MODULE III: Corporate Governance —

Comprehensive Q&A (Second Edition)

Q1. Define Corporate Governance. Explain its Evolution,

Theoretical Foundations, Core Principles, and Legal
Framework in India with relevant case laws.
Answer:

1.1 Introduction and Meaning

Corporate Governance is the system of rules, practices, processes, and structures through
which a company is directed, controlled, and held accountable. It defines the distribution of
rights and responsibilities among all participants in a corporation — the board, managers,
shareholders, creditors, auditors, regulators, and other stakeholders — and spells out the rules
and procedures for making corporate decisions.

The word "governance" is derived from the Latin "gubernare" — to steer or to guide.
Corporate governance therefore means steering the corporation in the right direction, with
accountability, transparency, and fairness.

At its core, corporate governance answers three fundamental questions:

 Who has the authority to make decisions in a company?

 How are those decisions made and executed?
 To whom is the company accountable for those decisions?

1.2 Evolution of Corporate Governance

Global Evolution:

Phase 1 — The Classical Period (Pre-1970s):

 Companies operated largely without external governance norms.

 The separation of ownership and control was first identified by Berle and Means
(1932) in "The Modern Corporation and Private Property" — owners (shareholders)
and managers (agents) have different interests — the foundational Principal-Agent
Problem.

Phase 2 — Scandals and Reforms (1980s–1990s):

 Corporate failures: Maxwell Communications (UK), BCCI, Enron (US), WorldCom.

  Cadbury Committee Report (1992) — UK:
o First comprehensive corporate governance code.
o Defined CG as "the system by which companies are directed and controlled."
o Introduced concept of independent directors, audit committees, separation
of CEO and Chairman roles.
 Greenbury Report (1995): Executive remuneration.
 Hampel Report (1998): Combined Code on Corporate Governance (UK).
 OECD Principles of Corporate Governance (1999, revised 2004, 2015, 2023).

Phase 3 — Post-Enron Era (2000s):

 Sarbanes-Oxley Act, 2002 (USA): Strict financial reporting controls, auditor

independence, criminal liability for false certifications.
 King Report (South Africa): Stakeholder-inclusive governance model.

Phase 4 — ESG and Sustainability (2010s–present):

 Environmental, Social, and Governance (ESG) integration into governance.

 UN Sustainable Development Goals (SDGs).
 TCFD (Task Force on Climate-related Financial Disclosures).
 BRSR in India (2021).

Evolution in India:

Year Development
1992 SEBI established; securities market regulation begins
1999 Kumar Mangalam Birla Committee Report — first Indian CG code
2000 Clause 49 of Listing Agreement introduced
2002 Naresh Chandra Committee — auditor independence
2003 N.R. Narayana Murthy Committee — strengthened Clause 49
2004 Revised Clause 49 — independent directors, audit committees
2009 Satyam Scandal — governance failure; catalyzed Companies Act reform
2013 Companies Act, 2013 — comprehensive statutory governance framework
2015 SEBI LODR Regulations replaced Clause 49
2017 Uday Kotak Committee — further LODR amendments
2021 BRSR introduced; mandatory for top 1000 listed entities from FY 2022-23

1.3 Theoretical Foundations of Corporate Governance

(a) Agency Theory:

 Jensen and Meckling (1976) — shareholders (principals) appoint managers (agents)

to run the company.
 Agency problem: Managers may pursue self-interest (perquisites, empire-building)
rather than maximizing shareholder value.
 Solution: Governance mechanisms — board oversight, incentive compensation
(ESOPs), auditing, disclosure.
(b) Stewardship Theory:

 Contrasts with agency theory.

 Managers are stewards of the company — intrinsically motivated to act in the best
interests of shareholders.
 Suggests that board independence may not always be necessary — skilled, motivated
inside directors can serve shareholders well.

(c) Stakeholder Theory:

 R. Edward Freeman (1984) — companies have obligations not just to shareholders

but to all stakeholders (employees, customers, communities, environment).
 Basis for CSR, BRSR, and ESG-integrated governance.

(d) Resource Dependence Theory:

 Board members provide resources — networks, expertise, legitimacy, access to

capital.
 Board composition should be designed to maximize these resource contributions.

(e) Institutional Theory:

 Companies adopt governance practices not only for efficiency but to gain legitimacy
in the eyes of institutional investors, regulators, and society.

1.4 Core Principles of Corporate Governance (OECD Framework)

Principle Explanation
Transparency Timely and accurate disclosure of all material information
Accountability Board and management accountable to shareholders and stakeholders
Fairness Equal treatment of all shareholders, including minority and foreign
Responsibility Board responsible for company strategy, risk, and oversight
Independence Decisions free from conflicts of interest
Sustainability Long-term value creation; environmental and social responsibility

1.5 Legal Framework in India

(a) Companies Act, 2013:

Section Provision
Section 2(34) Definition of Director
Section 149 Board composition — independent directors, woman director
Section 152 Appointment of directors
Section 166 Duties of Directors — good faith, due diligence, no conflict
Section 173 Board meetings — minimum 4 per year
 Section Provision
Section 177 Audit Committee
Nomination & Remuneration Committee; Stakeholders Relationship
Section 178
Committee
Section 134 Board's Report — governance disclosures
Section 135 Corporate Social Responsibility
Section 188 Related Party Transactions
Section 204 Secretarial Audit
Schedule IV Code for Independent Directors
Schedule VII CSR Activities

(b) SEBI LODR Regulations, 2015:

 Regulations 17–27 cover comprehensive listed company governance norms.

(c) Other Laws:

 SEBI Act, 1992; Competition Act, 2002; IBC, 2016; FEMA, 1999.

1.6 Important Case Laws

(a) Satyam Computer Services Scandal (2009):

 Facts: Founder Ramalinga Raju admitted to fabricating Rs. 7,136 crore in cash
balances.
 Governance Failure: Rubber-stamp board; auditor (PwC) failure; related party
transactions concealed.
 Impact: Triggered Companies Act, 2013 reforms — strengthened auditor
independence, class action suits (Section 245), rotation of auditors.
 SFIO Investigation: Serious Fraud Investigation Office (Section 212, Companies
Act) indicted 10 accused.

(b) V.B. Rangaraj v. V.B. Gopalakrishnan (1992 SC):

 Restrictions on share transfer in SHA not binding on company unless reflected in

AoA.
 Established primacy of AoA over private agreements.

(c) Tata-Mistry Dispute (2016–2021 SC):

 Facts: Cyrus Mistry removed as Chairman of Tata Sons; alleged oppression of

minority shareholders.
 Supreme Court (2021): Restored Mistry's position (later set aside on technical
grounds); significant discussion on duties of directors, minority rights, and
governance in family-controlled conglomerates.
 Impact: Highlighted importance of board independence, succession planning, and
governance in promoter-controlled companies.
(d) SEBI v. Sahara India Real Estate Corp (2012 SC):

 Supreme Court held that Optionally Fully Convertible Debentures (OFCDs) issued to
the public were securities requiring SEBI compliance.
 Illustrated importance of securities law compliance in capital raising.

Q2. Explain the Models of Corporate Governance —

Indian Model, Anglo-American Model, German Model,
and Japanese Model. Analyze their suitability and
comparative strengths.
Answer:

2.1 Why Different Models Exist

Corporate governance models are shaped by:

 Legal tradition — common law vs. civil law.

 Ownership structure — dispersed vs. concentrated.
 Capital market development — strong vs. weak stock markets.
 Cultural and social norms — individualistic vs. collective.
 Economic history — industrialization patterns, role of banks.

The four principal models are: Anglo-American, German, Japanese, and Indian.

2.2 Anglo-American Model (Market/Outsider Model)

Countries: USA, UK, Canada, Australia.

Legal Foundation:

 Common law tradition.

