The Great Company Law Debacle: Separating Fact from Fiction

Unpacking the myths surrounding India's corporate governance framework

As a law student or a junior advocate, you've probably encountered a plethora of myths surrounding Company Law in India. From the notion that only public companies need to comply with corporate governance norms to the assumption that private companies are exempt from all regulatory requirements, it's time to bust these myths and get to the bottom of what really matters.

One of the most enduring myths is that private companies are exempt from all regulatory requirements under the Companies Act, 2013. While it's true that private companies have more flexibility when it comes to complying with certain provisions, such as holding board meetings or passing resolutions, they are not entirely exempt from all regulatory requirements. For instance, under Section 117 of the Companies Act, 2013, private companies must still maintain a minimum paid-up capital and subscribe to a maximum number of shares.

Another myth is that only public companies need to comply with corporate governance norms, such as having an independent director or implementing an internal audit system. However, the Securities and Exchange Board of India (SEBI) has made it clear that even private companies can be held accountable for non-compliance with corporate governance norms, particularly if they are part of a larger group or have a significant public holding. The SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, make it clear that private companies can also be subject to the same listing obligations as public companies.

In the landmark case of Shriram EPC (India) Ltd. v. Union of India, the Supreme Court of India ruled that even private companies can be held liable for violating corporate governance norms, including the requirement to maintain proper books of accounts. The court held that the Companies Act, 2013, applies equally to all companies, public or private, and that private companies cannot claim exemption from certain provisions simply because they are private.

Another myth is that only large companies need to worry about corporate governance. However, the Companies Act, 2013, has expanded the scope of corporate governance requirements to include even small and medium-sized enterprises (SMEs). Under Section 2(85) of the Act, an SME is defined as a company that has a paid-up capital of not more than Rs. 10 crores or a turnover of not more than Rs. 50 crores.

In conclusion, the myth-busting begins with understanding that Company Law in India is not just about public companies or large corporations. The Companies Act, 2013, applies equally to all companies, and corporate governance norms are not just a luxury for the big boys. Students often get this wrong by assuming that only large companies need to comply with regulatory requirements or that private companies are exempt from all corporate governance norms. The truth is that all companies, regardless of size or type, must comply with the requirements of the Companies Act, 2013, and SEBI regulations to avoid being held accountable for non-compliance.