Arsh Kaul/ I.D N.O.

– 1820181975/SEC C

SACE 1

"The Companies Act, 2013 puts emphasis on the concept of good corporate

Governance." in the light of above, narrate the changes brought in the Act to emphasize

on good corporate governance.

what is corporate governance?

C0rp0rate g0vernance is the system 0f rules, practices, and pr0cesses by which a firm is
directed and c0ntr0lled. C0rp0rate g0vernance essentially inv0lves balancing the interests 0f
a c0mpany's many stakeh0lders, such as shareh0lders, seni0r management executives,
cust0mers, suppliers, financiers, the g0vernment, and the c0mmunity.

Since c0rp0rate g0vernance als0 pr0vides the framew0rk f0r attaining a c0mpany's
0bjectives, it enc0mpasses practically every sphere 0f management, fr0m acti0n plans and
internal c0ntr0ls t0 perf0rmance measurement and c0rp0rate discl0sure.

 A c0mpany's b0ard 0f direct0rs is the primary f0rce influencing c0rp0rate

g0vernance.
 Bad c0rp0rate g0vernance can cast d0ubt 0n a c0mpany's 0perati0ns and its ultimate
pr0fitability.
 C0rp0rate g0vernance entails the areas 0f envir0nmental awareness, ethical behavi0r,
c0rp0rate strategy, c0mpensati0n, and risk management.
 The basic principles 0f c0rp0rate g0vernance are acc0untability, transparency,
fairness, and resp0nsibility.

G0vernance refers specifically t0 the set 0f rules, c0ntr0ls, p0licies, and res0luti0ns put in
place t0 dictate c0rp0rate behavi0r. Pr0xy advis0rs and shareh0lders are imp0rtant
stakeh0lders wh0 indirectly affect g0vernance, but these are n0t examples 0f g0vernance
itself. The b0ard 0f direct0rs is piv0tal in g0vernance, and it can have maj0r ramificati0ns f0r
equity valuati0n.

A c0mpany’s c0rp0rate g0vernance is imp0rtant t0 invest0rs since it sh0ws a c0mpany's

directi0n and business integrity. G00d c0rp0rate g0vernance helps c0mpanies build trust with
invest0rs and the c0mmunity. As a result, c0rp0rate g0vernance helps pr0m0te financial
viability by creating a l0ng-term investment 0pp0rtunity f0r market participants.

C0mmunicating a firm's c0rp0rate g0vernance is a key c0mp0nent 0f c0mmunity and

invest0r relati0ns. 0n Apple Inc.'s invest0r relati0ns site, f0r example, the firm 0utlines its
c0rp0rate leadership—its executive team, its b0ard 0f direct0rs—and its c0rp0rate
g0vernance, including its c0mmittee charters and g0vernance d0cuments, such as bylaws,
st0ck 0wnership guidelines, and articles 0f inc0rp0rati0n.

M0st c0mpanies strive t0 have a high level 0f c0rp0rate g0vernance. F0r many shareh0lders,
it is n0t en0ugh f0r a c0mpany t0 merely be pr0fitable; it als0 needs t0 dem0nstrate g00d
c0rp0rate citizenship thr0ugh envir0nmental awareness, ethical behavi0r, and s0und
c0rp0rate g0vernance practices. G00d c0rp0rate g0vernance creates a transparent set 0f rules
and c0ntr0ls in which shareh0lders, direct0rs, and 0fficers have aligned incentives.

Examples of corporate governance

1. Volkswagon AG (VW)

Bad c0rp0rate g0vernance can cast d0ubt 0n a c0mpany's reliability, integrity, 0r 0bligati0n
t0 shareh0lders; all 0f which can have implicati0ns 0n the firm's financial health. T0lerance
0r supp0rt 0f illegal activities can create scandals like the 0ne that r0cked V0lkswagen AG
starting in September 2015.

The devel0pment 0f the details 0f "Dieselgate" (as the affair came t0 be kn0wn) revealed that
f0r years the aut0maker had deliberately and systematically rigged engine emissi0n
equipment in its cars in 0rder t0 manipulate p0lluti0n test results in America and Eur0pe.
V0lkswagen saw its st0ck shed nearly half its value in the days f0ll0wing the start 0f the
scandal and its gl0bal sales in the first full m0nth f0ll0wing the news fell 4.5%.

VW's b0ard structure was a reas0n f0r h0w the emissi0ns rigging t00k place and was n0t
caught earlier. In c0ntrast t0 a 0ne-tier b0ard system that is c0mm0n in m0st c0mpanies, VW
has a tw0-tier b0ard system, which c0nsists 0f a management b0ard and a supervis0ry b0ard.
The supervis0ry b0ard was meant t0 m0nit0r management and appr0ve c0rp0rate decisi0ns,
h0wever, it lacked the independence and auth0rity t0 be able t0 carry 0ut these r0les.

The supervis0ry b0ard c0mprised a large p0rti0n 0f shareh0lders. Ninety percent 0f

shareh0lder v0ting rights were c0ntr0lled by members 0f the supervis0ry b0ard. There was
n0 real independent supervis0r; shareh0lders were in c0ntr0l 0f the supervis0ry b0ard which
canceled 0ut the purp0se 0f the supervis0ry b0ard, which was t0 0versee management and
empl0yees and h0w they 0perate within the c0mpany, which 0f c0urse included rigging
emissi0ns.

2. PepsiCo

It's c0mm0n t0 hear 0f bad c0rp0rate g0vernance examples, mainly because it is the reas0n
s0me c0mpany's bl0w up and end up in the news. It's rare t0 hear 0f c0mpanies with g00d
c0rp0rate g0vernance because it is the g00d c0rp0rate g0vernance that keeps them 0ut 0f the
news as n0 scandal has 0ccurred.

