Indian Corporate Governance Expectations for Foreign Companies

Why Corporate Governance in India Has Become Non-Negotiable

India's corporate governance framework has undergone a transformation over the past decade. The Companies Act 2013 replaced outdated legislation from 1956, and the Securities and Exchange Board of India (SEBI) has progressively tightened governance norms through its Listing Obligations and Disclosure Requirements (LODR) Regulations. For foreign companies operating in India through subsidiaries, branch offices, or joint ventures, understanding these requirements is not optional.

As of 2025-2026, India's governance standards increasingly apply extra-territorially. SEBI has clarified that unlisted subsidiaries of listed entities must comply with related party transaction classifications under LODR, and foreign subsidiaries have no specific exemption. The regulatory trajectory is clear: governance standards will continue to tighten, not relax.

The Two-Pillar Governance Framework

Pillar 1: The Companies Act, 2013

The Companies Act, 2013 governs all companies incorporated in India, including wholly owned subsidiaries of foreign companies. Key governance provisions include:

• Board composition requirements: Minimum two directors for private companies; minimum three for public companies
• Resident director mandate: At least one director must be a person who has stayed in India for at least 182 days in the financial year
• Board meeting frequency: Minimum four board meetings per year, with no more than 120 days between consecutive meetings
• Director disqualification: Directors who fail to attend all board meetings in a 12-month period are automatically vacated
• Related party transactions: Require board or shareholder approval depending on value and nature

Pillar 2: SEBI LODR Regulations

The SEBI LODR Regulations apply to listed companies but increasingly impact unlisted subsidiaries of listed entities. If your parent company is listed on any stock exchange globally and has a material Indian subsidiary, the LODR cascade is relevant. Key provisions include:

• One-third to one-half of the board must comprise independent directors
• Mandatory audit committee, nomination and remuneration committee, and stakeholders relationship committee
• At least one independent director of the listed parent must sit on the board of an unlisted material subsidiary
• Quarterly and annual financial disclosures with prescribed formats

Board Composition Requirements for Foreign Subsidiaries

Minimum Board Structure

For a foreign-owned Indian subsidiary structured as a private limited company, the minimum governance requirements are:

The Resident Director Requirement

Every company incorporated in India must have at least one resident director who has resided in India for a minimum of 182 days during the financial year. This applies from the date of incorporation, and failing to appoint one is a compliance violation.

For foreign companies setting up in India, this typically means:

• Hiring a local professional director through a resident director service
• Relocating a member of the parent company's team to India
• Appointing a trusted local partner or employee who meets the residency requirement

The Digital Signature Certificate (DSC) and Director Identification Number (DIN) are mandatory for all directors, including foreign nationals serving on Indian company boards.

Independent Directors: When They Become Mandatory

Applicability Thresholds

Independent directors are not mandatory for all companies. The requirement triggers at specific thresholds:

• Listed companies: Mandatory. One-third of the board must be independent if the chairman is non-executive; one-half if there is no regular non-executive chairman.
• Unlisted public companies: Mandatory if paid-up share capital exceeds INR 10 crore, or turnover exceeds INR 100 crore, or outstanding loans/borrowings/debentures/deposits exceed INR 50 crore.
• Private limited companies: Not mandatory under current regulations, regardless of size.

Independent Director Appointment Rules

For companies where independent directors are required:

• Appointment for a maximum of two consecutive terms of five years each
• A cooling-off period of three years must elapse before reappointment after two terms
• Appointment through a special resolution requiring 75% shareholder approval (as per revised SEBI norms for listed companies)
• Independent directors cannot have any material pecuniary relationship with the company
• Must declare independence at the first board meeting of each financial year

Mandatory Committees and Their Functions

Audit Committee

Mandatory for:

• All listed companies
• Unlisted public companies with paid-up capital exceeding INR 10 crore, or turnover exceeding INR 100 crore, or outstanding loans exceeding INR 50 crore
• All public companies with a turnover above INR 200 crore

The audit committee must comprise a minimum of three directors, with independent directors forming a majority. The chairperson must be an independent director who can read and understand financial statements. Key functions include:

• Reviewing financial statements and audit reports
• Pre-approving all related party transactions
• Evaluating internal financial controls
• Reviewing the adequacy of the internal audit function
• Approving or modifying transactions with related parties

Nomination and Remuneration Committee

Required for listed companies and prescribed classes of unlisted public companies. Must have at least three non-executive directors, with at least half being independent. Responsibilities include recommending board appointments, setting performance evaluation criteria, and formulating remuneration policies.

