2. Rating systems all around the world
• USA – In the United States, the law is derived from 4 sources: constitutional law, statutory law,
administrative regulations, and the common law (which includes case law).
• Constitutional law is the body of law governing the interpretation and implementation, the
subject of which mainly concerns the scope of power of the United States federal government as
compared to the individual states and the fundamental rights of individuals.
• Statutory law or statute law is written law passed by a body of legislature. This is as opposed to
oral or customary law; or regulatory law promulgated by the executive or common law of the
judiciary. Statutes may originate with national, state legislatures or local municipalities.
• Administrative law encompasses statutes, common law, and directives issued by the Office of
Information and Regulatory Affairs in the Executive Office of the President, that together define
the extent of powers and responsibilities held by administrative agencies of the United States
government (both executive branch agencies and independent agencies).
• Common law may refer to “judge-made” law, otherwise known as case law. Cases are legal
determinations based on a set of particular facts involving parties with a genuine interest in the
3. Rating systems all around the world
• INDIA – In India, we have 3 types of legal systems, viz. Ethical laws, Moral laws &
• Ethical laws: Rules of Ethics are specific statements of minimally acceptable as
well as unacceptable professional conduct. The Code is designed to provide
guidance to members, applicants, and certified individuals as they make
• Moral laws: Moral law is a system of guidelines for behavior. These guidelines
may or may not be part of a religion, codified in written form, or legally
enforceable. Moral law is a set of universal rules that should apply to everyone.
• Contract laws: prescribes the law relating to contracts in India and is the key act
regulating Indian contract law. It determines the circumstances in which promises
made by the parties to a contract shall be legally binding. Under Section 2(h), the
Indian Contract Act defines a contract as an agreement which is enforceable by
4. Corporate Governance
• Corporate Governance - is the practice of ensuring a corporation
conducts itself accountably, fairly and openly in all its dealings. It is the
responsibility of a company’s board of directors.
• Goal of corporate governance is to ensure a company’s leaders are
managing the finances of the business effectively and that they always act
in the best interest of stakeholders (shareholders, employees, customers,
suppliers and creditors).
• Companies often have their own corporate governance frameworks, rules
and processes for managing the conduct of the organization. Most also
have to comply with external regulations or laws governing their industry
• The pillars of successful corporate governance are: accountability, fairness,
transparency, assurance, leadership and stakeholder management.
5. Corporate Governance in India
• CG in India - The organizational framework for corporate governance initiatives in India
consists of the Ministry of Corporate Affairs (MCA) and the Securities and Exchange
Board of India (SEBI).
• Ministry of Corporate Affairs (MCA) is primarily concerned with administration of the
Companies Act 2013, the Companies Act 1956, the Limited Liability Partnership Act,
2008, Insolvency and Bankruptcy Code, 2016 & other allied Acts and rules & regulations
framed there-under mainly for regulating the functioning of the corporate sector in
accordance with law. It is responsible mainly for regulation of Indian enterprises in
Industrial and Services sector.
• Securities and Exchange Board of India (SEBI) is a statutory regulatory body, owned by
the Government of India, which is entrusted with the responsibility to regulate the Indian
capital markets. It monitors and regulates the securities market and protects the
interests of the investors by enforcing certain rules and regulations.
• Minister of Finance and Corporate Affairs of India, Nirmala Sitharaman, has said
legitimate profit earning cannot be devoid of social responsibility, and that companies
cannot get away without meeting corporate social responsibility requirements.
6. The Companies Act 1956 & 2013
• Legislature and regulatory rules of India was managed by The Companies Act, 1956,
which enabled companies to be formed by registration, and set out the responsibilities
of companies, their directors and secretaries. This law has been revised and legislature
and regulatory rules of India is now managed by The Companies Act, 2013.
• The new law is aimed at easing the process of doing business in India and improving
corporate governance by making companies more accountable. The 2013 Act also
introduces new concepts such as one – Person Company, small company, dormant
company and corporate social responsibility (CSR).
• The Insolvency and Bankruptcy Code, 2016 was enacted by the Parliament with the aim
to provide and revamp the framework for insolvency resolution in India in a time bound
manner and for the promotion of entrepreneurship, credit availability and balancing of
different interests of each and every stakeholder of a Company.
• An insolvency & bankruptcy law is designed to address a situation in which a debtor is no
longer able to pay its debts to its creditors generally (rather than individually) and, in that
context, provides a mechanism that will provide for the equitable treatment of all
7. Insolvency and Bankruptcy Code, 2016
• Example of IBC Code –
• Lenders and insolvency professionals in India walked into uncharted territories by taking Jet
Airways to the insolvency court. This paved the way forward for resolution of the aviation sector
under the Insolvency and Bankruptcy Code, 2016, (IBC).
• Jet Airways is the first airline to undergo resolution under IBC. Jet posted losses in eight out of
ten fiscals between 2008-2018 and began showing signs of increasing stress in August last year,
when it delayed salary payments of some employees.
• Jet Airways, on April 17, announced the temporary suspension of all flight services as it failed to
secure interim funding to maintain even the bare minimum operations.
• Under IBC, bids were invited for Jet’s revival. Things took a turn for the worse when Etihad
Airways, Jet’s erstwhile strategic partner, said it would not participate in the resolution process.
• An Insolvency Resolution Professional (IRP) was appointed for Jet. The IRP has been directed to
submit a progress report to the court. The court also heard the plea of the counsel representing
Jet’s engineers and managers.