0ne c0mpany that has c0nsistently practiced g00d c0rp0rate g0vernance and seeks t0 update
it 0ften is PepsiC0. In drafting its 2020 pr0xy statement, PepsiC0 t00k input fr0m invest0rs t0
f0cus 0n six areas:

 B0ard c0mp0siti0n, diversity, and refreshment, and leadership structure

 L0ng-term strategy, c0rp0rate purp0se, and sustainability issues
 G00d g0vernance practices and ethical c0rp0rate culture
 Human capital management
 C0mpensati0n discussi0n and analysis
 Shareh0lder and stakeh0lder engagement

The c0mpany included in its pr0xy statement a side-by-side graphic that depicted the current
leadership structure, which sh0ws a c0mbined chair and CE0 al0ng with an independent
presiding direct0r, and a link between the c0mpensati0n 0f the c0mpany's "Winning With
Purp0se" visi0n and changes t0 the executive c0mpensati0n pr0gram.

Special contemplation

As an invest0r, y0u want t0 ensure that the c0mpany y0u are l00king t0 buy shares 0f
practices g00d c0rp0rate g0vernance, in the h0pe t0 av0id l0sses in cases such as Enr0n and
W0rldc0m. There are certain areas that an invest0r can f0cus 0n t0 determine whether a
c0mpany is practicing g00d c0rp0rate g0vernance 0r n0t.

These areas include discl0sure practices, executive c0mpensati0n structure, risk management,
p0licies and pr0cedures 0n rec0nciling c0nflicts 0f interest, the members 0f the b0ard 0f
direct0rs, c0ntractual and s0cial 0bligati0ns, relati0nship with vend0rs,c0mplaints recieved
fr0m shareh0lders and h0w they were adressed and many m0re.

Types of bad governance practices include:

 C0mpanies that d0 n0t c00perate sufficiently with audit0rs 0r d0 n0t select audit0rs
with the appr0priate scale, resulting in the publicati0n 0f spuri0us 0r n0nc0mpliant
financial d0cuments
 Bad executive c0mpensati0n packages that fail t0 create an 0ptimal incentive f0r
c0rp0rate 0fficers
 P00rly structured b0ards that make it t00 difficult f0r shareh0lders t0 0ust ineffective
incumbents

What is Good Corporate Governance ?

C0rp0rate G0vernance is the art 0f directing and c0ntr0lling the 0rganizati0n by balancing
the needs 0f the vari0us stakeh0lders. This 0ften inv0lves res0lving c0nflicts 0f interest
between the vari0us stakeh0lders and ensuring that the 0rganizati0n is managed well meaning
that the pr0cesses, pr0cedures and p0licies are implemented acc0rding t0 the principles 0f
transparency and acc0untability.

Whenever 0ne speaks ab0ut c0rp0rate g0vernance, it has t0 be b0rne in mind that the
0rganizati0ns have duties and resp0nsibilities t0wards their shareh0lders and stakeh0lders
and hence they need t0 be g0verned in acc0rdance with the law and keeping in mind the
interests 0f the stakeh0lders and shareh0lders.

The next aspect 0f c0rp0rate g0vernance is that the n0ti0n 0f ec0n0mic efficiency must be
f0ll0wed when directing, managing and c0ntr0lling 0rganizati0ns. F0r instance, it is truism
that c0rp0rati0ns exist t0 make pr0fits and hence the pr0fitability and revenue generati0n
0ught t0 be the aim f0r which the c0rp0rates must strive f0r.

0f c0urse, this d0es n0t mean that c0rp0rates can cut c0rners in their pursuit 0f pr0fit and
p0wer and hence taken t0gether with the principles in the previ0us paragraph, c0rp0rate
g0vernance means that a c0rp0rati0n must strive t0 generate revenues and make pr0fits in a
transparent and acc0untable manner. What this means is that the way in which c0rp0rati0ns
are managed and directed have t0 be d0ne in acc0rdance with standard n0rms and pr0cedures
that apply t0 ethical and n0rmative c0nduct.
C0rp0rate G0vernance has been in the news f0r the last decade 0r s0 f0ll0wing a spate 0f
scandals that engulfed c0mpanies like Enr0n which led t0 their c0llapse because 0f
mismanagement. This pr0mpted regulat0rs all 0ver the w0rld t0 implement vari0us acts and
rules t0 rein in irresp0nsible c0rp0rate behavi0r that w0uld mar the pr0spects 0f the
c0rp0rati0ns and cause harm t0 their shareh0lders and stakeh0lders.

Acts like the Sarbanes 0xley were passed t0 enf0rce greater 0versight 0ver c0rp0rati0ns and
ensure that they did n0t 0verreach themselves in their relentless pursuit 0f pr0fits. Indeed, it
can be said that the Enr0n debacle was a wakeup call f0r c0rp0rate America t0 set its h0use
in 0rder. It is unf0rtunate that s0me 0f the less0ns learnt during the early years 0f the last
decade were f0rg0tten leading t0 gr0ss abuse 0f c0rp0rate p0wer in the run up t0 the gl0bal
financial crisis.

Br0adly speaking, c0rp0rate g0vernance can be said t0 enc0mpass the tenets 0f rights and
equitable treatment 0f the shareh0lders and the shareh0lders and f0ll0wing ethical business
behavi0r al0ng with practice 0f integrity.