Stakeholders Relationship Committee

Mandatory for listed companies and companies with more than 1,000 shareholders, debenture holders, deposit holders, or any other security holders. Handles investor grievances, share transfers, and communication with security holders.

Related Party Transactions: The Governance Minefield

What Qualifies as a Related Party Transaction

Related party transactions (RPTs) are among the most scrutinised governance areas for foreign-owned Indian subsidiaries. Transactions between the Indian subsidiary and its foreign parent, sister companies, key management personnel, or their relatives are all classified as RPTs.

Common RPTs in foreign subsidiary operations:

• Management fees paid to the parent company
• Royalty payments for brand or technology use
• Inter-company loans and advances
• Purchase or sale of goods/services from group companies
• Shared services arrangements
• Transfer pricing arrangements for cross-border transactions

Approval Requirements (2025-2026)

The RPT approval framework operates at multiple levels:

SEBI's revised Industry Standards, effective from September 2025, mandate standardised disclosure formats for RPT approvals. Related parties cannot vote on resolutions for approving RPTs in which they are interested.

CSR Compliance: The 2% Spending Mandate

When CSR Becomes Mandatory

Section 135 of the Companies Act mandates Corporate Social Responsibility spending for companies meeting any of these thresholds:

• Net worth of INR 500 crore or more (proposed to be lowered to INR 100 crore under Companies Amendment Bill 2025)
• Turnover of INR 1,000 crore or more (proposed to be lowered to INR 500 crore)
• Net profit of INR 5 crore or more (proposed to be lowered to INR 3 crore)

If your Indian subsidiary meets any one of these thresholds in any preceding financial year, CSR compliance becomes mandatory.

CSR Spending Requirements

• Minimum spend: 2% of average net profits from the preceding three financial years
• CSR Committee: Mandatory with at least three directors, including one independent director (where applicable)
• Eligible activities: Listed under Schedule VII of the Companies Act, including education, healthcare, environmental sustainability, rural development, and disaster management
• Carry forward: Excess CSR spending can be set off against the requirement of up to three succeeding financial years
• Unspent amounts: Must be transferred to a designated CSR Unspent Account within 30 days of the end of the financial year, and spent within three financial years. Failing this, the amount must be transferred to a Schedule VII fund (e.g., Prime Minister's National Relief Fund).

Vigil Mechanism and Whistleblower Policy

Mandatory Requirements

Under Section 177 of the Companies Act and Regulation 22 of SEBI LODR, certain companies must establish a vigil mechanism (whistleblower policy):

• All listed companies
• Companies that accept deposits from the public
• Companies that have borrowed money from banks and public financial institutions exceeding INR 50 crore

The whistleblower policy must:

• Enable directors, employees, and stakeholders to report genuine concerns about illegal or unethical practices
• Provide adequate safeguards against victimisation of the complainant
• Provide direct access to the chairperson of the audit committee in exceptional cases
• Resolve complaints within 60 days (as per SEBI's 2025 guidelines)

SEBI's Whistleblower Reward Mechanism

Under the SEBI (Prohibition of Insider Trading) Regulations, SEBI offers a reward of 10% of the money disgorged as a result of a whistleblower complaint relating to insider trading violations. The maximum reward is INR 10 crore, up from INR 1 crore previously. This incentivises reporting and has led to an 8% year-on-year increase in whistleblower complaints across BSE-50 companies in FY 2024-25.

Annual Compliance Calendar for Governance

Foreign subsidiaries must maintain a strict annual compliance calendar for governance obligations:

Penalties for Governance Non-Compliance

India's penalty regime for governance failures has become increasingly severe:

• Failure to appoint resident director: Company penalty of INR 1 lakh to INR 5 lakh; officer in default penalty of INR 50,000 to INR 1 lakh
• Failure to constitute audit committee: INR 1 lakh to INR 5 lakh for the company; INR 25,000 to INR 1 lakh for each officer in default
• Failure to spend CSR amount: Fine of up to twice the unspent amount or INR 1 crore, whichever is less; officers liable for up to INR 25 lakh or 3 years imprisonment
• RPT violations: Imprisonment for up to 1 year and/or fine of INR 25,000 to INR 5 lakh
• SEBI LODR non-compliance: Listed entities face penalties up to INR 25 crore or 3 times the profit made, whichever is higher

The Registrar of Companies (RoC) and SEBI actively enforce these provisions. The National Company Law Tribunal (NCLT) has become increasingly efficient at adjudicating governance disputes.