 USA: Delaware General Corporation Law; Sarbanes-Oxley Act, 2002; Dodd-Frank
Act, 2010.
 UK: Companies Act, 2006; UK Corporate Governance Code, 2018.

Ownership:

 Dispersed share ownership — shares widely held by institutional investors (mutual

funds, pension funds) and retail investors.
 No dominant controlling shareholder.
 Market for corporate control — hostile takeovers discipline underperforming
management.
Board Structure:

 Unitary (one-tier) board — single board with executive and non-executive

(independent) directors.
 CEO-Chairman separation — increasingly mandated.
 Board Committees: Audit, Remuneration, Nomination.

Key Characteristics:

 Primary objective: Maximize shareholder value (shareholder primacy).

 Short-term earnings orientation.
 Active institutional investor engagement (proxy voting, shareholder activism).
 High level of mandatory disclosure.
 Strong securities regulation (SEC in USA; FCA in UK).

Strengths:

 Strong minority shareholder protection.

 Efficient capital allocation through markets.
 High transparency and disclosure standards.
 Active governance discipline through takeover market.

Weaknesses:

 Short-termism — focus on quarterly earnings.

 Excessive executive compensation.
 Neglect of non-shareholder stakeholders.
 Example: Enron, WorldCom, Lehman Brothers failures.

2.3 German Model (Stakeholder/Insider Model)

Countries: Germany, Austria, Netherlands, Scandinavia.

Legal Foundation:

 Civil law (Roman law) tradition.

 Aktiengesetz (Stock Corporation Act), 1965.
 Codetermination Acts (Mitbestimmungsgesetz), 1976.

Ownership:

 Concentrated ownership — large banks (Hausbank), insurance companies, other

corporates hold major stakes.
 Cross-shareholdings between companies.
 Less reliance on public equity markets.

Board Structure — Two-Tier System:

 Tier Name Composition Function
Shareholder representatives +
Upper Supervisory Board Monitors management;
Employee representatives (50:50 for
Tier (Aufsichtsrat) approves major decisions
large companies)
Lower Management Board Runs day-to-day
Executive directors only
Tier (Vorstand) operations

Codetermination (Mitbestimmung):

 Companies with > 2,000 employees: Supervisory Board must be 50% employee
representatives.
 Companies with 500–2,000 employees: 1/3rd employee representatives.
 Gives workers a formal voice in company governance.

Key Characteristics:

 Stakeholder model — balances interests of shareholders, employees, banks,

community.
 Long-term orientation — not driven by quarterly results.
 Strong bank-industry relationships (Hausbank system).
 Less transparent to outside investors.

Strengths:

 Protects employee and community interests.

 Long-term strategic focus.
 Stable ownership resists hostile takeovers.
 Strong industrial relations.

Weaknesses:

 Less attractive to foreign/minority investors.

 Slow decision-making (consensus-based).
 Limited transparency.
 Weak protection for minority shareholders.

2.4 Japanese Model (Keiretsu/Network Model)

Countries: Japan.

Legal Foundation:

 Companies Act of Japan (Kaisha Ho), 2005.

 Financial Instruments and Exchange Act.

Ownership Structure — Keiretsu:

  Keiretsu = network of companies with cross-shareholdings, bound by long-term
business relationships.
 Horizontal Keiretsu (e.g., Mitsubishi, Mitsui): centered around a main bank; member
companies in diverse sectors.
 Vertical Keiretsu: Large manufacturer with suppliers and distributors.
 Main Bank (Meinkāin): Principal lender; monitors corporate governance; steps in
during distress.

Board Structure:

 Historically insider-dominated — board mostly composed of senior employees

promoted internally.
 Post-2014 reforms: Japan Corporate Governance Code — increased independent
directors requirement.

Key Characteristics:

 Long-term relationships over short-term profits.

 Lifetime employment for core employees.
 Consensus-based decision making (Nemawashi/Ringi).
 Minimal role for external shareholders.
 Low dividend payouts; profits reinvested.

Strengths:

 Extremely stable, long-term relationships.

 Strong employee welfare.
 Resilient to hostile takeovers.
 High product quality culture.

Weaknesses:

 Very weak minority shareholder protection.

 Low ROE (Return on Equity) — criticized by foreign investors.
 Opacity and insularity.
 Slow to adapt to global governance standards.

2.5 Indian Model of Corporate Governance

Legal Foundation:

 Companies Act, 2013 (primary statute).

 SEBI LODR Regulations, 2015.
 SEBI (SAST) Regulations, 2011 (Takeover Code).
 SEBI (PIT) Regulations, 2015 (Insider Trading).
 Competition Act, 2002.
 IBC, 2016.
Ownership Structure:

 Promoter-dominated — founding family/group holds controlling stake (often 50–

75%).
 Institutional investors (FIIs, DIIs, MFs) hold significant minority stakes.
 Public (retail) shareholders.
 Challenge: Protecting minority shareholders from promoter entrenchment.

Board Structure — Unitary (One-Tier):

 Single board with executive, non-executive, and independent directors.

 Section 149, Companies Act, 2013:
o Minimum 3 directors (public company); minimum 2 (private company).
o At least 1/3rd independent directors for listed companies.
o 50% independent directors if Chairman is executive or related to promoter
(SEBI LODR Regulation 17).
o At least 1 woman director (Section 149(1)).
o At least 1 resident director (Section 149(3)).

Key Characteristics:

 Hybrid model — draws from Anglo-American (legal framework, disclosure) and

German (stakeholder consciousness via CSR).
 Compliance-driven governance — regulatory mandates rather than voluntary
adoption.
 Promoter interests dominant; minority protection improving.
 Active SEBI regulation.
 Growing institutional investor activism (proxy advisory firms — Institutional Investor
Advisory Services (IiAS), InGovern).

Evolution:

 Pre-2000: Minimal governance; promoter dominance unchecked.

 2000–2009: Clause 49 introduced; corporate governance as compliance exercise.
 2009–2013: Satyam scandal; governance failures exposed; Companies Act, 2013
enacted.
 2013–present: Substantive governance; independent directors empowered; BRSR;
IBC.

2.6 Comprehensive Comparison Table

Anglo-
Feature German Japanese Indian
American
Common Law
Legal Tradition Common Law Civil Law Civil Law
(British)
Promoter-
Ownership Dispersed Bank/Corporate Keiretsu (cross)
dominant
 Anglo-
Feature German Japanese Indian
American
Board Structure One-tier Two-tier Insider-dominated One-tier (hybrid)
Primary Shareholder Stakeholder Relationship/long- Compliance +
Orientation value value term promoter
Capital Market
Very high Low Low Moderate-high
Role
Very strong
Employee Role Minimal Strong (informal) Weak formally
(50%)
Minority
Strong Moderate Very weak Improving
Protection
Transparency High Moderate Low Moderate-high
Regulated (SEBI
Takeover Market Active Restricted Very restricted
SAST)
Key Regulator SEC/FCA BaFin FSA Japan SEBI/MCA

Q3. Explain the Regulatory Framework for Listed

Companies in India under SEBI LODR Regulations, 2015.
Discuss the key compliance obligations and governance
norms in detail.
Answer:

3.1 Background and Rationale

When a company lists its securities on a stock exchange, it enters public life — its shares are
available to millions of investors who rely on accurate, timely information and sound
governance to protect their investments. The regulation of listed companies is therefore more
stringent than for private companies.

Regulatory Architecture for Listed Companies:

SEBI (Apex Regulator)

↓
SEBI LODR Regulations, 2015
↓
Stock Exchanges (BSE / NSE) — Front-line regulators
↓
Listed Company — compliance obligations
↓
Shareholders, Investors, Public

3.2 SEBI LODR Regulations, 2015 — Overview

Full Name: SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015.
Notification Date: September 2, 2015. Effective Date: December 1, 2015. Replaced:
Clause 49 of the Listing Agreement (equity); Clause 35B, Clause 52 (debt), etc.