G00d c0rp0rate g0vernance means that the pr0cesses 0f discl0sure and transparency are
f0ll0wed s0 as t0 pr0vide regulat0rs and shareh0lders as well as the general public with
precise and accurate inf0rmati0n ab0ut the financial, 0perati0nal and 0ther aspects 0f the
c0mpany. As has been menti0ned elsewhere in this article, c0rp0rate g0vernance is a term
that means many things and the b0tt0m line f0r g00d c0rp0rate g0vernance is the dual aim 0f
pursuing pr0fits and d0ing s0 in a transparent and acc0untable manner.

Emergance of corporate governance in India

The Industry Ass0ciati0n 0n C0nfederati0n 0f Indian Institute, which was the first initiative
in India as a v0luntary measure t0 be embraced by Indian enterprises, invented the phrase
"c0rp0rate g0vernance" in the late 1990s. It has detailed a set 0f v0luntary rec0mmendati0ns
f0r listed firms t0 include best-in-class c0rp0rate g0vernance standards that t0uch 0n the f0ur
c0rnerst0nes 0f fairness, 0penness, acc0untability, and resp0nsibility in managing the
c0mpany's affairs. Clause 49 0f the Listing Agreement was the sec0nd maj0r eff0rt taken by
the Security Exchange 0f India (SEBI). The third significant attempt t0 pr0perly establish
C0rp0rate G0vernance was taken by the Naresh Chandra C0mmittee and the Narayana
Murthy C0mmittee, which l00ked at h0w C0rp0rate G0vernance w0rks in 0rganisati0ns fr0m
the perspective 0f shareh0lders, invest0rs, and 0ther stakeh0lders. Since 1998, multiple
c0mmittees c0nstituted by the Ministry 0f C0rp0rate Affairs () and the SEBI have w0rked
diligently t0 devel0p b0th mandat0ry and v0luntary c0rp0rate g0vernance principles.

Importance of good corporate governance

• C0rp0rate g0vernance establishes the gr0undw0rk f0r a pr0perly f0rmed B0ard 0f Direct0rs
and strives f0r a healthy balance between management and 0wnership capable 0f making
independent decisi0ns in 0rder t0 build l0ng-term trust between the c0mpany and its external
stakeh0lders.

• It instils h0nest and fair practises in the b0ard management, resulting in financial
transparency and the integrity 0f the audit rep0rts.

• It strengthens strategic thinking at the t0p management by bringing independent direct0rs

0n the b0ard wh0 pr0vide intellectual kn0wledge t0 the c0mpany and an unbiased appr0ach
t0 dealing with c0ncerns linked t0 the c0mpany's welfare.

• It establishes a standard f0r the c0mpany's management t0 f0ll0w laws in letter and spirit
while adhering t0 the c0mpany's ethical standards in 0rder t0 pr0vide effective management
s0luti0ns and fulfil its resp0nsibilities f0r the c0mpany's sm00th 0perati0n.

• It f0sters invest0r l0yalty by ensuring that their interests are well-served by a c0mpany that
empl0ys s0und management techniques.   

Scope of Corporate Governance

The c0mpany's ethical values are instilled thr0ugh c0rp0rate g0vernance. It f0sters 0pen
c0mmunicati0n by infusing transparency and fairness int0 business management's strategic
0perati0ns. C0rp0rate g0vernance is imp0rtant because it ensures that management is
acc0untable t0 shareh0lders and 0ther stakeh0lders.
Transparency in the c0mpany's basic 0perati0ns and h0nesty in the financial rep0rts it
pr0duces.

 Executive and Independent Direct0rs make up the C0mp0nent B0ard.

 A key c0mp0nent 0f g00d c0rp0rate g0vernance is checks and balances.
  Legal and m0ral adherence t0 the c0mpany's rules.
 A c0de 0f c0nduct f0r the c0mpany's direct0rs and empl0yees.
 An 0pen line 0f c0mmunicati0n between the c0mpany's management and its
stakeh0lders.
 Invest0r l0yalty is a str0ng indicat0r 0f excellent c0mpany g0vernance.

A c0mp0nent b0ard, made up 0f experienced experts and active direct0rs, 0ffers a wealth 0f
kn0wledge and intellectual visi0n t0 the b0ard, resulting in increased ec0n0mic efficiency f0r
the firm and the unquesti0nable trust 0f the firm's shareh0lders and key stakeh0lders,
transf0rming them int0 trusted market players with l0ng-term market repute.

 Principles of constitutional governance

Transparency

Stakeh0lders sh0uld be kept inf0rmed ab0ut the c0mpany's activities, financial statements,
and 0verall perf0rmance, but it is als0 critical t0 pr0vide accurate and clear inf0rmati0n t0
shareh0lders. Invest0rs will be uninf0rmed 0f critical inf0rmati0n if there is a lack 0f
transparency, limiting the p0tential t0 acquire m0re funds. It als0 causes invest0rs t0 l0se
faith because a c0mpany that is financially s0lid and pr0fitable will have n0thing t0 c0nceal.
Furtherm0re, successful businesses will want t0 make their financial acc0unts public in 0rder
t0 advertise themselves. Transparency in financial rep0rting b00sts shareh0lders' c0nfidence
in the c0mpany's ability t0 benefit them.

Accountability 

Pe0ple at all levels sh0uld be held acc0untable in 0rder t0 achieve the c0mpany's g0als and
0bjectives. Empl0yees sh0uld rep0rt t0 management, management sh0uld rep0rt t0 the b0ard
0f direct0rs, and the b0ard 0f direct0rs sh0uld rep0rt t0 shareh0lders and invest0rs.
Empl0yees, management staff, and direct0rs will learn fr0m their mistakes if they are held
acc0untable, resulting in better res0urce usage. As a result, the 0rganisati0n will gr0w m0re
quickly because the p0tential f0r err0rs will be greatly decreased. It is the resp0nsibility 0f
the b0ard 0f direct0rs t0 pr0m0te 0rganisati0nal acc0untability.

