Understanding the Concept of Corporate Governance in the light of Companies Bill 2009:
An analysis of Proposed Amendments
This is a vitally important period for corporate governance in India. After many false starts and delays, significant progress was made in the reform of company law with the completion of a comprehensive review in 2005 and the laying before the Lok Sabha of a new Companies Bill on October 23, 2008. Any satisfaction that might have been felt as a result of these positive steps was cut short soon after, however, with the emergence of a significant corporate governance scandal at the beginning of 2009. On January 7, the chairman of Satyam Computer Services, B. Ramalinga Raju, admitted that there had been a systematic inflation of cash on the company's balance sheet over a period of some seven years amounting to almost $1.5 billion. The immediate fallout from this admission was familiar to those who witnessed the corporate scandals on the London Stock Exchange in the late 1980s and early 1990s (for example, Polly Peck, BCCI and Maxwell) or on the New York Stock Exchange at the beginning of the current century (for example, Enron, WorldCom and Xerox).  The advent of the new Parliament (the 15th Lok Sabha) has provided an answer. While the Companies Bill 2008 lapsed with the end of the 14th Lok Sabha, the new government has decided to reintroduce the same Bill with only the date changed.
The question that remains for those with an interest in Indian corporate governance is what changes might that Standing Committee usefully consider? Has the extensive discussion of corporate governance in India over the past decade coupled with stock market regulatory reforms produced an effective system? Are any remaining problems already addressed by the Bill? This article sets out to address these questions and to offer answers that will hopefully be of use to those now considering the Bill.
Historical Analysis of Emergence of Corporate Governance in India:
When India attained independence from British rule in 1947, the country was poor, with an average per-capita annual income under thirty dollars. However, it still possessed sophisticated laws regarding "listing, trading, and settlements."It even had four fully operational stock exchanges. Subsequent laws, such as the 1956 Companies Act, further solidified the rights of investors.
In the decades following India's independence from Great Britain, the country turned away from its capitalist past and embraced socialism. The 1951 Industries Act was a step in this direction, requiring "that all industrial units obtain licenses from the central government."The 1956 Industrial Policy Resolution "stipulated that the public sector would dominate the economy." To put this plan into effect, the Indian government created enormous state-owned enterprises, and India steadily moved toward a culture of "corruption, nepotism and inefficiency." As the government took over floundering private enterprises and rejuvenated them, it essentially "converted private bankruptcy to high-cost public debt."One scholar referred to India's economic history as "the institutionalization of inefficiency."
The absence of a corporate-governance framework exacerbated the situation. Government accountability was minimal, and the few private companies that remained on India's business landscape enjoyed free reign with respect to most laws; the government rarely initiated punitive action, even for nonconformity with basic governance laws. Boards of directors invariably were staffed by friends or relatives of management, and abuses by dominant shareholders and management were commonplace. India's equity markets "were not liquid or sophisticated enough" to punish these abuses.
In 1992, in a defining moment in India's corporate-governance history, the Indian Parliament created the Securities and Exchange Board of India ("SEBI") to "protect the interests of investors in securities and to promote the development of, and to regulate, the securities market." In the years leading up to 2000, as Indian enterprises turned to the stock market for capital, it became important to ensure good corporate governance industry-wide. Additionally, a plethora of scams rocked the Indian business scene, and corporate governance emerged as a solution to the problem of unscrupulous corporate behaviour.
In 1998, the Confederation of Indian Industry ("CII"), "India's premier business association," unveiled India's first code of corporate governance. However, since the Code's adoption was voluntary, few firms embraced it. Soon after, SEBI appointed the Birla Committee to fashion a code of corporate governance. In 2000, SEBI accepted the recommendations of the Birla Committee and introduced Clause 49 into the Listing Agreement of Stock Exchanges. Clause 49 outlines requirements vis-à-vis corporate governance in exchange-traded companies.
Then, Chandra Committee was constituted on August 21, 2002 under the chairmanship of Naresh Chandra, a former cabinet secretary. The background to this event was, of course, the series of corporate failures in the United States commencing with Enron, the subsequent collapse of Andersen, one of the then Big Five auditing firms, and the passing into law of the Sarbanes-Oxley Act. The Committee reported on December 23, 2002 and opened by noting the advances that had been made as a consequence of the Birla Report and cl.49 of the listing agreement. Indeed, it went so far as to say that the guidelines to which Indian companies were now subject "rank among some of the best in the world". It continued in a much more pessimistic tone, however, by suggesting that there was nevertheless "a wide gap between prescription and practice" and that the enforcement of corporate governance was hampered by "inefficiency, corruption and the intricate, dilatory legal system". The list of areas that the Committee was asked to examine--and if necessary recommend changes to--focuses extensively on auditors, with mention also of CEO/CFO certification and of the role of independent directors.
In 2003, SEBI instituted the Murthy Committee to scrutinize India's corporate-governance framework further and to make additional recommendations to enhance its effectiveness. SEBI has since incorporated the recommendations of the Murthy Committee, and the latest revisions to Clause 49 became law on January 1, 2006.
The Irani Report and Companies Bill 2009:
As was mentioned above, previous efforts towards the reform of company law as it affected corporate governance had resulted in draft legislation but had not produced actual legal change. This was due to the fact that a more extensive review of company law was in due course envisaged. Finally, over a month after the SEBI issued the amended cl.49, an Expert Committee on Company Law was established by the Ministry of Company Affairs  under the chairmanship of Dr Jamshed J. Irani, a director on the board of Tata, on December 2, 2004. The scope of this review was obviously much broader than any of the other reports considered above, and what follows focuses only on the issues directly relevant to the consideration of corporate governance, in particular as they have been dealt with in the Companies Bill initially laid before the Indian Parliament in 2008 and reintroduced in August 2009. The recommendations given by Irani committee report will be discussed later in proposed amendment part of the article.