The LODR Regulations are organized into chapters:

 Chapter II: General obligations of listed entities.

 Chapter III: Continuous disclosure requirements.
 Chapter IV: Obligations of listed entities having specified securities.
 Chapter V: Obligations related to corporate governance.

3.3 Board of Directors (Regulation 17)

Composition:

 Board must have an optimum combination of executive and non-executive directors.

 At least one woman director (independent for top 500 listed entities by market cap
— Regulation 17(1)(a)).
 Where chairman is a non-executive director: at least 1/3rd independent directors.
 Where chairman is executive director or related to promoter: at least 50%
independent directors.

Meetings:

 Board must meet at least 4 times per year.

 Maximum gap between any two consecutive meetings: 120 days.

Maximum Directorship (Regulation 17A):

 Independent Director: Maximum 7 listed entities.

 Whole-time Director of one listed entity: Maximum 3 other listed entities as
independent director.
 Chairperson of listed entity: not to serve as Independent Director in more than 5 listed
entities (proposed amendment).

Skills Matrix:

 Listed entities must disclose skills/expertise/competence of board members in annual

report.
 Enables shareholders to evaluate board quality.

Quorum (Regulation 17(2A)):

 Quorum for board meetings: 1/3rd of board size or 3 directors, whichever is

higher.
 At least one independent director must be present.

Performance Evaluation:
  Board must carry out formal annual performance evaluation of itself, its committees,
and individual directors (including independent directors).
 Schedule IV, Companies Act, 2013 — Code for Independent Directors includes
guidance on performance evaluation.

3.4 Independent Directors — Detailed Provisions

Definition (Section 149(6), Companies Act, 2013): An independent director is one who:

 Is not a promoter or related to promoters.

 Has no material or pecuniary relationship with the company (except sitting fees).
 Has not been an employee/KMP in preceding 3 years.
 Is not a material supplier, customer, or service provider.
 Does not hold > 2% of shares in the company.
 Is not a CEO/MD/whole-time director in any NGO receiving > 25% of its income
from the company.

Term:

 Maximum 2 consecutive terms of 5 years each (total 10 years).

 After 2 terms — 3-year cooling-off period before reappointment.
 Re-appointment after cooling off requires special resolution.

Independence:

 Must declare independence at first board meeting and every year.

 Separate meeting of independent directors (at least once a year) — Schedule IV —
to review performance of non-independent directors and the board as a whole.

Removal:

 Independent director can only be removed by special resolution with prior intimation
to SEBI (for listed companies).

3.5 Board Committees under SEBI LODR

(A) Audit Committee (Regulation 18)

Composition:

 Minimum 3 directors.
 Majority must be independent directors.
 All members must be financially literate; at least one must have financial
management/accounting expertise.
 Chairperson must be an independent director and must be present at AGM.
Functions (Section 177, Companies Act + Regulation 18):

 Oversight of financial reporting process.

 Review of quarterly and annual financial statements.
 Recommendation for appointment, re-appointment, removal of auditors; fix audit fee.
 Approval of related party transactions (RPTs).
 Review of internal audit reports.
 Review of internal financial control systems.
 Scrutiny of inter-corporate loans and investments.
 Whistleblower policy — direct access to Audit Committee chairperson.
 Review of management's discussion and analysis.
 Review of functioning of whistleblower mechanism.

Meetings: At least 4 times per year; gap not exceeding 120 days.

(B) Nomination and Remuneration Committee (Regulation 19)

Composition:

 At least 3 directors, all non-executive.

 At least 50% independent directors.
 Chairperson must be an independent director.
 Chairperson of company shall not chair NRC (to avoid conflict).

Functions:

 Recommend board appointments and re-appointments.

 Formulate criteria for determining qualifications, positive attributes, and
independence of directors.
 Devise remuneration policy for directors, KMPs, and senior management.
 Recommend remuneration for directors and KMPs.
 Annual performance evaluation framework.
 Diversity on board — formulate policy.

(C) Stakeholders Relationship Committee (Regulation 20)

Composition:

 Chaired by a non-executive director.

 At least 3 directors.
 At least 1 independent director.
 Company Secretary acts as compliance officer.

Functions:

 Consider and resolve grievances of security holders — transfer, dividends, duplicate

certificates, annual reports.
 Review of measures taken for shareholder participation.
 Review of adherence to service standards by RTAs.
 Recommend measures for shareholder grievance reduction.
Reporting:

 Quarterly report of complaints to board.

 Details of pending complaints in annual report.

(D) Risk Management Committee (Regulation 21)

Applicability: Top 1000 listed entities by market capitalization (as on March 31 of

preceding year).

Composition:

 Majority members must be board members.

 At least one independent director on the committee.
 Chairperson must be a board member.
 Chief Risk Officer (CRO), if any, must be a member.

Functions:

 Formulate Risk Management Policy.

 Oversee cyber security, material subsidiary risks.
 Monitor and review material risks.
 Report to board.
 Ensure sustainability risk governance.

Meetings: At least twice a year.

3.6 Related Party Transactions — Regulation 23

Definition (Section 2(76), Companies Act, 2013): Related party includes: director, KMP,
their relatives, subsidiary/associate/holding company, body corporate in which director/KMP
is a director/member with >2% shareholding.

Key Requirements:

Requirement Details
Prior Audit Committee
All RPTs require prior approval of Audit Committee
Approval
Audit Committee may give omnibus approval for repetitive
Omnibus Approval
RPTs subject to conditions
Material RPTs require ordinary resolution; related parties
Shareholder Approval
cannot vote
Transaction > Rs. 1,000 crore or 10% of annual consolidated
Materiality Threshold
turnover (whichever is lower)
Quarterly Disclosure Within 21 days of end of each quarter to stock exchanges
Annual Report Disclosure Directors' Report + Notes to Financial Statements
Stricter norms (Amendments 2022):

 Subsidiary RPTs also require parent listed entity's Audit Committee approval.
 All entities in promoter group defined as related parties.

3.7 Continuous Disclosure Obligations

Regulation 29 — Prior Intimation:

 Listed entity must give at least 2 working days' prior notice to stock exchange
before board meetings to consider:
o Financial results.
o Dividends.
o Buyback.
o Rights issue.
o Alteration of capital structure.

Regulation 30 — Material Events:

 Disclosure of material events/information within 24 hours of occurrence.

 Within 30 minutes of conclusion of board meeting for decisions taken in board
meeting.

Materiality Policy:

 Company must formulate a policy on materiality for Regulation 30 disclosures.

 Qualitative and quantitative thresholds.

Examples of Material Events:

 Acquisitions, mergers, demergers.

 Restructuring of loans.
 Commencement/closure of operations.
 Major litigations.
 Cyber security incidents.
 Change in KMPs (CEO, CFO, CS).
 Natural calamities affecting operations.

Regulation 33 — Financial Results:

 Quarterly (unaudited): Within 45 days of end of each quarter.

 Annual (audited): Within 60 days of financial year end.
 Must be reviewed/audited by statutory auditor.
 Published in English national daily and regional language daily of company's
registered office state.

Regulation 34 — Annual Report:

  Submit to stock exchanges within 21 working days of AGM.
 Includes: Financial Statements, Director's Report, MDA, CG Report, BRSR.

Regulation 36 — Shareholder Meeting Information:

 Notice of AGM/EGM with all required details to be sent at least 21 clear days in
advance.

Regulation 46 — Website Disclosures: Listed entity must maintain a functional website

with:

 Details of business, financial results, shareholding pattern.

 Terms and conditions of independent directors.
 Contact information of Compliance Officer.
 Grievance redressal policy.
 BRSR.
 Code of conduct.

3.8 Shareholding Pattern — Regulation 31

 Filed within 21 days of end of each quarter.

 Shows distribution: Promoter & Promoter Group; Public (Institutional + Non-
institutional).
 Promoter pledging of shares must be disclosed separately.
 Maximum promoter stake in a listed company: 75% (minimum 25% public float —
SEBI minimum public shareholding rule, June 2010).