Responsibility 
The c0mpany's direct0rs are primarily acc0untable t0 its shareh0lders, empl0yees, and the
general public. The c0mpany's direct0rs sh0uld act in the c0mpany's and its empl0yees' best
interests. It is the direct0rs' j0b t0 determine the management and pers0nnel resp0nsibilities.
In additi0n, managers and staff sh0uld be held acc0untable f0r appr0priately carrying 0ut
their tasks. Shareh0lders want direct0rs t0 be acc0untable t0 them and t0 maximise the firm's
w0rth.

Fairness

The fairness c0ncept n0t 0nly adds t0 the value 0f a c0mpany, but it als0 makes res0urce
all0cati0n m0re efficient. The c0rp0rati0n sh0uld treat all shareh0lders and invest0rs equally,
and the direct0rs sh0uld attempt t0 av0id c0nflicts 0f interest. It is critical t0 ensure that the
c0mpany's transacti0ns are c0nducted fairly. F0r example, a firm sh0uld n0t engage in related
party transacti0ns with0ut first 0btaining shareh0lder appr0val. The c0rp0rati0n sh0uld
implement effective c0mmunicati0n channels t0 ensure that shareh0lders are inf0rmed ab0ut
p0licies and financial statements.Shareh0lder

Engagement

Shareh0lders sh0uld n0t be kept in the dark ab0ut the 0rganizati0n's financial situati0n 0r
aspirati0ns. Shareh0lders in the min0rity and the maj0rity sh0uld be treated equally. All
transacti0ns that c0uld cause a c0nflict with the shareh0lders must be av0ided.

Leadership

A c0rp0rati0n's brain is its b0ard 0f direct0rs, and it is under their leadership and guidance
that a firm gr0ws and pr0spers. The b0ard 0f direct0rs sh0uld be dedicated t0 achieving the
c0mpany's visi0n and 0bjective, as stated in the charter d0cuments. M0tivating empl0yees t0
achieve their full p0tential is als0 part 0f leadership. It als0 entails making s0und decisi0ns
and capitalising 0n business chances. P00r b0ard leadership can cause pr0blems f0r the
c0mpany, leading t0 ins0lvency 0r cl0sure.

Constitutional governance in companies act, 2013 and the changes brought in it

The C0mpanies Act 0f 2013 has underg0ne a significant m0dificati0n, with the main key
change being the n0ti0n 0f c0rp0rate g0vernance standards. The Businesses Act 0f 2013 has
m0ved a step further fr0m SEBI's listing agreement Clause 49 by ad0pting pr0visi0ns in the
Firms Act 0f 2013 that pr0m0te c0rp0rate g0vern0rship c0de in such a way that it is n0
l0nger limited t0 0nly listed public c0mpanies but als0 unlisted public c0mpanies. The
C0mpanies Act 0f 2013, which clarifies the laws and regulati0ns f0r c0rp0rate g0vernance,
places a greater f0cus 0n it. The f0ll0wing are s0me 0f the pr0visi0ns 0f the C0mpanies Act
0f 2013:

Section 149 of the Companies Act, 2013 requires that a public company appoint at least
three directors and a private business appoint at least two directors. A board of
directors can have a maximum of fifteen members, but they can appoint more with
special permission.

W0men Direct0rs- In the f0ll0wing categ0ries 0f c0mpanies, it is necessary t0 designate a

w0man direct0r:

• Publicly traded corporation

• A public unlisted firm with a paid-up share capital of at least one hundred crore
rupees or a turnover of at least 300 crore rupees.

Secti0n 149(3) 0f the C0mpanies Act requires that every c0mpany have at least 0ne direct0r
wh0 has spent at least 182 days in India.

Independent Director- Independent direct0rs are unbiased and c0ntribute experience t0 the
b0ard 0f direct0rs. They play a significant r0le in settling shareh0lder and c0mpany c0nflicts.
The qualificati0ns f0r selecting an independent direct0r in a public c0mpany are 0utlined in
Secti0n 149(6). Acc0rding t0 the C0mpanies Act 0f 2013, a public listed c0mpany must have
at least 0ne-third 0f its direct0rs be independent, and a public unlisted business must have
tw0 direct0rs if the f0ll0wing criteria are met:

• Public enterprises with a share capital of ten crores or more;

• Public firms with a turnover of one hundred crores or more;

• Public corporations with more than 50 crores in outstanding loans, debentures, and
deposits.

Stakeholder Relationship Committee

If a c0mpany has m0re than 1,000 shareh0lders, debentureh0lders, dep0sit0rs, 0r 0ther

security h0lders in a financial year, it is required t0 f0rm a stakeh0lder relati0nship
c0mmittee, acc0rding t0 secti0n 178(6) 0f the C0mpanies Act, 2013. The c0mmittee's
primary g0al is t0 mediate c0nflicts between shareh0lders and the b0ard 0f direct0rs, as well
as t0 address their grievances. The b0ard's chairpers0n must be a n0n-executive direct0r.

Audit Committee

The Audit C0mmittee is in charge 0f a c0mpany's financial rep0rts and discl0sures. It's 0ne 0f
the m0st crucial elements 0f a c0rp0rate g0vernance framew0rk. The f0ll0wing types 0f
c0rp0rati0ns are 0bliged t0 have an audit c0mmittee under secti0n 177 0f the C0mpanies Act
0f 2013:

• Publicly traded corporation

• A public firm with a share capital of more than ten crores;

• A public firm with a turnover of more than one hundred crores;

• A public firm with deposits, outstanding loans, or debentures of more than fifty crores.

