Corporate Governance in India: Issues and Reforms

Abstract

Corporate governance in India presents a fundamental implementation gap despite a seemingly comprehensive and sophisticated regulatory framework. This article examines three core, systemic challenges that perpetuate this paradox: a fiction of board independence, a fragmented enforcement landscape, and the inherent conflicts arising from concentrated  ownership dynamics. Through a blend of doctrinal analysis and comparative study, it proposes concrete reforms that pivot from a rigid, rules-based approach to one focused on measurable outcomes, regulatory integration, and powerful market incentives. Our aim is to bridge the chasm between statutory compliance and genuine, effective governance, creating a more resilient and trustworthy corporate ecosystem.

I. Introduction

India’s corporate governance framework presents a paradox: sophisticated regulation coupled with persistent implementation failures. Despite the progressive mandates of the Companies Act 2013 and enhanced SEBI regulations, governance scandals from the spectacular collapse of Satyam to the systemic failures at IL&FS demonstrate a troubling truth: structural compliance alone cannot ensure effective oversight.¹ This article addresses a core legal and institutional problem: how can India move beyond a governance model that is merely a ceremonial checklist to one that fosters genuine effectiveness and accountability? It is an inquiry into the very soul of corporate stewardship, asking not what is on the books, but what truly works in practice.

The analysis proceeds through three interconnected arguments: current governance failures stem from specific structural defects that rules-based frameworks cannot address; comparative international experience offers tested solutions adaptable to Indian conditions; and targeted reforms can transform governance culture while maintaining business flexibility essential for economic growth.

II. The Core Legal Problem

India’s corporate governance suffers from three interconnected challenges that undermine the very purpose of its regulatory framework, much like a beautiful blueprint whose foundations have been laid on shifting sand.

Board Independence Fiction

Section 149 of the Companies Act 2013 mandates the appointment of independent directors for listed companies, yet genuine independence remains an elusive ideal.² Research by prominent institutional advisory services indicates that a significant percentage of top Indian companies fail to achieve meaningful board independence, with an estimated 48% of Nifty 500 companies struggling in this regard.³ The statutory definition provides comprehensive disqualification criteria, meticulously listing relationships that preclude a person from being deemed independent. Yet, these structural requirements cannot address behavioural independence; they are the scaffolding, not the final building.

The heart of the problem lies in the director selection process. Promoter influence, a natural outgrowth of India’s concentrated ownership model, often results in the appointment of “independent ” directors who are personally or professionally beholden to the promoters. This creates a situation scholars term “independence in form but not in substance,”⁵ where directors are technically compliant with the law but lack genuine autonomy to challenge management decisions. This hollows out the institutional mechanisms designed to protect minority shareholders and prevent corporate malfeasance.

Enforcement Fragmentation

Corporate governance oversight is a complex, multi-agency ballet in India, involving the Securities and Exchange Board of India (SEBI), the Ministry of Corporate Affairs (MCA), the Serious Fraud Investigation Office (SFIO), and various sectoral regulators. This diffusion of authority often results in coordination challenges and jurisdictional gaps.⁶ The division between SEBI’s capital market focus and MCA’s corporate law compliance creates opportunities for regulatory arbitrage.⁷

The IL&FS collapse serves as a stark case study of this fragmentation. Despite five independent directors and multiple regulatory oversight, systematic failures persisted undetected until catastrophic default.⁸ This demonstrated that accountability becomes diluted when no single body holds ultimate responsibility.

Concentrated Ownership Dynamics

India’s corporate structure is predominantly characterized by concentrated promoter ownership, creating a fundamentally different governance landscape from dispersed ownership markets.⁹ While Western frameworks address conflicts between professional managers and diffuse shareholders, India faces inherent conflicts between majority (promoter) and minority shareholders.¹⁰ The promoter-shareholder, often doubling as CEO or Chairman, may not always align with public shareholder interests. Governance mechanisms must therefore curb potential abuses by majority shareholders, not just police managerial self-interest.

