Corporate governance for Indian companies is set primarily by the Companies Act, 2013 -- board composition, independent directors, audit committees, and related-party transaction approval -- with listed companies additionally subject to SEBI's Listing Obligations and Disclosure Requirements Regulations, 2015, which is amended frequently and should be checked against the latest SEBI circulars for current thresholds.
Board composition and independent directors
Sections 149 and 152 of the Companies Act, 2013 govern the composition of a company’s board,
including minimum and maximum director counts and the requirement for prescribed classes of companies (based
on criteria like paid-up capital, turnover, or borrowings) to appoint independent directors -- directors with
no material pecuniary relationship with the company, meant to bring independent judgment to board decisions.
Section 177 requires certain companies to constitute an Audit Committee with a majority of independent
directors, and separately, prescribed classes of companies must also constitute a Nomination and
Remuneration Committee and, where applicable, a Corporate Social Responsibility Committee, each with its own
composition rules under the Act. Every company must additionally have at least one director who has stayed
in India for a total period of not less than 182 days in the previous calendar year, a requirement distinct
from -- and easy to confuse with -- the separate NRI/foreign-director eligibility rules that apply more
broadly to board appointments.
Related-party transactions
Section 188 of the Companies Act requires board (and, above certain thresholds, shareholder) approval for
transactions between the company and its related parties -- directors, key managerial personnel, or entities
they control -- to prevent related parties from extracting value at the expense of the company and other
shareholders. Interested directors are additionally required to recuse themselves from voting on a resolution
approving a contract or arrangement in which they are personally interested, and non-compliant transactions
can be ratified within a prescribed period, failing which they become voidable.
Additional governance for listed companies -- SEBI LODR
Listed companies face an additional governance layer under the SEBI (Listing Obligations and Disclosure
Requirements) Regulations, 2015 (SEBI LODR) -- covering board composition (including a mandatory woman
director requirement), related-party transaction approval thresholds, and disclosure obligations including
Business Responsibility and Sustainability Reporting (BRSR) for ESG matters. SEBI amends LODR considerably
more often than Parliament amends the Companies Act -- current related-party-transaction and disclosure
thresholds should be checked against the latest SEBI circular rather than assumed static, particularly since
SEBI has progressively tightened related-party disclosure and materiality thresholds in recent amendment
cycles in response to several high-profile corporate governance controversies at listed companies.
Do all companies in India need to appoint independent directors?
No -- the requirement applies only to prescribed classes of companies under the Companies Act, 2013
(generally based on paid-up capital, turnover, or outstanding loans/borrowings/debentures/deposits crossing
specified thresholds), plus all listed companies under SEBI LODR. Smaller private companies below the
prescribed thresholds are not required to have independent directors.
What happens if a related-party transaction is entered into without the required approval?
A related-party transaction entered into without the board or shareholder approval required by Section 188
can be voidable at the option of the board, and the director or employee responsible can be required to
indemnify the company against any resulting loss, in addition to potential penalties under the Act.
Why does SEBI LODR matter if my company is governed by the Companies Act already?
SEBI LODR applies as an additional, more stringent layer specifically for listed companies -- it does not
replace the Companies Act, 2013, but adds disclosure and governance obligations (like BRSR reporting and
tighter related-party-transaction thresholds) that unlisted companies are not subject to.