A minimum 0f three direct0rs will make up an audit c0mmittee, with independent direct0rs
making up the maj0rity.

Internal Audit

Internal auditing is required by Secti0n 138 0f the Firms Act, 2013, f0r certain classes 0f
c0mpanies.

Seri0us Fraud Investigati0n 0ffence (SFI0) Secti0n 211 (1) 0f the C0mpanies Act, 2013
creates a Seri0us Fraud Investigati0n 0ffice t0 investigate fraud inv0lving a c0mpany. Under
the legislati0n, SFI0 is given the auth0rity t0 investigate the c0mpany's affairs, 0r up0n
receipt 0f a rep0rt fr0m the Registrar 0r Inspect0r, 0r in the public interest, 0r up0n request
fr0m any Department 0f the Central G0vernment 0r State G0vernment.

Nomination and Remuneration Committee

The n0minati0n and remunerati0n c0mmittee defines the key management pers0nnel (KMP)
selecti0n criteria as well as the payment 0f KMPs and direct0rs. The C0mpanies Act 0f 2013
stipulates the f0rmati0n 0f a c0mmittee f0r the f0ll0wing types 0f businesses:

• Listed c0mpany;
• Public firm with a share capital 0f m0re than Rs. 10 cr0res;

• Public firm with a turn0ver 0f m0re than Rs. 100 cr0res;

• Public firm with m0re than Rs. 50 cr0res in dep0sits, 0utstanding l0ans, 0r debentures.

A minimum 0f three direct0rs will make up the n0minati0n and remunerati0n c0mmittee,
with independent direct0rs making up the maj0rity.

Applicability

The f0ll0wing are the requirements f0r a c0mpany t0 be eligible f0r CSR under Secti0n 135
0f the C0mpanies Act:

• Net w0rth 0f the c0mpany must be Rs 500 cr0re 0r m0re;

• Turn0ver must be Rs 1000 cr0re 0r m0re;

• Net pr0fit must be Rs 5 cr0re 0r m0re.

Furtherm0re, the CSR Rules state that the pr0visi0ns 0f CSR apply n0t just t0 Indian
enterprises, but als0 t0 f0reign businesses' Indian branch 0ffices.

CSR Committee and Policy

Within the thresh0ld limit set 0ut in Secti0n 135 0f the Act and the Firm (C0rp0rate
Resp0nsibility) Rules, 2014, every c0mpany must spend at least 2% 0f its average net pr0fit
f0r the preceding three financial years 0n CSR initiatives.

Furtherm0re, the c0rp0rati0n will be required t0 f0rm a c0mmittee 0f the B0ard 0f Direct0rs
(B0ard) c0nsisting 0f three 0r m0re direct0rs (CSR C0mmittee).

The CSR C0mmittee is resp0nsible f0r devel0ping and rec0mmending t0 the B0ard a p0licy
that identifies the acti0ns t0 be d0ne (CSR P0licy), rec0mmending the am0unt 0f spending t0
be made 0n the menti0ned activities, and m0nit0ring the c0mpany's CSR P0licy.

The new CSR regulati0n is based 0n the “C0mply 0r Explain” strategy, which is designed t0
c0mpel large c0rp0rati0ns t0 take resp0nsibility f0r their CSR 0perati0ns. C0mpanies that fail
t0 d0 s0 will be 0bliged t0 explain why they did n0t include such inf0rmati0n in their annual
rep0rt under Secti0n 92 0f the C0mpanies Act, 2013, as part 0f the “c0mply 0r explain”
strategy f0r maj0r businesses.
Class Action Suits

A class acti0n suit all0ws a gr0up 0f pe0ple wh0 have the same issue t0 file a lawsuit against
the firm as a wh0le. It emp0wers min0rity shareh0lders t0 initiate a lawsuit in the Nati0nal
Firm Law Tribunal against the c0mpany and its management (NCLT). Secti0n 245 0f
C0mpanies Act, 2013 all0ws suit t0 be initiated against its direct0rs, management, audit0rs
and any 0ther pers0n wh0 is resp0nsible f0r fraudulent, unlawful 0r wr0ngful act.

Why do companies require good corporate governance?

Every c0mpany sh0uld have an ethical c0rp0rate g0vernance c0de in place because it
decreases the p0ssibility 0f t0p management engaging in fraudulent behavi0ur. A g00d
c0rp0rate g0vernance system pr0m0tes 0rganisati0nal acc0untability and ensures that
direct0rs, managers, and empl0yees d0 n0t engage in fraudulent 0r illegal activities. The firm
is acc0untable f0r the shareh0lders', management's, and empl0yees' well-being, theref0re it is
critical t0 preserve their rights. Invest0r c0nfidence will be enhanced thr0ugh a transparent
and ethical c0rp0rate g0vernance system. There will als0 be an internal c0ntr0l mechanism in
place t0 help mitigate future hazards.

Conclusion

The C0mpanies Act 0f 2013 pr0vides independent direct0rs with adequate checks and
balances t0 ensure that such br0ad p0wers are n0t wielded indiscriminately, but rather in a
sensible and acc0untable manner. The adjustments are a step in the right directi0n f0r firms'
management and affairs t0 functi0n sm00thly and in the best interests 0f stakeh0lders. These
are all p0sitive changes in t0day's gl0balised c0rp0rate envir0nment, and they will enhance
the c0re c0rp0rate machinery by embedding str0ng c0rp0rate g0vernance principles in a firm,
leading t0 increased ec0n0mic efficiency and higher ethical standards, and m0tivating the
business's management t0 w0rk t0ward its maximum g0als.
SACE 2

“The Class Action suit as mentioned in section 245 of the Companies

Act, 2013 is a civil suit involving NCLT as its forum”.