Priorities for Indian Corporate Governance in the Context of Companies Bill 2009
Having gained a clearer picture of the particularity of the Indian context and thus of the sorts of issues that the various committees have sought to respond to or accommodate as they have considered the most appropriate approach to corporate governance in the country, it is now possible both to assess the adequacy of the developments to date, not least those in the Companies Bill 2009, and to make recommendations for further reform, not least because a unique opportunity in this regard exists given the presence of the Bill in the Indian Parliament. India is consequently well placed to avoid falling into the trap of responding only to the immediate crisis as has been the case in the United Kingdom and especially the United States in the past. For example, some studies suggest that the changes wrought by the Sarbanes-Oxley Act, while responding to the problems immediately evident in the aftermath of the Enron and other scandals, left large areas of corporate governance untouched notwithstanding that reform of these would predictably have had a greater beneficial effect. It is important, then, not to fixate on the problems most obviously exposed by the Satyam scandal, but to look at the issue of corporate governance in India in the round when considering what the response should be. It should be noted that the same studies that were critical of Sarbanes-Oxley have drawn the lesson from that experience that while the response to crisis will often have the quality of a knee-jerk reaction, "their motivating impact can be leveraged and their bad effects alleviated by good statutory design".
Legislative Brief of the Companies Bill 2009:
Under this heading only those provisions of the Bill would be discusses which are relevant to the corporate governance.
The support offered for the proposed National Company Law Tribunal (NCLT) One very significant feature of which had been envisaged in the Companies (Second Amendment) Act 2002, but which had not so far been introduced owing to a legal challenge as to its constitutionality. Despite the challenge (which is not actually mentioned in the Irani Report), the Committee sees advantages in terms of speed and specialisation and calls for speedy conclusion of the process to establish the new court. Thus, if a dedicated company law tribunal could be established with the requisite powers, then a very significant step would be taken in closing that gap. It should also be noted that a specialist Company Law Board already exists, but both it and the High Court are regarded as being responsible for delay because of the weight of business they have to deal with.
Notwithstanding the still outstanding legal challenge, the Companies Bill 2009 includes provisions in relation to the tribunals envisaged by the Irani Committee, very much in the terms of the 2002 Act.
The central government is required to constitute the NCLT composed of a president (who must be or have been a High Court judge for at least five years) and a number (to be determined) of judicial and technical members. It is also required to establish an appellate tribunal composed of a chairperson and a number to be determined (not exceeding eleven) of judicial and technical members.
It is also very significant, given concerns with the current arrangements, that the Tribunal and Appellate Tribunal are specifically not bound by the Code of Civil Procedure 1908, but, provided that they adhere to the principles of natural justice, "shall have the power to regulate their own procedure”. The Tribunal and Appellate Tribunal nevertheless enjoy the same powers as other courts with regard to the summoning of witnesses, treatment of evidence, contempt of court, etc. Very importantly, the Tribunal and Appellate Tribunal will have exclusive jurisdiction over the classes of cases they are empowered to hear.The Bill also envisages the establishment of special courts "for the purpose of providing speedy trial of offences under this Act" which once again would enjoy exclusive jurisdiction with an appeal lying to the High Court.
2. PFI’s and Government companies generally
In this regard, it is instructive to look at the Irani Committee's observations and recommendations in relation to government companies generally and the government's response in the context of the Bill. A particular problem identified by the committee is the poor example set by government companies when it comes to finalisation of accounts and audit. Despite the fact that directors in general are liable to penalties in such cases, the practice has grown up of exempting the directors of government companies from such penalties. "This is leading to an unhealthy situation which must be addressed." Specifically, the Irani Committee recommends that such exemptions and protections must be done away with so that government companies "operate in the market place on the same terms and conditions as other entities". Notwithstanding the Irani Committee's recommendations in this regard, however, cl.357 allows the Government to disapply or otherwise modify the Act in relation to government companies, subject only to a negative resolution procedure of both houses of the Indian Parliament. It is hard to escape the conclusion that the government is not interested in holding either the companies in which it is a majority shareholder or the directors of such companies to the same standards as apply to all other companies and their directors.
Clause 132(3) of the 2009 Bill reflects the Irani Committee's recommendation as regards at least one-third of the board of a listed company being independent directors and requires companies to comply with this requirement within one year of the coming into force of the Act, which could pose problems given the apparent problems to date in recruiting NEDs in India. Clause 132(5) provides the definition of independence and explicitly excludes nominee directors from this definition. It is noteworthy that the intention in India is to make this a legal requirement rather than a simply code provision.
4. Board Committees:
All listed companies are required to establish audit and remuneration committees. Regarding the requirements for an audit committee, these are less stringent than envisaged by the Irani Committee: while the chair must be independent, thereafter only a majority is required to be independent, and only one director is required to have knowledge of financial management, audit or accounts. This looks like a significant watering down, but may perhaps be explained by the tight time-limit for compliance of one year from the date of commencement. Nevertheless, a longer limit with more stringent requirements would appear to be preferable.
Similarly, the requirements in relation to the remuneration committee represent a watering down of the Irani Committee's recommendations: while cl.158(10) requires that it be composed entirely of NEDs, only one of these need be independent.
As regards the stakeholders relationship committee, this is required by the Bill for larger companies, and must have a NED as chairman, but no other restrictions are imposed on membership. Interestingly, given the ambiguity of the language employed by the Irani committee, the Bill explicitly states that the role of the committee is to "consider and resolve the grievances of stakeholders”. There is no further discussion of who the stakeholders are either in cl.158 or in the definitions clause, nor of precisely what the consideration and resolution of grievances might involve nor of the procedure to be followed in the event that a resolution is not reached. Nor is any further information provided in the Notes on Clauses appended to the Bill. This is an issue in apparent need of clarification in Parliament not least because as matters stand a literal reading of cll.158(13) and 158(15) would render a company liable to a fine and the members of the committee liable to a fine or imprisonment in the event that they failed to resolve a grievance.
