO of Infosys resigned over his dispute with the promoter
Narayan Murthy, Infosys stock was down by up to 10%, leading to a drastic fall in its
market capitalisation. The day when Nandan Nilekani was named as the non-executive
chairman, shares of Infosys ended with over 3% higher on 28th August 2017. In terms of
equity volume, 1.422 million shares of the company were traded on the BSE and over 20
million changed hands at the NSE during the day.37 Shares across the Tata Group
companies soared on 26th October 2016 following the removal of Cyrus Mistry as
chairman and appointment of Ratan Tata as the interim chairman. Among the major Tata
Companies, Tata Motors declined 1.2%, Tata Steel was down 2.5%, Tata
Communications fell 2.4%, Tata Power was down 1.9% and Tata Consultancy Services
fell 0.7%.37. The surprise move led to near-term uncertainties, but it was not a crisis at
Tata Group like that in Infosys and it did not change the fundamentals of companies.
 Corporate governance in India 27

Thus, we see that the stock prices of shares of these two companies were considerably
affected by the corporate governance fiasco within the companies. One may wonder then,
who is the real sufferer in the end of this whole debacle? It is indeed the company and its
investors who had agreed to pay a premium for good governance but gain less than
deserved or desired.
In the following paragraphs, the key governance issues in relation to role of
promoters in these two companies have been discussed.

3.4 Corporate governance conundrums and the glaring questions

The above corporate fallouts prompt many glaring questions for the Indian corporate
governance scenario and make it important to reassess the governance models that are
followed. In India, the governance regulations and principles are not acutely implemented
in practice and therefore, a thorough reassessment of the regulatory and enforcement
framework surrounding role of promoters viz. a viz. their extended roles; institution of
independent directors viz. a viz. the role of the majority and minority shareholders and
the independence of the board of directors, is the need of the hour.38
The incidents of Tata and Infosys have raised some pertinent questions in this regard.
The complaints by the outgoing CEO that he was not free to take decisions in the
company due to constant pressure of the promoters makes one question whether
shareholder’s democracy exists in the Indian boardrooms? The allegations raised by the
chairman in case of Tata sons about the related party transactions, following bad business
decisions by the promoters, despite other directors questioning the same, if found to be
true, shows that business judgment of executive directors is largely compromised.
Though it cannot be safely concluded that the allegations of chairman are right, his ouster
cannot be seen in a good spirit. Further, the ouster of Nussli Wadia as an independent
director from the Tata’s board exhibits that dissenting voices are not celebrated. Wadia’s
removal, both in procedure and in substance is a first of its kind in India and has sent
serious scare among the independent directors who have been made to believe that they
are on the mercy of majority shareholders who dominate the decision making on the
board (most of them being from the family of founders/promoters).39
Following paragraphs explore this issue further and addressee how the battle of stakes
compromises board independence and impairs fair judgment of independent directors.

4 Role of promoters – battle of stakes

In the Indian corporate space, the role of promoters is unique in its own sense. As
discussed above, India follows a concentrated shareholding model, and this is largely
attributable to the fact that in India the promoters are usually also the owners of the
companies and therefore, evidently are the dominant shareholders. As in most cases, they
do not severe themselves from the management and day-to-day running of the company
and wish to be the vanguards of the company. Often, this is a problematic scenario as it
gives rise to the disputed territory between majority and minority shareholders. To add to
the peculiarity, in India, the promoters most often do not even have the majority stake in
company since the shareholding is spread between families, friends, relatives, etc.40 Thus,
they have a say in the restructuring of businesses, transfer of assets between groups of
28 N. Shikha and R. Mishra

companies, preferential allotment of shares to dominant shareholders, payments for

services to closely held companies, etc.41 It is quite evident from this that the voices of
the minority shareholders are easily subdued and promoters are able to obtain approvals
and get tasks done at the behest of the minority shareholders within the letter of the law.
Indispensable in India, these owners or promoters of giant powerhouses usually find
themselves congenial in the political landscape as well, which also majorly affects their
ability to influence decisions smoothly without much ado.
While one may argue that the legal framework enshrined under the Companies Act
2013 and the SEBI guidelines ensures maximum protection to the minority shareholders,
it does not hold true in the practical picture. The Companies Act 2013 offers protection to
the minority shareholders by making a provision of oppression and mismanagement
under Section 241 wherein ‘any member of a company can make a whereby controlling
shareholders can wipe out the effect of the cumulative voting process.
Further, Section 244 of the Indian Companies Act 2013 prescribes the shareholder
qualifications required to make an application under Section 241 of the same act which is
“in the case of a company having a share capital, not less than one hundred members of
the company or not less than one-tenth of the total number of its members, whichever is
less, or any member or members holding not less than one-tenth of the issued share
capital of the company.”
The most recent example of the inadequacy of this provision may be seen in the
Tata-Mistry case, where Cyrus Mistry filed a lawsuit before the NCLT under Section 241
of the act alleging oppression and mis-management against Tata Sons along with a plea
for waiver. The NCLT rejected the waiver application as well as the petition alleging
oppression and mismanagement stating that firstly, Mistry did not hold 10% shareholding
in Tata Sons as it does not meet the eligibility threshold for waiver and secondly, he
failed to fulfil the cause of action in his allegations against Tata Sons.42 NCLT took the
view that the act of the majority was not hit by repugnancy and that the petitioner failed
to sufficiently establish harm or injury to economic interest, as substantial interest is not
enough. The Tribunal also went on to say that majority is the rule and minority is the
exception and that purposive interpretation is not a regular but only a rare phenomenon.43
Thus, we see that in the absence of there being a case of shareholder action and affecting
economic interests, waiver applications may not be maintainable. NCLT has adopted a
technical approach to ensure that frivolous litigation is prevented and adopted the basic
principles for granting relief in interim applications.44
As witnessed in the Tata Mistry case, the Mistry family firms own 18.94% ordinary
shares in Tata Sons and have been on the board for over 30 years. The stake of Mistry’s
firm is less than the required shareholding to block a special resolution that requires a
75% support. The minutes of the board meeting held on 24th October 2017 indicate that
when Cyrus Mistry was removed as chairman, no representative of his family firm that
has been a minority shareholder for a long time was present in the board meeting. The
plight of the ousted chairman was such that even the copy of legal opinions taken by the
company about his removal were not made available to him in advance.45 Thus, we see
that there has been complete failure of the principles of transparency, accountability and
fairness, and independence has been largely compromised. It is submitted that whether
the allegations raised by Mistry are right in law, the procedural fairness in upholding
shareholders democracy is imperative and should not be compromised.46
Apart from the Indian regulatory framework, the OECD Principles of Corporate
Governance, 1999 have served as parameters for corporate governance norms for several
 Corporate governance in India 29