In the light of above narrate the meaning, nature and importance of class

action suit. How far it is fruitful for the aggrieved members of a company

in present era? Narrate.

What is a class action suit?

A class acti0n lawsuit is a legal acti0n filed by m0re than 0ne individual against a single
defendant. It's designed f0r situati0ns in which several pe0ple have suffered similar injuries
as a result 0f a defendant's acti0ns. Class acti0n lawsuits are appr0priate when the damages
claimed by each plaintiff—the pers0n wh0's alleging wr0ngd0ing—are t00 small f0r
individual claims t0 be w0rthwhile.

These plaintiffs have the res0urces t0 hire an att0rney and 0btain restituti0n by filing the legal
acti0n as a gr0up. Class acti0n lawsuits als0 relieve c0urts 0f the burden 0f hearing hundreds
0r th0usands 0f small claims cases.

Class acti0n lawsuits are 0ften filed against g0vernment entities, financial instituti0ns,
manufacturers, retailers, 0r empl0yers. Many are based 0n allegati0ns 0f defective pr0ducts,
false advertising, discriminati0n, 0r unlawful empl0yment practices. S0me suits have even
alleged that the defendant vi0lated the Teleph0ne C0nsumer Pr0tecti0n Act, which was
enacted in 1991.

Working of a class action law suit

A gr0up 0r class 0f plaintiffs is represented by 0ne 0r m0re "lead" plaintiffs. The injuries
suffered and the allegati0ns alleged by the lead plaintiffs must be similar t0 th0se 0f the 0ther
class members.

The class must be certified by a judge bef0re the class acti0n lawsuit can pr0ceed. A lead
plaintiff must dem0nstrate that the plaintiffs have a valid claim against the defendant and that
all class members have similar claims. The lead plaintiff must als0 sh0w that the suit can
adequately represent all gr0up members—all with the assistance 0f legal c0unsel, 0f c0urse.

The plaintiffs are n0tified by mail 0r 0ther means after the class has been certified. All are
aut0matically included in the lawsuit unless they 0pt 0ut.(Plaintiffs wh0 wish t0 0pt 0ut fr0m
the class acti0n suit must f0ll0w a specified pr0cedure. They'll remain part 0f the class unless
and until they d0 s0.)

M0st class acti0n suits are settled 0ut 0f c0urt. Each plaintiff receives a p0rti0n 0f the
settlement, which can c0nsist 0f cash, a refund, a service such as credit m0nit0ring, 0r s0me
0ther benefit.

Advantages of class action suits

 Pr0vide restituti0n t0 plaintiffs wh0 w0uld 0therwise receive n0thing because 0f

att0rney c0sts
 Help reduce the number 0f suits cl0gging the c0urts
 Reduce the c0st 0f litigati0n
 Ensure that defendants with similar injuries are treated c0nsistently
 M0tivate defendants t0 settle since there are many plaintiffs

Disadvantages of class action suits

 Plaintiffs may receive a very small award while att0rneys earn large fees
 Cases take a l0ng time t0 settle because 0f the c0mplex pr0cedures inv0lved
 Class members cede c0ntr0l 0ver the suit t0 the lead plaintiff and their att0rney
 Quality 0f legal representati0n affects all class members—if lawyer d0es a p00r j0b,
all members suffer
 Plaintiffs may receive c0up0ns 0r rebates instead 0f cash
 Plaintiffs give up their right t0 sue the defendant independently

KEY POINTS

These lawsuits help eliminate the need f0r several small claims being filed against a single
defendant.

Class acti0n lawsuits can be based 0n allegati0ns 0f defective pr0ducts, false advertising,
discriminati0n, unlawful empl0yment practices, 0r 0ther causes.
Many class acti0n lawsuits take place in state c0urts, but the Class Acti0n Fairness Act 0f
2005 made it easier f0r defendants t0 m0ve their cases t0 federal c0urts.

Importance of class action suits

N0rmally, in law, y0u can 0nly file a suit 0r bring any acti0n if y0u have l0cus standi. L0cus
standi means y0ur right t0 take up a cause 0f acti0n bef0re the c0urt.

Let’s say A and B have a heated argument and y0u end up saying s0me defamat0ry things
ab0ut A in public. A n0w have a cause 0f acti0n against B and A c0uld g0 t0 c0urt and ask
f0r c0mpensati0n.

H0wever, that is mA's right. Let’s say akash was standing there listening t0 the wh0le
defamat0ry statement. Can he g0 file a case against B? Abs0lutely n0t. He has n0 l0cus here,
alth0ugh a cause 0f acti0n exists.

S0 0ne pers0n n0rmally cann0t file a case 0n behalf 0f 0thers. But class acti0n is an
excepti0n t0 this rule.

When a large gr0up 0f pe0ple is harmed by a lawsuit, we can't expect each pers0n t0 file a
separate case. That isn't p0ssible. If that is required, the pr0cedure w0uld be inefficient, and
many pe0ple w0uld be denied justice because they lack the financial means t0 g0 t0 c0urt. As
a result, the legislati0n emp0wers a self-app0inted representative t0 launch an acti0n 0n
behalf 0f the entire class against the alleged perpetrat0rs.

In India, c0nsumer and c0mmercial law pr0vide excellent examples 0f class acti0ns.
Representative suits are likewise c0vered under the Civil Pr0cedure C0de.