Practical Governance Strategies for Foreign Companies

For Wholly Owned Subsidiaries

• Structure the board with a mix of parent-company nominees and local professionals who understand Indian governance requirements
• Appoint a qualified Company Secretary to manage statutory compliances. This is mandatory for companies with paid-up capital of INR 10 crore or more.
• Invest in governance technology. Board management software, compliance dashboards, and automated filing reminders significantly reduce the risk of missed deadlines.
• Establish an RPT policy from day one, even if your subsidiary is below the mandatory threshold. Regulators view proactive governance positively.

For Joint Ventures

• Define governance structures in the joint venture agreement, including board representation, veto rights, and dispute resolution mechanisms
• Agree on RPT approval processes upfront, as transactions between JV partners are RPTs by definition
• Establish a clear information-sharing protocol to ensure the foreign partner has adequate visibility into Indian governance compliance

Secretarial and Filing Compliance

Mandatory Filings with the Registrar of Companies

Foreign-owned Indian companies must maintain rigorous filing compliance with the Ministry of Corporate Affairs (MCA) through the MCA21 portal. Key annual filings include:

• Form AOC-4: Financial statements including balance sheet, profit and loss account, and auditor's report. Due within 30 days of the Annual General Meeting.
• Form MGT-7 / MGT-7A: Annual return with details of shareholders, directors, and changes during the year. Due within 60 days of the AGM.
• Form ADT-1: Appointment of auditors. Must be filed within 15 days of the AGM at which the auditor is appointed.
• DIR-3 KYC: Annual KYC for all directors. Due by September 30 each year. Failure results in DIN deactivation.
• FC-GPR filings: Required within 30 days of allotting shares to foreign investors.

Consequences of Filing Delays

The MCA imposes additional fees for late filings calculated at INR 100 per day of delay, with no upper cap. For a company that misses a filing deadline by 6 months, the additional fee alone would be INR 18,000. More critically, persistent non-compliance can lead to the company being flagged as a "defaulting company" on the MCA portal, which affects its ability to make further filings, obtain regulatory approvals, and maintain good standing with banks and partners.

Statutory Audit Requirements

Appointment and Rotation of Auditors

Every Indian company must appoint a statutory auditor at the time of incorporation. For companies meeting certain thresholds, auditor rotation is mandatory:

• Individual auditors: Maximum tenure of one term of five consecutive years
• Audit firms: Maximum tenure of two terms of five consecutive years each (10 years total)
• Cooling-off period: Five years after completing maximum tenure

For foreign subsidiaries, the statutory auditor must be registered with the Institute of Chartered Accountants of India (ICAI). International audit firms operate in India through their affiliated Indian member firms. Choosing an auditor with transfer pricing expertise is critical for companies with significant cross-border transactions with their parent company.

Cost Audit and Secretarial Audit

Companies in specified industries (manufacturing, mining, processing) with a turnover above INR 35 crore must conduct a cost audit. Companies with a paid-up capital of INR 50 crore or more, or turnover of INR 250 crore or more, must also undergo a secretarial audit conducted by a practicing Company Secretary.

ESG and Sustainability Governance

Environmental, Social, and Governance (ESG) requirements are rapidly evolving in India and increasingly affect foreign companies:

• Business Responsibility and Sustainability Reporting (BRSR): Mandatory for the top 1,000 listed companies by market capitalisation. BRSR Core is being extended to the value chain, meaning listed companies may require ESG disclosures from their unlisted suppliers and subsidiaries.
• BRSR Core assurance: Reasonable assurance on BRSR Core disclosures is being phased in, starting with the top 150 companies from FY 2025-26 and extending progressively.
• Climate-related disclosures: India is aligning with international frameworks. The Securities and Exchange Board of India has signalled that climate risk reporting, including Scope 1, 2, and eventually Scope 3 emissions, will become standard governance requirements.

Foreign companies with sustainability commitments at the global level should ensure their Indian governance structures accommodate these emerging requirements, particularly if the parent company is subject to the EU Corporate Sustainability Reporting Directive (CSRD) or similar frameworks.

Key Takeaways

• The Companies Act 2013 and SEBI LODR form a two-pillar governance framework that applies to all companies in India, with increasing extra-territorial reach
• Board composition, including the resident director requirement, must be in place from the date of incorporation. Use professional advisory services to navigate director appointments.
• Related party transactions are the highest-risk governance area for foreign subsidiaries. Establish robust RPT policies and ensure audit committee pre-approval for all inter-company transactions.
• CSR compliance thresholds are expected to be lowered under the Companies Amendment Bill 2025, potentially bringing more mid-sized foreign subsidiaries under the 2% spending mandate
• Penalties are real and increasing. The MCA and SEBI actively enforce governance norms, and non-compliance can result in significant fines and even imprisonment of officers in default.