countries including India. These principles have formed the basis for the corporate
governance jurisprudence in many countries and in most of them these, their respective
regulatory and enforcement legislations on corporate governance emulate these
principles. They provide for shareholder protection and lay down certain basic guidelines.
Despite the strong legal framework along with the guiding principles of OECD that
argue for stricter framework for minority protection and various other committees that
were formed in the interim, the rights of the minority shareholders only remain effective
in theory.

5 Independence of the independent directors – reality or myth?

The issue of Nussli Wadia’s removal as an independent director from the board has raised
several governance questions as it defies both law and logic. Wadia has strongly
retaliated his removal arguing for a stronger protection for independent directors for
carrying out onerous duties and responsibilities. While Tata sons has alleged that he has
acted in concert with Mistry and defended their decision for being as per law, the
question of fairness of laws relating to removal of independent directors has come to
light. In the following paragraphs, the laws relating to removal of independent director
under Indian Companies Act has been analysed. The section raises some vital concerns
regarding the lacuna that exists under the laws, arguing for a case for immediate
attention. But first, let us understand the position of independent directors under the
company laws in India.

5.1 Independent directors under the Indian law

Independent directors are often expected to protect the interests of minority shareholders;
their foremost duty is to act for the benefit of the company.47 The independent directors
are supposed to act independent of the management and for the benefit of the
shareholders of the company. The concept of independent directors was introduced by the
Cadbury Committee Report on ‘The Financial Aspects of Corporate Governance’ in
1992.48 This has been adopted under the Indian regulatory framework in the same spirits.
The Cadbury report recognised that corporate governance is not only about prescribing
norms for corporate structures with a certain number of rules and regulations, but it is
about the need for broad principles, the true safeguard of which lies in the application of
informed and independent judgments by experienced and qualified individuals-executive
and non-executive directors, shareholders and auditors.49 The central components of this
voluntary code, the Cadbury code, are:
1 Board balance – The board should be a combination of executive and non-executive
directors, where the former can bring intimate business knowledge and the latter can
bring a broader perspective to the companies’ activities. The board and all its
directors share the responsibility of taking effective actions and decisions, without
any conflict of interest.50 The report lays great emphasis on the non-executive
directors and their ability to make independent judgment on key issues of strategy,
performance, resources, individual key appointments and standards of conduct. Most
non-executive directors on a board should be independent of the company.
30 N. Shikha and R. Mishra

Companies must make the necessary changes to the composition of the boards to
maintain their vitality.51
2 Role of chairman – The role of the chairman is crucial in securing good governance
by ensuring that the board and the executive and non-executive directors alike, are
motivated, encouraged and enabled to perform their respective roles. Also, the role
of chairman and chief executive should be separate so there is a clear division of
responsibilities, balance of power and decision-making so that there is no individual
has unfettered power.52
3 Board structures and procedures – The board should ensure that control of the
company remains in their hands through the decisions they make collectively to
ensure potential misjudgements and illegal practices. An important aspect of the
board is the appointment of committees, such as the audit, remuneration and
nomination committees. The board should function by way of a fixed schedule to
determine the procedures to be followed for any transaction or any other decisions
that are required to be taken in board meetings.53
4 Nomination committee – A nomination committee may be set up for making board
appointments. It should comprise of most non-executive directors and be chaired
either by the chairman or a non-executive director.54
5 Audit committee – The board should establish an audit committee of at least three
nonexecutive director s with written terms of reference that deal clearly with its
authority and duties. The primary responsibility for good corporate governance rests
with the directors. The statutory role of the auditors is to provide the shareholders
with independent and objective assurance on the reliability of the financial
statements and of certain other information provided by the company.55
6 Remuneration committee – Membership of this committee should be made up
wholly of independent non-executive directors. There will need to he attendance by
executive directors for appropriate items. Boards should establish a remuneration
committee, made up of independent non-executive directors, to develop policy on
remuneration and devise remuneration packages for individual executive directors.56
7 Board accountability to shareholders – The shareholders elect the directors and the
latter run the business on their behalf and are held accountable for their actions and
decisions. The shareholders should effectively communicate their views through
general meetings and regularly put forward their questions. The effectiveness of
general meetings could be increased to strengthen the accountability of boards
towards the shareholders.57
Under the Indian Law, the Companies Act of 1956 did not require appointing an
independent director on the company board and it was a mandatory requirement only for
listed companies. Also, the Act of 1956 did not define the term ‘independent director’.
The 2013 Act has defined the term ‘independent director’ under Section 2(47) which says
that ‘independent director’ means an independent director as referred to in Subsection (5)
of Section 149 and has taken over many of the provisions of Clause 49 of the listing
agreement and provides the criteria for tenure, remuneration, qualifications, appointing,
and liability of the independent directors. It also creates provisions for position of
nominee directors and a mandatory requirement to appoint at least one-woman director
 Corporate governance in India 31