III. Statutory Framework Analysis

Companies Act 2013: Foundational Architecture

The Companies Act 2013 represented a landmark shift, moving India’s corporate law into a modern, stakeholder-oriented paradigm. Its governance architecture includes: Board Composition requiring at least one-third independent directors with stringent independence criteria;¹¹ Institutional Oversight through mandatory board committees – Audit, Nomination and Remuneration, and Stakeholders’ Relationship – with independent director majorities;¹² and Stakeholder Orientation through mandatory Corporate Social Responsibility spending of 2% of average net profits.¹³

SEBI Listing Regulations: Market Focus

SEBI’s LODR Regulations 2015 serve as the critical market-facing complement, imposing enhanced disclosure obligations, strengthened Audit Committee powers, and comprehensive related party transaction oversight.¹⁴ Recent amendments reflect proactive regulatory adaptation to evolving market risks.¹⁵

IV. Judicial Interpretations and Leading Cases

Judicial pronouncements have been instrumental in shaping the contours of corporate governance, acting as a crucial interpreter of statutory intent.

Sahara India Real Estate Corporation Ltd v SEBI (2012)

This landmark Supreme Court judgment was a powerful testament to the principle of “substance over form.” The Court held that SEBI’s regulatory authority extends to any instrument involving public investor concerns, irrespective of its technical legal classification. The Court forcefully stated that companies could not escape regulation through artificial structuring designed to create regulatory gaps.¹⁶ This principle has been a powerful tool in SEBI’s arsenal, allowing it to regulate novel financial products and protect public investors by looking beyond clever legal structures to the economic reality of the transaction.

Tata Consultancy Services Limited v Cyrus Investments Pvt Ltd (2021)

The protracted Tata-Mistry dispute brought critical questions of board autonomy and minority shareholder oppression to the Supreme Court. The judgment, while complex, clarified the limits of judicial intervention in commercial decisions. The Court emphasized that the removal of a director based on a loss of confidence does not automatically constitute oppression. The judiciary would not interfere in commercial affairs absent proof of malicious intent or a clear legal violation.¹⁷ The judgment, therefore, sought to strike a delicate balance between protecting minority shareholders and respecting the legitimate commercial judgment of the board.

Governance Failure Case Studies

The legal framework’s strength is often tested in the crucible of corporate crisis.

Satyam Computer Services (2009): The Rs.7,000 crore accounting fraud orchestrated by Chairman Ramalinga Raju was not merely a crime, but a catastrophic failure of governance.¹⁸ It exposed the complete ineffectiveness of audit committees and independent directors who, despite being legally compliant, were unable or unwilling to detect the systemic fraud. The Satyam scandal directly led to significant reforms, including stricter audit requirements and an enhancement of independent director duties.

IL&FS (2018): The default on a staggering Rs. 91,000 crore debt, despite the presence of five independent directors and a seemingly robust committee structure, demonstrated that structural compliance can be a hollow shell without genuine effectiveness.¹⁹ The IL&FS collapse underscored the dangers of complex corporate structures and the systemic risks that can build up undetected when regulatory fragmentation allows entities to fall through the cracks.

V. Comparative International Analysis

United Kingdom: Principles-Based Model

The UK’s “comply-or-explain” system emphasizes flexibility over rigid compliance.²⁰ Companies either comply with code principles or provide robust public explanations for non-compliance, allowing company-specific adaptation while maintaining transparency-based accountability. This offers India a compelling lesson: selective adopt of comply-or-explain mechanisms could provide flexibility for smaller listed companies without compromising minimum standards.

The Sarbanes-Oxley Act represents comprehensive rules-based governance with clear standards and consistent enforcement.²¹ However, its rigidity and high compliance costs limit direct applicability to developing markets. India has prudently incorporated elements like mandatory audit committees while avoiding more onerous aspects.

Australia: Hybrid Approach

Australia combines principles-based codes with mandatory regulatory requirements,²² offering a pragmatic middle ground. This provides legal certainty in critical areas while allowing principles-based guidance elsewhere – a model India has naturally evolved towards.

