Newsletter Category: 2026

“The ultimate responsibility for the bank’s performance, conduct and control rests with the Board”, says the Reserve Bank of India (RBI). What is new one might ask.

The draft of RBI’s Amendment Directions 2026, relating to commercial banks (somewhat oddly titled the draft RBI Amendment Directions, 2026) was issued on April 8, 2026, for public consultations. The sentence in the preceding paragraph is the first of the 5 key principles for determining the matters to be placed before the Board, in addition to the matters specified in Appendix 1 and Appendix 2 of the draft. The first principle, focusing on the ultimate responsibility resting with the Board, goes on to state that some matters may be delegated to the Board committees/ sub-committees/ senior management, along with reporting requirements, as may be necessary. Delegation of the powers and functions of the Board to a Board committee is understandable, and is par for the course. However, delegating the functions/ responsibilities of the Board to a sub-committee or to senior management seems inappropriate. Only Board committees should ordinarily be the delegatees of the Board. As for sub-committees, it is not understood to which entities the reference is because committees of the Board are Board committees, and not sub-committees, as often erroneously mentioned by senior bank functionaries.

The second principle states that the matters reserved for the Board’s approval or to be brought to its notice for information or reporting should be clearly articulated. It goes on to state that the role and responsibilities of the Board under various statutes or regulations, may also be taken into account in determining such matters. If there are responsibilities arising out of statutes or regulations, it is a non-negotiable requirement that the Board deals with such matters. The words “may also be taken into account” gives the impression that even in regard to statutory or regulatory prescriptions, the Board has a choice.

The third principle states that the Chairperson of the Board shall have the primary responsibility for setting the agenda of the meeting. The Chair of the Board is primus inter pares, and is not a superior authority, placed hierarchically above the rest of the Board members. Further, considering that the Board as a collective entity is at the apex of decision-making, the agenda for Board meetings should be owned by the Board. It is necessary for managements to understand that setting an agenda for the Board amounts to taking the Board for granted. The agenda should be set with the Board.

The fourth principle states that the Board shall ensure that it receives sufficient information from the management to discharge its role effectively. It goes on to state that the Board shall clearly define the nature, level of detail and frequency of information required from the management. Given the number and variety of agenda items, some of which could not have been anticipated, it is inconceivable how a Board can, in advance, clearly define the nature, level of detail and frequency of information. What is important is that the Board ensures that the information received is adequate and timely, to facilitate decision-making.

The fifth principle states that the Board shall periodically review the matters to be placed before it, as well as the matters delegated to the Board committees/ sub-committees/ senior management. The review shall also include the timelines for circulation of agenda items, adequacy of information captured in the agenda, and the time allotted for important matters. The timelines for circulation of agenda items have been laid down in the Secretarial Standards, which forms a part of the Companies Act, 2013. There is no scope for ambiguity with regard to timelines.

At this stage, it is useful to look at the reasons that are stated to have prompted the draft amendment directions. Paragraph 1 of the draft dated April 8, 2026 says that this is a result of a comprehensive review and rationalisation of instructions issued by RBI from time to time, and is “an endeavour to enable Boards to utilise their time effectively, and to facilitate a more focused and qualitative engagement on strategy and risk governance”. Is there an admission residing in this statement that an overly prescriptive regime, leading to a plethora of instructions, has, in the past, deflected bank Boards from spending adequate time on strategy and risk management?

The statement on developmental and regulatory policies includes inter alia review of matters placed before the Boards of the bank and consolidation of supervisory instructions. As far as regulatory matters are concerned, RBI had, in a major departure from an earlier stipulation, prescribed 7 broad themes to merit the attention of bank Boards. Separately, and in addition thereto, RBI has also mandated certain policies and matters to be placed before the Board for approval, review or information. The 7 broad themes have had no impact on the reduction of agenda items, since bank managements, and also Boards, have slotted all the agenda items under these different themes. These themes are the equivalent of umbrellas under which several agenda items can take shelter, thus, having no impact on the reduction of agenda items coming up before the Board. The present endeavour to enable Boards to utilise their time effectively, and to facilitate a more focussed and qualitative engagement on strategy and risk governance, is a very welcome and timely move. The comprehensive review and rationalisation of such instructions should result in a significant reduction in the number of items to be considered by the Board. Failing this, it would be yet another exercise that does not yield the desired outcome.

The consolidation of supervisory instructions gives a clear indication of the load that Boards are having to contend with. In 2025, the RBI undertook a comprehensive consolidation exercise, and reduced the existing regulatory circulars / guidelines from more than 9,000 to 238 function-wise master directions. RBI had, several years ago, constituted a Regulations Review Authority (RRA), and its second edition has been in existence for some time. The fact that so many directions have survived the scrutiny of the RRA is a matter of concern.

Appendix 1 deals with the policy matters prescribed by RBI for approval of the Board, and contains an analysis indicating which of them can be delegated. What the exercise reveals is that a large number of them have been considered not appropriate for delegation, meaning that the Board will continue to grapple with these issues. It is understood that policy documents are important enough to merit the attention of the Board, and should not, in any event, be finalised without the Board approval. There are quite a few items which are recommended for being taken out of the Board’s direct purview. Interestingly, what is stated is that these can be left to committees to which powers have been delegated by the Board. Clearly, the power to delegate some of these items existed earlier, and therefore, to say that these items should be left to those committees is not saying anything new.

One item which merits specific comment is the policy on compensation of Directors/ Chief Executive Officers/ Material Risk Takers. This matter is not considered appropriate to be taken away from the Board. The question that the banking Regulator needs to ask is whether compensation in individual cases should be determined by the Central Bank, as has been done for many years, impacting the ability of the Board to assert its position vis-à-vis the senior officers of the bank. The criteria for granting fixed remuneration to the Non-Executive Directors of the bank is also a matter that has been reserved for the Board.