on board. The new companies act lays great emphasis on enduring the actual
independence of the directors for better management and administration and to act in the
best interests of the shareholders and other stakeholders. The new act has also stressed
upon transparency and accountability norms while making independent directors liable
for acts or omissions or commission by the company that was with their knowledge and
attributable through the board process.
The Act of 2013 has increased the number of directors to 15 through a special
resolution process. It also introduces four committees, namely:
1 audit committee
2 nomination and remuneration committee
3 stakeholders relationship committee
4 corporate social responsibility committee.
Section 173 of Act of 2013 deals with meetings of the board and Section 174 provides for
the quorum. It makes it mandatory for at least one independent director to be present in
the board meeting and if for some reason he is not able to attend, then the decision taken
in the meeting shall only be final after ratification by the independent director. It also
introduces the provision for directors to participate in board meetings through video
conferencing or other audio-visual means that are capable of recording and recognising
the participation of directors. Participation of directors by audio-visual means would also
be counted towards the quorum.
Provisions laid down in Clause 49 of the listing agreement were the parameters,
although the definition of independent directors in the latter failed to specify procedures
for appointment, removal, extent of their powers and duties and the role of the
shareholders in their appointment and removal.58 To be further in line with the listing
agreement, Schedule IV of the Companies Act 2013 provides for a ‘Code for independent
directors’ that lays down guidelines for professional conduct along with roles, duties,
evaluation mechanism, meetings, etc.
The lessons from the past indicate that while listed companies were required to
undertake mandatory evaluations of their boards of directors, including independent
directors, most of them did not do so despite the provisions of the Companies Act and the
SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015.
In the wake of the Tata-Mistry legal feud, the Indian regulator SEBI released a
guidance note on 5th January 2017 addressing the issue of evaluation of the board of
directors of a listed company. The guidance note provides for a threefold evaluation
process consisting of a pre and post evaluation mechanism providing two methods of
evaluation, internal and external and prescribes voluntary disclosure requirements and
reviews based on feedback from concerned parties. The aim of the note is “to educate the
listed entities and their board of directors about various aspects of board evaluation and
improve their overall performance as well as corporate governance standards to benefit
all stakeholders.” Though the note is not exhaustive or mandatory, it has been seen as an
objective document to ensure whether the board discussions are healthy and free flowing,
whether critical and dissenting suggestions are welcome and whether conflicts of interest
are monitored and dealt with.59
With very significant changes that have been introduced in the Companies Act 2013
with a focus on board processes, the act has been criticised for leaving many loose ends
32 N. Shikha and R. Mishra

giving way to future disputes. It does not properly cater to avoid bias and subjectivity of
the board in certain decision-making cases. Further, the provisions do not prescribe a fair
and separate process for the removal of independent directors, as opposed to non-
independent directors. Therefore the majority shareholders and promoters still have the
final word on the removal of independent directors, effectively nullifying their ability to
raise any real concerns regarding company management.60 The reason for this is in
developed markets such as the USA and the UK, independent directors are relatively
protected as shareholdings are much more diffused.

5.2 Removal of independent directors: filling the gap between conventional

wisdom and reality
The Tata-Mistry case is a perfect testament to this predicament of the Indian framework.
Following the legal battles between the ousted chairman and the promoter, Indian
billionaire industrialist Nussli Wadia, Chairman of Wadia Group who had been an
independent director of Tata Sons for over three decades was removed claiming that he
had been galvanising other independent directors to act against the interests of the Tata
Group. Wadia refuted the allegations and made a plea to the SEBI seeking its
intervention on his ouster.61 To oust Nussli Wadia from Tata Steel and Tata Motors, all
that was required of Tata Sons was call for a special shareholder meeting and win a
simple majority vote. The dominant shareholder, who is calling for the removal, is not
barred from voting on the issue. The ordinary resolution requirement for removal of
independent directors highlighted yet another form of the board’s weakness under Indian
corporate set-up. The regulators had also opined that this requirement of ordinary
resolution appears low considering the existence of large shareholdings by promoters or
promoter groups in large-sized Indian companies, as well as because of the unawareness
and inactive role of majority of retail investors into the matters of company’s
management, including the passing of resolutions for removal of independent directors.62
This issue also raised eyebrows as to the role of independent directors and whether
their role is justified by the term ‘independent’. SEBI in Wadia removal decided to go by
the rule book of Tata Sons rule book and Section 149 of the Companies Act 2013 and
allowed company to remove the director by ordinary resolution but at the same time
stated that there is a lacuna in the law and observed that the present provisions make the
removal process less stringent than the appointment.
The use of legal armour to oust an independent director from board has questioned
the position of other independent directors on the board. Are they expected to act as a
mere rubber stamp or should they be expected to act objectively and independently.63
There could have been no better example than the Tata-Mistry tussle to substantiate the
governance issues highlighted in this paper? This issue is also one that indicates that the
Indian ‘culture’ of family-oriented businesses is widespread and ironically, has
widespread protection of the law. It also evidences the fact that if a company that has
commanded decades of pristine reputation can falter in its governance principles, the
deficiencies in governance standards are far from being resolved. The Tata-Mistry
dispute has brought to the fore many discrepancies in management decisions, especially
the carefully crafted roles of the majority shareholders and independent directors, where
the former are usually the flag bearers of the company and the latter are to remain under
the influence of the former for as long as it may require. In most cases such as this one,
 Corporate governance in India 33