• National Company Law Tribunal (NCLT) Mumbai admitted Jet Airways insolvency plea by SBI,
initiated resolution process.
8. Regulations of Corporate Governance (SEBI)
• SEBI is a regulatory authority established on April 12, 1992.
• SEBI was established with the main purpose of curbing the
malpractices and protecting the interest of its investors. Its main
objective is to regulate the activities of Stock Exchange and at the
same time ensuring the healthy development in the financial market.
9. Regulations of Corporate Governance (SEBI)
• In order to ensure good corporate governance SEBI came up with detailed
Corporate Governance Norms:
• Companies are required to get shareholders approval for RPT (Related
Party Transactions), it established whistle blower mechanism, clear
mandate to have at least one woman director in the Board and moreover it
elaborated disclosures on pay packages
• Listed companies are required to provide the option of e-voting to its
shareholders on all proposed or passed at general meetings. Those who do
not have access to e-voting facility, they should be provided to cast their
votes in writing on Postal Ballot. There was the need to amend the
provision so that the provisions of the listing agreement can be aligned
with the provisions of Companies Act, 2013. By doing so an additional
requirement can be provided to strengthen the Corporate Governance
norms in India with respect to Listed companies.
10. Regulations of Corporate Governance (SEBI)
• Clause 49 of the Listing Agreement was also amended by SEBI in order to
strengthen the Corporate Governance framework for Listed companies in
India. The revised clause forbids the independent directors from being
eligible for any kind of stock option. Whistle blower policy is also added in
the revised clause whereby the directors and employees can report any
unethical behavior, any fraud or if there is violation of Code of Conduct of
the company. By the amendment Audit Committee is also enhanced, now it
will include evaluation of risk management system and internal financial
control, will keep a check on inter-corporate loans and investments. The
amendment now requires all the companies to form a policy for the
purpose of determination of ‘material subsidiaries’ and that will be
12. “ICICI Chanda Kochhar Case”
• Chanda Kochhar allegedly favoured Videocon Group in lending practices.
• On 29 March 2018, Videocon group promoter Venugopal Dhoot provided crores
of rupees allegedly to NuPower Renewables Pvt Ltd (NRPL), a firm he had set up
with Chanda Kochhar's husband Deepak Kochhar and two relatives six months
after the Videocon group got Rs 3,250 crore as loan from ICICI Bank in 2012.
• He allegedly transferred proprietorship of the company to a trust owned by
Deepak Kochhar for Rs 9 lakh, six months after he received the loan from ICICI
Bank. The Videocon account was declared an NPA (Non-performing Assets) or a
bad loan in 2017.
• On 24 January 2019, Chanda, her husband Deepak, and industrialist Venugopal
Dhoot were named in a CBI FIR for cheating and defrauding ICICI Bank to the tune
of Rs 1,730 crore.
13. RBI Guidelines on Remuneration of CEO
• Effective governance of compensation:
• 1.1 Guideline 1: Compensation Policy:
• Banks should continue to formulate and adopt a comprehensive
compensation policy covering all their employees (including
CEO) and conduct annual review thereof.
• 1.2 Guideline 2: Nomination and Remuneration Committee
(NRC) : The board of directors of banks should constitute a
‘Nomination and Remuneration Committee’ (NRC) of the board
to oversee the framing, review and implementation of
compensation policy of the bank on behalf of the board.
14. RBI Guidelines on Remuneration of CEO
• 2.1 Guideline 3: For Whole Time Directors / Chief Executive Officers
/ Material Risk Takers (MRTs)
(a) compensation is adjusted for all types of risks, (b) compensation
outcomes are symmetric with risk outcomes, (c) compensation
payouts are sensitive to the time horizon of the risks, and (d) the
mix of cash, equity and other forms of compensation are consistent
with risk alignment.
• 2.1.1 Fixed Pay and Perquisites :
• 2.1.2 Variable Pay :
• (a) Composition of Variable Pay:
• (b) Limit on Variable Pay.
15. Strict Liability for Directors:
1. LIABILITY OF DIRECTORS (Under Companies Act 2013)
2. Liability to the company
3. Liability to the third parties.
4. Liability to the breach of warranty.
5. Liability for breach of statutory duties.
6. Liability for acts of co-directors.
7. Criminal Liability.
16. RIGHTS OF MINORITY SHAREHOLDERS AS PER
COMPANIES ACT 2013:
• Minority Shareholder: Equity holder of a firm who does not have the voting control of the firm, by
virtue of his or her below fifty percent ownership of the firm's equity capital.
• Right to appoint a director- Small shareholders, upon notice of not less than 1/10th of the total
number of such shareholders or 1000 shareholders, have a small shareholder director elected.
• Right in decision making and such director appointed shall be considered as independent director.
• Oppression and mismanagement- Right to apply to tribunal by the minority shareholders, when
management or control of the company is being conducted in a manner prejudicial to the
interests of the class or company.
• Rights with respect to reconstruction and amalgamation- Purchase of shares of dissenting
shareholders at a determined value by the registered valuer. The minority have been given a
right to make an offer to the majority shareholders to buy the shares of minority shareholders.
The transferor company shall be the agent for making payments to minority shareholders.
• Class action suit: Class action suit may be filed by the minority shareholders as per the provisions
of Companies Act, 2013.
17. Reason of corporate governance failure
• Ineffective boards
• Poor communication
• Risk blindness
• Technological disruption
• Information glass ceiling