5. Duties of directors
As far as duties of directors are concerned there exists vagueness in language employed by Irani Committee. Given this vagueness, it is perhaps not surprising that cl.147 of the 2009 Bill stays on familiar territory. Thus we find statutory expressions of the duty to act in good faith in the best interests of the company, the duty of skill and care, the duty to avoid conflicts of interest and undue personal gain, but no attempt to give expression to the Committee's vague desire "to have regard to the interests of employees, etc.". The Bill's drafters may have been influenced by the Irani Committee's apparent scepticism of the United Kingdom's more extensive list, though commentators appear clear that it represents more of a clarification of the law than a modification and that its principal effect will be in reminding directors of the obligation to take account of others to the extent that this is in the interests of the company. It could, therefore, be suggested that a similar approach would be a useful addition to Indian company law given that self-serving decisions may be more of an issue in the context of closely held companies. It is certainly the case that the Word Bank report on corporate governance in India perceived a need for a clear statutory statement of directors' duties.
6. Liabilities of Independent and non executive directors:
In contrast to earlier calls for legal exemptions and protections from certain criminal and civil penalties for independent and NEDs, the Irani Committee suggests instead that the liability of such directors should be established on the basis of a knowledge test. In this last regard, it is significant that the Committee also recommends a set of rights of access to information on the part of independent and NEDs. The Bill indeed draws no distinction between the categories of directors with regard to liabilities but does provide a variety of powers, such as those of the audit committee under cl.158. As regards a knowledge test, the Bill is silent. The conclusion would have to be drawn that the clarity called for by the Irani Committee has not yet been achieved.
7. Corporate Structure
Perhaps influenced by the Sarbanes-Oxley Act, and echoing the sentiments of the Chandra and Murthy Committees, the Irani Committee wants to see certain key managerial personnel recognised by law "along with their liability in appropriate aspects of company operations". In this regard it identifies the CEO, company secretary and CFO. This recommendation is reflected in cll.174-178 of the Bill. By contrast, the existing legislation is silent with regard to the CEO and CFO.
8. Minority Interests:
Significant in this regard, and perhaps influenced by developments in the United Kingdom and the United States, is the suggestion that while the existence of derivative and class actions have been recognised by the courts in India, these should be placed on a statutory footing. The Committee takes a similar view in relation to investor protection generally. Ultimately, however, while the Companies Bill 2009 does make mention of a class action, it does not include a statutory derivative action. Again, given the problems identified earlier, for example in relation to government companies, the lack of a clearly defined derivative action would appear to represent a missed opportunity to enhance the protection of minority shareholders and encourage higher standards of governance. The approach of the Irani Committee might also be read as an indication of the success of earlier efforts aimed at minority protection, such as the possibility for companies of a certain size to have a director elected by a small shareholder on the Board.
9. Accounts and Audit
The Irani Committee notes, as did the earlier Birla Committee, that work is under way on the part of the ICAI to bring Indian accounting standards into line with international standards and that progress is expected shortly.
In relation to accounting standards, the 2009 Bill echoes the pre-existing s.210A of the 1956 Act in that it empowers the central government to establish an advisory committee, the National Advisory Committee on Auditing and Accounting Standards, which would in due course and in consultation with the ICAI make recommendations to the Government on these matters. Clause 119 empowers the Government to lay down accounting standards. Much accordingly depends upon what the ICAI ultimately achieves.
In common with the US approach, and following the Chandra and Murthy Committees, certain non-audit services are to be prohibited while others could be allowed provided there is pre-approval by the board or the audit committee. Clause 127 of the 2009 Bill reflects this recommendation.
10. Internal Control
Again reflecting the recognition of the importance of internal control in other jurisdictions, the Irani Committee "feels that the internal controls in any organization constitute the pillar on which the entire edifice of Audit stands". Accordingly, these controls "should be certified by the CEO and CFO of the Company and in the Directors' report through a separate statement on the assessment". This recommendation is implemented in the 2009 Bill in cl.120(4)(e) where it is provided that the Directors' Responsibility Statement shall state inter alia that "the directors, in the case of a listed company, had laid down internal financial controls to be followed by the company and that such internal financial controls have been complied with". This is bolstered by cl.126(3)(i), which requires that the auditor's report shall state "in the case of listed companies, whether the company has complied with the internal financial controls and directions issued by the Board". Note also that cl.158(5) includes among the terms of reference of the audit committee "evaluation of internal financial controls and related matters" while cl.158(6) gives the audit committee authority to call for comments from auditors about internal control systems.
An analysis of the proposed Amendments:
1. Encouraging institutional investor engagement with corporate governance
One of the most striking aspects of the foregoing examination of developments in corporate governance in India, as well as in the jurisdictions from which it has drawn most inspiration, is the growing awareness of the extent to which institutional investors do not engage in the monitoring of governance which it has traditionally been assumed that they have a rational self-interest in doing. India has already taken action in this regard insofar as cl.49 of the listing agreement is policed by the SEBI rather than institutional investors. As sensible as this undoubtedly is at one level, there are at least two objections. First of all, it places an immense burden on the SEBI, which the reported level of non-compliance suggests it is struggling to cope with. This may be due to the fact that the SEBI is regarded by some of those it is supposed to be regulating as ineffective insofar as it has often seen its decisions overturned on appeal and insofar as there is a perception that it has not been dealing with the most problematical cases. Accordingly, while there is no doubt that the SEBI would benefit from more resources,there must be a serious question as to whether it would ever be possible to resource it to a point where it would be sufficient in and of itself to ensure that appropriate standards of corporate governance are applied across all listed companies.