The approval items contained in Appendix 2 include a wide range of subjects, some of which clearly should not take up the time of the Board, if the stated intent of this exercise is to make adequate time available to the Board for focusing on strategy and risk management. There are 11 approval items which have been included in the list for delegation at the discretion of the Board. Some of them merit comment. The appointment of the Chief Risk Officer (CRO) is proposed to be left to the Risk Management Committee of the Board. Some time ago, in a paper on the need to strengthen risk management, it was stipulated that the risk management function should be sufficiently strengthened and safeguarded. The present thinking seems to be that the Board needs to have no visibility on the appointment of the CRO. Similarly, in the case of the Chief Compliance Officer (CCO), it has been left to the discretion of the Board to delegate this to the Audit Committee (AC) of the Board. Considering that the CCO is expected to ensure compliance, not only relating to accounting and financial matters, the appointment of a person to this post should be with the approval of the Board, and not of the AC. Further, the existing paragraph, which mandates the Board to review the status of action taken on points arising from the earlier meetings till action is completed to the satisfaction of the Board, is proposed to be deleted. The action taken report is the only control document available to the Board to determine whether its decisions have been acted on. To discontinue this, would be to blindside the Board on a very essential aspect on the Board’s functioning. It is also proposed to delete the existing provision that a public sector bank shall place before its Board, copies of all directives/ circulars and other important communications from RBI and the Government. This deletion would lead to the Board’s remaining unaware of directives and communications from RBI and the Government, and would be a grievous omission. Such items, as are important for the functioning of the Board, should not be deleted in the guise of leaving the Board with more time to focus on strategy and risk management.

There are 6 items which come under the heading “maybe discontinued at the discretion of the Board”. Of them, 1 is an approval matter, 4 are review items and 1 is a reporting item. The small number of items identified for possible discontinuation gives rise to the question whether this exercise will actually release time for the bank Boards to attend to matters that Boards alone have to address. There is perhaps a good case for RBI itself to reexamine the matter, and to prune the lists, where considered appropriate. Would it be uncharitable to ask whether a mountain went into labour, and gave birth to a mouse?

The present draft is the result of a comprehensive review and rationalisation of instructions issued by RBI from time to time. This is apparently an internal exercise. Considering that the revised prescriptive arrangement would significantly impact the manner in which Boards function, it might be worthwhile, even at this stage, to constitute a committee comprising a few Chairpersons, a few Managing Directors and a few Independent Directors to collectively reflect on the present workload of the Board, and to come up with experience-based suggestions that can make a meaningful difference.

While RBI has undertaken this mammoth exercise, SEBI has not lagged behind. Its continuing concern with the performance of Directors in the boardroom, and consequently, with the performance of Boards, has thrown up, not for the first time, the need to provide training for Directors. This proceeds on the assumption that most Directors are non-performing or under-performing, and require to be suitably enabled and encouraged to perform their duties better. The fact that this concern has been articulated shortly after the high-profile exit of the Chairperson of a bank Board, is not to be ignored. Some might say that the focus on training of Directors has come very soon after the high-profile resignation, leading to the possible conclusion that there is a causal relationship. Whether the present move is consequent, or merely subsequent, is not a matter that should detain us. It is more important to focus on what is sought to be achieved. If newspaper reports are to be given credence, it would seem that the latest initiative is to work with industry bodies, corporates and academic institutes to shore up the quality of Directors. These training programmes, as in the past, could focus on the letter of law and regulations, and get into minor details such as the forms to be filled, without touching on Board dynamics and behavioural attributes, which are critical to understand in the context of Boards. The central issue is whether the Boards are correctly constituted, or whether in spite of provisions in law and regulations, they remain a collection of individuals among whom the comfort level is high, leading to the absence of a constructive challenge being mounted to management. As in the case of medical treatment, it is necessary to go in for diagnosis before attempting prescription and treatment. The underperformance of Boards merits very careful diagnosis. It does not lend itself to a single solution across the wide variety of Boards. It is only a robust and meaningful Board evaluation exercise which will identify the areas for improvement, including, but not limited to, the replacement of under-performers, and bringing on Board those that have the commitment and competence to guide the company. This is a matter that cannot be mandated by the Regulator. It is for each Board to see the value of Board evaluation, and to put in place a proper Board evaluation process.

It is useful in this context to look at developments in one of India’s large private sector banks. The non-executive Chairperson of the Board, an Independent Director, resigned from the Board stating that what was happening in the bank was not consistent with his value systems. His resignation letter did not contain the specifics that triggered the resignation. Further, subsequent statements made by him led to the papering over the seriousness that his resignation should have attracted. RBI accorded approval, the same day, to the appointment of an interim Chairperson, and also made a statement to the effect that there was nothing wrong in the operations of the bank. Whether such a statement should have been made post haste is a matter deserving attention.

Interestingly, SEBI reportedly articulated serious concerns regarding the fall in the share price of the bank, and the resultant loss that it had caused to investors. SEBI’s view was that no Director or Chairperson should act in a manner by which the interests of the shareholders would be adversely impacted. It was clearly a response to the statement made by the outgoing Chairperson, and a suggestion that departing Directors should calibrate their statements appropriately. SEBI’s directions on resignations by Directors clearly state that the reason for resignation should be indicated, and there should be an assertion that there is no other reason leading to the resignation. In that view of the matter, it would seem unfair to find fault with a departing Chairperson, whose stated reason for resignation was that the developments in the bank were not in congruence with his value system and beliefs.

It is time for Regulators across domains to take a deep breath and not rush to conclusions, or give contradictory signals. It is useful to recall that when there were allegations against the CEO of another large private sector bank a few years ago, the then Non-Executive Chairperson rushed to assure stakeholders that all was well, before the cookie crumbled.

Focused Boards. Engaged Directors. The ingredients are in place. How will the recipe turn out? The proof of the pudding is in the eating.

