Corporate Governance in India: A Comprehensive Guide for Foreign Companies

India’s regulatory landscape has undergone significant changes in recent years, with a focus on promoting transparency, accountability, and investor protection. The country’s corporate governance requirements are designed to ensure that companies operate in a fair, transparent, and responsible manner. As a senior finance leader or CFO of a multinational company (MNC) planning to open a subsidiary in India, you are well aware of the importance of adhering to local corporate governance requirements. 

This article provides an overview of the key legislation, requirements, and compliance relaxations for foreign companies planning to open a subsidiary in India. Please note that this article focuses on corporate governance requirements for foreign companies setting up subsidiaries in India and does not cover other types of entities such as one-person companies, non-profit organizations, or proprietorships. 

Overview of India’s Corporate Governance Framework

India’s corporate governance framework is based on the principles of transparency, accountability, and fairness. The framework is governed by various laws, regulations, and guidelines, including:

• The Companies Act, 2013
  • The implementation of the Companies Act, 2013, introduced numerous provisions aimed at strengthening corporate governance. This included the establishment of the National Company Law Tribunal (NCLT) to address corporate disputes and enhance transparency.
• The Securities and Exchange Board of India (SEBI) Regulations
• The Listing Obligations and Disclosure Requirements (LODR) Regulations
• The Indian Accounting Standards (Ind AS)

The Ministry of Corporate Affairs (MCA) and SEBI are the primary regulators responsible for overseeing corporate governance in India.

Key Principles of Corporate Governance in MNCs

Corporate governance within multinational corporations (MNCs) hinges on a set of fundamental principles that form the bedrock for ethical, transparent, and responsible business conduct. These principles ensure that MNCs operate in a manner that safeguards the interests of their shareholders while also taking into account the well-being of diverse stakeholders and the broader communities in which they operate.

The key principles of corporate governance in MNCs include:

• Transparency and Disclosure: MNCs must maintain precise and comprehensive financial records, offering thorough financial statements. This transparency engenders confidence among investors, creditors, and stakeholders.

• Accountability and Responsibility: The board of directors plays a pivotal role within MNCs, being responsible for overseeing the company’s management, setting strategic objectives, and ensuring adherence to the organization’s mission and values.

• Fairness and Equity: Every shareholder, regardless of their ownership portion, should receive fair treatment and have equivalent access to information and the procedures for decision-making.

• Independence of Directors: Independent directors hold a pivotal role in impartial oversight. They do not partake in day-to-day operations and can provide unbiased judgment on matters presented to the board.

• Ethical Business Conduct: MNCs should establish and enforce codes of conduct that advocate ethical behavior and discourage unethical practices such as bribery, corruption, and fraud.

1. Governance Requirements for Listed Subsidiaries in India

Listed companies in India are governed by the Companies Act, 2013, and the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015. The key requirements for listed companies include:

• Board composition: At least 50% of the board should comprise non-executive directors, and at least one-third should be independent directors.
• Audit committee: Mandatory with a minimum of three directors, including independent ones.
• Nomination and remuneration committee: Required to evaluate director performance and recommend remuneration.
• Stakeholders’ relationship committee: Handles grievances of shareholders.
• Corporate social responsibility (CSR): CSR policy and expenditure if net worth, turnover, or profits exceed specific thresholds.
• Disclosures: Quarterly and annual financial results, shareholding pattern, corporate governance report.
• Code of conduct: For directors and senior management.

2. Governance Requirements for Unlisted Public Subsidiaries in India

Unlisted public companies in India are governed by the Companies Act, 2013. The key requirements for unlisted public companies include:

• Board composition: Unlisted public subsidiaries must have a minimum of two directors, one of whom must be a resident director in India. This requirement ensures that the company has a local presence and that at least one director is familiar with Indian laws and regulations.
• Audit committee: An audit committee is mandatory for unlisted public subsidiaries if their turnover exceeds ₹100 crore or their paid-up share capital is more than ₹10 crore. The audit committee must comprise a minimum of three directors, including independent directors, and must be responsible for overseeing the company’s financial reporting and auditing processes.
• Nomination and remuneration committee: Unlisted public subsidiaries must establish a nomination and remuneration committee, which is responsible for evaluating the performance of directors and recommending their remuneration. The committee must comprise a minimum of three directors, including independent directors.
• CSR compliance: Unlisted public subsidiaries must comply with CSR requirements if their net worth, turnover, or profits exceed specific thresholds. The company must have a CSR policy in place and must spend at least 2% of its average net profits on CSR activities.
• Annual returns: Unlisted public subsidiaries must file annual returns with the Registrar of Companies, which must include disclosure of financials and directors’ information. The annual return must be filed within 60 days of the company’s annual general meeting.