The second objection to relying on the SEBI to great an extent is the fact that it essentially allows institutional investors to abdicate their responsibilities. If there really is a desire to develop open, transparent and engaged capital markets, then the idea that institutional investors have responsibilities with respect to governance as opposed to simply opportunities for profit must surely be taken seriously.
If there is a lesson for India in all of this, it is surely that the Companies Bill 2009 should be seen as an opportunity to deal with the correctly identified problem of poor institutional shareholder engagement, whether public or private sector, as a means of bolstering the role played by the SEBI. This could be done by placing the provisions that are currently in cl.49 of the listing agreement in a schedule to the Bill and thus requiring companies to obtain ex ante shareholder agreement for departures from them. The SEBI could continue to perform its existing role in terms of checking compliance under the listing agreement. The difference would be that it would now be checking compliance with corporate governance arrangements that had been explicitly agreed to by shareholders. This in turn would require provisions in the Bill mandating the disclosure of voting records, while all of these developments would presuppose the existence of an analogue. Taken together this looks like a fairly comprehensive change to the status quo, but it is actually much less demanding than might appear to be the case at first sight: the stewardship principles would essentially be no more that what has been called for for at least a decade by the CII insofar as they have expressed their expectations of what is required from institutional investors; the addition of a schedule to the Bill would be no more than the adoption of a mirror image of cl.49 directed initially at the ex ante agreement of shareholders as opposed to solely the ex post compliance checking of the SEBI; and the provisions mandating disclosure of institutional shareholder voting records would be no more than the adoption of the minimum provision required to close the circle of corporate governance monitoring. In short, if all the parties involved in corporate governance are doing what they ought to do, then they will feel no burden from any of these proposals.
The advantage for India of adopting these changes in the context of the Companies Bill would be that it would be taking the chance to be at the forefront of corporate governance reform rather than playing catch-up with the hitherto entrepreneurial jurisdictions, such as the United Kingdom and the United States. It would also be adopting measures that are well adapted to the particular problems identified in the Indian context as well as signalling to global investors that it is setting a standard appropriate to the future development of investment. The proposal set out above that a mirror image of cl.49 should appear in a schedule to the Companies Bill essentially means that default rules are being introduced into the Indian context and that companies will be able to propose and shareholders will be able to agree to departures from the default position. A "mandatory" element remains in that SEBI will be responsible for monitoring compliance from the point of view of the listing authority, but significantly it will be monitoring compliance with the agreed position, not with mandatory rules imposed by a third party.
2. Directors duties in relation to NED’s:
The adequate operation of the proposal outlined above, aimed as it is at encouraging the engagement of institutional investors and tapping into their monitoring potential, will also depend upon the presence on Indian boards of committed and qualified independent NEDs. One issue, however, that seems to have caused particular concern in India is the fact that NEDs are subject to the same duties as executive directors. Recall, for example, that the Chandra Committee called for there to be exemptions for NEDs from a wide range of civil and criminal liabilities. Furthermore, there is evidence that the Satyam scandal has raised fears in the minds of many independent NEDs, sparking something of a mass exodus from Indian boardrooms.
Interestingly, while the Companies Bill reflects the Irani Committee's recommendation that directors' duties be set out in statute, rather than relying on their traditional common law expression, it does not directly address this question of a knowledge test. The closest it comes is in the statutory expression of a duty of skill and care, but even here there is a question as to just how sophisticated this test is and what impact it might have, if any, on the differential treatment of executive and non-executive directors. Clause 147(3) states that "A director shall exercise his duties with due and reasonable care, skill and diligence". By contrast, in the United Kingdom, the Companies Act 2006 took the opportunity to set out in detail a two-part test inspired by s.214 of the Insolvency Act 1986 that was first enunciated as an expression of the common law by Hoffmann J. in 1991 and subsequently supported by the Law Commissions. Thus, s.174 of the 2006 Act reads as follows:
"(1) A director of a company must exercise reasonable care, skill and diligence.
(2) This means the care, skill and diligence that would be exercised by a reasonably diligent person with--
(a) the general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions carried out by the director in relation to the company, and
(b) the general knowledge, skill and experience that the director has."
It would accordingly appear that while the United Kingdom's recent Companies Act might provide a clearer and more satisfactory test of skill and care than that appearing in the Indian Companies Bill from the point of view of shareholders, there is still nothing that would reassure NEDs about the risks that they may be running by accepting such positions on the boards of Indian companies.
In this regard it is perhaps most instructive to look at the recent Australian case law where there has been more consideration of the specific question of the standard to which NEDs will be held. Thus there has been recognition that although both executive and non-executive directors are subject to the same standard, nevertheless what will be required of them in specific circumstances will depend upon what role and function each has been entrusted with in a given company.
In AWA Ltd v Daniels, for example, Rogers C.J. said that:
"In contrast to the managing director, non-executive directors are not bound to give continuous attention to the affairs of the corporation. Their duties are of an intermittent nature to be performed at periodic board meetings, and at meetings of any committee of the board upon which the director happens to be placed. Notwithstanding a small number of professional company directors there is no objective standard of the reasonably competent company director to which they may aspire. The very diversity of companies and the variety of business endeavours do not allow of a uniform standard.”
On the other hand, this should not be read as meaning that NEDs can essentially abdicate responsibility either to other directors or to management or expert advisers where what is at issue are matters that they "knew or should have known about", as the Supreme Court of New South Wales has recently held in the case of ASIC v MacDonald.
