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New company law reshapes India governance

A sweeping new company law in India is a major overhaul of the basic rules for corporate operation and an attempt to introduce greater transparency and improved corporate governance.

Like many things in India, there is much hope and even greater questions about the details and effectiveness of the new regime. Rules from the regulator will fill in many of the details. But it’s clear that any company doing business in India or doing business with Indian companies should watch these developments carefully. 

The Indian corporate sector can certainly do with improved corporate governance. While ongoing India FCPA investigations of Wal-Mart and Anheuser-Busch InBev SA/NV might draw more attention in developed markets, the Satyam scandal, the operatic case against the sprawling Sahara Group, and other corporate scams dominate concerns in routine in India.

There are a number of significant changes.

Independent directors are mandated, and the standards for independence are tightened. This can be important in India, as boards are notorious for being composed of insiders (often family members) or quasi-insiders who have little incentive to oppose the status quo. Director liability in India is so weak that until the new law the primary risk to directors is personal criminal liability for any checks bounced by the company.

Cosy auditing relationships are a problem in many markets. The new law mandates periodic rotation of auditors to prevent the kind of cooperation that helped create the Satyam situation. Personal liability for company CFOs can potentially make that job even more dangerous than it already is.

New provisions enable class action lawsuits under certain circumstances, which might help pressure companies that go public but remain effectively family or promoter-run proprietorships.

The Serious Fraud Investigation Office (“SFIO”) under the Corporate Ministry will have new powers to raid, arrest and seize. The SFIO has been moderately active but needs these new powers to be more effective.   
The new law seems a big step in many right directions. However, a cynic might suggest that the law is partly a rally by a bureaucracy and political class riddled with scandal in the past few years. Public pressure on the political establishment in the last few years have left it affronted by the growth and complaints of corporate India. New investigative powers might be just the thing to strike back at the private sector, which has largely escaped condemnation for its scandals while the public sector has faced withering attacks.

However, you might have your doubts about the real threat of any enforcement in India if you had joined me on a visit to the freshly painted, specially designated courtroom at Hyderabad’s lively Nampally Criminal Court and watched the beatific face of Satyam promoter Ramalingam Raju as he sat in the box of the accused. Despite the endless criminal proceedings, Raju’s calm, unlined face and mild expression was not the look of a man worried about punishment. The new company law may change the look on the face of corporate India.

The company law reform is rich with implications for companies operating in India or dealing with companies in India. I will look at some of these issues in upcoming notes. If readers have any particular topics they would like discussed, please write to me.

A full version of the new law is here (309 page pdf).


Russell Stamets is a Contributing Editor of the FCPA Blog. He was the first non-Indian general counsel of a publicly traded Indian company and was general counsel for a satellite broadcasting joint venture of a large Indian business house. Russ can be contacted here.

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