3. Governance Requirements for Private Subsidiaries in India

Private subsidiaries of foreign companies in India, including those classified as small companies, are subject to the provisions of the Companies Act, 2013. To ensure effective governance and compliance, private subsidiaries must adhere to the following key requirements:

• Board composition:Private subsidiaries must have a minimum of two directors, one of whom must be a resident director in India. This requirement ensures that the company has a local presence and that at least one director is familiar with Indian laws and regulations.
• Audit committee: The formation of an audit committee is not mandatory for private subsidiaries unless they meet certain financial thresholds, such as a turnover exceeding ₹100 crore or a paid-up share capital exceeding ₹10 crore. However, if an audit committee is formed, it must comprise a minimum of three directors, including independent directors.
• CSR:Private subsidiaries must comply with CSR requirements if they meet certain financial criteria, such as a net worth of ₹500 crore or more, a turnover of ₹1,000 crore or more, or a net profit of ₹5 crore or more. The company must have a CSR policy in place and must spend at least 2% of its average net profits on CSR activities.
• Board meetings: Private subsidiaries must hold a minimum number of board meetings annually, depending on their classification as small or non-small companies. Small companies must hold at least two board meetings annually, while non-small companies must hold at least four board meetings annually.
• Annual filings: Private subsidiaries must file their financial statements and annual returns with the Registrar of Companies annually. The annual return must include details of the company’s shareholders, directors, and financial performance.

4. Governance Framework for Limited Liability Partnerships (LLPs) in India

Limited Liability Partnerships (LLPs) in India are governed by the LLP Act, 2008. While LLPs are not required to comply with the same governance requirements as companies, they must still adhere to certain key requirements. These include:

• Partners: LLPs must have a minimum of two partners, at least one of whom must be a resident in India. This requirement ensures that the LLP has a local presence and that at least one partner is familiar with Indian laws and regulations.
• Annual returns:LLPs must file their annual returns and statements of accounts and solvency with the Registrar of LLPs. This requirement ensures that LLPs provide regular updates on their financial performance and solvency.
• Audit requirement: LLPs are required to undergo an audit if their turnover exceeds ₹40 lakh or their contribution exceeds ₹25 lakh. The audit must be conducted by a chartered accountant or a firm of chartered accountants. While LLPs are not required to establish an audit committee, they may choose to do so voluntarily to provide additional oversight and guidance on their financial reporting and auditing processes.
• Board Composition and CSR Requirements: Unlike companies, LLPs are not required to have a board of directors or to comply with corporate social responsibility (CSR) requirements. However, LLPs may choose to establish a board or committee voluntarily to provide additional governance and oversight. Similarly, LLPs may choose to adopt CSR practices voluntarily, even if they are not required to do so by law.

Governance Framework for Public Sector Undertakings (PSUs) in India

Public Sector Undertakings (PSUs) in India are governed by a complex framework of laws and regulations, including the Companies Act, SEBI regulations (if listed), and specific government directives. Foreign companies planning to partner with PSUs in India, whether through joint ventures, investments, or other means, must navigate this framework to ensure compliance and successful collaboration.

Key Governance Requirements for PSUs in India

PSUs in India are subject to the following key governance requirements:

1. • Board Composition: PSUs must have a board of directors that includes:
     • A Chairman and Managing Director (CMD) or a Managing Director (MD) who is responsible for the overall management of the company.
     • A minimum of two independent directors who are not associated with the government or the PSU.
     • A minimum of two government-nominated directors who are appointed by the government.
     • Other directors who may be appointed by the government or the PSU.
   • Annual Filing Requirements: PSUs must file their annual reports and accounts with the Registrar of Companies and the Ministry of Corporate Affairs. The annual report must include:
     • Financial statements, including the balance sheet, profit and loss account, and cash flow statement.
     • A report on the company’s performance and achievements.
     • A report on the company’s corporate social responsibility (CSR) initiatives.
   • Corporate Social Responsibility (CSR): PSUs are required to comply with CSR regulations, which mandate that companies spend a minimum of 2% of their average net profits on CSR activities.
   • Audit Committee: PSUs must establish an audit committee that is responsible for overseeing the company’s financial reporting and auditing processes.
   • Vigilance Mechanism: PSUs must establish a vigilance mechanism that is responsible for investigating and addressing complaints of corruption and misconduct.
   • Transparency and Accountability: PSUs must maintain transparency and accountability in their operations, including by disclosing information about their financial performance, CSR initiatives, and governance practices.