It is accordingly submitted that NEDs under such an approach would not be held to an unduly high standard but that they would be expected to do the jobs they are employed by the shareholders to do. The Companies Bill could usefully, however, incorporate wording more closely modelled on the UK Companies Act in order to offer more guidance to the courts (and specifically to the future National Company Law Tribunal (NCLT), which would then be in a position to develop the jurisprudence on this point). Beyond that, it is also noteworthy that the courts in the United Kingdom, Australia and India now have a good deal of material to look at in reaching conclusions about what should reasonably be expected from NEDs in the shape respectively of the Combined Code, the Corporate Governance Principles and Recommendations and the CII Code. In the same way that directors are expected to look to these documents for guidance or instruction on how they are to carry out their functions, it is no more than reasonable that the courts should look to these too in any case where there is a question as to what a director ought to have known or done.
3. A statutory derivative action:
A further development that appears desirable if institutional investors are to be able to play the role envisaged for them above is the implementation of a statutory derivative action. This was called for by the Irani Committee, but does not appear in the Companies Bill. While institutional investors have come in for criticism for their apparent failure to monitor and challenge the governance of companies involved in the financial crisis, especially in relation to risk management, they have equally responded that there are jurisdictions where there is a need for shareholders to be further empowered if they are to be able to perform as expected.India certainly falls into this category insofar as a number of factors conspire to make the position difficult for minority shareholders including: the persistence of close control even among listed companies; the significant presence of government companies subject to exceptions and dispensations; and the well-documented delays that bedevil the court system. Factors such as these only exacerbate the problem that exists for shareholders in any situation where there is concern that duties have been breached to the detriment of the company: the company is the proper claimant but the day-to-day decision-making, including on whether or not to litigate, is in the hands of the board. In all of these circumstances, whereas a derivative action exists at common law in India, there would be definite advantages to this being set out clearly on a statutory basis--just as was done in the United Kingdom.
4. The establishment of specialist courts:
The plans for the establishment of the NCLT and Appellate Tribunal set out in the Companies Bill 2009 were discussed at length above and will not be reviewed again here. Suffice it to say that the reform proposals discussed above all to a greater or lesser degree depend for their effectiveness on the existence of functional and reliable courts, capable of timely consideration and enforcement of company law in relation to corporate governance. India could then finally derive the competitive advantage that comparative lawyers have seen to be missing despite its common law system,as the specialist court would be well placed to provide the space for the empirical development of the law adapting to changing circumstances that is supposed to be a defining characteristic of a common law system. The alternative is that investors will increasingly seek to circumvent the Indian court system by contracting for arbitration in another jurisdiction. At the time of writing, however, a final ruling is still awaited from the Supreme Court on the constitutionality of the proposal for the NCLT. The objection raised by the Madras Bar Association relates to the transfer of power from the High Court to the NCLT and the Appellate Tribunal. The matter has now been referred to a Constitution Bench of the Supreme Court given its "seminal importance" and the fact that it is "likely to have a serious impact on the very structure and independence of the judicial system".While concerns regarding the novelty of the proposals, not least the involvement of technical as well as judicial members, are understandable, it is to be hoped that an important opportunity to solve a fundamental problem will not be missed.
5. Adoption of international accounting standards:
Beyond the specifically legal reforms listed so far, a crucial step for India in improving its corporate governance will be the adoption of international accounting standards. The Birla and Irani Committees both called for this, noted that the ICAI has been involved in work in this direction and called for a speedy conclusion to the process. While some within the corporate governance and accounting worlds may have expressed surprise that the auditors of Satyam were unable to see what that company was doing,  there is perhaps some cover for the auditors from the observation that "Indian accounting standards provide considerable flexibility to firms in their financial reporting and differ from International Accounting Standards (IAS) in several ways that often make interpreting Indian financial statements a challenging task".The World Bank review of accounting and audit in India highlighted the fact that "certain IFRS and IFRS concepts are yet to be adopted, less detailed disclosures are required in some Indian Accounting Standards, and certain Indian Accounting Standards are narrower in scope than equivalent IFRS”and continued in an equally troubling tone that "Vague statements were noticed in some reviewed financial statements that raise a question on the validity of the auditor's opinion on 'true and fair view"'. Some commentators do, however, see reasons for optimism given the presence of a number of factors favouring the adoption of international standards, including: the pressure to adopt such standards as a result of entering into joint ventures with partners from developed economies; the exposure of recent graduates to international accounting standards on MBA and accounting courses at both domestic and foreign universities; and the increasing presence of international faculty at Indian universities. It must be conceded, however, that the picture is mixed and the World Bank review also highlighted problems with regard to the education and training of accountants. It is accordingly clear that the simple adoption of international standards by the ICAI will not be the end of the process.
6. Government Companies:
Insofar as the logic of the proposed reforms discussed so far is accepted, the question of the differential indeed preferential treatment of government companies comes to the fore. While some claim that state-owned enterprises are actually in the vanguard in relation to the implementation of corporate governance requirements, others have demonstrated that compliance with cl.49 of the listing agreement is actually very poor among those state-owned enterprises affected.  There is one encouraging sign in this regard in the shape of guidelines on corporate governance for government companies issued by the Department for Public Enterprise. This recognises that:
"It is imperative that ethics, probity and public accountability are maintained in the functioning of all public enterprises. In other words good Corporate Governance practices should be inbuilt in the management system of Public Enterprises."
In order to achieve this the guidelines provide, first, that listed state-owned enterprises must follow the requirements set down by the SEBI, that is, cl.49, and, secondly, that other SOEs should follow a series of requirements that are clearly inspired by that clause of the listing agreement. As encouraging as this development undoubtedly is, there are indications that things are not going as well as might be hoped. First, the guidelines state that they are to be experimental for one year, but there is no indication on the website of the Department for Public Enterprise as to whether a review has been carried out, whether the experiment has been judged a success or whether any developments are deemed appropriate. Secondly, the official communication from the Department at the time of the issuing of the guidelines indicated that the Department "would also grade the CPSEs on the basis of their compliance of the corporate governance guidelines". Again, the Department's website, fully two years after the guidelines were issued, is silent as to whether this has been carried out. Thirdly, and surely most problematically, a recent decision from the SEBI regarding an alleged breach of cl.49 by GAIL (India) Ltd, a listed state-owned enterprise, would appear to have revealed a significant loophole in the regulations for listed companies that operates so as to exclude SOEs from liability in circumstances where the reason for the apparent breach can be laid at the door of the Government as shareholder rather than at that of the company itself.