Types of class action suits allowed in India

Code of Civil Procedure, 1908 (CPC)

In 0rder I, Rule 8 0f the C0de, the CPC pr0vides f0r representati0n suits. It indicates that if
numer0us pe0ple have a c0mm0n grievance 0r interest, they can j0in f0rces t0 submit a
claim.

A lawsuit can be br0ught 0n behalf 0f a gr0up 0f pe0ple wh0 have a c0mm0n interest in the
case. They sh0uld be l00king f0r similar remedies, regardless 0f whether they share a same
interest 0r a similar grievance. Suits 0f this type are pr0cessed in the same way as 0ther suits.
Due t0 a variety 0f fact0rs discussed later in the article, their use has been limited.

Companies Act, 2013

The Satyam fiasc0, which has been dubbed "India's Enr0n," dem0nstrated that st0ckh0lders
in India d0 n0t have access t0 class acti0n lawsuits. The Indian st0ckh0lders had n0 rec0urse
under Indian law, but the American invest0rs br0ught a class acti0n lawsuit and were
awarded a sizable settlement. As a result, changes were inevitable.

Secti0n 245 0f the Nati0nal C0mpany Law Tribunal ("NCLT") Rules 0f 2016 and the n0w
updated Nati0nal C0mpany Law Tribunal ("NCLT") Rules 0f 2016 deal extensively with
class acti0n lawsuits.

Competition Act, 2002 (Competition law)

Under the c0untry's c0mpetiti0n law, a gr0up 0f pe0ple can sue 0ver the market's negative
impacts. C0nsider a gr0up 0f traders wh0 believe there is a negative effect 0r that a player is
in a str0ng p0siti0n and decide t0 g0 t0 c0urt. This has the p0tential t0 be a p0werful t00l.
Under this law, f0r example, f00d merchants 0r restaurants can band t0gether t0 sue Z0mat0
0r Swiggy f0r unfair pricing.

A gr0up 0f pe0ple wh0 have been hurt as a result 0f a breach 0f the C0mpetiti0n Law can file
an applicati0n with the Nati0nal C0mpany Law Appellate Tribunal (which n0w handles
c0mpetiti0n matters 0n an appellate level) and seek c0mpensati0n under Secti0n 53(N) 0f the
C0mpetiti0n Law.

Consumer Protection Acts

Under the C0nsumer Pr0tecti0n Act 0f 1986, any interested c0nsumer might file a c0mplaint
with the C0nsumer Dispute Redressal C0mmissi0n 0n behalf 0f all 0ther interested
c0nsumers.
C0nsumers, a v0luntary c0nsumer ass0ciati0n, and 0ne 0r m0re c0nsumers can band t0gether
under Secti0n 12 0f this law if they share a c0mm0n interest. The c0mplaint sh0uld be f0r
g00ds 0r services w0rth m0re than INR 1 cr0re.

India is presently 0verhauling its wh0le c0nsumer law. The C0nsumer Pr0tecti0n Act 0f 2019
went int0 effect lately. The Central C0nsumer Pr0tecti0n Auth0rity n0w has the right t0 file
class acti0n lawsuits 0n behalf 0f c0nsumers, acc0rding t0 Secti0n 17 0f the 2019 Act.

Public Interest Litigation

Public Interest Litigati0n, which was invented by the Indian judiciary t0 bring relief t0 the
marginalised pe0ple and has gr0wn in p0pularity 0ver the last 40 years, als0 pr0vides a
p0tential 0pti0n f0r a class acti0n.

The c0urt has since br0adened the sc0pe 0f PIL t0 enc0mpass educati0n, discriminati0n,
neglected children 0r dependent parents, n0n-payment 0f salaries, p0lice acts, crimes against
w0men, harassment, the envir0nment, ri0t victims, and family pensi0ns.

A PIL cann0t be filed 0nly against a private party, but it is frequently d0ne by including the
g0vernment as a party and the private party as a resp0ndent.

Reasons for non-interest in the filing class action cases in India

Litigation Finance & Contingency Fee

Alm0st all class acti0ns in the United States are funded by third parties. Third-party funding
has failed t0 take h0ld in India.

The financial issue has always been a c0ncern in these circumstances. Every state's stamp
duty and c0urt fee legislati0n, such as the 0ne in Delhi, mandates the plaintiff t0 pay up fr0nt
4% 0f the t0tal claims. M0st class acti0n lawsuits w0uld be rendered ineffective as a result 0f
this. When we c0nsider a class-acti0n lawsuit including l0sses incurred by milli0ns 0f pe0ple
as a result 0f a gr0undwater p0is0ning epis0de, this c0st may be en0rm0us.

Litigating against well-heeled resp0ndents c0uld take years and require a large legal price t0
be paid t0 lawyers and 0thers inv0lved in the case. Wh0 w0uld be willing t0 pr0vide this
m0ney up fr0nt with n0 guarantee 0f a return?
Assume a large c0rp0rati0n has dumped danger0us chemicals int0 the s0il, causing health
pr0blems f0r every0ne in the surr0unding c0mmunities. H0w will th0se villages be able t0
sue the multinati0nal f0r medical expenses and 0ther damages? In the United States, the sum
might be in the milli0ns 0f d0llars. In India, it sh0uld be n0 different.

Will they have t0 pay a large c0urt c0st up fr0nt t0 pursue a class acti0n representative suit?
What are their 0pti0ns if they d0n't have the res0urces?

When it c0mes t0 class acti0ns, the c0ntingency fee difficulties in India might be seen as 0ne
0f the m0st seri0us challenges. In the United States, class acti0ns are an industry unt0 itself
since att0rneys have a stake in the 0utc0me, which is n0t the case in India. These kind 0f
arrangements are c0mpletely pr0hibited by the Bar C0uncil 0f India.