Additional Governance Requirements for PSUs: As government-owned companies, PSUs are subject to additional governance requirements, including:

• Compliance with Government Directives: PSUs must comply with directives issued by the government, including those related to their financial performance, CSR initiatives, and governance practices.
• Parliamentary Oversight: PSUs are subject to parliamentary oversight, including through the presentation of annual reports and accounts to Parliament.
• CAG Audit: PSUs are subject to audit by the Comptroller and Auditor General (CAG) of India, which is responsible for auditing the financial statements of government-owned companies.
• Vigilance Clearance: PSUs must obtain vigilance clearance from the government before appointing or promoting employees to senior positions.

Implications for Foreign Investors

Foreign companies planning to partner with PSUs in India must be aware of the governance framework outlined above. Specifically:

• Joint ventures: Foreign companies entering into joint ventures with PSUs must ensure that the joint venture entity complies with the governance requirements outlined above. This includes:
  • Ensuring that the joint venture entity has a board of directors that meets the requirements outlined above.
  • Ensuring that the joint venture entity has an audit committee and a vigilance mechanism in place.
  • Ensuring that the joint venture entity complies with CSR regulations and has a CSR policy in place.
  • Ensuring that the joint venture entity maintains transparency and accountability in its operations, including through regular disclosure of financial information and performance metrics.
• Investments: Foreign companies investing in PSUs must be aware of the governance framework and ensure that the PSU complies with the requirements outlined above. This includes:
  • Conducting due diligence on the PSU’s governance practices and ensuring that they meet the requirements outlined above.
  • Ensuring that the PSU has a strong and independent board of directors that can provide effective oversight and guidance.
  • Ensuring that the PSU has a robust audit committee and vigilance mechanism in place to prevent corruption and misconduct.
  • Ensuring that the PSU complies with CSR regulations and has a CSR policy in place.
• Other collaborations: Foreign companies collaborating with PSUs in other ways, such as through partnerships or consortia, must also ensure that the collaboration complies with the governance requirements outlined above. This includes:
  • Ensuring that the partnership or consortium agreement includes provisions for governance and oversight.
  • Ensuring that the partnership or consortium has a clear and transparent decision-making process.
  • Ensuring that the partnership or consortium complies with CSR regulations and has a CSR policy in place.
  • Ensuring that the partnership or consortium maintains transparency and accountability in its operations, including through regular disclosure of financial information and performance metrics.

Compliance Relaxations for Startups Registered Under DPIIT

Startups registered under the Department for Promotion of Industry and Internal Trade (DPIIT) are eligible for various compliance relaxations, aimed at promoting innovation, entrepreneurship, and growth. These relaxations include:

• Exemptions from Certain Filings: Startups registered under DPIIT are exempt from filing certain documents and returns with the Registrar of Companies (ROC), such as:
  • Form DIR-11 (Notice of resignation of a director)
  • Form DIR-12 (Particulars of appointment of directors and the key managerial personnel)
  • Form MGT-14 (Filing of resolutions and agreements)
• Relaxed Norms for Private Placements and Issuance of Shares: Startups registered under DPIIT are eligible for relaxed norms for private placements and issuance of shares, including:
  • Exemption from the requirement of filing a prospectus with the ROC for private placements
  • Exemption from the requirement of obtaining a valuation report from a registered valuer for private placements
  • Relaxation in the norms for issuance of shares, including the ability to issue shares with differential voting rights
• Other Compliance Relaxations: Startups registered under DPIIT are also eligible for other compliance relaxations, including:
  • Exemption from the requirement of having a minimum number of independent directors on the board
  • Exemption from the requirement of having a audit committee
  • Relaxation in the norms for related-party transactions

How Outsourcing to Experts like Finsmart Accounting Can Support You

Managing the process of setting up a subsidiary in India can be a complex and time-consuming task, especially when it comes to navigating the complexities of India’s regulatory environment. Outsourcing to experts like Finsmart Accounting can provide you with the support and guidance you need to ensure compliance with Indian regulations, optimize your corporate governance structure, and minimize the risk of non-compliance.

Finsmart Accounting is a leading provider of corporate governance and compliance services to foreign companies setting up subsidiaries in India. Our team of experts has a deep understanding of the regulatory requirements for foreign companies in India, including the Companies Act, 2013, and other applicable laws and regulations.

By outsourcing to Finsmart Accounting, you can:

• Gain a deeper understanding of the regulatory requirements for foreign companies in India
• Ensure compliance with Indian regulations, including the Companies Act, 2013
• Optimize your corporate governance structure to meet Indian regulatory requirements
• Minimize the risk of non-compliance and associated penalties
• Mitigate the risk of reputational damage due to non-compliance

To learn more about how Finsmart Accounting can support you in setting up a subsidiary in India, schedule a consultation with our team of experts today.

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