In short, there is yet another indication that government companies enjoy a privileged position in comparison to those in the private sector, a fact that raises important questions about the willingness of the government to deal meaningfully with corporate governance problems and equally about the seriousness with which private sector companies may be expected to take corporate governance in view of these manifest double standards.
Good corporate governance may not be the engine of economic growth, but it is essential for the proper functioning of the engine. As this Note demonstrates, good corporate-governance practices can help increase investment, decrease corruption, and reduce wasting of scarce resources.The long awaited re-codification of Indian company law has begun to take shape through the government's recent introduction to Parliament of the Companies Bill 2008 and the referral of the same to the Select Committee. The bill seeks to establish a new benchmark for corporate governance in comparison to the existing framework under the Companies Act 1956. In short, India has a chance with the Companies Bill 2009 to take a lead in corporate governance innovation rather than following developments in the United States or the United Kingdom. This may also be an auspicious time to take on this task. The evidence of the impact on the global financial crisis on emerging economies such as India is inconclusive: some indicators point to decoupling from developed trading partners while others suggest a closer correlation between the respective business cycles. Whatever the truth of the situation it cannot harm India's prospects going forward to send a clear signal of intent with regard to corporate governance to the global financial market and at the very least to build on the favourable position that it appears to occupy in relation to other emerging economies.
 John Paterson, “Corporate Governance In India in the context of companies Bill 2009: Part 1: Evolution”, International company and Commercial Law review; 2010.
For details, see Nandini Rajagopalan and Yan Zhang, "Recurring failures in corporate governance: a global disease?", Business Horizons, 2009, vol. 52, 545-552, 545. See also "India's Enron", The Economist, January 8, 2009.
 For a convenient review, see Jill Solomon, “Corporate Governance and Accountability”, 2nd edn (Chichester: John Wiley & Sons, 2007), pp.49 et seq.
 For a convenient review, see Solomon, “Corporate Governance and Accountability,” 2007,pp-31-34.
 "Companies Bill, 2009 introduced in Lok Sabha", Government of India Press Information Bureau, Press Release, August 3, 2009. See also "Companies Bill Housed in Lok Sabha", Economic Times, August 4, 2009.
Omkar Goswami, “Corporate Governance in India, in Taking Action Against Corruption in Asia and the Pacific” 85, 86 (Asian Dev. Bank & Org. for Econ. Co-operation & Dev. eds., 2002).
 See generally The Companies Act, 1956, No. 1, Acts of Parliament, 1956, available at http://indiacode.nic.in/fullact1.asp?tfnm=195601.
 Eugene B. Mihaly, “Multinational Companies and Wages in Low-Income Countries”, 3 J. Small & Emerging Bus. L. 1, 10 (1999).
 The Securities and Exchange Board of India Act, 1992, No. 15, Acts of Parliament, 1992, available at http://indiacode.nic.in/fullact1.asp? tfnm=199215.
 . There were three major scams that rocked the Indian business scene in the 1990s. The first was a securities scam, the second involved multinational corporations, while the third involved "disappearing companies." Id.
 Confederation of Indian Indus., About Us, http:// www.ciionline.org/AboutCII/44/default.html (last visited April 12, 2010).
 Infosys, Infosys Annual Report 2005-06, at 114 (2006), available at http://www.infosys.com/investor/reports/annual/Infosys_AR06.pdf. Dr. Kumar Mangalam Birla is the Chairman of the Birla Committee, id., and the Chairman of the Aditya Birla Group, one of India's largest businesses. Aditya Birla Group, India's First Global Corporation, Profile of Mr. Kumar Mangalam Birla, http://www.adityabirla.com/the_group/km_birla_profile.htm (last visited 2010-04-12).
 Department of Company Affairs, Report of the Committee on Corporate Audit and Governance under the chairmanship of Naresh Chandra (2002) (Chandra Report), para.2.
 Chandra Report, 2002, para.4. This more pessimistic view was backed by the Central Vigilance Commissioner, N. Vittal, delivering the Tata Memorial Lecture in the same year when he said: "I find the legal and administrative environment in India provides excellent scope for corrupt practices in business. As a result unless a management is committed to be honest and observe the principles of propriety, the atmosphere is too tempting to observe good corporate governance in practice." Quoted in Tricker, Corporate Governance: Principles, Policies and Practices, 2009, p.206.
 The Murthy Committee was headed by Narayana Murthy, Chairman of the Board of the Directors of Infosys Technologies Limited. Infosys, Profile of N.R. Narayana Murthy, http://www.infosys.com/about/Narayana_Murthy.asp (last visited Jan. 18, 2007). Infosys is an information-technology-consulting and software-services provider. Infosys, Overview: Pioneering a New Generation of Strategic Offshore Outsourcing, http://www.infosys.com/about/default.asp (last visited apr 12, 2010).
 Varun Bhat, “Corporate Governance in India: Past, Present, And Suggestions for the Future”, Owa Law review, May 2007.
 Ministry of Company Affairs, Report of the Expert Committee on Company Law chaired by Dr Jamshed J. Irani, 2005 (Irani Report), Ch.I, para.5.
 John Paterson, “Corporate Governance In India in the context of companies Bill 2009: Part 1: Evolution”, International company and Commercial Law review; 2010.