the independent directors are often silenced under the garb of observing their ‘fiduciary
duties’ while the reality may be far from this.
In the Tata case, it is far too coincidental that all the independent directors took a
unanimous decision to remove Cyrus Mistry as chairman without offering him an
opportunity to defend his ouster; rather, what appears more believable is that this decision
was taken to serve the interests of the overpowering shareholders (Tata Trusts). It would
certainly have been closer to logic and reason if Mistry were removed through a
shareholder meeting rather than a seven to one board meeting that was attended by a
select few. The most obvious conclusion that flows out of this unfortunate reality is that
in India, there is an absence of wisdom about division of roles and responsibilities, and
separation of powers. While the board and its directors are often left at the mercy of the
promoters who most often also find themselves to be the controlling shareholders, the
result being, concentration of power in the hands of a privileged few.
While the legislators are relooking into the provision of ousting of independent
directors, it will be interesting to see how the judiciary in case of Tata and Mistry
observes such removal, since the inclination of the judicial and legislative framework is
tilted towards upholding company decisions unless proven otherwise by solid evidence or
testimony.

6 Recommendations of the Uday Kotak committee

The 21-member SEBI Committee was constituted on 2nd June 2017 under the
chairmanship of Uday Kotak, Executive Vice-Chairman and MD, Kotak Mahindra Bank
Ltd. with the objective to overhaul the standards of corporate governance of listed
companies in India. The recommendations centred on the following principles:
a Shaping governance for long-term value creation.
b Shaping governance to protect shareholder interests.
c Building regulatory capacity for enhancing governance in listed entities.
The recommendations of the committee with proposed amendments to the SEBI (Listing
Obligations and Disclosure Requirements) Regulations 2015 are given briefly below:
a Minimum of six directors on the board of directors.
b Board must disclose the competencies/expertise that its directors should possess.
c Special resolution for appointment/continuation of non-executive directors beyond
the age of 75 years for the relevant term.
d Interaction between the non-executive directors and senior management at least once
a year. The quorum for every board meeting should be a minimum of three directors
or one-third of the total strength of the board of directors, whichever is higher,
including at least one independent director.
e Listed entities with more than 40% public shareholding should separate the roles of
chairperson and MD/CEO.
34 N. Shikha and R. Mishra

f The maximum number of listed entity directorships held by a person to be brought

down to 8 April 2019 and to 7 April 2020.
g All listed entities, irrespective of whether the chairperson is executive or
non-executive, may be required to have at least half its total number of directors as
independent directors in a phased manner.
h The eligibility criteria of independent directors to exclude persons who constitute the
promoter group and board inter-locks arising due to common non-independent
directors on boards of listed entities. The board as part of the board evaluation
process may be required to certify every year that each of its independent directors
fulfils the conditions specified in the regulations.
i Formal training and induction for independent directors especially with respect to
governance.
j Requirement of a lead independent director especially where the chairperson is
non-independent.
k Independent directors to hold more than one exclusive meeting in a year without the
presence of other directors.
l Related parties may cast a negative vote on matters related to related party
transactions.
m Role of committees: The audit committee should meet at least five times a year and
all other mandatory committees to necessarily meet at least once a year. For
meetings of each committee, the presence of at least one independent director may
be made mandatory.
• Audit committee: The committee should review the utilisation of funds of listed
entity infused into unlisted subsidiaries including foreign subsidiaries, scrutinise
the end utilisation of funds where the total amount of loans/advances/investment
from the holding company to the subsidiary exceeds Rs. 100 crore or 10% of the
asset size of the subsidiary, whichever is lower.
• Nomination and remuneration committee: Two-thirds directors will be
independent directors. All payments to the senior management are to be
recommended by this committee.
• Stakeholder relationship committee: The role of SRC to be widened to include
resolving security holder grievances, proactively engaging and communicating
with security holders, reviewing measures to be taken for effective exercise of
voting rights by shareholders, reviewing adherence to service standards in
respect of services rendered by the registrar and share transfer agent, etc. There
should be at least three directors with one being an independent director.
• Risk management committee: The requirement of the RMC may be extended to
the top 500 listed entities by market capitalisation as against to the top 100
currently. The role of this committee is also to cover the aspects of cyber
security.
• Information technology committee: This committee may be set up to focus on
digital and other technological aspects.
 Corporate governance in India 35

While most of the recommendations have been accepted by SEBI, others have been
accepted with few modifications or have been referred to government agencies and
professional organisations for their views/suggestions. Nevertheless, the
recommendations and proposed amendments if taken in the right spirit, shall have a
long-standing impact on fairness, transparency and accountability in governance of listed
companies.