With a major corporate governance related development in one of India’s largest private sector banks, it would normally have been appropriate for this newsletter, being a commentary on governance, to address issues arising from that development. However, with the plethora of pundits having pronounced judgement in the absence of evidence, we consciously decided to reserve our comments and our observations until such time as more information was available in the public domain. We therefore turned to another matter which has been occupying mindspace in several boardrooms over the last few months.

On January 7, 2026, National Financial Reporting Authority (NFRA) put out a circular (hereinafter called the Circular) requiring Boards, Audit Committees (ACs), Auditors and Those Charged With Governance (TCWG) to address aspects of the audit process in order to minimise any slip ups that might have taken place as a result of lack of clarity of roles and responsibilities. The subject of the Circular is “Effective Communication Between Statutory Auditors and Those Charged with Governance, Including Audit Committees”. It will be seen therefrom that the primary concern of NFRA is on the adequacy and effectiveness of communication between Auditors and TCWG, in other words, the Auditees.

The Circular refers to provisions of the Companies Act, 2013 and sets out the responsibilities of the Board of Directors, the Independent Directors (IDs), the AC and the Auditors. It does not increase the regulatory load, but emphasises that there are responsibilities, which, presumably in NFRA’s opinion, require reiteration and reinforcement. The Chairman, NFRA has, in a public statement, mentioned that ACs are not doing all of what is expected of them, and it is perhaps this concern that has led to this comprehensive Circular.

Central to the Circular is the group referred to as TCWG. This term had been safely tucked away in the Auditing Standards, but has suddenly become centrestage in conversations on audit quality and Auditing Standards.

What is the TCWG, and who determines its composition? In paragraph 3.1 of the Circular, NFRA refers to paragraph 10(a) of SA 260 (revised), and defines TCWG as those with responsibility for overseeing the strategic direction of the company, and obligations relating to the accountability of the company. Paragraph 11 of SA 260 lays down that it shall be mandatory for the Auditor to determine appropriate persons as TCWG within the governance structure. It acknowledges, seemingly grudgingly, that as per the Companies Act, 2013, the Board of Directors has overall responsibilities for the governance of the company, and it will qualify for being considered as TCWG. Given the primacy of the Board, as derived from statute, in matters relating to governance, it seems somewhat condescending to state that it qualifies for being considered as TCWG. In the same breath, the Circular states that the TCWG could also be a sub-group of the Board, which could be the AC plus some of the Board members. Having made these seeming concessions, the Circular states that “in any case, it is necessary for the Auditor to determine TCWG at the start of the audit”.

Section 134 of the Companies Act, 2013 and the related Rules thereunder require that the financial statements, including the consolidated financial statements, if any, shall be approved by the Board of Directors. Section 134(5) of the Companies Act, 2013 provides that the Directors Responsibility Statement referred to earlier in the Section should disclose the Board’s assertions on some critical aspects such as adherence to applicable Accounting Standards, selection and application of accounting policies, and making of judgements/ estimates on reasonable and prudent basis. The implementation of adequate Internal Financial Controls (IFC), and ensuring their operating effectiveness is a responsibility of the Board, as mandated by the statute. Therefore, the constitution of the TCWG cannot detract from the statutory responsibility of the Board.

Some comment is necessary on why NFRA was set up. Section 132 of the Companies Act, 2013 tasks NFRA with improving the overall auditing structure. Its broad functions include protecting the interests of investors, setting Auditing and Accounting Standards, conducting quality review of Auditors and audit firms, investigation, inspections and monitoring compliance. It will be noticed that the thrust of Section 132 is on ensuring improvement of auditing quality. Prior to the coming into being of NFRA, only the Institute of Chartered Accountants of India (ICAI) had the responsibility of regulating audit professionals, setting Accounting Standards, and ensuring strong audit quality. ICAI being a membership body, which also had a regulatory component, it was felt that the regulatory function was, in some sense, being circumscribed by the membership function. This inherent weakness of self-regulatory organisations (SROs) manifested in creating the feeling that even when transgressions were noticed, disciplinary proceedings were tardy and ineffective. Following a dispute between ICAI and NFRA, which had to be judicially determined, NFRA emerged with the powers and the responsibility to lay down Accounting Standards. In the course of its inspections of major audit firms, it found significant deficiencies, including, but not limited to, independence and professionalism. In NFRA’s view, it seemed inadequate to deal with Auditors alone, and therefore NFRA started communicating with ACs, both directly and through the Auditors. In a series of papers, referred to as “NFRA Auditor-Audit Committee Interaction Series”, NFRA advised the ACs, through the Auditors, on the questions the committee members ought to raise in regard to the auditing process and the findings of audit. The Circular travels a little further, and specifically refers to the responsibilities of IDs under Schedule IV of the Companies Act, 2013. Whether this is an overreach, or a legitimate implied extension of its remit, is a matter that needs to be separately addressed.

As earlier stated, the focus of the Circular is on effective communication. NFRA seems to have arrived at the conclusion that the communication between Auditors and AC (TCWG) was a one-way communication, in which the Auditors made presentations, at quarterly intervals, detailing their observations and the procedural and substantive deficiencies noticed. It was felt that the AC (TCWG) to whom the presentations were made did not, because of time pressure or otherwise, put the appropriate questions to the Auditors, and challenge, or seek clarity on, their findings. Stated differently, it would seem that the AC has been perceived as passive recipients of information put out by the Auditors.

What is presently contemplated by the Circular is effective two-way communication. The Auditors are expected to communicate to the TCWG all that is relevant to facilitate a clear understanding by the TCWG. The latter is expected to put its questions in writing to the Auditors, or supplement oral questions by subsequent written communications. It need hardly be stated that besides questioning the trust on which oral communication is based, this would place an extraordinary burden on the TCWG to raise all relevant matters in writing. Is this yet another case of over-prescriptive regulation turning out to be counterproductive, with TCWG going through the motions of asking a few questions in writing?

