CS Professional · Environmental, Social and Governance (ESG) - Principles and Practice

Legislative Framework of Corporate Governance in India

The legislative framework of corporate governance in India is the set of statutory rules, mainly the Companies Act, 2013, that decide which entities are covered, how foreign companies are treated, how they are wound up, and how Tribunal members are chosen. Learn each provision, apply it to the facts, and conclude.

What this chapter covers

This chapter covers the legal base on which Indian corporate governance rests. You start with how the Companies Act, 2013 applies to companies and to special categories such as insurance, banking and electricity companies. Then you move to three narrower areas: foreign companies, winding up of foreign companies, and selection of Tribunal and Appellate Tribunal members.

The provisions are short, but exact. Examiners test small conditions: a percentage, a list of persons, who has a casting vote. Your answer should state the provision, apply it to the facts given, and reach a conclusion.

The chapter links to the rest of Paper 1. Later parts on governance, board practice and reporting assume you know which law applies to which entity and which forum decides disputes. Treat this chapter as the base layer for that.

This chapter sits in the Governance and Sustainability part of Paper 1, the largest part of the paper. The content is compact and rule-based, so it is one of the easier areas to score in if you learn the conditions precisely. Case-based questions often hinge on one condition, such as the 50 per cent shareholding test for foreign companies, and a student who knows it exactly gets the conclusion right where others guess.

Legislative Framework of Corporate Governance in India: topics in the order to study them

1Corporate Governance Framework under Companies Act, 2013Start here because it fixes which companies and bodies the Act covers, and everything else builds on that.
2Application of the Act to Foreign CompaniesNext, because it extends the Act to foreign companies and introduces the 50 per cent holding test.
3Winding Up of Foreign CompaniesStudy it after the application rules, since it deals with a foreign body that has stopped doing business in India.
4Selection of Members of Tribunal and Appellate TribunalKeep it last: it is a separate, list-based topic about who appoints and who sits on the Selection Committee.

How to prepare Legislative Framework of Corporate Governance in India

This chapter is about exact wording. Prepare it by reading the provision, then practising its use on facts.

Read Section 1 (extent, commencement and application) and note that the Act extends to the whole of India and applies to companies incorporated under this Act or any previous company law.
List the special categories in Section 1(4): insurance, banking, electricity and companies under special Acts. For each, note the Act that prevails where there is inconsistency.
Learn Section 379 as a rule with a condition: where not less than fifty per cent of paid-up share capital, equity or preference or both, is held by Indian citizens or Indian companies or bodies corporate, the foreign company must comply as if it were an Indian company.
Learn Section 376 in your own words: a foreign body corporate that ceases to carry on business in India may be wound up as an unregistered company, even if it has been dissolved abroad.
Make a table for Section 412: who is appointed after consulting the Chief Justice of India, and who sits on the Selection Committee. Also note the Convener, the casting vote and the validity protection.
Write short case answers for each topic: provision, facts, conclusion. Time yourself so you can finish within the paper's limits.

Common mistakes in Legislative Framework of Corporate Governance in India

Saying the Companies Act applies fully to banking, insurance and electricity companies.
Fix: Always add that the special Act prevails to the extent of inconsistency.
Stating the 50 per cent test as 'more than 50 per cent'.
Fix: Write 'not less than fifty per cent', so exactly 50 per cent also qualifies.
Counting only equity shares under the foreign company test.
Fix: Remember it covers paid-up share capital, whether equity, preference or partly each, held singly or in the aggregate.
Thinking a foreign company dissolved abroad cannot be wound up in India.
Fix: State that the provision applies notwithstanding dissolution under its home country's laws, and that winding up is as an unregistered company.
Mixing up who is appointed on consultation and who on Selection Committee recommendation.
Fix: Keep two lists: consultation with the Chief Justice of India for the President, chairperson and Judicial Members; Selection Committee for Members of the Tribunal and Technical Members of the Appellate Tribunal.
Writing only the rule in case-based answers.
Fix: Use the order: provision, application to the given facts, conclusion.

Last-day revision: Legislative Framework of Corporate Governance in India

The Companies Act, 2013 extends to the whole of India.
It applies to companies incorporated under this Act or any previous company law.
For insurance companies, the Act applies except where inconsistent with the Insurance Act, 1938 or the IRDA Act, 1999.
For banking companies, it applies except where inconsistent with the Banking Regulation Act, 1949.
For electricity companies, it applies except where inconsistent with the Electricity Act, 2003.
Section 379: if not less than 50% of paid-up capital of a foreign company is held by Indian citizens or Indian bodies corporate, it complies as if Indian.
Section 376: a foreign body corporate that ceases business in India can be wound up as an unregistered company, even if dissolved abroad.
Section 412(1): the Tribunal President and the Appellate Tribunal chairperson and Judicial Members are appointed after consulting the Chief Justice of India.
Selection Committee: Chief Justice of India or nominee (Chairperson), a senior Supreme Court Judge or a High Court Chief Justice, Secretary MCA, and Secretary Law and Justice.
The Chairperson has a casting vote on equality of votes; the MCA Secretary is Convener.
No appointment is invalid merely because of a vacancy or a defect in the Committee's constitution.

Legislative Framework of Corporate Governance in India practice questions

Legislative Framework of Corporate Governance in India in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Legislative Framework of Corporate Governance in India: frequently asked questions

What does Section 379 say about foreign companies?

Sections 380 to 386 and Sections 392 and 393 apply to all foreign companies. If not less than fifty per cent of the paid-up share capital is held by Indian citizens or Indian companies or bodies corporate, the foreign company must also comply with this Chapter and other prescribed provisions as if it were an Indian company.

Can a foreign company be wound up in India after it has been dissolved abroad?

Yes, under Section 376. If a body corporate incorporated outside India has carried on business in India and ceases to do so, it may be wound up as an unregistered company. This holds even though it has been dissolved or has otherwise ceased to exist under its home country's laws.

Who is on the Selection Committee for Tribunal members?

Under Section 412(2), it has the Chief Justice of India or his nominee as Chairperson, a senior Judge of the Supreme Court or a High Court Chief Justice, the Secretary in the Ministry of Corporate Affairs, and the Secretary in the Ministry of Law and Justice. The Chairperson has a casting vote if votes are equal.

Does a defect in the Selection Committee invalidate an appointment?

No. Section 412(5) says no appointment of Members of the Tribunal or the Appellate Tribunal is invalid merely because of a vacancy or a defect in the constitution of the Selection Committee.