7 Conclusions: the way forward

The above discussions show how corporate governance of Indian business houses have
unique issue of disciplining the dominant shareholders who generally belong to the
family of promoters. The dominance of the family promoters as shareholders on the
company’s board makes the board less independent. They even compromise the role of
independent directors who in practice have been appointed by these majority
shareholders.
While India has tried to follow best practices of governance, taking cues from Anglo
Saxon model and OECD Principles on corporate governance, it has failed to address its
local peculiarities.64 The new Companies Act 2013 has addressed issues of governance to
some extent, by defining who shall be an independent director and providing for code for
duties of directors, a lot remains to be done in this regard.
Coming to the main question of role of promoters in corporate governance in India as
addressed in this paper, it is submitted that the promoters have travelled beyond their
classical role of being mere founders of a company and continue to serve as shareholders
of the company. In cases where their shareholding is reduced to a small fraction, they still
influence board through their constant mentoring, as seen in case of Infosys. This
continued association comes in way of making independent decision by the board.
Further, the legal process of appointment and removal of directors, including that of an
independent director, has posed great challenge in addressing the board interference by
promoters.
The way out of the situation arising from Tata companies and Infosys is to have
strong board of directors with a set of competent independent directors who adhere to the
concept of excellence in corporate governance.65 This objective cannot be achieved by
mere regulatory provisions in the Companies Act 2013, which do not take one to a
definite position in the context of companies for appointment of independent directors.
To achieve this, the ethical code of directors’ conducts need to develop in a manner that
business ethics of such directors does not remain subject of literature but becomes a
matter of practice through a constant vigil and enforcement mechanism.66
The other aspect relates to pecuniary relationship for making a person disqualified for
being appointed as an independent director. Such observations are merely ornamental. It
is the set of people in the board of directors – executive and non-executive (independent)
directors that share the future of companies. In other words, the human element in
corporate governance makes companies to optimise their functioning and fully utilise
resources. This need picking up of professionally trained good independent
directors – men of knowledge, character and integrity, which demand cannot be met fully
from the existing stock of persons but must be trained to meet future demand in a regular
way. Independent directors need not be picked up just to bestow favours or adhere to the
36 N. Shikha and R. Mishra

legal requirements under the present practice. Such persons need to have an
understanding of the business of the companies, financial expertise, strategic
management qualities, understanding of human behaviour of internal staff, customers,
vendors, R&D aspect of companies, understanding of integrated logistics and supply
chains, the management and understanding of web-based IT systems and similar other
expertise, sending to the work culture of the enterprise, where they are to work.
Obviously, all the qualities cannot be expected in one or two individuals.
The board of directors will have to be broad based with persons of different
disciplines. Such persons can be picked up from:
1 Existing personalities
2 Trained for the future. Regarding the second aspect, the suggestions are as under:
• The Ministry of Company Affairs should provide encouragement through
financial grants, where necessary, to the existing institutions to structure training
programmes for company directors and conduct such courses on quarterly/half
yearly basis.
• All independent directors should attend at least one such training course before
assuming responsibilities as independent directors or within one year of
becoming an independent director.
• A person, who has not undergone such a course of training, should be ineligible
for being appointed as an independent director. This suggestion can be
implemented in a phased manner, if the demand outstrips the supply.
• There should be a trainee appraisal system periodically to judge the quality of
the programme and to decide which agencies should be given a greater role and
which should be dropped.
• Out of the independent directors in a company a lead director may be appointed
to coordinate the functioning of the independent directors. The present criteria of
financial relationship to disqualify an independent director should continue.
• The Ministry of Company Affairs should maintain a data bank of independent
directors as mandated by s. 150 of the Companies Act 2013 and place it on its
website so that the companies can pick up such directors from such bank.
• The role of promoter should be clearly defined in the law to give it a strict
meaning and definition, leaving less or no scope for misinterpretation.
• The independent directors should be appointed by a consortium of outgoing
independent directors and this decision should not be left to the promoters or the
board.
• Any removal or disqualification should only be through a speaking proposal
which should be circulated well in advance and voting should be made possible
through paper ballots and audio-visual mediums such as video conferences or
emails.
Thus, it is submitted that to achieve excellence in corporate governance, national
peculiarities should be addressed alongside the global issues of governance. In case of
Indian companies, laws need to provide a strict mechanism that restricts promoters who
are enjoy and influence the decision making in the company through informal methods
(despite their reduced shareholdings), compromising the independent business judgment
 Corporate governance in India 37

of the executive directors and the board. This issue of promoters’ interference on the
board if not addressed well in time by the regulators, the battle of stakes will continue to
disrupt the business environment of the country.