Earlier in this newsletter, the question was raised as to who decides the composition of the TCWG. The Auditors responsibility, derived from the Accounting Standards, cannot override the statutory responsibility given to the Board of Directors. It therefore stands to reason that the TCWG should be constituted by the Board of Directors, through an appropriate resolution of the Board.

The next question which arises is the membership of the TCWG. Clearly, all AC members should be members of the TWCG. In addition, there could be members of the Board, such as members of the Risk Management Committee, whose presence in the TCWG would add value to the deliberations. Should TCWG then be a body larger than the AC, but smaller than the Board? It is readily conceded that the entire Board might not have the time to interact at least twice a year with the Auditors.

The Circular also contemplates the existence of a Nodal Officer to communicate with the Auditors. Some Boards seem to have decided that the CFO would be best placed to be the Nodal Officer, having regard to his/her functions, and the continuing interactions with the AC. This raises a fundamental question. Managements, even at present, interact with the Auditors. Should TCWG’s interaction not bring a Board perspective, as distinct from a management’s perspective, into the conversation and the communication with the Auditors? If superintendence of the management’s functioning is a responsibility of the Board, it follows that the TCWG’s communication with Auditors cannot be left to a management functionary, such as the CFO. There is a supporting role that the CFO can perform in making information available, and clarifying the management’s perspective. These however have to be inputs made available to the TCWG to enable a constructive conversation with the Auditors. Boards should keep this aspect in mind, while deciding both the composition of the TCWG and identification of the Nodal Officer.

It is also interesting to note that the communication with Statutory Auditors would involve aspects of strategic direction. Strategy is a matter that is finalised by the Board, with the assistance of management, and clearly at the time of finalising the strategy, including the determination of strategic direction, there cannot be a major role for Auditors. UPSI (unpublished price sensitive information) concerns cannot be brushed aside. Second guessing of strategic decisions by an entity that is not tasked with the determination of strategy is an unwise step.

It is no one’s case that the quality of audit should not be significantly improved. However, the better approach will be to identify the existing shortcomings in the audit process, as already done by NFRA in a number of cases, and strengthening processes based on those observations and conclusions. Spreading the net wide, and looking at how ACs perform, and whether IDs are measuring up, could be seen as getting into the domain of SEBI. It is interesting to note that the Public Company Accounting Oversight Board (PCAOB) in the USA, set up under the Sarbanes-Oxley Act, 2002, is under the aegis of the Securities and Exchange Commission (SEC), whereas NFRA is a creature of statute. It is easy to contemplate the possibility that turf battles lie ahead of us as different Regulators, with the right intentions, exercise the authority vested in them by statute.

Putting in place a pragmatic regulatory regime should necessarily be preceded by meaningful consultations with the relevant stakeholder community. Absent this, we could end up prescribing in haste, and amending at leisure.

Corporate governance conversations have, in recent months, centred around Audit Committees (ACs), Auditors, Independent Directors (IDs) and, more recently, Those Charged With Governance (TCWG), the last being a relatively recent addition to the active vocabulary of corporate governance. Common among all of these is the institution of IDs. While it existed in other jurisdictions, the institution of IDs was formally given birth to in Clause 49 of the Listing Agreement, after which it assumed a statutory basis through The Companies Act, 2013 (The Act).

Corporate governance failures have often resulted in fingers being pointed at IDs. The most common question asked is whether they were sleeping on the job. Even less charitable is the explanation that having been appointed by the promoters, they consciously chose to look the other way when governance shenanigans were playing out for all to see. These episodes have also given rise to the questions – “Who needs IDs?”, “What purpose do they serve?”, and “Whose interests are they safeguarding in boardroom discussions?”.

The foregoing are clearly extreme positions to take. At the other end of the spectrum there is an increasing number of promoters and controlling stakeholders who have seen, and are continuing to see, value in having IDs. As one promoter stated unambiguously – “I recognise that the ID is on the company’s Board to protect me from myself. Any excesses that I resort to consciously or unconsciously might not survive the scrutiny of diligent IDs.” If the institution of IDs is to continue to exist, and to play a significant role, it is necessary to ask ourselves – why persons with no stake in the fortunes of the company should agree to come on the Board, and expose themselves to the liabilities and risks that necessarily go with Board positions. As in every contractual relationship, there ought to be consideration as one of the elements of the contract. It is in that context that an attempt is being made in subsequent paragraphs to examine how, to what extent, and in what manner, Directors, especially IDs, should be compensated.

There is no need to lead evidence to support the proposition that if the compensation is inadequate, the wrong persons, including those with ulterior motives, might get onto Boards. At the same time, it can be contended, with reasonable certainty, that excessive compensation will negatively impact the independence that is expected in the process of decision-making. Clearly therefore, a balance ought to be struck between what is too little and what is too much. There is a section of observers, fortunately not too many, who believe that being on a Board is tantamount to public service, and should not be in the expectation of receiving any compensation. The expectation that pro bono service will be provided by Directors does not sit well with the challenges of being a part of the Board. Why should any sensible person agree to serve on a Board, without being compensated, when legal and regulatory liabilities keep increasing by the day?

How then are Directors to be compensated? The first element that is normally spoken about is the sitting fees paid to Directors for attending meetings of the Board and the committees. Presently, there is a statutory cap of Rs 1 lakh per meeting that is payable to members of Boards or committees. Many companies pay lesser amounts, with perhaps the unstated explanation that meetings in any event are formalities, where not much business gets discussed, and not many decisions get taken, leaving it to the management to chart, with minimal Board intervention, the course that companies ought to take. There is also the specious argument that payment of sitting fees is avoidable expenditure, and therefore the number of meetings have to be bare minimum.

