India’s corporate governance for foreign-owned companies

Corporate governance remains a central theme for businesses operating in India. High-profile incidents continue to attract public and regulatory scrutiny, from governance and internal control concerns at leading technology platforms, to compliance failures at regional offices of multinationals and concerns raised by independent directors of major banks.

The consequences of governance failures extend beyond legal exposure to include financial, operational and reputational implications affecting investor confidence and long-term enterprise value. Corporate governance is no longer viewed merely as a procedural obligation. It constitutes a broader framework for accountability, risk management, transparency and effective oversight.

Against this backdrop and given India’s unique regulatory environment and evolving compliance requirements, navigating the country’s corporate governance landscape remains complex, particularly for foreign-owned companies operating through Indian subsidiaries. Understanding these practical considerations is critical to building resilient and sustainable governance structures in India.

India’s corporate governance regulatory framework

The Companies Act, 2013, together with corresponding rules and applicable secretarial standards, forms the cornerstone of India’s corporate governance framework. It governs company incorporation, management and operations, prescribing requirements for the constitution of board of directors, its powers and obligations, shareholders’ rights, disclosures, audits and financial recordkeeping.

In addition, listed companies are regulated by the Securities and Exchange Board of India (SEBI), specifically SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, which impose enhanced governance requirements that are increasingly relevant even to unlisted subsidiaries of listed foreign parents.

Further, companies with foreign investment are also subject to the provisions of the Foreign Exchange Management Act, 1999 regulated by the Reserve Bank of India. Depending on the nature of the business, companies may also be subject to sector-specific regulatory frameworks, such as the Insurance Regulatory and Development Authority of India (IRDAI) regulations for insurance companies.

These laws, together with other applicable labour, environmental and operational laws, impose governance obligations that extend over and above those prescribed under the Companies Act.

The Companies Act places the board at the centre of corporate decision making. Every company must have the minimum prescribed number of directors (two for private companies), with at least one director passing the residency test. Certain companies must also appoint at least one woman director. The board must convene at least four meetings annually, with not more than 120 days between consecutive meetings.

The board is collectively responsible for various functions, including approving the financial statements, preparing the directors’ report and ensuring compliance with applicable legal requirements.

Directors are also subject to individual statutory and fiduciary duties. Directors are required to attend at least one board meeting in a financial year, failing which their office may become vacant. The Companies Act prescribes fiduciary duties requiring directors to act in good faith and in the company’s best interests; exercise due care, skill and diligence; and avoid conflicts of interest.

The Companies Act further incorporates the concept of “officer in default” to determine and assign liability. Typically, executive directors (i.e. directors involved in day-to-day management of the company) and key managerial personnel, such as CEO, CFO and managing director, are considered as officers in default. Non-executive and independent directors may be held liable in limited circumstances, including where the contravention occurs with their knowledge, consent or failure to act diligently.

The governance framework also incorporates checks and balances through shareholder oversight. Certain fundamental decisions require shareholder approval, including changes to the objects clause of the memorandum of association, increase in the authorised share capital and related party transactions (RPT) exceeding prescribed thresholds. The RPT framework is among the most scrutinised areas and warrants careful attention from foreign-owned companies. Additionally, the National Company Law Tribunal provides statutory remedies for oppression, mismanagement and class action suits, giving minority shareholders effective recourse.

To promote transparency, accountability and robust internal controls, the Companies Act prescribes a framework for maintaining books of account and financial statements that present a true and fair view of the company’s affairs; constituting committees such as the audit committee and CSR committee for qualifying companies; and undertaking periodic reporting to regulators.

Statutory auditors play a critical role within the governance framework and are required to independently scrutinise the company’s affairs. Auditors are also under a statutory obligation to report suspected frauds committed by the company, its officers or employees, either internally or to the central government, depending on the value involved.

Challenges and workarounds

Given the complexity of India’s corporate governance landscape, foreign investors often encounter structural and operational challenges in ensuring compliance. Key governance challenges and practical guidance to address them are discussed below.

Underestimating Indian compliance ecosystem. India is a compliance-heavy jurisdiction, with obligations spanning multiple laws and regulators at central and state levels. The Companies Act, for instance, requires on average monthly statutory filing. Labour and indirect tax laws impose similar requirements. Routine intra-group arrangements (loans, guarantees, investments) may trigger approval, disclosure or reporting requirements. Companies are therefore required to monitor and manage a continuous cycle of compliance obligations.

This is compounded by frequent regulatory changes. The Companies Act has undergone several amendments since its inception in 2013 and continues to be amended periodically. The rules framed thereunder are also revised frequently, and regulatory circulars and notifications issued by the Ministry of Corporate Affairs add further layers of compliance. Foreign investors often find it challenging to keep pace with these changes and assess their impact on local operations.

One-size-fits-all approach. Multinational groups often implement global governance frameworks across subsidiaries for consistency in compliance standards. However, a one-size-fits-all approach may not be effective in India. Given the country’s unique legal and regulatory landscape, global policies require localisation or supplementation from both legal and practical perspectives.

For instance, global codes of ethics may prescribe monetary thresholds for gifts and hospitality higher than those prescribed under Indian law or prevailing market practice. Similarly, the definition of public servant is wider under Indian anti-corruption laws and may also extend to private sector personnel performing public duties.

Further, centralised decision making from distant headquarters can result in insufficient visibility into local operations and emerging risks, particularly where operations are in smaller cities with a less evolved compliance culture.

Miscalculating the extent of directors’ duties and exposure. Foreign investors often underestimate the extent of duties, responsibilities and potential liability exposure associated with serving as a director of an Indian company, particularly for a foreign resident. While local teams may manage day-to-day operations, directors remain obligated to various statutory and fiduciary responsibilities mentioned above. Depending on the circumstances, directors may be exposed to liability for contraventions of the company, particularly where they failed to act diligently.

A related practical consideration is that global insurance policies for company directors and officers (D&O) may not adequately cover Indian statutory penalties, many of which are quasi-criminal in nature. Companies should review their D&O coverage specifically against Indian exposure.

Another practical consideration relates to disclosures. Directors are required to provide information for various corporate and regulatory purposes (e.g. residential address, contact number and interest in other entities), some accessible publicly for a nominal fee. Companies (Significant Beneficial Owners) Rules, 2018 also imposes complex declaration obligations for multi-layered foreign holding structures. Foreign directors and investors are often surprised by the extent of such disclosure requirements.

While India’s corporate governance framework may appear complex, many challenges can be effectively managed through proactive planning and local engagement. Key measures include: (1) conducting a comprehensive regulatory mapping at the outset to identify applicable laws, regulators and filing obligations specific to the company’s sector, structure and investment route; (2) localising global governance policies to align with Indian law; (3) establishing a compliance calendar with clear ownership and escalation timelines; (4) instituting regular board-level training programmes on duties and personal liability exposure under Indian law; and (5) setting up effective internal reporting and whistle-blower mechanisms.

Equally important is engaging experienced local counsel at an early stage – particularly during incorporation, structuring of foreign investment and expansion into regulated sectors – to ensure that governance frameworks are designed with Indian legal requirements in mind. Periodic governance and secretarial audits (mandatory for certain companies) help proactively identify and remediate compliance gaps.

For foreign-owned companies in India, robust governance is no longer merely a compliance requirement; it is a strategic imperative that underpins sustainable growth, protects against director-level liability, preserves stakeholder trust and supports long-term value creation.