3.9 Corporate Governance Report — Regulation 27

 Half-yearly compliance report to stock exchanges within 21 days of end of each

half-year.
 Annual Corporate Governance Report as part of Annual Report.
 Includes:
o Board composition and details.
o Meetings held and attendance.
o Audit Committee, NRC, SRC, RMC details.
o Remuneration of directors and KMPs.
o Shareholder information.
o Disclosures — RPTs, penalties, means of communication.
o Declaration by CEO on compliance with Code of Conduct.
o Certificate from Practicing Company Secretary (PCS) on compliance with CG
requirements.
3.10 Penalties for Non-Compliance with SEBI LODR

Violation Fine (per day/instance)

Rs. 1,000/day (first 60 days); Rs. 5,000/day
Late filing of financial results
thereafter
Non-appointment of woman director Rs. 50,000 per quarter
Non-constitution of Audit Committee Rs. 1,00,000 per quarter
Non-compliance with board
Rs. 1,00,000 per quarter
composition
Non-disclosure of material events Adjudication under SEBI Act — up to Rs. 25 crore
Insider trading violations Up to Rs. 25 crore or 3x profits — whichever higher

Q4. Explain the Legal Framework for Regulation of

Foreign Companies Doing Business in India. What are
their compliance requirements under the Companies Act,
2013, FEMA, and other laws?
Answer:

4.1 Concept and Definition

Section 2(42) of the Companies Act, 2013 defines a foreign company as:

"Any company or body corporate incorporated outside India which — (a) has a place of
business in India, whether by itself or through an agent, physically or through electronic
mode; and (b) conducts any business activity in India in any other manner."

Significance of "Electronic Mode": Post the 2013 Act, even companies without a physical
presence in India but conducting business through electronic/digital means are covered. This
is particularly relevant for e-commerce and digital service companies.

4.2 Modes of Presence and Entry

Mode 1: Liaison Office (LO)

 Purpose: Represent parent company in India; promote trade; no commercial/revenue-

generating activity.
 Permitted Activities: Market research, promoting exports/imports, facilitating
technical/financial collaboration.
 Prohibited Activities: Trading, manufacturing, commercial services, signing
contracts.
 RBI Approval: Required under FEMA Regulations.
 Duration: Initially 3 years; renewable.
 Compliance:
 o Annual Activity Certificate (AAC) from Chartered Accountant submitted to
AD Bank and RBI by September 30 every year.
o Section 380 — filing with ROC within 30 days.
o Audited accounts (even if no commercial activity).

Mode 2: Branch Office (BO)

 Purpose: Carry out limited commercial activity representing parent.

 Permitted Activities: Export/import of goods; professional services; R&D;
promoting technical collaborations; IT services; acting as buying/selling agent.
 RBI Approval: Required; initial approval for 3 years; renewable.
 Branch office can generate revenue — but profits cannot be reinvested in India;
must be repatriated.
 Compliance:
o Section 380 and 381 — ROC filings.
o Annual Accounts filing.
o AAC from CA.
o Income Tax filings on India-sourced income.

Mode 3: Project Office (PO)

 Purpose: Execute a specific project in India (typically infrastructure, construction,

defence).
 Eligibility: Foreign company must have a contract with an Indian company for a
project in India.
 RBI Approval: General permission (no prior approval) if contract funded by inward
remittance or by multilateral/bilateral international financing agency.
 Duration: Coterminous with project.
 Compliance: Annual activity certificate; ROC filing.

Mode 4: Wholly Owned Subsidiary (WOS) / Joint Venture:

 Incorporated as an Indian company under Companies Act, 2013.

 Governed by Indian law; FDI regulations apply.
 Most common and preferred mode for active business in India.
 FDI under Automatic Route: In most sectors (no prior government approval).
 FDI under Government Route: Defence (beyond 74%), media, insurance (beyond
49%), pharma (brownfield beyond 74%), certain others.

4.3 Companies Act, 2013 — Chapter XXII Provisions (Sections 379–393)

Section 379 — Application of Act to Foreign Companies:

 Provisions of the Act apply to foreign companies in relation to their Indian operations.
 Central Government may exempt any class of foreign companies.

Section 380 — Documents to be Filed with ROC: Every foreign company establishing a
place of business in India must file, within 30 days of establishment, with the ROC (Registrar
of Companies) having jurisdiction over the state where its principal place of business is
situated:

Documents to be filed:

1. Certified copy of charter/statutes/MoA or equivalent document.

2. Full address of registered/principal office in country of incorporation.
3. List of directors and secretary (with nationality, address, DOB, other directorships).
4. Name and address of persons resident in India authorized to accept legal notices
on behalf of the company (Authorized Representative).
5. Full address of principal place of business in India.
6. If applicable — particulars of any charge created on property in India.

Form: FC-1 (filed with ROC).

Section 381 — Accounts of Foreign Companies:

 Prepare and file a copy of financial statements (P&L and Balance Sheet) as per the
law of their country of incorporation AND a statement of Indian business operations.
 File within 6 months of close of financial year.
 Must comply with Schedule III (financial statement format) as far as applicable.
 Form FC-3 (list of places of business) to be updated annually.

Section 382 — Display of Name:

 Must display company name, country of incorporation, whether limited liability — in

English and local language:
o At every place of business in India.
o On all business letters, bill heads, notices, advertisements.
o On official seal (if any used in India).

Section 383 — Service of Documents: Any document/process/notice to be served on a

foreign company can be addressed to:

 Any person whose name is filed with ROC as authorized to accept service.
 Any officer of the company at its principal place of business in India.

Section 384 — Debentures: Debenture provisions of the Act applicable to foreign

companies' debentures in India.

Section 385 — Certification of Incorporation: If a foreign company ceases to have a place

of business in India, it must give notice to ROC.

Section 386 — Interpretation: Director includes member of the foreign company's board;
Secretary includes equivalent officer.

Section 392 — Punishment for Contravention:

 Company: Fine not less than Rs. 1 lakh and up to Rs. 3 lakhs.
 Continuing default: Additional fine of Rs. 50,000 per day.
  Every officer in default: Punishable with fine.

4.4 FEMA Compliance for Foreign Companies

Governing Law: Foreign Exchange Management Act, 1999; FEMA (Establishment in India
of Branch/LO/PO) Regulations, 2016 (RBI Master Direction).

RBI Approval Process:

1. Application to AD Category I Bank (Authorized Dealer Bank).

2. AD Bank forwards to RBI Foreign Exchange Department.
3. RBI issues Unique Identification Number (UIN) upon approval.

Ongoing FEMA Compliance:

 All expenses of LO/BO/PO must be met from inward foreign remittance from
parent.
 LO cannot earn any income in India.
 BO can earn income but must repatriate profits.
 Form FNC — application for opening bank account for LO/BO/PO.
 Annual Activity Certificate (AAC) — submitted by September 30 for previous
financial year — certifies activities, expenses, remittances.

Closure of LO/BO:

 Application to AD Bank; AAC for final period; tax clearance from Income Tax
department; ROC intimation.
 Balance funds repatriated after settlement of all Indian liabilities.

4.5 Taxation of Foreign Companies in India

Income Tax Act, 1961:

 Foreign companies taxed at 40% (base rate) on income sourced from India.
 Surcharge: 2% (if income Rs. 1–10 crore); 5% (if income > Rs. 10 crore).
 Health and Education Cess: 4% on tax + surcharge.
 Effective rate: ~43.68% for income > Rs. 10 crore.

Permanent Establishment (PE):

 If foreign company has a PE in India, its profits attributable to PE are taxable.

 Types: Fixed Place PE; Dependent Agent PE; Service PE; Virtual PE (digital
economy).