Conversations with Board and committee members, and a study of the minutes of meetings, as also the agenda, will establish that much of the heavy lifting is being done by the Board committees, especially the AC. Therefore, treating committee meetings as mere calendar items should not pass muster in well intentioned companies. It is important to note that sitting fees is paid for attending meetings. It is paid at a uniform rate to all members, and does not differentiate between those that contributed significantly to discussions and decision-making, and those that remained steadfastly silent. Clearly sitting fees is not intended to be an instrument of compensation that recognises and rewards performance.

The only other manner of compensation that Indian law recognises for IDs is the payment of commission based on the profits of the company. Here again, there is a statutory cap imposed by the Act, which stipulates that the total commission payable to all Non-Executive Directors (NEDs), independent or non-independent, taken together should not exceed 1% of the profits of the company. Surveys undertaken by Excellence Enablers in the last few years have revealed that the total commission paid to the Directors of companies does not come anywhere near the statutory limit of 1%. The question therefore arises whether the gap between the statutory limit, and the amount of commission paid, should be reduced, if not totally eliminated. Earlier no commission could be paid to IDs on Boards of loss-making companies. This was a counterproductive stipulation since it was the loss-making companies that needed to have good Directors on the Boards, to help them turnaround. Mercifully, this has been partially addressed by permitting a modest commission in such cases.

One fundamental issue that needs to be addressed is whether all Directors on the Board ought to get equal compensation. Unlike in the case of sitting fees, there is clearly an opportunity available to differentiate between performing Directors and non-performing Directors, and to compensate each of them based on their contribution. In some companies, the unfortunate practice of deriving contribution from the number of meetings attended still persists. Some others use a base number and provide for additional compensation for holders of positions such as the Chair of the AC or the Chair of some other important committee. This too does not travel far enough because compensation thus calculated is derived from the positions held, example AC Chairpersonship, and not from contribution.

What then is the best method to assess contribution? Schedule IV of the Act stipulates that there shall be an annual evaluation or review of the performance of Directors. If the process of evaluation is undertaken honestly, and is a robust and no holds barred exercise, it will be possible to identify those that contribute, and those that merely make up the numbers in the boardroom. The box-ticking approach to evaluation undertaken by a large number of companies does not serve any useful purpose. To address this, it is necessary for the Securities Markets Regulator to mandate that once in 2-3 years, the process of Board evaluation should be undertaken by outside experts, and should not be the kind of peer evaluation that rates every Director as God’s gift to humankind.

Basis a robust and honest Board evaluation process, the commission to be paid to Directors should be determined. There is no other satisfactory method to incentivise and reward performance in boardrooms.

A third element of compensation, which existed before the Act dealt it a death blow was the grant of stock options to IDs. Buying into the argument that the grant of stock options would promote short termism, the lawmakers abandoned it without considering remedies. The problem, largely imaginary, of short termism could have been addressed by getting the shares received by IDs locked-in, so that during their term of office as ID, they would be prevented from dealing in those shares. In fact, going further, it could have been prescribed that such shares, as the Directors have on the basis of stock options, should be locked-in for a period of at least 2 years after they have demitted office. In some cases, shareholders attending Annual General Meetings have perused the shareholding pattern, as reflected in the annual reports, and asked Directors why they were not holding company shares, and how they could be trusted with identifying themselves with the company where they did not own shares. It is reasonable to believe that persons who have shares in companies will act in the interest of the companies in order to bolster the company’s financial position, and to ensure better returns to all stakeholders. The present position of denial of stock options to IDs is a travesty of justice.

When it comes to Executive Directors (EDs) on the Board, with executive responsibilities, performance is expected to be measured in terms of KRAs, with a sizeable component of the compensation being variable pay. It has been noticed that sometimes there is a disconnect between the KRAs and the compensation paid to EDs. Absent this correlation, there is no incentive for EDs to perform to the best of their ability. Nomination and Remuneration Committees seem to be turning a blind eye to this aspect of their remit. One other matter that tends to get ignored is the phenomenon of clawback. It stands to reason that an ED, who is compensated excessively in relation to his or her performance should be subjected to clawback, so that unjust gains do not accrue, at the expense of the other stakeholders. In some jurisdictions, especially following the global financial crisis, executive compensation has been an object of scrutiny. In India, only in a couple of cases has clawback been attempted. Shareholders have also expressed their unhappiness at excessive compensation being paid to EDs, when the company’s performance has moved southwards. It is time that the subject of compensation for both NEDs and EDs is thoroughly debated, so that a commonsensical solution can emerge, leading to adequate compensation for performing Directors. This one measure will contribute to more productive boardroom conversations, translating to the better interest of all stakeholders, and a brighter future for the company.

Disclosure in regard to compensation are sometimes unclear, and leaves the reader of reports less informed. In a somewhat negative development, the US Regulator has indicated an intention to move in the direction of lesser disclosures on compensation in regard to some categories of highly paid employees.

It is not that there have been no conversations on this subject. They have regrettably not led to worthwhile decisions. It is yet another instance of the truism that “when all is said and done, more will be said than done”.

On December 5, 2025, the Securities Appellate Tribunal (SAT or the Tribunal) passed detailed orders in the context of an appeal filed by Dr Pawan Singh, the Managing Director (MD) and CEO of PTC India Financial Services Limited (PFS), challenging an order passed by Whole Time Member (WTM), SEBI on June 12, 2024. The impugned order by WTM, SEBI was against Dr Pawan Singh, the Appellant before SAT and Mr Rajib Kumar Mishra who was the Non-Executive Chairman of PFS.

On January 19, 2022, 3 Independent Directors (IDs) of PFS resigned from the Board, and sent copies of their resignation letters to SEBI, alleging violation of corporate governance norms. SEBI’s impugned order indicates that there were 6 specific allegations made in the resignation letters of the IDs.

