India's Company Act of 2013: A Governance Shift into the Sunlight

• Author: Sarah Alvy
• Position: California Western School of Law and San Diego State University Graduate School of Business
• Pages: 187-220

e Indonesian Journal of International & Comparative Law

ISSN: 2338-7602; E-ISSN: 2338-770X

http://www.ijil.org

© 2015 e Institute for Migrant Rights Press

187

INDIA’S COMPANIES ACT OF 2013

A GOVERNANCE SHIFT INTO THE SUNLIGHT

SARAH ALVY

California Western School of Law and San Diego State University Graduate School of

Business

E-mail: alvy@rohan.sdsu.edu

With respect to emerging markets in today’s global economy, it has become

increasingly apparent that the design of a country’s corporate governance

system aects its macro-economy. Recently enacted, India’s Companies

Act of 2013 overhauls the country’s corporate governance system. With

implementation underway, many academics and business professionals

alike wonder whether the Act will be successful in achieving its policy

objectives. is article examines and critiques three novel provisions of

the Act including: mandatory female board membership, corporate social

responsibility, and auditor rotation. is article identies India-specic

challenges to the provision mandating female board membership, but

argues from a managerial perspective that the provision will enhance

corporate governance and oversight in the long-run. Lastly, the article

comments on how the U.S. could emulate India by adopting a similar

non-binding regulation designed to promote female board membership.

Keywords: Company Law, Corporate Governance, Corporate Social

Responsibility, Law and Development, Gender and Law, Women and the

Law, Gender Diversity on Corporate Boards.

The Indonesian Journal of International & Comparative Law Volume II Issue 1 (2015) at 187–220

Sarah Alvy

188

I. INTRODUCTION

Inuenced by Supreme Court Justice Louis D. Brandeis’s century-old dec-

laration that “[s]unshine is said to be the best of disinfectants[,]” United

States corporate governance and securities law demands transparency and

honesty through regulatory disclosure.1 Increased transparency not only

helps the investing public and society-at-large understand what compa-

nies and their boards are doing, it also encourages company employees

to meet their obligations to stakeholders. In turn, this transparency gives

stakeholders a foundation upon which they may raise claims when they

believe greater oversight, governance, and control is needed. Further, cor-

porate governance and securities law promote capital formation while

maintaining the integrity and eciency of our capital markets.2 Accord-

ingly, scholarly research has found that the design of a country’s corporate

governance system aects the country’s macro-economy and its ability to

attract foreign capital.3

India is home to the world’s largest emerging economy, and the

country has experienced rapid economic transformation since the early

1990s.4 is transformation has been accompanied by sweeping corporate

1. L D. B, O P’ M 92 (1914). Justice Brandeis was

referring to the banking industry during the early 1900s and disclosure demands

as a ray of sunshine that provides transparency to the investing public. e

United States’ mandatory disclosure system began after the Great Depression and

ensuing market collapse of 1929. Our federal securities laws enacted thereafter, the

Securities Act of 1933 and the Securities Exchange Act of 1934, were premised on

mandatory disclosure as the remedy to our market’s failure. See J D. C 

., S R C A M 5 (7th ed. 2013).

2. See generally S  E C, e Laws that Govern the

Securities Industry, http://www.sec.gov/about/laws.shtml (last visited Oct. 20,

2014).

3. Afra Afsharipour, Rising Multinationals: Law and the Evolution of Outbound

Acquisitions by Indian Companies, 44 U.C. D L. R. 1029, 1034-1035 (2011)

(analyzing India’s macro-economy via outbound acquisition activity, Afsharipour

argues that the “law plays a number of important roles in the emergence of Indian

multinationals.” Stating that “legal reforms and legal history have shaped outbound

acquisitions both in terms of transaction structure and transaction size [and that]

legal constraints on M&A activity by Indian rms and the traditional governance

of Indian rms impose substantial restrictions not only on the methods used by

Indian multinationals in pursuing outbound acquisitions, but also on the future

potential of Indian multinationals.”) [hereinafter Rising Multinationals].

4. See KC Chakrabarty, Deputy Governor, Reserve Bank of India, Inaugural Address

Sarah Alvy

India’s Companies Act of 2013: A Governance Shift into the Sunlight

189

governance reforms.5 Business and economic analysts expect this

economic transformation to continue under the pro-business leadership

of the newly elected Prime Minister, Narendra Modi.6 In fact, Mr. Modi’s

economic policies emphasize his commitment to “make in India . . . an

invitation to all to turn India into a new global manufacturing hub.”7

India has become a leader in the global economy thanks to its

exponential economic growth, yet its development still relies on its ability

to attract foreign direct investment.8 Recently, a series of unfortunately

at the Antique India Market Conference: India’s Economic Transformation (Sept.

7, 2009) [hereinafter KC Chakrabarty]. India is the world’s largest democracy,

with over 1.2 billion people. It had a gross domestic product (GDP) of $1.73

trillion in 2010. And it is considered a robust cultural hub, with multiple

languages and religions. Transparency International, India Facts & Figures, http://

www.transparency.org/country/#IND (last visited Oct. 30, 2014).

5. See Afra Afsharipour, e Emergence of New Corporate Social Responsibility

Regimes in China and India,  U.C. D B. L.J. 175, 209 (2014) (noting

that “India’s reform eorts were spurred by the needs of India’s rapidly expanding

economy, including a signicant widening of India’s investor base to encompass

both increased foreign and institutional investors.”) [hereinafter Emergence of New

Corporate Social Responsibility Regimes]. See also Afra Afsharipour, e Promise and

Challenges of India’s Corporate Governance Reforms, 1 I J. L.  E. 33, 33-

34 (2010).

6. Narendra Modi assumed oce on May 26, 2014. Sta Writer, Narendra Modi

is sworn in as the 15th Prime Minister of India, T T  I, http://

timesofindia.indiatimes.com/news/Narendra-Modi-is-sworn-in-as-the-15th-

Prime-Minister-of-India/articleshow/35620796.cms (last visited Nov. 17, 2014).

See Anant Vijay & Eric Bellman, India April-June GDP Grew 5.7% On-Year, W

S. J. (Aug. 29, 2014), http://online.wsj.com/articles/india-april-june-gdp-grew-

5-7-on-year-1409317312. See also Prudence Ho, Asian IPOs, Other Share Sales Hit

Four-Year High, W S. J. (Oct. 12, 2014), http://online.wsj.com/articles/ipos-

other-share-sales-in-asia-hit-four-year-high-1413149585?KEYWORDS=ipos-

other-share-sales-in-asia-hit-four-year-+high.

7. Narendra Modi, An Invitation to ‘Make in India’, W S. J. (Sept. 25, 2014),

http://online.wsj.com/articles/narendra-modi-an-invitation-to-make-in-india-

1411687511?KEYWORDS=%22make+in+india%22 (Prime Minister Modi also

stated that “India will pursue its dreams in partnership with our international

friends. History tells us that India’s natural instinct is to be open to the world. India

will be open and friendly—for business, ideas, research, innovations and travel.”).

See also Arvind Panagariya, e Promise of Modinomics How the New Prime Minister

Can Bring Back Growth, F A. (June 10, 2014), http://www.foreignaairs.

com/articles/141556/arvind-panagariya/the-promise-of-modinomics (noting

it’s demographic prole “. . . India is young, and it is predicted to become even

younger, with a healthy growth in population. It will not, therefore, face the labor

shortages that have already hit many other economies, including China.”).

8 See generally Sarbapriya Ray, Impact of Foreign Direct Investment on Economic Growth