Notes
1 For further discussion, please see Shikha, N. (2017) ‘Corporate governance in India – a
paradigm shift’, Int. J. of Corporate Governance, Vol. 8, No. 2, pp.81–105.
2 Chandrachud, A. (2011) ‘The emerging market for corporate control in India: assessing (and
devising) shark repellents for India’s regulatory environment’, Wash. U. Global Stud. L. Rev.,
Vol. 187, No. 10, p.238.
3 Please see Isaacs, N. (1925) ‘Promoters a legislative problem’, Harvard Law Review, May,
Vol. 38, No. 7, pp.887–902.
4 See Lela, P. and Seems, M. (2007) ‘Diversity in shareholder protection in common law
countries’, J. Inst’l. Comparisons, Vol. 5, No. 3, p.3 [online] http://ssrn.com/abstract--988409
(accessed 12 September 2017).
5 Bombay Stock Exchange Listing Agreement, cl. 40A(iii).
6 Rule 19(2)(b) of the Securities (contracts) Regulation Rules, 1957, read together with
Regulation 41 of the Securities and Exchange Board of India (Issue of Capital and Disclosure
Requirements) Regulations, 2009 and Clause 40A of the Listing Agreement of the Bombay
Stock Exchange. However, Rule 19(2)(b) was amended on 4 June 2010 by a Ministry of
Finance Notification, by which:
1 only companies whose post issue capital calculated at offer price is more than Rs. 40,000
million (i.e., $868 million) can maintain public shareholding of 10%
2 such companies must raise their public shareholding levels up to 25%, by a minimum of
5% in any given year.
7 The term acting in concert has been defined under Indian Law under the Regulation 2(e) of the
SEBI Takeover Code in the following words: “Persons who, for a common objective or
purpose of substantial acquisition of shares or voting rights or gaining control over the target
company, pursuant to an agreement or understanding (formal or informal), directly or
indirectly cooperate by acquiring or agreeing to acquire shares or voting rights in the target
company or control over the target company.”
8 Violating this rule for up to three months after the initial six-month offering period triggers
compulsory delisting, and promoters may be required to acquire the securities of the remaining
public shareholders at fair market value, subject to their option to remain shareholders in the
corporation. Securities and Exchange Board of India (Delisting of Securities) Guidelines,
2003, Gazette of India, Sections 9.4, 17.1, 17.2 (2003). Note that The Indian Takeover Code,
under the ‘creeping acquisition’ rule, permits promoters (or for that matter, anybody else) who
hold 15% to 55% in a corporation to consolidate their holding by up to 5% each financial year,
but it does not allow them to exceed 55% voting rights post-acquisition without otherwise
making a public announcement or setting off any of the triggers requiring a mandatory tender
offer. Additionally, inter-se transfers within the promoter group are ordinarily exempt from the
mandatory tender offer requirements of the Takeover Code.
9 See Chakrabarti et al. (2007) Supra Note 54, at 59; Family Businesses Raise Corporate
Governance Concerns, Says Moody’s, Indian Express, 23 October [online]
http://www.indianexpress.com/story/231282.html [hereinafter Moody’s]. Also
Narayanan, S.K.T. (2006) Indian Family-Managed Companies: The Corporate Governance
Conundrum, Unnumbered Working Paper [online] http://ssm.com/abstract 1093230 (accessed
12 September 2017).
10 Supra at 1.
11 Anderson, R.C. and Reef, D.M. (2003) ‘Founding family ownership and firm performance:
evidence from the S&P 500’, Journal of Finance, Vol. 58, No. 3, pp.1301–1328.
38 N. Shikha and R. Mishra

12 See La Porta, R. et al. (2001) ‘Investor protection and corporate valuation’, J. Fin., Vol. 57,
No. 3, p.1147, La Porta, R. et al. (1997) ‘Legal determinants of external finance’, J. Fin.,
Vol. 52, No. 3, p.1131, La Porta, R. et al. (2006) J. Fin., Vol. 61, No. 1, pp.2, 27, Doidge, C.,
Karolyi, G.A. and Stulz, R.M. (2007) ‘Why do countries matter so much for corporate
governance’, Journal of Financial Economics, Vol. 86, No. 2, pp.1–39.
13 La Porta, R., Lopez-de-Silanes, F., Shleifer, A. and Vishny, R.W. (1998) ‘Law and finance’,
Journal of Political Economy, Vol. 106, No. 6, pp.1113–1155.
14 Dhawan, J. (2006) ‘Board of directors and corporate governance in large listed firms in India’,
IUP Journal of Corporate Governance, Vol. 5, No. 3, pp.39–61.
15 Ghosh, S. (2006) ‘Do board characteristics affect corporate performance? Firm-level evidence
for India’, Applied Economics Letters, Vol. 13, No. 7, pp.435–443(9).
16 Monks, R. and Minnow, N. (1995) Corporate Governance, Blackwell, Cambridge,
Massachusetts.
17 Shleifer, A. and Vishnu, R. (1993) ‘Survey of corporate governance’, Quarterly Journal of
Economics, Vol. 108, No. 3, pp.995–1025.
18 Prasanna, P.K. and Corporate Governance (2006) ‘Independent directors and financial
performance: an empirical analysis’, Indian Institute of Capital Markets 9th Capital Markets
Conference Paper.
19 Barton, D., Coombes, P. and Wong, S.C-Y. (2004) ‘Asia’s management to pay closer attention
to the problem of corporate governance challenge’, McKinsey Quarterly, Vol. 2, pp.54–61.
20 Jackling, B. and Johal, S. (2009) ‘Board structure and firm performance: evidence from
India’s top companies’, Corporate Governance: An International Review, Vol. 17, No. 4,
pp.492–509.
21 Cadbury, A. (1992) The Financial Aspects of Corporate Governance, pp.14–90, Gee
and Co. Ltd., London [online] http://www.ecgi.org/codes/documents/cadbury.pdf (accessed
12 September 2017).
22 For further discussions please see Reed, D. and Mukherjee, S. (2004) Corporate Governance
Reforms in Developing Countries, in Corporate Governance, Economic Reforms, and
Development, Vol. 10. However, there is some debate as to whether a standardised
Anglo-American model of corporate law even exists maladies of over influence of promoters
on board and the regulations for disciplining the dominant shareholders were not robust
enough. This resulted in several scams and incidents of ill corporate governance.
23 Virotic, A. (2010) ‘Evolution and effectiveness of independent directors in Indian Corporate
Governance’, Hastings Bus. L.J., Vol. 6, No. 281, p.376. For a critical view, see Shikha, N.
(2012) ‘Potemkin Village of independent directors’, Journal on Governance, Vol. 1, No. 5,
p.489.
24 Bhattacharya, A.K. (2013) Does India Need A Unique Corporate Governance Code? [online]
http://www.business-standard.com/article/economy-policy/asish-k-bhattacharyya-does-india-
need-a-unique-corporate-governance-code-112102900066_1.html (accessed 9 September
2017).
25 Ibid.
26 SEBI repeatedly made public statements through its chairman indicating its intention to ensure
that government companies too strictly comply with Clause 49. See PSUs must meet Clause
49 norms, REDIFF MONEY (India) (3 January 2008).
27 See SEBI cracks the whip-violation of corporate code under lens, THE TELEGRAPH (India)
(12 September 2007): SEBI proceeds against 20 Cos for not complying with Clause 49 norms,
THE HINDU. Also see during October and November 2008, SEBI passed a series of orders
involving several government companies, viz. NTPC Ltd. (8 October 2008), GAIL (India)
Ltd. (27 October 2008), Indian Oil Corporation Ltd. (31 October 2008) and Oil and Natural
Gas Corporation Ltd. (3 November 2008) [online] http://www.sebi.gov.in.
28 Rangaraya in his book argues that India is as an emerging economic giant. See Pangaria, A.
(2008) The Emerging Giant, Oxford University Press, India.
 Corporate governance in India 39