Transfer Pricing (Sections 92–92F):

  Transactions between foreign company and its Indian entity must be at Arm's Length
Price (ALP).
 Annual Transfer Pricing Audit — Form 3CEB from Chartered Accountant.
 Advance Pricing Agreement (APA) available for certainty.

Equalisation Levy:

 Finance Act, 2016 introduced Equalisation Levy on digital services.

 6% on online advertising services provided to Indian businesses by non-residents.
 2% on e-commerce supply/services by non-resident e-commerce operators
(introduced 2020; subsequently withdrawn from April 2025 under US trade pressure).

Double Tax Avoidance Agreements (DTAA):

 India has DTAAs with 90+ countries.

 Foreign companies can claim DTAA benefits to reduce Indian tax liability.
 Form 10F + Tax Residency Certificate + No PE declaration.

4.6 Other Regulatory Requirements

Law Requirement for Foreign Company

GST (CGST Act, 2017) Registration if making taxable supplies in India; file returns
Compliance with Factories Act, EPF, ESIC, Minimum Wages
Labour Laws
for Indian employees
Competition Act, 2002 CCI merger notification if acquisition meets thresholds
FPI registration for portfolio investments; Takeover Code for
SEBI Regulations
listed company acquisitions
Clearances under Environment Protection Act for
Environmental Laws
manufacturing
Data Protection (DPDP
Compliance if processing personal data of Indian citizens
Act, 2023)
IPR Separate registration of patents, trademarks in India

Q5. What are Corporate Governance Compliance

Obligations in India? Explain periodic, event-based, and
ongoing compliances for listed and unlisted companies.
Answer:

5.1 Classification of Compliance Obligations

Corporate governance compliance in India can be categorized as:

Type 1 — Periodic Compliances: Must be completed by specified dates irrespective of
events. Type 2 — Event-Based Compliances: Triggered by specific corporate events
(change of directors, allotment of shares, etc.). Type 3 — Ongoing Compliances:
Continuous obligations that must be maintained at all times.

5.2 Board and Meeting Compliances

Board Meetings:

 Minimum 4 board meetings per year; maximum gap of 120 days (Section 173).
 Notice of board meeting: 7 days in advance (Section 173(3)); shorter notice with
consent of majority directors including at least one independent director.
 Secretarial Standard-1 (SS-1): Governs agenda, quorum, recording of dissent,
signing of minutes.
 Minutes: Signed by Chairman within 30 days of next meeting; preserved
permanently.

Annual General Meeting (AGM):

 Section 96: Hold AGM within 6 months from close of financial year.
 First AGM: Within 9 months from close of first financial year.
 Not more than 15 months gap between two AGMs.
 Venue: City/town where registered office is situated (or at any other place with
Central Government approval for special meetings).
 Notice: Minimum 21 days clear notice to members.
 Secretarial Standard-2 (SS-2): Governs AGM procedures.
 E-voting: Mandatory for listed companies for all AGM resolutions (Section 108;
Rule 20 of Companies (Management and Administration) Rules, 2014).

5.3 Financial Reporting Compliances

Financial Statements:

 Section 129: Must comply with Ind AS (mandatory for listed companies and certain
unlisted companies — Companies (Indian Accounting Standards) Rules, 2015).
 Ind AS converged with IFRS.
 Consolidated financial statements mandatory if company has subsidiaries.
 Signed by: Chairman/MD/CEO + CFO + at least 2 directors + Company
Secretary (Section 134(1)).

Filing Financial Statements:

 Form AOC-4 (financial statements) — within 30 days of AGM (listed companies —

60 days of AGM).
 Form AOC-4 CFS (consolidated financial statements) — within 30 days of AGM.
 XBRL filing — mandatory for listed companies; structured digital format.
Board's Report (Section 134): Must contain:

 Extract of Annual Return (or web link).

 Number of board meetings.
 Directors' Responsibility Statement (Section 134(3)(c)).
 Statement on internal financial controls.
 Statement on compliance with applicable laws.
 Particulars of RPTs (Form AOC-2).
 Material changes after year end.
 CSR Report (if applicable).
 Statement of subsidiaries/associates/joint ventures.
 Risk Management Policy.
 Remuneration details (Rule 5, Companies (Appointment and Remuneration of
Managerial Personnel) Rules, 2014).
 Details of conservation of energy, technology absorption, foreign exchange.

Auditor's Report:

 Section 143 — auditor reports on financial statements.

 CARO, 2020 (Companies (Auditor's Report) Order, 2020) — specific reporting
requirements on internal controls, fraud, related party transactions, borrowings,
litigation, undisclosed income.
 Section 143(12) — Auditor must report suspected fraud to Central Government.

5.4 Audit-Related Compliances

Statutory Audit:

 Section 139: Auditor appointed for 5-year term; ratified every year at AGM.
 Auditor rotation: Same audit firm cannot be appointed for more than 2 consecutive
terms of 5 years each (for listed companies and certain others) — total maximum 10
years.
 After rotation, cooling-off period of 5 years.
 Form ADT-1 — intimation of auditor appointment within 15 days of AGM.

Secretarial Audit:

 Section 204 — Mandatory for:

o Every listed company.
o Public company with paid-up share capital ≥ Rs. 50 crore OR turnover ≥ Rs.
250 crore.
o Companies with outstanding loans/borrowings ≥ Rs. 100 crore (Rule 9
amendment 2020).
 Conducted by Practicing Company Secretary (PCS).
 Report in Form MR-3 — annexed to Board's Report.
 Covers: Companies Act, SEBI regulations, FEMA, listing agreements, sector-specific
laws.
Internal Audit:

 Section 138 — Mandatory for:

o Listed companies.
o Public companies: paid-up capital ≥ Rs. 50 crore OR deposits ≥ Rs. 25 crore
OR turnover ≥ Rs. 200 crore OR outstanding loans ≥ Rs. 100 crore.
 Can be conducted by CA or CMA (can be internal employee or external firm).
 Report reviewed by Audit Committee.

Cost Audit:

 Section 148 — For specified industries (cement, sugar, pharma, telecom, steel, etc.).
 Conducted by Cost Accountant (CMA) holding Certificate of Practice.
 Form CRA-2 — appointment filing; Form CRA-4 — report filing within 30 days of
signing.

5.5 ROC Filing Compliances (Key Forms)

Form Purpose Deadline

MGT-7/7A Annual Return Within 60 days of AGM
Within 30 days of AGM (60 for
AOC-4 Financial Statements
listed)
DIR-12 Change in directors/KMPs Within 30 days of change
MGT-14 Filing board/shareholder resolutions Within 30 days of passing
ADT-1 Auditor appointment Within 15 days of AGM
MR-1 Appointment of MD/WTD/Manager Within 60 days of appointment
PAS-3 Return of allotment Within 30 days of allotment
CHG-1 Creation/modification of charge Within 30 days (extendable to 60)
Notice of situation/change of registered
INC-22 Within 30 days of change
office
BEN-2 Significant Beneficial Owner return Within 30 days of receipt
MBP-1 Director's interest disclosure At every AGM and on change
DIR-8 Director's disqualification disclosure Before appointment/at every AGM

5.6 Insider Trading Compliances

SEBI (Prohibition of Insider Trading) Regulations, 2015:

Structured Digital Database (SDD):

 Company must maintain an SDD of all persons who have access to Unpublished
Price Sensitive Information (UPSI).
 SDD must record: name, PAN, designation, nature of UPSI shared, date of
sharing/receipt.
 Data retained for 8 years.
  SDD must be maintained internally by company; cannot be outsourced.

Trading Window:

 Trading window must be closed when UPSI exists.

 Closed: From end of every quarter until 48 hours after disclosure of financial results.
 Also closed when any other UPSI is in existence.
 Trading Window Closure Policy to be adopted.

Pre-Clearance:

 Designated Persons (DPs) — directors, KMPs, other employees with UPSI access —
must obtain pre-clearance before trading above threshold (typically Rs. 10 lakh or as
prescribed in code).