VI. Policy Trade-offs and Considerations

Corporate governance reform is a delicate balancing act, a push-and-pull between competing objectives. The ideal framework is not a monolithic structure but a finely tuned system that respects these inherent tensions.

Market Integrity vs. Business Autonomy

Regulators must perpetually weigh the need to ensure market integrity against the imperative of preserving entrepreneurial freedom. Overly prescriptive rules can stifle innovation and impose a disproportionate burden on nascent businesses. India has wisely adopted a hybrid approach that mandates critical requirements for market-wide integrity while offering principles-based guidance for areas where business autonomy is paramount.²³

Stakeholder Capitalism Implementation

India’s statutory embrace of stakeholder capitalism through CSR requirements is a bold and unique experiment. However, it faces significant implementation challenges, including enforcement difficulties for broad stakeholder duties and the lack of a clear, measurable framework for assessing the creation of stakeholder value.²⁴ This area requires careful legal and economic scholarship to move beyond a mere compliance burden to a genuine driver of corporate purpose.

VII. Empirical Evidence

Empirical research offers a valuable reality check on the effectiveness of current reforms. A study in the Indian Journal of Finance found that board independence, a key statutory requirement, shows a limited correlation with firm performance, suggesting that structural requirements alone are insufficient to drive value.²⁵ While a BSE Corporate Governance Index Report showed improved scores post-2013 reforms, it also highlighted that significant implementation gaps persist.²⁶ On a more encouraging note, research on financial reporting quality in India demonstrates that strong governance practices correlate with reduced earnings management and improved transparency, proving that well-governed firms are more trustworthy.²⁷

VIII. Three Core Reform Recommendations

Our analysis points to three core, interconnected reforms that can transform Indian corporate governance from a compliance-driven exercise to an outcome-oriented system.

Recommendation 1: Outcome-Based Governance Standards

• Problem: The current compliance model focuses on board composition and meetings rather than decision-making effectiveness.
• Solution: Replace structural compliance with effectiveness standards measuring board decision quality, internal control robustness, and stakeholder value creation.
• Implementation: Develop governance effectiveness metrics benchmarked against industry practices, subject to annual independent assessment and public disclosure. Link regulatory benefits to demonstrated effectiveness.
• Timeline: 18-month development, 24-month phased implementation.

Recommendation 2: Integrated Governance Authority

• Problem: Regulatory fragmentation creates jurisdictional gaps enabling systemic failures.
• Solution: Establish a unified Corporate Governance Authority integrating SEBI, MCA, and SFIO oversight functions, operating on risk-based supervision.
• Implementation: New legislative framework establishing unified authority with technology-enabled risk assessment tools and industry-specific standards.
• Timeline: 24-month legislative process, 36-month operational integration.

Recommendation 3: Market-Based Governance Incentives

• Problem: Weak market rewards for strong governance limit voluntary compliance.
• Solution: Create financial incentives through governance-linked listing fees, credit rating integration, and mandatory institutional investor stewardship reporting.
• Implementation: Collaborate with exchanges and rating agencies to create governance-benefit frameworks.
• Timeline: 12-month regulatory development, 24-month market implementation.

IX. Stakeholder Impact Analysis

The proposed reforms would have a broad and profound impact on all stakeholders in the corporate ecosystem. Corporate Entities would face increased initial compliance costs, but would gain significant competitive advantages through improved access to capital and a stronger brand reputation. Investors, particularly institutional and retail, would benefit from enhanced protection and greater transparency. However, they would also need to invest in their own governance assessment capabilities. Regulators would require enhanced coordination mechanisms and a significant investment in technology to build the digital governance infrastructure necessary for risk-based supervision.