It is not the purpose of this newsletter to examine, in detail, each of those alleged violations, and to comment on the correctness, or otherwise, of SAT’s orders in relation thereto. The present exercise is an attempt to look at the issues through the lens of corporate governance, taking into account the structural and consequential aspects of how companies are governed, and ought to be governed.

The first of the issues throws considerable light on the state of affairs that existed in PFS. One Mr Ratnesh, had been identified as a suitable candidate to join PFS as Whole Time Director (WTD) and Director (Finance). There were discussions relating to whether he should be appointed on absorption basis or on deputation basis. The HR department of PTC India (PFS is a material subsidiary of PTC India) was the entity that “predominantly handled the selection, the appointment and the joining process of Mr Ratnesh”. Cutting to the chase, it is noticed that on October 29, 2021, Mr Ratnesh submitted his joining report to the then-Chairman of PFS, Mr Deepak Amitabh, who forwarded the papers to the Appellant, directing him to “accept the joining in terms of decision of PFS Board in 138th and 139th meeting”. Subsequent thereto, the Appellant did not accept the joining report, and facilitate the joining of Mr Ratnesh as WTD and Director (Finance). After considering all the facts placed before it, SAT decided that “in these circumstances, specially when the release letter of NTPC states that it is a provisional release, the responsibility to not allow Mr Ratnesh to join as Director (Finance) cannot be SQUARELY (emphasis supplied) put on the Appellant”. Based on this finding, SAT concluded that the findings related to these issues “are not CONCLUSIVELY (emphasis supplied) proved”. There is a fundamental issue which needs to be grappled with. When there is a Board decision to allow an individual to join as Director (Finance), and when the Chairman directs the MD to give effect to that decision, is it open to the MD to not act on those directions? It is unquestionable that in the structure that obtains in a corporate entity, the Board of Directors is an authority superior to the MD and CEO or any other member of the management. Resultantly, the directions of the Board have to be implemented by the management. In the context of SAT’s observations that the responsibility to not allow the joining cannot be squarely put on the Appellant, one wonders on whom the responsibility can be put. Even if for argument’s sake, the use of the word “squarely” is intended to convey that it is not the exclusive responsibility of the Appellant to give effect to the orders of the Board, is there an element of partial or shared responsibility? Or can the recipient of the directions of the Board, communicated through the Chairman, get away scot-free, with non-implementation of the directions?

In an issue regarding alleged delayed reporting, SAT came to the conclusion that “Thus, it is clear that though there was delay, it was not deliberate, nonetheless there was dereliction without any malafide intention”. This finding gives rise to a few questions. If, admittedly, there was delay in reporting, someone must have been responsible for such delay. The Committee of IDs, which examined this matter, concluded that “there was a dereliction of duty in non-disclosure of FAR 2018”. One of the meanings of the word dereliction is “the shameful failure to fulfil one’s obligations”. It is not clear how a conclusion was reached that there was no malafide intention. SAT also noted that “this whole issue is to be viewed in the context that it was an isolated case out of 100s of loan cases dealt by PFS and NBFC”. How was the conclusion reached that this was an isolated case?

The former Chairman, in a letter to the Board, on August 5, 2021, highlighted 7 points, which in his view, impacted adversely on corporate governance in the company. While dealing with this matter, the Appellate Tribunal stated that two of the issues had been discussed earlier in its order, and three issues were not pursued. Also, no finding has been given in the impugned order on one of the 7 issues. Accordingly, the Tribunal arrived at the conclusion that only on one point, namely, that the Appellant was responsible to ensure that correspondence addressed to the Chairman reached his office, was there a need for determination. In deciding this issue, the Tribunal observed that “MD and CEO is not expected to ensure that correspondence reaches the right person. In any case, the Chairman was an Ex-Officio Non-Executive Chairman and did not have a regular office”. Even if the ex-officio Non-Executive Chairman did not have a regular office, he surely would have had an address at which he could have been reached. In disposing off this matter, the Tribunal observed “in our view, the issue is trivial and does not behove the Regulator to take up such matters seriously”. The finding of the Tribunal that the issue is trivial, and that it does not behove the Regulator to take up such matter seriously, is an aspect on which no comment is offered.

Yet another issue considered by the Tribunal was the amendment in the terms of sanction without the approval of the Board. In regard to this matter, the Board on September 29, 2021 observed that “if the Board directives were not followed in the instant case, then responsibility for the same be fixed, and necessary action should be taken by MD and CEO”. The Tribunal interpreted this direction of the Board to mean that since the Appellant was directed to fix responsibility, it was implied that the Board believed that the Appellant was not responsible for the amendment. The question arises as to whom else the Board could have given such a direction since there was no other Executive Director in the company at that time.

In their letters of resignation, the IDs had alleged that their communications had been ignored and limited/ incomplete information was being provided to them. It appears from the appellate order that the IDs sought the appointment of a legal counsel, and since no legal counsel was immediately appointed, they proceeded to appoint a legal counsel after a few days of making the request. The Tribunal noted that there was no undue delay on the part of the management in responding to the request of the IDs. However, the observation of the management that a separate legal consultation was “premature”, appears to have been glossed over. It is relevant to ask whether in such a matter, as appointment of legal counsel, the management should second-guess the IDs, and observe that such an appointment was “premature”.

In the matter of reconstitution of the Audit Committee, and not changing the structure and composition of the Board, the Appellant contended that SEBI’s mail to PFS was in the nature of an advisory, and was not in the nature of an order issued by SEBI. It is passing strange that in regard to a matter as serious as the structure and composition of the Board, a communication from SEBI should be treated as an advisory, and not as an order to be complied with.

What is most unfortunate is the finding of the Tribunal that “the entire issue was at the most a corporate battle in which such an interference by the Regulator was not called for”. One wonders whether the Regulator should have looked the other way when 3 IDs had resigned, and in communications to SEBI alleged that there were serious corporate governance issues. Also, when only one corporate was involved, it is difficult to understand how the goings on were described as a corporate battle.