Code of Conduct:

 Listed companies must adopt a Code of Conduct for prevention of insider trading.
 Compliance Officer (typically Company Secretary) manages and implements code.

Disclosures:

 Initial: DPs must disclose holdings within 7 days of becoming DP.

 Continual: Within 2 trading days of trade above Rs. 10 lakh (to company); company
discloses to exchange within 2 trading days.
 Annual: Holdings of DPs disclosed to company.

5.7 Vigil Mechanism / Whistleblower Policy

Section 177(9) and (10), Companies Act, 2013:

Mandatory for:

 Every listed company.

 Every company accepting deposits from public.
 Every company having outstanding loans ≥ Rs. 50 crore.

Requirements:

 Establish Vigil Mechanism for directors and employees to report genuine concerns.
 Must make adequate safeguards against victimization of persons who use the
mechanism.
 Provide direct access to Chairperson of Audit Committee in exceptional cases.
 Details of vigil mechanism to be disclosed on company's website and in Board's
Report.
5.8 Significant Beneficial Ownership (SBO) Compliances

Section 90, Companies Act, 2013 + Companies (Significant Beneficial Owners) Rules,
2018:

Definition: SBO = individual who ultimately holds ≥ 10% of shares/voting

rights/dividend/distribution rights indirectly or has right to exercise/control.

Compliance:

 Companies must identify SBOs.

 Register of SBOs maintained by company.
 Form BEN-1 — SBO declaration to company; Form BEN-2 — company files with
ROC.
 Non-compliance: company can restrict rights attached to such shares (dividends,
voting).

Q6. Explain Corporate Communications and Reporting

Systems in India. What are the statutory and voluntary
reporting frameworks, and how has technology
transformed corporate reporting?
Answer:

6.1 Concept and Importance

Corporate communications encompasses all formal and informal communications between

a company and its stakeholders — shareholders, investors, employees, regulators, customers,
media, and the public.

Corporate reporting refers specifically to the formal, structured disclosure of financial,

operational, governance, and sustainability information through prescribed formats and
channels.

Why Corporate Communications Matter:

 Enables informed investment decisions by shareholders and investors.

 Ensures regulatory compliance and avoids penalties.
 Builds investor trust and market confidence.
 Demonstrates accountability of management and board.
 Supports price discovery in capital markets.

6.2 Statutory Reporting Framework

Annual Report:

The Annual Report is the most comprehensive document a company publishes. Under
Regulation 34 of SEBI LODR, it must contain:

(a) Standalone and Consolidated Financial Statements:

 Balance Sheet, P&L, Cash Flow Statement, Statement of Changes in Equity.

 Notes to Accounts including accounting policies.
 Compliance with Ind AS (Indian Accounting Standards converged with IFRS).

(b) Board's Report (Section 134, Companies Act): Complete governance disclosure
including:

 Directors' Responsibility Statement — confirming financial statements give a true and

fair view; prepared as per Ind AS; internal financial controls adequate; all laws
complied with.
 Risk Management Policy.
 CSR Report.
 RPT disclosure (Form AOC-2).
 Conservation of energy, technology absorption.
 Foreign exchange earnings and outgo.
 Details of subsidiaries, JVs, associates (Form AOC-1).
 Auditor's and Secretarial Auditor's Report.

(c) Management Discussion and Analysis (MDA):

 Regulation 34(2)(e), SEBI LODR — mandatory for listed companies.

 Forward-looking narrative covering:
o Industry structure and developments.
o Opportunities and threats.
o Segment-wise performance.
o Outlook for future.
o Risks and concerns.
o Internal control systems.
o Financial performance with key ratios.
o Human resources and industrial relations.

(d) Corporate Governance Report:

 Detailed governance disclosures required under Regulation 34(3) read with

Schedule V of SEBI LODR.
 Covers all aspects of Regulation 17–27 compliance.
 Must include PCS certificate on CG compliance.
 CEO/CFO certification on accuracy of financial statements and internal controls.

6.3 Business Responsibility and Sustainability Report (BRSR)

Regulatory Basis:

 SEBI Circular SEBI/HO/CFD/CMD-2/P/CIR/2021/562 dated May 10, 2021.

 Regulation 34(2)(f) of SEBI LODR — BRSR forms part of Annual Report.

Mandatory for:

 Top 1000 listed entities by market capitalization — mandatory from FY 2022-23.

 Voluntary for others.

Framework: Based on 9 Principles of National Guidelines for Responsible Business

Conduct (NGRBC, 2018):

Principle Theme
P1 Businesses should conduct and govern themselves with integrity
P2 Provide goods/services in a safe and sustainable manner
P3 Respect and promote employee well-being
P4 Respect interests of and be responsive to all stakeholders
P5 Respect and promote human rights
P6 Respect, protect, and restore the environment
P7 Responsibly engage with policy and advocacy
P8 Promote inclusive growth and equitable development
P9 Engage with and provide value to consumers responsibly

Structure:

Section A: General Disclosures — company profile, governance, stakeholder engagement.

Section B: Management and Process Disclosures — policies, commitments, governance

processes for each principle.

Section C: Principle-wise Performance Disclosures (9 principles) — quantitative and

qualitative metrics.

BRSR Core:

 From FY 2023-24 — top 150 listed entities must provide independent

assurance/verification of BRSR Core KPIs.
 BRSR Core includes: GHG emissions, water consumption, diversity ratio, CSR
spend, supply chain disclosures, etc.
 From FY 2024-25 — extended to top 250 entities.
 Ultimate goal: independent assurance by top 1000 entities.

Significance: BRSR is India's equivalent of ESG (Environmental, Social, Governance)

reporting frameworks globally.

6.4 SEBI Real-Time Disclosure System

Regulation 30 Disclosures — Stock Exchange Platform:

All material events disclosed within 24 hours (or 30 minutes for board meeting decisions) on:

 BSE Corporate Filing System (BSECFS).

 NSE Electronic Application Processing System (NEAPS).

Types of Disclosures on Exchange Platforms:

 Board meeting outcomes (quarterly results, dividends, mergers).

 Shareholding pattern (quarterly).
 Corporate governance report (half-yearly).
 Analyst/institutional investor meets — outcome and presentations.
 Investor grievance report.
 Statement of deviation/variation in use of IPO/rights issue proceeds.
 Credit ratings.

6.5 MCA21 System — Digital Regulatory Reporting

MCA21 Portal (Ministry of Corporate Affairs):

 All ROC filings submitted online through eForms.

 Digital Signature Certificate (DSC) mandatory for signing forms.
 STP (Straight Through Processing) for routine filings.
 CIN (Corporate Identity Number) — unique identifier for every company.

XBRL (eXtensible Business Reporting Language):

 Mandatory for:
o All listed companies.
o Companies with paid-up capital ≥ Rs. 5 crore or turnover ≥ Rs. 100 crore.
 Financial statements tagged in XBRL format — machine-readable, enabling
automated analysis.
 Enables SEBI/MCA to do data analytics on financial statements.
 India uses MCA XBRL taxonomy based on Ind AS.

MCA21 Version 3.0:

 Cloud-based; launched 2021.

 Enhanced filing experience; AI-based processing.
 Integration with GST, SEBI, Income Tax databases.

6.6 Voluntary Reporting Frameworks

(a) Integrated Reporting (<IR>):

  Framework by IIRC (International Integrated Reporting Council, now part of
IFRS Foundation).
 Combines financial and non-financial reporting across 6 Capitals:
o Financial Capital.
o Manufactured Capital.
o Intellectual Capital.
o Human Capital.
o Social and Relationship Capital.
o Natural Capital.
 SEBI encourages listed entities to adopt IR in addition to BRSR.
 Several Indian companies (Infosys, HUL, Wipro, Mahindra) publish Integrated
Reports.

(b) Global Reporting Initiative (GRI):

 Most widely used global sustainability reporting framework.

