Master10
Business, Corporate Governance & Startups Module

Companies Act, SEBI & Corporate Governance

Corporate governance in India is anchored in the Companies Act, 2013, which replaced the archaic Companies Act of 1956. The 2013 Act introduced transformative provisions, including the statutory mandate under Section 135 requiring eligible profitable corporations to spend at least 2 percent of their average net profits on Corporate Social Responsibility (CSR) activities. It also strengthened minority shareholder rights, mandated female representation on boards, and instituted the National Company Law Tribunal (NCLT) and NCLAT for corporate dispute resolution. Capital market integrity and listed corporate disclosures are overseen by the Securities and Exchange Board of India (SEBI), established as a statutory body in 1992, which enforces regulations against insider trading, fraudulent trade practices, and market manipulation.

Key Concepts & Examination Highlights

  • Section 135 of the Companies Act, 2013 made India the first country in the world to statutorily mandate Corporate Social Responsibility (CSR) spending (2% of net profits).
  • SEBI was established as a non-statutory body in 1988 and given statutory powers under the SEBI Act, 1992.
  • The National Company Law Tribunal (NCLT) was constituted in 2016 under Section 408 of the Companies Act, 2013.
  • The Companies Act, 2013 introduced the concept of One Person Company (OPC) and mandated at least one woman director for specified public companies.
  • CSR requirements under Section 135 apply to companies with net worth >= ₹500 crore, turnover >= ₹1,000 crore, or net profit >= ₹5 crore during any financial year.
  • The National Company Law Appellate Tribunal (NCLAT) hears appeals against orders passed by the NCLT, IBBI, and the Competition Commission of India (CCI).
  • Independent directors are mandated under Section 149 of the Companies Act 2013, requiring listed public companies to have at least one-third of total directors as independent directors.
  • The Kumar Mangalam Birla Committee (1999) and Narayana Murthy Committee (2003) laid the foundations for Clause 49 of the Listing Agreement on corporate governance.
  • Serious Fraud Investigation Office (SFIO) is a statutory multi-disciplinary organization established under Section 211 of the Companies Act 2013 to investigate complex corporate frauds.
  • SEBI's Prohibition of Insider Trading (PIT) Regulations strictly prohibit trading securities using Unpublished Price Sensitive Information (UPSI).
  • The Competition Act, 2002 established the Competition Commission of India (CCI) to prevent anti-competitive agreements, abuse of dominant position, and regulate combinations and mergers.
  • The Uday Kotak Committee on Corporate Governance (2017) recommended separating the roles of Chairperson and Managing Director or CEO in top listed firms.
  • The Companies Act, 2013 contains 470 sections organized into 29 chapters and 7 schedules, replacing the old Companies Act of 1956.
  • National Financial Reporting Authority (NFRA) was constituted in October 2018 under Section 132 of the Companies Act, 2013, as an independent regulator for auditing and accounting standards.
  • Investor Education and Protection Fund (IEPF) Authority was established under Section 125 of the Companies Act to administer unpaid dividends and protect retail investors.
  • Whistleblower mechanism and vigil mechanism are legally mandated under Section 177 of the Companies Act, 2013, for all listed companies and companies accepting public deposits.
  • The Audit Committee of a listed company must consist of a minimum of three directors, with independent directors forming the majority under Section 177.
  • SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, known as LODR Regulations, consolidate and streamline disclosure norms for listed entities.
  • SCORES (SEBI Complaints Redress System) is a centralized web-based grievance redressal system launched by SEBI to resolve complaints from securities investors.
  • Qualified Institutional Buyers (QIBs) are institutional investors such as mutual funds, venture capital funds, and foreign portfolio investors possessing expertise to evaluate financial markets.
  • Alternative Investment Funds (AIFs) are privately pooled investment vehicles classified into Category I (startups, social ventures), Category II (private equity, debt funds), and Category III (hedge funds).
  • Related Party Transactions (RPTs) require mandatory approval of the Audit Committee and shareholders under Section 188 of the Companies Act, 2013, to prevent conflict of interest.
  • Depository Receipts (DRs), such as American Depository Receipts (ADRs) and Global Depository Receipts (GDRs), allow Indian companies to raise foreign capital from overseas markets.
  • Business Responsibility and Sustainability Reporting (BRSR) was mandated by SEBI for top 1,000 listed entities by market capitalization to disclose Environmental, Social, and Governance (ESG) metrics.
  • Buyback of shares by a company is governed by Section 68 of the Companies Act, 2013, capping the buyback at 25% or less of the company's paid-up capital and free reserves.
  • The Companies Act, 2013, received Presidential assent on 29 August 2013, replacing the Companies Act, 1956, following the comprehensive recommendations of the Dr. J.J. Irani Committee (2005).
  • A One Person Company (OPC) is defined under Section 2(62) of the Companies Act, 2013, as a company which has only one person as a member, promoting individual entrepreneurship.
  • Corporate Social Responsibility (CSR) is mandated under Section 135 for companies with a Net Worth of Rs 500 crore or more, Turnover of Rs 1,000 crore or more, or Net Profit of Rs 5 crore or more during any financial year.