As stated earlier in this newsletter, our focus has been on corporate governance issues, as they played out in PFS. Given the developments in this matter, and the fact that most of the findings of SEBI have been set aside by the Appellate Authority, it is perhaps time for SEBI, and also the Ministry of Corporate Affairs (MCA) to clearly lay down, in a no holds barred document, that the management will not have the freedom to question and defy the directions of the Board, and to not comply with those directions. The sanctity of the corporate structure must be preserved if corporate governance is to be ensured.

2026 is here. We wish our readers a very Happy New Year.

 Nearly 5 years ago, while introducing the budget, the Finance Minister indicated the Government’s intention to consolidate and amend the laws relating to the securities markets. With a few years having elapsed, and with no major public consultation exercise, there was reason, at least for the skeptics, to believe that this was yet another budget announcement which would not be translated into action. The wait is over. We now have a Securities Markets Code of 2025 (SMC or Code), which has been referred to the Select Committee of Parliament for consideration. With a number of commentators having expressed diverse views and apprehensions, it is possible that the Standing Committee’s recommendations will emerge after a few months. Thereafter, there would be a process of getting the revised Bill incorporating the recommendations, which have been accepted, of the Standing Committee, and getting the approval of both Houses of Parliament, before the President assents to the Bill. In a year of legislative hyperactivity, this is the last Bill to emerge.

While all this might take time, there is no reason not to give credit where it is due. 3 enactments, one of 1956 vintage, one of 1992 vintage, and one of 1993 vintage are sought to be combined into a single Code, eliminating conceptual confusion and the overlaps that exist in the 3 enactments. The Finance Minister needs to be complimented on giving effect to a budget announcement involving considerable complexity in execution, even if the draft Bill has taken a few years to surface. Even a prima facie reading of the Bill gives a clear indication that there is no major disconnect between what was sought to be achieved, and the Bill in its present form. It focusses deservedly on simplification of procedures, which will enable the honest conduct of business, and remove procedural and substantive cobwebs. That stated, it is useful to look at some of the specific aspects of the Bill. Limitations of space stand in the way of commenting on all provisions.

The preamble to the SMC states that it is a Bill to consolidate and amend the laws relating to the securities market. The preamble of the SEBI Act, 1992 was more focused, in that it specifically referred to the protection of the interest of investors, the regulation of the market, and the development of the market. This seems to have been shifted to Clause 11(1) which states that “Subject to the provisions of the Code, the Board shall protect the interest of investors in securities and promote the development of, and regulate the securities markets, by such measures as it may deem fit.” Moving this principal objective from the Preamble to a mere Clause seems to be inappropriate.

Clause 2(k) defines the word “depository”. It might have been preferable to define “depository participant” in the said manner.

There are a number of provisions requiring details to be set out as “prescribed”. Care should be taken while framing the Rules to ensure that substantive powers which ought to be in the Act, do not find their way into the Rules. Excessive delegation has been the bane of quite a few enactments in recent times. Delegated legislation is not an instrument to fill gaps in legislation.

Clause 4(1) provides for the composition of the Board. The size is proposed to be increased to 15 members, including 6 members who are independent of SEBI. The question to ask is whether a 15 member Board is unwieldy, having regard to the responsibilities and activities contemplated by the Code. The proviso to Clause 11(4) states that the Central Government shall endeavour to appoint at least 3 persons with expertise in the securities market. Assuming that conflict of interest, as contemplated by the Code, is to be safeguarded against, it would be interesting to see from where at least 3 persons with expertise in the securities market, but no present involvement, would be sourced. In addition to the Chairperson, there will be at least 5 Whole Time Members (WTMs). Given the present size of SEBI, the possibility exists that this would be a top-heavy organisation, with resultant complexities in reporting structures.

Clause 5 provides that Chairperson and every WTM of the Board shall hold office for a term not exceeding 5 years. It would have been useful to clearly state that no extension or reappointment of the Chairperson or any WTM is contemplated.

The proviso to Clause 8(1) states that the Members of the Board may, by circulation, take decisions in such manner as may be specified by regulations. It is for the Board, and not for the Members of the Board, to take decisions in regard to the exercise of the powers vested by the Code.

Clause 9(1) provides for the appointment of such other officers or employees, as the Board considers necessary, for the efficient discharge of its functions under the Code. With markets having grown, and the complexity of instruments and the number of market participants having increased, one major problem has been the bandwidth available to SEBI for timely discharge of its duties. Whether the authority vested by Clause 9(1) will quickly translate to creating an organisation of the right size, and expertise, needs to be addressed without loss of time.

Clause 11(2)(q) vests in the Board the powers to lay down principles for the implementation of the Code. Considering that we have transited, or are transiting, to a principles-based regime, it might have been worthwhile to state the principles in a separate chapter, as a part of the Code, as has been done in the SEBI LODR Regulations, 2015.

One interesting provision which features in Clause 11(3) states that the Board shall review its performance and functioning, including the proportionality and effectiveness of the regulations made in this behalf. It would seem that the review of the performance of the organisation, and the regulatory impact assessment of regulations, have been telescoped into the same provision. While performance review on an annual basis, is a welcome development, it would have been useful to set out in the Code the manner in which the performance review will take place, rather than leave it to the Rules or regulations to be made later. A leaf could be taken out of the provisions of Schedule IV of the Companies Act, 2013.

Clause 13(2) states that the investigation undertaken by the Investigating Officer should be completed within a period of 180 days. The proviso thereto states that where the investigation report is not submitted within the said period, the Investigating Officer shall provide the status of the investigation to the Board, and record the reasons for the delay, and request the WTM concerned for extension of time. It seems odd that the status report would be presented to the Board, and the WTM concerned would be the authority to grant extension of time. Surely, this entire matter of ascertaining the status, and granting extension, where necessary, could have been left to the WTM concerned. With the legal expertise that is available to entities that are the subject matter of investigation, it is a moot question as to how many investigations would be completed within the period of 180 days, though the intent in proposing a time limit is honourable.