 Robert C. Clark, "Understanding and Resolving Crisis-Generated Corporate Governance reform" (2005) 1(4) Corporate Governance Law Review 456.
 See John Paterson, "Corporate Governance in India in the Context of the Companies Bill 2009 (Part 2: Evaluation)"  I.C.C.L.R. 89 [section 3(b)(i)].
 See Companies Act 1956 s.10E.
 A discussion of the relative merits of the two systems from the practitioner point of view, see Gopal Pd. Dokania, "National Company Law Tribunal and Appellate Tribunal", Chartered Accountant, August 2003, pp.147- 151.
 Companies Bill 2009 cl.369.
 Companies Bill 2009 cl.371.
 Companies Bill 2009 cl.385(1). The wording of this clause is similar to the provisions relating to the existing Securities Appellate Tribunal which hears appeals from decisions of the SEBI. See Securities Laws (Second Amendment) Act 1999 s.15U(1).
 Companies Bill 2009 cll.385(2) and 386.
 Companies Bill 2009 cl.391.
 Companies Bill 2009 cl.396.
 Companies Bill 2009 cl.397.
 Companies Bill 2009 cl.398.
 Irani Report, 2005, Ch.IX, para.38.
 Irani Report, 2005, Ch.IX, para.39.
 Companies Bill 2009 cl.132(4).
 Mahamuni, Mahamuni, "The potential role of non-executive directors in Indian Companies"  I.C.C.L.R. 207, 215.
 Companies Bill 2009 cl.158(1).
 Companies Bill 2009 cl.158(3).
 Companies Bill 2009 cl.158(2).
 Companies Bill 2009 cl.158(4).
 Companies Bill 2009 cl.158(12).
 Companies Bill 2009 cl.158(1).
 Companies Bill 2009 cl.1.
 Note that cl.49, of the listing agreement includes a reference to a "Shareholders/Investors Grievance Committee" (emphasis added), but given that both the Irani Committee and the Bill's drafters have specified "Stakeholders", it would appear that they have something else in mind or have both committed the same error. See para. IV(G)(iii) of cl.49.
 See, for example, Paul Davies, Principles of Company Law, 8th edn (London: Sweet &Maxwell, 2008), para.16.26. See also Deryn Fisher, "The Enlightened Shareholder: Leaving Stakeholders in the Dark--Will section 172(1) of the Companies Act 2006 make directors consider the impact of their decisions on third parties?"  I.C.C.L.R. 10.
 For a positive reading of the developments contained in cl.147 of the Companies Bill 2009, see Bikramaditya Ghosh and Karmendra Singh, "Directors' Duties in India: Strengthening the Laws on Trusteeship"  I.C.C.L.R. 199, 204-205.
 "The Companies Act should clearly spell out the fiduciary obligations of directors, including care, skill and diligence in the performance of their duties, as well as loyalty and avoidance of conflicts of interest". See World Bank, Report on the Observance of Standards and Codes: Corporate Governance Country Assessment--India, 2004, p.11.
 Irani Report, 2005, Ch.IV, para.22.
 Irani Report, 2005, Ch.IV, para.24.
 Irani Report, 2005, Ch.IV, para.34.1. See also Chandra Report, 2002, recommendation 2.10. See also Sarbanes-Oxley Act 2002 s.304.
 See also Companies Bill 2009 cl.2(1)(zza).
 Irani Report, 2005, Ch.VI, para.10.2.
 Companies Bill 2009 cl.216.
 See, for example, the statutory derivative action now provided in the UK Companies Act 2006 ss.263 and 268,
 Legislative Brief, The Companies Bill 2009, PRS Legislative Research, Centre for Policy Research, www.prsindia.org. (last visited on April 12, 2010.)
 Companies Bill 2009 cl.118.
 Irani Report, 2005, Ch.IX, para.26.
 See especially the Sarbanes-Oxley Act 2002 ss.302 and 404. See also the Turnbull Report in the UK: Internal Control: Guidance for Directors on the Combined Code (London: Institute of Chartered Accountants in England and Wales, 1999).
 Irani Report, 2005, Ch.IX, para.31.
 Irani Report, Ch.IX, para.31. ICCLR 2010, 21(2), 41-53
 John Paterson; “Corporate Governance in India in the light of Companies bill 2009:Part I: Evolution”, International Company and Commercial Law Review, 2010.
 Ajay Shah, Susan Thomas and Michael Gorham,” India's Financial Markets: An Insider's Guide to How the Markets Work “(Chicago: Elsevier and IIT Stuart Center for Financial Markets Press, 2008), pp.210-211.
 See World Bank, Report on the Observance of Standards and Codes, Corporate Governance Country Assessment: India (Document of the World Bank, 35084, April 2004), s.IV.A.
 Abha Bakaya, "Independent directors on quitting spree", Economic Times, April 20, 2009.
 . Norman v Theodore Goddard  B.C.L.C. 1028 Ch D.
 Law Commissions, Company Directors: Regulating Conflicts of Interest and Formulating a Statement of Duties (1999), Law Commission No.261 and Scottish Law Commission No.173, Cm.4436.
 AWA Ltd v Daniels (1992) 7 A.C.S.R. 759 at 867
 Australian Securities and Investments Commission v Macdonald (No.11)  NSWSC 287 at -.
 ASX Corporate Governance Council, Corporate Governance Principles and Recommendations, 2nd edn (Sydney: Australian Securities Exchange, August 2007).
 For a discussion of the challenges facing courts in referring to extra-legal codes in the application of company law, see Simon Goulding, Lilian Miles and Alexander Schall, "Judicial enforcement of extra-legal codes in UK and German Company Law--including observations on OLG Schleswig Holstein, NZG 2004, 669 (Mobilcom II) and LG München I, NZG 2004, 626 (Hypovereinsbank)" (2005) 1 E.C.F.R. 21.