  • Qualifying companies under Section 135 are required to spend at least 2% of the average net profits made during the three immediately preceding financial years on activities enumerated in Schedule VII.
  • Schedule VII of the Companies Act lists permissible CSR activities, including eradicating hunger and poverty, promoting education and gender equality, healthcare, environmental sustainability, and rural sports.
  • Section 149(4) mandates that every listed public company shall have at least one-third of the total number of directors as Independent Directors.
  • Section 149(1) of the Companies Act requires prescribed classes of companies (including all listed companies) to appoint at least one resident Woman Director to their Board.
  • The National Company Law Tribunal (NCLT) was constituted under Section 408 of the Companies Act on 1 June 2016, following the recommendations of the Justice V. Balakrishna Eradi Committee.
  • The National Company Law Appellate Tribunal (NCLAT) was constituted under Section 410 of the Companies Act, 2013, to hear appeals against the orders of NCLT and the Competition Commission of India.
  • The Serious Fraud Investigation Office (SFIO) is a statutory multi-disciplinary fraud-investigating agency established under Section 211 of the Companies Act, 2013, under the Ministry of Corporate Affairs.
  • The National Financial Reporting Authority (NFRA) was notified in October 2018 under Section 132 as an independent regulator overseeing the accounting and auditing standards of public interest entities.
  • The SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR Regulations) govern mandatory periodic corporate disclosures, shareholder rights, and board committee structures for listed entities.
  • The Uday Kotak Committee on Corporate Governance, constituted by SEBI in 2017, recommended separating the roles of Chairperson and Managing Director/CEO, enhanced board diversity, and stricter audit oversight.
  • The Kumar Mangalam Birla Committee (1999) on Corporate Governance formulated India's first formal code of corporate governance, incorporated into the landmark Clause 49 of the Equity Listing Agreement.
  • The N.R. Narayana Murthy Committee (2003) on Corporate Governance recommended mandatory audit committee independence, whistleblower mechanisms, and transparent related party transaction disclosures.
  • SEBI (Prohibition of Insider Trading) Regulations, 2015, prohibit trading in securities by insiders having possession of Unpublished Price Sensitive Information (UPSI).
  • SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (Takeover Code) mandates an open offer when an acquirer's voting rights cross the trigger threshold of 25%.
  • Section 177 of the Companies Act mandates every listed company and specified public companies to establish an Audit Committee comprising a minimum of three directors with independent directors forming a majority.
  • The Nomination and Remuneration Committee (NRC) is mandated under Section 178 to identify qualified individuals for directorships and formulate remuneration criteria.
  • The Stakeholders Relationship Committee is required under Section 178(5) for companies having more than 1,000 shareholders, debenture-holders, or other security holders to resolve investor grievances.
  • The Investor Education and Protection Fund (IEPF) is established under Section 125 of the Companies Act to pool unpaid dividends, matured deposits, and debentures unclaimed for seven consecutive years.
  • Key Managerial Personnel (KMP) under Section 2(51) includes the Chief Executive Officer, Managing Director, Company Secretary, Whole-time Director, and Chief Financial Officer.
  • Secretarial Audit is mandatory under Section 204 for every listed company and specified public companies, conducted by an independent Practicing Company Secretary (PCS).
  • Related Party Transactions (RPTs) under Section 188 require prior approval from the Audit Committee and a special resolution from disinterested shareholders if transaction values exceed prescribed thresholds.
  • Class Action Suits under Section 245 allow a specified number of shareholders or depositors to file collective legal proceedings against the company, directors, or auditors for fraudulent or misleading acts.
Curriculum & Reference Sources: Ministry of Corporate Affairs (MCA), SEBI Annual Reports, Companies Act 2013 Gazette.

Sample Solved Questions & Concept Explanations

8 Verified Concept Questions
Q1.EASY

Which statutory regulatory body is mandated to protect investor interests and regulate securities markets, stock exchanges, and listed companies in India?

Q2.MEDIUM

Under Section 135 of the Companies Act, 2013, eligible profitable corporations are statutorily required to spend what minimum percentage of their average net profits on Corporate Social Responsibility (CSR)?

Q3.HARD

In which year was the Securities and Exchange Board of India (SEBI) granted statutory regulatory powers through an Act of Parliament, transitioning from its earlier non-statutory executive status?

Q4.EASY

Established in 1875 as 'The Native Share & Stock Brokers' Association', which is Asia's oldest stock exchange?

Q5.EASY

How many constituent blue-chip companies are tracked by the benchmark 'Nifty 50' index of the National Stock Exchange of India (NSE)?

Q6.EASY

What is the unique 8-digit identification number allotted by the Ministry of Corporate Affairs to an individual intending to be appointed as a director in an Indian company?

Q7.EASY

Which corporate structure allowing a single natural person to incorporate a limited liability company was first introduced in India under the Companies Act, 2013?

Q8.EASY

Under Section 149(1) of the Companies Act, 2013, what requirement is mandatory for every listed public company regarding board composition?