The proviso to Clause 14(6) states that where the Investigating Officer is satisfied that the issuance of notice will cause undue delay in investigation, or there is an apprehension that records, books etc may be destroyed, mutilated, concealed etc, he may, for reasons to be recorded in writing, dispense with the issue of notice. While urgency in specific cases can be appreciated, it would have been useful to provide for a post-hoc notice, rather than dispense with the issuance of notice.

The element of proportionality has been introduced in Clause 19. This is a very welcome step.

In a departure from the budget statement, the Government Securities Act, 2006 has not been incorporated in the SMC. This non-inclusion is a welcome move since the said Act is not of a piece with the 3 enactments that are being consolidated.

Clause 73 provides that the Board may designate one or more of its officers as Ombudsperson to receive and redress grievances of investors. This seems to be a needless provision considering that SEBI already has a fairly elaborate mechanism to deal with grievances of investors. If it is believed that the mechanism is not measuring up, the logical step would have been to tweak or refine what exists, without creating a new institution in the form of Ombudspersons. Further, conceptually an Ombudsperson should not be on the rolls of an organisation, grievances relating to which are expected to be gone into. The expectation of neutrality and impartiality in the functioning of the Ombudsperson could itself give rise to challenges if they are insiders.

Clause 85(h) provides that any person aggrieved by an order passed by the Insurance Regulatory and Development Authority of India (IRDAI), the Pension Fund Regulatory and Development Authority (PFRDA) or the International Financial Services Centres Authority (IFSCA) may prefer an appeal to the Tribunal having jurisdiction in the matter. Considering the expanded jurisdiction of the Tribunal, it might have been worthwhile to rename it as a Financial Services Appellate Tribunal, rather than to retain the original name of the Securities Appellate Tribunal (SAT).

Clause 127(1) provides that the Board shall, after the end of each FY, within a period of 90 days, submit to the Central Government, a report giving a true and full account of its activities, policies and programmes during the previous FY. An annual report is necessarily a postmortem exercise. To ensure accountability to the legislature, it might have been useful to prescribe that the Chairperson and the WTMs shall appear before the Standing Committee once in 6 months, to brief the Committee on what transpired in the previous 6 months, and what is planned by way of policy measures for the next 6 months. This direct reporting, with a prescribed periodicity, will ensure that the functional autonomy of the organisation vis-à-vis the administrative ministry is ensured.

Clause 129(1) states that the National Institute of Securities Market (NISM), a public Trust, established by the Board, shall be deemed to have been established under this Code. Resultantly, NISM also has a place in the statute. Clause 129(2) states that the Board shall regulate the NISM for capacity building of intermediaries. The NISM was set up with 6 separate schools to address different requirements in the securities market ecosystem. It should not be converted to a training school for intermediaries, since it would then take its eyes of the ball of investor education, which is the most critical requirement in India’s securities market. In the same breath, it might be worthwhile considering whether the transfer of funds from the General Fund to the Consolidated Fund of India should be preceded by setting apart a significant amount for meaningful investor education throughout the country, and for promoting a class of qualified investment advisors.

Clause 131(1) provides that “Without prejudice to the foregoing provisions of this Code, the Board shall, in exercise of its powers or the performance of its duties under this Code, be bound by such directions on questions of policy as the Central Government may give in writing to it, from time to time” Though this power, which exists under the present Act, has not been exercised, it is a sword hanging over the head of the regulatory organisation, and at least, in theory, impacting on its functional autonomy. Admittedly, the power of the Central Government to give directions is confined to questions of policy. What constitutes a question of policy could itself be a matter of doubt, and the provision in Clause 131(2) stating that the decision of the Central Government, whether a question is one of policy or not shall be final, gives extraordinary powers, which mercifully have not been exercised till now. Observers of the financial scene might recall that some years ago, there was a distinct possibility of the issue of directions, under a similar provision, to the RBI.

Clause 146(2) provides for the matters in relation to which the Board may make regulations. It might be useful to examine whether the tendency to make substantive provisions is safeguarded against.

Clause 147 provides that the Board shall, while making regulations, publish the draft regulations, in order to invite public comments. It is worth considering whether the details of the proposal, and the reasons for making these regulations, are put out in the public domain so that the consultation exercise starts before the draft regulations have been given shape to.

Clause 2(zo) defines “subsidiary instructions” as instructions made under Clause 149, and includes any circular, master circular, guideline and such other instrument. Clause 148 provides that every Rule, regulation and bye-law made, and subsidiary instructions issued, under the Code shall be laid before each House of Parliament. This is clearly excessive. It would have been sufficient to provide that only Rules and regulations are laid before both Houses of Parliament.

Clause 150 provides for the constitution of one or more Advisory Committees to advise on matters relating to the making of subsidiary instructions, and any other issue relating to the administration of the Code. It is not necessary to provide for Advisory Committees in a statute. Setting up of Advisory Committees is, and should be, an inherent power vested in the organisation.

Market Infrastructure Intermediaries (MIIs) have been given significant powers in the Code. They are subject to regulation by SEBI. One of the welcome moves in the Code is that it has subsumed the Depositories Act of 1993. There was no reason to have a separate Act for Depositories, and the problems that arose by giving a separate legislative standing to Depositories, as distinct from other MIIs, have surfaced on quite a few occasions in the past.

There is no certainty on the manner in which the Code will emerge finally through the Select Committee and the two Houses of Parliament. A skeptic might well say “mischief thou art afoot. Take what course thou wilt”.

The Code is clearly intended to ensure that it is a means to the end of enabling the honest and speedy conduct of business. Time will tell whether this intention translates to reality.