 GRI Standards (2021) — Universal Standards, Topic Standards.
 Many Indian BSE/NSE 500 companies publish GRI-aligned sustainability reports.

(c) SASB (Sustainability Accounting Standards Board):

 Industry-specific sustainability standards; now part of IFRS ISSB.

(d) TCFD (Task Force on Climate-related Financial Disclosures):

 Framework for disclosing climate risks and opportunities.

 SEBI Consultation Paper (2023) — considering mandatory TCFD-aligned
disclosures.

(e) ISSB Standards (IFRS Sustainability Disclosure Standards):

 IFRS S1 (General Sustainability-Related Disclosures) and IFRS S2 (Climate-Related

Disclosures) issued in 2023.
 India likely to align BRSR with ISSB standards in the near future.

(f) UN Global Compact Communication on Progress (UNGC CoP):

 Annual reporting by UNGC signatory companies on progress on 10 principles (human

rights, labour, environment, anti-corruption).

6.7 Technology and Innovation in Corporate Reporting

(a) Digital/Online Annual Reports:

 Companies increasingly publish interactive digital annual reports with

infographics, videos, and navigable content.
 Physical copies sent only to shareholders who specifically request.
(b) Video Annual Reports:

 CEOs deliver video messages; virtual AGMs enable broader shareholder

participation.

(c) AI and Analytics:

 Regulators (SEBI, MCA) use AI to analyze XBRL data, detect anomalies in financial
statements, identify insider trading patterns.

(d) Blockchain for Corporate Records:

 Pilot projects for maintaining share registry, board minutes on blockchain.

 NSDL/CDSL exploring blockchain-based corporate actions.

(e) Virtual / Hybrid AGMs:

 MCA General Circular (2020, extended): Companies permitted to hold EGMs and
AGMs through video conferencing.
 SEBI Circular (2022): Framework for listed company AGMs through VC/OAVM
(Other Audio Visual Means).
 Increased shareholder participation from across India and abroad.

(f) E-voting:

 Section 108, Companies Act + Rule 20: Mandatory for listed companies; offered to
all shareholders 3 days before AGM.
 Platforms: NSDL e-Voting, CDSL e-Voting, KFin Technologies.
 Remote e-voting eliminates need for physical attendance for routine decisions.

Q7. Explain Corporate Social Responsibility (CSR) under

Section 135 of the Companies Act, 2013 in comprehensive
detail — covering legal provisions, Schedule VII activities,
governance, unspent amount, impact assessment, and
emerging trends.
Answer:

7.1 Introduction and Philosophy

India enacted the world's first mandatory CSR law through Section 135 of the Companies
Act, 2013. CSR in India is not merely charitable giving — it is a structured, governance-
driven obligation embedded in the corporate statute itself.

Philosophical Basis:
  Gandhian Trusteeship: Business is a trustee of society's wealth.
 Stakeholder Theory (Freeman): Companies owe obligations to all stakeholders.
 Triple Bottom Line (Elkington): Profit, People, Planet.
 SDGs (UN, 2015): 17 Sustainable Development Goals — CSR activities aligned to
SDGs.

7.2 Legal Framework

Primary Provisions:

 Section 135, Companies Act, 2013.

 Schedule VII — List of CSR Activities.
 Companies (Corporate Social Responsibility Policy) Rules, 2014 (as amended in
2021).
 MCA FAQs and Circulars on CSR.

Timeline of Amendments:

Year Amendment
2014 CSR Rules notified; CSR Policy framework established
2016 MCA Circular — CSR eligible expenditures clarified
2019 Companies (Amendment) Act — civil penalties; unspent amount provisions
2020 COVID-19 activities included in Schedule VII; PM CARES Fund included
CSR Amendment Rules 2021 — major overhaul; international organizations; ongoing
2021
projects; Form CSR-2
2022 Further amendments — CSR registration mandatory for implementing agencies

7.3 Applicability — Section 135(1)

Mandatory CSR for every company (including holding, subsidiary, and foreign companies
with Indian operations) fulfilling any one criterion in the immediately preceding financial
year:

Criterion Threshold
Net worth Rs. 500 crore or more
Turnover Rs. 1,000 crore or more
Net profit Rs. 5 crore or more

Important Points:

 Threshold tested on preceding financial year's financials.

 If a company crosses threshold in FY 2023-24, it must comply with CSR in FY 2024-
25.
 If company falls below threshold for 3 consecutive years — exempted from CSR
obligation.
  Net profit for CSR = Section 198 computation (excludes tax paid, dividends, capital
expenditure).
 Foreign companies: Section 135 applies to foreign companies with branch/project
offices in India if they meet thresholds.

7.4 CSR Expenditure — Section 135(5)

Mandatory spend:

 At least 2% of average net profits of the preceding 3 financial years.

 If company has not completed 3 years — average of years since incorporation.

Illustration:

Net Profit FY 2021-22: Rs. 80 crore

Net Profit FY 2022-23: Rs. 100 crore
Net Profit FY 2023-24: Rs. 120 crore
Average Net Profit = (80 + 100 + 120) / 3 = Rs. 100 crore
Mandatory CSR Spend FY 2024-25 = 2% × Rs. 100 crore = Rs. 2 crore

What counts as CSR spend:

 Contribution to projects/programs listed in Schedule VII.

 Contribution to implementing agencies registered under CSR Rules.
 CSR capacity building of implementing agencies (max 5% of CSR expenditure).
 Administrative overhead of CSR implementation (max 5% of CSR expenditure).
 Impact assessment cost (max 5% of CSR expenditure).

What does NOT count as CSR spend:

 Activities benefiting only employees/workers.

 Statutory compliance expenditures (mandatory environmental expenses).
 Activities outside India (with limited exceptions — IITs, NLUs, National
Laboratories for R&D).
 Contributions to political parties.
 CSR activities through entities not registered on MCA portal.

7.5 CSR Committee — Section 135(1)

Mandatory Constitution:

 Minimum 3 directors, including at least 1 independent director.

Exceptions:
  Companies not required to have independent directors (private companies, certain
small companies): CSR Committee without independent director.
 Companies with CSR obligation < Rs. 50 lakhs: Board itself acts as CSR Committee
— no separate committee required.

Functions:

 Formulate and recommend CSR Policy to the Board.

 Recommend annual CSR expenditure amount.
 Monitor CSR Policy implementation.
 Recommend activities from Schedule VII.
 Review implementation reports and impact assessments.

7.6 Schedule VII — Eligible CSR Activities (Exhaustive List)

Item Activity
Eradicating hunger, poverty, malnutrition; promoting preventive healthcare; sanitation;
(i)
safe drinking water
Promoting education; special education; employment-enhancing vocational skills;
(ii)
livelihood enhancement projects
Promoting gender equality; empowering women; setting up homes for women,
(iii)
orphans, senior citizens; reducing inequalities
Environmental sustainability; ecological balance; protection of flora/fauna; animal
(iv)
welfare; agroforestry; natural resource conservation; climate change
Protection of national heritage, art, culture; promotion of traditional arts and
(v)
handicrafts
Measures for armed forces veterans, war widows/dependants; training for
(vi)
rural/Olympic/Paralympic/nationally recognized sports
Contribution to PM's National Relief Fund (PMNRF), PM CARES Fund, other Central
(vii)
Government funds for socio-economic development
Contributions to Central Government-approved technology incubators within academic
(viii)
institutions
(ix) Rural development projects
(x) Slum area development
(xi) Disaster management — relief, rehabilitation, reconstruction
(xii) Promotion of sports (added separately from national sports training)

Post-COVID Additions:

 Contribution to PM CARES Fund — eligible CSR.

 Activities under National Health Mission — eligible.
 Setting up COVID-19 testing facilities; supply of PPE kits — eligible.

7.7 CSR Implementation Modalities — Rule 4

How CSR activities may be implemented:

(a) Direct Implementation:

 Company itself carries out CSR activities through its own team.
 Example: Company runs its own schools, hospitals, skill training centres.