X. Implementation Challenges

The path to these reforms is not without its obstacles. Resistance to Change from corporate entities, who may view outcome-based standards as subjective and complex, is a significant risk. Phased implementation with clear incentive structures and extensive consultation is essential to encourage voluntary adoption. Resource Constraints will also be a major challenge, as the creation of a new, integrated authority and the development of new metrics will require significant investment. Public-private partnerships and, where appropriate, international development assistance could be explored to build capacity. Finally, Enforcement Capacity remains a perpetual challenge. Limited regulatory personnel necessitate technology-enabled supervision and a clear prioritization of risks to ensure that the most serious failures are addressed swiftly.

Conclusion

India’s corporate governance evolution requires a move beyond a mere checklist of rules to a true cultural transformation. It is not a matter of adding more laws, but of ensuring that the laws we have are effective and that the spirit of accountability is embedded in every boardroom decision. The three proposed reforms – outcome-based standards, integrated supervision, and market incentives – address fundamental challenges through systemic rather than incremental changes.

Success requires coordinated action across regulators, market participants, and corporate leadership to create a governance ecosystem that supports both vigorous economic growth and robust stakeholder protection. India’s experience, with its unique hybrid regulatory approach and stakeholder-oriented corporate purpose, offers valuable lessons for emerging markets seeking to build resilient and trustworthy corporate sectors.

Effective corporate governance is not merely regulatory compliance; it is the cornerstone of building sustainable businesses that create long-term stakeholder value while maintaining the public trust. The continued development of India’s governance framework will be instrumental in the achievement of this essential objective, securing a future of growth and market integrity.

Policy Summary

Three concrete reforms to strengthen Indian corporate governance: 

1. Outcome-based effectiveness standards replacing structural compliance; 
2. Integrated governance authority unifying regulatory oversight; 
3. Market-based incentives rewarding governance quality. Implementation requires 18-36 months with coordinated regulatory, market, and corporate action focusing on effectiveness over compliance.

References

¹ Business Standard, ‘Corporate Governance Challenges in India’ (2024).

² Companies Act 2013, s 149.

³ Institutional Investor Advisory Services, ‘Corporate Governance Report 2023’.

⁴ Companies Act 2013, s 149(6).

⁵ NSE Insights, ‘Independent Directors: Form vs. Substance’ (2023).

⁶ Ministry of Corporate Affairs, ‘Annual Report 2023-24’.

⁷ SEBI, ‘Consultation Paper on Corporate Governance’ (2024).

⁸ National Company Law Tribunal (NCLT) Order, In re IL&FS Matter (2018).

⁹ BSE, ‘Ownership Pattern Analysis’ (2024).

¹⁰ Indian Institute of Corporate Affairs, ‘Concentrated Ownership Study’ (2023).

¹¹ Companies Act 2013, s 149(4).

¹² Companies Act 2013, ss 177-178.

¹³ Companies Act 2013, s 135.

¹⁴ SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015.

¹⁵ SEBI Circular, ‘HVDLE Governance Norms’ (April 2025).

¹⁶ Sahara India Real Estate Corporation Ltd v SEBI (2012) 10 SCC 603, para 89.

¹⁷ Tata Consultancy Services Limited v Cyrus Investments Pvt Ltd (2021) 9 SCC 449, paras 178, 203.

¹⁸ Serious Fraud Investigation Office (SFIO), ‘Investigation Report on Satyam’ (2010).

¹⁹ Ministry of Corporate Affairs, ‘IL&FS Analysis’ (2019).

²⁰ Financial Reporting Council, ‘UK Corporate Governance Code’ (2023).

²¹ Sarbanes-Oxley Act of 2002 (US).

²² ASX Corporate Governance Council, ‘ASX Corporate Governance Principles and Recommendations’ (2024).

²³ SEBI, ‘Policy Framework on Governance Regulation’ (2024).

²⁴ Indian Journal of Corporate Law, ‘Stakeholder Duties’ (2024).

²⁵ Indian Journal of Finance, ‘Board Independence and Performance’ (2024).

²⁶ BSE, ‘Corporate Governance Index Report’ (2024).

²⁷ Financial Reporting Quality Study India (2024).