 See Paterson, "Corporate Governance in India in the Context of the Companies Bill 2009 (Part 1: Evolution)"  I.C.C.L R. 51 [section 2(e)(ix)].
 See International Corporate Governance Network, "Statement on the Global Financial Crisis", November 10, 2008. It is worth noting that there are likely to be economic benefits from implementing the sort of change proposed here. Among the findings reported by Ghosh and Revilla is the fact that the provision of legal protection for minority shareholders assists in the attainment of market liquidity and efficiency. See Swati Ghosh, and Ernesto Revilla, "Enhancing the efficiency of securities markets in East Asia" (World Bank Policy Research Paper 4129, February 2007). And it may be that the Satyam scandal has prompted change in this regard inasmuch as the SEBI has recently introduced guidelines governing its offering of legal aid to investor associations wishing to raise actions. See Securities and Exchange Board of India (Aid for Legal Proceedings) Guidelines (2009).
 See Robert W. McGee, "Corporate Governance in Asia: Eight Case Studies" (Florida International University, College of Business Administration, School of Accounting, Working Paper, January 2008) and the discussion in Paterson, "Corporate Governance in India in the Context of the Companies Bill 2009 (Part 2: Evaluation)"  I.C.C.L R. 88.
 . Paul Davies and Jonathan Rickford, "An Introduction to the New UK Companies Act"  E.C.F.R. 48, 51.
 See Rajagopalan and Zhang, "Corporate Governance Reforms in China and India: Challenges and Opportunities" (2008) 51 Business Horizons 55, 63.
 Madras Bar Association v Union of India (2007) 6 Madras Law Journal 1805 SC.
 Rahul Bajaj, who chaired the Confederation of Indian Industry committee that produced the country's first code of corporate governance, wrote recently: "I cannot understand how the auditors in Satyam did not realise what was happening." See Rahul Bajaj, "Corporate Governance" (2009) 58(1) Chartered Accountant 44.
 Rajesh Chakrabarti, William L. Megginson and Pradeep K. Yadav, "Corporate Governance in India", Journal of Applied Corporate Finance (forthcoming-- references are to pre-publication typescript), p.20 (emphasis added).
 World Bank, Financial Management Unit, South Asia Region, India: Report on the Observance of Standards and Codes--Accounting and Auditing (Document of the Word Bank, Report No.32510-IN), para.57.
 World Bank, India: Report on the Observance of Standards and Codes (Document of the Word Bank, Report No.32510-IN), para.61.
 Sanjay Kallapur and Ranjani Krishnan, "Management Accounting in India" in Christopher S. Chapman, Anthony G. Hopwood and Michael D. Shields (eds), Handbook of Management Accounting Research, Vol.3 (Amsterdam: Elsevier Ltd, 2008), pp.1399-1410 at p.1408.
 World Bank, I ndia: Report on the Observance of Standards and Codes (Document of the Word Bank, Report No.32510-IN), paras 32-39.
 See the speech by the Arun Balakrishnan, chairman and managing director of Hindustan Petroleum, to a seminar on the new Guidelines on State-Owned Enterprise Corporate Governance in India, June 2008, p.8. Available online at http:// www.hindustanpetroleum.com/Upload/En/ChairmansSpeech/Files/SOECorporateGovernanceJune08.pdf [Accessed January 13, 2010]. He further states that "Public Sector Units, especially the centrally-owned ones, stand head and shoulders above the rest in terms of degree of quality of corporate governance": p.12.
 See V.V.S.K. Prasad and T. Venkateswara Rao, "Corporate Governance: A Comparative Study of Select Public Sector and Private Sector Companies in India" (April 16, 2009).
 . See Department for Public Enterprises, Guidelines on Corporate Governance for State-Owned Enterprises (June 2007) (DPE Guidelines).
 DPE Guidelines, 2007, para.5.
 See http://www.dpe.nic.in [Accessed April 12, 2010].
 Office Memorandum No. 18(8)/2005-GM, June 22, 2007 from the Joint Secretary of the Department for Public Affairs.
 See http://www.dpe.nic.in [Accessed April 12, 2010].
 Adjudication Order No.BS/AO- 57/2008. Order under s.23(i) of Securities Contracts (Regulation) Act 1956 read with r.4 of Securities Contracts (Regulation) (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules 2005 in the matter of adjudication Proceedings against GAIL (India) Ltd (GAIL (India) adjudication).
 John Paterson, “Corporate Governance in India in the context of the Companies Bill 2009: Part 3: Proposals”; International Company and Commercial Law Review, 2010.
 Countries can choose between different engines, such as foreign direct investment and import substitution, to name two. Regardless of which model of economic growth a country adopts, however, poor corporate governance will prove to hinder sustainable growth and development.
 For an up-to-date appraisal, see Jarko Fidrmuc, and Iikka Korhonen, "The Impact of the Global Financial Crisis on Business Cycles in Asian Emerging Economies", forthcoming, Journal of Asian Economics (forthcoming).
 Shamila Jayasuriya, for example, finds that "countries that experienced lower post-liberalization volatility are in general characterized by favourable market characteristics such as higher market transparency and investor protection, and better quality of institutions such as a higher regard for rule of law and lower levels of corruption" and that India is precisely one of those countries that experienced lower post-liberalisation volatility. Shamila Jayasuriya, "Stock market liberalization and volatility in the presence of favorable market characteristics and institutions" (2005) 6 Emerging Markets Review 170, 170, 182. It is important to bear in mind, however, the sort of countries that the comparison is drawn with. Those exhibiting higher post-liberalisation volatility were Colombia, Pakistan and Venezuela.
ICCLR 2010, 21(4), 131-143
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