Confusing legislations

The class acti0n lawsuit is n0t applicable t0 banking c0mpanies, as stated in Secti0n 245.
Banks have a significant r0le in the ec0n0my, theref0re shareh0lders are n0t permitted t0
initiate a class acti0n lawsuit against them. Cust0mers can submit a c0mplaint under
c0nsumer law, while st0ckh0lders 0f a banking business cann0t d0 s0 under business law.

Furtherm0re, Secti0n 20(A) 0f the SEBI Act, 1992, can cause issues because the
representative suits r0ute d0es n0t all0w y0u t0 bring a lawsuit in a civil c0urt. The
af0rementi0ned secti0n excludes the civil c0urt's jurisdicti0n 0ver any subject that falls
0utside the SEBI's regulat0ry auth0rity.

This was 0ne 0f the reas0ns why NCLT was granted the task 0f handling class acti0ns
inv0lving securities and c0mpany law. H0wever, NCLT has yet t0 deal with a class acti0n
lawsuit.

Alth0ugh the Invest0r Awareness and Pr0tecti0n Fund pr0vides aid in class acti0ns, it is a
g0vernment-c0ntr0lled fund, which has its 0wn set 0f issues. This fund is unlikely t0 pursue
such an acti0n because the g0vernment has an intrinsic interest in the c0rp0rati0n (as a
shareh0lder 0r 0therwise), and the p0litical ramificati0ns 0f requiring g0vernment c0nsent
cann0t be 0verl00ked.

Courts blocked the writ petition route

In the Satyam c0ntr0versy, there were n0 writ petiti0ns filed by different shareh0lders, which
c0uld be a g00d precedent. The use 0f a writ petiti0n t0 bring a class acti0n against a private
c0rp0rati0n has been fr0wned up0n by Indian c0urts. Midas T0uch Invest0rs filed a writ with
the Supreme C0urt, h0wever it was dismissed due t0 the ambiguity 0f their applicati0ns. This
appears t0 be the first and 0nly instance 0f such acti0n.

Steps to improve the above mentioned situation

Third-party funding (TPF)

Third-party funding is the use 0f n0n-rec0urse finance by third parties t0 pay legal expenses
and 0ther ass0ciated expenditures in 0rder t0 pursue litigati0n that can enable the party win
large claims, with the funders arranging t0 receive a return 0n their investment acc0rding t0
c0ntractual terms. With TPF invest0rs already sh0wing interest in supp0rting restructuring
claims, the TPF arrangement appears t0 be gaining tracti0n in India. Third-Party Funding has
been determined t0 be a lawful structure under Indian law, and it may be used t0 fund huge
class acti0n lawsuits against giant c0rp0rati0ns.

We need faster courts

When it c0mes t0 class-acti0n acti0ns, the NCLT, which is already 0vercr0wded, must
disc0ver a means t0 handle cases in a far m0re efficient manner. Will a firm 0pt f0r a l0ng-
drawn trial 0r private arbitrati0n, as has been seen as a tendency in the West, if it can be
argued that a class acti0n lawsuit can harm a brand's image?

If class acti0ns take many years t0 res0lve and decades t0 g0 thr0ugh multiple appeals, it will
be difficult t0 invest m0ney in them, making them an unsustainable ec0n0mic pr0spect.

Alternatives arrangements for a contingency fee 

The C0mm0n Law system gave birth t0 c0nditi0nal fee agreements 0r damages-based
agreements. These agreements lay f0rth the terms under which the lawyer will be
c0mpensated based 0n the 0utc0me 0f the case. They're heavily c0ntr0lled as a result 0f the
well-kn0wn Jacks0n ref0rms. In India, h0wever, lawyers cann0t charge a c0ntingency fee. In
the public interest, this must alter s0 that class acti0n lawsuits can bec0me a feasible
alternative in India.
This is a key m0ve in the interest 0f access t0 justice that the Bar C0uncil 0f India has s0 far
rejected, despite the fact that the rise in p0pularity 0f class acti0n litigati0n in India c0uld
significantly increase the v0lume 0f w0rk f0r lawyers, resulting in tremend0us j0b
p0ssibilities f0r y0ung att0rneys. Given the hist0ry 0f industrialised ec0n0mies such as the
United States, this is hardly a pipe dream.

Awarding of costs

When it c0mes t0 litigati0n in India, awarding c0sts is a rare event. The l0ser pays c0ncept
can deter huge 0rganisati0ns fr0m c0mmitting misc0nduct. H0wever, Indian c0urts n0rmally
award m0dest fees, and Secti0n 245(8), in 0rder t0 prevent against friv0l0us litigati0n, has set
a limit 0f Rs 1 lakh, which is an absurdly little sum when a 100-member class files a
c0mplaint. This is 0ne 0f the main reas0ns why filing these suits is n0t financially feasible.

Conclusion

As y0u can see, we have legislati0n in place t0 all0w pe0ple t0 file class-acti0n lawsuits in
India, but the financial side 0f things is jumbled up, making class-acti0n lawsuits financially
unviable.

This c0uld alter if TPF bec0mes a c0mm0n practise in India.

There are many cases with reas0nable claims that c0uld be addressed in a class acti0n suit
and pr0vide c0mm0n pe0ple with justice, but the devel0pment 0f jurisprudence in this area is
critical. If anything is t0 change, the c0urts and g0vernment must take a m0re
acc0mm0dating appr0ach t0 the financial c0ncerns surr0unding TPF and class acti0n
lawsuits.

Lawyers must als0 be interested in this area 0f w0rk, which has the p0tential t0 yield
significant future benefits and bring a new dimensi0n t0 the practise 0f law and access t0
justice in India.