29 The Fight for Corporate Governance in India (2013) [online] http://www.livemint.com/

Opinion/hxFqnfbyCG5fRWD6PuiGfP/The-fight-for-corporate-governance-in-India.html
(accessed 12 September 2017).
30 Ibid.
31 In 2015, a proposal to buy Panayi Ltd., an Israeli automation company, was put before the
Board of Infosys for approval. Although this was highly contested by the then CFO, Rajiv
Bansal, eventually the deal was sealed for $200 million. To buy Panayi Ltd., Infosys ended up
paying a higher value by making a working capital investment of $20million as the Panayi
shareholders took out $20 million from the company. In the anonymous complaint made by a
whistle-blower, many controversial issues surrounding Bansal’s disagreement over the
acquisition, involvement of the top management in the decision to go ahead with the
acquisition, involvement of top lawyers and auditors of the company in covering up the
decision, were brought to light highlighting the fact that proper governance measures were
required to investigate the wrongdoings and the wrongdoers, however, this was far from what
transpired in the next few months at Infosys.
32 Infosys CEO Vishal Sikka Resigns: A Timeline of Events that Led to the Move (2017) [online]
http://www.livemint.com/Industry/krlpDy1RvB6JLUdksZNqaJ/Infosys-CEO-Vihal-Sikka-
resigns-A-timeline-of-events-that-l.html (accessed 12 September 2017).
33 Vishal Sikka Resigns: Timeline of Narayan Murthy’s Corporate Governance Tussle with
Infosys (2017) [online] http://www.financialexpress.com/industry/vishal-sikka-resigns-
timeline-of-narayana-murthys-corporate-governance-tussle-with-infosys/813392/ (accessed 12
September 2017).
34 Infosys Governance Issue: Why Narayan Murthy is Right About Voicing Concern (2017)
[online] http://www.firstpost.com/business/infosys-governance-issue-why-n-r-narayana-
murthy-is-right-about-voicing-concern-3276050.html (accessed 12 September 2017).
35 Full Text: Cyrus Mistry’s Email to Tata Sons Says he was Reduced to ‘Lame-Duck’ Chairman
(2016) [online] http://indianexpress.com/article/business/companies/full-text-cyrus-mistrys-
mail-to-tata-sons-board-members-reveals-a-lot-ratan-tata/ (accessed 10 September 2017).
36 Ibid.
37 Infosys Shares End Over 3% Higher on Nandan Nilekani’s Return (2017) [online]
http://www.livemint.com/Money/WrR3a3HF6CMoxJcW3SV7VP/Infosys-shares-rise-over-4-
as-investors-welcome-Nandan-Nile.html (accessed 12 September 2017).
38 For a review of this empirical literature, see Chakrabarti, R., Megginson, W.L. and
Yadav, P.K. (2008) ‘Corporate Governance in India’, J. App. Corp. Fin., Vol. 20, No. 59,
pp.70–71. Also see Dharmapala, H. and Khanna, V.A. (2008) Corporate Governance,
Enforcement, and Firm Value: Evidence from India [online] http://ssm.com/abstract=1105732.
39 Virotic argues that if independent directors can be removed by a simple majority of
shareholders, then the controlling shareholders can reverse the effect of appointing
independent directors by removing them through exercise of their influence. This could result
in disastrous consequences that exacerbate the majority-minority agency problem. For
instance he refers to Russia where one of the shortcomings of the revised company law in
Russia is that although it provided for director elections through mandatory cumulative voting,
it continued to retain a straight forward removal process (albeit with some differences).
40 Varma, J. (1997) ‘Corporate Governance in India: disciplining the dominant shareholder’,
IIMB Management Review, Vol. 9, No. 4, pp.5–18 [online] https://faculty.iima.ac.in/~jrvarma/
papers/iimbr9-4.pdf (accessed 12 September 2017).
41 Ibid.
42 Chatterjee, P., Desai, V. and Mistry, C. (2017) Tata Sons Legal Battle: NCLT Lays Down
Principles for Oppression and Mis-management Claims [online] http://www.nishithdesai.com/
information/news-storage/news-details/article/cyrus-mistry-tata-sons-legal-battle-nclt-lays-
down-the-principles-for-oppression-and-mis managemen.html (accessed 12 September 2017).
40 N. Shikha and R. Mishra