(b) Through Implementing Agencies:

Type of Agency Requirements

Section 8 company set up by
Incorporated and registered
itself/holding/subsidiary/associate
Section 8 company established by
Statutory body
Central/State Government
Must have 3-year track record in relevant CSR
Section 8 company, registered trust, or
activities; Must be registered on MCA CSR
registered society set up independently
Portal (Form CSR-1) from April 1, 2021
Can be engaged for design, monitoring,
International Organisations evaluation, and research of CSR projects
only — not direct implementation

MCA CSR Portal Registration (Form CSR-1):

 All implementing agencies must register on the MCA portal.

 Mandatory from April 1, 2021.
 Company cannot count CSR expenditure through unregistered implementing
agencies.

(c) Collaboration with Other Companies:

 Two or more companies may collaborate on a common CSR project.

 Each company can count its share of contribution.
 All collaborating companies must separately disclose.

7.8 Treatment of Unspent CSR Amount

Section 135(5) and (6) — as amended by Companies (Amendment) Act, 2019:

Two scenarios:

Scenario A — Ongoing CSR Projects (Section 135(6)):

 Any unspent amount relating to an ongoing project (multi-year project approved by

board) must be transferred within 30 days of financial year end to:
o "Unspent Corporate Social Responsibility Account" — special bank
account.
 Amount must be spent on the project within 3 years from transfer date.
  If not spent within 3 years → transfer to a Fund specified in Schedule VII within 30
days of expiry.

Scenario B — Other CSR Activities (Section 135(5)):

 Unspent amount not relating to ongoing projects must be transferred to a Schedule

VII Fund (PM Relief Fund, Swachh Bharat Kosh, Clean Ganga Fund, etc.) within 6
months of financial year end (i.e., by September 30).

Surplus from CSR:

 Any surplus arising from CSR activities must be:

o Reinvested in the same project; OR
o Transferred to Unspent CSR Account; OR
o Transferred to Schedule VII Fund.
 Cannot be added back to company profits (Rule 7(3)).

Carry Forward of Excess CSR Spend:

 If company spends more than 2% in one year → excess can be set off against
mandatory requirement of next 3 financial years (Rule 7(3) — Amendment 2021).

7.9 Impact Assessment

Rule 8(3) — Impact Assessment:

Applicability:

 Companies with CSR obligation of Rs. 10 crore or more in preceding 3 financial

years must conduct impact assessment for:
o CSR projects with outlay of Rs. 1 crore or more.
o Projects that have been completed at least 1 year before undertaking impact
assessment.

Who Conducts:

 Independent agency — must be external; not connected with implementing agency.

What is Assessed:

 Whether CSR project achieved its intended outcomes.

 Beneficiary satisfaction.
 Social return on investment.
 Long-term sustainability of project outcomes.

Disclosure:

 Impact Assessment Report included in Annual CSR Report (part of Board's Report).
  Disclosed on company website.

Cost:

 Administrative/impact assessment cost capped at 5% of CSR expenditure for that

year or Rs. 50 lakhs, whichever is less.

7.10 CSR Reporting

Annual CSR Report (Rule 8): Annexed to Board's Report — must contain:

 Brief CSR Policy overview.

 Composition of CSR Committee.
 Web link to CSR Policy and projects.
 Average net profit of preceding 3 years.
 Prescribed CSR expenditure (2%).
 Total CSR amount spent/committed.
 Details of CSR projects (ongoing and completed): name, location, implementing
agency, amount.
 Details of unspent CSR amount.
 Details of amount transferred to Schedule VII fund.
 Confirmation by board that implementation and monitoring is as per CSR Policy.

Form CSR-2:

 Separate standalone form filed with ROC in addition to Annual Return.

 Contains detailed CSR information.
 Must be filed by March 31 following the financial year.
 Introduced from FY 2021-22 onwards.

7.11 Penalties — Section 135(7)

Post-Companies (Amendment) Act, 2019:

Non-compliance Penalty
Failure to transfer unspent CSR amount to Company: Twice the unspent amount
Unspent CSR Account or Schedule VII Fund OR Rs. 1 crore, whichever is less
1/10th of unspent amount OR Rs. 2
Every officer in default
lakh, whichever is less

Important: Pre-2019 position — non-spending required explanation in Board's Report;

criminal prosecution was possible. Post-2019: civil penalty regime; explanation still required;
criminal prosecution removed for CSR default.
7.12 Emerging Trends in CSR

(a) CSR and SDG Alignment:

 MCA encourages companies to align CSR with UN SDGs.

 Annual reports increasingly map CSR activities to specific SDGs.

(b) CSR and ESG Integration:

 BRSR captures broader ESG metrics beyond mandatory CSR.

 Companies adopting integrated CSR + sustainability strategy.

(c) Technology in CSR:

 Digital platforms for real-time CSR project tracking.

 Social impact measurement tools (Social Return on Investment — SROI).
 Geo-tagging of CSR project sites for verification.

(d) CSR in Climate Action:

 Growing allocation to clean energy, sustainable agriculture, water conservation.

 India's Net Zero 2070 commitment driving climate-focused CSR.

(e) Corporate-NGO-Government Partnerships:

 Companies increasingly partnering with government schemes (Swachh Bharat, Jal

Jeevan Mission, Poshan Abhiyan) for CSR delivery.

7.13 Master Summary Table — All Key Provisions

Topic Legal Provision Key Requirement

Net worth ≥ Rs. 500 Cr / Turnover ≥ Rs. 1,000 Cr
CSR Applicability Section 135(1)
/ Net Profit ≥ Rs. 5 Cr
CSR Spend Section 135(5) 2% of 3-year average net profit
CSR Committee Section 135(1) 3 directors incl. 1 independent
CSR Activities Schedule VII 12 broad areas
Implementing
Rule 4 Must be registered on MCA portal (Form CSR-1)
Agencies
Unspent (Ongoing) Section 135(6) Transfer to Unspent CSR A/c within 30 days
Unspent (Others) Section 135(5) Transfer to Schedule VII Fund within 6 months
For obligation ≥ Rs. 10 Cr; project outlay ≥ Rs. 1
Impact Assessment Rule 8(3)
Cr
Company: 2x unspent or Rs. 1 Cr; Officer: Rs. 2
Penalties Section 135(7)
lakh
Rule 8 + Form
CSR Reporting Form Annexed to Board's Report; separate ROC filing
CSR-2
 Topic Legal Provision Key Requirement
Section 149 / Reg. 1/3rd or 50% IDs; woman director; resident
Board Composition
17 director
Section 177 / Reg.
Audit Committee Min. 3 directors; majority IDs; 4 meetings/year
18
Section 178 / Reg.
NRC All non-executive; majority IDs
19
Secretarial Audit Section 204 Mandatory for listed companies; Form MR-3
Annual Return Section 92 Form MGT-7; within 60 days of AGM
Within 24 hours; 30 minutes for board meeting
Material Events LODR Reg. 30
decisions
Financial Results LODR Reg. 33 Quarterly: 45 days; Annual: 60 days
LODR Reg. 34(2) Top 1000 listed entities; mandatory from FY
BRSR
(f) 2022-23
SEBI PIT Reg.
Insider Trading SDD; Trading window; pre-clearance; disclosures
2015
Foreign Company
Section 380 Form FC-1 within 30 days of establishment
Filing
Foreign Company
Section 381 Form FC-3; within 6 months of financial year end
Accounts
FEMA NDI Rules,
FDI Pricing Resident to non-resident: not less than FMV
2019

This comprehensive Q&A covers the complete Module III syllabus on Corporate Governance
— including evolution, governance models, listed company regulation, foreign company
compliance, governance-related compliances, communications and reporting systems, and
CSR — with all relevant legal provisions, case laws, and regulatory references suitable for
10-mark detailed examination answers.