43 Cyrus Investments, Anr, V., Tata Sons and Ors (2016) NCLT [online]
http://nclt.gov.in/Publication/Mumbai_Bench/2017/397_398/Tata%20Sons%20Ltd.pdf
(accessed 12 September 2017).
44 Supra at 31.
45 Seven to One: How Cyrus Mistry was Removed from Tata Sons on 24 October [online]
http://www.business-standard.com/article/companies/seven-to-one-how-cyrus-mistry-was-
removed-from-tata-sons-on-october-24-116122200013_1.html (accessed 7 September 2017).
46 OECD (1999) OECD Principles of Corporate Governance, pp.15–21, Paris.
47 Cheffins, B. (2000) ‘Corporate governance reform: Britain as the exporter’, Hume Papers on
Public Policy: Corporate Governance and the Reform of the Company Law, Vol. 8, No. 1
[online] http://ssrn.com/abstract=215950. Note that Professor Cheffins continues to make an
interesting contrast with the position in insider systems: While agency costs seem unlikely to
pose a serious problem in countries with an insider/control-oriented system of ownership and
control, a different danger exists. This is that core investors will collude with management to
cheat others who own equity. For instance, a controlling shareholder might engineer
‘sweetheart’ deals with related firms to siphon off a disproportionate share of a public
company’s earnings. Minority shareholders can also be prejudiced if a company is dominated
by an entrepreneur who, motivated by vanity, sentiment or loyalty, continues to run the
business after he is no longer suited to do so or transfers control to family members who are
ill-suited for the job. It follows that in insider/control-oriented jurisdictions, providing suitable
protection for minority shareholders should be a higher priority than reducing agency costs
and fostering managerial accountability. Correspondingly, the corporate governance issues
that will matter most in such countries are likely to be of a different character than they are in
Britain.
48 Supra at 16.
49 Cadbury committee recommendations were based on ‘comply or explain’ policy where by the
non-compliers need to explain as to why have they not followed the commendations. See
MacNeil, I. and Li, X. (2006) ‘Comply or explain: market discipline and non-compliance with
the combined code’, Corporate Governance: An International Review, Vol. 14, No. 5,
pp.486–496. And Arcto, S., Bruno V. and Faure-Grimaud, A. (n.d.) Corporate Governance in
the UK: Is Comply or Explain Approach Working? [online] http://eprints.lse.ac.uk/24673/1/
dp581_Corporate_Governance_at_LSE_001.pdf (accessed 20 August 2018).
50 Supra at 16, pp.18–20.
51 Ibid, para 4.10–4.17, pp.21–23.
52 Ibid, para 4.7–4.9, pp.20–21.
53 Ibid, para 4.21–4.24, p.23.
54 Ibid, para 4.30, p.26.
55 Ibid, para 4.33–4.39, pp.26–29
56 Ibid, para 4.40–4.46, pp.30–31.
57 Ibid, para 46.1–6.8, pp.47–50.
58 Desai, V. and Rathod, S. (2017) Corporate Governance in India Faces a Potential Watershed
Moment, pp.9–15, The Official Publication of the Inter-Pacific Bar Association [online]
http://www.nishithdesai.com/fileadmin/user_upload/pdfs/NDA%20In%20The%20Media/New
s%20Articles/Corporate_Governance_in_India_Faces_A_Potential_Watershed_Moment.pdf
(accessed 12 September 2017).
59 Sebi Issues Guidelines to Evaluate Company Boards (2017) [online]
http://www.livemint.com/Companies/q2PhqwLf58etiqad9LGqHJ/Sebi-issues-guidelines-to-
evaluate-company boards.html (accessed 12 September 2017).
60 Supra at 47.
61 Amid Typhoon Tata Nussli Wadia Backs Cyrus Mistry (2017) [online]
https://www.forbes.com/sites/naazneenkarmali/2017/01/16/amid-typhoon-tata-nusli-wadia-
backs-Cyrus-Mistry/#46a4a5a44607 (accessed 12 September 2017).
 Corporate governance in India 41

62 Garg, P. (2017) ‘The Tata corporate governance episode: the India-specific issues and
concerns’, Indicators Law [online] https://indiacorplaw.in/2017/09/tata-corporate-governance-
episode-india-specific-issues-concerns.html (accessed 12 September 2017).
63 For further discussion please see Nolan, R.C. (2005) ‘The legal control of directors’ conflicts
of interest in the United Kingdom: non-executive directors following the Higgs report’,
Theoretical Inq. l., Vol. 413, No. 6, pp.427–429.
64 Afsharpour, A. (2009) ‘Corporate governance convergence: lessons from the Indian
experience’, Nw. J. Int’l L. & Bus., Vol. 335, No. 29, p.402.
65 For election of Independent directors, Amaranth proposes that they should be elected through
the method of cumulative voting. In this method, controlling shareholders will not be
permitted to vote for the election of independent directors. The independent directors will be
elected by most votes that are cast by all the non-controlling shareholders. Hence the
expression ‘majority of the minority’, see Supra 21.
66 For further discussion on corporate governance and ethics, please see Argon, S. (2005)
‘Corporate governance: an ethical perspective’, Journal of Business Ethics, Vol. 61, No. 4,
pp.343–352.